General Counsel, Corporate Secretary and Vice President, Policy
MSN - 0081
Feb 13, 2013
Sale of Principal Protected Notes by Approved Persons of MFDA Members
MFDA Staff Notices are intended to assist Members and their Approved Persons in the interpretation, application of and compliance with requirements under MFDA By-laws and Rules. Notices make reference to these requirements and set out MFDA staff's interpretation of how to comply with these requirements. Notices may also include best practices or guidance.
On August 30, 2012, the Canadian Securities Administrators (“CSA”), except the securities regulator in Quebec, issued CSA Multilateral Staff Notice 46-306 Third Update on Principal Protected Notes (“CSA Notice”). The CSA Notice confirms the view of the applicable CSA jurisdictions that compliance with Know-Your-Client (“KYC”) and suitability obligations is a critical aspect of investor protection and should apply to sales of all principal protected notes (“PPNs”) by individual registered representatives of their member firms (except where a specific exemption from these obligations exist).
As stated in the CSA Notice, the CSA wants to ensure that representatives of self-regulatory organizations (“SROs”) who sell PPNs only do so in their capacity as an employee or agent of their registered dealer, so that the usual KYC and suitability obligations in the SRO rules apply to these sales. To achieve this objective, the Recognizing Regulators asked the SROs to take appropriate actions to clarify the applicability of these obligations to all dealings in PPNs by SRO representatives. To this end, MFDA staff is issuing this notice to Members to set out our expectations relating to the distribution of PPNs by Approved Persons of MFDA Members.
The CSA Notice sets out the CSA’s understanding and expectations regarding PPN distribution channels. The CSA Notice states that the CSA understands that while some PPNs are distributed directly by banks or other federal or provincial deposit-taking institutions, those PPNs that are not distributed through registered dealers are generally limited to PPNs with specific features (“Specified PPNs”)1. The CSA Notice states that the CSA expects that these institutions will distribute PPNs that are not Specified PPNs only through registered dealers in order to ensure the application of the usual KYC and suitability obligations.
Sale of PPNs by Approved Persons of MFDA Members
It is our understanding that PPNs that are not Specified PPNs are currently distributed through Approved Persons of MFDA Members on behalf of the Member firms and, accordingly, are subject to KYC and suitability obligations under MFDA Rules. MFDA staff is of the view that it is consistent with the obligation under MFDA Rule 2.1.1 (Standard of Conduct) to deal fairly, honestly and in good faith with clients that KYC and suitability obligations apply to the sale of all PPNs that are not Specified PPNs.
Accordingly, it is our expectation that all dealings by Approved Persons in PPNs that are not Specified PPNs will be transacted by these individuals in their capacity as an employee or agent of their Member firm. MFDA staff will monitor the sale of PPNs by Members and Approved Persons and take appropriate action if current distribution practices change or other regulatory concerns arise.
1 In CSA Notice 46-306, “Specified PPN” is defined as a PPN with the following features: (i) a term to maturity of five years or less; and (ii) eligibility for coverage by the Canada Deposit Insurance Corporation (or a provincial equivalent).