IIROC studying whether to change proficiency assurance model

IIROC yesterday released a notice intended to initiate a consultation process to consider whether the existing proficiency assurance model best serves the public interest and meets the needs of IIROC and the industry.

IIROC's current agreement with the Canadian Securities Institute, the exclusive provider of IIROC regulatory courses, is set to expire in January 2016. Going forward, IIROC may retain the current model, or adopt another model that includes multiple education or examination providers.

Comments, including responses to a number of consultation questions, are being accepted by IIROC until November 17, 2014. For more information, see IIROC Notice 14-0181.

IIROC expands implementation of single-stock circuit breakers

IIROC published guidance yesterday that will expand its implementation of single-stock circuit breakers.

As we discussed in February 2012, under IIROC's current guidance on single-stock circuit breakers, securities that are part of the S&P/TSX Composite Index, as well as ETFs comprised principally of listed securities, will be halted for trading where there has been a price increase or decline of at least 10% in a five minute period. The circuit breaker initially halts the particular security for five minutes, and this time may be extended for a further five minute period if a significant imbalance of buy and sell orders remain. The circuit breaker only applies between 9:50 a.m. and 3:30 p.m.

Under the new guidance, single-stock circuit breakers will also now apply to securities that are considered "actively-traded". Actively traded securities are those that are traded at least 500 times per trading day and have an average trading value of at least $1.2 million per trading day, in total across marketplaces, during the preceding three calendar months.

The trigger is also being modified so as to require price volatility of at least 10% and 20 trading increments in a five minute period to avoid inappropriately triggering a circuit breaker for lower-valued securities. Meanwhile, the post-open period (9:30 a.m. to 9:50 a.m.), which IIROC characterizes as a time of natural volatility, and the 30 minute period following the resumption of trading after a regulatory halt, will now be covered by a trigger that applies in the event of a price increase or decline of at least 20% and 40 trading increments in a five-minute period.

The new guidance will come into effect on February 2, 2015. For more information, see IIROC Notice 14-0170.

IIROC proposal would allow firms to provide unaudited summary statements of financial position

Late last month, IIROC proposed amendments to its Dealer Member Rules intended to allow dealers to satisfy a client's request for a copy of the dealer's summary statement of financial position without having to obtain an auditor's report for that statement.

IIROC is accepting comments on its proposed amendments until September 24. For more information, see IIROC Rules Notice 14-0157.

MFDA proposes enhanced client reporting requirements

The Mutual Fund Dealers Association of Canada recently released proposed amendments to its rules aimed at harmonizing these with enhanced CSA client reporting requirements adopted last year.

Among other things, the proposed changes address issues related to client reporting and trade confirmations. As we previously discussed, IIROC also adopted amendments to its Dealer Member Rules for the same purpose earlier last month. Comments on the proposal are being accepted until September 10, 2014.

IIROC adopts enhanced client reporting requirements

The Investment Industry Regulatory Organization of Canada yesterday announced the adoption of amendments to its Dealer Member Rules, part of phase 2 of the Client Relationship Model Project, intended to harmonize its rules with enhanced CSA client reporting requirements adopted last year. Among other things, the amendments will require that retail customers be informed of all fees and charges associated with client instructions to purchase or sell a security before the purchase or sale takes place. An initial version of the amendments was published late last year, and the final amendments will be fully implemented by July 15, 2014.

The CSA, meanwhile, have announced the issuance of parallel orders in jurisdictions that will provide IIROC member firms with relief from the related requirements found in NI 31-103 for those firms that comply with the corresponding IIROC requirements. All CSA members except for Quebec have issued similar parallel orders for MFDA member firms.

For more information, see CSA Staff Notice 31-339 and IIROC Notice 14-0133.

IIROC releases 2013 report on exemptions granted

IIROC released its annual Exemption Report today, which provides a summary of the exemptions granted last year from certain UMIR and Dealer Member Rule provisions. Ultimately, 478 exemptions from IIROC requirements were granted in 2013, with most of the exemptions being granted from proficiency requirements.

Exemptions from proficiency requirements were granted in a range or circumstances, including in connection with registered representatives seeking to add portfolio management services to their IIROC registration and where the individuals had previously completed the relevant courses. Circumstances where off-marketplace trades were permitted included transfers of securities to accredited investors that were subject to a statutory resale restriction (hold period), principal take-on trades where the Participant was to undertake a distribution to its clients and to permit purchases pursuant to the private agreement exemption for exempt take-over bids.

For more information, see IIROC Notice 14-0128.

IIROC report highlights enforcement activity for 2013

Earlier this week, the Investment Industry Regulatory Organization of Canada released its Enforcement Report for 2013, which covers IIROC's enforcement activities and key policy initiatives for last year.

According to IIROC, enforcement priorities in 2013 included focusing on the protection of seniors and vulnerable investors, unsuitable investment recommendations and firms' supervision of retail operations. In relation to the market activities, IIROC's enforcement focus was on the identification, investigation and prosecution of cases involving manipulative and deceptive trading (including such practices as wash trading, spoofing and layering).

Ultimately, IIROC conducted 200 investigations in 2013 across Canada. The regulatory violations most prosecuted against individuals related to due diligence, handling of client accounts and suitability. Inappropriate personal financial dealings, discretionary trading and off-book transactions also garnered a number of prosecutions. In the case of firms, prosecutions were most likely in relation to concerns over supervision and capital deficiencies. Sanctions against individuals and firms totaled almost $8 million.

In respect of policy initiatives and developments, the report highlights IIROC's project to consolidate its enforcement rules, its draft sanction guidelines, and its efforts to collect fines and cost awards, which include new legislative powers in Quebec to facilitate enforcement of IIROC's disciplinary decisions in the province and the authority to enforce cost orders in Ontario in light of a 2013 Superior Court decision. IIROC also states that it intends to begin publishing on its website a list of disciplined individuals who are delinquent in the payment of monetary sanctions.

IIROC releases proposed guidance to establish marketplace thresholds

The Investment Industry Regulatory Organization of Canada yesterday released proposed guidance designed to establish a framework for Canadian marketplaces to adopt appropriate marketplace thresholds. Such controls are intended to control short-term, unexplained price volatility and promote fair and orderly markets.

IIROC initially proposed a set of principles in May 2012 as it considered formal proposals to establish marketplace price and volume thresholds. The proposed guidance is ultimately based on three principles, namely that: (i) marketplace thresholds should operate to generally preclude the execution of orders at prices that would otherwise, on execution, require regulatory intervention by IIROC on the triggering of a single-stock circuit breaker or the application of the unreasonable trade policy; (ii) the volatility control mechanism used by a marketplace should have the least amount of impact that is practical on the market-wide operation of the price discovery mechanism and access to "tradable" liquidity; and (iii) the introduction or amendment of marketplace thresholds by a marketplace should, to the greatest extent possible, not impose a regulatory burden on other marketplaces or stakeholders.

According to IIROC, the proposed guidance is intended to be principles-based, allow each marketplace flexibility in the structure and application of its marketplace threshold, and ensure that marketplace thresholds can be implemented with minimal impact on stakeholders.

Comments are being accepted on the proposed guidance until July 3, 2014. According to IIROC the final guidance will become effective at least 180 days following the publication of a final notice. For more information, see IIROC Notice 14-0089.

IIROC proposes guidance for part-time CFOs

Earlier this week, IIROC published for comment proposed guidance setting out the organization's expectations regarding the engagement of part-time chief financial officers. Specifically, the proposed guidance confirms that the obligations of part-time CFOs are the same as those of full-time CFOs, and also outlines dealers' responsibilities of supervision. The issue of part-time CFOs who work for more than one dealer is also considered, with IIROC setting out expectations for CFOs in such circumstances.

IIROC is accepting comments on the proposed guidance until June 2, 2014. For more information, see IIROC Notice 14-0088.

IIROC reports best execution survey results

Simon Romano -

On March 28, 2014, IIROC released a notice (14-0082) summarizing the results of an online survey on the issue of best execution of its members engaged in secondary market trading of listed securities. The survey was conducted between December 2012 and February 2013.

“Best execution” is defined under National Instrument 23-101 as the “most advantageous execution terms reasonably available under the circumstances”, and the NI 23-101 obligation is to use “reasonable efforts” to achieve best execution. For IIROC regulated dealers, the obligation as set out in Rule 5.1 of the Universal Market Integrity Rules (UMIR) is to “diligently pursue the execution of each client order on the most advantageous execution terms reasonably available under the circumstances.”

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IIROC adopts guidance on use of business titles and financial designations

Earlier this week, the Investment Industry Regulatory Organization of Canada announced that it is adopting guidance in respect of regulatory expectations relating to the use of business titles and financial designations. As we discussed earlier this year, IIROC published draft guidance on the subject in January, and the final version of the guidance addresses issues identified by stakeholders during the public consultation period and provides additional guidance where necessary.

For more information, see IIROC Notice 14-0073.

IIROC publishes proposed guidance on underwriting due diligence

Earlier today, the Investment Industry Regulatory Organization of Canada published a request for comments in regards to proposed guidance respecting underwriting due diligence. Noting that IIROC dealers play an important role as gatekeepers to the Canadian capital markets, IIROC’s stated purpose in developing the proposed guidance is to promote consistency and enhance standards among its Dealer Members.  

While intended to codify “common practices and suggestions” the proposed guidance may represent a departure from what some Dealer Members consider as the current market standard. In developing the proposed guidance, IIROC notes that its process began by soliciting input on current practices from an industry advisory committee composed of senior industry representatives from a cross-section of firms in terms of size and regional representation. However, while IIROC engaged in this and various other consultations, the proposed guidance has ultimately been prepared by and reflects the views of IIROC staff.  Given its comprehensive nature, the proposal offers a good opportunity for Dealer Members to generally revisit their underwriting practices with a view to identifying possible gaps and enhancing existing practices.

The proposed guidance is classified into nine key areas that relate to all aspects of the underwriting due diligence process (discussed in detail below). These are expressed as principles and accompanied by practical examples. While presenting these “common practices,” IIROC is careful to note that due diligence, by its nature, is a fluid and evolving process and should be customized to the particular circumstances based on the underwriter’s exercise of professional judgement. We have set out these nine principles below, with highlights of IIROC’s discussion and/or examples of practices that IIROC has identified as reflecting each principle.

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IIROC releases guidance regarding dealer outsourcing

Earlier this week, the Investment Industry Organization of Canada released guidance relating to the outsourcing arrangements commonly entered into by investment dealers.

Generally, the notice summarizes existing requirements and guidance relating to entering into and maintaining outsourcing arrangements, describes the types of business activities that may and may not be outsourced and sets out IIROC's expectations concerning due diligence procedures that must be undertaken by dealers prior to outsourcing business activities.

More specifically, IIROC notes that since current rules require that certain functions and activities be performed by Approved Persons, outsourcing is effectively prohibited in respect of most client-facing activities, such as the assessment of client information to ensure compliance with "know your client" obligations, the performance of suitability assessments and the handling of client complaints by a designated complaints officer. An exception to this general prohibition in respect of client-facing activities is the outsourcing of the performance of investment decision-making in managed accounts, which is specifically permitted by IIROC's Dealer Member Rules to be outsourced to an external portfolio manager.

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IIROC updates proposed rule regarding oversight of debt securities trading

Last week, IIROC republished a proposed rule that would require reporting of debt transactions. As we discussed last year, IIROC initially released a draft rule in February 2013 to require each IIROC dealer member to report on a post-trade basis all debt market transactions executed by the dealer member, including those executed on an Alternative Trading System (ATS) or through an Inter-Dealer Bond Broker (IDBB). The more recent version of the draft rule, whose purpose is to facilitate the creation of a database of transaction information that would enable IIROC to carry out its responsibilities with respect to surveillance and oversight of OTC debt market trading, includes a number of revisions in response to stakeholder comments.

Changes made to the latest revision include setting out the data elements that must be reported for transactions and extending the deadline to report transactions to IIROC from T+1 at 2:00 a.m. to T+1 at 2:00 p.m. 

Comments on the proposed rule are being accepted until March 10, 2014. For more information, see IIROC Notice 14-0004.

A look back at 2013

From the implementation of prospectus pre-marketing rules to a new "notice-and-access" framework for proxy materials, the past year has been a busy one for capital market regulators. And, 2014 is shaping up to be a busy one as well, with indications from regulators that we could soon see the release of proposals related to crowdfunding, proxy voting and gender diversity. Further, the federal government, along with Ontario and B.C. continue to work towards the creation of a cooperative securities regulator.

In case you missed them the first time around, we've compiled some of our most popular and substantive posts from the last 12 months, below.

M&A

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IIROC will no longer intervene on unreasonably priced odd lot trades

IIROC announced earlier this week that, effective immediately, it will no longer intervene to vary or cancel odd lot trades that execute at unreasonable prices. According to IIROC's recent annual compliance report, odd lot executions do not impact a security's last sale price, volume-weighted average price, closing price or other common benchmarks. Market integrity is not impaired by such trades and, according to the notice, the change is consistent with its existing guidance on variation and cancellations of trades. For more information, see IIROC Notice 13-0297.

IIROC proposes expanded single-stock circuit breakers

On December 11, the Investment Industry Regulatory Organization of Canada released proposed guidance to broaden its application of single-stock circuit breakers.  

Specifically, under the new guidance, IIROC would extend the coverage of SSCBs to include all "actively-traded" securities (securities that traded an average of at least 500 times and with an average trading value of at least $1.2 million per trading day during the previous three months), increase the time during which SSCBs operate to include regular trading hours (i.e. 9:30 a.m. to 4:00 p.m., with a modified threshold during the post-open and pre-close periods), provide that SSCBs remain active for a security on a day when a regulatory halt has occurred on that security, and modify the general trigger for a trading halt to an increase or decline in price of at least 10% and 20 trading increments in a five minute period.

During the post-open (9:30 a.m. to 9:50 a.m.) and pre-close (3:30 p.m. to 4:00 p.m.) periods, the trigger would be a price increase or decline of at least 20% and 40 trading increments in a five minute period. According to IIROC, the post-open and pre-close periods are periods of natural volatility during which a higher threshold should apply.

In connection with the proposal, IIROC will maintain on its website a report listing all securities that are subject to SSCBs, which will be updated monthly and in the event of certain changes. Comments are being accepted by IIROC until March 10, 2014. For more information, see IIROC Notice 13-0298.

IIROC proposes enhanced client reporting requirements

IIROC today published for comment proposed amendments to its Dealer Member Rules intended to harmonize its rules with enhanced CSA client reporting requirements adopted earlier this year.

Among other things, the amendments would require: (i) that retail customers be informed of all fees and charges associated with a client instruction to purchase or sell a security prior to the transaction taking place; (ii) annual account performance reporting; and (iii) annual account fee and charge reporting.

The amendments form part of Phase 2 of the CSA Client Relationship Model (CRM) Project. For the proposals with an intended effective date of July 15, 2014 or earlier, the comment period is 60 days. In the case of proposals scheduled to come into effect on either July 15, 2015 or July 15, 2016, the comment period has been set for 120 days. For more information, see IIROC Notice 13-0300.

IIROC's annual compliance report identifies dealers' common deficiencies

Earlier this week, the Investment Industry Regulatory Organization of Canada released its Annual Consolidated Compliance Report for 2013/2014. The report, which sets out the results of recent targeted reviews and describes IIROC's key priorities for the next fiscal year, is intended to assist dealers in satisfying compliance obligations.

Specifically, the report identifies IIROC's three key areas of compliance focus over the next year, namely (i) financial and operational compliance, including with respect to balance sheet leverage and repo book financing risk management practices, outsourcing of regulatory functions (with IIROC stating that guidance on the subject would be issued by year end), and maintenance of books and records on accounting systems physically located on servers outside a dealer's control;  (ii) surveillance and trading conduct compliance, including in respect of unreasonable or clearly erroneous trades, electronic trading rule requirements, best execution practices and cyber-crime; and (iii) business conduct compliance , including in respect of the implementation of client relationship model provisions, personal financial dealings with clients and outside business activities, and policies and procedures for communicating through social media.

Meanwhile, the report highlights the results of IIROC's targeted compliance reviews. With respect to non-arm's length investment products, IIROC found that a majority of dealers reviewed had appropriate controls in respect of suitability obligations and accredited investor determination in the sale of non-arm's length products. However, issues were identified with respect to conflict of interest disclosure and product due diligence. The report also identifies areas of concern with respect to dealers' best execution practices, books and records, margin requirements for dealers engaged in underwriting, internal controls, safekeeping and custody of customer and firm assets, policies and procedures for supervision of business and trading conduct, manipulative and deceptive trading practices, client compliant handling and various registration related deficiencies.

For more information, see IIROC Notice 13-0296.

IIROC provides guidance for providing notice of DEA agreements

On December 3, the Investment Industry Regulatory Organization of Canada published guidance to assist participant dealers in complying with new gatekeeper and notice requirements for direct electronic access (DEA) and routing arrangements.

As we discussed earlier this year, under amendments to NI 23-103 Electronic Trading that come into force on March 1, 2014, only participant dealers may provide DEA, and DEA may not be provided to a client acting and registered as a dealer with a securities regulatory authority. Related amendments to UMIR that come into force on the same day will require dealers to notify IIROC when entering into a written agreement for DEA or a routing arrangement. The changes to UMIR also expand gatekeeper reporting obligations to include certain information related to DEA and routing arrangements.

IIROC's recently released notice, meanwhile, provides guidance on such matters including the means of providing notice, the information that is required in the notice to IIROC and the timing of notice. For more information, see IIROC Notice 13-0290.

ISS publishes 2014 Canadian corporate governance policy updates

Last week, Institutional Shareholder Services released updates to its Canadian benchmark corporate governance policy effective for meetings on or after February 1, 2014.

Among other things, the updated policy addresses the failure by boards to adequately respond to majority withhold votes for directors or majority supported shareholder proposals, adjusts the pay for performance evaluation methodology, generally recommends withhold votes for directors who are overboarded or have a poor record of board or committee meeting attendance, recommends generally voting against enhanced quorum bylaws for contested director elections, and removes the exception under which ISS would approve a stock option repricing or option exchange proposal.

Policy updates for the United States, Europe and Asia-Pacific were also released. Check back in the coming weeks for further analysis on the Canadian policy updates.

IIROC republishes proposals to consolidate enforcement rules

The Investment Industry Regulatory Organization of Canada today republished revised proposed rules to consolidate certain enforcement and related rules found in the UMIR and Dealer Member Rules. As we published last year, IIROC first released a draft set of rules in March 2012, and the proposed version released today addresses comments from stakeholders to the initial proposals and input from the Canadian Securities Administrators, including in regards to the confidentiality of investigations, standards of conduct and sanctions.

Comments are being accepted by IIROC until February 12, 2014. For more information, see IIROC Notice 13-0275.

IIROC releases draft sanction guidelines

The Investment Industry Regulatory Organization of Canada (IIROC) yesterday published for comment updated draft sanction guidelines that set out the principles and factors regarding the imposition of sanctions that may be considered in IIROC disciplinary proceedings. 

The draft guidelines, which consolidate the current Dealer Member and UMIR sanction guidelines, are intended to assist enforcement staff and respondents in the negotiation of settlement agreements, help hearing panels in determining whether to accept settlement agreements and assist hearing panels in determining the appropriate sanctions after disciplinary hearings. The draft guidelines reflect the following material changes to the current sanction guidelines, namely: (i) the elimination of prescribed fine ranges and/or suggested minimum fines; and (ii) the treatment of a respondent's inability to pay.

IIROC also released three draft companion policy statements that, while not part of the guidelines, provide IIROC staff's views in respect of their approach to suspensions and permanent bars, internal discipline by dealers and credit for cooperation, each of which commonly arises in the negotiation of settlement agreements or in the imposition of sanctions by a hearing panel following a contested disciplinary proceeding.

IIROC is accepting comments on the draft guidelines and policy statements until February 3, 2014. For more information, see IIROC Staff Notice 13-0269.

AMF 2012-2013 annual report highlights new mandates

Maïté Murray -

The Autorité des marchés financiers (AMF) recently released its 2012-2013 annual report. The report reviews the actions undertaken by the AMF during the last year and identifies policy areas it will focus on in the coming months.

The report highlights, among other things, two new mandates that the Quebec government has conferred upon the AMF that have broadened the scope of its typical activities. These include administering a new framework to regulate money-services businesses pursuant to the Money-Services Businesses Act, which requires that any person or entity who operates such a business must hold a license issued by the AMF, and processing applications by businesses for authorizations to enter into public contracts or subcontracts under the Integrity in Public Contracts Act.

The report also emphasizes the AMF’s intention, in line with its five-year strategic plan (2012-2017), to reinforce its consumer protection programs, including handling of complaints and dispute resolution, and the financial services compensation fund, which compensates victims of fraud.

Looking forward, the AMF will continue to collaborate with the other members of the Canadian Securities Administrators (CSA) towards the development of a framework for the regulation of defensive tactics in Canada. Having assumed the leadership of the CSA Derivatives Committee, the AMF will also continue to pursue the development and implementation of a nationally harmonized regulatory framework for OTC derivatives. The AMF will likewise continue to consider the appropriate regulatory response to concerns about the services provided by proxy advisory firms.

During the period covered by the report, Louis Morisset assumed the position of President and CEO of the AMF formerly held by Mario Albert.  

IIROC proposes regulations regarding order execution services

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed amendments to UMIR and its Dealer Member Rules intended to ensure that similar activity that occurs through different forms of third-party electronic access is subject to the same degree of supervision and regulatory oversight. The proposals specifically focus on order execution services (OES), being one of the ways of providing direct electronic access, which also include direct electronic access and routing arrangements.

Among other things, the proposals would (i) require that client IDs be assigned to any OES client that meets certain activity thresholds; (ii) introduce a definition of Manipulative and Deceptive Activities that would clarify dealers' supervision requirements for retail and institutional customer accounts; and (iii) introduce into the Dealer Member Rules a requirement for an OES dealer to consider the inherent risks of third-party electronic order entry and identify and address such risks in its policies and procedures. IIROC also published proposed guidance setting out expectations in regards to the proposed supervision requirements.

As we discussed a few months ago, the CSA's requirements in regards to the provision of direct electronic access are set to come into force on March 1, 2014. IIROC's proposals, which set out a number of specific questions for stakeholders to consider, are open for comment until January 14, 2014. For more information, see IIROC Notice 13-0255 and IIROC Notice 13-0256.

Relief from relationship disclosure information requirements extended for IIROC members

The CSA announced yesterday that relief exempting IIROC members from the requirement to provide relationship disclosure information, as prescribed under s. 14.2(1) of NI 31-103,  would be extended to March 26, 2014.

CSA members initially provided an exemption from the requirements of s. 14.2(1), set to expire on December 31, 2013, to the benefit of IIROC members that complied with IIROC's rules once in force. As we discussed last year, IIROC adopted specific requirements for relationship disclosure as part of its Client Relationship Model Project, with implementation planned for March 26, 2013 for new clients and March 26, 2014 for existing clients. As IIROC's rules will not come into effect until next year in respect of existing clients, the CSA relief will extend its exemption in respect of existing clients to March 26, 2014 in order to harmonize with IIROC's implementation schedule.

The relief orders, being issued by CSA jurisdictions, will come into effect on December 31, 2013. For more information, see CSA Staff Notice 31-335.

IIROC issues draft guidance respecting average price disclosure on trade confirmations

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed guidance intended to consolidate previously-issued guidance respecting marketplace and average price trade disclosure on trade confirmations. The proposed guidance also seeks to clarify acceptable average price disclosure language for use on trade confirmations.

Comments on IIROC's proposal is being accepted until November 8, 2013. For more information, see IIROC Notice 13-0241.

IIROC Annual Report highlights regulatory progress

The Investment Industry Regulatory Organization of Canada yesterday released its 2012-2013 annual report, which outlines the progress made by IIROC over the past year to protect investors, promote compliance and effective risk management, and foster fair, efficient and competitive capital markets.

