Commission Approval of Rule: OSC Rule - 31-503 - Limited Market Dealers

 

NOTICE OF RULE, REVOCATION AND AMENDMENT OF REGULATION
AND RESCISSION OF POLICY UNDER THE SECURITIES ACT
RULE 31-503
LIMITED MARKET DEALERS

Notice of Rule and Rescission of Policy

The Commission has, under section 143 of the Securities Act (the "Act"), made Rule 31-503 Limited Market Dealers (the "Rule").

The Rule, the revocation of and amendments to provisions of the Regulation under the Act (the "Regulation") and the material required by the Act to bedelivered to the Minister of Finance were delivered on January 28, 1998. If the Minister does not approve the Rule, reject the Rule or return it to theCommission for further consideration, the Rule will come into force on April 13, 1998. If the Minister approves the Rule, the Rule will come into force fifteendays after it is approved.

The Commission has also on the date on which the Rule comes into force rescinded the Policy Notice of the Commission entitled "Procedures and Requirementsfor Implementing Amendments to the Regulation Regarding Entry into and Ownership of the Ontario Securities Industry" published in (1987), 10 OSCB 2969(the "Policy Notice").

Concurrently with the making of the Rule, the Commission has amended and revoked certain sections of the Regulation. See "Regulations to be Amended orRevoked".

Substance and Purpose of Rule

Prior to 1987, the Act provided exemptions from the prospectus and registration requirements for certain types of securities and trades. Trades conductedpursuant to these exemptions comprised the "exempt market". In order to assess the activity of the exempt market and provide a level of regulatory oversight,these registration exemptions were removed for market intermediaries through the introduction in 1987 of Part XI of the Regulation, known as "universalregistration". The limited market dealer category of registration was introduced as part of the universal registration system. The restrictions and conditionsrelated to a limited market dealer registration are set forth in section 207 of the Regulation.

Subsection 207(3) of the Regulation provides that the conditions of registration applicable to a limited market dealer and to the salespersons, officers andpartners of a limited market dealer shall be those applicable to an investment dealer and to the salespersons, officers and partners of an investment dealer,respectively. Subsection 207(4) of the Regulation provides the Director with authority to vary the application of subsection 207(3) under certain conditions. Inthe Policy Notice the Commission indicated that it had determined not to implement the provisions of subsection 207(3) of the Regulation pending furtherconsideration of the appropriate conditions of registration for limited market dealers. As a result of the Policy Notice, limited market dealers were not requiredto comply with the regulatory requirements applicable to investment dealers under sections 107 to 125 of the Regulation. In addition, it became Staff practice tonot require limited market dealers to deliver audited annual financial statements to the Commission.

From 1987 to 1990, the Commission monitored limited market dealer activity. In 1990, the Commission published for comment an alternative to universalregistration entitled "Proposed Changes to Registration Exemptions and Registration Processes" in (1990), 13 OSCB 5396. However, as a result of significantand conflicting comments, the Commission determined not to proceed with that proposal as it relates to limited market dealers.

Current administrative practice has altered the position of the Commission as stated in the Policy Notice. In particular, limited market dealers are currentlyrequired to comply with section 114 of the Regulation and part of section 125 of the Regulation, which relate to account supervision and compliance functions asit is considered necessary in the public interest to require such compliance.

The Rule replaces section 207 of the Regulation and reflects the terms of the Policy Notice and the current administrative practice of the Director. The Rule alsoimposes a requirement to segregate, and hold in trust, customers' subscriptions or prepayments held pending investment.

Summary of Rule

The Rule sets out the restrictions related to a limited market dealer registration and the conditions of registration for limited market dealers, their salespersons,officers and partners. The Rule provides that a limited market dealer may only engage in trading for which subsection 206(1) of the Regulation removes theregistration exemptions in the Act. The conditions of registration for a limited market dealer and its officers, partners and directors are limited to accountsupervision, including the requirement to know your client and assess the suitability of trades for a client, the requirement to have a compliance officer and arequirement to hold clients' free credit balances in trust and not to commingle those funds with the funds of the registrant.

The Rule also extends the requirements that are applicable to directors of investment dealers to directors of limited market dealers. Under the Policy Notice andsubsection 207(3) of the Regulation only salespersons, officers and partners of limited market dealers were subject to the requirements applicable to salespersons,officers and partners of investment dealers.

Finally, the Rule sets out a simplified procedure for applicants for registration as a limited market dealer to apply for an exemption from the provisions of Ontariosecurities law that requires that a limited market dealer file with the Commission audited annual financial statements.

Summary of Written Comments Received by Commission

The Commission did not receive any comments on the Rule.

Regulations to be Amended or Revoked

Subsections 207(1), (2), (3) and (4) of the Regulation are revoked by the Commission on the effective date of the Rule.

The Commission has amended section 98 and subsection 100(3) of the Regulation on the effective date of the Rule to refer to the proposed Rule rather thansection 207 of the Regulation. The Commission has amended section 205 of the Regulation on the effective date of the Rule to add a reference to the proposedRule as it replaces section 207 which is a section within the Part of the Regulation referred to in section 205.

The Commission has amended subsection 53(1) of Schedule 1 of the Regulation on the effective date of the Rule to make it subject to this Rule.

