Canada: Proposals For A New "Restricted Dealer" IIROC Member Category Released For Comment

Last Updated: August 17 2012
Article by Prema K. R. Thiele and Julie Mansi

Most Read Contributor in Canada, November 2017

In mid-July 2012, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC), the self-regulatory organization for investment dealers in Canada, outlined their proposals to create a new category of IIROC member – restricted dealer member – and to migrate certain U.S.-based firms currently registered as exempt market dealers (EMD) to this new dealer category. CSA Staff Notice 31-331 Follow-Up to Broker-Dealer Registration in the Exempt Market Dealer Category (CSA Staff Notice 31-331) and IIROC Notice 12-0217 IIROC Concept Proposal – Restricted Dealer Member Proposal (IIROC Concept Proposal) available here and here set out the regulators' views on the appropriate regulatory regime for EMDs who are carrying on so-called "brokerage activities". Comments on the IIROC Concept Proposal are due by October 9, 2012 (90 days after publication).

Staff of the Ontario Securities Commission first signalled concerns about exempt market dealers (EMD) carrying on "brokerage activities" that they viewed as akin to those activities carried on by IIROC-member investment dealers in the context of registration applications being considered during 2011. This uneasiness resulted in CSA Notice 31-327 Broker-Dealer Registration in the Exempt Market Dealer Category being released in September 2011. The CSA highlighted that the EMD category of registration was being used by dealers "involved in brokerage activities, including trading securities on an exchange, or entering into arrangements similar to introducing-carrying broker activities" rather than what they viewed as the intended, or "more appropriate", activity of an EMD which was to participate in the distribution of prospectus-exempt, off-exchange securities. The CSA's concerns were heightened by the fact that certain broker-dealer firms registered in the United States and members of the Financial Industry Regulatory Authority (FINRA), had obtained registration as EMDs (or had applied for such registration) and also had obtained (or applied for) certain exemptions which facilitated these firms carrying on brokerage activities in Canada. The CSA explained that they would conduct further consultation, but in the meantime, the OSC staff confirmed that they would only grant conditional registration to any FINRA broker-dealers applying for registration as an EMD.

Following the publication of CSA Notice 31-327, the CSA conducted a survey of all EMD firms to determine the extent to which those EMDs were carrying on brokerage activities. The CSA confirmed in CSA Staff Notice 31-331 that their primary focus is on FINRA member broker-dealer firms that are conducting brokerage activities in Canada.

The message from the CSA is very clear. IIROC should oversee any registered dealer that is conducting brokerage activities – even those dealers, like EMDs, that deal only with accredited investors – because IIROC rules and supervision specifically govern exchange trading practices and address the risks associated with brokerage activities. The CSA emphasize that their overall objective is to ensure consistent regulation of similar activities, which they feel is compromised if EMDs are permitted to carry on brokerage activities without having to be within the jurisdiction of IIROC.

IIROC's Proposed "Restricted Dealer" Member Category

If the regime described in the IIROC Concept Proposal is introduced, any firm that carries on "brokerage activities" in Canada, whether with clients that are "accredited investors", "permitted clients" or otherwise, will need to be registered as an investment dealer and become a member of IIROC. U.S. broker-dealers which are FINRA members may qualify to become a "restricted dealer member" of IIROC, provided they comply with the conditions to such membership. Firms presently registered as EMDs and carrying on these activities will be required to change their registration to that of investment dealer and apply for membership with IIROC pursuant to an accelerated membership application process alluded to in the IIROC Concept Proposal.

Although the overall objective of the CSA and IIROC is clearly stated, the Concept Proposal raises questions. Amendments to applicable rules of the CSA, including National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31- 103), and to IIROC rules will be required in order to move forward with this proposed regime, and we would expect that these further regulatory publications will provide further clarification.

What does it mean to carry on "brokerage activities"?

Neither the CSA nor IIROC provide for a specific definition of "brokerage activities", although the IIROC Concept Proposal lists activities that are being conducted by U.S. broker-dealers and FINRA members (registered in Canada as EMDs), including securities brokerage and trading, prime brokerage and securities lending, execution, clearing and settlement services and related record keeping services, and custody of customer funds and securities. It is not clear why these activities are problematic when they are being provided only to accredited investors (which is the case for all EMDs), nor is it clear exactly which activities cause concern and for what reason.

Which EMDs and firms will these proposals capture?