IIROC's accomplishments over the past year include new electronic trading rules, the publication of guidance on deceptive trading practices and publication of a proposed framework for enhanced oversight of the Canadian debt market. On the enforcement front, IIROC held 58 disciplinary hearings over the past year, issued 26 suspensions and 7 terminations. This compares to 73 disciplinary hearings, 29 suspensions and 9 bans the previous year. In addition to regulating registered firms and individuals, IIROC also regulates trading on four stock exchanges and seven equity alternative trading systems (ATSs).

IIROC issues guidance regarding management of stop loss orders

The Investment Industry Regulatory Organization of Canada (IIROC) today issued final guidance regarding the management of stop loss orders in light of dealers' obligations under the new UMIR electronic trading rule amendments effective March 1, 2013. The guidance supplements prior guidance regarding the execution of triggered stop loss orders, and also includes answers to a number of frequently asked questions regarding managing stop loss orders.

For more information, see IIROC Notice 13-0191.

IIROC amends proposed dealer termination provisions

On June 27, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed amendments to delete from a previous proposal draft provisions regarding the suspension and termination of Dealer Members. The original proposals are part of IIROC's project to rewrite its Dealer Member Rules in plain language. 

According to the notice, IIROC staff believes that a hearing panel should determine whether to suspend or terminate the membership of a Dealer Member in all circumstances. Comments on the proposals are being accepted for 60 days from publication of the notice. For more information, see IIROC Notice 13-0174.

OSC granted approval for agreements governing SEDAR and other National Systems

The OSC announced today that it has received Ministerial approval for certain agreements among it, the BCSC, ASC and AMF with respect to the outsourcing and management of, and ownership and licensing of intellectual property comprising, certain nationally shared information technology systems, including SEDAR, SEDI and the NRD.

Also approved was an agreement among these parties governing the administration and application of surplus funds generated by the operation of these national systems, as well as a similar agreement relating only to the NRD with IIROC.

IIROC releases 2012 report on exemptions granted

Earlier this week, Investment Industry Regulatory Organization of Canada released its second annual Exemption Report, which provides an overview of exemptions granted last year by IIROC from certain UMIR and Dealer Member Rule provisions. Ultimately, Market Regulation Policy staff, the IIROC Board of Directors or IIROC staff granted 257 exemptions, including 62 granted in response to a request by Participant to act as principal or agent in respect of an off-marketplace trade and 157 from proficiency requirements.

Circumstances where off-marketplace trades were permitted included transfers of securities to accredited investors that were subject to a statutory resale restriction (hold period), principal take-on trades where the Participant was to undertake a distribution to its clients and to permit purchases pursuant to the private agreement exemption for exempt take-over bids. Exemptions from proficiency requirements were granted in a range or circumstances, including to accept alternative work experiences.  IIROC staff also granted 26 exemptions with respect to “bulk transfers” of client accounts.

IIROC's first exemption report was issued in May 2012. For more information, see IIROC Notice 13-0149.

CSA report reviews performance of MFDA

The Canadian Securities Administrators today released an oversight review report that reviews the performance of the Mutual Fund Dealers Association of Canada (MFDA) over the last few years. The report, which covers such topics as the MFDA's corporate governance, enforcement of members and policy-making procedures, ultimately concludes that the MFDA has met the terms and conditions of the applicable recognition orders granted by securities regulators. Areas identified for corrective action are also set out. According to the report, CSA Staff are generally satisfied with the MFDA's responses to stated concerns. 

IIROC releases inaugural enforcement report

The Investment Industry Regulatory Organization of Canada (IIROC) recently released its inaugural enforcement report for 2012. According to the report, which provides a summary of IIROC's enforcement actions between 2009 and 2012, IIROC initiated 256 investigations and 129 prosecutions during 2012, with assessed fines and fees totaling over $12 million. The most common regulatory violation prosecuted by IIROC with respect to individuals concerned issues related to due diligence, handing of client accounts, or suitability. Meanwhile, prosecutions against firms were most commonly a result of issues concerning supervision. The report also provides summaries of the most significant cases IIROC has prosecuted in the last few years.

IIROC proposes expanded oversight of debt securities trading

On February 20, IIROC released for comment a proposed new rule that would require reporting of debt transactions.

Specifically, under the proposal, each IIROC dealer member would have to report on a post-trade basis all debt market transactions executed by the dealer member, including those executed on an Alternative Trading System (ATS) or through an Inter-Dealer Bond Broker (IDBB).

For these purposes, “debt securities”  would mean any securities that provide the holder with a legal right, in specified circumstances, to demand payment of the amount owing, including in respect of a debtor-creditor relationship. The fact that a security was issued in another country or denominated in a foreign currency would not disqualify it from being a debt security and the term would include securities with short-term maturities or mandatory tender periods such as commercial paper and floating rate notes as well as traditional notes and bonds. Debt securities, however, would not include derivative products that are not securities (e.g., futures contracts, interest-rate swaps).

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IIROC coordinates circuit breakers with updated U.S. triggers

Earlier this week, IIROC released a guidance notice with regards to the new U.S. market-wide trading circuit breakers.  Effective April 8, 2013, trading halt triggers in the U.S. will be based on declines of the S&P 500 Index of 7% (a Level 1 halt), 13% (Level 2) and 20% (Level 3).

For days that U.S. markets are closed and Canadian marketplaces are open, trading halts will be triggered based on similar percentage declines of the S&P/TSX Composite Index. The timing and duration of the market-wide trading halts will otherwise match U.S. requirements.

For more information, see IIROC Notice 13-0059.

IIROC releases guidance on deceptive trading practices

On February 14, the Investment Industry Regulatory Organization of Canada (IIROC) confirmed that it considers certain trading strategies typically associated with high frequency trading (HTF) as manipulative and deceptive in respect of the Universal Market Integrity Rules.

Specifically, IIROC outlined that it considers layering, quote stuffing, quote manipulation, spoofing and abusive liquidity detection to contravene Rule 2.2 of UMIR. That said, IIROC's notice also clarified that it was not censuring algorithmic or high frequency trading generally, as some HFT strategies, for example, contribute to the quality of price discovery in a stock. Further, while the listed practices are generally associated with automated order systems, the notice stated that the offending strategies are prohibited whether conducted electronically or manually.

IIROC released a draft version of the guidance in July 2012. A summary of comments received to the draft guidance, as well as IIROC's responses, was also released. For more information, see IIROC Notice 13-0053 and Notice 13-0054.

IIROC releases FAQ regarding notification trigger under electronic trading supervisory requirements

Last week, IIROC released a notice to address inquiries received regarding amendments to UMIR, effective March 1, that are intended to align IIROC's trading supervisory requirements with the requirements found in NI 23-103 Electronic Trading. Under the amendments, a Participant must notify IIROC if it enters into an arrangement to have a third party perform certain services on its behalf.

The notice released yesterday answers questions regarding certain specific circumstances that require notification, as well as providing information regarding how to contact IIROC and the type of information required.

For more information, see IIROC Notice 13-0044.

MFDA codifies standards for assessing suitability of leveraging

The Ontario Securities Commission has approved amendments to the Mutual Fund Dealers Association of Canada's Rule 2.2.1 and Policy No. 2 regarding suitability obligations in cases of leveraged borrowing. The changes will, among other things, codify minimum criteria standards for assessing the suitability of client leveraging and provide guidance on the type of documents MFDA members will be required to review and maintain to facilitate supervision of a leveraging strategy. The MFDA released proposed amendments on the subject in July 2011.

IIROC releases guidance regarding non-arm's length investments

The Investment Industry Regulatory Organization of Canada yesterday released recommendations and best practices respecting the distribution by dealers to clients of non-arm's length investment products. Such products include those issued by: the dealer itself, an issuer or selling securityholder with which the dealer does not deal at arm's length, or an issuer or selling securityholder to which a dealer is otherwise connected or related.

According to IIROC, dealers are expected to follow a sequence of steps in order to satisfy their obligations in respect of the distribution of non-arm's length products, namely: (i) conducting product due diligence; (ii) completing a conflict of interest assessment; and (ii) assessing client-specific suitability. IIROC also stated that compliance reviews will focus on dealers' written policies and procedures, with the guidance providing a list of particulars expected in written policies.

IIROC originally published for comment draft expectations in February 2010. A summary of comments received, and IIROC's responses, was also published yesterday. For more information, see IIROC Notice 13-0039 and Notice 13-0040.

IIROC looks to address use of business titles and financial designations

Earlier this week, IIROC published the results of a dealer survey on the use of business titles and financial designations and provided draft guidance on the subject.

According to IIROC, the results of the survey suggest that a wide variety of business titles and financial designations are currently used by licensed representatives within and across firms, including many that do not provide a "meaningful" description of the types of services or products provided to clients. Meanwhile, only about 40% of responding firms had specific written policies and procedures in place respecting the use of titles and financial designations for licensed representatives. That said, 87% of responding firms did have a review and approval process for the use of such titles and designations.

The proposed guidance, meanwhile, communicates IIROC's expectations that firms will implement policies and procedures on business titles and the use of financial designations that will "promote greater transparency" for clients. To increase public understanding, IIROC suggests that business titles be coupled with an explanation of an individual's IIROC approval category and corresponding proficiencies. With respect to the approval of financial designations, IIROC states that a number of factors should be considered, including whether the designation has a rigorous curriculum, a continuing education requirement and a public disciplinary process.

IIROC is accepting comments on its draft guidance until March 9, 2013. For more information, see IIROC Notice 13-0005.

IIROC releases annual compliance report for 2012

The Investment Industry Regulatory Organization of Canada last month released its annual compliance report for 2012. The report, intended to help dealers comply with regulatory expectations, outlines common deficiencies found in IIROC staff's compliance examinations in the last year, and also sets out IIROC's examination priorities for the current fiscal year.

Specifically, the report outlines a number of deficiencies identified pursuant to IIROC's targeted compliance reviews and surveys. Highlighted issues include (i) non-compliance with aspects of IIROC rules regarding the handling of client complaints; (ii) inadequate internal controls; (iii) deficiencies regarding books and records, including with respect to control and access over customer records on brokerage accounting systems located on affiliates' computer servers and failures to capture and record off-book transactions; (iv) deficiencies in respect of related party transactions, including failures to execute written cost or service-sharing agreements that identify services provided and method of fee calculation; (v) deficiencies regarding policies and procedures for identifying and managing conflicts of interest; (vi) inadequate policies and procedures regarding due diligence; (vii) malfunctions or programming errors related to automated trading systems causing market disruptions; (viii) failures in providing timely responses to trade inquiries, particularly in relation to clients with direct market access; and (ix) inadequate controls over primary distribution of debt. 

Meanwhile, for 2012-2013, the report states that IIROC staff intend to focus on issues such as non-arm's length investment products, know-your-client documentation, order-execution only services, capital and liquidity risk management, outsourcing, IFRS, electronic trading controls and extended failed trades reporting.

For more information, see IIROC Notice 12-0359.

IIROC releases statistical analysis of high frequency traders

Last month, the Investment Industry Regulatory Organization of Canada published the first two phases of a study into high-frequency trading (HFT) in Canadian equity markets. The report, which provides a statistical analysis of the trading activity of a study group of traders with relatively high order-to-trade (HOT) ratios between August 1 and October 31, 2011, is intended to assist regulators in determining the most appropriate response to the growth of HFT over the last few years.

Ultimately, the report found that 11% of all traders during the study period were HOT traders and that this group accounted for 22% of the total share volume, 32% of dollar value and 42% of all trades. Among other things, the study also found that the HOT group, which traded predominantly in TSX-listed securities trading between $1 and $5, was responsible for a greater percentage of dark activity than lit, a large number of orders cancelled in comparison to trades executed and used the Anonymous marker more often than other market participants.

The third part of the study is intended to assess the impact of HFT activity with respect to market quality and integrity. Concurrent with the release of its report, IIROC also published a proposed request for assistance, which includes several questions IIROC seeks to address, from those with demonstrated expertise in the area of equity market structure. According to IIROC, the work of outside experts will supplement the internal analysis being undertaken by the organization.

Comments on the proposed request for assistance will be accepted until January 11, 2013. For more information, see IIROC Notice 12-0374.

IIROC describes expectations regarding sale of PPNs

The Investment Industry Regulatory Organization of Canada yesterday released a guidance note setting out its expectations regarding application of know your client and suitability obligations to dealings in principal protected notes (PPNs) by IIROC dealer members. The guidance follows publication of a CSA staff notice (excluding Quebec) this past August that described the CSA's expectations that deposit-taking institutions will use registered dealers and individuals to distribute all PPNs that are not “Specified PPNs,” being those with a term of five years or less.

IIROC Dealer Member Rule 18.14 allows registered representatives and investment representatives to engage in another gainful occupation provided certain conditions are met, effectively permitting dual employment with the investment dealer and an affiliated financial institution. According to IIROC, the sale of PPNs by such a dually employed individual could create client confusion as to which entity the client is dealing with (the financial institution or the IIROC dealer) and would result in the application of know your client and suitability protections dependent on the distribution channel.

Consequently, IIROC states that all sales of PPNs by an IIROC registered individual must be transacted solely in their capacity as an employee or agent of the dealer member. IIROC also expects that all dealers will have policies and procedures to give this expectation effect and to ensure adequate supervision and compliance oversight. For more information, see IIROC Notice 12-0384.

IIROC updates expectations regarding compliance and supervision

The Investment Industry Regulatory Organization of Canada (IIROC) released a notice earlier this week setting out its expectations with respect to the compliance function at member firms, as well as the roles and responsibilities of firms, boards, management, compliance departments and compliance officers. The notice updates a previous notice issued in 2006 and is intended to ensure consistency between the expectations of IIROC and registration reform related amendments that include new registration categories, changes to the scope of registerable activities and updates on compliance related functions.

Ultimately, the notice covers such issues as (i) the responsibility for compliance; (ii) the distinction between supervisory and compliance roles; (iii) the roles of the dealer, board, management and compliance officer; (iv) when individuals may be subject to enforcement action; and (v) creating an effective compliance program. A number of "tips" are also provided for compliance officers to ensure that expectations are met.

A draft version of the notice was initially published for comment in December 2011. IIROC's summary of comments and responses were also published this week.

For more information, see IIROC Notices 12-0379 and 12-0380.

Amendments to UMIR to extend supervisory requirements to electronic trading

Last week, the Investment Industry Regulatory Organization of Canada announced amendments to UMIR intended to align IIROC's trading supervisory requirements with the requirements found in NI 23-103 Electronic Trading. As we've discussed previously on this blog, NI 23-103 and its Companion Policy were recently adopted in order to address the risks of electronic trading, specifically with respect to credit risk, market integrity risk, technology or systems risk and regulatory arbitrage risk

The amendments to UMIR, meanwhile, are intended to: (i) expand existing trading supervision obligations to specifically address the risks associated with electronic trading ; (ii) set out specific supervisory provisions related to the use of automated order systems; (iii) clarify the circumstances under which a trade may be cancelled, varied or corrected with notice to, or consent of, a market regulator; (iv) allow for a participant to authorize an investment dealer to perform on its behalf the setting or adjusting of a specific risk management or supervisory control, policy or procedure, or for a participant to use the services of a third party provider; and (v) establish certain gatekeeper obligations for participants who have authorized an investment dealer to perform on its behalf the setting or adjustment of a risk management or supervisory control, policy or procedure.

The amendments become effective on March 1, 2013 and, while most requirements must be implemented by that date, IIROC will allow participants and access persons until May 31, 2013 to complete testing and implementation of automated controls. Meanwhile, IIROC also released guidance that address the amended provisions. For more information, see IIROC Notices 12-0363 and 12-0364.

IIROC announces bi-annual tests of dealers' business continuity plans

The Investment Industry Regulatory Organization of Canada (IIROC) has announced that industry-wide tests of dealers' business continuity plans will be conducted on a bi-annual basis going forward. Such tests have been conducted in the past, and IIROC has scheduled the next industry test for October 5, 2013. During the upcoming testing, IIROC will focus on the scenario of inaccessibility of dealers’ data centers where business transactions are processed.

While the upcoming test is being conducted on a voluntary basis, IIROC is strongly urging dealers to participate. For more information, see IIROC Notice 12-0279.

IIROC publishes circuit breaker levels for Q4 2012

The Investment Industry Regulatory Organization of Canada (IIROC) yesterday published its circuit breakers for the fourth quarter of 2012, which are set in coordination with those in U.S. markets. In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for Q4 2012 are 1,350 points, 2,700 points and 4,050 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,250 points; Level 2 (20%) - 2,450 points and Level 3 (30%) - 3,700 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline. For more information, see IIROC Notice 12-0285.

IIROC releases concept paper on portfolio margining

The Investment Industry Regulatory Organization of Canada (IIROC) released a concept paper this week to solicit comments to assist staff in its review and assessment of whether portfolio-based margining could provide a feasible alternative to current margin requirements for determining dealers' regulatory capital levels and margin lending limits for certain sophisticated clients.

Currently, margin must generally be provided on a position-by-position basis and calculated as a set percentage of the market value of each account position or underlying security to each account position for investment products held in a dealer's proprietary inventory account. Portfolio-based margining instead bases capital or margin requirements on the expected market value losses of an overall portfolio of securities in an account.

recently commissioned study of the feasibility of using a portfolio-based methodology recommends that IIROC adopt such a methodology in order to achieve a better match between funding, collateral and risks in the marketplace, reduce the frequency and impacts of systemic risk events and keep pace with developments in other major world markets.

IIROC is asking stakeholders to consider a number of specific questions in formulating responses to the concept paper, including whether utilizing the methodology should be mandatory and whether it should be available only to dealers and/or "qualifying non-individual accounts" (acceptable institutional (AI), acceptable counterparty (AC) and regulated entity (RE) accounts) that maintain a set capital amount. For more information, see IIROC Notice 12-0275.

IIROC releases 2011-2012 Annual Report

Hot on the heels of the OSC's release of its 2012 Annual Report, IIROC has just released its annual report for 2011-2012. Entitled Raising the Bar, the report outlines the progress made by IIROC to enhance regulatory standards and strengthen investor protection in Canada, and also summarizes the organization's enforcement activities over the last year.

Of particular interest, the report includes a scorecard that sets out how IIROC's activities in fiscal 2012 furthered the goals outlined in its Strategic Plan for 2011-2012 (IIROC recently updated its Strategic Plan for 2012-2015). Accomplishments over the last year included completing the initial phase of the Dealer Member rules plain language rewrite (as we discussed in March 2011 and May 2011), finalizing the OTC Securities Fair Pricing Rule, and conducting over 300 onsite compliance reviews of member firms.

On the enforcement end, IIROC noted that it held 73 disciplinary hearings over the course of the year, issued 29 suspensions and banned 9 individuals from the industry. This compares to 60 disciplinary hearings, 19 suspensions and 13 bans the previous year.

IIROC provides guidance on variation and cancellation of trades

On August 20, Investment Industry Regulatory Organization of Canada (IIROC) released guidance regarding the circumstances in which it may intervene to vary or cancel trades it considers "unreasonable" or not in compliance with UMIR. As we discussed in an earlier post, IIROC released proposed guidance on the subject in April, and the final version of the guidance reflects changes suggested in response to comments received in response to the original proposal.

Ultimately, guidelines are provided with regards to (i) a "no touch zone" for which there will generally be no regulatory intervention when the price difference between the erroneous trade and the current fair value of the security does not exceed the greater of 10% of the security's price or 10 trading increments; (ii) the limited conditions under which IIROC would consider intervening to cancel an erroneous trade; and (iii) the market-based conditions used to determine whether a higher threshold than the "no touch zone" will be used when an erroneous trade has been executed during significant market volatility, outside normal trading hours or in a security of limited or very limited liquidity. For more information, see IIROC Notice 12-0259.

IIROC releases draft guidance regarding Dealer Members' compensation arrangements with retail clients

On August 14, the Investment Industry Regulatory Organization of Canada (IIROC) issued a request for comments on draft guidance concerning the compensation arrangements offered by dealer members to retail clients. Specifically, the draft guidance considers the advantages and disadvantages of commission-based and fee-based accounts and ultimately provides a number of specific issues that IIROC wants dealer members to consider in determining the suitability of compensation arrangements for any given client.

IIROC's draft guidance suggests that dealer members may need to adjust long standing supervisory practices to ensure current practices are appropriate for both fee-based and traditional commission-based accounts and suggests that proper procedures should be in place to: (i) assess suitability at account opening to take into account the factors applicable to commission and fee-based accounts, including whether the client engages in or plans to engage in frequent trading and the relative size of the assets of the account; (ii) provide the disclosure required for commission-based and fee-based accounts and how they differ from one another; (iii) have effective account activity supervision procedures in place, including alternative methods for selecting and reviewing accounts when dealing with fee-based accounts; (iv) regularly review compensation structure suitability; (v) prevent double charging as a result of embedded commissions or improper transfers between commission and fee-based accounts; and (vi) provide adequate disclosure to clients regarding the true costs associated with investment choices, including where products have built-in fees.

Comments on the draft guidance are being accepted for 90 days from the publication of the notice. For more information, see IIROC Notice 12-0253.

IIROC's new strategic plan includes establishing electronic trading framework

On August 3, the Investment Industry Regulatory Organization of Canada (IIROC) released a new strategic plan for 2012-2015. The plan sets out IIROC's strategic goals for the next few years, namely (i) promoting a culture of compliance; (ii) promoting the protection of the investing public; (iii) delivering effective and expert regulation; (iv) strengthening the fairness, integrity and competitiveness of the Canadian capital markets; (v) acting in an accountable, transparent and fair manner; (vi) being a cost-effective and efficient organization; and (vii) being an employer of choice.

Of particular interest, the plan provides information regarding the steps IIROC will take to promote a culture of compliance, including monitoring dealers' evolving service offerings, undertaking periodic industry-wide compliance audits and surveys (including to review compliance with best execution obligations and policies relating to management of conflicts in distribution of non-arm's length products), completing its plain language rule initiative and, with industry participation, conducting a review of underwriting due diligence standards. On the topic of strengthening the fairness and competitiveness of markets, IIROC intends, among other things, to address market structure issues by establishing a framework for electronic trading and updating surveillance alerts and enforcement approaches in the context of high frequency trading.

IIROC to update guidance on marketplace disclosure for trade confirmations

On July 27, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed guidance respecting the marketplace disclosure language it would deem acceptable for trade confirmations. The guidance follows its April 2010 proposal, expected to be approved by securities regulators on or before October 15, 2012, that would require trade confirmations to disclose the marketplace on which a trade was executed or other marketplace language acceptable to IIROC.

Assuming approval of the proposed amendments, IIROC would deem the following disclosure language acceptable where an order was executed on a single marketplace in Canada, multiple marketplaces in Canada, a foreign organized regulated market (including one in the U.S.), or any combination of one or more marketplace and foreign organized regulated markets:

"Traded on one or more marketplaces or markets, details available upon request."

The guidance would be effective October 15, 2012, which would coincide with the implementation date of UMIR amendments respecting the regulation of short sales, failed trades, dark liquidity. For more information, see IIROC Notice 12-0236.

IIROC extends implementation date of account suitability requirements to March 2013

As we discussed in a post earlier this year, IIROC recently announced the approval and implementation of core elements of its Client Relationship Model project. However, in light of challenges being encountered by dealers in meeting the September 26, 2012 implementation date, IIROC has announced that that the implementation of the account suitability assessment requirements will be extended to March 26, 2013. For more information, see IIROC Notice #12-0225.

IIROC releases draft guidance on deceptive trading practices

Earlier this week, the Investment Industry Regulatory Organization of Canada released proposed guidance in which it confirms that certain trading strategies, including "layering", "quote stuffing" and "spoofing" are considered to be manipulative and deceptive trading practices under UMIR. The guidance was published in light of the evolution in recent years towards automated order systems, including algorithmic trading and high frequency trading. According to the IIROC notice, while no consensus definition exists on what constitutes "high frequency trading" or "HFT", recent industry estimates suggest HFT activity makes up between 25% and 40% of trades on Canadian marketplaces.

