BULLETIN #0683-P

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Paige Ward

General Counsel, Corporate Secretary and Vice President, Policy

(416) 943-5838

pward@mfda.ca

BULLETIN #0683-P

March 17, 2016

Approval of Amendments to Rule 1.2 (Individual Qualifications)

The securities regulatory authorities in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island and Saskatchewan have approved/not objected to the public interest amendments to Rule 1.2 (Individual Qualifications) and the consequential amendments to MFDA Policies. The amendments have received all requisite approvals and are now in effect.

The amendments are intended to conform MFDA Rules to similar requirements under securities legislation by adopting changes made to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”), Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (“Form 33-109F4”) and the Companion Policy to NI 31-103 (“31-103CP”), in respect of requirements pertaining to proficiency and outside activities.

The amendments to Rule 1.2 are attached as Schedule “A”.

  1. Proficiency

Under the new MFDA Rule 1.2.3 (Education, Training and Experience), Approved Persons must not perform an activity that requires securities registration unless the Approved Person has the education, training and experience that a reasonable person would consider necessary to perform the activity competently.

The adoption of a general proficiency principle within MFDA Rules is intended to address situations where additional education, training and proficiency may be appropriate (e.g. where Members and Approved Persons trade in investment products that have unique features, such as exchange-traded funds).

  1. Outside Activity

Rule Amendments

The amendments to Rule 1.2 conform to similar changes made under securities legislation by adopting a definition of “outside activity” that includes activities involving any officer, director and other equivalent positions and positions of influence. The definition is consistent with similar changes adopted under Form 33-109F4 and 31-103CP.

Other amendments to Rule 1.2 clarify the application and scope of existing obligations under MFDA Rules in respect of outside activities.

Consequential MFDA Policy Amendments

In addition, amendments were made to update the Rule references set out in certain MFDA Policies. Accordingly, consequential amendments have been made to MFDA Policy No. 1 New Registrant Training and Supervision; Policy No. 2 Minimum Standards for Account Supervision; Policy No. 5 Branch Review Requirements; and Policy No. 6 Information Reporting Requirements. The amendments to the consequential amendments to MFDA Policy No. 1, 2, 5 and 6 are attached as Schedule “B”.

Revised MFDA Staff Notice

In conjunction with the amendments to Rule 1.2, MFDA staff has also revised MFDA Staff Notice MSN-0040 Outside Activity, a copy of which is attached as Schedule “C”. In addition to a discussion of the conforming changes to reflect the Rule amendments, the revised Notice includes guidance in the following areas: (i) the types of activities that should be considered to be outside activities; (ii) Member obligations with respect to approving and supervising the outside activity, and the related Approved Person obligations; (iii) the disclosure to be provided to clients of the outside activity; and (iv) positions of influence held by an Approved Person.


Schedule “A”

MUTUAL FUND DEALERS ASSOCIATION OF CANADA

1.2 INDIVIDUAL QUALIFICATIONS

1.2.1 Compliance with MFDA Requirements. Each Member shall ensure that any Approved Person executes and delivers to the Member an agreement in a form as prescribed from time to time by the Corporation agreeing, among other things, to be subject to, comply with and be bound by the By-laws and Rules.

1.2.2    Registration. An Approved Person must have satisfied any applicable proficiency and other registration requirements set out in securities legislation and established by the securities regulatory authority having jurisdiction.

1.2.3    Education, Training and Experience. An Approved Person must not perform an activity that requires registration under securities legislation unless the Approved Person has the education, training and experience that a reasonable person would consider necessary to perform the activity competently, including understanding the structure, features and risks of each security that the Approved Person recommends.

1.2.4 Training and Supervision. Upon commencement of trading or dealing in securities for the purposes of any applicable legislation on behalf of a Member, all Approved Persons who are salespersons shall complete a training program within 90 days of such commencement and a concurrent six month supervision period in accordance with such terms and conditions as may be prescribed from time to time by the Corporation, unless he or she has completed a training program and supervision period in accordance with this Rule with another Member or was licensed or registered in the manner necessary, and is in good standing, under applicable securities legislation to trade in mutual fund securities prior to the date of this Rule becoming effective.