Each of the amendments to the Regulation and the revocation of sections of the Regulation are subject to the approval of the Minister of Finance and will not beeffective until the Rule comes into force.

Text of Rule

The text of the Rule follows.

Text of Rescission of Policy

The Rule will replace the Policy Notice. The Commission is rescinding the Policy Notice effective the date the Rule becomes effective. The text of therescission is as follows:

"The policy of the Ontario Securities Commission entitled "Procedures and Requirements for Implementing Amendments to the Regulation Regarding Entry intoand Ownership of the Ontario Securities Industry" is rescinded."

Text of Amendment to and Revocation of Regulation

1. The Commission is amending section 98 of the Regulation effective the date the Rule becomes effective. The text of the amendment is as follows:

"Section 98 of Regulation 1015 of the Revised Regulations of Ontario, 1990, is amended by deleting paragraph 6 and replacing it with the following:

"Limited market dealer, being a person or company that is registered solely for the purpose of trading in securities in accordance with Rule 31-503 LimitedMarket Dealers."."

2. The Commission is amending subsection 100(3) of the Regulation effective the date the Rule becomes effective. The text of the amendment is as follows:

"Subsection 100(3) of Regulation 1015 of the Revised Regulations of Ontario, 1990, is amended by deleting the reference to section 207 of the Regulation andadding the following to the end of that subsection:

"or Rule 31-503 Limited Market Dealers"."

3. The Commission is amending section 205 of the Regulation effective the date the Rule becomes effective. The text of the amendment is as follows:

"Section 205 of Regulation 1015 of the Revised Regulations of Ontario, 1990, is amended by replacing the phrase "Where this Part" with the following:

"Where this Part or Rule 31-503 Limited Market Dealers"."

4. The Commission is revoking subsections 207(1), (2), (3) and (4) of the Regulation effective the date the Rule becomes effective. The text of the revocation isas follows:

"Subsections 207(1), (2), (3) and (4) of Regulation 1015 of the Revised Regulations of Ontario, 1990 are revoked."

5. The Commission is amending subsection 53(1) of Schedule 1 to the Regulation effective the date the Rule becomes effective. The text of the amendment is asfollows:

"Subsection 53(1) of Schedule 1 to Regulation 1015 of the Revised Regulations of Ontario, 1990 is amended by replacing the phrase "Except as set out insubsection (2)" with the following:

"Except as set out in subsection (2) and Rule 31-503 Limited Market Dealers"."

DATED: January 30, 1998.

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ONTARIO SECURITIES COMMISSION RULE 31-503 - LIMITED MARKET DEALERS

 

PART 1 DEFINITIONS

1.1 In this Rule "registration requirement" means the requirement in securities legislation that prohibits a person or company from trading in a security or actingas an underwriter or an adviser unless the person or company is registered in the appropriate category of registration under securities legislation.

PART 2 REGISTRATION OF LIMITED MARKET DEALER

2.1 Restricted Trading Activities - A limited market dealer may act as a market intermediary for the purpose of trades for which the exemptions from theregistration requirement are not available because of subsection 206(1) of the Regulation.

2.2 Financial Intermediary - A financial intermediary shall not be registered as a limited market dealer.

2.3 Conditions of Registration

(1) A limited market dealer is subject to the conditions of registration applicable to an investment dealer under Ontario securities law, excluding the conditions insections 107 to 113, 116 to 118, 120, 121 and 123 and subsection 124(6) of the Regulation and Part 1 of Rule 31-504 Applications for Registration.

(2) A salesperson, officer, partner or director of a limited market dealer is subject to the requirements applicable to a salesperson, officer, partner or director,respectively, of an investment dealer under Ontario securities law excluding the requirements of sections 107 to 113, 116 to 118, 120, 121 and 123 andsubsections 124(1), 124(3) and 124(6) of the Regulation and Part 1 of Rule 31-504 Applications for Registration.

(3) A limited market dealer and a registered salesperson, officer and partner of a limited market dealer shall segregate in a trust account customers' subscriptionsor prepayments held pending investment.

(4) Neither a limited market dealer nor a registered salesperson, officer or partner of a limited market dealer shall commingle with such person's assets,customers' subscriptions or prepayments held pending investment.

PART 3 EXEMPTION FROM FINANCIAL STATEMENT FILINGS

3.1 Exemption from Financial Statement Filings - An application under section 147 of the Act for an exemption from the requirement that registrants file annualaudited financial statements may consist of the following sentence if the application is made before or concurrently with the filing of an application forregistration or renewal of registration as a limited market dealer and if the applicant is not registered, and is not seeking registration, in any other category ofregistration:

"[name of applicant] applies for an exemption from the requirement of the Act for registrants to file annual audited financial statements, such exemption toterminate if and when the applicant becomes a registrant in any category in addition to the applicant's registration as a limited market dealer, other than as asecurities adviser."

3.2 Order Granting Exemption - The issuance by the Director of a certificate of registration or renewal of registration for a limited market dealer is evidence ofthe approval of the application made under section 3.1, if the applicant has complied with that section, unless the exemption request is denied in writing by theDirector.

3.3 Fees - There shall be no fees payable for the application described in section 3.1.

PART 4 EXEMPTION

4.1 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 theexemption.