MSN - 0082
Sep 12, 2013
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.
Amendments to MFDA By-law No. 1, Rule 2.5.5 (Branch Manager) and Policy No. 2 Minimum Standards for Account Supervision permit Members to implement a system involving the remote supervision of branches with the prior approval of MFDA staff.
The purpose of this Notice is to assist Members that wish to implement a supervisory system involving the remote supervision of branches by providing additional guidance and clarification in respect of the principle-based requirements under Rule 2.5.5 and Policy No. 2 and other related considerations.
I. Implementing an Effective Remote Supervisory Structure
Assessment of Risk Factors
Section 1 of Part IV of Policy No. 2 sets out a non-exhaustive list of factors that a Member should consider when determining whether an on-site branch manager is necessary at any given branch location. The purpose of this list is to assist the Member in its assessment of whether, from a risk perspective, a proposed branch supervisory structure involving remote supervision appropriately meets regulatory objectives under MFDA Rules, or whether, at any given location, the supervision by an on-site branch manager would be more appropriate.
Overall Supervisory Framework
For remote supervision to be effective, the other elements of the Member’s overall supervisory framework must be strong. Where there are concerns in respect of effective supervision at the Member, staff would be unlikely to approve any proposals received from the Member respecting a remote supervision arrangement. Such concerns could arise, for example, in situations where:
the Member is not adequately performing reviews under Policy No. 5 Branch Review Requirements; deficiencies are identified with respect to the Member’s Tier 2 supervisory system; or there are inadequate staff resources at the Member. Before submitting a proposal to MFDA staff, Members should ensure that any material deficiencies in their existing supervisory structure are addressed.
In addition, consideration should be given as to whether the change to a remote supervisory structure would increase the supervisory responsibilities of individuals at the Member to such an extent that they would no longer be able to appropriately fulfill all of their duties. In particular, where a Member’s proposal for remote supervision involves assigning a remote supervisor that has his/her own book of business, Members should consider whether the remote supervisor would be able to appropriately service clients and perform his/her supervisory responsibilities.
Under Policy No. 2, Members will be required to maintain an internal record of branch managers and the branches/sub-branches they are responsible for supervising. Where supervisory tasks and functions associated with a branch location are divided among different individuals at the Member, the Member’s records should clearly document who is responsible for performing which supervisory tasks or functions. For example, some Members may propose having Tier 1 trade reviews and new account approvals done remotely, but may still assign staff on-site at the branch location to report complaints to head office.
All Members should ensure that they establish written job descriptions for remote supervisors and staff with supervisory responsibilities and that the activities performed and scope of authority exercised by such individuals on a day-to-day basis is reflected accurately, and in sufficient detail, in such job descriptions.
Communicating Contraventions of Law or Regulatory Requirements to Head Office
Members seeking to implement a supervisory structure involving remote supervision must, as a risk control measure, consider addressing how possible contraventions of law or regulatory requirements at the branch level would be communicated to the head office.
To address this consideration, Members may, for example, specify within their policies and procedures that all Approved Persons at the Member have a general obligation to communicate to head office whenever they are aware, through a written or verbal complaint or otherwise, that any current or former Approved Person has or may have contravened any law or regulatory requirement relating to:
- theft, fraud, misappropriation, forgery, money laundering, market manipulation, insider trading, misrepresentation, or unauthorized trading;
- a breach of client confidentiality;
- engaging in securities related business outside of the Member;
- engaging in an undeclared occupation outside the Member; or
- personal financial dealings with a client.
We note that some Members, in their policies and procedures, currently adopt an approach that is generally similar to the one noted above.
Alternatively, Members may specify that an individual at the branch location will be designated to communicate any such matters to head office if and when he/she becomes aware of them through a written or verbal complaint or otherwise. We note that the performance of this function by an individual at the branch location would not involve any responsibility beyond
communicating to head office any such possible contraventions of law or regulatory requirements of which they become aware.
Policy No. 5 Branch Review Program and Periodic Visits
All Members are required to have an adequate Branch Review Program under Policy No. 5. A Branch Review Program is an integral part of a Member’s overall supervisory framework. Branch reviews enhance, support and assess the effectiveness of the Member’s routine supervisory activities and assist in identifying and evaluating risk factors at specific branch locations. Where a Member adopts a remote supervision structure, a highly effective Branch Review Program is particularly important.
Under section 2 of Part IV of Policy No. 2, the Member’s policies and procedures must provide for periodic visits to the branch and sub-branch, as necessary, to ensure that business is being conducted properly at the location. Where a Member has a robust Policy No. 5 Branch Review Program that includes an adequate risk rating for all locations and a review cycle where locations are reviewed more frequently than once every three years, periodic supervisory visits by remote supervisors may not be necessary. For example, we note that some MFDA Members already perform a Policy No. 5 review for many of their locations on an annual basis.
Members are reminded that Policy No. 5 branch reviewers must be independent from the individuals performing Tier 1 supervision.
Processes, Tools, Systems Used for Supervisory Activity
Members should consider the processes, tools, systems and documents used for remote supervisory activity (e.g. those used in the review and approval of new accounts, trade reviews, etc.). In particular, Members should ensure that the remote supervisor will have the same access to information and documentation as would be available to an on-site branch manager.
II. MFDA Pre-Approval Process
Under Rule 2.5.5(c), Members wishing to adopt an alternate supervisory structure involving remote supervision must submit a proposal for staff pre-approval.
In considering requests for pre-approval, MFDA staff will generally assess the Member’s overall branch supervisory structure. In addition to obtaining staff pre-approval, the ability of Members to continue to use supervisory structures involving remote supervision will be subject to the Member’s ability to demonstrate, on an ongoing basis, that the Member is able to continue to
appropriately meet its obligations under MFDA Rules and Policies respecting branch supervision. Where staff determines that a Member’s supervisory structure, in practice, is not able to adequately meet such supervisory requirements, staff’s approval may be withdrawn.
Proposals for Remote Supervision
Member proposals for remote supervision which are submitted for MFDA staff pre-approval should, at a minimum, include the following information:
- an organizational chart that: sets out all branch and sub-branch locations; identifies all locations where remote supervision is proposed; sets out the number of Approved Persons and total assets under administration at the location(s) where remote supervision would be conducted; and identifies the supervisory staff assigned to Tier 1 or Tier 2 supervision of locations that would be subject to remote supervision. Where the supervisory staff persons responsible for such Tier 1 or Tier 2 reviews are also producing branch managers, information respecting the size of the book of such branch managers (i.e. the number of clients and assets under administration) should also be provided;
- an analysis of resources required to implement the remote supervision structure that identifies any additional staff to be hired and the average volume of trades or other supervisory activity for each remote supervisor;
- a description of the activities of the remote supervisors, including supervisory responsibilities and other duties or responsibilities conducted for the Member or affiliates;
- a description of the Policy No. 5 and/or supervisory visits which includes: an explanation of the Member’s risk-based cycle, risk criteria and number of locations within each cycle; and
- a description of the systems and tools used to perform remote supervision.
As part of the pre-approval process, where appropriate, staff may seek other particulars from the Member in addition to the information noted above.
Once a Member has determined that it can implement an effective remote supervisory structure, the proposal should be submitted to the MFDA Communications and Membership Services Department.