IIROC is accepting comments on the proposed guidance until October 15, 2012. For more information, see IIROC Notice 12-0221.

IIROC releases restricted dealer member proposal for U.S.-based dealers

The Investment Industry Regulatory Organization of Canada (IIROC) today proposed the introduction of a "Restricted Dealer Member" class of IIROC member. According to IIROC, the proposed new category is intended to respond to policy concerns regarding exempt market dealers, typically based in the U.S., that are conducting brokerage activities in Canada. As we discussed in a September 2011 post, the CSA considered the issue last year.

To that end, the proposed Restricted Dealer Member category would be limited to U.S. FINRA-members, whose business activity would be limited to the scope of business activity approved by FINRA in the firm's membership agreement with the U.S. regulator. Further, more than 50% of the firm's securities would have to be owned by foreign entities or residents. As such, the RDM category would be unavailable to Canadian investment dealers.

Under the proposal, and among other things, a Restricted Dealer Member would be subject to a prescribed de minimis threshold of business activity, restricted to dealing with prescribed “retail” and “institutional” investors and would not be permitted to rely on the international dealer or international adviser exemption from registration in NI 31-103.

IIROC is accepting comments for 90 days from today.

IIROC publishes draft guidance for dealers regarding leveraged investing

Earlier this week, the Investment Industry Regulatory Organization of Canada released draft guidance regarding the responsibilities of dealers and representatives that advise clients to use borrowed money to invest or who become aware that a client intends to make such leveraged investments. In releasing the guidance, IIROC cited an increasing number of cases where inappropriate leveraging strategies were recommended to clients or where risks were not sufficiently disclosed.

The guidance thus provides a checklist of issues that registered representatives should consider before making a recommendation to invest with borrowed funds. These considerations apply whether a client is engaging in leveraged strategies through margin loans advanced by the dealer (on-book borrowing), or loans from third parties (off-book borrowing).

The guidance also sets out the minimum controls that dealers should have in place, including with respect to suitability reviews of client accounts employing a leveraging strategy. Minimum controls expected of dealers also include procedures to ensure compliance with the requirements related to permitted referral arrangements.

Comments on the draft guidance are being accepted until October 4, 2012. For more information, see IIROC Notice 12-0208.

IIROC publishes circuit breaker levels for Q3 2012

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 12-0207 setting out its circuit breakers for the third quarter of 2012, which are set in coordination with those in U.S. markets. In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for Q3 2012 are 1,250 points, 2,500 points and 3,750 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,300 points and Level 3 (30%) - 3,400 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline.

Note: The thresholds in the original IIROC notice were inadvertently transposed. An updated notice is expected soon.

IIROC requests comments on marketplace threshold rules

The Investment Industry Regulatory Organization of Canada (IIROC) recently proposed a set of principles intended to guide it as it considers formal proposals to establish marketplace price and volume thresholds. Specifically, two guiding principles are proposed, namely (i) that marketplace thresholds should generally preclude the execution of orders that would otherwise require regulatory intervention by IIROC due to the trigger of a single-stock circuit breaker or the application of policies regarding the variation and cancellation of trades; and (ii) that the application of marketplace thresholds should have the least amount of impact on price discovery and access to tradable liquidity.

The release considers existing mechanisms to control volatility and notes that IIROC has issued guidance or request for comments with respect to single-stock circuit breakers, regulatory intervention for the cancellation or variation of trades and market-wide circuit breakers. IIROC notes, however, that these mechanisms are based on price impact and are not directly affected by the volume of an order. Ultimately, IIROC requests comments on all aspects of controlling price volatility in the Canadian marketplace and specifically on a number of questions, including: (i) whether marketplaces should be required to adopt a form of marketplace thresholds; (ii) whether the proposed guiding principles are appropriate and whether there are additional ones that should be considered; and (iii) whether marketplace thresholds should be more flexible during periods of natural volatility. Comments are being accepted until August 8, 2012.

MFDA releases strategic plan through 2014

The Mutual Fund Dealers Association of Canada (MFDA) has released a new strategic plan for the period through 2014. Specifically, the MFDA identifies four key strategic goals for itself in the plan, namely: (i) enhancing collaboration with the industry; (ii) promoting investor confidence and ensuring the MFDA continues to be an active participant in the Canadian securities regulatory landscape; (iii) continuing to pursue staff excellence; and (iv) ensuring that the MFDA continues to pursue opportunities for process efficiencies so that it operates in a responsible and effective manner. For more information, see MFDA Bulletin #0525-M.

IIROC provides information on exemptions granted in 2011

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) released a notice providing information on exemptions granted in 2011. Ultimately, IIROC granted a total of 66 exemptions last year, most of which were related to requests by a Participant to act as a principal or agent in respect of a trade that would be completed off-marketplace. The exemptions covered by the notice, however, do not include those related to proficiency or other registration requirements. For more information, see IIROC Notice 12-0166.

IIROC webcast considers "accredited investors" issues

Earlier this month, IIROC released a webcast intended to provide information regarding issues related to "accredited investors". Specifically, the webcast discusses adviser obligations and provides information regarding the risks of buying securities without a prospectus.

IIROC releases "clean up amendments" to plain language rewrite project

On March 30, IIROC released a set of proposed amendments intended to account for rule provisions that have not otherwise been accounted for in its proposed plain language rewrite project. The "clean-up" amendments result from a review by IIROC staff that determined, among other things, that definitions originally included the "Interpretation and principles" section of the rules were better suited in other places and that some provisions had been inadvertently missed.

While most are not considered substantive, some of the amendments have been characterized as such, namely those that would (i) repeal the provision that allows a dealer to distribute its securities through a transaction such as a take-over bid or amalgamation that will create a trading market in the securities under certain circumstances; (ii) repeal the provision requiring dealers to fulfill their contractual obligations and report other dealers who do not fulfill their contractual obligations; and (iii) repeal the rule relating to the amount of commission that may be charged by a dealer in connection with the exercise of rights to subscribe for shares.

IIROC is accepting comments for 90 days from the publication of the notice. For more information, see IIROC Notice 12-0111.

IIROC publishes revised draft guidance on trade variation and cancellation

Last week, IIROC released proposed guidance regarding the circumstances in which it may engage in regulatory intervention in order to vary or cancel trades. As we discussed in December 2010, IIROC released an earlier version of the guidance just over a year ago with the intention of providing transparency and certainty with respect to intervention criteria. Ultimately, the proposal, which takes into account comments received in response to the earlier version, would, among other things: 

  1. restrict intervention when the price difference between an erroneous trade and the current fair value of the security does not exceed the greater of 10% of the price of the security or 10 trading increments;
     
  2. allow for a higher price threshold depending on market conditions when a trade has been executed during a period of significant market volatility, outside normal trading hours or in a security of a very limited liquidity;
     
  3. limit intervention to circumstances of extreme price dislocation where there is no reasonable expectation of execution, or a trading error that does not impact market price but which places the issuer at risk;
     
  4. clarify the erroneous trade review process.

Ultimately, according to IIROC, regulatory intervention is intended to be engaged only when market integrity is at risk and necessary to maintain fair and orderly markets, and trades will not necessarily be varied or cancelled to remedy client error. Until such time that final guidance is issued, regulatory intervention will be undertaken in accordance to the revised proposal. Comments on the proposal is being accepted until May 29, 2012. For more information, see IIROC Notice 12-0112.

IIROC publishes circuit breaker levels for Q2 2012

The Investment Industry Regulatory Organization of Canada (IIROC) today published Notice 12-0122 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the second quarter of 2012.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for Q2 2012 are 1,300 points, 2,600 points and 3,900 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,250 points; Level 2 (20%) - 2,500 points and Level 3 (30%) - 3,750 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline.

IIROC adopts new fee models for market and dealer regulation

The Investment Industry Regulatory Organization of Canada (IIROC) announced today that it is adopting new fee models for market and dealer regulation effective April 1, 2012. As we discussed last month, the new fee models, which allocate and recover IIROC's annual operating cost on the basis of each function's cost drivers, were approved by regulators earlier this year. Comprehensive fee model guidelines were also published earlier this month. For more information, see IIROC Notice 12-0085.

IIROC to consolidate enforcement rules

On March 23, the Investment Industry Regulatory Organization of Canada (IIROC) released a set of proposed rules intended to consolidate and rationalize enforcement-related rules currently contained in the Dealer Member Rules and UMIR. Specifically, the proposed rules include those respecting investigations, disciplinary hearings, compliance and registration. Consequential amendments to UMIR would also be made.

IIROC is accepting comments on the proposals until June 21, 2012. For more information, see IIROC Notice 12-0104.

IIROC announces implementation of core elements of CRM project

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) announced the approval of amendments to Dealer Member Rules to adopt core elements of its Client Relationship Model (CRM) Project for investment dealers. Specifically, the amendments provide for(i) improved relationship disclosure, including requiring that investors receive more information on account types and transaction and account fees; (ii) enhanced standards regarding conflicts of interest management and disclosure; (iii) increased suitability assessment standards to ensure that investments are appropriate to investors' objectives and time horizon; and (iv) account performance reporting.

While most of the amendments will come into force over the next two years, the account performance reporting requirements have been deferred until the CSA performance reporting requirement have been finalized. The amendments were last published for comment in January 2011. The approved amendments reflect revisions made to address comments received.

Meanwhile, IIROC also published guidance to assist dealers on compliance with the new requirements, as well as guidance relating to "know your client" and suitability obligations. For more information, see IIROC Notices 12-0107, 12-0108 and 12-0109.

Mutual fund dealers now required to send clients quarterly statements

On March 2, the Mutual Fund Dealers Association of Canada (MFDA) announced the adoption of amendments to MFDA Rule 5.3 (Client Reporting), which are now in effect. The amendments, intended to ensure that the frequency of account statement delivery requirements under MFDA rules are consistent with those established under NI 31-103, require mutual fund dealers to deliver a statement to all clients at least once every three months. The amendments were initially proposed in October 2011. For more information, see MFDA Bulletin #0521-P.

IIROC proposes guidance on short sale order designations

In light of its announcement last week that UMIR amendments will soon result in the repeal of pricing restrictions on short sales, IIROC has also issued proposed guidance on short sale and short-marking exempt order designations. Specifically, the proposed guidance is intended to assist in the correct use of the designations. An earlier version of the guidance was initially released last year.

IIROC expects to issue a final version of the guidance in advance of the date on which the amendments to UMIR are scheduled to take effect. IIROC is accepting comments on the proposed guidance until May 2. For more information, see IIROC Notice 12-0079.

IIROC releases study on effects of short sale circuit breakers

Last week, the Investment Industry Regulatory Organization of Canada released a study that considered whether short selling activity on Canadian markets of inter-listed securities is affected by the triggering of short sale circuit breakers in the U.S. Specifically, the study sought to determine whether cases of U.S. circuit breakers being triggered during the study period in early 2011 resulted in any systemic redirection of short selling activity to Canadian markets.

Ultimately, the study found that such circuit breaker events in the U.S. had minimal effects on short selling activity on Canadian markets. According to IIROC, the results of the study and other studies on the subject demonstrate that Canada has not had the problems with short sales and failed trades experienced in other jurisdictions.

IIROC republishes proposals to permit partial swap offset strategies

On February 17, the Investment Industry Regulatory Organization of Canada (IIROC) republished proposed amendments to its Dealer Member Rules that would extend the current margin treatment on swap offsets to partial swap offsets. The proposals are intended to ensure that the capital requirements reflect the reduced position risk of partial swap offsets on interest rate and total performance swaps. The proposals, initially published in February 2009, now include housekeeping amendments to clarify the minimum margin requirements for unhedged interest rate and total performance swap positions.

Comments are being accepted on the proposed amendments until March 19, 2012. For more information, see IIROC Notice 12-0057.

IIROC integrated fee model approved

Last week, IIROC announced that regulators have approved its proposed integrated fee model. As we've discussed in previous posts, IIROC proposed a new dealer regulation fee model in April 2010 and a new market regulation fee model in November of that year (which it republished in 2011).

The integrated fee model works on the basic principle of allocating IIROC's annual operating cost to two pools of costs, comprising of dealer and market regulation, and recovering from dealers and marketplaces on the basis of each function's cost drivers. Under the dealer regulation fee model, rates will be determined by a dealer's revenue tier, while the fees for each marketplace will be based on a marketplace's share of the total number of messages processed by IIROC's surveillance system (in order to recover the IT costs of surveillance), as well as a fee based on the marketplace's share of the total number of trades (in order to recover all other regulation costs).

The new fee model will be implemented by IIROC on April 1, 2012. IIROC expects to publish further information, including guidelines prior to that date. For more information, see IIROC Notice 12-0043.

IIROC publishes proposed dealer margin rules

On February 3, IIROC, as part of its plain language rule re-write project, published a proposed series of rules respecting margin requirements. The proposed rules are intended to, among other things, clarify IIROC expectations respecting certain rules, ensure that the rules reflect current industry practice, ensure consistency with other dealer member rules and streamline the decision making and rule interpretation process.

A number of substantive revisions to current rules are also proposed. These include new provisions setting out the steps a dealer must take in deciding whether to allow a client to trade on margin, requiring that dealers obtain a margin ruling from IIROC staff when the margin treatment for a particular investment product is not specified within IIROC rules, and setting out the margin requirements for government and other non-commercial debt called for redemption.

IIROC is accepting comments on its proposals for 90 days from the publication of its notice. For more information, see IIROC Notice 12-0042.

IIROC implements single-stock circuit breakers

The Investment Industry Regulatory Organization of Canada (IIROC) today announced the implementation of single-stock circuit breakers to facilitate a halt across all marketplaces in the trading of a security experiencing rapid price movement. The circuit breaker program is intended to address short term, unexplained price volatility in individual securities.

Specifically, securities that are part of the S&P/TSX Composite Index, as well as ETFs comprised principally of listed securities, will be subject to trading halts in the event of a price increase or decline of at least 10% in a five minute period. The circuit breaker will initially halt the particular security for five minutes, and this time may be extended for a further five minute period if a significant imbalance of buy and sell orders remain. Circuit breakers will not be active in the first 20 minutes following the regular market opening nor in the 30 minutes prior to the regular close of trading.

Should IIROC determine that a further halt is required such as, for example, to allow for the dissemination of material news, IIROC may replace the single-stock circuit breaker halt with a traditional "regulatory halt". Any trades executed after the triggering of the circuit breaker but prior to the halt at more than 5% beyond the trigger price would be cancelled.

Single-stock circuit breakers will be implemented as part of an implementation phase expected to last between six months and a year, during which time IIROC intends to monitor trading in all securities on Canadian marketplaces. Following the initial implementation phase, IIROC intends to review the single-stock circuit breaker program and publish the results of its review, at which point it will solicit comment on whether adjustments should be made to the terms of the program.

IIROC today also released the public comments received in response to its initial proposals, released in November 2010, as well as its responses. The circuit breaker program announced today will ultimately be more limited than IIROC's initial proposal, which would have applied to all securities listed on a Canadian exchange. For more information, see IIROC Notices 12-0040 and 12-0041.

IIROC updates compliance and supervision guidance

On December 15, the Investment Industry Regulatory Organization of Canada (IIROC) released a draft guidance note regarding the role of compliance and supervision at member firms. The draft guidance is intended to update IDA Member Regulation Notice MR-0435, released in 2006, in light of recent amendments to registration requirements contained in NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations in order to ensure consistency between the registration reform related amendments and IIROC's guidance. The draft guidance considers such issues as the responsibility for compliance, the distinction between supervisory and compliance roles, and the role of dealers, board of directors, management and the compliance officer. The notice also includes guidance on creating an effective compliance program, and provides information on the circumstances under which IIROC may initiate enforcement proceedings relating to compliance or supervisory matters.

Comments on the draft guidance are being accepted for 60 days from the date of the notice. For more information, see IIROC Notice 11-0361.

IIROC releases guidance allowing dealers to guarantee trade prices

On January 9, the Investment Industry Regulatory Organization of Canada (IIROC) published guidance regarding the procedures to be followed by a Participant (dealer) wishing to guarantee a trade price for a client order that outperforms a benchmark price. As we discussed last year, IIROC released a draft version of the guidance on July 4 that would allow a certain amount of "outperformance" to be guaranteed under certain circumstances if a dealer agreed to take the trade as principal. Under the initial proposal, dealers would only be able to guarantee outperformance up to a maximum of the lesser of 50% of the Participant's historical realized outperformance of the same benchmark over the prior calendar quarter and 30 basis points.

The final version of the guidance released yesterday, however, has been revised to address public comments received. Of particular interest, the guidance now provides that a dealer may guarantee outperformance up to a maximum of the greater of 50% of the Participant's historical realized outperformance of the same benchmark over the prior calendar quarter and 25 basis points. Thus, dealers will be able to guarantee outperformance of 25 basis points, even in the absence of a demonstrated ability to outperform the benchmark.

For more information, see IIROC Notice 12-0010.

IIROC releases amendments to rules respecting interpretation and standards

The Investment Industry Regulatory Organization of Canada (IIROC) today released proposed amendments to its rules regarding interpretation and standards. The amendments, released as part of IIROC's plain language rule rewrite project, are intended to remove unnecessary rule provisions, clarify IIROC's expectations with respect to certain rules, ensure that the rules reflect actual IIROC practices and ensure consistency with other IIROC rules and applicable securities legislation. The proposed amendments are open to a 90-day comment period. For more information, see IIROC Notice 12-0005.

IIROC publishes circuit breaker levels for Q1 2012

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 12-0001 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the first quarter of 2012.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for Q1 2012 are 1,200 points, 2,400 points and 3,600 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,200 points; Level 2 (20%) - 2,350 points and Level 3 (30%) - 3,550 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline.

IIROC sets out filing deadlines for 2012

The Investment Industry Regulatory Organization of Canada yesterday released the filing deadlines for monthly financial reports to be filed by its members in 2012. For those dealers that have had their changeover to IFRS deferred to 2012, additional days for the first two monthly financial reports will be provided. For more information, see IIROC Notice 11-0363.

Overcoming securities regulation lock-in

Canadian financial regulators are hampered by the gridlock that comes with fragmentation. Independent oversight could promote new ways of thinking

Ian Russell and Edward Waitzer -

As Canadian securities regulators become more fragmented, the tendency to "lock-in" to policy choices based on previous decisions has increased.

This tendency is natural where individuals working in teams are often less equipped to act on key information than when there is more accountability. The gridlock is exacerbated by a complex and rapidly evolving market environment, contributing to oversimplification and "tunnel vision." Many of us tend to see the world in a particular way when it serves our self-interest to do so. It's easy to ignore "inconvenient" facts or analysis to promote a desired outcome. And yet in today's world, "normal" paradigms rarely hold up.

Likewise, there is a proclivity for "conservatism bias," where information is interpreted to confirm prior expectations. There is also perceived safety in the status quo, even when available evidence suggests a different course of action. This is particularly so when consensus is difficult to achieve or there is much uncertainty over the consequences of a particular action.

Each of these biases are a disincentive to engage in independent, analytical thought. Efforts are made to avoid such conduct through accountability mechanisms (e.g., review by third parties, independent auditing). But these mechanisms no longer work as effectively as they should with Canadian securities regulators.

The challenge is particularly acute with respect to the reform of existing rules, where inertia becomes an obstacle to the adjustments required to ensure competitive and well-functioning markets and to address the inevitable, unintended consequences of regulation.

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IIROC requests comments on market-wide circuit breakers

The Investment Industry Regulatory Organization of Canada (IIROC) published a notice this week requesting comments on whether Canadian market-wide circuit breakers should be reconsidered in light of potential changes to circuit breakers in the United States.

Currently, market-wide circuit breaker policy in Canada is coordinated with circuit breakers in the U.S., where trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average. It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has related triggers based on drops in the S&P/TSX Composite Index.

With the U.S. Financial Industry Regulatory Authority (FINRA) proposing to amend its circuit breaker structure and thresholds, IIROC is now considering whether to continue its coordination with U.S. circuit breakers, adopt Canada-specific parameters for the triggering of circuit breakers, or adopt a hybrid approach. IIROC is thus requesting comments on the potential options and has set out a number of specific questions for respondents to consider.

Comments on IIROC's proposals are being accepted until February 13, 2012. For more information, see IIROC Notice 11-0359.

IIROC communications guidelines updated to reflect social media

IIROC released guidance yesterday regarding the communication, supervision and retention of advertisements, sales literature and correspondence by dealers. The notice, which replaces previous guidelines issued in 2004, is intended to reflect the emergence of social media as a form of communication (see our February post discussing the draft version of the guidance).

The notice thus provides guidelines with respect to: (i) whether certain online practices constitute advertising or sales literature; (ii) the application of recordkeeping requirements to social media websites; (iii) suitability and recommendations; (iv) supervisory responsibilities; (v) electronic and voicemail orders; (vi) third-party communications and research; and (vii) other various regulatory requirements.

The guidelines are effective immediately.

IIROC proposes requiring disclosure of IIROC membership

The Investment Industry Regulatory Organization of Canada published proposals last week that would require its dealers to disclose their membership in IIROC. Among other things, dealers would have to display the IIROC decal at business locations to which clients have access and display the IIROC logo on client trade confirmations, account statements and on the dealer's website. According to the notice, the proposals are intended to raise public awareness of the advantages of working with IIROC-regulated firms and advisors, and help investors determine the regulatory status of firms and individuals. IIROC is accepting comments on the proposals for 60 days.

Registration rule exemptions for SRO members adopted by CSA

The Canadian Securities Administrators today announced the adoption of amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and its Companion Policy related to exemptions for SRO members. A draft proposed version of the amendments was published in May and the final amendments are substantially similar to the earlier version. Assuming that ministerial approvals are received, the amendments will come into force on February 28, 2012.

IIROC releases compliance report for 2011

The Investment Industry Regulatory Organization of Canada (IIROC) yesterday released its Annual Consolidated Compliance Report for 2011. The report outlines matters that require firm attention, identifies deficiencies identified by IIROC's compliance examination teams over the last year and sets out IIROC's focus for the 2011-2012 examination cycle.

The report begins by identifying a number of matters requiring firm attention, including with respect to notification to IIROC of material changes. Specifically, the report notes that in some instances dealers having made significant changes to business models without informing IIROC prior to implementation.

Meanwhile, common examination deficiencies respecting financial and operations compliance include missing written services agreements in related party transactions and cases in which inaccurate or inappropriate margin rates have been applied. In the case of business conduct compliance, the report identifies a number of deficiencies, including: (i) situations where members with order-execution only services provide clients with "planning tools" that result in recommendations; (ii) policies and procedures that have not been appropriately customized to a firm's business and risks; (iii) inadequate identification of conflicts of interest; (iv) inadequate controls respecting the sale of private placements to accredited investors; and (v) inadequate controls respecting employee accounts.

The report also discusses the focus for the 2011-2012 examination cycle, including client complaints handling, the use of titles and designations, and trading conduct compliance. With respect to the latter, IIROC states, among other things, that it will be conducting reviews of compliance with best execution obligations and dealers' OTC supervision procedures. 

For more information, see IIROC Notice 11-0306.

Court finds FINRA lacks authority to sue for collection of fines

In a judgment released earlier this month, the United States Court of Appeals for the Second Circuit found that the Financial Industry Regulatory Authority, which regulates securities firms doing business in the U.S., lacks the authority to bring court actions to collect disciplinary fines. The case, Fiero v. FINRA, involved FINRA's pursuit of unpaid fines subsequent to disciplinary action against the plaintiffs.

Specifically, the Court of Appeals found that while Section 15A(b) of the Securities Exchange Act of 1934 (the Exchange Act) provides self-regulatory organizations with the authority to discipline members by various means, including suspension, fine and censure, the legislation provides no express statutory authority for such organizations to bring judicial actions to actually collect fines. The Court found the statutory omission to be significant and intentional, and compared the provision to section 21(d) of the Exchange Act, which provides the SEC with express authority to seek judicial enforcement of penalties. In addressing the apparent enforcement gap created by FINRA's ability to levy but not pursue fines, the Court noted that FINRA can already enforce fines by the "draconian sanction" of revocation of a firm's registration.

