Transcript a practical look at the exempt market dealer requirements + n.i 31-103

A Practical Guide for Exempt
Market Dealers
September 14, 2010
Your Panelists
Brian Prill – Partner, McLean & Kerr LLP;
President EMDA
Ian Pember – Senior Vice President,
Administration and Compliance, Hillsdale
Investment Management Inc.; co-chair
AIMA Canada Legal & Finance Committee
David Gilkes – Vice President, Sutton Boyce
Gilkes Regulatory Consulting Group;
Director EMDA
Marsha Gerhart – Counsel, Borden Ladner
Gervais LLP; Director EMDA
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Today’s discussion

Discussion of practical issues facing EMDs
• Overview
 Filings – Sept. 28, 2010 Deadline
 UDP, CCO and Permitted Individuals
• Conduct and compliance requirements
 Capital and insurance
 Internal controls and compliance
• Client relationships
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What business can an EMD be in?

Prospectus exemptions
• EMD’S may act as a dealer by trading in a
security that is distributed under an exemption
from the prospectus requirements

NI-45-106 has 41 prospectus exemptions
• 18 are transactions an EMD could potentially
act upon
• Not restricted to accredited investors
Who doesn’t need to be registered as
an EMD?

“Northwestern” exemption
• Financial service providers cannot rely
on exemption


PM who trades in proprietary nonprospectus qualified investment
funds to managed account
International dealers
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What you need to file

Sept 28/2010 deadline
• Firm registration form 33-109F6


Existing EMD’s in Ontario & Newfoundland
file in other applicable jurisdictions
Firms in other jurisdictions acting as EMD’s
file to complete registration
• Individual registration form 33-109F4



Dealing reps, UDP and CCO - registration
Permitted individuals - information only
Proficiency requirements for Dealing Reps
and CCO
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Ultimate designated person (UDP)


Must be CEO of the company or the
registerable business unit or sole
proprietor
Responsibilities
• Supervise activities of the firm directed to
ensuring compliance by firm & individuals
• Promote culture of compliance


Access to Board required at all times
No prescribed proficiency requirements
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Chief Compliance Officer (CCO)


Must be officer or partner of the company
or sole proprietor (CCO & UDP can be
same person)
Responsibilities
• Establish & maintain policies and procedures to
ensure compliance of firm and individuals
• Report to UDP
• Access to and Annual Report to Board for
purpose of assessing compliance by firm &
individuals

Proficiency – EMP or CSE plus the PDO
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Who are Permitted Individuals?



Individuals who are not registered and
who:
• Are director, CEO, COO, CFO, (or
perform those functions) or
• Have beneficial ownership, or control
over, > 10% of voting securities of a
firm
Submit through NRD Form 33-109F4
within 7 days of appointment
No proficiency requirements
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What is your level of capital?

Capital requirement
• Minimum required working capital is $50,000
• Cannot be less than zero for 2 consecutive
days – if less than zero notify regulator asap
• Working capital calculated on unconsolidated
basis – Form 31-103F1
• Basically current assets less current liabilities,
with adjustments

Warning! – If you are borderline this could
require close monitoring
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How’s your insurance?
• Maintain bond insurance with specified
clauses & double aggregate limit
• Bond insurance – highest of




Lesser of $50,000/employee or $200,000
Lesser of 1% of total client assets under
management or $25mm
Lesser of 1% of dealer assets or $25mm
Amount as determined by directors
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Financial reporting

Capital requirement reporting
• Must file Form 31-103F1 annually with
regulators within 90 days of year end
• Not need for EMDs to file interim
financials or interim Form 31-103F1
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And more Financial Reporting

Annual financial statements
• Must be prepared in accordance with
GAAP (IFRS effective Jan 1/2011)
• Standard audit opinion amended for
non-consolidation if applicable
• Warning! – To control costs assess if
there is any requirement for audited
consolidated financial statements
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Internal controls & compliance are
important

Internal controls & systems
• Do you have an adequate system of
controls & supervision to meet
regulatory requirements?
• Is your compliance system effective?
• Do your records achieve the desired
regulatory outcome?
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How do you create an effective
compliance regime?

