Canada: IIROC Proposes Restricted Membership For U.S. Broker-Dealers

Highlights

  • U.S. FINRA broker dealers can directly seek cross-membership with IIROC to become investment dealers in Canada
  • These "Restricted Dealer Members" would be exempt from normal IIROC financial reporting and financial compliance, but otherwise subject to all IIROC rules and fees
  • Trading to be restricted to non-retail Canadian customers – international dealer and international adviser exemptions will not be available to Restricted Dealer Members

On July 12, 2012, the Investment Industry Regulatory Organization of Canada (IIROC), the investment dealer self-regulatory organization that is the Canadian equivalent of the Financial Industry Regulatory Authority (FINRA), published for comment a concept proposal on the introduction of a new class of IIROC member, called a " Restricted Dealer Member". The IIROC proposal is being made in response to concerns expressed by the Canadian Securities Administrators (CSA) relating to the scope of activities being undertaken by exempt market dealers (EMDs), that were previously identified in the CSA Staff Notice 31-327 Broker-Dealer Registration in the Exempt Market Dealer Category (CSAN 31-327).

IIROC's proposed framework seeks to facilitate the migration to IIROC membership of approximately 22 FINRA member broker-dealers that are currently carrying out brokerage activities with Canadian clients as either EMDs or in a temporary similar category of restricted dealers. Under the proposal, migration to IIROC membership will require such firms to surrender their current EMD or restricted dealer registrations, as well as their international dealer or international adviser exemptions, and to apply for investment dealer registration under provincial securities law as well as seek IIROC membership. The proposal will also allow a FINRA broker-dealer to directly seek cross-membership with IIROC.

Background

Under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), since October 2009, an EMD has been permitted to trade in any security that has been, or could be, distributed pursuant to a prospectus exemption. This includes brokerage services to "accredited investors", which includes a class of individual investors meeting certain high-income or net-worth criteria, in addition to investors who would be considered "Institutional Customers" under IIROC's Dealer Member Rules. In the past, the CSA had granted certain exemptive relief to EMDs which facilitated prime brokerage and other brokerage services (for example, relief from the prohibition on EMDs providing margin).

EMD registration was frequently sought by foreign firms as a way of expanding their Canadian business beyond the limitations of the international dealer registration exemption, which generally prohibits trading in securities of Canadian issuers. Following the implementation of NI 31-103, the CSA received numerous registration applications from U.S. firms regulated by FINRA seeking to obtain EMD registration status. Many U.S. firms were also already registered in Ontario as limited market dealers and had been converted to EMDs.

However, the CSA started to have some policy concerns about the breadth of activity conducted by these foreign EMDs under NI 31-103. These concerns were expressed in CSAN Notice 31-327 in September 2011. The CSA surveyed registered EMDs and identified a number of existing EMDs, including firms that have an affiliated IIROC Dealer Member, that are carrying out brokerage activities for accredited investors. The services of concern include (i) securities brokerage and trading, (ii) prime brokerage and securities lending, (iii) execution, clearing and settlement services and related record-keeping services, (iv) custody of customer funds and securities, and (v) subject to certain exemptive relief, lending money, extending credit and providing margin to clients. As an interim measure, the CSA ceased registering foreign EMDs in 2011 and new applicants have been temporarily registered by the CSA as restricted dealers instead, subject to specific terms and conditions.

Proposed IIROC Restricted Dealer Member Category

IIROC's new Restricted Dealer Member proposal is guided by the following key principles:

  • the benefits of globalized markets and cross-border access;
  • recognition of regulatory overlap between U.S. and Canadian regulatory regimes;
  • providing a financially viable alternative arrangement to FINRA-regulated firms;
  • fostering a level paying field among firms conducting similar brokerage activities and avoiding opportunities for regulatory arbitrage; and
  • acknowledgment that "Institutional Customers" and truly sophisticated and wealthy "Retail Customers" are capable of assessing the risks of doing business with a U.S. entity.

The proposed IIROC Restricted Dealer Member category will have the following key requirements, among others:

