Compliance roundup

By Staff | April 19, 2013 | Last updated on April 19, 2013
5 min read

1. CSA requires enhanced disclosure for group RESPs

The CSA has amended National Instrument 41-101: General Prospectus Requirements, and Form 41-101F2 Information Required in an Investment Fund Prospectus.

The aim is to make scholarship plans, or group RESPs, easier to understand.

There’s now a new form, 41-101F3: Information Required in a Scholarship Plan Prospectus. “It is written in plain language, will generally be no more than four pages, and highlights the potential benefits, risks and the costs of investing in a scholarship plan,” a CSA release says.

Rebecca Cowdery, partner at Borden Ladner Gervais LLP, has clients in the group RESP industry and says the impulse behind the new requirement is admirable. But the form “could be more balanced,” she says, adding it puts more emphasis on costs and risks than benefits.

2. IIROC issues guidance on designations

IIROC is concerned about misleading business titles and financial designations.

“With the many titles in use, identifying best practices that are embraced and implemented by IIROC-regulated firms will provide investors with better descriptions and understanding of the services offered to retail clients,” says Susan Wolburgh Jenah, IIROC’s president and CEO.

The regulator is putting together a glossary of common financial designations and certificates. Cowdery applauds the move, noting it addresses “the problem of people who call themselves advisors but are really sales representatives. It’s the first time the issue has been discussed publicly. IIROC will weigh in on what the terms mean, and it will expect dealer firms to choose appropriate names,” she explains.

IIROC will not be dictating job titles and descriptions. Rather, when someone uses a title implying a specialty in planning and investments for senior citizens, the regulator will want him to have the training and experience to justify that title.

3. CSA issues notice on AR and AAR applications

Sell mutual funds? Work for an IIROC dealer? Are you an investment banker?

You may not qualify to be registered as an Advising Representative of a portfolio manager, say the Canadian Securities Administrators. CSA has issued a staff notice detailing why it accepts or rejects applications to become Advising Representatives (ARs) or Associate Advising Representatives (AARs), which have portfolio management duties.

Applicants must meet educational qualifications laid out in NI 31-103, as well as possess relevant investment management experience. The notice further clarifies what qualifies as relevant experience.

The litmus test is “sufficient experience performing securities research and analysis,” as well as whether the applicant is providing specific advice, says the notice. So if your application to become an AR was rejected, here are some possible reasons:

  • You’re an AAR without sufficient experience to qualify as an AR;
  • You have client relationship management experience, but not enough securities analysis experience;
  • You don’t provide specific advice, and don’t develop investment policy statements for clients;
  • You have corporate finance experience but not portfolio analysis or securities selection experience;
  • You sell a limited number of portfolio solutions at an IIROC dealer (in this case, you may qualify as an AAR);
  • You’re a consultant who doesn’t specifically research individual securities;
  • You only sell mutual funds.

The notice stresses that if you provide specific advice to clients, you may require registration.

“The regulators steadfastly refuse to register someone if all they have is IIROC- or MFDA-member experience, i.e. selling securities. You must have real portfolio manager experience before they’ll register you as an Advising Representative,” Cowdery explains.

4. IIROC revises electronic trading rules

IIROC has amended its Universal Market Integrity Rules (UMIR) to defend against electronic trading errors.

The amendments require automated controls to prevent entry of an order that:

  • exceeds a pre-determined credit or capital threshold;
  • exceeds a pre-determined value or volume limit on orders from a participant, access person or client; or
  • violates UMIR or any applicable securities regulation.

The amendments came into effect March 1, 2013, but dealers have until May 31, 2013 to test and implement their automated controls. Doug Clark, managing director of research at ITG Canada Corp., says the changes are meant to prevent something like last August’s Knight Capital debacle in the U.S. The electronic trading firm experienced a technical problem that caused major disruptions in prices for almost 150 NYSE-listed companies.

Implementing the new requirements “should be virtually seamless for most institutional and retail investors,” he says, adding many already have the appropriate tools in place. Clark says the rules are principles-based rather than prescriptive to avoid the potential for loopholes. Yet dealers are wary because the “limited clarity leaves them feeling less secure that their solutions will be deemed sufficient when audited.

“More guidance would put the Street at ease and ensure greater consistency of risk checks among dealers.”

5. IIROC proposes expanded oversight of trading in debt securities

IIROC has offered for comment a plan for enhanced surveillance of the debt market. The new framework would:

  • ensure consistent and standardized reporting of OTC debt market transactions;
  • create a database of transactions for all specified OTC debt securities;
  • develop regular surveillance reports for IIROC to monitor trade activity;
  • provide tools for IIROC to query and analyze the transaction data;
  • ensure the Market Trade Reporting System reports compiled by IIROC based upon transaction data collected from market participants and filed with the Bank of Canada are complete, reliable and accurate; and
  • enable analysis of trends and developments in the debt and money markets.

The comment deadline is May 22, 2013. Cowdery notes lack of transparency has been a long-standing criticism of the Canadian bond space. “When you’re investing in a bond you really don’t know if you’re getting the right price. The proposal is seeking standardized reporting and additional transparency. This is great for investors,” she says.

Clark, who also applauds the move, says if the proposals are implemented, the large fixed-income dealers would have to send IIROC end-of-day files on all transactions, along with basic market data. “This is a far cry from the real-time requirements in the equity space,” he says, “but a big step in allowing the regulators to better understand how our fixed-income markets are performing.”

He adds the move would eventually allow investors to know the markup they’re paying on the wholesale rate for bonds. “IIROC wants to know sellers are making a reasonable profit and not gouging,” Clark says. staff


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