IIROC Withdraws Restricted Dealer Member Proposal; CSA Announces Intention to Amend National Instrument 31-103 


February 2013

Securities Bulletin

On February 7, 2013, the Investment Industry Regulatory Organization of Canada (IIROC) announced that it does not intend to proceed with its concept proposal to introduce a new category of "Restricted Dealer Members" to the IIROC platform (the Proposal). The Proposal was first published for comment and described in our bulletin titled "IIROC's Restricted Dealer Member Proposal" in July 2012.

The Proposal was developed in response to policy concerns regarding the scope of activities being undertaken by certain exempt market dealers (EMDs), which are also Financial Industry Regulatory Authority (FINRA) member broker dealers. Such EMDs were carrying out brokerage activity in Canada. The Proposal was intended to migrate these EMDs to IIROC membership by requiring them to surrender their EMD registration and apply for investment dealer registration under provincial securities law, as well as seek IIROC membership in the Restricted Dealer Member category.

In discussing its reasons for deciding not to proceed with the Proposal, IIROC noted that the vast majority of commenters did not support the Proposal and outlined several overarching concerns that emerged from these submissions. These concerns include: (i) an unlevel playing field between full IIROC Dealer Members and the proposed Restricted Dealer Members in favour of FINRA member firms; (ii) insufficient comparability between the corresponding IIROC and FINRA rules that govern financial operations; (iii) insufficient information regarding the scope of services and products that FINRA broker dealers were currently providing to Canadian investors as EMDs; and (iv) a lack of reciprocity in the United States.

IIROC also noted that the majority of commenters agreed with the concerns outlined in the Proposal regarding the current scope of the EMD registration category and were in favour of amending National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to restrict the activities that can be carried out by an EMD to better reflect the category's original purpose. Commenters were generally supportive of providing impacted firms with a reasonable transition period to seek investment dealer registration and full IIROC membership.

In CSA Staff Notice 31-333 Follow-up to Broker Dealer Registration in the Exempt Market Dealer Category, also published on February 7, 2013, the Canadian Securities Administrators (CSA) confirmed their intention to publish proposed amendments to NI 31-103 later in 2013 to prohibit EMDs from conducting brokerage activities (the Amendments). In this regard, the CSA noted: (i) EMDs that are conducting brokerage activities may continue to do so until the Amendments come into force, but must restrict their activities to those permitted by the EMD category after the Amendments become effective; and (ii) FINRA member firms granted restricted dealer registration that are conducting brokerage activities in accordance with the terms and conditions of such registration will have their registration and any related exemptive relief extended to the date the Amendments come into force.

Impacted firms should consider how they will conduct brokerage activities in the future. The CSA suggest that they can: (i) transfer their brokerage activities to an affiliated Canadian incorporated IIROC Dealer Member; (ii) restrict their activities such that they fit within the activities permitted for EMDs following the Amendments; or (iii) rely on the international dealer exemption in section 8.18 of NI 31-103 in respect of brokerage activities with permitted clients relating to foreign securities.

by Shahen Mirakian and Sandra Zhao

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013