A 1990 rule change purporting to authorize FINRA's collection of fines, meanwhile, was found to have been mischaracterized as a "house-keeping" rule when, in fact, it was a substantive change requiring publication of a notice and comment period. As such, the purported rule change "was never properly promulgated and cannot authorize FINRA to judicially enforce the collection of its disciplinary fines."

IIROC publishes circuit breaker levels for Q4 2011

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0277 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets for the fourth quarter of 2011.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the fourth quarter of 2011 are 1,100 points, 2,250 points and 3,350 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,200 points; Level 2 (20%) - 2,450 points and Level 3 (30%) - 3,650 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline. Triggering the Level 1 threshold between 2:00 and 2:30 p.m., for example, would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur. The threshold levels for the third quarter have decreased from those for the third quarter of 2011.

OSC approves inclusion of market value definition in MFDA Form 1

The OSC has approved amendments to the MFDA's Form 1 to include the definition of "market value". The amendments are intended to clarify the definition of market value and ensure consistency in the valuation of securities by MFDA members. Form 1 is a special purpose report that includes financial statements and it is to be prepared in accordance with IFRS, subject to exceptions prescribed by the MFDA. Under these exceptions, securities reported are to be valued at "market value." The MFDA's definition of "market value" prescribes specific valuation criteria for, among others, listed securities, unlisted and debt securities and precious metal bullion and commodity futures contracts.

Securities regulators approve changes to marketplace trading obligations

As we discussed in April 2010, the Investment Industry Regulatory Organization of Canada proposed amendments to UMIR last year that would, among other things, replace the definition of "Market Maker Obligations" with a definition of "Marketplace Trading Obligations" and make various other changes to odd lot and marketplace trading obligations. The OSC and a number of other Canadian securities regulators have now approved the amendments, which become effective today. For more information, see IIROC Notice 11-0251.

IIROC releases 2011 annual report

The Investment Industry Regulatory Organization of Canada released its 2010-11 annual report today, entitled Building Confidence in Canada's Capital Markets. Among other things, the report provides a profile of the industry regulated by IIROC and describes the progress made by the organization towards achieving its strategic goals.

IIROC proposes UMIR amendments to address dark liquidity

On July 29, the Investment Industry Regulatory Organization of Canada published proposed amendments to the Universal Market Integrity Rules that address the regulation of dark liquidity on Canadian markets.

The release of IIROC's proposals represents the next step in the effort by the Canadian Securities Administrators and IIROC to adopt regulations to address issues surrounding dark pools and dark orders. The proposed amendments released last week follow various previous steps taken by regulators to consider the issues, including a joint CSA/IIROC consultation paper released in 2009, a consultation forum held in March 2010 and a CSA/IIROC position paper published in November 2010.

Among other things, the proposed amendments would (i) introduce or amend, as the case may be, definitions of "better price", "dark order" and "last sale price"; (ii) allow IIROC to designate a minimum size for orders that are not displayed in a consolidated market display; (iii) allow IIROC to designate a minimum size of an "iceberg" order that must be displayed in a consolidated market display; (iv) provide that orders entered on a marketplace must trade with visible orders on that marketplace at the same price before trading with dark orders at the same price on that marketplace; and (v) require, subject to certain exceptions, an order entered on a marketplace that trades with an order that has not been displayed in a consolidated market display to either receive a better price or be for more than 50 standard trading units, or have a value of more than $100,000.

Comments on the proposals are being accepted until October 27, 2011. For more information, see IIROC Notice 11-0225.

For a discussion of the regulatory framework for dark liquidity, see IIROC Notice 11-0226 / Staff Notice 23-311, which was also published last week and contains a summary of public comments in response to the CSA/IIROC position paper of November 2010. Also see our post on the proposed amendments to NI 21-101 Marketplace Operations, which were published in March.

IIROC proposes allowing dealers to guarantee trade at price that outperforms benchmark price

On July 4, the Investment Industry Regulatory Organization of Canada published proposed guidance on the guarantee by a Participant (dealer) of a trade price for a client order. The proposed guidance would allow a certain amount of "outperformance" to be guaranteed under certain circumstances if a dealer agreed to take the trade as principal. According to IIROC, expanding the guidance in this way would allow dealers to "offer institutional clients more execution options while ensuring that the Participant does not abuse the ability to provide a guarantee to sidestep the obligations of the Participant to orders displayed in a consolidated market display."

Under the proposal, dealers would only be able to guarantee outperformance up to a maximum of the lesser of 50% of the Participant's historical realized outperformance of the same benchmark over the prior calendar quarter and 30 basis points.

For more information, see IIROC Notice 11-0202.

MFDA proposes codifying minimum standards for leverage suitability

The Mutual Fund Dealers Association of Canada (MFDA) recently released proposed amendments to the MFDA's "Know-Your-Client" rule (Rule 2.2.1) to clarify that suitability obligations extend to leveraging recommendations and to establish transparent minimum regulatory standards in assessing leverage suitability. The MFDA is accepting comments on its proposals until October 6. For more information, see MFDA Bulletin #0487-P.

MFDA releases consultation paper on the use of third party back-office service providers

On June 30, the Mutual Fund Dealers Association of Canada (MFDA) released a consultation paper that considers the regulatory concerns arising from the use of third party back-office service providers. Back-office services can include such things as software or systems for processing trades, generating client account statements and supervising compliance with regulatory requirements.

The paper identifies a number of regulatory issues emanating from the use of such services and requests feedback from stakeholders regarding potential solutions to address the MFDA's concerns. Issues identified in the paper include the need for MFDA members to ensure compliance with regulatory requirements prior to implementation of a back-office system, the need for such systems to maintain the data necessary to meet record-keeping requirements and the need to ensure that compliance tools incorporated into back-office systems actually result in compliance with MFDA requirements.

The paper goes on to consider a number of options to address the MFDA's concerns including, for example, the development of a non-mandatory list of approved service providers. Ultimately, the paper requests stakeholders to provide their views on the various issues and options and to provide any recommendations or alternatives.

Comments are being accepted by the MFDA until September 30. For more information, see MFDA Bulletin #0484-P.

IIROC publishes circuit breaker levels for Q3 2011

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0203 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the third quarter of 2011 are 1,200 points, 2,400 points and 3,650 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,300 points; Level 2 (20%) - 2,650 points and Level 3 (30%) - 3,950 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline. Triggering the Level 1 threshold between 2:00 and 2:30 p.m., for example, would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur. The threshold levels for the third quarter are slightly lower than those for the second quarter of 2011.

IIROC publishes proposed rules relating to debt markets and inter-dealer bond brokers

As we've discussed in the past, the Investment Industry Regulatory Organization of Canada is currently undertaking a project to rewrite its rules in plain language. To that end, today IIROC published for comment proposed Dealer Member Rules 7200 through 7300, relating to debt markets and inter-dealer bond brokers. According to IIROC, the proposed rules are intended to consolidate and clarify existing rules and do not contain any substantive amendments. For more information, see IIROC Notice 11-0164.

IIROC reminder of implementation date for trade variation reporting

As we discussed in our post of March 1, IIROC has set June 1st as the date on which requirements to report trade variations and cancellations, as well as extended failed trades, will take effect. Yesterday, IIROC published reminders (notice on trade variations and cancellations and notice on extended failed trades ) of the requirements' impending implementation. The relevant notices also provide answers to a number of questions respecting the new obligations.

For more information, see IIROC Notice 11-0160 and Notice 11-0161.

IIROC to post webcast on fiduciary standards

Later this afternoon, the Investment Industry Regulatory Organization of Canada (IIROC) will be posting on its website a recorded webcast considering the Canadian and U.S. perspectives on fiduciary standards and the differences between such a standard and the suitability standard. The webcast will be available for viewing as of 4:00 p.m. today.

As we wrote in March, SEC staff have recently recommended a uniform fiduciary standard for investment advisers and broker-dealers in the U.S. Our colleague Ed Waitzer also considered the standards to which financial advisers in the U.S. and Canada are subject in his post of February 17, 2011.

U.S. exchanges propose replacement of circuit breaker pilot

Early last month, the U.S. SEC announced that national securities exchanges and the Financial Industry Regulatory Authority (FINRA) had filed a proposal to replace the circuit breakers for individual stocks, currently in place as part of a pilot project, with a "limit up-limit down" mechanism. Circuit breakers are trading pauses imposed in individual securities due to extraordinary market volatility. The proposed new mechanism, however, would prevent trades in a security from occurring outside of a specified price band. Stocks subject to the current circuit breaker (being those on the S&P 500 Index, the Russell 1000 Index and certain others) would generally be limited to a 5% trading price band, while other equities would be limited to 10% (as compared to prices of that security in the preceding five-minute period during a trading day).

For more information on the circuit breaker pilot project, see our posts of May 19, June 7 and September 21, 2010. Notably, the pilot project has been extended to the earlier of August 11, 2011 or the date on which the limit up-limit down mechanism is adopted.

IIROC releases draft guidance on outside business activities

Yesterday, the Investment Industry Regulatory Organization of Canada issued updated guidance on outside business activities. The proposed guidance follows last year's proposed rule on Dealer Members' personal financial dealings with clients and outside business activities, and is intended to replace current guidance once the proposed rule is finalized.

Outside business activities include activities that could give rise to a potential conflict of interest or client confusion, including specifically activities conducted outside of the Dealer Member by an approved person where direct or indirect payment is received or expected. IIROC cites membership on a board of any organization as an example of an activity that may give rise to potential conflicts. The IIROC notice also reminds registrants that Form 33-109F4 Registration of Individuals and Review of Permitted Individuals requires approved person to disclose their outside business activities to IIROC.

The proposed guidance sets out a non-exhaustive list of considerations for dealer members relating to outside business activities, including that such activities:

  • should not materially impair a dealer member's duty of care to clients;
     
  • should not involve the use of client information;
     
  • must be clearly seen to be outside the dealer member;
     
  • include robust and impartial approval and control processes; and
     
  • should be in keeping with both the letter and spirit of Dealer Member Rules 18.14(1)(e) and 29.1.

The proposed guidance also considers the supervision of outside business activities and filing requirements via NRD. For more information, see IIROC Notice 11-0150.

Comment period on IIROC short sale proposals coming to an end

As we discussed in posts of February 25 and March 18, IIROC has requested comments on proposed amendments to the UMIR that would, among other things, repeal short sale price restrictions currently applicable on Canadian markets. The comment period for the proposed amendments is quickly drawing to a close and ends on May 26, 2011. IIROC's proposals would see the repeal of the tick test and introduce the requirement that all short sales be marked as such. However, orders from accounts meeting specific requirements (including certain arbitrage and institutional accounts) would qualify for a "short-marking exempt" designation.

Of particular interest in the notice are IIROC's comments regarding the disclosure of short sale activity. Specifically, in response to the IOSCO principle stating that short selling should be subject to a reporting regime that provides timely information to the market or market authorities, IIROC confirms that it recognizes the problems associated with current short position reporting. IIROC communicates its intention, therefore, to produce and publicly release, semi-monthly, short sale summaries based on aggregated trading data across all marketplaces regulated by IIROC for orders that are marked as short sales, to be implemented following the implementation of the proposed amendments. The nature and scope of this disclosure remains to be seen.

According to IIROC, the CSA and IIROC are proposing to publish a joint notice to solicit feedback on whether additional proposals to enhance disclosure of short sales and failed trades in Canada are required. For example, the joint notice may seek comment on whether "disclosure of short positions by institutional investors may be necessary, similar to 'buy-side' reporting requirements that have been or are being widely implemented in other jurisdictions" as well as the type, level and frequency of public disclosure of failed trades in equity securities traded on all Canadian marketplaces and cleared through CDS.

This subsequent notice on enhanced disclosure, however, has yet to be published. In the U.S., meanwhile, the SEC recently issued a request for comment on the feasibility of requiring real-time reporting of short sale positions of publicly listed securities, either publicly or only to the SEC and FINRA. In a sign of what may be to come in Canada, the SEC notice asks specific questions of market participants, including with respect to the benefits and costs of real time reporting of investors' short positions.

MFDA provides guidance regarding electronic account statements

In response to the required frequency of account statement delivery under NI 31-103 Registration Requirements and Exemptions, the Mutual Fund Dealers Association of Canada (MFDA) has released guidance to assist its members in assessing the issues respecting sending account statements by electronic means. The bulletin cites privacy issues for specific attention and recommends that members and/or members' back-office service providers meet with MFDA staff before sending documents electronically. According to the MFDA, the following issues will be considered in assessing member compliance with regulatory requirements:

  • the confidentiality, security and integrity of client information sent electronically;
     
  • the procedures to obtain consent to receive documents electronically and the form of consent;
     
  • record retention and audit trails; and
     
  • the form and content of the electronic document and the length of time for which the document will be made available to clients.

For more information, see MFDA Bulletin #0474-P.

IIROC announces changes to ComSet reporting requirements

On May 2, the Investment Industry Regulatory Organization of Canada (IIROC) announced that it was making changes to Complaints and Settlement Reporting (ComSet) reporting requirements. Specifically, IIROC will require members, as of June 1, to attach relevant supporting documentation at the time of entering a ComSet event. According to IIROC, the additional documentation will allow it to "conduct more timely and efficient initial reviews of ComSet filings" and result in fewer subsequent information requests. For more information, see IIROC Notice 11-0142.

IIROC releases updated Strategic Plan

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) issued its updated Strategic Plan for 2010-2012. The plan outlines IIROC's priorities and projects for the new fiscal year, including the implementation of IIROC's Client Relationship Model (which was republished for a 60-day comment period in January), the enhancement of compliance and enforcement efforts in the area of suitability issues, the finalization of a fair pricing rule for fixed-income and other over-the-counter securities, the introduction of new dealer and marketplace member fee models and the assessment of the scope of electronic and high frequency trading on equity marketplaces. For more information, see IIROC Notice 11-0126.

IIROC publishes circuit breaker levels for Q2 2011

On April 1, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0016 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the second quarter of 2011 are 1,200 points, 2,400 points and 3,600 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,400 points; Level 2 (20%) - 2,800 points and Level 3 (30%) - 4,200 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m., for example, would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

CSA release IIROC oversight review

Earlier this month, the Canadian Securities Administrators released an oversight review of the Investment Industry Regulatory Organization of Canada. The review was intended to: (i) asses whether IIROC is in compliance with the terms and conditions of its recognition order; (ii) assess whether IIROC's regulatory processes are adequate, consistent and fair; and (iii) evaluate the progress of the integration of IIROC's predecessor, the IDA and RS.

While the review found IIROC to be in substantial compliance with the terms and conditions of its recognition order, it identified a number of areas for improvement and provided CSA's recommendations. IIROC's responses were also included.

IIROC publishes revised guidance on best execution obligations

The Investment Industry Regulatory Organization of Canada (IIROC) has issued revised guidance on best execution and management or orders, as well as with respect to the use of certain order types. IIROC originally published the guidance for comment in November 2010, and yesterday's notices include a summary of comments received and IIROC responses

The revised notices provide guidance with respect to the management of order flows in the context of best execution obligations and the use of certain order types in the context of recent developments in Canadian market structure. For more information, see IIROC Notices 11-011211-0113 and 11-0114.

CSA, IIROC and MFDA announce expanded disciplined persons list

Yesterday, the Canadian Securities Administrators (CSA), Investment Industry Regulatory Organization of Canada (IIROC) and Mutual Fund Dealers Association (MFDA) announced the launch of an expanded Canadian Disciplined Persons List. The expanded list will now include the names of persons disciplined by IIROC and the MFDA, dating back to 2004, in addition to records of disciplinary actions by provincial securities regulators.

Noting that sanctions imposed by securities regulators are a matter of public record, the announcement states that the combined list will now allow the public to search for those disciplined by securities regulators or the SROs in one place, regardless of how serious the matter.

CPSS and IOSCO release report on financial market infrastructures

On March 10, the Bank for International Settlements'  Committee on Payment and Settlement Systems and the International Organization of Securities Commissions released a consultative report containing a set of principles designed to apply to financial market infrastructures that record, clear and settle transactions in financial markets. The new principles, which consider such issues as credit and liquidity risk management, settlement, efficiency and transparency, are intended to replace the existing sets of CPSS and CPSS-IOSCO standards and provide greater consistency in the regulation and oversight of FMIs worldwide.

The OSC, AMF and Bank of Canada recently cited their participation in developing the report and encouraged Canadian stakeholders to provide comments to IOSCO and the BIS by the July 29, 2011 deadline.

For more information, see Principles for financial market infrastructures.

More on IIROC's proposed short sale amendments

Raman Grewal

As we discussed in February, the Investment Industry Regulatory Organization of Canada released proposed amendments to the Universal Market Integrity Rules last month that would repeal the restrictions on the price at which a short sale may be made on Canadian markets. 

As discussed in detail in our post of April 28, 2009, currently under UMIR, a short sale may not be made unless the price is at or above the last sale price for that security, subject to certain exceptions (referred to as the tick-test or the “uptick rule”) and there must be a “reasonable expectation” of settling the trade.

Under the proposed amendments, all price restrictions relating to short sales would be repealed and all short sales would be subject to the requirement to be “marked” as short sales, other than those exempt from marking as “short-marking exempt” orders. IIROC would have the ability to designate securities as being “short sale ineligible securities” and “pre-borrow” requirements would be imposed on certain securities (requiring that the person entering the order have made arrangement to borrow the securities that would be required to settle the trade prior to the entry of the order).

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OSC approves IFRS-related amendments to Form 1

As we discussed in a post last year, IIROC proposed amendments to its Form 1 in August 2010 to harmonize the standards used to comply with the financial reporting requirements of Form 1 with IFRS as much as possible. The OSC has now approved the amendments, with revisions. The amendments came into effect as of February 28, 2011 and are for the period beginning January 1, 2011. While the approved amendments do not include the changes initially proposed to the definition of "market value of securities", IIROC has indicated that a change in definition is forthcoming in the months ahead.

A number of departures from IFRS, however, have been made, including (i) reporting of client and broker trading balances on a net basis or gross basis; (ii) treating preferred shares as regulatory capital; and (iii) presenting the financial statements on a non-consolidated basis. Meanwhile, Dealer Members that meet certain criteria will be able to request a deferral for one year on the implementation of IFRS, except for certain specified departures. For more information, see IIROC Notice 11-0082.

SEC staff recommend uniform fiduciary duty for broker-dealers and investment advisers

In late January, the U.S. SEC submitted a staff study to Congress that recommended a uniform fiduciary standard for investment advisers and broker-dealers that provide securities investment advice to retail customers. The study, which noted that broker-dealers are generally not currently subject to a fiduciary standard under federal securities laws, recommended a fiduciary standard no less stringent than currently applied to investment advisers be extended to broker-dealers. The SEC was required to undertake the study to comply with Dodd-Frank, and the study also provided suggestions for further harmonization of the broker-dealer and investment adviser regulatory regimes. Whether the study's recommendations are followed through with, however, remains to be seen.  According to the SEC, the views expressed in the study are those of SEC staff and "do not necessarily reflect the views" of the SEC or individual commissioners.

In Canada, standards applicable to registrants such as dealers and advisers were somewhat harmonized in conjunction with the coming into force of the new registration regime for dealers, advisers and investment fund managers. Work also continues on IIROC's Client Relationship Model project, which attempts to address issues relating to such things as conflicts of interest management and suitability assessment. For a further discussion, see Ed Waitzer's post of February 17, entitled "Make advisors work for investors".

IIROC releases rewrite of rules relating to dealer organization and registration

As part of its plain language rules rewrite project, the Investment Industry Regulatory Organization of Canada (IIROC) recently released proposed Rules 2100 through Rules 2700 regarding dealer member organization and registration. Beyond rewriting the rules in plain language, the proposals make a number of substantive changes, including with respect to ownership of a dealer member's securities and dealer member structure, in order to, among other things, clarify IIROC's expectations and ensure that the rules reflect actual IIROC practices.

Comments on the proposals are being accepted for 90 days from publication. For more information, see IIROC Notice 11-0061.

OSC signs MOU with MFDA to facilitate compliance and enforcement

A memorandum of understanding between the OSC, certain other provincial securities regulators and Investment Industry Regulatory Organization of Canada (IIROC) entered into with the Mutual Fund Dealers Association of Canada (MFDA) is set to come into effect on March 23, 2011.

The MOU is intended to facilitate the sharing of information regarding compliance and enforcement matters by establishing a framework for the MFDA's use, under certain circumstances, of the National Registry Database system.

IIROC announces implementation dates for reporting of trade variations and cancellations and extended failed trades

On February 25, IIROC announced that the requirement to provide a report of a trade variation or cancellation will be in effect as of June 1, 2011. The requirement to provide a report of an extended failed trade will also be implemented on the same day. IIROC approved the reporting requirements in October 2008, but had deferred implementation.

For more information, see IIROC Notices 11-0079 and 11-0080.

OSC approves MFDA rule regarding transaction fees

The Ontario Securities Commission has now approved new MFDA Rule 2.4.4 and amendments to MFDA Rule 5.1. As we discussed in November, Rule 2.4.4 requires MFDA members, prior to the acceptance of an order, to inform clients of sales and service charges, as well as any other fees to be deducted in respect of the proposed transaction. Meanwhile, amendments to Rule 5.1 require MFDA members to maintain evidence that clients were informed of such fees and charges.

CCGG releases director compensation principles

The Canadian Coalition for Good Governance recently released a a set of principles for director compensation "for boards to consider when structuring their own compensation plans to ensure that their interests are aligned with those of the equity owners of the company." According to the principles: (i) director compensation should not be so high as to potentially compromise the independence of directors; (ii) compensation should reflect expertise and a director's actual time commitment to the board; (iii) compensation should vary for different director roles; (iv) boards should consider requiring a minimum shareholding for directors and encourage investment beyond the minimum; (v) boards should minimize the complexity of director compensation structures; and (vi) directors should consider periodically seeking approval for directors' compensation from shareholders.

Make advisors work for investors

As published in Tuesday's Financial Post

Edward Waitzer -

In January 2004, the Ontario Securities Commission released a concept paper advocating a "fair dealing model." The paper acknowledged that the regulatory regime -- regulating dealers and their representatives through the products they sell -- was based on the outdated assumption that transaction execution is the primary reason people seek financial services. Recognizing that most customers are seeking advice, the concept paper proposed changing the regulatory framework to focus on the advisory relationship.

Financial professionals and salespersons in Canada are allowed to call themselves advisors, irrespective of their professional designation. Few, however, are compensated directly for their advice. Instead, they are paid commissions to sell specific products. Addressing the conflicts of interest that result from commission-based compensation, the paper proposed that retail clients should be entitled to rely on objective advice that is in their best interest and, when there are conflicts of interest, they should be clearly disclosed so that the client can understand the conflicts and how they may affect the advice given.

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OSC considering mandatory business continuity testing

The OSC released a staff notice this week regarding business continuity planning and, specifically, the industry-wide test scheduled by IIROC for September 10, 2011. While the testing is voluntary, OSC staff

encourage all dealers, marketplaces and clearing agencies to participate in the September 2011 market-wide exercise organized by IIROC. Participation in this exercise may facilitate the discovery of any potential communication issues, points of failure between industry participants within and across different jurisdictions or other issues with services provided by third-party service providers.

Notably, the notice states that the OSC is also considering whether to make such testing mandatory "through rule proposals or additional requirements in the recognition orders of various entities." For more information, see OSC Staff Notice 11-764.

IIROC updates guidance on client communications in light of social media

The influence of social media has spurred the Investment Industry Regulatory Organization of Canada to release draft guidance to address issues respecting its members' communications with clients through websites such as Facebook, Twitter and blogs. The guidance, which would replace the IDA's MR0281 from 2004, is intended to assist members in satisfying their obligations under Rule 29.7 of IIROC's Dealer Member Rules and clarifies that "electronic communication, including social media web sites, may constitute advertising, sales literature or correspondence depending upon their content and purpose."

