Notice: NI - 33-104 - Selling Arrangements

Notice: NI - 33-104 - Selling Arrangements

National Instrument

 


NOTICE OF PROPOSED NATIONAL INSTRUMENT 33-104

AND COMPANION POLICY 33-104CP

SELLING ARRANGEMENTS

Substance and Purpose of Proposed National Instrument and Companion Policy

The substance and purpose of the proposed National Instrument are to establish a requirement for notice to a regulator of a Canadian securities regulatoryauthority prior to entering certain selling arrangements. The substance and purpose of the proposed Companion Policy are to outline the factors the regulator willconsider in reviewing a selling arrangement notice.

As a result of amendments to Canadian securities legislation in 1987 relating to the removal of ownership restrictions on registrants, a number of financialinstitutions invested in existing registrants or incorporated registrants as subsidiaries. The Canadian Securities Administrators (the "CSA") expressed regulatoryconcerns about the arrangements between a financial institution and its related registrants in relation to conducting securities activities within retail offices of thefinancial institution, in particular the sale of mutual fund securities and the other relationships of registrants to clients common to the financial institution and itsrelated registrants.

In 1987, the CSA established a subcommittee to review these regulatory issues and provide recommendations to the CSA. The subcommittee consulted withrepresentatives of financial institutions, registrants related to financial institutions, self-regulatory organizations, the Canadian Bankers Association, The TrustCompanies Association of Canada, the Investment Funds Institute of Canada and the Office of the Superintendent of Financial Institutions. The subcommitteethen put forward to the CSA a series of "Principles of Regulation" for consideration by the CSA commencing in 1988.

The CSA adopted The Principles of Regulation Re: Full Service and Discount Brokerage Activities of Securities Dealers in Branches of Related FinancialInstitutions in November 1988. These Principles permit dealers to carry on securities activities in branch offices of the registrant established within retail officesof a related financial institution subject to conditions that are intended to limit potential public confusion and conflicts of interest.

In November 1988 most of the CSA also adopted The Principles of Regulation Re: Distribution of Mutual Funds by Financial Institutions, which permit the saleof mutual fund securities issued by a mutual fund that is sponsored by the financial institution or an affiliate of the financial institution in retail offices of thefinancial institution by persons who are dually employed by the financial institution and the registrant. These Principles also establish conditions to the sale ofmutual funds in this manner that are intended to limit potential public confusion and conflicts of interest.

In June 1990 the CSA adopted The Principles of Regulation Re: Activities of Registrants Related to Financial Institutions, which deal with several issues arisingout of the ownership by a financial institution of registrants including selling arrangements, disclosure of confidential client information and settling of securitiestransactions through a client's account at a related financial institution. These Principles also established a national clearing system for review of networkingnotices and advised registrants that the CSA viewed a selling arrangement as akin to a networking arrangement.

The proposed National Instrument and Companion Policy, together with proposed National Instrument 33-102 Distribution of Securities at Financial Institutionsand its Companion Policy 33-102CP, proposed National Instrument 33-103 Distribution Networks and proposed National Policy 33-201 Networking and SellingArrangement Notices replace the Principles of Regulation.

The proposed National Instrument and Companion Policy are initiatives of the CSA. The National Instrument is expected to be adopted as a rule in BritishColumbia, Alberta, Ontario and Nova Scotia, as a Commission regulation in Saskatchewan and as a policy in all other jurisdictions represented by the CSA. Theproposed Companion Policy is expected to be implemented as a policy in each of the jurisdictions represented by the CSA.

The proposed National Instrument and Companion Policy implement, in part, the recommendation of the CSA Task Force on Operational Efficiencies thatCanadian securities regulatory authorities increase the co-ordination of regulation, including standardization of requirements.

Terms used in the proposed Companion Policy that are defined or interpreted in the National Instrument or a definition instrument in force in the jurisdictionshould be read in accordance with the National Instrument or definition instrument, unless the context otherwise requires.

Summary of Proposed National Instrument and Companion Policy

The proposed National Instrument establishes a requirement that registrants deliver a notice to a regulator prior to entering certain selling arrangements. Nonotice is required, except in Quebec, if the selling arrangement relates to an inducement and the inducement does not result in the client paying more for theproduct or service provided by the registrant. In British Columbia a notice is required if the proposed selling arrangement is between a registrant and a Canadianfinancial institution to which the registrant is not a related party.

