Skip to Main Content

Bulletin #0350-P

Policy
Rule 2.4.1 (Payment of Commissions to Non-Registered Entities) - Extension of Suspension to March 31, 2010

Contact: Paige L. Ward
BULLETIN #0350 – P
Director of Policy and Regulatory Affairs
December 22, 2008
Phone: 416-943-5838
E-mail: pward@mfda.ca

MFDA Bulletin

Policy

For Distribution to Relevant Parties within your Firm

Rule 2.4.1 (Payment of Commissions to Non-Registered Entities) –
Extension of Suspension to March 31, 2010

The securities regulatory authorities in British Columbia, Nova Scotia, Ontario and
Saskatchewan (the “Applicable Jurisdictions”) have approved an extension of the suspension
period for Rule 2.4.1 (Payment of Commissions to Non-Registered Entities) until March 31,
2010 with a requirement for the MFDA to submit proposed Rule amendments to Rule 2.4.1 by
May 31, 2009.

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. As a result, provided that certain conditions are satisfied,
Members with Approved Persons registered in Applicable Jurisdictions are permitted to pay
commissions on behalf of those Approved Persons to a corporation that is not registered as a
dealer or a salesperson, notwithstanding the provisions of Rule 2.4.1.

As described in MFDA Bulletin #0325-P, published on September 9, 2008, the MFDA submitted
an application to the Applicable Jurisdictions to amend the Recognition Orders to extend the
suspension of Rule 2.4.1 to December 31, 2010. The application and related documents were
published for comment on August 29, 2008, with the comment period expiring on September 29,
2008. The MFDA received seven comment letters with respect to the application. A summary of
comments and the MFDA response is attached as Schedule “A”.

In the Joint Notice of Approval issued on December 19, 2008, the Applicable Jurisdictions
expressed the view that the March 31, 2010 expiry date would provide sufficient time for the
recognizing regulators to consider the regulatory impact of the MFDA rule proposal and for the
MFDA to implement the resulting approved amendments. The Applicable Jurisdictions have
indicated that if the MFDA does not meet the May 31, 2009 deadline to submit a rule proposal,
Page 1 of 6

the Applicable Jurisdictions will provide a status update on the suspension of Rule 2.4.1 and will
inform the industry which jurisdictions will be bringing Rule 2.4.1 into force on April 1, 2010.

The Alberta Securities Commission has not suspended Rule 2.4.1 and, accordingly, in Alberta
commissions must be paid directly to the registered salesperson. The Manitoba Securities
Commission and New Brunswick Securities Commission suspended Rule 2.4.1 in Manitoba and
New Brunswick until such time as a decision or legislative amendments have been made with
respect to the payment of commissions to non-registered entities.

Next Steps

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

Further Information

The Joint Notice of Approval and the respective Variation Orders and Amended Recognition
Orders of the Applicable Jurisdictions extending the suspension of MFDA Rule 2.4.1 can be
accessed at:

http://www.osc.gov.on.ca/MarketRegulation/SRO/mfda/ro/sro-mfda_20081219_amd-cert-ro.jsp
http://www.osc.gov.on.ca/Regulation/Orders/2008/ord_20081128_225_mfda_variation.jsp
http://www.bcsc.bc.ca/comdoc.nsf/comdoc.nsf/webpolicies/CF370070A74A1EFB882575240059362E?OpenDocum
ent
http://www.gov.ns.ca/nssc/whatsnew.asp#rules
http://www.sfsc.gov.sk.ca/ssc/gennews2008.shtml

DOCs#157799

Page 2 of 6

SCHEDULE A

Summary of Public Comments Respecting Proposed Amendments to the MFDA’s
Recognition Order to Extend the Suspension of Rule 2.4.1

On August 29, 2008, the British Columbia Securities Commission, Nova Scotia Securities
Commission, Ontario Securities Commission and Saskatchewan Financial Services Commission
(collectively “Applicable Jurisdictions”) published Proposed Amendments to the MFDA’s
Recognition Order to Extend the Suspension of Rule 2.4.1 for a 30-day public comment period
that expired on September 29, 2008.

