On December 20, 2010, a working group of provincial/territorial government representatives released for comment a long-awaited consultation paper on possible options that would allow for the incorporation of individual sales representatives of registered dealers and advisers. Consultation on Possible Options for the Incorporation of Individual Representatives of Registered Dealers and Advisers in Canada [available here] is open for comment until February 25, 2011.
The working group emphasizes that no government or securities regulator has approved the various options and that the Consultation Paper is intended to stimulate discussion and comment.
The Consultation Paper provides a useful background to the issues around incorporated salespersons, including a discussion on the drawn-out history of the practice of "directed commissions" that has grown up in the mutual fund dealer community, which was recently sanctioned by the Mutual Fund Dealers Association of Canada with the finalization of MFDA Rule 2.4.1.
The Consultation Paper presents three possible options to deal with industry requests for more flexible alternative business structures. The first two options would involve amendments to the various provincial securities acts, which is why the Consultation Paper was released by a working group of government officials and not by the securities regulators. The Consultation Paper provides no sample legislative amendments however, and the details about each proposal are only very briefly presented.
- Legislative proposal developed by the Alberta Securities Commission (ASC). This previously unpublished proposal recommends a legislative framework for incorporation of sales representatives of registered dealers and advisers. Under this proposal, the corporation of a sales representative would apply for an annual permit from the Executive Director (presumably of each applicable securities commission where the sales representative is registered) to authorize it to provide trading or advising services to clients. There would be restrictions on shareholdings in the applicable corporation and a regime to ensure that the individual sales person and the applicable dealer/adviser firm remain liable to the client and securities laws continue to apply to both the dealer/adviser firm and the individual salesperson.
- Legislative proposal recommended by Advocis, the industry association for financial advisors and planners. Its proposal for legislative changes is reportedly based on the regulatory requirements found in the life insurance sector. Advocis' proposal is more lenient than the one proposed by the ASC, but the essential principles outlined in connection with the ASC proposal would be respected.
- Regulatory permission to allow all dealers (and presumably also advisers) to pay commissions/compensation to the non-registered corporations of individual sales representatives. This option is presented as one designed to level the playing field for IIROC member firms and representatives, so that these firms and representatives could organize their affairs similar to MFDA members and MFDA Rule 2.4.1.
The working group asks for comments generally on the options, as well as responses to six specific questions, which include questions about the tax consequences of the proposals, regulatory obstacles to implementation of the proposals and concerns as to investor protection.
We would be pleased to assist you in developing a comment letter in response to this Consultation Paper. We intend to analyze the various options, and the issues raised by the working group with a view to providing the working group with our views
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