The note further clarifies that the requirement under NI 31-103 Registration Requirements and Exemptions for firms to retain records of business activities, financial affairs, client transactions and communication, requires firms to "design systems and programs with compliant record retention and retrieval functionalities for all methods of communication." Such requirements apply to content posted on Twitter, Facebook, blogs and chat rooms, as well as content transmitted by email. The notice also considers supervisory obligations in light of dealers' use of social media websites.

IIROC is accepting comments on the draft guidance for 60 days from the publication date of the notice. For more information, see IIROC Notice 11-0051.

IIROC releases guidance on locked and crossed markets

IIROC published guidance on February 1 on specific questions respecting “locked” and “crossed” markets in the context of NI 23-101 Trading Rules and its companion policy. The guidance reflects the repeal of the "best price" obligation and the other consequential amendments to UMIR discussed in our post of earlier today. IIROC published a proposed version of the guidance in April 2010 and yesterday's notice also provides responses to comments it received on its original proposals.

For more information, see IIROC Notice 11-0042 and IIROC Notice 11-0043.

OSC approves UMIR amendments regarding order protection rules

The Ontario Securities Commission announced last week that it has approved amendments to IIROC's Universal Market Integrity Rules, proposed in November 2009, that are consequential to the CSA's implementation of changes to National Instrument 23-101 Trading Rules regarding trade-through protection.

Among other things, the amendments, effective February 1, 2011, will repeal the rule and policies respecting the "best price" obligation of participants, provide that the order protection rule cannot be avoided when a participant is considering a trade on a foreign organized regulated market and require participants and access persons to have adequate policies and procedures for handling orders that do not rely on a marketplace to ensure compliance with the order protection rule. For more information, see IIROC Notice 11-0036.

OSC approves amendments to MFDA minimum capital requirements

The Ontario Securities Commission (OSC) announced today that it has approved amendments to MFDA Rule 3.1.1, intended to harmonize the MFDA's minimum capital requirements with those under National Instrument 31-103 Registration Requirements and Exemptions, as well as amendments to Form 1 - Financial Questionnaire and Report. The amendments, which were also approved by various other jurisdictions, are conditional on the MFDA submitting proposed amendments to Form 1 to include a definition of "market value" of securities to regulators for review and approval by March 31, 2011.

IIROC increases arbitration program award limit

The Investment Industry Regulatory Organization of Canada (IIROC) announced last week that, following consultations undertaken last year, it has decided to increase the award limit under its arbitration program to $500,000. Further, IIROC is amending the program's rules of procedures to allow claimants to opt to eliminate an arbitrator's discretion to award costs in most circumstances. For more information on the amendments, which are effective as of today, see IIROC Notice 11-0016.

Working group releases paper on incorporation of individual representatives of dealers and advisers

On December 20, 2010, a provincial/territorial government working group released a consultation paper to elicit feedback on potential options respecting the incorporation of individual sales representatives of registered dealers and advisers. Specifically, the paper considers the benefits and regulatory concerns surrounding the issue of payments by dealers and advisers to non-traditional business structures, as well as the options being examined.

While National Instrument 31-103 Registration Requirements and Exemptions does not deal with the incorporation of individual sale representatives, MFDA Rule 2.4.1 permits individual sales representatives of a MFDA member to have his or her commissions paid directly to a non-registered corporation under certain conditions. IIROC rules, meanwhile, do not allow the relationship between a dealer and a person conducting securities-related business on behalf of the dealer to be that of an incorporated salesperson.

Ultimately, the paper invites feedback on a number of options under consideration, including legislative proposals and amendments to IIROC rules. Comments on the consultation paper are being accepted by the governments of Alberta and Quebec until February 25.

IIROC republishes proposals to implement CRM

The Investment Industry Regulatory Organization of Canada today republished a proposal to implement core aspects of its Client Relationship Model Project. IIROC's proposal would address issues relating to relationship disclosure, conflicts of interest management and disclosure, suitability assessment and account performance reporting. Proposed transition periods would range from the immediate implementation for certain provisions relating to conflict identification to three years for certain disclosure to existing clients.  

IIROC also stated that the CSA are expected to publish proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions to introduce cost disclosure and performace reporting requirements for all registered dealers and advisers.

Proposals to address CRM issues were originally published in February 2008 and revised rules were subsequently released in April 2009. IIROC's proposal also includes responses to comments received to its April 2009 proposals. Comments on today's proposals are being accepted for 60 days.

IIROC publishes circuit breaker levels for Q1 2011

The Investment Industry Regulatory Organization of Canada (IIROC) today published Notice 11-0001 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the first quarter of 2011 are 1,150 points, 2,300 points and 3,450 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,350 points; Level 2 (20%) - 2,700 points and Level 3 (30%) - 4,000 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

IIROC seeks transparency respecting trade cancellation and variation

On Wednesday, the Investment Industry Regulatory Organization of Canada released proposed guidance intended to make transparent the criteria it would use to determine whether to vary or cancel a trade under the authority of the Universal Market Integrity Rules.

Under Rule 10.9 of UMIR, IIROC may vary or cancel a trade that is "unreasonable" or not in compliance with UMIR or any policy. IIROC's regulatory intervention powers are currently exercised under its broad discretion. The proposed guidance is intended to elaborate upon and set out more transparent standards in regard to the exercise of these powers, particularly with respect to its power under 10.9(1)(d) respecting "unreasonable" trades.

In addition to the factors provided by Rule 10.9(2) for determining whether a trade is unreasonable, the proposed guidance also sets out a number of additional factors IIROC will consider, such as whether the volume or number of trades is unusual in the context of the market and whether the trade was made in error or as the result of a deliberate trade. The notice also includes information regarding halts with respect to situations where there has been "asymmetric" dissemination of material information. In this regard, IIROC acknowledges that intervention in trading related to asymmetric dissemination of material information is fairly unique to Canada, but maintains it has intrinsic value in protecting market integrity and providing a clear and transparent remedy to parties harmed by such activity. The relative certainty and immediacy of this remedy being distinguished from the remedy under the statutory regime for civil liability in secondary markets.

With respect to trades that are not in compliance with UMIR, IIROC stated that it may intervene in cases of rule violations that are self-evident at the time of execution, including violations of the client-principal trading requirement under Rule 8.1 of UMIR, the market stabilization price restrictions under Rule 7.7, the requirement not to "abuse" a person with Market Maker Obligations under Part 1 of Policy 2.1 or the requirement to move the market in an orderly manner over a period of time when executing a pre-arranged trade or intentional cross under Part 2 of Policy 2.1.

IIROC is accepting comments on the proposed guidance until February 14, 2011. For more information, see IIROC Notice 10-0331.

IIROC to test business continuity on September 10, 2011

The Investment Industry Regulatory Organization of Canada has confirmed that it has rescheduled the industry-wide test of dealers' business continuity plans, originally planned for June 2010, to September 10, 2011. The industry test, which was cancelled due to this summer's G20 meetings, will test the scenario of inaccessibility of downtown Toronto. While tests will be conducted voluntarily,

IIROC strongly urges all Dealer Members to participate in these tests as they represent a valuable opportunity for Dealer Members to supplement their respective mandatory annual tests which are required under IIROC regulation.

For more information, see IIROC Notice 10-0332.

IIROC clarifies calculation methodology for conversions and reconversions

On December 3, the Investment Industry Regulatory Organization of Canada published amendments to its Dealer Member Rules that "make it explicit which option values are to be used in calculating minimum capital and margin requirements for all of the Conversion and Reconversion offset strategies." The amendments take effect on January 4, 2011. For more information, see IIROC Notice 10-0322.

MFDA sets out transition periods for CRM project

MFDA members approved a number of amendments to MFDA Rules at the Annual General and Special Meeting of Members on December 1. Rule amendments include those with respect to transaction fees, proficiency requirements and the Client Relationship Model project. For more information, see MFDA Bulletin #0458-P. While some of the amendments are already in effect, those respecting the Client Relationship Model are subject to transition periods. For example, the requirements for relationship disclosure under Rule 2.2.5 will not be effective until September 28, 2011 for new clients and December 3, 2013 for existing clients. A summary of the various transition periods for the amended rules is provided in MFDA Bulletin #0459-P.

IIROC requests comments on proposed "rate by revenue" fee model

As we discussed in a post of April 30, IIROC proposed a new dealer regulation fee model earlier this year that would incorporate a "rate by revenue tier" approach to dealer regulation. IIROC has now developed such a market regulation fee model, which it published for comment on November 30. The proposed model would see each marketplace charged a fee based on the marketplace's share of the total number of messages processed by IIROC's surveillance system (in order to recover the IT costs of surveillance), as well as a fee based on the marketplace's share of the total number of trades (in order to recover all other regulation costs). IIROC would continue to collect the market regulation fee from dealer members (the minimum monthly fee would be $4,800 per member), but marketplace-specific costs would be recovered directly from the marketplace that incurred such costs. IIROC is accepting comments on the proposed new fee model until January 29, 2011. For more information, see IIROC Notice 10-0316.

IIROC requests comments on proposed guidance regarding best execution obligations

On November 30, the Investment Industry Regulatory Organization of Canada proposed draft guidance regarding the management of order flows with respect to best execution obligations under UMIR. The guidance, released in the context of "a more complex trading environment", sets out a list of frequently asked questions relating to order types in the context of achieving best execution. Namely, the guidance considers issues such as: (i) order routing decisions; (ii) how to manage orders when not all marketplaces are open; (iii) considerations for deciding where to "book" an order; and (iv) obligations when using a third-party vendor for order routing.

Meanwhile, guidance was also proposed regarding the use of certain order types. According to IIROC, "a particular order type may function as designed but the execution outcome may result in an unanticipated price." IIROC stated that it has particular concern with order types without specific execution price limits. Guidance on the subject was also structured as an FAQ, and considered such issues as (i) whether market orders or limit orders should be used "in today's more complex markets"; (ii) whether "stop loss" orders prevent losses in fast moving markets; and (iii) whether "All or None" orders can be used to guarantee a fill of an order at a specific price in volatile markets.

IIROC is accepting comments on the proposed guidance until January 31, 2011. For more information, see IIROC Notice 10-0317.

IIROC proposes uniform 6-year limitation period for enforcement proceedings

On November 26, the Investment Industry Regulatory Organization of Canada proposed amendments to its Dealer Member Rules that would provide a uniform six-year limitation period to all IIROC enforcement proceedings. While current rules allow IIROC to initiate proceedings against a former member or former approved person for five years after the cessation of IIROC membership, there is no limitation period on proceedings relating to current dealer members or approved persons. Specifically, the new rule, which would apply to current and former members and approved persons, would require IIROC to commence proceedings within six years of "the date of the occurrence of the last event on which the proceeding is based."

IIROC is accepting comments on the proposed amendments until January 25, 2011, and specifically requested comment on the concept of allowing for the extension of the limitation period where both IIROC and the Dealer Member or Approved Person agree to the extension.

For more information, see IIROC Notice 10-0310, the language of the proposed amendments and the blackline of the rules proposed to be amended.

MFDA provides further guidance to proposed rule regarding transaction fees

As we discussed in our post of June 25, the Mutual Fund Dealers Association of Canada proposed a new Rule 2.4.4 earlier this year that would require its members, prior to the acceptance of an order, to inform clients of sales and service charges, as well as any other fees to be deducted in respect of the proposed transaction. Meanwhile, proposed amendments to Rule 5.1 would require MFDA members to maintain evidence that clients were informed of such fees and charges.

The MFDA has now published a summary of comments received to its proposals, as well as MFDA staff responses. Further, the MFDA has released a companion regulation notice to provide further guidance with respect to the application of the proposed amendments.

For more information, see MFDA Bulletin #0455-P.

IIROC proposes single stock circuit breakers

The Investment Industry Regulatory Organization of Canada (IIROC) released a proposal for single-stock circuit breakers last week that would halt trading of a security experiencing "rapid, significant and unexpected price movement." The proposal would apply to all securities listed on a Canadian exchange, including inter-listed securities, and would provide tiers of trigger levels in order to "preserve a fair and orderly market" in times of extreme volatility.

Specifically, under the proposed mechanism, trading in a security listed on either the TSX-V or CNSX would be halted for ten minutes if the security experienced a price swing of the greater of 20% and 20 trading increments in a five minute period. TSX-listed securities that experienced a price swing of at least the greater of 10% and 10 trading increments in a five minute period would be halted for five minutes, with a five-minute extension possible. In either case, IIROC could replace the single-stock circuit breaker halt with a traditional "regulatory halt" where so required. There would be circumstances, however, where a single-stock circuit breaker would not trigger a halt in trading, such as after the imposition of a "regulatory halt" in the trading of that security.

IIROC is accepting comments on its proposals until January 17, 2011. Once it has reviewed the comments received and established the final parameters of its proposal, IIROC intends to develop an alert as part of the "STEP" surveillance platform. While the implementation of single-stock circuit breakers would begin as a manual system similar to the current imposition of trading halts, IIROC intends to ultimately automate the process. According to IIROC, however, automation would not commence earlier than April 1, 2011.

As we've discussed in the past, the U.S. SEC is currently piloting single-stock circuit breakers until December 10, 2010. For more information on the U.S. project, see our posts of May 19 and September 21.

CSA/IIROC publish position paper on dark liquidity

The Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada (IIROC) published a joint position paper today that considers, and provides the regulators' views on, the issues associated with dark pools and dark orders. According to IIROC and the CSA, their views are intended to provide "more clarity" around how dark orders should be treated and facilitate "investor understanding and choice" regarding the execution of orders.

The paper follows a year of consultations on the subject and sets out the position of the regulators on a number of issues, namely: 

  • that only orders meeting a minimum size threshold be exempt from pre-trade transparency requirements;
     
  • that, while, two dark orders meeting the minimum size exemption should be able to execute at the national best bid or best offer, meaningful price improvements should be required in all other circumstances; 
     
  • that visible (lit) orders should execute before dark orders at the same price on the same marketplace, except where two dark orders meeting the minimum size exemption can be executed at that price; and
     
  • that meaningful price improvement should be considered as one trading increment as defined under UMIR. For securities with a difference between the best bid price and the best ask price of one trading increment, one-half increment will be considered to be meaningful price improvement.

Comments are being accepted on the position paper until January 10, 2011. Once comments have been considered, the CSA and IIROC intend to propose rule changes as required.

Changes contemplated to MFDA Investor Protection Corp fund

As we discussed in our post of June 24, the MFDA requested comments this past summer on a proposal to increase the size of the MFDA Investor Protection Corporation (IPC) fund to $50 million. The MFDA, which accepted comments on the proposal until September 1, has now agreed to increase the size of the fund. The time frame for raising the additional $20 million, however, will be extended to seven years rather than the originally-contemplated five years.

For more information, and for a description of next steps, see MFDA Bulletin #0452-M.

IIROC publishes fourth quarter 2010 circuit breaker levels

Earlier this month, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 10-00259 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the fourth quarter of 2010 as 1,050 points, 2,100 points and 3,150 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,200 points; Level 2 (20%) - 2,450 points and Level 3 (30%) - 3,650 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

IIROC publishes consolidated compliance report

On October 22, the Investment Industry Regulatory Organization of Canada released its Annual Consolidated Compliance Report, which discusses the deficiencies found by IIROC compliance teams during field examinations of member firms. IIROC teams in Financial and Operations Compliance, Business Conduct Compliance and Trading Conduct Compliance identified three general compliance deficiencies common across the above programs, namely: (i) inadequate supervisory testing; (ii) inaccurate or incomplete books and records; and (iii) compliance programs not updated to reflect new rules or obligations. Specific compliance deficiencies identified included inaccurate or inappropriate margin provisions, inadequate controls around the sale of private placements and inadequate procedures to ensure that better priced orders in the visible market are not traded-through.

IIROC further stated that it would be undertaking focused regulatory reviews on an ongoing basis to test for compliance in specific areas. For more information, see IIROC Notice 10-0278.

IIROC releases AML compliance guide

The Investment Industry Regulatory Organization of Canada (IIROC) yesterday released a new Anti-Money Laundering Compliance Guide to replace the IDA's 2002 "Deterring Money Laundering Activity". The new document is intended to provide dealers with guidance on complying with anti-money laundering and anti-terrorist financing requirements in light of the legislative and regulatory changes of recent years.

According to IIROC, since no standard program will be appropriate for all firms, the guidance has been prepared to assist dealers in adapting their compliance program "specifically to their firm's business, ensuring that it covers the scope of their customer base, the types of accounts, the types of transactions, the extent of the firm's international activities and all the risks and other relevant factors within the firm."

See IIROC Notice 10-0273

IIROC releases proposals regarding member financial standards and operations

The Investment Industry Regulatory Organization of Canada (IIROC) also published proposed rules today regarding general dealer member financial standards, the protection of client assets, financing arrangements, operations and other internal control requirements. As part of IIROC's rules rewrite project, the proposals are intended to eliminate unnecessary rule provisions, clarify IIROC's expectations with respect to certain rules, ensure that the rules reflect current industry practices, ensure consistency with other rules and streamline the decision making and rule interpretation process.

Much like IIROC's other rule proposals published today, the new provisions contain numerous substantive changes to current rules, such as with respect to reporting of early warning situations and deadlines for certain financial filings. IIROC is accepting public comments on the proposals for 90 days from today's publication of its notice.

See: IIROC Notice 10-0267

IIROC releases rule amendments regarding suitability and sales

As part of its ongoing project to rewrite its Dealer Member Rules in plain language, the Investment Industry Regulatory Organization of Canada (IIROC) today published a set of proposed new provisions respecting its members' dealings with clients. The proposals cover such issues as suitability, sales practices, communicating with the public, supervision and complaint handling. According to IIROC, the rewrite is intended to eliminate unnecessary rule provisions, clarify IIROC's expectations with respect to certain rules, ensure that the Rules reflect IIROC's practices and ensure consistency with other rules and applicable securities legislation. Draft guidance was also published by IIROC.

Beyond consolidating existing rules, the proposals also contain substantive changes to current obligations. For example, proposed Rule 3400 states that in order to comply with suitability requirements, members must consider the suitability of the client's account type, trading strategy, order type and the method of financing the trade. Proposed Rule 3500, meanwhile, would require members to provide clients with a commission fee schedule on account opening. Further substantive changes can be found throughout the proposals.

IIROC is accepting public comment on its proposals for 90 days from today.

See: IIROC Notice 10-0266

SEC and CFTC release joint report on May 6 market volatility

The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) released a joint report on Friday outlining their findings respecting the extreme market volatility of May 6, 2010. According to the report, the rapid execution of an automated sell program concerning a large number of futures contracts by a large fundamental trader during a time of high volatility and thinning liquidity was a main contributor to the day's events. The selling pressure from the automated sell program helped cause a liquidity crisis in the contracts and in individual securities.

Meanwhile, CFTC Chairman Gary Gensler stated yesterday that a joint committee of the CFTC and SEC has been asked to consider the report and make recommendations. Mr. Gensler specifically mentioned that he expects to hear recommendations with respect to: (i) requiring executing brokers to have an obligation to enter and exit in an orderly manner; (ii) increasing visibility into the full order book, either in aggregate or in detail; and (iii) potential revisions to market pauses, either for single exchanges or for cross-market circuit breakers.

The Investment Industry Regulatory Organization of Canada released its review of the day's market volatility last month.

FINRA proposes allowing all-public panel arbitrations

On September 28, the U.S. Financial Industry Regulatory Authority (FINRA) announced that it will file a rule proposal with the Securities and Exchange Commission next month that will allow investors to opt for all-public panels in arbitration claims. According to FINRA, "[g]iving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process".

In recent months, the Investment Industry Regulatory Organization of Canada (IIROC) has also been considering changes to its arbitration program. A review of the program was initiated in December 2009, while a request for comments on specific changes was released in August 2010.

IIROC announces launch of surveillance platform

The Investment Industry Regulatory Organization of Canada (IIROC) announced the launch of a surveillance system yesterday that will allow it to conduct surveillance across all Canadian equity markets. According to IIROC, the Surveillance Technology Enhancement Platform (STEP) will allow it to "keep pace with the dramatic increase in the speed and volume of trading activity" in Canadian equity markets. Among other things, STEP provides IIROC with an increased monitoring capacity and the ability to more easily identify potential violations, such as with respect to best execution and trade-throughs.

IIROC releases results of flash crash review

Pursuant to its announcement earlier this year that it would analyze the market volatility (flash crash) of May 6, the Investment Industry Regulatory Organization of Canada (IIROC) yesterday released the results of its regulatory review. IIROC's report identified a number of factors that contributed to the fateful day's trading patterns in the securities reviewed, notably, the existence of large sell imbalances, electronic trading activity in the securities, the fact that "traditional" market makers were generally not active in the securities reviewed and the triggering of stop loss orders. 

IIROC ultimately made a number of recommendations to address the issues identified, including: (i) a review of the current market-wide circuit breaker to determine whether trigger levels are appropriate and whether an independent Canadian circuit breaker level should be employed; (ii) considering whether single stock circuit breakers should be implemented; (iii) the adoption of volatility controls; (iv) considering how to effectively manage stop loss orders in the current multi-market and high-speed environment; and (v) a review of the erroneous and unreasonable price policies and procedures.

IIROC is expecting to issue a request for comments on a single stock circuit breaker in the near future. IIROC also stated that a review of the current erroneous and unreasonable price policies and procedures is currently underway and a notice will be published for comment when completed. Guidance is expected to be issued respecting the use of stop loss orders, while news on the other recommendations will be provided as work is completed.

IIROC releases new product due diligence review

In addition to its PPN review findings, the Investment Industry Regulatory Organization (IIROC) also released findings and recommendations last week concerning its regulatory review of new product due diligence. The review, conducted earlier this year at a sample of dealers that distribute structured products, tested for such things as adequate written policies, procedures and operational controls on new products. The review also assessed how dealers have incorporated IIROC's due diligence Guidance Note of March 2009 into their business practice.

Ultimately, IIROC found that many of the written policies and procedures reviewed were deficient in a material respect. Deficiencies indentified included the lack of the following: (i) a clear definition of "new product"; (ii) an appropriate level of internal review; (iii) an adequate analytical framework for the consideration of whether the new product should be offered; (iv) consideration of possible conflict of interest scenarios and how they should be addressed; (vi) consideration of proficiency, training and marketing issues; and (vii) a process to monitor and review customer complaints regarding new products and for monitoring compliance with any restrictions placed on the sale of the new product.

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IIROC releases PPN review findings

On August 31, the Investment Industry Regulatory Organization of Canada (IIROC) released findings and recommendations deriving from its 2009 compliance review of principal protected notes (PPNs). The review, based on a representative sample of dealers, considered, among other things, the adequacy of the selling firm's knowledge of the product and the firm's training for sales personnel and whether appropriate point of sale disclosure was provided to investors.

Ultimately, IIROC made a number of findings and recommendations regarding the obligations of dealers to their clients with respect to PPNs, including the following:

  1. The dissemination of required disclosure to clients was inconsistent among members. On this point, IIROC reminded dealers that they are required to have a "new product due diligence" policy and are required to implement procedures to ensure that any clients purchasing a PPN receive the required appropriate disclosure.
     
  2. The majority of dealers appeared to rely on product issuers to distribute the monetization notices directly to unit holders without the benefit of a contractual agreement requiring issuers to distribute on the dealer's behalf. IIROC stated that all dealers should review their contractual agreements with issuers to ensure that responsibility for the distribution of notices is clearly delineated.
     
  3. Most dealer marketing material was inadequate and missed key information. On this point, IIROC reminded dealers of their obligations regarding sales literature under IIROC Rule 29.7(1) regarding the fair presentation of potential risks.
     
