Canada: Canadian Securities Regulators Propose Revised Rules To Regulate Use Of Client Brokerage Commissions

On January 11, 2008, the Canadian securities administrators (the CSA) released for a second comment period proposed National Instrument 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research Services, along with an accompanying companion policy. This proposed "soft dollar" rule and policy is the CSA's response to the forty-three comment letters received after the first publication of the CSA proposals in July 20061, as well as the new restrictions on the use of soft dollars that became effective during 2006 and 2007 in the United States and the United Kingdom.

The proposed rule and policy are designed to replace recommended approaches for the use of soft dollars adopted in 1986 by the Ontario Securities Commission (OSC Policy Statement 1.9), and later by l'Autorité des marchés financiers in Québec (AMF Policy Statement Q-20). The proposed rule does not deviate to any great extent from these policies, however, the CSA provide much needed additional guidance and clarifications as to what would constitute order execution, order execution services and research services. The proposed rule also will expand the level of disclosure that portfolio managers, including managers of mutual funds, will be expected to give their clients about the use of brokerage commissions.

The proposals will have the effect of eliminating the term "soft dollars" from the lexicon of Canadian regulation, as the CSA propose to use only the more descriptive, if less colourful, phrase, "use of client brokerage commissions".

The proposals reinforce the CSA's long-standing fundamental views on the use of client brokerage commissions by registrants:

  • Client brokerage commissions may not be used to pay for any goods or services that are not order execution services or research services. Even when commissions are used to pay for permitted services, such services must benefit the client whose trades generated the commissions.
  • The amount of commissions used to pay for permitted services must be reasonable in relation to the value of the services received and the adviser must be able to justify the use of commissions to acquire the services.
  • Clients are entitled to understand what goods and services registrants are acquiring with the commissions generated from their trades.

We anticipate that many of the clarifications made in the proposed rule and policy will be welcomed by registrants, given that the proposed rules are less ambiguous than previously proposed and the CSA now provide more useful guidance on the various goods and services that may be legitimately acquired with brokerage commissions.

The rule will only apply to trades in securities for an investment fund, a fully managed account or any other account or portfolio over which an adviser exercises investment discretion on behalf of third party beneficiaries, where brokerage commissions are charged by the dealer. This means that the rules will only apply to trades in securities that are exchange-traded, or where there is an independent pricing mechanism that enables the adviser to accurately and objectively determine the amount of commissions or fees charged. However, the CSA confirm their view that advisers must consider their fiduciary duty to deal fairly, honestly and in good faith with clients where they obtain goods and services other than order execution in conjunction with trades such as principal trades in fixed income securities where a mark-up is charged. In other words, advisers would be wise to take guidance from the proposed rule even where trading in fixed income and other non-exchange traded securities.

Order execution services will include goods and services provided or used between the point at which an adviser makes an investment decision and the point at which the resulting securities transaction is concluded – this is described as the "temporal standard" for order execution services. Some clarifications about services that would constitute order execution services or research services include:

  • advice, analyses or reports regarding various subject matters relating to investments, including databases and software that support these services, as well as traditional research reports, narrowly focused publications, fees to attend relevant educational seminars and conferences and trading advice from a dealer as to how, when or where to trade an order
  • order management systems, algorithmic trading software and market data, post-trade analytics from prior transactions, quantitative analytical software, market data from feeds or databases that will be analysed or manipulated to arrive at meaningful conclusions
  • custody, clearing and settlement services that are directly related to an executed order that generated commissions
  • mixed use items to the extent that they have some elements that may meet the definitions of order execution services or research services and brokerage commissions are allocated to acquire only those acceptable elements.

We expect that advisers will need to closely review the proposed disclosure requirements under the rule to ensure that the proposals are realistic and capable of practical implementation. Although the CSA explain that they have reduced the amount of quantitative disclosure required, advisers will still be required to provide narrative disclosure, including a description of the process they follow to select dealers to carry out portfolio transactions, the names of dealers and third parties that provided goods and services and the types of goods and services provided. Some quantitative disclosure will be required, including aggregated and per client amounts of client brokerage commissions paid, as well as a reasonable estimate of brokerage commissions used to acquire permitted goods and services.

Managers of publicly offered investment funds will note that it may not be sufficient to make the required disclosure in the annual information form of the investment funds, particularly given the differences between the existing AIF disclosure rules and the new disclosure rules proposed by the CSA. The CSA explain that they will be reviewing the prospectus disclosure rules in light of NI 23-103. The CSA suggest in the companion policy that fund managers should consider making the mandated disclosure to the independent review committee for their investment funds, presumably on the basis, although this is not explicitly stated, that the fund manager is in a conflict of interest position when it is deciding to use the commissions generated from portfolio trades of the funds in the manner contemplated in NI 23-103. In our view, it would be appropriate for a fund manager to conclude, where it or an affiliate is the portfolio manager for the funds, that use of brokerage commissions is a conflict of interest matter requiring IRC input, however, we question the necessity for the CSA's prescriptive suggestion that the mandated disclosure should be made to the IRC.

Any adviser, including a manager of an investment fund, that engages sub-advisers for client accounts, will be required to report on the use of client brokerage commissions by those sub-advisers. Industry participants will need to consider the mechanics of complying with this requirement carefully to determine if this is feasible.

Registrants will want to ensure that they have appropriate compliance systems in place to, among other things, ensure that an adviser can identify which clients benefit from the use of client brokerage commissions. Advisers must be able to value the goods or services received and illustrate that the amount of brokerage commissions paid to acquire those goods and services was reasonable in relation to that value. Dealers' compliance systems should be able to ensure that brokerage commissions are charged and accepted only in exchange for order execution services and research services. Maintaining proper books and records regarding use of commission brokerage will be very important for registrants.

Although we think that improvements to the proposals are necessary, particularly in the areas of disclosure and the CSA's views about the application of the rules to fund managers, we believe that these proposals will provide welcome additional certainty and consistency in respect of an area of the investment industry that has not always been well understood. We note that the CSA propose a six-month transition period to the new rules, which means that if NI 23-102 is brought into force by the end of 2008 as anticipated, registrants will be required to comply with it in mid-2009.

If you would like more information about how proposed NI 23-102 will affect you, please call your usual lawyer in BLG's Investment Management Group or any one of the following Investment Management Group leaders. We would be pleased to assist you in preparing a comment letter on proposed NI 23-102 by the comment deadline of April 10, 2008.


1. The first version of the proposed rule and companion policy published in 2006 was preceded by the publication in February 2005 of Concept Paper 23-402 Best Execution and Soft Dollar Arrangements by the British Columbia, Alberta, Manitoba, Ontario and Québec securities regulators.

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 Topics
Related Articles
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
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 (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

To Use 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.


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.


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