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Final Rule: OSC Rule - 31-505 - Conditions of Registration
Final Rule: OSC Rule - 31-505 - Conditions of Registration
NOTICE OF RULE UNDER THE SECURITIES ACT
ONTARIO SECURITIES COMMISSION RULE 31-505
CONDITIONS OF REGISTRATION AND REVOCATION OF REGULATIONS
Notice of Rule
The Commission has, under section 143 of the Securities Act (the "Act"), made Rule 31-505 Conditions of Registration (the "Rule").
The Rule and the material required by the Act to be delivered to the Minister of Financewere delivered on October 9, 1998. If the Minister does not approve the Rule, reject theRule or return it to the Commission for further consideration, the Rule will come into forceon December 23, 1998. If the Minister approves the Rule, the Rule will come into force 15days after it is approved.
The Rule was published on two occasions.
Substance and Purpose of Rule
The substance and purpose of the Rule are to consolidate current requirements of theRegulation which establish conditions of registration with related requirements arising fromthe administrative practice of the Director, and to expand such requirements in order toprovide certainty for applicants for registration and appropriate authority for certainenforcement matters for the Commission. In particular the Commission is using its rulemaking authority to reinstate in the Rule the provisions of sections 221 and 222 of theRegulation. Subsection 222(1) of the Regulation was struck down in the decision of theOntario Court of Justice (Provincial Division) R. v. Haldenby (1994), 17 OSCB 4311 asoutside the then regulation making power under the Securities Act (the "Act").
Summary of Rule
Section 114 of the Regulation currently contains requirements relating to the opening andsupervision of accounts by registered dealers and advisers. The Rule expands the scopeof subsection 114(1) of the Regulation to require that the supervision relate to adviceprovided to clients. The procedures must be in writing and the registered dealer andadviser must send written notice to the Commission designating an individual responsiblefor opening new accounts and supervising trades made for or with clients and adviceprovided to clients.
The Rule expands the current provision in subsection 114(2) of the Regulation to allowinvestment dealers or brokers to comply with the applicable by-law, rule, regulation, policy,procedure, interpretation or practice of the Investment Dealers Association or The TorontoStock Exchange in satisfaction of the requirements of Part 1 of the Rule respecting newaccounts and account supervision.
The Rule incorporates the requirement to know your client and assess suitability currentlyestablished in subsection 114(4) of the Regulation. This provision has been expanded toensure that individual registrants are also required to comply with the know your client andsuitability rules.
The Rule incorporates the exceptions to the know your client and suitability requirementsof section 114 of the Regulation that relate to execution of trades on the instructions ofregistered advisers and opening of accounts by registered advisers.
The Rule combines the provisions currently contained in subsection 114(3) of theRegulation which require registrants to designate a person responsible for the openingand supervision of accounts and the provisions of section 125 of the Regulation whichrequire dealers and certain advisers to designate a compliance officer.
The Rule permits the compliance officer to delegate supervisory functions and codifiesStaff practice of requiring branch managers to be registered for trading.
The Rule expands each of these provisions to ensure that they relate to all categories ofadvisers.
The Rule incorporates the provisions of sections 221 and 222 of the Regulation except asthey applied to "registered directors" as section 25 of the Act does not contemplate theregistration of directors.
The Rule imposes an obligation on registered dealers and advisers to supervise theirregistered salespersons, officers and partners in accordance with Ontario securities lawand any supervisory terms or conditions imposed on their registered salespersons, officersor partners. The Rule does not specify the necessary level of supervision but does requirethat a branch manager be responsible for oversight of each branch either from within thebranch or from another location.
Summary of Comments Received by the Commission on the Second Publication
The Commission received the following two comments on the second publication of theRule from the Canadian Bankers Association and TD Asset Management Inc.
One commentator was concerned that the structure for compliance officers would not workfor larger firms and that the rules of the Investment Dealers Association of Canada shouldbe imported into the Rule.