  4. IIROC found that some dealers' registered representatives did not understand all the features of the PPN products they were recommending to clients. In response, IIROC stated that dealers must take a proactive approach to reviewing and monitoring products, which should include a written policy for the due diligence of new products.
     
  5. IIROC found the PPN products to be suitable for the accounts tested.
     
  6. There was no uniformity in the level of training to registered representatives regarding PPNs. IIROC stated that dealers must ensure their registered representatives and sales staff are educated and understand the important features of products being marketed to clients.
     
  7. IIROC found deficiencies in the information included on monthly statements, which should be clear and informative.

See IIROC Notice 10-0233.

IIROC proposes IFRS-related amendments to Form 1

On August 27, the Investment Industry Regulatory Organization of Canada (IIROC) published proposed amendments to Form 1, used to monitor the financial solvency of dealer members. The proposals would include amendments to the "market value" definition in Form 1 to adopt the mandated IFRS valuation approach, except where value cannot be reliably measured in which case IIROC has proposed an alternative approach.  While IIROC's proposals are intended to harmonize the standards used in financial reporting with IFRS as much as possible, a number of departures from IFRS are proposed. These include reporting of client and broker trading balances on a net basis, treating preferred shares as regulatory capital and presenting the financial statements on non-consolidated basis. IIROC is accepting comments on its proposals for 60 days from the date of publication of the notice.

IIROC Notice 10-0230 - Amendments to Form 1 to adopt IFRS for regulatory reporting purposes
Attachment A - Amendments to Form 1
Attachment B - Black-line Form 1

IIROC launches AdvisorReport

The Investment Industry Regulatory Organization of Canada (IIROC) announced yesterday the launch of IIROC AdvisorReport, described as a "resource to help investors learn the background of advisors who are currently approved to work at IIROC-regulated firms." AdvisorReport will provide investors with online access to information on, among other things, a current registrant's educational background, employment history with IIROC member firms since 2003 and disciplinary history. AdvisorReport replaces IIROC's Member Firm/Registrant Info Service launched in 2003. According to IIROC, AdvisorReport provides improvements over the previous service, as it is easier to use, faster and provides more information in one place.

IIROC News Release
IIROC Notice 10-0232
Backgrounder: IIROC AdvisorReport

IIROC proposes increasing award limit under arbitration program

The Investment Industry Regulatory Organization of Canada (IIROC) yesterday released a summary of public comments relating to its review of the IIROC arbitration program in response to a notice published in December 2009.  Following its review, IIROC also has now released a request for comments on, among other things, proposals to increase the award limit under the program to $500,000 and to amend the procedural rules to permit claimants, at the commencement of a proceeding, to eliminate the arbitrator's discretion to award costs against a party. According to IIROC, the higher award limit

is appropriate and reflects a balance between providing greater access to recourse that is expeditious and cost-effective, and ensuring adherence to principles of natural justice and legal process.

The comment period on the proposals ends on October 8, 2010.

See: IIROC's News Release, IIROC Notice 10-0227 and Appendix A to the Notice, reviewing comments submitted in response to the previous notice.

MFDA proposes amendments to minimum capital requirements and financial questionnaire and report

The Mutual Fund Dealers Association of Canada (MFDA) proposed amendments today to MFDA Rule 3.1.1 that are intended to ensure that MFDA Members registered in other registration categories under Canadian securities legislation are subject to consistent minimum capital requirements under MFDA Rules and National Instrument 31-103 Registration Requirements and Exemptions. The MFDA also proposed amendments today to MFDA Form 1 (Financial Questionnaire and Report) that are intended to to align financial reporting under Form 1 with International Financial Reporting Standards.
 
Comments are being accepted on the proposed amendments to Rule 3.1.1 and Form 1 until October 12, 2010.

CSA release MFDA Oversight Review Report

Earlier this month, the Canadian Securities Administrators released its Oversight Review Report of the Mutual Fund Dealers Association of Canada. The report followed an oversight review of the MFDA's regulatory functions by staff at various provincial securities regulators to (i) assess whether the MFDA is in compliance with the relevant terms and conditions of its recognition orders; (ii) determine whether the MFDA's regulatory processes are efficient, effective, consistent and fair; and (iii) evaluate whether the MFDA has adequate staffing, resources and training to perform its regulatory functions effectively and efficiently.

Ultimately, while the review found that the MFDA was generally compliant with the relevant terms and conditions of its recognition orders, it did include a number of recommendations, including with respect to the Financial Compliance group at head office. Recommendations concerned internal benchmarks used by the Financial Compliance group, the review of financial questionnaire and reports and the financial compliance examination process. The report includes the MFDA's responses to the report's concerns and the expected follow-up where appropriate.

OSC approves MFDA rule amendments regarding client accounts and communication

The OSC has approved amendments to MFDA rules respecting client accounts, client communications and client reporting. The original proposals, which we noted in our post of May 2009 and will, among other things, require that investors are provided with certain information at the time of account opening, clarify the duty of MFDA Members and approved persons to assess the suitability of investments in client accounts when various triggering events occur and clarify Members' supervisory requirements regarding client communications that disclose a rate of return.

IIROC publishes third quarter 2010 circuit breaker levels

On July 2, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 10-0191 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the third quarter of 2010 as 1,000 points, 2,050 points and 3,050 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,350 points and Level 3 (30%) - 3,500 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

MFDA proposes amendments to regulations re client property, transaction fees and records

The Mutual Fund Dealers Association of Canada (MFDA) proposed amendments today that would remove the existing obligations in MFDA Rule 3.3.2 to hold client cash for investment in mutual funds separately from client cash for other investments. According to the MFDA, however, the protection of client assets would not be impacted as existing requirements to segregate client cash held in trust from Member property would be maintained. The amendments are being proposed in anticipation of similar changes to National Instrument 81-102 Mutual Funds.

Meanwhile, amendments were also proposed to MFDA Rule 2.4.4 regarding transaction fees or charges and Rule 5.1 respecting the requirement for records, in order to require MFDA members to inform investors of transaction fees or charges prior to the acceptance of their order.

Comments are being accepted on the proposed amendments to Rule 3.3.2 until September 24 and until September 23 with respect to the proposed amendments to Rules 2.4.4 and 5.1.

MFDA releases bulletin regarding increase in IPC fund

On June 17, 2010, the Mutual Fund Dealers Association of Canada (MFDA) published Bulletin #0437, requesting comments on recommendations made by the Board of Directors of the MFDA Investor Protection Corporation (IPC) to increase the size of the IPC fund.

The IPC fund, which is intended to protect clients of MFDA Members in the case of Member insolvency, is expected to reach its initial $30 million target by the end of this calendar year and the IPC board has recommended accumulating a further $20 million over the next five years.

MFDA releases G20 plan

We have now updated our post on the regulators' G20 plans to include an announcement by the MFDA.

SIFMA releases systemic risk oversight study

The U.S. Securities Industry and Financial Markets Association (SIFMA) recently released the results of a study intended to "assist regulators and policymakers in preparing for expanded systemic risk oversight" and enhance the ability of regulators to respond to future systemic risk events. The study was based on interviews with a number of organizations, including regulators, securities broker-dealers, insurers and hedge funds.

IIROC publishes corporate governance review report

According to IIROC's Recognition Order, IIROC must review its corporate governance structure within two years of the date of recognition and periodically thereafter. Pursuant to this requirement, IIROC recently completed such a review and published a report assessing the success in meeting its governance principles and making recommendations to "further develop" its governance structure. The report, prepared by IIROC's Corporate Governance Committee has been adopted by its board of directors. 

The Recognition Order provides that IIROC's governance structure and arrangements must ensure: (i) effective oversight of the entity; (ii) fair, meaningful and diverse representation on the board and any committees of the board, including a reasonable proportion of independent directors; (iii) a proper balance among the interests of the different persons or companies subject to regulation by IIROC; and (iv) that each director or officer is a fit and proper person. The report ultimately concluded that the present governance structure and arrangements ensure that each principle is being met.

That being said, the report recognized that "governance is a dynamic process" that must "evolve and change as circumstances and requirements change". Thus the report includes a number of recommendations, including increasing the maximum size of the board of directors, establishing the position of Vice-Chair, providing a principles-based exception to the definition of independence for board members, providing for a one-year cooling-off period before an individual connected with a dealer, marketplace or IIROC could be considered independent and enhancing the information provided to members in connection with director voting.

IIROC hosting Tips for Traders Toronto

The Investment Industry Regulatory Organization of Canada (IIROC) announced today that it is hosting a "Tips for Traders Toronto" education session on June 16 at the Design Exchange to consider recent market events and associated compliance issues. President and CEO of IIROC Susan Wolburgh Jenah will be making the opening remarks.

IIROC publishes OTC securities fair pricing rule

The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to its Dealer Member Rules that would address the fairness of pricing and transparency of OTC market transactions. Initial proposals on the subject were previously published for comment in April 2009 and IIROC has revised its proposals in light of comments received.

Specifically, IIROC's proposals would: (i) require dealers to fairly and reasonably price securities traded in OTC markets, with an exception for primary market transactions and OTC derivatives set out in the rule; (ii) require dealers to disclose yield to maturity on trade confirmations for fixed-income securities and notations for callable and variable rate securities; and (iii) require dealers to include on trade confirmations sent to retail clients in respect of OTC transactions a statement indicating that they have earned remuneration on those transactions unless the amount of any mark-up or mark-down, commissions and other service charges is disclosed on the confirmation. A draft guidance note, describing the scope of the proposed rule, fair pricing considerations and documentation requirements, has also been published by IIROC.

The proposals are open for a 30-day comment period.

SEC proposes consolidated audit trail system

Citing the lack of a central database containing comprehensive and readily accessible data regarding orders and executions, the U.S. Securities and Exchange Commission proposed a new rule on May 26 that would require SROs to establish a consolidated audit trail system. Under the new system, exchanges and FINRA, as well as their members, would be required to provide certain information to the central repository regarding each quote and order in a National Market System (NMS) security.

Such a consolidated system would be intended to: (i) provide regulators direct and timely access to uniform consolidated order and execution information for all orders in NMS securities from all participants across all markets; (ii) enable SROs to better fulfill their regulatory responsibilities to oversee their markets and members; and (iii) enable the SEC to better carry out its oversight of the NMS for securities.

The SEC is accepting public comments on the proposal for 60 days after its publication in the Federal Register.

IIROC proposes rule on personal financial dealing with clients

The Investment Industry Regulatory Organization of Canada (IIROC) today proposed a new rule intended to "clearly articulate that any personal financial dealing with clients, subject to limited exemptions, is considered inappropriate conduct, a conflict of interest and a violation of the general business conduct standards." Prohibited conduct would include receiving direct or indirect benefits or other considerations from clients (other than through a Dealer Member), entering into private settlement agreements with clients, lending money or borrowing money from clients, and having any control or authority over the financial affairs of clients. Amendments to the current Rule 18.14 were also proposed in order to clarify that outside business activities require disclosure to, and approval by, Dealer Members.

Comments on the proposals are being accepted by IIROC for 90 days from today's publication.

CSA and IIROC provide update on dark pools

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) today provided an update on their review of market structure issues such as dark pools. The update provides an overview of the views expressed at a consultation forum recently held by the two organizations to discuss Consultation Paper 23-404 Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada. Some of the themes that emerged during the forum included the practice of broker preferencing at the marketplace level and internalization of order flow, the practice of dark pools sending Indications of Interest to attract order flow and the use of market pegged orders. The notice also provides a summary of comments received with respect to the Consultation Paper and states that the CSA and IIROC continue to consider market structure issues and welcome further comments.

FINRA proposes enhanced oversight of firms' back offices

The U.S. Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice on May 26 requesting comments on proposed rule amendments intended to enhance the oversight of broker-dealers' back office operations. The proposed amendments would create a registration category for operations professionals engaged in, or supervising, activities relating to sales and trading support and the handling of customer assets. A new qualification exam for operations professionals would be established as well as continuing education requirements. Comments on FINRA's proposal are being accepted until July 12, 2010.

CDS proposes amendments regarding issue and entitlement procedures

CDS Clearing and Depository Services (CDS) has proposed amendments to its procedures to allow qualified CDS participants to issue and maintain security positions in CDSX in an uncertificated format. According to CDS, the amendments would provide "another option for issuers to issue their securities and is a further step supporting the Canadian capital markets' move towards a dematerialized environment." CDS is accepting comments on its proposed amendments for the next 30 calendar days.

CSA and IIROC analyzing recent market volatility

Last Friday, the Canadian Securities Administrators (CSA) announced that it was conducting, along with the Investment Industry Regulatory Organization of Canada (IIROC), a "comprehensive analysis" of the events of May 6th with respect to market volatility in the U.S. and Canada. Specifically, the CSA and IIROC state that they will engage in "active dialogue" with other regulators, marketplaces and market participants to consider market volatility issues. Further, they intend to examine electronic trading issues and the appropriateness of the existing circuit breaker policies. For more information on the response of regulators to the events of earlier this month, see our post of May 11.

IIROC announces online reporting of post licensing requirements

The Investment Industry Regulatory Organization of Canada (IIROC) has announced that effective June 14, its Dealer Members will be able to download an online report listing the post licensing requirements and corresponding due dates of its relevant employees. Post licensing requirements are set out in IIROC's Dealer Member Rules and include certain courses and examinations. With the creation of online reporting, IIROC will no longer be providing email notifications listing such requirements.

IIROC releases updated annotated UMIR

The Investment Industry Regulatory Organization of Canada (IIROC) released an update to the annotated Universal Market Integrity Rules (UMIR) yesterday that incorporates changes to the rules, guidance issued and disciplinary decisions made since June 1, 2008. The annotated rules are current as of April 1, 2010.

CPSS and IOSCO release two reports regarding OTC derivatives

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) released two reports yesterday regarding OTC derivatives. The first, Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs, provides guidance to central counterparties clearing OTC derivatives in applying the Technical Committee's 2004 recommendations. Considerations for trade repositories in OTC derivatives markets, meanwhile, provides a set of considerations for trade repositories in OTC derivatives markets and relevant authorities.

IOSCO releases consultation paper regarding credit rating agencies

The Technical Committee of the International Organization of Securities Commissions (IOSCO) recently released a consultation report addressing recent regulatory initiatives that impact credit rating agencies. Specifically, the report is intended to evaluate whether, and if so how, international initiatives implement the four IOSCO principles regarding credit rating agencies, being: (i) quality and integrity in the rating process; (ii) independence and conflicts of interest; (iii) transparency and timeliness of ratings disclosure; and (iv) confidential information.

IOSCO is accepting public comments on the report until August 6, 2010.

Regulators respond to market volatility

As regulators continue to investigate last Thursday's extreme market volatility, the Investment Industry Regulatory Organization of Canada (IIROC) has announced that it has re-priced or cancelled various trades occurring during the market slide. Various U.S. markets have also announced that they would cancel trades (see for example announcements from NYSE Arca and NASDAQ). Meanwhile, the Securities and Exchange Commission (SEC) announced yesterday that it has met with the leaders of the Financial Industry Regulatory AuthorityNASDAQ, BATS, Direct Edge, ISE and the CBOE, and that all parties have agreed on a structural framework for strengthening circuit breakers and handling erroneous trades.

Today, the SEC and Commodity Futures Trading Commission announced the formation of a joint committee to address "emerging regulatory issues", with the first item on the committee's agenda being a review of last Thursday's market events. Meanwhile, SEC Chairman Mary Schapiro testified before the Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises this afternoon to summarize the events of May 6, provide an overview of the current market structure and discuss various regulatory tools to be considered "in determining how best to maintain fair and orderly financial markets and to prevent severe market disruptions in the future."

FINRA to perform market oversight functions of NYSE Regulation

It was announced on May 4 that the U.S. Financial Industry Regulatory Authority (FINRA) would be assuming the market surveillance and enforcement functions currently conducted by NYSE Regulation. Under the agreement, which is subject to review by the Securities and Exchange Commission, FINRA would assume the regulatory functions for NYSE Euronext's U.S. equities and options markets, being the NYSE, NYSE Arca and NYSE Amex.

IIROC provides guidance on insider and significant shareholder markers

The Investment Industry Regulatory Organization of Canada (IIROC) published a notice on April 28 providing guidance related to UMIR obligations to mark orders to purchase or sell securities for insiders or significant shareholders. The notice anticipates the upcoming implementation on April 30 of the new insider reporting regime and provides answers to frequently asked questions regarding the UMIR obligations. Questions considered include, among others: (i) whether every order for an insider of a particular security must contain a marker; (ii) when a participant can rely on "know your client" information to establish whether a marker is required; and (iii) whether a marked order can be bundled together with orders for those that are not reporting insiders.

IIROC proposes new dealer regulation fee model

On April 28, the Investment Industry Regulatory Organization of Canada (IIROC) recommended a new dealer regulation fee model that would incorporate a "rate by revenue tier" approach, while reducing the level of fee disparity among dealer members.  Fees for smaller members would be increased and fee disparity for the largest firms would be reduced. Rates would also be published and made available to dealer members annually. According to IIROC, the new model would help achieve "a fair fee model". Comments are being accepted on the new model until June 28.

IIROC publishes proposed amendments to marketplace trading obligations

The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to UMIR respecting market maker, odd lot and other marketplace trading obligations. Specifically, the proposals would replace the definition of "Market Maker Obligations" with a definition of "Marketplace Trading Obligations" in order to provide marketplaces with more flexibility in structuring their market making systems.

Market maker obligations are obligations imposed by the rules of a recognized exchange or recognized quotation and trade reporting system (QTRS) on a person to guarantee (i) a two-sided market for a particular security on a continuous or reasonably continuous basis; and (ii) the execution of orders for the purchase or sale of a particular security which are less than a minimum number of units of the security as designated by the marketplace. The new definition, however, would allow exchanges and QTRSs to structure their market maker systems to provide one or both of the above functions and allow marketplaces to provide for an odd-lot arrangement by contract. The proposed amendments would also make consequential amendments to conform the language used in various UMIR provisions to the new definition.

Comments on the proposals are being accepted by IIROC until June 24, 2010.

IIROC releases strategic plan

The Investment Industry Regulatory Organization of Canada (IIROC) recently released its Strategic Plan for 2010-2012. The plan describes IIROC's vision and values and sets out the challenges it faces in fulfilling its mandate. Specifically, the plan discusses the following goals: 

  1. Promoting a culture of compliance and high standards among those subject to IIROC's jurisdiction. This will include a reorganization of IIROC's rules to enhance comprehension, providing compliance examination findings and recommendations to members and undertaking periodic industry-wide compliance audits.
     
  2. Delivering effective, efficient and expert regulation. Projects that IIROC will undertake in pursuit of this goal include the implementation of a risk-based methodology for registration and completing its framework approach to IFRS.
     
  3. Maintaining market integrity by actively monitoring market structure developments and market-related events. IIROC states that it will reduce timelines to complete enforcement investigations and bring proceedings, clarify roles and relationships in order to strengthen the client/adviser relationship and continue to develop its policies respecting OTC and debt markets.
     
  4. Ensuring that it discharges its responsibilities in a cost-effective manner, which will include the implementation of an equitable Dealer and Marketplace Member fee model.
     
  5. Maintaining a confident and well-trained staff.

IIROC announces release of pass rates of proficiency courses

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) announced that CSI Global Education, the exclusive course provider to IIROC for entrance level proficiency requirements, will now begin releasing exam pass rates for IIROC licensing courses. CSI will provide pass rate data annually to member firms for those "key" CSI regulatory courses required by IIROC.

MFDA publishes complaint handling guidance

Pursuant to changes to MFDA Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline that took effect on February 1, the MFDA recently published a notice intended to provide for guidance in interpreting the requirements of the revised policy.

MFDA publishes leveraging supervision guide

The Mutual Fund Dealers Association of Canada (MFDA) recently published a Leverage Supervision Guide to assist its members in meeting their suitability requirements pursuant to MFDA Rule 2.2.1(c).

Pursuant to MFDA Rule 2.2.1(c), MFDA members and approved persons must use due diligence to "ensure that each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client's investment objectives". Suitability guidelines were released in April 2008 by the MFDA and the recently-published Guide is intended to provide further guidance and recommended best practices on developing leverage policies and procedures, analyzing practices, maintaining appropriate documentation and supervision of leverage recommendations.

On April 6, meanwhile, the MFDA published revised leverage risk disclosure, which its members must start providing to clients as of July 1. 

IIROC postpones business continuity planning test

The Investment Industry Regulatory Organization of Canada (IIROC) announced on April 19 that it has decided to cancel the industry business continuity planning test scheduled for June 26, 2010. The voluntary test, in which IIROC encourages all Dealer Members to participate, has been rescheduled to September 10, 2011

IIROC publishes trade confirmation and matching requirements

The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to its Dealer Member Rules intended "to promote compliant trade matching practices, as well as to eliminate the sending of duplicative trade related correspondence to clients." Specifically, amendments to Rule 800.49 would: (i) extend the trade reporting requirement; (ii) define a "non-exchange trade"; (iii) provide guidance to allow Dealer Members to classify trades as being either compliant or non-compliant with reporting requirements; and (iv) establish an acceptable monthly compliant trade percentage threshold. Rule 200.1(h) is also subject to change, as an exemption to the trade confirmation requirement would be added in cases where certain conditions were met.

IIROC publishes second quarter 2010 circuit breaker levels

On April 1, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the second quarter of 2010 as 1,050 points, 2,150 points and 3,200 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,200 points; Level 2 (20%) - 2,400 points and Level 3 (30%) - 3,600 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

IIROC proposes guidance on locked and crossed markets

On March 26, the Investment Industry Organization of Canada (IIROC) published proposed guidance respecting “locked” and “crossed” markets. The proposed guidance would replace previous guidance that was recently repealed in light of amendments to National Instrument 23-101 Trading Rules. Specifically, IIROC’s proposed guidance would provide assistance in complying with the relevant provisions of NI 23-101 and its Companion Policy, as well as with the “best price” and “best execution” obligations under UMIR.

MFDA releases bulletin reviewing compliance deficiencies

On March 22, the Mutual Fund Dealers Association of Canada (MFDA) released a bulletin in which it discussed the "significant financial compliance deficiencies" identified during on-site examinations of its member firms. Specifically, the bulletin identified the following serious deficiencies: (i) incorrect margin rate applied to securities owned; (ii) securities not held at acceptable securities locations; (iii) incomplete reporting on Form 1; (iv) trust bank accounts not reconciled to back office system; and (v) nominee name client assets not reconciled to third party information on a monthly basis. According to the MFDA, such deficiencies are often "a result of a firm not adequately managing or considering the capital implications of significant changes in their business".

Meanwhile, an MFDA bulletin released on the same day reviewed common deficiencies identified during MFDA staff's review of auditor working paper files. Financial audits of MFDA members occur in accordance with Rule 3.5.1(b) and the MFDA intended the bulletin "to enhance awareness and understanding of the special audit requirements for external auditors".

OSC approves MFDA rule amendments regarding payment of commissions

The Ontario Securities Commission (OSC) announced today that it has approved amendments to MFDA Rule 2.4.1 to allow Approved Persons of MFDA Member firms to have remuneration from the Member paid directly to an unregistered corporation, subject to certain conditions. The final version of the amendments include changes made since their initially publication for comment in June 2009.

IIROC releases proposed amendments to rules concerning business conduct and client accounts

Earlier today, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed amendments to its rules respecting business conduct and client accounts. Specifically, proposed Rule 3100 - Business Conduct would consolidate various current rules relating to business conduct and impose on Dealer Members a duty to use due diligence to ensure orders and recommendation are within the bounds of good business practice. Meanwhile, proposed Rule 3200 - Client Accounts would also consolidate various rules and impose responsibilities on Dealer Members with respect to, among other things, client identification, account information, discretionary trading and conflicts of interest. A table of concordance was also released by IIROC, which is accepting comments on the proposals for 90 days.

