Notice and Proposed Rule: OSC Rule - 31-506 - SRO Membership - Mutual Funds Dealers

Notice and Proposed Rule: OSC Rule - 31-506 - SRO Membership - Mutual Funds Dealers

Request for Comment OSC Rule



NOTICE OF PROPOSED RULE

31-506

SRO MEMBERSHIP - MUTUAL FUND DEALERS


Substance and Purpose of Proposed Rule

The purpose of the proposed Rule is to address certain regulatory issues that arise in connection with oversight of mutual fund dealers. The proposed Rule requires all mutual fund dealers to be members of a self-regulatory organization or stock exchange recognized by the Commission (a "SRO"). The proposed Rule conforms to the fundamental principle in paragraph 4 of section 2.1 of the Securities Act (Ontario) (the "Act") under which the Commission should, subject to an appropriate system of supervision, use the enforcement capability and regulatory expertise of recognized self-regulatory organizations.

The proposed Rule is substantially similar in effect on mutual fund dealers as National Policy Statement No. 49 ("NP 49") was on "national dealers".

Recent Regulatory History of Mutual Fund Regulation Review

In February 1994, Commissioner Glorianne Stromberg was asked by the Commission to undertake a review of the Canadian investment funds industry for the purpose of considering whether changes were needed in how investment funds and the offering and sale of their securities are regulated. The CSA supported this review. This review culminated in the January 1995 release of Commissioner Stromberg's report "Regulatory Strategies for the Mid-90's - Recommendations for Regulating Investment Funds in Canada" (the "Stromberg Report")(1).

Commissioner Stromberg recommended in her report that there be a national self-regulatory body for all dealers and that the regulatory structure for investment funds be simplified by combining provincial resources into a single centralized regulatory body.

The CSA constituted the Investment Funds Steering Group to consider the recommendations contained in the Stromberg Report in June 1995(2). The Investment Funds Steering Group urged the CSA and the industry to move toward development of a single SRO to regulate the activities of distributors of mutual funds.(3)

The CSA then established the CSA Investment Funds Implementation Group, a high level CSA committee, to consider how the CSA should implement the recommendations contained in the Stromberg Report and the subsequent report of the Investment Funds Steering Group. The CSA Investment Funds Implementation Group in its report released in May of 1997,(4) placed a high priority on an initiative for a national SRO to regulate the activities of all dealers in securities, including mutual fund dealers.

Although the Commission has determined to make the proposed Rule, it believes that optimally, the mutual fund industry should be regulated by a single national SRO having jurisdiction over all distributors of securities, including mutual fund securities. The Commission will continue to encourage the development of a single national SRO to regulate distributors of securities.

The Commission is continuing to work with IFIC and the IDA to establish an SRO for mutual fund dealers that will meet the requirements of the Commission necessary for recognition by the Commission. It is anticipated that the Commission will recognize for the purposes of this proposed Rule a SRO that requires its members to contribute to a member funded contingency fund. Therefore all members of recognized SROs will participate in a contingency fund, which is an insurance fund for investor protection with respect to failed securities firms in Canada. Any such contingency fund is intended to cover losses of securities and cash balances, within prescribed limits, suffered by clients of a participating firm in the event of that firm's insolvency. Levies for the contingency fund may be based on the firm's level of activity in the capital markets, i.e. gross revenues.

Summary of Proposed Rule

The proposed Rule requires membership in a SRO recognized by the Commission. The anticipated effect of this membership is to require mutual fund dealers to make contributions to a contingency fund. The proposed Rule does not specify the organization that will be recognized by the Commission for this purpose.

Authority for Proposed Rule

The following sections of the Act provide the Commission with authority to adopt the proposed National Instrument. Paragraph 143(1)1 of the Act authorizes the Commission to make rules prescribing requirements in respect of applications for registration and the renewal, amendment, expiration or surrender of registration. Paragraph 143(1)2 of the Act authorizes the Commission to make rules prescribing conditions of registration or other requirements for registrants or any category or subcategory of registrant.