The CSA requests comment as to whether the proposed National Instrument should take into account whether the selling arrangement results in the client payingmore for the service or product provided by the Canadian financial institution.

The proposed National Instrument requires a selling arrangement notice to be delivered to the regulator prior to entering into a selling arrangement under whicha dealer requires a client as a condition of dealing with or purchasing a product or service from the dealer, to deal with or purchase a product or service from theCanadian financial institution. The CSA also requests comment as to whether these kinds of selling arrangements should be prohibited given that section 7.4 ofNational Instrument 81-105 Mutual Fund Sales Practices prohibits certain tied-selling arrangements for mutual funds.

Selling arrangement notices for selling arrangements carried out in more than one jurisdiction should be submitted under National Policy 33-201 Networking andSelling Arrangement Notices.

The proposed Companion Policy indicates some of the factors a regulator will consider, in its review of a selling arrangement to determine whether the nature ofthe inducement and conditions proposed to be implemented in connection with the arrangement affords an adequate level of investor protection or otherwiseraises public interest concerns. The proposed National Policy also reminds dealers that certain tied selling arrangements may be prohibited under the CompetitionAct (Canada).

Authority for Proposed National Instrument

In those jurisdictions in which the National Instrument is to be adopted or made as a rule or regulation, the securities legislation in each of those jurisdictionsprovides the securities regulatory authority with rule-making or regulation-making authority in respect of the subject matter of the proposed National Instrument.

In Ontario, paragraph 143(1)13 of the Securities Act (Ontario) provides the Ontario Securities Commission with authority to make rules regulating trading oradvising in securities to prevent trading or advising that is fraudulent, manipulative, deceptive or unfairly detrimental to investors.

Alternatives Considered

The proposed National Instrument replaces the statement by the CSA in The Principles of Regulation Re: Activities of Registrants Related to FinancialInstitutions that a selling arrangement is considered a networking arrangement and is therefore subject to review by the CSA prior to implementation. The CSAbelieve these Principles have worked well to date and did not consider any alternatives.

Unpublished Materials

In proposing the National Instrument and Companion Policy, the CSA has not relied on any significant unpublished study, report, decision or other writtenmaterials.

Related Instruments

The proposed National Instrument and Companion Policy are related. The proposed Companion Policy is also related to proposed National Policy 33-201Networking and Selling Arrangement Notices.

Anticipated Costs and Benefits

The proposed National Instrument provides a benefit to investors as it provides regulatory oversight of arrangements that affect investors' relationships withregistrants and entities with which the registrant is offering a joint product or service. The proposed National Instrument will result in costs to registrants whowill be required to provide notice of selling arrangements.

The proposed National Instrument codifies a part of the Principles of Regulation and maintains the status quo. The CSA believe the benefits outweigh the costsimposed.

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument and Companion Policy. Submissions received byFebruary 27, 1998 will be considered.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission in duplicate, asindicated below.

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Securities Registry, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territory

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

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows:

Claude St. Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certainprovinces 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:

Ross McLennan
Director, Registration
British Columbia Securities Commission
(604) 899-6500

David Sheridan
Legal Counsel
Alberta Securities Commission
(403) 297-2630

Barbara Shourounis
Director
Saskatchewan Securities Commission
(306) 787-5645

David Cheop
Counsel
Manitoba Securities Commission
(204) 945-2548

Tanis MacLaren
Associate General Counsel
Ontario Securities Commission
(416) 593-8259

Renée Piette
Financial Analyst
Commission des Valeurs Mobilières du Québec
(514) 873-5009

Elaine Anne MacGregor
Deputy Director, Capital Markets
Nova Scotia Securities Commission
(902) 424-7768

Ruth DeMone
Registrations Officer
Prince Edward Island Securities Commission
(902) 368-4550
Proposed National Instrument and Companion Policy

The text of the proposed National Instrument and Companion Policy follows, together with footnotes that are not part of the National Instrument or CompanionPolicy, as applicable, but have been included to provide background and explanation.

 

DATED: November 28, 1997.