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Bulletin #0519-P

Policy
Request for Comments on Revisions to Member Regulation Notice MR-0057 – The Role of Compliance and Supervision

Contact: Paige
Ward
BULLETIN #0519–P
General Counsel & Vice-President, Policy
February 24, 2012
Phone: (416) 943-5838
E-mail: pward@mfda.ca

MFDA Bulletin

Policy

For Distribution to Relevant Parties within your Firm

Request for Comments on Revisions to Member Regulation Notice
MR-0057 – The Role of Compliance and Supervision

On November 30, 2006, staff of the Mutual Fund Dealers Association of Canada (“MFDA”),
Market Regulation Services Inc., the Bourse de Montreal Inc. and the Investment Dealers
Association of Canada (now Investment Industry Regulatory Organization of Canada –
“IIROC”), issued The Role of Compliance and Supervision Notice (MFDA Member Regulation
Notice MR-0057), which set out the expectations of the self-regulatory organizations (“SROs”)
regarding the compliance function at Member firms, as well as the role, responsibility, and
accountability of Member firms, their Board of Directors, management, Compliance
Departments, and compliance officers.

The attached draft updated Notice has been revised in response to Registration Reform related
amendments contained in National Instrument 31-103 Registration Requirements, Exemptions
and Ongoing Requirements
and conforming changes to MFDA Rules. The Notice, as revised, is
intended to ensure consistency and conformity between the Registration Reform related
amendments and MFDA Member Regulation Notice MR-0057.

As a result of changes to the IIROC registration categories and to ensure guidance is provided to
Members with an appropriate degree of specificity and clarity, the revised Notice will be issued
separately by each SRO. However, MFDA and IIROC staff have worked together to ensure that
concepts and principles in the revised MFDA and IIROC Notices remain harmonized.

Members and other interested parties are requested to provide comment on the revised Member
Regulation Notice, which is attached to this bulletin.

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Comments on the revised Member Regulation Notice may be sent by April 24, 2012 (60 days
from issuance of this Bulletin) to:

Paige L. Ward
General Counsel & Vice-President, Policy

By Mail:
Mutual Fund Dealers Association of Canada
121 King Street West
Standard Life Tower
Suite 1000
Toronto, Ontario
M5H 3T9

Or Electronically at: pward@mfda.ca

Or By facsimile: (416) 943-1218

DOCs#284553

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link to page 3

Contact: Paige L. Ward
MR-0057
General Counsel and Vice President, Policy
December 5, 2006
Phone: 416-943-5838
E-mail: pward@mfda.ca

Draft dated February 24, 2012

MEMBER REGULATION NOTICE
THE ROLE OF COMPLIANCE AND SUPERVISION

Introduction

On November 30, 2006, staff of Market Regulation Services Inc., the Mutual Fund Dealers
Association of Canada (the “MFDA”), the Bourse de Montreal Inc. and the Investment Dealers
Association of Canada (now Investment Industry Regulatory Organization of Canada –
“IIROC”), issued “The Role of Compliance and Supervision” Notice (MFDA Member
Regulation Notice MR-0057), which set out the expectations of the self-regulatory organizations
(“SROs”) regarding the compliance function at Member firms, as well as the role, responsibility,
and accountability of Member firms, their Board of Directors, management, Compliance
Departments, and compliance officers.1

This updated Notice is being issued in response to Registration Reform related amendments
contained in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing
Registrant Obligations (“NI 31-103”) and conforming changes to SRO Rules. The Registration
Reform related amendments to NI 31-103 include: new registration categories, changes to the
scope of registerable activities, updates on compliance related functions, as well as updates on
supervisors’ roles and responsibilities. The purpose of this Notice, as revised, is to ensure
consistency and conformity between the explanations provided through the Registration Reform
related amendments and the previously issued SRO Joint Notice on the Role of Compliance and
Supervision.