1.2.5   Misleading Business Titles Prohibited. No Approved Person shall hold him or herself out to the public in any manner including, without limitation, by the use of any business name or designation of qualifications or professional experience that deceives or misleads, or could reasonably be expected to deceive or mislead, a client or any other person as to the proficiency or qualifications of the Approved Person under the Rules or any applicable legislation.

1.3 OUTSIDE ACTIVITY

1.3.1   Definition. For the purpose of the By-laws, Rules and Policies, “outside activity” means any activity conducted by an Approved Person outside of the Member:

  1. for which direct or indirect payment, compensation, consideration or other benefit is received or expected;
  2. involving any officer or director position and any other equivalent positions; or
  3. involving any position of influence.

1.3.2    Requirements for Outside Activity. An Approved Person may have, and continue in, an outside activity provided that:

  1. Not prohibited. The Corporation and the securities regulatory authority in the jurisdiction in which the Approved Person carries on, or proposes to carry on, the outside activity do not prohibit the Approved Person from engaging in such outside activity;
  2. Notification. The Approved Person discloses the outside activity to the Member;
  3. Approval. The Approved Person obtains written Member approval of the outside activity prior to engaging in such outside activity;
  4. Conduct unbecoming. The outside activity of the Approved Person must not be such as to bring the Corporation, its Members or the mutual fund industry into disrepute; and
  5. Disclosure. To the extent that the outside activity could be confused with Member business, clear written disclosure is provided to clients that any activities related to the outside activity are not the business of the Member and are not the responsibility of the Member.

1.4 REPORTING REQUIREMENTS

(Amendments not proposed to text of Rule)

DM# 344583


Schedule “B”

MUTUAL FUND DEALERS ASSOCIATION OF CANADA

MFDA Policy No. 1 New Registrant Training and Supervision

Current references to MFDA Rule 1.2.1(c) are amended to reference MFDA Rule 1.2.4 in the following sections of the Policy:

  • Introduction;
  • Training Program;
  • Supervision Policy; and
  • Conformation of Completion of New Registrant Training and Supervision Program.

MFDA Policy No. 2 Minimum Standards for Account Supervision

Current references to “outside business activity” and “dual occupations” are amended to reference “outside activity” in the following sections of the Policy:

  • Section IV. Branch Office Supervision, paragraph 1;
  • Section IV. Branch Office Supervision, paragraph 3, subsection on Daily Reviews; and
  • Section VI. Identification of Trends in Trading Activity, paragraph 2.

MFDA Policy No. 5 Branch Review Requirements

Current references to “outside business activity” and “dual occupations” are amended to reference “outside activity” in the following sections of the Policy:

  • Section on Branch Review Procedures, paragraph b) Branch Interviews;
  • Section on Branch Review Procedures, paragraph e) Review of Sales Communications, Advertising and Client Communications; and
  • Section on Scope of Review.

MFDA Policy No. 6 Information Reporting Requirements

Current references to MFDA Rule 1.2.2 are amended to reference MFDA Rule 1.4 in Section 1. Introduction to the Policy.

Current references to “occupation” are amended to reference “outside activity” in the following sections of the Policy:

  • Part A- Approved Person Reporting Requirements, Section 4.1, paragraph (iv); and
  • Part B- Electronic Reporting Requirements for Members, Section 6.1, paragraph (iv).

Schedule “C”

Contact: Paige Ward
General Counsel, Corporate Secretary and Vice-President, Policy
Phone: (416) 943-5838
Email: pward@mfda.ca

MSN-0040
May 20, 2005
(Updated March 17, 2016)

MFDA STAFF NOTICE
OUTSIDE  ACTIVITY

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.

This Notice discusses the following topics:

  1. Definition of ‘Outside Activity’
  2. Activities of the Member
  3. Activities Allowed Outside of the Member
  4. Obligation to Disclose Outside Activities
  5. Member Policies and Procedures
  6. Member Approval of Outside Activities
  7. Ongoing Member Supervisory Obligations
  8. Member Response to Supervisory Issues
  9. Positions of Influence
  1. Definition of ‘Outside Activity’

  1. In accordance with MFDA Rule 1.3.1 (Outside Activity – Definition), “outside activity” is defined as any activity conducted by an Approved Person outside of the Member:
  2. for which direct or indirect payment, compensation, consideration or other benefit is received or expected;
  3. involving any officer or director position and any other equivalent positions; or
  4. involving any position of influence.