IIROC expects reporting of business model changes

On March 10, 2010, the Investment Industry Regulatory Organization of Canada (IIROC) published a guidance note outlining its expectations with respect to Dealer Members reporting changes to their business models. According to IIROC, it is "essential" that it be made aware of "significant changes" to a member's business model as such reporting will enable more efficient and effective regulatory supervision. While a "significant change" depends on the circumstances of each case, the note provides some examples of changes that are expected to be reported. Further, IIROC expects the notifications to be thorough and detailed so as to allow it to "fully understand and assess" the changes to the business model.

CSA and IIROC hosting consultation forum on dark pools and market structure

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are hosting a forum on March 23 at the Design Exchange in Toronto to discuss Consultation Paper 23-404, "Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada", published in September 2009. Interested parties can register on the IIROC website.

IIROC repeals earlier guidance on locked and crossed markets

IIROC yesterday repealed an earlier notice that provided guidance on "locked" and "crossed" markets in the context of a dealer's obligations under the Universal Market Integrity Rules (UMIR). The repeal of the guidance results from recent amendments to NI 23-101 Trading Rules and its Companion Policy, which contain provisions regarding locked and crossed markets.

IIROC publishes draft requirements for distribution of non-arm's length investment products

On February 5, the Investment Industry Regulatory Organization of Canada (IIROC) published for comment its draft rules notice, "Requirements and Best Practices for distribution of non-arm's length investment products", which addresses the regulatory concerns raised by the distribution by a Dealer Member to its clients of investment products issued by the Member itself, an issuer, or a selling securityholder with which a Member does not deal at arm's length or is otherwise connected. The draft notice sets out IIROC staff's expectations regarding distributions by Dealer Members of non-arms length investment products and provides guidance to assist Dealer Members in meeting their regulatory obligations to their clients. The draft notice also includes a new requirement that Dealer Members must notify IIROC in advance of the initial distribution of non-arms length investment products. In publishing the draft requirements, IIROC cited concerns regarding potential conflicts of interest, product due diligence and client suitability.

IOSCO and CPSS to review standards for financial market structures

Yesterday, the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) announced the launch of a comprehensive review of financial market infrastructure standards, including payment systems, securities settlement systems and central counterparties. The review, which will be led by CPSS members (consisting of central banks, including the Bank of Canada), members of the IOSCO Technical Committee (which includes the OSC and AMF), the IMF and World Bank, is part of an initiative "to reduce the risks that arise from interconnectedness in the financial system."

Amendments to CDS rules proposed regarding issuance of money market securities

CDS Clearing and Depository Services Inc. (CDS) recently published proposed amendments to its rules regarding the processes for issuing, transferring and maintaining custody of money market securities in CDSX. Specifically, the amendments (i) clarify the process by which securities become eligible for CDSX; (ii) provide for an exception allowing CDS to release confidential information concerning a participant where the information concerns material risk events;  (iii) create a single, uniform qualification for all participants acting as issuer agents; and (iv) create new internal control standards for participant issuer agents.

CDS is accepting comments on the proposed amendments for 30 calendar days following the January 29th publication of the proposals.

Changes to MFDA policy regarding complaint handling and investigations effective February 1st

Amendments to MFDA Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline and consequential amendments to related MFDA rules and policies are scheduled to come into effect on February 1, 2010. The amendments are intended to provide "additional guidance with respect to the standards that Members should have in place regarding complaint handling and supervisory investigations" as well as consistency with the new registration regime and IIROC complaint handling requirements. The amended Policy No. 3 considers such issues as the assessment and handling of complaints, settlement agreements, supervisory investigations, internal discipline and record retention.

IIROC announces approval of UMIR amendments

The Investment Industry Regulatory Organization of Canada (IIROC) today announced that securities regulators have approved amendments to the Universal Market Integrity Rules (UMIR) respecting trading during certain securities transactions. Rule 7.7 of the UMIR governs the activities of dealers, issuers and others in connection with a distribution of securities, securities exchange take-over bid, issuer bid or amalgamation, arrangement, capital reorganization or similar transaction. Rule 7.7, paralleled OSC Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions prior to approval of these amendments. While some provisions of Rule 7.7 will now differ from OSC Rule 48-501, both rules will remain substantively similar and it is intended they will be applied in a consistent manner.   Among other things, the amendments:

  • modify the exemption governing bids or purchases of certain securities during restricted periods by permitting such bids at the best independent bid price at the time of order entry rather than at the last independent sale price;
     
  • replace the requirement that a mutual fund be designated by the market regulator prior to qualifying as an exempt exchange-traded fund with a provision that any mutual fund with units that are listed or quoted security in continuous distribution in accordance with legislation would qualify unless the regulator has designated the mutual fund to be a security excluded from the definition of "Exempt Exchange-traded Fund";
     
  • clarify the definition and interpretation of "restricted period";
     
  • clarify the types of private placements that may become subject to restrictions under Rule 7.7 of UMIR;
     
  • clarify that in determining the "best ask price" or "best bid price", reference is made only to orders contained in a consolidated market display for a marketplace that is then open for trading; and
     
  • make further consequential and editorial amendments.

The amendments are effective as of today, January 8, 2010.

IIROC announces enhancements to ComSet reporting system

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) announced changes to the Complaints and Settlement Reporting System (ComSet) in order to ensure "more accurate tracking and management of client complaints." Specifically, IIROC is making changes to the details of client information reported by its members on the ComSet system in order to enhance the accuracy of information reported.

MFDA proposes amendments to Rules resulting from registration reform

On December 23, the Mutual Fund Dealers Association of Canada (MFDA) published proposed consequential amendments to its rules intended to ensure consistency with the new registration regime under National Instrument 31-103 Registration Requirements and Exemptions. Specifically, the amendments would impact the rules respecting proficiency requirements, referral arrangements, standards of supervision, client reporting and record retention. Meanwhile, MDFA Policy No. 6 Information Reporting Requirements would also be amended.

Comments on the proposals are being accepted until March 23, 2010.

IIROC publishes first quarter 2010 circuit breaker levels

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the first quarter of 2010 as 1,050 points, 2,100 points and 3,150 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,300 points and Level 3 (30%) - 3,450 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

IIROC provides guidance for supervision of branch offices

On December 22, 2009, the Investment Industry Regulatory Organization of Canada (IIROC) published guidance for members on maintaining an adequate branch supervisory program. The notice follows a review by IIROC of the branch supervision processes of various IIROC members in early 2009. The published notice identifies common concerns with members' branch audit programs and outlines a number of best practices in response to each concern.

Regulators approve IIROC client complaint handling rule

On August 19, the Investment Industry Regulatory Organization of Canada (IIROC) published a rules notice respecting the anticipated implementation of its client complaint handling rule proposals. On December 22, IIROC announced the approval of these rules by the applicable securities regulatory authorities, with minor changes. The amendments are intended to establish an effective framework for the client complaint process by setting out standards and timelines for firms to acknowledge, investigate and respond to client complaints regarding alleged misconduct relating to the handling of client accounts.

Specifically, firms have five business days under the new standards to acknowledge receipt of a complaint and must investigate and respond to the client within 90 days. Responses must be presented in a fair and clear manner, and the notice provides further details respecting the required contents of a firm's response. Where a firm is unable to meet the 90 day timeframe, it will be expected to explain the reason for the delay to the client and IIROC. Further a Designated Complaints Officer must be appointed to manage the complaint handling process and to act as a liaison with IIROC.

The new standards take effect on February 1, 2010.

IIROC issues notice regarding arbitration program review

Citing investor need for "access to a straightforward, expeditious dispute resolution system", on Wednesday the Investment Industry Organization of Canada (IIROC) issued a request for comments regarding the review of its arbitration program. IIROC's program review began in the fall of 2008 and the immediate notice considers the results attained.

The notice acknowledges the declining use of the program (only eight cases have been initiated this year) and discusses improvements to the program as well as IIROC's proposal to increase the award limit. Specifically, IIROC has taken steps to consolidate the program's infrastructure, standardize reporting to IIROC and compile statistical information about the program. IIROC also seeks to increase the award limit under the arbitration program to $350,000 and seeks public comment on this proposal as well as suggestions to improve the effectiveness and utilization of the program.

Comments are being accepted until March 16, 2010.

IIROC President discusses policy priorities

On December 1, Susan Wolburgh Jenah, President and CEO of the Investment Industry Regulatory Organization of Canada (IIROC) spoke at the Compliance Legal Section's annual compliance conference in Toronto. Ms. Jenah discussed the initiatives undertaken by IIROC over the past year, including improving the quality and timeliness of IIROC guidance with a focus on new and complex products and also provided hints of things to expect over the course of the next year.

Specifically, Ms. Jenah discussed a number of initiatives currently being developed by IIROC, including:

The last three items were the subject of published proposals over the last year and, according to Ms. Jenah, are in various stages of development and consultation.

MFDA releases compliance bulletin regarding IFRS transition

The Mutual Fund Dealers Association of Canada (MFDA) yesterday released a bulletin regarding the upcoming transition to IFRS. The bulletin follows up on an earlier request for comment published by the MFDA in June 2009 that considered whether to require all MFDA Members to submit financial reporting to the MFDA based on IFRS or whether to limit the requirement only to those Members that would likely be considered "publicly accountable enterprises".

Despite concern that a universal requirement would increase costs for those Members that would not otherwise be required to convert to IFRS, the MFDA has decided to adopt the new standard for all Members. According to the MFDA, this approach will not have a significant impact on Members and ensures "that consistent, fair and cost-effective regulatory oversight of the membership continues." Further, the MFDA intends to publish proposed changes to reporting requirements and appropriate departures from IFRS (such as where the regulatory benefit from requiring IFRS compliance would be minimal) sometime in the future.

IIROC hosting compliance conference in Toronto

The Investment Industry Regulatory Organization of Canada (IIROC) is hosting a compliance-focused conference on December 1 in Toronto. The conference, targeted to employees of compliance, legal and related departments of IIROC member firms, will be considering issues respecting best execution and trade through, the client relationship model and current legal trends. Online registration is available here.

IIROC urges dealers to participate in business continuity tests

On November 10, the Investment Industry Regulatory Organization of Canada (IIROC) provided an update on its testing of Dealer Members' business continuity plans. While the tests are conducted on a voluntary basis, IIROC also stated that it "strongly urges" all members to participate in such tests as they "represent a valuable opportunity for Dealer Members to supplement their respective mandatory, in house annual tests which are required under IIROC regulation."

OSC approves amended CDS procedures for New York Link

The Ontario Securities Commission has now approved amendments filed by CDS Clearing and Depository Services regarding the additional collateral requirements for participants of the New York Link service. As described in our previous post, the additional requirements take effect on November 1.

IIROC reminds members of business continuity obligations

In light of concerns regarding the H1N1 Flu, the Investment Industry Regulatory Organization of Canada (IIROC) is reminding its members of their obligations under IIROC Rule 17.16 to have adequate business continuity plans in effect. Specifically, IIROC is recommending that members ensure that such plans are "up-to-date and cover business disruptive scenarios, including potential pandemic scenarios."

IIROC publishes market regulation policy update

The Investment Industry Regulatory Organization of Canada (IIROC) has published a market regulation policy update for October 2009. The policy update briefly reviews the status of new rules yet to be implemented (reporting of extended failed trades and trade variations and cancellations), those currently under development (trade-through protection and market stabilization) and considers recent issues such as dark pools and short sales. The update also states that IIROC is currently analyzing the use of circuit breakers by stock exchanges around the world and that a proposal for further study has been prepared. According to IIROC, the research thus far "is inconclusive as to the effectiveness of circuit breakers on a global scale."

IIROC answers questions regarding new registration categories

Yesterday (October 21), the Investment Industry Regulatory Organization of Canada released a notice responding to "recurring questions" received by its staff regarding the new approval categories for "Executives" and "Supervisors" under the new registration regime. Specifically, the notice describes those individuals that must be approved under one of the above noted categories, as well as considering the proficiency requirements for Supervisors.

IIROC to release webcast on enforcement trends

IIROC is expected to release its annual webcast regarding enforcement issues this afternoon at 4:00 p.m. EDT. The webcast will be available on-demand anytime after its release. A French version of an earlier webcast regarding conflicts of interest will also be released.

IIROC publishes draft guidelines regarding KYC and suitability

On October 2, the Investment Industry Regulatory Organization of Canada (IIROC) published draft guidance respecting its members' know-your-client and suitability obligations. The draft guidance does not seek to amend relevant requirements, but rather "sets out IIROC's interpretation, expectations and suggested best practices" respecting meeting current obligations. The note discusses issues such as new account application requirements, know-your-client information and product suitability.

Considering the "significance of the subject matter", IIROC is accepting comments on the draft guidance until December 16, 2009.

IIROC provides fourth quarter circuit breaker levels

On October 1, the Investment Industry Regulatory Organization of Canada (IIROC) published a guidance note relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the fourth quarter of 2009 as 950 points, 1,950 points and 2,900 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,250 points and Level 3 (30%) - 3,400 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

CSA and IIROC publish paper on dark pools, dark orders and other market structure developments

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) today announced the publication of Joint Consultation Paper 23-404, entitled "Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada". The paper discusses the evolution of the Canadian market and specifically considers the emergence of multiple marketplaces. The lack of transparency associated with some alternative trading systems is noted and specific questions are raised regarding dark pools, dark orders, market pegged orders and smart order routers.

Written submissions on the issues set out in the consultation paper are being accepted until December 29, 2009. The CSA and IIROC also stated that they intend to convene a roundtable to discuss the issues and the submissions received.

MFDA outlines changes to Rules and Member practices due to registration reform

Earlier this month, the Mutual Fund Dealers Association of Canada published a bulletin advising its Members of expected changes to its rules and Member practices due to the implementation of National Instrument 31-103 Registration Requirements and Exemptions. The bulletin specifically considers changes to proficiency requirements and categories of registration, new client mobility provisions, the harmonization of requirements for referral arrangements and changes to the frequency and content of account statements. A second bulletin, published a few days after the first, clarified record-keeping requirements for branch managers.

Additional amendments to CDS New York Link and DTC Direct Link services published

As previously announced by CDS Clearing and Depository Services (CDS), effective November 1, 2009, CDS sponsored participants of the New York Link service will be subject to expanded collateral requirements. On August 14, CDS proposed amendments that would require New York Link service participants to pledge additional collateral to CDS and require both New York Link and DTC Direct Link participants to post collateral to support newly created participant funds for each of these services. CDS has now published additional changes to the proposed amendments published on August 14.

The additional changes include: (i) the removal of U.S. dollar cash as an acceptable form of collateral for the participant funds for New York Link and DTC Direct Link; (ii) an adjustment of the collateral requirement deadlines for the National Securities Clearing Corporation (NSCC) participant fund for New York Link participants; (iii) the adjustment of the deadline for participants to request the withdrawal of excess cash collateral from the NSCC participant fund held by the NSCC for New York Link; (iv) changes to holiday processing for the NSCC participant fund for New York Link; (v) information on how participants can pledge collateral to the New York Link and DTC Direct Link participant funds managed by CDS; and (vi) service suspension.

Comments on the proposed amendments are being accepted by CDS for 30 days following the publication of the above notice in the OSC Bulletin.

IIROC releases final amendments to Dealer Member Rules to implement registration reform

The Investment Industry Regulatory Organization of Canada (IIROC) announced yesterday the approval of amendments to its Dealer Member Rules related to the implementation of registration reform. Proposed amendments were originally published for comment on September 26, 2008 and an amended proposal was published on July 17, 2009. The final version of the amendments, having incorporated the suggestions of the securities regulators, have now been approved by the regulators. The amendments will, among other things, reduce the number of approval categories from 46 to 11, merge supervisory categories and implement a principles-based approach to supervision. Most of the amendments will be effective on September 28, 2009 in conjunction with National Instrument 31-103 Registration Requirements and Exemptions.

MFDA releases Member reference guide

On September 2, the Mutual Fund Dealers Association of Canada (MFDA) announced the publication of a reference guide "to assist Members in the development of adequate written policies and procedures", as required by MFDA Rule 2.10. The MFDA states that the policies and procedures of Members should, at a minimum, include the topics described in the guide. The required topics are presented in the form of a reference chart, with references provided to specific rules, notices and policies.

Court of Appeal affirms IDA jurisdiction over former member

On August 28, the Ontario Court of Appeal released its decision in Taub v. Investment Dealers Association of Canada, a case respecting the jurisdiction of the Investment Dealers Association, (now merged with Regulation Services to form the Investment Industry Regulatory Organization of Canada (IIROC)), to discipline former members. The IDA's rules and bylaws, by which members agreed to be governed, specified that the IDA had jurisdiction over former members for the purposes of discipline for five years after one's membership ended. In this case, the IDA brought disciplinary procedures against Taub a year after he ceased being a member of the association. Taub challenged the IDA's jurisdiction over former members, but was unsuccessful before the association's hearing panel in this regard. On review, the Ontario Securities Commission agreed that the IDA had jurisdiction over Taub. The Divisional Court, however, overturned the findings of the IDA panel and the OSC. In doing so, the Divisional Court found that section 21.1(3) of Ontario's Securities Act made no provision for the regulation of former members which, therefore, limited the reach of the IDA's jurisdiction to current members.

In the immediate appeal, the Ontario Court of Appeal found that the OSC's reasons were clear and understandable and that they justified the result reached by the Commission. The Court of Appeal disagreed that the language of s. 21.1(3) limited the jurisdiction of the IDA and ultimately set aside the decision of the Divisional Court.

IIROC approves rule respecting obligations to Canadian Investor Protection Fund

The Investment Industry Regulatory Organization of Canada announced on Tuesday that it had approved the addition of Rule 41 to its Dealer Member Rules. Rule 41 outlines the obligations of IIROC and its Dealer Members to the Canadian Investor Protection Fund (CIPF), including the payment of CIPF assessments and compliance with actions that the CIPF requests be taken. The CIPF, created in 1969, protects investors by ensuring the return of customers' securities, cash and other property in the case of the bankruptcy of an IIROC Dealer Member.

IIROC publishes reminder respecting best execution and best price obligations

The Investment Industry Regulatory Organization of Canada (IIROC) published a notice yesterday with respect to the best execution and best price obligations of Participants under the Universal Market Integrity Rules (UMIR). The notice is not intended to change previous guidance on "best execution" and "best price" obigations, but "simply reminds Participants of their obligations given that securities listed on the TSXV now trade on other marketplaces."

Rule 5.1 of UMIR states that Participants "shall diligently pursue the execution of each client order on the most advantageous terms for the client as expeditiously as practicable under prevailing market conditions" and the notice makes clear that, in doing so, Participants are expected to consider trade and order information from all marketplaces that trade the same securities. With respect to Rule 5.2, IIROC states that Participants must review its policies and procedures "on an ongoing basis to reflect changes to the trading environment and market structure (which would include the fact that securities listed on TSXV now trade on multiple marketplaces)."

The notice notes that while over 98% of trades and volume in TSXV-listed securities are made through the TSXV, an increase in trading activity on alternative trading systems "indicates that trading opportunities in TSXV-listed securities are increasingly available" on such alternate systems.

IIROC releases amendments to complaint handling requirements

On Wednesday, the Investment Industry Regulatory Organization of Canada released a rules notice respecting the anticipated implementation of its client complaint handling rule proposals. IIROC first proposed amendments to its Dealer Member Rules to establish a framework for complaint handling in February 2009, and the proposals just released incorporate what IIROC has described as "minor" changes in response to public comments received. The complaint handling process requires Dealer Members to appoint a designated complaints officer and establish written complaint-handling procedures, while also setting out the general process and timelines for responding to complaints.

IIROC has submitted its proposals to the Canadian Securities Administrators (CSA) for final approval and the proposals will become effective 30 days after CSA approval and the issuance of an IIROC rules notice. Thus, IIROC advises Dealer Members to start preparing for implementation. A black-line copy reflecting changes to its earlier proposal was also provided.

CDS Requests Comments on Participant Collateral and Funding Requirements relating to DTC Direct Link and New York Link Services

As previously announced by CDS Clearing and Depository Services (CDS) effective November 1, 2009, CDS sponsored participants of the New York Link Service will be subject to expanded collateral requirements. CDS is proposing amendments that will require New York Link service participants to pledge additional collateral to CDS and require both New York Link and DTC Direct Link participants to post collateral to support newly created participant funds for each of these services. The amendments also clarify the process by which New York Link and  DTC Direct Link participants can comply with the new collateral and funding requirements.  

As CDS is subject to DTC's firm deadline of November 1, 2009, the proposed amendments have been published for a 30-day comment period. 

OSC Approves Amendments updating TSX Order Designation Rules

The Ontario Securities Commission has approved amendments to TSX Rule 4-403 of the Toronto Stock Exchange Rule Book and Policies. The amendments, originally published for comment on March 27, 2009, update the order marking requirements of the rule and introduce a requirement for participating organizations to mark orders entered for the account of an issuer pursuant to a normal course issuer bid.  

IIROC publishes notice regarding registration reform implementation issues

On August 4, the Investment Industry Regulatory Organization of Canada published a notice providing additional guidance regarding amendments to its Dealer Member Rules related to the implementation of the registration reform project. The notice covers: (i) the approval of Ultimate Designated Persons and Chief Compliance Officers; (ii) the approval category of "Supervisor" and timelines for meeting the new approval requirements; (iii) new record-keeping requirements for Dealer Members; (iv) changes to business types; (v) automatic transfers; and (vi) approval notices. The amendments to IIROC's Dealer Member Rules were published on July 17.

IIROC provides guidance on procedures for executing designated trades

The Investment Industry Regulatory Organization of Canada (IIROC) today published a guidance note respecting the procedures for executing designated trades under the Universal Market Integrity Rules (UMIR) by a Participant as principal that involve a distribution to clients of a significant block of stock of a listed security. The notice provides guidance in the form of questions and answers respecting the procedures for executing such trades.

IIROC releases annual Consolidated Compliance Report

The Investment Industry Regulatory Organization of Canada today released its first Annual Consolidated Compliance Report for the 2008/2009 examination cycle. The report present's compliance deficiencies found during IIROC's examination of almost 200 member firms. The examinations were completed by IIROC's compliance examination groups and the findings of each group are discussed in the report. The general deficiencies encountered by all compliance examination programs are also discussed, being: inadequate supervision of some business activities, inadequate internal control procedures and testing documentation and inaccurate or incomplete books and records. The report also identifies deficiencies that will be the focus of the current year's examination program.

SEC takes further action on short sales

The U.S. Securities and Exchange Commission yesterday announced that it is taking further steps in an attempt to curtail abusive "naked" short selling in equity securities and improve transparency respecting short sales generally. To that end, the SEC is making permanent, with some limited modifications, its interim final rule of October 2008 requiring broker-dealers to promptly purchase or borrow securities to deliver on a short sale. Further, the SEC stated that it is working with self-regulatory organizations to make short sale volume and transaction data available on SRO websites. The SEC's consideration of proposals on short sale price tests and circuit breaker restrictions also continues.

IIROC and FINRA announce formal cooperation agreement

The Investment Industry Regulatory Organization of Canada (IIROC) and the U.S. Financial Industry Regulatory Authority (FINRA) today announced a cooperation agreement whose objective is to "enhance the effectiveness of both organizations through the exchange of information and other cross-border assistance." The news release describing the arrangement further stated that "[i]n addition to information sharing on compliance and enforcement related matters, IIROC and FINRA plan to work together on issues related to firm oversight and examinations."

IIROC releases IFRS survey results and staff recommendations

As part of the Investment Industry Regulatory Organization of Canada (IIROC) staff analysis on the adoption of IFRS in Canada, a survey of dealers was undertaken in early 2009 "to gauge the dealer membership's awareness and understanding of IFRS and to determine the impact of the implementation of IFRS compared to current regulatory reporting of the dealer member's business." Today, IIROC published a rules notice releasing the results of the survey as well as IIROC staff's recommendation that IFRS be adopted by all dealer members. Exemptions from specific accounting standards, however, are recommended, including exemptions from: (i) certain specific note disclosure requirements; (ii) the production of comparative financial data for the first IFRS financial statements; and (iii) the valuation of receivables and payables. Comments on the notice are being accepted by IIROC until September 14, 2009.

