BULLETIN #0549-P

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Contact: Paige
Ward
BULLETIN #0549 – P
General Counsel & Vice-President, Policy
December 3, 2012
Phone: 416-943-5838
E-mail: pward@mfda.ca

MFDA Bulletin

Policy

For Distribution to Relevant Parties within your Firm

Amendments to MFDA By-law No. 1, Rule 2.2.1 (“Know-Your-Client”)
and Form 1

The MFDA held its 2012 Annual General and Special Meeting of Members (“AGM”) on
November 29, 2012. At the AGM, Members approved certain amendments to the MFDA By-
law No. 1, Rule 2.2.1 (“Know-Your-Client”) and Form 1, as set out below.

1.
Amendments to MFDA By-law No. 1

Amendments to MFDA By-law No. 1 are intended to permit a broader range of persons to be
considered as candidates for Public Directors on the MFDA Board and increase Industry Director
participation on the Audit Committee to allow for broader industry input.
The amendments have received all requisite approvals and are now effective. The amended By-
law is attached as Schedule “A”.

2.
Amendments to MFDA Rule 2.2.1 (“Know-Your-Client”)

Proposed amendments to Rule 2.2.1(c) will clarify that the obligation for Members and
Approved Persons to ensure that each order accepted, or recommendation made for any account
of a client, is suitable includes recommendations to borrow to invest. Proposed amendments to
Rule 2.2.1(d) will clarify that, where a transaction proposed by the client is not suitable for the
client, Member’s and Approved Person’s obligations to advise the client of this fact and maintain
evidence of the advice apply to transactions involving the use of borrowed funds. In addition,
proposed Rule 2.2.1(f) will clarify that Members and Approved Persons are required to use due
diligence to ensure that the suitability of the use of borrowing to invest is assessed on certain
trigger events consistent with the amendments under Rule 2.2.1(e) with respect to investment
suitability.


The amendments are awaiting approval of the recognizing securities commissions and will be
effective on a date to be subsequently determined by the MFDA. In addition, Member
Regulation Notice MR-0069 Suitability Guidelines will be revised in order to reflect the
proposed amendments. To view the proposed amendments, please go to:
www.mfda.ca/regulation/propamend.html.

3.
Housekeeping Amendments to MFDA Form 1

Proposed amendments to the MFDA Form 1 are intended to update the two Independent
Auditor’s Reports contained within Form 1 to comply with MFDA reporting requirements,
which are based upon International Financial Reporting Standards (“IFRS”).

The General Notes and Definitions to Form 1 state that comparative figures on all statements are
required at the audit date. However, for the first fiscal year that Members were required to
provide audited financial reports using the new Form 1, a transitional provision was granted
allowing comparative balances to be excluded from the statements in the audited Form 1. As
such, the two prescribed Independent Auditor’s Reports within Form 1 did not contain reference
to comparative balances. Consequently, the proposed amendments will update: (i) the
Independent Auditor’s Report for Statements A, D and E; and (ii) the Independent Auditor’s
Report for Statements B, C and F so that auditors can refer to the date of comparative balances as
required by the General Notes and Definitions to Form 1.

The amendments are awaiting approval of the recognizing securities commissions and will be
effective on a date to be subsequently determined by the MFDA. To view the proposed
amendments, please go to: www.mfda.ca/regulation/propamend.html.

DOCs# 319901

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Schedule “A”