An outside activity includes activities for which the Approved Person does not receive, or expect to receive, payment, compensation, consideration, as set out in clauses (b) and (c) of Rule 1.3.1, and activities for which the Approved Person receives, or is expecting to receive, payment, compensation, consideration, as set out in clause (a) of Rule 1.3.1.

In addition, an outside activity can include a single transaction or event and does not necessarily have to occur with repetition, regularity or continuity.

The requirements of Rule 1.3 cannot be avoided by structuring transactions so that the benefit does not flow directly to the Approved Person.  For example, an activity or occupation carried on by an Approved Person that could or does result in a benefit to the Approved Person’s spouse, or to a corporation in which the Approved Person has an interest or exercises control, would fall within the definition of outside activity as an indirect benefit.

Members and Approved Persons must be aware of their obligations with respect to completing Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (“Form 33-109F4”) which requires all registrants to disclose their current employment, other business activities, officer positions held and directorships. The Canadian Securities Administrators has issued guidance in this regard in Companion Policy 31-103 CP Registration Requirements, Exemptions and Ongoing Registrant Obligations.

  1. Activities of the Member

MFDA Rule 1.1.1 (Members) requires that all “securities related business” must be conducted through the Member, with exceptions for the sale of deposit instruments not on account of the Member and the activities of bank employees conducted in accordance with the Bank Act (Canada). “Securities related business” is defined in MFDA By-law No. 1 to mean any business or activity which constitutes trading or advising in securities for the purposes of applicable securities legislation in any jurisdiction in Canada. This includes securities sold pursuant to exemptions under applicable securities legislation.

Apart from the specific exceptions noted in Rule 1.1.1, Approved Persons are prohibited from personally engaging in the sale of any investments that would be considered securities under applicable legislation, or selling or advising on such investments through any entity other than their MFDA Member dealer (often referred to as “selling away” or “off book trading”).

  1. Activities Allowed Outside of the Member

Pursuant to MFDA Rule 1.3.2 (Requirements for Outside Activity), an Approved Person may have, and continue in, an outside activity provided that:

  • The MFDA and the securities regulatory authority in the jurisdiction in which the Approved Person carries on, or proposes to carry on, the outside activity do not prohibit the Approved Person from engaging in such outside activity;
  • The Approved Person discloses the outside activity to the Member;
  • The Approved Person obtains written Member approval of the outside activity prior to engaging in such outside activity;
  • The outside activity of the Approved Person must not be such as to bring the MFDA, its Members or the mutual fund industry into disrepute; and
  • To the extent that the outside activity could be confused with Member business, clear written disclosure is provided to clients that any activities related to the outside activity are not the business of the Member and are not the responsibility of the Member.
  1. Obligation to Disclose Outside Activities

  1. Disclosure to Member
    Approved Persons are required to disclose all outside activities to their Member prior to engaging in the activities.
  2. Disclosure to Client
    Pursuant to Rule 1.3.2 (e), clear written disclosure must be provided to clients that the outside activity is not the business of the Member and not the responsibility of the Member. With respect to new clients, Approved Persons are expected to provide such disclosure at the time the client relationship is established. Where the Approved Person has an existing relationship with a client and the outside activity is a new activity or there is a change to an existing outside activity, written disclosure to the client is required at the time when the Approved Person first engages in the outside activity with the client.

    Members and their Approved Persons are required to provide written disclosure to the client in respect of any outside activity where the outside activity could be confused with Member business. For example, where the outside activity deals with financial services such as financial planning, insurance, mortgages, real estate, and tax and estate planning, the outside activity must be disclosed. Where there is uncertainty as to whether an outside activity should be disclosed to a client, Members and their Approved Persons should provide the required disclosure.

    In addition, the nature of the outside activity and the name of the legal entity through which the activity is conducted should be disclosed to the client.

  3. Disclosure to Securities Regulatory Authority
    Members and Approved Persons must comply with securities legislation, which generally requires full disclosure to the applicable securities regulatory authority of any outside activity.  In accordance with National Instrument 33-109 Registration Requirements and specifically Form 33-109F4, Approved Persons must disclose activities engaged in outside of their sponsoring firm, including all officer and director positions and any other equivalent positions held, as well as positions of influence. This disclosure is required whether or not the Approved Persons receives compensation and whether or not any such position is business related.
  1. Member Policies and Procedures

Members are required to establish, maintain and implement policies and procedures designed to approve outside activities and to ensure subsequent compliance with MFDA Rules and By-laws as these relate to the activities. These policies and procedures should include reasonable measures for detecting undisclosed outside activity. Members should review the MFDA Policies and Procedures Manual and Reference Guide to assist in the development of these policies and procedures.

Members should ensure that their policies and procedures respecting outside activities address:

  • The requirement for Approved Persons to disclose all outside activities, obtain pre-approval of outside activities and the process by which Approved Persons may seek such pre-approval;
  • The Member’s criteria for the approval of outside activities;
  • The requirement to communicate to the Branch Manager or supervisor the details of the Member’s approval of, and any refusal to approve, the Approved Person’s outside activities;
  • The requirement for the Approved Person to notify the Member in the event of any material changes to significant aspects or termination of an outside activity; and
  • The requirement for records to include complete supporting evidence regarding the Member’s handling of all outside activity approval requests, including any special conditions, policies, procedures and controls that have been imposed and how compliance will be monitored.
  1. Member Approval of Outside Activities

Members that allow Approved Persons to engage in outside activities should perform reasonable due diligence and have a process in place that allows for the assessment and prior approval of any such activities. This process should ensure that Approved Persons are not involved in the approval of their own outside activities. As a preliminary step in the approval process, the Member must obtain from the Approved Person basic information about the activity, including the business name, the location where the activity will take place and the nature of the activity, the title or position of the Approved Person, the number of hours to be devoted to the activity and a description of any potential for confusion or conflicts of interest. Members should assess if the activity should be considered to be an outside activity based on the specific facts of the Approved Person’s activity and circumstances.

Member approval of outside activities must take into consideration any terms and conditions that have been imposed by the applicable securities regulatory authority on the Approved Person’s registration related to the activity. Members should be aware of these terms and conditions and supervise for their compliance. In any case, whether or not the securities regulatory authority has imposed any such terms and conditions, Members may decide to impose their own terms and conditions with respect to the approval of the outside activity. Evidence of the review and due diligence undertaken by the Member, as well as the approval, must be maintained in accordance with the record keeping requirements under the MFDA By-laws, Rules and Policies.

For approval of a position of influence as an outside activity, Members should review Section 9 of this Notice which discusses the specific considerations for the approval of positions of influence.

In addition, Members must maintain records of the process under which the outside activity was approved and specific details on the nature of the outside activity approved. The approval process should require the Approved Person to notify the Member of a material change and require the Member to approve that change. A material change could include the expansion of the activity initially approved by the Member or the offer of new services or products.

Some of the issues Members should consider before approving outside activities include:

  1. Conflicts of Interest
    The Member must consider issues relating to all potential conflicts of interest that may arise from the Approved Person’s duties as a salesperson and his or her outside activity. This would include consideration of the compensation to be paid under the arrangement, the nature of the relationship between the Approved Person and the outside entity, and any other potential conflicts that are identified. If any such conflict cannot be properly managed, the outside activity must not be permitted.
  2. Potential Client Servicing Issues
    Members must ensure that the outside activity does not impair the ability of the Member or Approved Person to provide continuous service to clients. This would include the inability to place trades in a timely manner.
  3. Standards of Conduct
    The Member must be satisfied that the outside activity will be consistent with the general standards of conduct imposed under MFDA Rule 2.1.1 (Standard of Conduct) and will not bring the MFDA, its members, or the mutual fund industry into disrepute. Accordingly, the background, history and experience of the others involved with the outside activity should be considered.
  4. Nature of the Activity and Related Proficiency
    The standard of review in considering whether to approve outside activity will depend on the nature of the activity. The review process regarding the investment of client funds or financial services provided outside of the Member should be more stringent than that applied with respect to outside activities that are clearly unrelated to the Member’s business. As a best practice, such review should include consideration of educational, experience or other relevant competency thresholds that may reasonably be expected as a prerequisite to allowing certain financial service activities.
  5. (e) Risk Management Issues
    Members should determine the extent to which there is the potential for the client to be confused between Member business and the Approved Person’s outside activity. The Member should recognize the potential exposure to complaints and litigation against the Member in the event that the outside activity is permitted.
  6. (f) Ability to Supervise
    The Member should evaluate its ability to satisfy supervisory requirements regarding the outside activity and consider the effect such requirements will have on resources.
  1. Ongoing Member Supervisory Obligations