The Commission has revised the Rule on the last published draft to permit the delegationof "supervisory" functions to persons who have salesperson level proficiency who reportto the compliance office and to permit the branch manager to engage in certain compliancefunctions. This was intended to remove unnecessary workload burdens on the complianceofficer. The Commission does not believe the structure is unworkable in the context of thelarger firms.
A second commentator suggested the use of the term "Ontario financial institution" bereplaced with the term "Canadian financial institution". The Commission has determinedto make that change. The change is not material as the definition of Ontario financialinstitution and Canadian financial institution as found in the definition instrumentsapplicable in Ontario are not significantly different.
Regulations to be Revoked
The Commission will revoke sections 114, 125, 221 and 222 of the Regulation effectivethe date the Rule comes into force.
Text of Rule
The text of the Rule follows.
DATED: October 9, 1998.
CONDITIONS OF REGISTRATION
PART TITLE
PART 1 NEW ACCOUNTS AND SUPERVISION
1.1 Recognized Self-Regulatory Organization andRecognized Stock Exchange Member 1
1.2 Dealing with Clients
1.3 Designation of Compliance Officer
1.4 Branch Manager
1.5 Know your Client and Suitability
1.6 Managed Accounts
1.7 Execution of Trades and Instruction
PART 2 GENERAL DUTIES
2.1 General Duties
PART 3 SUPERVISORY TERMS
3.1 Supervisory Terms
PART 4 EXEMPTION
4.1 Exemption
CONDITIONS OF REGISTRATION
PART 1 NEW ACCOUNTS AND SUPERVISION
1.1 Recognized Self-Regulatory Organization and Recognized StockExchange Member
(1) A member of The Toronto Stock Exchange may comply with arequirement of this Part by complying with a by-law, rule, regulation,policy, procedure, interpretation or practice of The Toronto StockExchange dealing with the same subject matter as that requirementthat has been approved by the Commission and published by TheToronto Stock Exchange.
(2) A member of the Investment Dealers Association of Canada maycomply with a requirement of this Part by complying with a by-law,rule, regulation, policy, procedure, interpretation or practice of theInvestment Dealers Association of Canada dealing with the samesubject matter as that requirement that has been approved by theCommission and published by the Investment Dealers Association ofCanada.
1.2 Dealing with Clients - A registered dealer or adviser shall establish andenforce written procedures for dealing with clients that conform with prudentbusiness practice and enable the dealer or adviser to serve its clientsadequately.
1.3 Designation of Compliance Officer
(1) A registered dealer or adviser shall designate a registered partner orofficer as the compliance officer who is responsible for dischargingthe obligations of the registered dealer or adviser under Ontariosecurities law.
(2) The person designated under subsection (1) by a registered dealeror adviser shall also be responsible for opening each new account,supervising trades made for or with each client and supervisingadvice provided to each client or, if a branch manager is designatedunder subsection 1.4(1), for supervising the branch manager'sconduct of the activities specified in subsection 1.4(2).
(3) Despite subsections (1) and (2), the designated compliance officermay delegate supervisory functions to an individual who reports to thecompliance officer and who meets the proficiency requirements underRule 31-502 Proficiency Requirements for Registrants for asalesperson in the same category of registration as the dealer or anofficer in the same category of registration as the adviser, that has ineach case designated the compliance officer.
(4) An applicant for registration or reinstatement of registration as adealer or adviser shall deliver to the Commission, with theapplication, written notice of the name of the person proposed to bedesignated under subsection (1).
1.4 Branch Manager
(1) If a registered dealer or adviser operates a branch office, theregistered dealer or adviser shall designate a registered salesperson,officer or partner as the branch manager for the branch.
(2) A branch manager is responsible for the branch for opening newaccounts, supervising trades made for or with each client andsupervising advice provided to each client and shall report directly tothe compliance officer designated under section 1.3.
(3) An applicant for registration or reinstatement of registration as adealer or adviser that proposes to operate a branch office shalldeliver to the Commission, with the application, written notice of thename of the person proposed to be designated under subsection (1).