Seven submissions were received during the public comment period:

1. Advocis
2. IGM Financial Inc. (“IGM”)
3. Independent Financial Brokers of Canada (“IFB”)
4. The Investment Funds Institute of Canada (“IFIC”)
5. The Investment Industry Association of Canada (“IIAC”)
6. Raymond James Ltd. (“RJL”)
7. Rogers Group Investment Advisors Ltd. (“RGIA”)

Copies of comment submissions may be viewed on the MFDA’s website at: www.mfda.ca.
The following is a summary of the comments received, together with the MFDA's responses.
Support for Extension of Suspension

All of the commenters supported an extension of the suspension of Rule 2.4.1.

Recommendation for Permanent Legislative Solution

Advocis, IGM, IFB, IIAC and RGIA expressed support for the MFDA’s request to extend the
suspension of Rule 2.4.1 as an initial step however recommended that the focus be on creating a
structure to allow Approved Persons to provide their services through a personal corporation.
IGM, IIAC and RJL commented that such a structure should not mirror the current MFDA model
of directed commissions but instead be designed along the lines of the regulations that allow
various professionals and other occupations to self-incorporate.

Advocis recommended that a permanent solution involve legislative amendments to provincial
securities acts to permit all advisors to carry on securities related activities through incorporated
entities.

IGM stated that, although the existing directed commissions approach by the MFDA works,
albeit imperfectly, legislation that allows professionals and other occupations to incorporate
Page 3 of 6

addresses the issues in a more elegant and effective way by establishing the requirements directly
in law as opposed to doing so indirectly through contract and undertakings.

IGM noted that while allowing mutual fund advisors to use non-registered personal corporations
to receive compensation from their dealers does raise potential concerns with respect to
supervision and liability to clients, these issues are addressed by current MFDA Rules.

IGM and RJL also noted; however, that the directed commission model is not entirely
satisfactory, since it is not the best way to implement the financial planning objectives that lead
advisors to use a personal corporation. IGM noted that the directed commission model is not the
optimum one for addressing the Canada Revenue Agency requirements. RJL expressed concern
that the directed commission model does not permit financial advisors to take advantage of the
benefits of the incorporation structure.

IIAC noted that current securities legislation across Canada provides that only individuals may
engage in registrable activities and, notwithstanding the suspension of MFDA Rule 2.4.1,
securities regulators have been clear that the commissions being redirected to the personal
corporation are being earned by the Approved Persons conducting all activities requiring
registration and not by personal corporations. IIAC expressed the view that the tax implications
of the redirection model are unclear and continuation of this model would create both uncertainty
for advisors and the possibility that they would not be able to take advantage of all of the benefits
associated with the corporation structure.

IFB supported the MFDA’s application to have Rule 2.4.1 suspended and develop a revised
Rule. IFB noted that the current practice of provincial securities regulators individually
approving extensions to the suspension of Rule 2.4.1 has lead to uncertainty and confusion for
Approved Persons and dealers. The IFB further noted that not all provinces have suspended the
Rule and even in jurisdictions where the Rule has been suspended, some dealers have refused to
pay commissions to an Approved Person’s personal corporation until the Rule is permanently
removed.

Need for CSA/SRO/Industry Committee

All the commenters recommended the establishment of a joint initiative involving the Canadian
Securities Administrators (“CSA”), the self-regulatory organizations (“SROs”) and industry to
address the issue of salesperson incorporation.

IIAC expressed the view that any legislative amendment with respect to the incorporation of
salespersons should ultimately require the involvement of the CSA, Investment Industry
Regulatory Organization of Canada (“IIROC”) and the MFDA in order to be successful. IIAC,
RJL and RGIA recommended that a committee be established with representatives from the
MFDA, IIROC, IIAC, CSA and the industry to finalize, in a timely manner, a rule that achieves
an appropriate regulatory, corporate and tax structure which would permit advisors to
incorporate.

Page 4 of 6

IFIC offered to convene a group of industry experts to meet with regulators to explore
possibilities for achieving durable change to Rule 2.4.1 that will meet the needs of all
stakeholders.

IGM suggested that the MFDA and the CSA work together to develop harmonized rules to apply
across Canada using legislation that allows professionals and other occupations to incorporate as
a model.