While Members do not have specific obligations under the Rules to supervise the approved outside activity itself on an ongoing basis, Members must monitor the activities of their Approved Persons in relation to compliance with MFDA Rules and applicable securities legislation. Accordingly, Members should take reasonable measures to ensure that there is no change in the outside activity that was approved.

Approved Person and Member obligations also include ensuring that the distinction between Member business and outside activity is properly disclosed to clients. Such disclosure should clarify that the outside activity is not the responsibility of the Member. In addition, Members must monitor for conflicts of interest and must follow up on all client complaints that relate to the outside activity.

Members are required to take measures to detect and look for evidence of undisclosed outside activities of their Approved Persons.

Effective processes to detect undisclosed outside activity can be implemented using many of the Member’s existing review procedures including:

  • Advertising, website and other social media reviews – MFDA Rule 2.7.3 (Review Requirements)
  • Approval of trade names – MFDA Rule 1.1.7 (Business Names, Styles, Etc.)
  • Branch reviews – MFDA Policy No. 5 Branch Review Requirements
  • Trend analysis and trade reviews – MFDA Policy 2 Minimum Standards for Account Supervision
  • Due diligence in recruitment
  • Complaint handling
  • Annual Approved Person questionnaires
  1. Member Response to Supervisory Issues

Where a Member becomes aware of an Approved Person’s undisclosed outside activity, it would generally be expected that the Member conduct a reasonable investigation to ensure that the issues noted above have been properly addressed.

In order to meet their supervisory obligations under MFDA Rules, Members must ensure that they have access to any files necessary to complete the investigation into the nature and extent of any undisclosed or unauthorized outside activity. Members must be aware of potential client privacy issues since information that clients disclose to the Approved Person as part of an outside activity may be deemed to be confidential. For more information on the collection, use and disclosure of personal client information, Members should review MFDA Staff Notice Joint Regulatory Notice on Federal and Provincial Privacy Legislation, issued in December 2003.

The Member must take steps appropriate for the type of activity identified, being particularly alert to potential client concerns. Members must take action to resolve any issues, such as by providing disclosure to clients, consideration of discipline, or other suitable measures.

Any information received by a Member that would suggest that the outside activities of an Approved Person may bring the Member or the mutual fund industry into disrepute must be followed up. Any client complaints received by the Member that relate to outside activities must be dealt with in accordance with the provisions of MFDA Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline. As required under Policy No. 3, complaints involving allegations of theft or misappropriation of funds or securities or of forgery must be promptly reported to the MFDA.

  1. Positions of Influence

Examples of positions of influence may include, depending on the circumstances, religious leaders, health care providers and military officers.

The processes by which positions of influence are approved and supervised as outside activities include all the requirements and best practices discussed throughout this Notice. However, as discussed below, there are several unique considerations with respect to approving and supervising positions of influence.

When considering the approval of positions of influence, Members must assess the nature of the position and the degree of influence that the Approved Person holds through that position. If the Approved Person’s influence is deemed to be significant enough that it would be difficult to separate the influence from the activities that the Approved Person performs as an Approved Person, the outside activity should not be approved. It would be inappropriate in this case for the Approved Person to hold the position of influence and also engage in financial dealing activities as an Approved Person.

In certain cases, the Member may decide that a conflict of interest may arise from the position of influence can be addressed through terms and conditions. For example, the Member may consider imposing terms and conditions to prevent the Approved Person from using the position of influence to influence an individual to become a client or to affect the ongoing relationship between the Approved Person and the client. The Member may also decide to implement processes that monitor how the Approved Person’s relationship with his/her clients was established in an effort to ensure that the Approved Person is not using the position of influence to manipulate individuals to become clients.

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