As noted previously, the CSA clearly intend any firm which is carrying on "brokerage activities" in Canada to be registered as an investment dealer and a member of IIROC. However, the IIROC Concept Proposal only specifically addresses U.S. registered broker-dealers that are FINRA-members. It is only these firms that will qualify for the proposed "restricted dealer" membership category. Neither the CSA nor IIROC refer to other EMDs, including domestic firms that may be carrying on these activities. These firms presumably would need to cease conducting "brokerage activities" or upgrade their registration to that of "investment dealer" and be subject to the complete IIROC rules-book.

Who can apply for IIROC membership as a "restricted dealer"?

A "restricted dealer" IIROC member can only be a firm registered as a broker-dealer in the United States and a FINRA member. The firm must also be a member of the Securities Investor Protection Corporation (SIPC). Perhaps as a result of the fallout from the bankruptcies of US futures dealers including MF Global and Peregrine Financial Group, and the adverse effects on certain Canadian clients from these events, IIROC, by limiting the restricted dealer member category to FINRA members with SIPC coverage, has clearly excluded US futures commission merchants from being able to seek membership in this category.

What requirements will apply to "restricted dealers"?

Firms in the "restricted dealer" membership category will be exempt from a number of IIROC's financial operations rules, including requirements governing financial reporting, minimum capital, minimum insurance coverage and margin, on the condition that the firm complies with the comparable FINRA requirements. Firms will not be required to join the Canadian Investor Protection Fund (CIPF), given that they must be members of SIPC (client disclosure of the differences between CIPF and SIPC must be provided). Furthermore, partners, directors, officers, employees and agents of these firms would be exempt from IIROC's minimum proficiency requirements, with the exception of those seeking approval as a registered representative or an investment representative. Individuals that are already registered as a dealing representative of a registered EMD, who would be registered as an RR or IR of the firm as an IIROC member, would be given a one-year transition period to complete the courses required to meet the proficiency requirements. IIROC intends to provide an exemption from its rules requiring a physical presence in Canada.

What conditions will apply to "restricted dealer" IIROC members?

Restricted dealer members will be restricted to dealing with only certain types of retail customers, in recognition of the fact that these firms will not be subject to all of IIROC's rules. The IIROC Concept Proposal suggests that the "accredited investor" threshold for retail customers may be too low for purposes of the proposed restricted dealer member category and IIROC specifically requests comment on the types of clients that a restricted dealer should be permitted to service under this new category.

Restricted dealers may also be subject to a de minimis threshold for doing business in Canada and will not be able to rely on any other registration exemption, including the international dealer exemption provided for in NI 31-103.

It is not clear to what extent, for example, restricted dealer members of IIROC could act as underwriters (and therefore sign an underwriters' certificate in a prospectus), given that EMDs can act as underwriters only for prospectus exempt offerings (including an offering of securities qualified by prospectus where the portion underwritten by an EMD is limited for distribution to accredited investors).

How different will this regime be from the international dealer exemption provided for in NI 31-103?

NI 31-103 provides for an "international dealer" exemption, which is available to U.S. FINRA members. There are virtually no requirements in order to rely on this exemption, other than having to appoint an agent for service, make prescribed filings and fee payments. The only limitations to relying on this exemption are that firms can only deal with "permitted clients" [institutional clients and ultra high net worth individuals] and only in predominantly "foreign securities". This begs the question as to what the substantive difference will be between firms relying on the international dealer exemption and firms that are "restricted dealer" members of IIROC, particularly if IIROC restricts these firms to only dealing with "permitted clients". What firms will apply to become "restricted dealer" members and for what purpose?

Will this proposal create a level playing field?

The IIROC Concept Proposal discusses the policy need for the proposed "restricted dealer" member category in terms of creating a level playing field for firms conducting "brokerage activities" in Canada.

Comments due on the IIROC Concept Proposal – October 9, 2012

Comments on the IIROC Concept Proposal are due by October 9, 2012 – in particular IIROC is seeking specific comment on the following elements of the IIROC Concept Proposal:

  • Should the proposal be implemented as a "grandfathering" solution to deal with existing registered EMDs who carry on "brokerage activities" or should it apply more broadly to allow for new entrants?
  • Is a de minimis threshold important? If so, what threshold should apply?
  • Should "restricted dealer" firms be restricted from dealing with only "permitted clients" and not the full panoply of "accredited investors"?

These proposals are important for the securities industry in Canada. Please contact the authors of this Bulletin, your usual lawyer in BLG's Investment Management group or the leaders of BLG's Investment Management group noted below if you have any questions about the proposals for a "restricted dealer" member category and how it may affect you or if you would like our assistance in providing your comments in response to the IIROC Concept Proposal.

About BLG

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

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

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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