Canada: Proposed Amendments to Permitted "Soft Dollar" Arrangements

Last Updated: August 21 2006
Article by Kimberly Poster

Proposed National Instrument 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research (the "Proposed Instrument") and Companion Policy 23-102 CP (the "Proposed Policy") will establish ageneral framework for the use of brokerage commission dollars by advisers to pay for trading related goods or services which are in addition to order execution, commonly known as "soft dollar" arrangements. The proposals refer to the concept paper released in February 2005, which indicated that such arrangements created potential conflicts of interest, where advisers might place their interests ahead of those of their clients and potentially obscurean adviser’s best execution obligations. The Proposed Instrument and Proposed Policy, if and when adopted, will replace existing policies in Ontario and Québec and will clarify the type of goods and services that may be acquired with client brokerage commissions. The Proposed Instrument also requires enhanced disclosure of soft dollar arrangements.

Significant Elements of the Proposed Instrument and Proposed Policy

Application

The Proposed Instrument will apply to advisers and registered dealers in circumstances where brokerage commissions are charged by a dealer in connection with the execution of a trade in securities. The reference to "brokerage commissions" includes any commission or similar transaction-based fee, including transactions done on a net basisif a fee can be broken out.

The Proposed Framework

The Proposed Instrument indicates that advisers may not enter into any arrangements to use brokerage commissions as payment for goods and services other than order execution services or research (discussed below). Amounts paid for any order execution service or research must be reasonable in relation to the value of the order execution services or research received, research received must add value to investment or trading decisions, and the order execution services or research must benefit the client. In connection with the requirement that the goods and services must benefit the client, the Proposed Policy clarifies that the adviser should have adequate policies and procedures inplace to ensure that a reasonable and fair allocation of the goods and services received is made to clients whose commissions were used as payment for these goods and services.

Registered dealers also have the obligation to ensure that commissions received from advisers on brokerage transactions are only used as payment for goods and services that meet the definition of order execution services or research.Registered dealers may forward to a third party any portion of the commissions they have charged on brokerage transactions to pay for order execution services or research provided to the adviser by that third party.

Definition of "Order Execution Services" and "Research"

The Proposed Instrument defines "order execution services" to include order execution, as well as goods and services that are directly related to order execution. "Order execution" means the entry, handling or facilitation of an order by a dealer, but not other tools that are provided to aid in the execution of trades. The Proposed Policy clarifies that goods and services that are directly related to order execution are those that are essential to the arranging and conclusion of the securities transactions that generated the commissions, such as custody, clearing and settlement services.

The Proposed Instrument defines "research" as advice relating to the value of securities or the advisability of effecting transactions in securities, and analyses or reports concerning securities, portfolio strategy, issuers, industries, or economic or political factors and trends. Such research must add value to an investment or trading decision. The Proposed Policy notes that research should include original thought and the expression of reasoning or knowledge,and that information that is commonly known or self-evident would not qualify. The Canadian Securities Administrators express a view that to be permitted research, the research must be provided before an adviser makesan investment or trading decision. Examples of permitted research include traditional research reports and market data that has been analyzed or manipulated to arrive at meaningful conclusions.

With respect to mixed-use goods and services (those that contain some elements that meet the definitions of orderexecution services or research, and other elements that do not, or that do not otherwise comply with the instrument),the Proposed Policy indicates that the adviser should make a reasonable allocation of the amounts paid according to their use, and should keep adequate books and records concerning the allocation.

Non-permitted goods and services are those that lack a clear connection to specific securities transactions, as well as goods and services that primarily relate to the operation of an adviser’s business. Examples include mass-marketed or publicly available information or publications, and trading surveillance or compliance systems.

The Proposed Policy provides further guidance on the types of goods and services that may be paid for with brokerage commissions. The Proposed Policy also reinforces that it is an adviser’s responsibility to determine whether a good or service may be paid for with brokerage commissions, and to ensure that the goods and services benefit its clients.

Disclosure Requirements

An adviser will be required to provide certain disclosure to each of its clients with respect to soft dollar arrangementson an initial basis before the adviser starts conducting business with the client, and must make periodic disclosure on at least an annual basis. One objective of the disclosure requirement is to increase transparency regarding the brokerage commissions paid on a client’s behalf, by helping clients to better assess the uses of brokerage commissions by their advisers (and to ensure they are getting fair value). For existing accounts, an adviser must make the initial disclosure by the earlier of six months from the date the Proposed Instrument takes effect and the date the adviser makes its first periodic disclosure.

Adequate disclosure must be made of the arrangements entered into, including the names of the dealers and third parties that provide goods and services and the general type of the goods and services provided. Advisers will also be required to make specific disclosures with respect to the amounts of commissions paid, including disclosure to each client of the total brokerage commission (by security class) on behalf of the client and all clients, and will be required to separate trades between those involving only order execution services, trades where the adviser receives bundled services, and trades where third parties receive part of the commission. Estimates will need to be made ofthe brokerage commissions for each of the categories as a percentage of the total brokerage commissions paid (for the client and for all clients), as well as the weighted average brokerage commission per unit of security.

In addition, advisers will be required to maintain details of goods and services received for which payment was made with brokerage commissions for the most recent five years, and to make this information available to clients upon request.

The form of disclosure may be determined by the adviser according to the needs of its clients, but should be provided in conjunction with other initial and periodic disclosure relating to the management and performance of the account.

Timing

The Canadian Securities Administrators are seeking general comments, as well as responses to a number of specific questions, by October 19, 2006. It is currently contemplated that once the Proposed Instrument comes into effect,there will not be any transition period. It is expected that once the Proposed Instrument is finalized, many adviserswill need to: (i) review their soft dollar practices; (ii) analyze whether the goods and services received comply with the Proposed Instrument; (iii) modify practices and/or arrangements; and (iv) arrange to compile and provide the additional information required to be disclosed to existing and new clients.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2006 McMillan Binch Mendelsohn LLP

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
Kimberly Poster
 
In association with
Related Topics
 
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