  • Comparability of FINRA's regulatory framework: IIROC proposes exemptions from certain of its financial operations requirements, including certain financial reporting, minimum capital, minimum insurance coverage and margin obligations, provided IIROC is satisfied that (i) U.S. regulation is based on comparable regulatory principles and produces comparable regulatory outcomes, and (ii) IIROC continues to have a robust co-operation and information-sharing arrangement with FINRA. Restricted Dealer Members will be required to file quarterly with IIROC a segmented unconsolidated income statement which separately discloses revenue, expense and net income for its Canadian operations, and an annual audited reconciliation of its consolidated excess net capital, as set out in its annual SEC filing, to the firm's unconsolidated excess net capital as set out in its FOCUS report.
  • Restricted Dealer Member eligibility criteria: Restricted Dealer Members must be (i) an entity formed under U.S. federal or state law, (ii) a member of FINRA, and (iii) a member of the Securities Investor Protection Corporation (SIPC). Canadian client assets must be insured by SIPC against loss due to insolvency of the Restricted Dealer Member. Restricted Dealer Members cannot participate in the Canadian Investor Protection Fund (CIPF) and its Canadian clients will not be eligible for CIPF coverage.
  • Restricted Dealer Member category not to be used by Canadian investment dealers: Restricted Dealer Membership is limited to firms with a head office or principal place of business in the U.S. and firms with more than 50% of their securities being owned, directly or indirectly, by foreign entities or residents, as well as an as-yet unspecified de minimis business test.
  • Scope of business activities: Business activity must be consistent with, and not exceed, the scope of business activity approved by FINRA in the firm's membership agreement with FINRA, including providing IIROC with notice of "material changes" in the operation of the firm for which the firm has made an application for approval or non-objection to FINRA.
  • Records of Restricted Dealer Members: Restricted Dealer Members must provide IIROC with an undertaking to furnish true and complete copies of all books and records which are required to be maintained in accordance with its IIROC membership agreement.
  • Attornment/Appointment of agents: Restricted Dealer Members will be subject to attornment and appointment of agent-for-service provisions, including associated requirements that are typically imposed on non-resident firms.
  • Cost recovery: Restricted Dealer Members must reimburse IIROC for any increased compliance costs resulting from IIROC's compliance reviews having to be conducted in foreign jurisdictions. Restricted Dealer Members will be subject to the same membership and annual fees as a full IIROC member.
  • Participating organization restriction: Restricted Dealer Members cannot be a participating organization in a Canadian marketplace overseen by IIROC, so they must continue to trade through a Canadian investment dealer to reach Canadian stock exchanges or alternative trading systems. IIROC is nevertheless considering applying universal market integrity rules to Restricted Dealer Members.
  • Limited retail customer coverage: Restricted Dealer Members will only be able to deal with a prescribed type of "Retail Customer" and "Institutional Customer", as defined under the IIROC Dealer Member Rules.
  • Unavailability of the international dealer and adviser exemptions: Restricted Dealer Members will no longer be able to rely on the "international dealer" or "international adviser" exemptions set forth in NI 31-103.
  • Introducing/carrying broker relationships: A Restricted Dealer Member can be an introducing broker, but can only be a carrying broker for another Restricted Dealer Member. It cannot be a carrying broker for a full Dealer Member.
  • Participation rights: Restricted Dealer Members will be eligible to participate on IIROC's Board, District Councils and advisory committees.

FINRA-regulated firms with EMD registration, including firms that have been temporarily registered by the CSA as restricted dealers, would be transitioned to IIROC Restricted Dealer Member status by making a streamlined application to the IIROC Board of Directors.

Except for individuals seeking IIROC approval as a "Registered Representative" or "Investment Representative" who would be entitled to a one-year transition period, existing partners, directors, executives, chief compliance officers and supervisors will be exempt from IIROC's minimum proficiency requirements as long as the individual remains approved in the category. However, all individuals that are sponsored by new firms applying for registration will generally be subject to IIROC's minimum proficiency requirements.

IIROC is welcoming feedback on the scope and direction of the proposed IIROC Restricted Dealer Member category, including specific comment on:

  • whether the Restricted Dealer Member proposal should be implemented as a grandfathering proposal for existing EMDs or restricted dealers that have been identified by the CSA as conducting brokerage activity or whether the proposal should continue to be available to potentially new entrants to the Canadian marketplace;
  • whether the proposed IIROC Restricted Dealer Member category should be subject to a de minimis threshold, and if so, whether the de minimis threshold should be premised on any of the following: (a) a prescribed number of Canadian clients, (b) a prescribed percentage of the aggregate consolidated gross revenue of the Restricted Dealer Member being derived from the investment dealer activities of the Restricted Dealer Member, as calculated at the end of the firm's most recently completed financial year, or (c) a prescribed percentage of the aggregate consolidated gross revenue of the Restricted Dealer Member being derived from Canadian resident clients in respect of Canadian securities, as calculated at the end of the most recently completed financial year; and
  • whether a retail customer restriction should be applied to Restricted Dealer Members, and if so, on what basis such a restriction should be dependent (e.g., "accredited investor", "permitted client" or a retail client who owns financial assets having an aggregate realizable value that exceeds C$10-million before taxes but net of any related liabilities).

Concurrently with the release of IIROC's concept proposal, the CSA released Staff Notice 31-331 Follow-up to Broker-Dealer Registration in the Exempt Market Dealer Category, supporting the view that IIROC should be responsible for oversight of FINRA-regulated firms that are conducting brokerage activities in Canada.

The IIROC proposals raise a number of questions which will need to be addressed during the comment period. For example, the only rule exemptions IIROC is proposing are on the financial operations side. All other business conduct, sales compliance and other member regulation provisions will apply fully to Restricted Dealer Members. Reconciliation of these requirements with FINRA rules will require some careful analysis to determine if there are any conflicts. The application of these Canadian IIROC rules to purely U.S. business is also unclear. Annual fees for IIROC dealer members are based upon their revenue as well as a risk component. Presumably IIROC will not seek to charge its annual fees based upon including U.S.-derived revenues, but this remains to be seen.

IIROC is inviting stakeholders to provide comments by October 10, 2012. During the consultation period, IIROC will engage in discussions with various other Canadian market participants regarding the proposal and its potential implications for their participant rules. At the conclusion of the consultation period, IIROC may make changes to its bylaws and Dealer Member Rules. If so, it is anticipated that the CSA would also propose corresponding changes to NI 31-103 that would further the policy objectives of the IIROC amendments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
16 Oct 2018, Seminar, Toronto, Canada

Join Blakes lawyers for our 10th annual overview of recent legal and regulatory developments and practical strategies to navigate the changing regulation of Canada’s payments industry.

26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

Similar Articles
Relevancy Powered by MondaqAI
Stikeman Elliott LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Stikeman Elliott LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions