IIROC Proposed Amendments to Client ID and Verification Requirements: The Argument for Red Tape Reduction

Darin Renton -

On July 6, 2017, IIROC published for comment IIROC Notice 17-0139 Proposed Amendments to Client Identification and Verification Requirements. IIROC is proposing changes to Part A of Rule 3200 of the proposed IIROC Dealer Member Plain Language Rule Book (the Proposed Amendments). The Proposed Amendments are designed to make IIROC rules consistent with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the Proceeds of Crime (Money Laundering) and Terrorist Act and its accompanying regulations, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (defined in the Notice as the “AML Requirements”).

Effects of the Proposed Amendments

The Proposed Amendments would:

  • Update the information Dealer Members are required to collect on clients who are not natural persons (such as corporations, partnerships and trusts)
  • Change the amount of time Dealer Members have to confirm certain client information
  • Reduce the number of clients who are exempt from Part A of Rule 3200 of the proposed IIROC Dealer Member Plain Language Rule Book (the IIROC Rules)
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Regulating the Regulators: IIROC 2016 Report Card Released

Darin Renton -

The Investment Industry Regulatory Organization of Canada (IIROC) is the national self-regulatory organization (SRO) that oversees all investment dealers, as well as trading activity on debt and equity marketplaces in Canada. Like other regulated entities, IIROC is subject to the oversight of securities regulators, in this case each of the ten provincial securities regulators that have recognized IIROC as an SRO, collectively, the Recognizing Regulators (RRs). On July 4, 2017, the participating RRs issued their Oversight Review Report of the Investment Industry Regulatory Organization of Canada with the results of their review for the period from April 1, 2015 to July 31, 2016. The previous review was conducted in 2015.

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CSA Withdraw Best Execution Disclosure Proposal

The CSA is withdrawing the best execution disclosure rules proposed in May 2014 in light of amendments to IIROC’s best execution rules which were approved on June 28, 2017. The 2014 proposed amendments to National Instrument 23-101 Trading Rules would have mandated specific dealer disclosure relating to best execution policies. At the time of the proposal, IIROC’s best execution rules did not apply to IIROC dealer members that were not IIROC participants (under the Universal Market Integrity Rules) and the rules did not require participants to disclose best execution policies. The recently approved amendments to IIROC’s best execution rules make the best execution requirements applicable to all IIROC dealer members and impose new disclosure requirements which are substantially similar to those originally proposed by the CSA.

For further information, please see CSA Staff Notice 23-318 Withdrawal of Proposed Amendments Regarding Best Execution Disclosure Under National Instrument 23-101 Trading Rules (July 6, 2017). 

CSA Propose Amendments for Designated Rating Organizations

Proposed rule amendments and policy changes related to designated rating organizations (DROs) and the credit ratings of DROs were published for comment by the Canadian Securities Administrators on July 6, 2017. The amendments to National Instrument 25-101 Designated Rating Organizations are being proposed in an effort to ensure that the European Union continues to recognize the Canadian DRO regime as “equivalent” to new EU requirements for credit rating organizations coming into force on June 1, 2018. In addition, the proposed amendments include revisions to NI 25-101 that reflect new provisions in the March 2015 International Organization of Securities Commissions (IOSCO) Code of Conduct Fundamentals for Credit Rating Agencies.

Concurrently, the CSA are proposing amendments to National Instrument 44-101 Short Form Prospectus Distributions and National Instrument 44-101 Shelf Distributions to recognize the credit ratings of Kroll Bond Rating Agency, Inc. for limited purposes.

The comment period is open until October 4, 2017. For further information, please see CSA Notice and Request for Comment Relating to Designated Rating Organizations (July 6, 2017). 

New Proposal for Prospectus-Exempt Resale of Foreign Issuers' Securities

The Canadian Securities Administrators have published for comment a new prospectus exemption for the resale of securities of a foreign issuer. The proposed amendments would replace the “10% shareholder ownership tests” under section 2.14 of National Instrument 45-102 Resale of Securities with an issuer-focused “Canadian connection” test exempting the resale of securities for non-reporting issuers if the resale is on an exchange or market, or to a person or company, outside of Canada and the issuer is a foreign issuer. Comments are being accepted until September 27, 2017. For further information, please see CSA Notice and Request for Comment Proposed Amendments to national Instrument 45-102 Resale of Securities Proposed Changes to Companion Policy 45-102CP to National Instrument 45-102 Resale of Securities, Proposed Consequential Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, and Proposed Consequential Changes to National Policy 11-206 Process for Cease to be a Reporting Issuer Applications (June 29, 2017).

OSC Republishes Rule for Distributions Outside of Canada

The Ontario Securities Commission has published amendments to its proposed OSC Rule 72-503 Distributions Outside of Canada originally published last year. The proposed rule is intended to replace “Interpretation Note 1 Distributions of Securities Outside of Ontario” and is being published for comment until September 27, 2017. For further information, please see Second Notice and Request for Comment Proposed OSC Rule 72-503 Distributions Outside Canada and Proposed Companion Policy 72-503 Distributions Outside Canada(June 29, 2017).

Reminder of Transition Periods for Changes to Canada's AML/Terrorist Financing Law Affect Dealers' Client ID Processes

Previously announced amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the Regulations) will be coming in force on June 30, 2017.

Those amendments expanded obligations with respect to the identification of politically exposed persons among existing and new account holders, as detailed below. At the same time, the transition period to continue to allow for procedures under the old guidelines for ascertaining a person’s identity has been extended to January 23, 2018.

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Accredited Investor Exemption Still First in Popularity

Foreign and Canadian issuers primarily rely on the accredited investor exemption when raising capital on a prospectus exempt basis, as reported in the recently published OSC Staff Notice 45-715 2017 Ontario Exempt Market Report. The Report, which summarizes capital raising activity by non-investment fund issuers in Ontario’s exempt market during 2015 and 2016, also notes an increase in activity in Ontario’s exempt market and the general take-up of prospectus exemptions that were introduced during 2015 and 2016. Notably, Ontario’s exempt market accounted for less than one-fifth of the total gross proceeds raised by Canadian issuers domestically and less than one-tenth of gross proceeds raised globally.

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Report of Exempt Distribution Certification and Information Requirements Revisited by the CSA

 Viviana Beltrametti Walker and Laura Levine - 

The recently harmonized Form 45-106F1 Report of Exempt Distribution (Report) is once again in the spotlight as the Canadian Securities Administrators, other than the British Columbia Securities Commission, have published for comment amendments to the certification and information requirements in the Report.  

What’s Being Proposed?

The bulk of the proposed amendments apply to Item 10 of the Report (the Certification) which requires that a director or officer of the issuer or underwriter filing the Report certify that he or she has read and understood the Report and that the information it contains is true. The proposed amendments to the Certification include: 

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TSX Intends to Digitize PIFs

The ability to electronically sign personal information forms (PIFs) and declarations required by the Toronto Stock Exchange is being considered pursuant to proposed amendments to the TSX Company Manual published for comment on June 1, 2017. The proposed amendments would also remove the requirement that a PIF, a declaration or a TSX listing application be notarized by a public notary in an effort to improve client experience and reduce regulatory burden on TSX-listed issuers. As indicated in the request for comments, the TSX intends to automate and make PIFs and declarations digitally available in the future. There are currently no similar plans to automate and digitize the listing application.

The proposed amendments are open for comment until July 4, 2017. For further information, please see Amendments to Toronto Stock Exchange Company Manual (June 1, 2017).

Canada Repeals Côte d'Ivoire and Liberia Sanctions while Extending Syria SEMA Prohibitions to More Individuals and Entities

Canadian regulations imposing limited trade sanctions against Côte d’Ivoire and Liberia were recently repealed following the termination of similar measures imposed on the two countries by U.N. Security Council Resolutions 2283 and 2288. The Canadian sanctions had focused primarily on the supply, sale, export or shipment of arms and related material to Côte d’Ivoire and Liberia.

In addition, the Government of Canada has also adopted amendments (here and here) that add a total of 44 individuals to part 2 of Schedule 1 of the Special Economic Measures (Syria) Regulations (the Syria SEMA Regulations). Five entities have also been added to part 1 of the same Schedule, while 2 individuals who were previously named are no longer included. The Syria SEMA Regulations prohibit persons in Canada and Canadians abroad from dealing in the property of the designated persons and have been in force since May 24, 2011.

IIROC and the Life Insurance Council of Saskatchewan Agree to Share Information

The Investment Industry Regulatory Organization of Canada (IIROC) and the Life Insurance Council of Saskatchewan (LICS) have entered into an information sharing agreement designed to provide stronger protection for investors and consumers. The June 2, 2017 agreement, which takes the form of a Memorandum of Understanding (MOU), aims to prevent rulebreakers from moving from IIROC’s jurisdiction to LICS’ jurisdiction (or vice versa) without close scrutiny and will result in IIROC and LICS sharing certain information about investigations and discipline. Joint investigations will also be enabled when both organizations are investigating the same individual.

The Saskatchewan MOU is similar to those entered into with insurance regulators in Alberta, British Columbia, Ontario and Quebec which are described in a fact sheet recently published by IIROC outlining its information sharing agreements generally.

TSXV codified past practice with amendments to change of business and reverse takeover policy

Effective December 15, 2016, the TSX Venture Exchange implemented amendments to its Policy 5.2 Changes of Business and Reverse Takeovers which, among other things, formalized existing working practices related to certain transactions and considerations that had not previously been included in the Policy, and corrected certain oversights related to procedural matters. The amendments also incorporated guidance related to discretionary waivers of shareholder approval requirements outlined by the TSXV in a March 30, 2015 bulletin.

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ASC Exempt Market Dealer Sweep Prompts Best Practice Guidance

Darin Renton -

The Alberta Securities Commission (ASC) recently completed a compliance “sweep” of 66 Alberta-based exempt market dealers (EMDs). The results of the sweep, which involved EMDs of many stripes, were released on May 10, 2017 as ASC Notice 33-705 - Exempt Market Dealer Sweep (Report). Overall, the ASC found a spectrum of compliance levels.  Some firms achieved a high level of compliance or were found to be “at least generally compliant”. At the opposite end of the spectrum, compliance levels of certain firms necessitated regulatory action on the part of ASC staff.

The sweep focused on compliance systems, sales practices and marketing (including KYC, KYP and suitability) as well as conflicts, relationship disclosure and client reporting issues. The EMDs reviewed included some that offer third-party exempt market products, others that are primarily involved with oil and gas-related venture capital and private equity (or with hedge funds and other pooled investment funds investing in publicly traded securities) and a third group that focus on mortgage-based investments.

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Rights Offerings Increase in Popularity

The use of prospectus-exempt rights offerings has increased across Canada since the adoption of the new rights offering exemption in 2015, as reported in a Staff Notice published by the Canadian Securities Administrators (CSA) on April 20, 2017. The Staff Notice highlights a number of areas where compliance and disclosure related to rights offerings can be improved and provides guidance for reporting issuers relying on the exemption. 

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