(4) Despite subsection (1), a mutual fund dealer that has appointed anadministration officer for a branch in accordance with the Policy of theCommission entitled "Principles of Regulations Re: Distribution ofMutual Funds by Financial Institutions" is not required to designatea branch manager for the branch until the date on which theCommission makes a rule replacing the Policy.
1.5 Know your Client and Suitability
(1) A person or company that is registered as a dealer or adviser and anindividual that is registered as a salesperson, officer or partner of aregistered dealer or as an officer or partner of a registered advisershall make such enquiries about each client of that registrant as
(a) subject to section 1.6, enable the registrant to establish theidentity and the creditworthiness of the client, and thereputation of the client if information known to the registrantcauses doubt as to whether the client is of good reputation;and
(b) subject to section 1.7, are appropriate, in view of the nature ofthe client's investments and of the type of transaction beingeffected for the client's account, to ascertain the generalinvestment needs and objectives of the client and thesuitability of a proposed purchase or sale of a security for theclient.
(2) Despite paragraph (1)(a) a registrant is not required to makeenquiries as to the creditworthiness of a client if the registrant is notfinancing the acquisition of securities by the client.
1.6 Managed Accounts
(1) For each account with a registered dealer opened and traded by aregistered adviser on behalf of a client, each of the dealer, and asalesperson, officer or partner responsible for the account, shalldetermine that the adviser is creditworthy, but does not have anyresponsibility under paragraph 1.5(1)(a) if the adviser executesorders in the adviser's name or identifies its client by means of a codeor symbols or guarantees the account.
(2) For each account with a registered dealer opened and traded by aregistered adviser on behalf of a client with no agreement thatpayment of the account is guaranteed by the adviser, each of thedealer that executes orders in the name of the client, and asalesperson, officer or partner responsible for the account, does nothave any responsibility under paragraph 1.5(1)(a), but shall obtain
(a) full information concerning the client to enable the registrantto establish the identity and the creditworthiness of the client;or
(b) from the adviser
(i) a letter confirming the familiarity of the adviser withapplicable Ontario securities law, requirements of self-regulatory organizations and requirements of theadviser for account supervision, and
(ii) a written undertaking to make the investigationscontemplated by those requirements and to advise, ifknown, whether the client is an insider of a reportingissuer or an employee, director, officer or partner of aperson or company engaged in the securities businessand the details of the relationship.
(3) An adviser shall for each account with a registered dealer openedand traded by the registered adviser on behalf of a client ask theclient if the client is an insider of a reporting issuer or an employee,director, officer or partner of a person or company engaged in thesecurities business and the details of the relationship.
1.7 Execution of Trades and Instruction - Paragraph 1.5(1)(b) does not applyto a registered dealer or a registered salesperson, partner or officer of aregistered dealer that executes a trade on the instruction of a registeredadviser, another registered dealer or a Canadian financial institution.
PART 2 GENERAL DUTIES
2.1 General Duties
(1) A registered dealer or adviser shall deal fairly, honestly and in goodfaith with its clients.
(2) A registered salesperson, officer or partner of a registered dealer ora registered officer or partner of a registered adviser shall deal fairly,honestly and in good faith with his or her clients.
(3) A registered salesperson, officer or partner of a registered dealer ora registered officer or partner of a registered adviser shall not act onbehalf of the dealer or adviser in a transaction of the dealer or adviserthat is not in compliance with Part XIII of the Regulation andMultilateral Instrument 33-105 Underwriting Conflicts or this Rule.
PART 3 SUPERVISORY TERMS
3.1 Supervisory Terms - A registered dealer shall supervise each of itsregistered salespersons, officers and partners and a registered adviser shallsupervise each of its registered officers and partners in accordance withOntario securities law and terms or conditions imposed by the Director or theCommission on the registration of the salesperson, officer or partner of thedealer or the officer or partner of the adviser requiring that the actions of theregistered salesperson, officer or partner of the registered dealer or theregistered officer or partner of the registered adviser be supervised in aparticular manner.
PART 4 EXEMPTION
4.1 Exemption - The Director may grant an exemption to this Rule, in whole orin part, subject to such conditions or restrictions as may be imposed in theexemption.