Advocis commented that it is important for the Recognizing Jurisdictions and the other CSA
members to be at the table in devising the appropriate solution, noting that if a permanent
solution involves a legislative proposal, then the MFDA will likely not present one in any detail
as this is beyond its mandate.

IFB expressed disappointment that the CSA chose not to adopt a national solution to the issue of
payment of commissions through the registration reform initiative and instead directed the
MFDA to consider the merits of extending the suspension deadline and develop wording for a
proposed Rule change.

Deadlines for Submission of Proposed Rule Amendment and Expiry of
Suspension

IFIC expressed support for the request for an extension of the suspension of Rule 2.4.1 until
December 31, 2010 and commented that the approach taken by Ontario, Nova Scotia and
Saskatchewan is needlessly constraining in light of the need for extensive further discussion of
proposed alternatives.

Advocis expressed concern that possible failure on the part of the MFDA to meet the May 31,
2009 deadline set by the Ontario Securities Commission, Nova Scotia Securities Commission
and Saskatchewan Financial Services Commission could have significant and costly
consequences for the industry. Advocis noted that a failure to meet the May 31, 2009 deadline
could lead to lack of harmonization as some jurisdictions may continue to extend the suspension
and others may choose to enforce the existing Rule. Advocis suggested that the May 2009
deadline is reasonable as long as advisor incorporation becomes a priority and the issue is dealt
with appropriately by MFDA and CSA members.

Advocis recommended that any variation of the current Order allow the Order to continue until it
is either rescinded or a permanent solution is adopted. Advocis also noted that adopting an
ongoing interim approach to the suspension until a permanent solution is implemented would
provide financial advisors and dealers with a higher level of comfort and lessen the compliance
burden in that it would be one less regulatory item to monitor.

IFB commented that while it supports an early resolution of the issue, it would be concerned if
the Rule expired in advance of the MFDA amendment being available for public comment.

IIAC and RGIA expressed general support for the MFDA’s request for the suspension of Rule
2.4.1 until December 31, 2010 along with the direction of some of the Applicable Jurisdictions to
Page 5 of 6

the MFDA to submit its proposed amendments to Rule 2.4.1 by May 31, 2010. IIAC and RGIA
also commented that, in order to promote consistency and a level playing field in the Canadian
financial services industry, any changes to Rule 2.4.1 should be considered along with proposed
changes to IIROC rules with a view to create a model that can operate for both the mutual fund
and securities industries in a seamless and effective manner.

Length of Comment Period

IFIC expressed the view that the 30-day comment period provided for this proposed amendment
is not sufficient to provide meaningful comments on this complex issue. IFIC suggested that the
MFDA allow for up to 120 days of public comment on new or changed regulations of material
impact so that there can be an adequate sounding of the views of industry and the general public.

MFDA Response

MFDA staff acknowledges industry concerns with respect to the lack of regulatory
harmonization regarding this matter and agrees with comments expressing the need for a
permanent solution that is harmonized across the industry and all jurisdictions. With respect to
the approach to be adopted in arriving at such a solution, we acknowledge the comments of the
industry that the preferred solution is for an incorporated salespersons model. We further
acknowledge comments of IGM that the directed commissions approach, while not the optimum
solution, is workable. We agree with the commenters that legislative amendments allowing for
incorporated salespersons are beyond the jurisdiction of the MFDA and would need to be
adopted and implemented by CSA members.

We recognize and agree with the comments expressing the need for equal and active
participation by the CSA, SROs and industry stakeholders in arriving at a timely and
appropriate solution. The MFDA is committed to working with the CSA, other regulators and
industry stakeholders on any joint CSA/SRO/industry committee established by the CSA to
resolve this issue.

MFDA staff also acknowledges industry comments emphasizing the need for an appropriate
solution to be developed within the timelines established by the CSA or for the suspension of
Rule 2.4.1 to be extended until such time as a permanent solution is reached. As noted, the
MFDA is committed to working with the CSA members and other regulators and industry
stakeholders towards the development of an appropriate and timely solution. In the interim, the
MFDA will continue to consider what amendments to MFDA Rules, if any, are appropriate to
address this issue.

With respect to the comment regarding the appropriate length of the comment period, the MFDA
will recommend to the CSA that a longer comment period (60 – 120 days) be established for new
or amended regulations of material impact going forward.


Page 6 of 6