Alternatives Considered

The Commission considers increased reliance on the self-regulatory system to be consistent with the purposes of provincial securities legislation. SROs can bring industry expertise to bear on members and can apply uniform standards on a consistent basis across provincial boundaries. They can react faster than a government agency to changes in market conditions and to activities of concern. As the system under NP 49 has worked well since its adoption in June 1993, the proposed Rule extends the system to mutual fund dealers. Under proposed Rule 31-507 SRO Membership - Securities Dealers, Ontario is, in effect, also extending NP 49 to all securities dealers. Some CSA jurisdictions are considering taking the same approach as Ontario with respect to both mutual fund dealers and securities dealers.

Unpublished Materials

In proposing the Rule, the Commission has not relied on any significant unpublished study, report or other material.

Anticipated Costs and Benefits

There are substantial benefits involved in a self-regulatory organization system of regulation. A self-regulatory organization system helps to ensure compliance with regulatory requirements and also helps to provide consistent application and interpretation of the regulatory requirements.

Clients of affected mutual fund dealers will benefit from the protections afforded by a SRO system and the availability of a dealer funded contingency fund as mutual fund dealers are not currently required to be members of a SRO and do not currently contribute to a dealer funded contingency fund.

The proposed Rule will impose costs on mutual fund dealers as they are not currently members of a SRO and do not currently contribute to a dealer funded investor compensation fund. These costs will include fees for membership in the SRO as well as the levies of a compensation fund which are expected to be based on the level of activity in the capital markets, i.e. gross revenues of the participant.

Based on experience to date under NP 49, the Commission believes that the benefits of the proposed Rule justify the costs.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by January 2, 1998 will be considered.

Submissions should be sent to the Ontario Securities Commission in duplicate, as indicated below:

c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As the Act requires that a summary of written comments received during the comment period be published, confidentiality of submission cannot be maintained.

Questions may be referred to any of: 
Tanis MacLarenAssociate General CounselOntario Securities Commission(416) 593-8259Randee PavalowPolicy Co-ordinatorOntario Securities Commission(416) 593-8257

Proposed Rule

The text of the proposed Rule follows, together with footnotes that are not part of the Rule but have been included to provide background and explanation.

Dated: October 3, 1997.

 

 

ONTARIO SECURITIES COMMISSION RULE 31-506

SRO MEMBERSHIP - MUTUAL FUND DEALERS(5),(6)

PART 1 MEMBERSHIP REQUIRED

1.1 Membership Required - A mutual fund dealer(7) shall be a member of a self-regulatory organization recognized by the Commission under section 21.1 of the Act or a recognized stock exchange.

PART 2 EFFECTIVE DATE

2.1 This rule shall be effective on , 1998(8) for an applicant for registration as a mutual fund dealer.

2.2 This rule shall be effective for a mutual fund dealer on the renewal of registration for the mutual fund dealer after , 1999(9).

PART 3 EXEMPTION

3.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictions as may be imposed in the exemption.

1. 0 "Regulatory Strategies for the Mid-90's - Recommendations for Regulating Investment Funds in Canada" prepared by Glorianne Stromberg for the Canadian Securities Administrators, January 1995.

2. News Release of the Ontario Securities Commission dated June 23, 1995 (1995), 18 OSCB 2992. The mandate of the Investment Funds Steering Group was released on September 7, 1995 (1995), 18 OSCB 4018.

3. The final report of the Investment Funds Steering Group - "The Stromberg Report, An Industry Perspective" - was released in November, 1996.

4. The "Report of the CSA Investment Funds Implementation Group" was published in Ontario on May 16, 1997 (1997), 20 OSCB 2512.

5. This Rule is new.

6. A general definition rule has been adopted as Rule 14-501 - Definitions. It contains definitions of certain terms used in more than one rule. Rule 14-501 also provides, among other things, that terms used in a rule and defined in Section 1 of the Securities Act or subsection 1(2) of the Regulation will have the respective meaning given to them in the Securities Act or Regulation, as appropriate.

7. The term "mutual fund dealer" is defined in Rule 14-501 as "a person or company registered under the Act in the category of mutual fund dealer".

8. The Commission expects this date to be six months after the Rule becomes effective.

9. The Commission expects this date to be eighteen months after the Rule becomes effective.