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Bulletin #0325-P

Policy
Request for Comment: Proposed Amendments to MFDA Recognition Orders to Extend the Suspension of Rule 2.4.1 (Payment of Commissions to Corporations)

Contact: Aamir
Mirza
BULLETIN #0325 – P
Senior Legal & Policy Counsel
September 9, 2008
Phone: 416-945-5128
E-mail: amirza@mfda.ca

MFDA Bulletin

Policy

For Distribution to Relevant Parties within your Firm

Request for Comment: Proposed Amendments to MFDA Recognition
Orders to Extend the Suspension of Rule 2.4.1 (Payment of Commissions
to Corporations)

MFDA Rule 2.4.1 requires that any remuneration in respect of business conducted by an
Approved Person on behalf of a Member be paid by the Member (or an affiliate) directly to and
in the name of the Approved Person.
The suspension of Rule 2.4.1 is currently set to expire on December 31, 2008. The MFDA has
submitted an application to the securities regulatory authorities in British Columbia,
Saskatchewan, Ontario and Nova Scotia (the “Applicable Jurisdictions”) to amend the
Recognition Orders to extend the suspension of Rule 2.4.1 to December 31, 2010. The MFDA
requested that the Applicable Jurisdictions extend the suspension to allow the MFDA time to
develop proposed amendments to Rule 2.4.1 that will allow Approved Persons to direct
remuneration in respect of business conducted by them on behalf of a Member to a non-
registered corporation, subject to conditions.
On August 29, 2008, the Applicable Jurisdictions published the MFDA’s application and related
documents for comment. Members are advised that the deadline for comments is September 29,
2008
.

Background

In 1999, the CSA Distribution Structures Committee published a position paper (the “CSA
Position Paper”) that outlined their regulatory concerns with existing structures and practices that
had evolved in the industry. One of the topics addressed in the CSA Position Paper was the
industry practice of dealers paying commissions to non-registered corporations. The CSA was
concerned that these non-registered corporations may be engaging in registerable activity and,
therefore, violating securities legislation.

Rule 2.4.1 was developed at the request of CSA members participating in the initial recognition
of the MFDA to ensure that MFDA Rules conformed to the positions articulated in the CSA
Position Paper.

2001-2004

In 2001, in response to industry concerns with Rule 2.4.1, the Applicable Jurisdictions, as a term
and condition of the MFDA’s recognition, suspended the operation of the Rule provided certain
conditions were met. Among these conditions was that the MFDA would participate on any joint
industry and regulatory committee struck by the commissions and their staff in their efforts to
develop amendments to applicable securities legislation that would allow an Approved Person to
carry on securities related business through a corporation while preserving the Member’s and
Approved Person’s liability to clients for the Approved Person’s actions. During the period
following the MFDA’s recognition and prior to the December 31, 2004 Rule 2.4.1 suspension
deadline, MFDA Staff understand that although discussions occurred at the CSA staff level on
this issue, no formal industry/regulatory committee was struck and no solution, legislative or
otherwise, was developed. As a result, the period of suspension, originally set to expire on
December 31, 2004, was subsequently extended to December 31, 2008, for the purpose of
providing the CSA time to consider this matter further.

2005-2008

The scope of Proposed National Instrument 31-103 – Registration Requirements, (“NI 31-103”)
was originally intended to include the issue of payment of commissions to corporations. In the
February 23, 2007 publication of the Instrument, the CSA indicated that they had not reached a
decision on this matter but intended to address this issue in 2007. During this period of time, we
understand that the CSA, in seeking a resolution to this matter, did consider but ultimately did
not approve a proposal submitted by the IDA. Accordingly, the most recent version of proposed
NI 31-103, published for comment on February 29, 2008, does not include proposals in respect
of this issue. In April 2008, CSA staff confirmed that NI 31-103 would not include a proposal on
this issue and advised that MFDA staff would need to consider whether it wanted to seek an
extension of the December 31, 2008 deadline as well as develop its own proposal on the issue.
Accordingly, the MFDA formally applied for an extension until December 31, 2010 and began
considering possible rule changes.

In the Joint Notice published with the MFDA’s application, staff of the OSC, NSSC and SFSC
indicated that they would consider extending the current suspension of

Rule 2.4.1 until March 31, 2010, with a requirement for the MFDA to submit its proposed
amendments to the Rule by May 31, 2009. OSC, NSSC and SFSC staff are of the view that a
March 31, 2010 expiry date would provide sufficient time to consider the regulatory impact of
any proposed amendments.

OSC, NSSC and SFSC staff do not support any further extensions and believe that an expiry date
of March 31, 2010 would provide sufficient time for MFDA Members and Approved Persons to
restructure any commission direction arrangements, to ensure compliance with Rule 2.4.1,
should the MFDA not submit a proposal by May 31, 2009.
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BCSC staff is of the view that an extension is necessary to allow the MFDA time to develop
amendments to Rule 2.4.1. However, they are not taking a position on the appropriate length of
the extension or future extensions at this time. In addition to commenting on matters relating to
the substance of the application to extend the suspension of Rule 2.4.1, BCSC staff seeks
comment on the appropriate date for the submission of the rule amendments and the expiry of the
suspension.

The Alberta Securities Commission has not suspended Rule 2.4.1 and, accordingly, commissions
must be paid directly to the registered salesperson. Members are also reminded, as noted in
MFDA Bulletin #0310-P (issued on June 2, 2008), that the New Brunswick Securities
Commission has made a Variation Order to the terms and conditions of MFDA Recognition as a
self-regulatory organization in New Brunswick to suspend Rule 2.4.1 until such time as a
decision or legislative amendments have been made with respect to the payment of commissions
to non-registered entities. The MFDA understands that staff of the Manitoba Securities
Commission also intends to recommend to their Commission that a similar extension to the
suspension of Rule 2.4.1 be granted.

Next Steps

MFDA staff, as requested by the Applicable Jurisdictions, will consider what Rule amendments,
if any, are appropriate which may include codifying the MFDA’s current practice of directed
commissions.

Further Information

To view the MFDA’s application and related documents, go to the BCSC’s website at:

http://www.bcsc.bc.ca/policy.aspx?id=6837&cat=BC%20Notices

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