IASB publishes IFRS for small and medium-sized entities

The International Accounting Standards Board (IASB) yesterday announced that it has issued a final version of its International Financial Reporting Standard (IFRS) for small and medium-sized entities (SMEs). SMEs are described as entities that publish general purpose financial statements for external users such as owners that are not involved in managing the business, creditors and credit rating agencies, but that do not have public accountability. According to the IASB, the IFRS for SMEs will "provide improved comparability for users of accounts; enhance the overall confidence in the accounts of SMEs; and reduce the significant costs of maintaining standards on a national basis." The IFRS for SMEs simplifies many of the principles of full standards and is a result of a number of years of working group development, round-table meetings and field-tests of a draft IFRS.

While the Canadian Accounting Standards Board (AcSB) has stated that the standard for SMEs will not be adopted in 2011 along with IFRS for publicly accountable companies, it is conceivable that the new standard will become a requirement at some point in the future.

IIROC provides third quarter circuit breaker levels

On July 2, the Investment Industry Regulatory Organization of Canada (IIROC) published a guidance note relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the third quarter of 2009 as 850 points, 1700 points and 2600 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite. The TSX trigger levels are: Level 1 (10%) - 1,050 points; Level 2 (20%) - 2,050 points and Level 3 (30%) - 3,100 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

MFDA publishes proposed amendment to By-law respecting "No Actions Against the Corporation"

On June 26, the Mutual Fund Dealers Association of Canada (MFDA) published MFDA Bulletin #0385-P, proposing amendments to section 35 (No Actions Against the Corporation) of its By-law No. 1. According to the MFDA, the proposed amendments are intended to (i) extend the existing protection found in section 35 of By-law No. 1 to the MFDA Investor Protection Corporation (MFDA IPC); and (ii) provide for, within MFDA By-laws, the "terms of the relationship between the MFDA and MFDA IPC and existing MFDA and Member obligations to the MFDA IPC."

The MFDA is accepting comments on the proposal until September 24, 2009.

IIROC publishes notice regarding "fit and proper" test for Approved Persons

The Investment Industry Regulatory Organization of Canada (IIROC) today released a notice setting out IIROC Registration Staff's "approach when conducting suitability reviews for individuals seeking IIROC approval and/or registration". The notice describes the three fundamental criteria IIROC Registration Staff use to evaluate whether an individual is "fit and proper" for approval, being integrity, financial solvency and competence. The notice also discusses the additional filings for disclosures that may affect an individual's suitability as well as a number of best hiring practices for sponsoring firms.

IIROC provides guidance on registration transition to new categories

The Investment Industry Regulatory Organization of Canada (IIROC) today released a guidance note setting out how it would transition current Approved Persons from existing categories to the proposed new categories under the upcoming registration regime to be implemented under proposed National Instrument 31-103 Registration Requirements, expected to come into force on September 28, 2009. The notice supplements the information published in CSA Staff Notice 31-311 on June 12.

The current category structure, consisting of 46 categories will be replaced with a regime containing 11 categories that will focus solely on the function of the Approved Person. The type of customer, product and whether the individual engages in portfolio management will be tracked separately.

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IIROC publishes notice regarding sales practices relating to leveraged and inverse ETFs

On June 11, IIROC published a notice concerning the sales practice obligations of Dealer Members with respect to leveraged and inverse exchange traded funds (ETFs). The notice discusses the application of various Dealer Member Rules, such as those respecting suitability, communications with the public, supervision and training, to the sales of leveraged and inverse ETFs. The U.S. Financial Industry Regulatory Authority, meanwhile, published a similar notice on the same topic.

IIROC publishes guidance for dealer members respecting credit risk policies and procedures

On June 11, the Investment Industry Regulatory Organization of Canada published a guidance notice for dealer members with respect to the "importance of being diligent in assessing and maintaining adequate credit risk policies and procedures" in light of recent financial market challenges. The notice discusses the nature of credit risk and the importance of managing exposure to such risk through a formal process that is independent of sales office functions.

IIROC states that credit risk practice should at a mimumum include active oversight of the board or owner/manager, credit policies established by management, review procedures for retail accounts and institutional credit worthiness reviews. With respect to specific best practices, the notice includes guidance with respect to margin, cash and international accounts and security concentrations in customer accounts.

SEC approves listing threshold for certain NYSE companies

Citing the "dramatic decline in stock prices and market capitalizations of many listed companies", the U.S. Securities and Exchange Commission recently published temporary changes filed by the New York Stock Exchange (NYSE) in its listing thresholds for certain listed companies. These changes went into effect on May 12, 2009, the date of filing by the NYSE, and will remain in force until October 31, 2009. Prior to these temporary amendments, the rules considered companies that qualified to list under the Earnings Test, Assets and Equity Test or the "Initial Listing Standard for Companies Transferring from NYSE Arca" standard of the NYSE's Listed Company Manual to be below compliance standards if their average global market cap over a consecutive 30 trading-day period was less than $75 million and, at the same time, total stockholders' equity was less than $75 million. These temporary changes have lowered the thresholds for these companies to $50 million. Although the changes are in effect, the SEC is inviting comments until June 25, 2009 as it has 60 days from the date of filing to abrogate the rule change.

IIROC establishes whistleblower service

On May 25, 2009, the Investment Industry Regulatory Organization of Canada (IIROC) announced that it has established a whistleblower service to allow individuals to report, online or by phone, "potential systemic wrongdoing, potential securities frauds or unethical behaviour by individuals or firms in the investment industry." IIROC's news release states that it will "immediately assess and ensure that prompt and appropriate follow-up action on reported issues or behaviour is taken."

The service is in effect as of May 25.

MFDA publishes proposed amendments to rules regarding client/advisor relationship

The Mutual Fund Dealers Association of Canada recently published proposed amendments to its rules with respect to client accounts, client communications and client reporting. The proposed amendments were originally published in 2008, but have been revised in response to comments received and to minimize differences between the Client Relationship Model of the MFDA and IIROC. Comments are being accepted by the MFDA prior to July 23, 2009.

IIROC proposes amendments to simplify the Equity Margin Project

IIROC recently published for comment proposed amendments (Proposed Amendments) to Dealer Member Rule 100.2(f)The Proposed Amendments are to those amendments proposed by IIROC under the Equity Margin Project (the Main Proposal), which are currently being reviewed by the securities commissions.  The Proposed Amendments are intended to simplify a number of processes for IIROC staff and Dealer Members regarding the implementation and ongoing support of the Equity Margin Project's new methodology for margining equity securities.  Comments on the Proposed Amendments will be accepted by IIROC until June 30, 2009.

IIROC publishes proposals on Client Relationship Model

IIROC has recently published a notice proposing rules and amendments in order to address various regulatory objectives under the Client Relationship Model Project, specifically: relationship disclosure, management and disclosure of conflicts of interest, account suitability and account performance reporting. Proposed rule changes were initially published in February 2008 by the IDA and the current proposals incorporate feedback received through the comment process as well as through subsequent consultations held with industry associations, the MFDA and provincial securities regulators. Comments are invited for a period of 90 days from the date of publication of the notice.

IIROC publishes proposed amendments to definition of "securities related activities"

On April 24, 2009, the Investment Industry Regulatory Organization of Canada released a notice of proposed amendments that would revise the definition of “securities related activities” in the Dealer Member Rules to refer to all investment products and also repeal the definition of “securities related business”. The primary objective of the changes is to “clearly articulate that IIROC registered representative recommended transactions for any investment product…must be conducted within and recorded on the books of an IIROC Dealer Member.” Further, the changes are intended to "harmonize the requirements for agent and employee salespersons to conduct certain activities within an IIROC Dealer Member and to record such activities on the books of the IIROC Dealer Member." Comments on the proposed amendments will be accepted by IIROC until June 23, 2009.

IIROC publishes notice regarding best price obligation

IIROC has published notice that regulatory authorities have approved amendments to the Universal Market Integrity Rules respecting the "best price" obligation. Among other things, the amendments, which became effective on May 16, 2008 when they were published, set out certain order handling methods, the use of which will satisfy the "reasonable efforts" requirements of the "best price" obligation. IIROC also published a notice providing guidance on specific questions related to compliance with the "best price" obligation.

IIROC publishes proposals regarding fair pricing of OTC securities and trade confirmation disclosure requirements

The Investment Industry Regulatory Organization of Canada today published proposed amendments to the Dealer Member Rules with respect to fair and reasonable pricing of over-the-counter traded securities (including fixed income securities) and trade confirmation disclosure requirements. The fair pricing proposal would cover OTC transactions for retail and institutional clients and require that Dealer Members “make a reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions.” The proposed rule also considers issues respecting mark-ups and mark-downs in the case of principal transactions and commissions or service charges in the case of agency transactions. A draft Guidance Note on the OTC proposal was also published.

The proposed amendments would also require disclosure of the yield to maturity for fixed income securities on trade confirmations as well as a remuneration statement on all OTC transactions for retail clients “where the amount of the mark-up or mark-down, commissions and other service charges” has not been disclosed.

IIROC is accepting comments on the proposals until July 16, 2009.

IIROC publishes notice regarding product due diligence

On March 23, 2009, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice providing guidance on the introduction and supervision of new financial products. Citing the gatekeeper role played by dealer members, the notice provides sample criteria for identifying products that may require review, as well as a list of best practices for product due diligence.

FINRA proposes new investment banking registration category

On March 2, 2009, the SEC provided notice of proposed changes to the NASD Rules as filed by the Financial Industry Regulatory Authority (FINRA). FINRA (a consolidation of the National Association of Securities Dealers and the member regulation, enforcement and arbitration functions of the New York Stock Exchange) is responsible for regulating securities firms doing business in the U.S. and prescribes the training and competence standards of securities representatives. The proposed changes to the NASD Rules would create a new limited representative registration category for investment banking professionals. In lieu of the current General Securities Registered Representative (Series 7) exam, those whose activities are limited to investment banking would take a more targeted qualification exam, while those already holding Series 7 registration would be "grandfathered" and not need to take the new exam.

CICA guidance for reporting non-GAAP financial measures

Last year, the Performance Reporting Board of the Chartered Accountants of Canada published guidance and recommendations for preparing and reporting non-GAAP financial measures. The document provides standardized definitions for EBITDA and Free Cash Flow and recommendations for utilizing those two specific measures. Particularly relevant in the current environment is the definition of Standardized EBITDA, which excludes "amounts included in net income or net loss for: ... (iii) amortization and impairment charges for capital assets."

IIROC publishes strategic plan

The Investment Industry Regulatory Organization of Canada recently published a strategic plan, dated December 2008, which sets out IIROC's broad goals and strategies. Goals include driving a culture of compliance among those subject to IIROC's jurisdiction and delivering effective, efficient and expert regulation.

IOSCO report on direct electronic access to markets published

The Technical Committee of the International Organization of Securities Commissions (IOSCO) recently published a consultation report with respect to policies on direct electronic access (DEA) to markets. The report reviews risks and concerns associated with DEA arrangements and proposes guidance with respect to pre-conditions for DEA, information flow and adequate systems and controls. Comments on the report may be submitted to the IOSCO until May 20, 2009.

IIROC to accept surveys in lieu of IFRS progress reports

On September 30, 2008, the Investment Industry Regulatory Organization of Canada (IIROC) issued Notice 2008-0113 regarding the adoption of International Financial Reporting Standards (IFRS). Notice 2008-0113 stated that IIROC would require progress reports on the adoption of IFRS from dealer members by April 1, 2009.

On February 23, 2009, however, IIROC released a notice stating that in lieu of a progress report, dealer members will be required to complete a survey, which will be sent to the CFOs of each dealer member. The purpose of the survey will be to "assist dealer members in their self-assessment of the impact to adopt IFRS" and IIROC intends to use the results to "identify implementation issues and next steps".

IIROC publishes notice regarding complaint handling requirements

The Investment Industry Regulatory Organization of Canada (IIROC) has published proposed amendments to its Dealer Member Rules with respect to the handling of client complaints. The proposed rules seek to establish "an effective framework" for the client complaint process by setting out timelines and standards to which Dealer Members must adhere. The text of the proposed amendments may be found here and comments on the proposals may be submitted to IIROC until March 16, 2009.

MFDA to establish task force to consider governance issues

In a bulletin published February 12, the Mutual Fund Dealers Association of Canada (the MFDA) announced that it was establishing a task force to review issues respecting its governance, which emanated from its annual general meeting of members held in December 2008. The issues to be reviewed include the process for nominating board members, the process for making and amending by-laws and rules, the failure to pass a by-law respecting the definition of "Public Director" and the terms of office for directors, and the failure to elect three proposed Public Directors. The MFDA stated that it is determined to fully review the governance issues and conduct a "robust" consultation process.

IIROC releases short sales studies

On February 4, the Investment Industry Regulatory Organization of Canada (IIROC) released two studies related to short sales. The first study, "Recent Trends in Trading Activity, Short Sales and Failed Trades", reviewed trading trends during the period of May 1, 2007 to September 30, 2008 with a particular focus on short selling and failed trades. The study found that despite the fact that the average number of daily trades increased "significantly" during the study period, "there was no significant change" with respect to short sales.

The second study released was the "Study on the Impact of the Prohibition on the Short Sale of Inter-Listed Financial Sector Issuers". The purpose of this study was to review the impact of recent restrictions by the OSC in September and October of 2008 (see below) to curb short selling in the face of increased market volatility. Notably, the study found that the OSC Orders "did not appear to have had any appreciable effect on the price of securities"  of either the securities of restricted or non-restricted financial issuers. The Orders, however, had "a significant impact on market quality" for the trading of restricted financial securities, as the Orders reduced the liquidity available in the restricted financials and increased the spread between the ask price and closing bid.

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IIROC provides update on Rule Book re-write

IIROC recently published a notice providing an update to its Rule Book Project. The objective of the Project is to "produce a clear, streamlined re-statement of the former IDA rules and make substantive reforms to certain important rules." IIROC further states that the Project is a necessary pre-condition to the production of a consolidated IIROC Rule Book that will consist of the Dealer Member Rules and UMIR. IIROC estimates completing the endeavour by February 2010.

IIROC Activates UN Reporting System

On January 20, the Investment Industry Regulatory Organization of Canada (IIROC) issued a notice, stating that effective January 21, 2009 all IIROC Dealer Members are to use IIROC's new web-based UN Reporting System to submit reports mandated under 83.11 of the Criminal Code, section 7 of the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism, subsection 11(2) of the Regulations Implementing the United Nations Resolution of the Democratic People's Republic of Korea and the Regulations Implementing the United Nations Resolutions on Iran (the three regulations enacted under the United Nations Act). The old method of reporting will no longer be valid.  Each Dealer Member must appoint a person within their organization, by no later than February 15, 2009, to act as the UN Report Administrator, failing which the Chief Compliance Officer will be appointed by default. 
 
The Dealer Member reporting obligations are described in IIROC Member Regulation Notices MR0102 and MR0458.

IIROC publishes trade-through protection rules

In response to the CSA's proposed amendments to NI 23-101 Trading Rules, released earlier this month, IIROC has now published for comment proposed amendments to the Universal Market Integrity Rules that would correspond to the changes to NI 23-101. IIROC's proposed amendments would include repealing the rule and policies respecting the "best price" obligation concurrent with the implementation of trade-through protection. With the publication of the proposed amendments, IIROC also withdrew from further consideration interim provisions on trade-through obligations, previously published by Market Regulation Services (a predecessor to IIROC). Until the amendments implementing trade-through protection are made to NI 23-101 and UMIR, however, Participants remain subject to the "best price" obligation under Rule 5.2 of UMIR.

IIROC requests comments on best practices for product due diligence

In addition to its ABCP study, IIROC has also published for comment a draft guidance note entitled "Best practices for product due diligence". Specifically, IIROC is requesting comment on the relevant criteria in determining whether a product should be subject to a due diligence review, factors to be considered in conducting product due diligence and the structures and procedures necessary for an effective review. 

IIROC publishes study on manufacture and distribution of third-party ABCP

On October 17, the Investment Industry Regulatory Organization of Canada (IIROC) announced the publication of a study concerning the manufacture and distribution of third-party asset-backed commercial paper in Canada. The study reviews the events leading up to the "liquidity crisis" of August 2007 in the ABCP market and includes recommendations concerning product due diligence, product transparency, conflicts of interest and credit ratings.

IIROC publishes notice regarding short sales and failed trades

On October 15, 2008, IIROC published a notice regarding the approval of amendments to the Universal Market Integrity Rules respecting short sales and failed trades. The amendments are based on an earlier notice, published in September 2007, and are intended to address potential abusive short selling and failed trade activity. These amendments will require reporting of failed trades after 10 trading days, limit the ability to cancel or vary executed trades, and allow IIROC to designate certain securities as ineligible for short sales entirely. They are also expected to involve the imposition of hard “pre-borrow” requirements in the case of persons who have executed failed trades, which will be subject to a request for comments. IIROC also announced that it is deferring adopting the removal of current short sale price restrictions and the removal of current requirements to file bi-monthly aggregate short position reports.

IIROC provides short selling guidance

In response to last week's OSC Extension Order with regards to the prohibition on the short sale of certain TSX-listed financial companies, IIROC has published guidance on the handling of short sales.

MFDA publishes proposed amendments to Rule 2.6

The MFDA is publishing for comment proposed amendments to Rule 2.6 Borrowing for Securities Purchases. The proposed amendments would require leverage risk disclosure only when an Approved Person makes a recommendation to invest using borrowed funds or becomes aware of a client borrowing for investment. The proposed amendments would also exempt RRSP loans from the disclosure requirements of Rule 2.6. In conjunction with the proposed amendments, MFDA staff will be revising the prescribed risk disclosure language in MR-0006 to provide a brief explanation of key risks and relevant considerations in plain language. The comment period expires November 3, 2008.

IIROC proposes rule Amendments to Implement the CSA Registration Reform Project

IIROC has published notice of proposed changes to its registration related rules to make them consistent with the objectives of the CSA’s Registration Reform Project proposals.

IIROC’s proposal to overhaul its rules encompasses significant amendments to the existing rules, and while designed primarily to implement the approach and objectives of the Registration Reform Project in the IIROC Dealer Member Rules, also includes proposed rule changes of a housekeeping nature and those directed at improving the clarity of the rules in general.

These rule amendments are expected to be made effective on the same date as proposed National Instrument 31-103 and related changes to securities laws required to implement the CSA’s Registration Reform Project. The proposal is open for a 30-day comment period.

Further short selling measures from the OSC and IIROC

On September 22, the OSC issued an amended Temporary Order with respect to the restrictions on short sales in order to address technical and operational matters originating from their original Temporary Order and to support similar issues addressed by the SEC.

Further, IIROC has released a Restated Reminder Respecting Obligations in the Conduct of Short Sales in order to review the obligations of Participants and Access Persons in the handling of short sales. Of interest, the reminder also states that as part of its market activity monitoring, IIROC intends to increase surveillance of short selling activity, in particular of issuers in the financial sector not covered by the OSC's Temporary Order.

Amendments to NI 21-101 Marketplace Operation and NI 23-101 Trading Rules

On August 12, 2008, the Minister of Finance approved amendments to NI 21-101 and NI 23-101, which are set to come into force on September 12, 2008. As described in our earlier post, the CSA initially approved amendments to NI 21-101 Marketplace Operation (NI 21-101) and NI 23-101 Trading Rules (NI 23-101) in June 2008 to deal mostly with the best execution obligation of dealers and advisers.  An unofficial consolidation of the amendments can be found here.

Amendments to TSX Opening and Closing Times

On August 26, 2008, the OSC approved amendments to the TSX Rules. The amendments remove from the TSX Rules the fixed opening and closing times of the TSX's trading sessions and instead authorize the Board of Directors of TSX Inc. to determine the opening and closing times. Certain minor changes to the amendments were made following their publication for comment on September 7, 2007 and the amendments take effect on September 12, 2008.

MFDA submits application to amend recognition orders

On August 29, the CSA published a Joint Notice and Request for Comment regarding an application by the MFDA to extend the suspension of MFDA Rule 2.4.1 to December 31, 2010.

MFDA  Rule 2.4.1 requires MFDA Members to pay any remuneration for business conducted by MFDA Approved Persons on the Members' behalf directly to and in the name of the Approved Persons. 

The MFDA is requesting that the securities regulatory authority in each of British Columbia, Ontario, Saskatchewan, and Nova Scotia extend the suspension of Rule 2.4.1 to December 31, 2010 to give it time to develop proposed amendments that would allow Approved Persons to direct remuneration in respect of business they conduct on behalf of MFDA Members to non-registered corporations, subject to certain conditions.

Suspension of MFDA Rule 2.4.1 currently expires on December 31, 2008.

The Mutual Fund Dealers Association of Canada - Notice of Consent

The OSC consented to the MFDA’s continued participation in the Co-operative Agreement with the AMF, pursuant to which the AMF, the Chambre de la sécurité financière and the MFDA co-ordinate their various regulatory functions with respect to MFDA Members and their Approved Persons operating in Québec.

Amendments to TSX Company Manual Approved

The TSX has adopted and the OSC has approved various amendments to the TSX Company Manual. The Amendments, effective as of June 16, 2008, are of a housekeeping nature and including the following:

  • Amendments to correct references to the Securities Act in Part III and Part VI of the Manual, required as a result of changes to the OSA.
  • Changes to Appendix H: Form 11 -- Notice of Private Placement, to clarify that blanket shareholder approvals are not permitted.
  • Changes to Appendix H: Form 12 - Notice of Intention to Make a Normal Course Issuer Bid
  • Appendix A -- Original Listing Application is being replaced with a streamlined application, but no substantive changes have been made.

CSA Notice on Best Execution (NI 21-101)

The CSA have approved amendments to NI 21-101 Marketplace Operation (NI 21-101) and and NI 23-101 Trading Rules (NI 23-101) to deal mostly with the best execution obligation of dealers and advisers.

The Amendments, now scheduled to come into force on September 12, 2008, were initially published for comment along with other proposed amendments on April 20, 2007 with the Joint Notice on Trade-Through, Best Execution and Access to Marketplaces (originally published in conjunction with RS, now IIROC. The CSA have now decided to separate these three topics and deal with each separately on separate timetables.

The current amendments deal with best execution along with some other minor changes, including changes related to the electronic audit trail provisions. Amendments dealing with trade-through protection and rules related to access to marketplaces are proposed to be dealt with under separate requests for comment in the coming months.

Notice of Approval published re: IIROC

The OSC and a number of other Canadian securities regulatory authorities or regulators have published this notice of approval of the Investment Industry Regulatory Organization of Canada (IIROC). IIROC is a result of the combination of the regulatory activities of the Investment Dealers Association of Canada (IDA) and Market Regulation Service Inc. (RS).

The notice of approval is comprised of IIROC’s official Recognition Order, a memorandum of understanding with respect to the regulatory oversight program for rule review and approval, IIROC’s new By-law No. 1 and Transition Rule No. 1 and certain consequential amendments to related documents. 

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TSX revisits exemption from securityholder approval for share exchange acquisitions of public entities

Ramandeep Grewal and Simon Romano

 

On October 12, 2007, the TSX issued a request for comments to determine whether it should revisit its practice of exempting listed issuers from the requirement to obtain security holder approval for share exchange acquisitions of other public entities. The request for comments includes a summary of some of the material considerations for or against such a proposal and a comparison to similar requirements in other jurisdictions.

The TSX Manual currently requires shareholder approval for acquisitions where the number of securities issued or issuable as consideration exceeds 25% of the issued and outstanding securities of a listed offeror. Prior to January 1, 2005, the TSX generally applied its historical practice of exempting listed issuers from this requirement for acquisitions of other public entities. Amendments that were effective on that date expressly added this exemption as Section 611(d) of the TSX Manual. In response to concerns raised by some market participants, the TSX has decided to review whether it is appropriate to continue to make this exemption available to its listed issuers.

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