1.
Definitions
“associate“, where used to indicate a relationship with any person, means:
(a)
any corporation of which such person beneficially owns, directly or indirectly,
voting securities carrying more than 10 per cent of the voting rights attached to all
voting securities of the corporation for the time being outstanding;
(b)
a partner of that person acting on behalf of the partnership of which they are
partners;
(c)
any trust or estate in which such person has a substantial beneficial interest or as
to which such person serves as trustee or in a similar capacity;
(d)
any relative of such person who resides in the same home as that person,
including his/her spouse, or his/her spouse who has the same home as such
person;
(e)
any person who resides in the same home as the person and to whom that person
is married, or with whom that person is living in a conjugal relationship outside of
marriage; or
(f)
any relative of a person mentioned in clause (e) above who has the same home as
such person;
but where the Board of Directors orders that two persons shall, or shall not, be deemed to be
associates, then such order shall be determinative of their relationships in the application of
By-laws, Rules and Forms, with respect to that Member;
Public Director” means a director who is not:
(a)
an officer (other than the Chair or a Vice-Chair) or an employee of the Corporation;
(b)
a current partner, director, officer, employee or person acting in a similar capacity of,
or the holder of a Significant Interest in:
(i)
a Member;
(ii)
an associate of a Member; or
(iii)
an affiliate of a Member; or
(c)
an associate of a partner, director, officer, employee or person acting in a similar
capacity of, or the holder of a Significant Interest in, a Member.
(a)who is not a current director (other than a Public Director), officer or employee of, or
of an associate or affiliate of:
(i)the MFDA;
(ii)any protection or contingency fund in which Members (at the time the director
holds the relevant office) are required to participate; or
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(iii)the Investment Funds Institute of Canada or the Investment Dealers
Association of Canada;
(b)who is not a current director, partner, significant shareholder, officer, employee or
agent of a Member, or of an associate or affiliate of a Member, of:
(i)the MFDA;
(ii)any protection or contingency fund in which Members (at the time the director
holds the relevant office) are required to participate; or
(iii)the Investment Funds Institute of Canada or the Investment Dealers
Association of Canada;
(c)who is not a current employee of a federal, provincial or territorial government or a
current employee of an agency of the Crown in respect of such government;
(d)who is not a current member of the federal House of Commons or member of a
provincial or territorial legislative assembly;
(e)who has not, in the two years prior to election as a Public Director, held a position
described in (a)-(d) above;
(f)who is not:
(i)an individual who provides goods or services to and receives direct significant
compensation from, or
(ii)an individual who is a director, partner, significant shareholder, officer or
employee of an entity that receives significant revenue from services the
entity provides to, if such individual’s compensation from that entity is
significantly affected by the services such individual provides to,
the MFDA or any protection or contingency fund in which Members are required to
participate, or a Member of the MFDA; and
(g)who is not a member of the immediate family of the persons listed in (a)-(f) above.
For the purposes of this definition:
(i)”significant compensation” and “significant revenue” means compensation or
revenue the loss of which would have, or appear to have, a material impact
on the individual or entity;
(ii)”significant shareholder” means an individual who has an ownership interest in
the voting securities of an entity, or who is a director, partner, officer,
employee or agent of an entity that has an ownership interest in the voting
securities of another entity, which voting securities in either case carry
more than 10% of the voting rights attached to all voting securities for the
time being outstanding.
“Significant Interest” means in respect of any person the holding, directly or indirectly, of the
securities of such person carrying in aggregate 10% or more of the voting rights attached to
all of the person’s outstanding voting securities.
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3. Directors
3.2
COMPOSITION OF THE BOARD OF DIRECTORS
The Board of Directors shall be composed of 6 Public Directors, 6 Industry Directors
and the President and Chief Executive Officer. The members of the Board of Directors
(other than the President and Chief Executive Officer) shall collectively and over time be
nominated and elected on the basis that there will be timely and appropriate regional
representation on the Board of Directors of Members of the Corporation across Canada,
provided that at any time (subject to the occurrence of vacancies) not less than 4 of the
directors shall represent regions other than the Provinces of Ontario and Quebec. In addition,
at any time (subject to the occurrence of vacancies) five of the Industry Directors shall be
officers or employees of a Member of the Corporation or of an affiliate or associated
corporation which is an associate of a Member. No Member, affiliate or associated
corporation which is an associate of a Member shall have more than 1 director, officer,
employee or other representative on the Board of Directors and, if such event should occur,
the Board of Directors in its discretion may request the resignation of or remove as a director,
any director or directors in order that the requirements of this section are satisfied. Each
director shall be at least 18 years of age.
3.6
COMMITTEES
3.6.1 Governance Committee
The Board of Directors shall establish a Governance Committee composed of 2
Public Directors and 2 Industry Directors. The 2 Industry Director members of the
Governance Committee shall be officers or employees of a Member of the Corporation or of
an affiliate or associated corporation which is an associate of a Member. The Chair of the
Governance Committee shall be 1 of the 2 Public Directors as selected by the Board of
Directors. The Governance Committee shall be responsible for identifying and
recommending to the Board of Directors Public and Industry Directors for election to the
Board of Directors in accordance with the By-laws and the terms of reference adopted for the
Governance Committee by the Board of Directors. In addition, the Governance Committee
shall perform such other duties as the Board of Directors may delegate or direct from time to
time. 1 Public Director and 1 Industry Director shall constitute a quorum of the Governance
Committee.
3.6.2 Audit
Committee
The Board of Directors shall establish an Audit Committee composed of 2 3 Public
Directors and 1 2 Industry Directors. The Chair of the Audit Committee shall be 1 of the 2 3
Public Directors as selected by the Board of Directors. The Audit Committee shall review
and report to the Board of Directors on the annual financial statements of the Corporation
and shall perform such other duties as the Board of Directors may delegate or direct from
time to time. 1 2 Public Directors and 1 Industry Director shall constitute a quorum of the
Audit Committee.

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