compliance-regulation

01 Proficiency standards for ETFs

Over the summer, the MFDA published a consultation paper proposing proficiency standards for reps selling ETFs.

It calls for training on how to:

  • give clients detailed product information;
  • disclose the way market quotes would be obtained;
  • detail each ETF transaction; and
  • explain how trade orders would be processed.

MFDA sought feedback on these proposals from mid-July through mid-September. But Bernard Pinsky, a partner at Clark Wilson in Vancouver, notes the B.C. Securities Commission published its own qualifications back in June, which may have prompted the MFDA to do the same.

“The other securities commissions probably decided that this was a pretty timely thing and jumped in on it,” says Pinsky. “Or, they had all been working on it, and B.C. jumped the gun.”

Regardless of the impetus, Pinsky says the proposal is a response to ETFs’ skyrocketing popularity in recent years. By the end of June, Canadian-listed ETF assets hit a record $84.7 billion, up from $76.8 billion only six months earlier. BMO Asset Management expects this figure to top $200 billion over the next five years. Meanwhile, the number of ETFs has more than tripled since 2010.

“This is a recognition that ETFs, which have become so popular and pervasive, are not the same as mutual funds,” says Pinsky. “The security commissions decided they better do something about the people selling them.”

Darin Renton, a partner at Stikeman Elliott in Toronto, notes the MFDA’s proposal follows past practice. For example, commodity pool rules have specialized proficiency requirements for salespersons. “The industry recognizes the need for proficiency and […] acknowledge[s] that there are significant differences between some ETFs and vanilla mutual funds, so investment advisors ought to get to a minimal level of proficiency before they sell these products to retail investors.”

Pinsky expects the proposal to go through. “That will be a very good marketing tool for the Mutual Fund Dealers Association. It benefits dealers, because it gives them the ability to distinguish themselves from online brokerage trading. Somebody who’s trading on their own will not have had training, whereas a mutual fund dealer who has had training can advise that person based on their own circumstances and what ETFs are most suitable to them.”

02 Harmonized report of exempt distribution

Also over the summer, the CSA published proposed amendments to NI 45-106 Prospectus Exemptions that would introduce a harmonized report of exempt distribution. The comment period ended October 13.

Gillian Dingle, who’s litigation counsel at Torys in Toronto, says that the proposal will reduce the compliance burden on issuers and underwriters. However, issuers will now have to specifically identify which category of exemption the purchaser is relying on.

“That will trickle down to advisors, because issuers will require advisors to provide that information to them when they’re subscribing as part of the offer.” She’s confident advisors are already aware of clients’ net worth and income levels. “But I don’t know that they’ve had to focus so critically on exactly what specific paragraph in the definition of accredited investor in 45-106 their particular client falls into.” Gone are the days, she adds, when an advisor could simply tick a box on a subscription agreement to purchase an exempt offer.

Another point Dingle singles out involves the purchaser as a registered advisor buying on behalf of a client with a fully managed account. “There have been differing industry practices as far as the identity of the purchaser that gets disclosed to the issuer and put into the report,” she explains. “The commission says the language of the instrument has always required that the beneficial owner/purchaser be identified.”

In practice, the investment manager is seen as purchasing principal. “For advisors,” she says, “if their practice […] has been to simply put the name of the firm as purchaser, then this new amendment may change that.” It will require disclosing the client’s name; but, with a fully managed account, that client may not even know a purchase is being made. “And, therefore, [the client] is not going to know that his/her name and detailed information may be passed on to the commission.”

Like Dingle, Pinsky expects the proposals to pass and welcomes them from a western perspective. “There will be more work for security brokers and issuers to do, except [in] British Columbia,” where standards are already high.

Form 45-106F1 Report of Exempt Distribution is currently required in all provinces except B.C., which uses Form 45-106F6. “F6 is more intrusive than F1,” says Pinsky. “F6 came into force three or four years ago, because the B.C. commission wanted to learn more about the issuer and the investors than the F1 form provided.”

The proposed new 45-106F1 would replace the current F1 and B.C.’s F6, he explains. It asks for information such as the number of employees at the issuer, residential addresses of each of the issuer’s insiders, the size of the issuer’s assets and the issuer’s date of formation.

Pinsky says the more information the securities commissions have the better, but asks, “How much regulatory burden do you put on companies in order to collect that information?”

by Allan Tong, a Toronto-based financial journalist.

Originally published in Advisor's Edge Report

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