Some considerations
• Determine resources available or required
• Establish a “Culture of Compliance” (“Tone at the top”)
• Understand the applicable rules and regulations
• Determine a framework for risk identification and
assessment
• Determine the internal controls to be used to manage
risks – includes accountabilities and responsibilities
(who, when, how)
• Establish mechanisms for supervision and oversight
(action and result)
 Management action in addressing matters
 Reporting and escalation
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Develop an effective Risk Assessment
Framework

You cannot manage risks if they are not
identified
• Identify the risks - Create a regulatory
summary, tailored to your firm
• Consider law firm checklists as a start point
• Review regulatory commentaries or advisories
• Keep up on developments
• Categorize risks – e.g. reputational,
operational, regulatory
• Assess potential impact – high, medium, low
• Determine response – accept, share, mitigate
& who is responsible?
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Client Relationships - Things you must
tell your clients (in writing)

Relationship disclosure
information
• deliver to a client, before any advice
given or security purchased or sold, all
information that a reasonable investor
would consider important about
relationship (prescribed information)
• Then notify client on timely basis of any
significant changes.
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Do you know your client?

KYC obligations
• Gatekeeper KYC


Determine who is the client and who has
responsibility for KYC & suitability
Maintain a/c opening & client documentation
and make reasonable efforts to keep current
• Suitability KYC





Investment needs & objectives
Investment knowledge & experience
Risk tolerance
Investment horizon
Income level & net worth
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Do you know your product?




Essential for suitability
Know features and risks
Due diligence in selection of issuer
KYP is proposed as an amendment to
the overarching proficiency
requirement in NI 31-103
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Obligations differ for some clients

“Permitted Client”
• Governments, banks & trust companies
• Other Cdn registrants and funds managed or advised by
them
• Pension funds or wholly owned subs regulated by OSFI
or province
• Individual with financial assets > $5mm
• Person or company with net assets > $25mm


Permitted clients can waive certain
requirements (in writing)
Requirements N/A if client is registered
firm, Cdn FI or Sched III bank
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Conflicts of Interest – how will you
respond?

Conflicts of interest
• Identify all current & potential material
conflicts to client in timely manner
• Avoid
• Respond
• Disclose


Related issuer
Restrictions on managed account
transactions
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Do you enter into referral
arrangements?

Referral arrangements
• “Referral fee” is any form of compensation paid for the
referral of a client to or from a registrant
• “Referral arrangement” is any arrangement agreeing to
pay or receive a fee
• Must be a written agreement between registrant &
person or company making or receiving referral
• Registrant making referral must take reasonable steps
to ensure that receiving company qualified, & registered
if necessary, to provide services

Referral arrangements
• Must disclose to client before account opening or any
services
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What happens when your client makes
a complaint?
• Document & effectively & fairly respond to
client complaints and have written policies and
procedures in place
• By Sept 28/11 ensure an independent dispute
resolution or mediation service is made
available, at firm’s expense, to clients
• When a complaint is received the client must
be informed asap how to contact the service.
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Other things you must provide

Trade confirmations & client statements
• EMD that has acted on behalf of client for
purchase or sale of security must promptly
deliver a written confirmation of the
transaction with specified information
• EMD must deliver statement to client at least
once every 3 months, or for month in which
transaction occurs (monthly if requested by
client)
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A few things to remember


Prohibition on lending, extending
credit or margin to a client
Any client assets held must be
segregated and in trust for client
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Looming deadlines

Sept 28/2010
• File Form 33-109F6 to register as
EMD in all applicable jurisdictions
• Dealing representatives must meet
proficiency requirements
• Meet capital requirements
• Relationship disclosure information
to be delivered to all clients
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Not so looming deadline

Sept 28/2011
• Independent dispute resolution or
mediation service must be in place
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Regulations to keep in mind
• NI 31-103 Registration Requirements
• NI 33-109 Registration Information
Requirements
• NI 45-106 Prospectus and Registration
Exemptions
• NI 81-102 Mutual Funds and NI 81-107
Independent Review Committee for
Investment Funds
• NI 23-101 Trading Rules
• NI 23-102 Use of Client Brokerage
Commissions as Payment for Order Execution
Services or Research Services
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