As a result of changes to IIROC registration categories and to ensure that guidance is provided to
Member firms of both the MFDA and IIROC with an appropriate degree of specificity and
clarity, the revised Notice is being issued separately by each SRO. However, MFDA staff has
worked with IIROC staff during the course of revisions to this Notice to ensure that concepts and
principles remain harmonized.

1 Effective June 1, 2008, Market Regulation Services Inc. merged with the Investment Dealers Association of
Canada to form the Investment Industry Regulatory Organization of Canada.
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Responsibility for Compliance

A strong culture of compliance, which focuses not only on compliance with MFDA requirements
and applicable laws, but also emphasizes the importance of personal integrity and the need to
deal with clients fairly, honestly, and in good faith at all times, is the responsibility of each
individual acting on behalf of a firm. Toward that end, and as noted in the Companion Policy to
NI 31-103, the existence of an Ultimate Designated Person (“UDP”), Chief Compliance Officer
(“CCO”), a Compliance Department, and other staff with compliance responsibilities does not
relieve anyone else of the obligation to act on or escalate compliance issues. Everyone at the
Member should understand the standards of conduct of their role, including the Board of
Directors (or equivalent), employees, and agents, whether or not they are registered.
Furthermore, compliance should not be viewed as an isolated activity of the Compliance
Department, but as an integral part of a Member’s general business activities. As such, it is the
responsibility of the UDP, CCO, Board of Directors, management, and supervisors to consider
and implement advice provided by those performing a compliance function. The role of the
Compliance Department is to identify, assess, advise on, communicate, monitor, escalate, and
report on the Member’s compliance with regulatory requirements.

Industry compliance professionals play an important role in the system of securities regulation.
SROs and industry compliance professionals share a common objective of promoting
compliance at their Member firms and setting high industry standards. In order to achieve this
objective, SROs need to clearly communicate their expectations of Members, including their
respective Board of Directors (or equivalent), UDP, CCO, management, supervisors, and other
individuals at the Member. The purpose of this Notice is to provide Members with SRO
expectations of the compliance function at Member firms and the role, responsibility, and
accountability of the above-noted individuals.

In the past, the MFDA has issued notices and bulletins that address many of the matters outlined
below. In addition, certain MFDA Rules and Policies deal specifically with supervisory and
compliance responsibilities. This Notice should be read in conjunction with those regulatory
instruments.

Distinction between Supervisory and Compliance Roles

Compliance Departments and compliance officers, while they carry out similar functions across
Member firms, have responsibilities tailored to the size, resources, and business needs of the
particular Member. In some cases, their sole responsibility will be fulfilling the compliance
function, in others, they may also have supervisory roles.

In contrast to the compliance role, a person in the role of supervisor has responsibility and
authority to manage the day-to-day activities of other Approved Persons of the Member so as to
ensure their compliance with MFDA requirements and other applicable laws.

A supervisor must have sufficient authority to take effective and timely remedial action where
account activity or any other matter under his or her supervision falls or appears to fall outside
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the bounds of conduct, just and equitable principles of trade or good business practice, or
violates any MFDA requirements or other applicable laws.

The difference between a supervisory and compliance role is defined by who has the authority to
resolve issues once they are identified. If a compliance officer has the authority to resolve issues
themselves, then he or she is also acting in a supervisory role. If the compliance officer’s
authority and ability to resolve issues is limited to escalating the matter to a supervisor, then he
or she is executing a compliance function.

In determining whether an individual is acting in a supervisory role, the MFDA will look at the
individual’s responsibilities, authority, and the functions he or she performs for the Member, not
simply at his or her title. While the MFDA will consider documentation setting out an
individual’s responsibilities and authority, staff will also look to confirm whether these are
reflected in the day-to-day operations of the firm. In other words, it is a two-fold test:
documentation and practice.

The activities of those exercising compliance functions should not be viewed by supervisors as a
substitute for them discharging their responsibilities to supervise the business of the Member.
For example, as set out in MFDA Policy No. 2 Minimum Standards for Account Supervision
(“Policy No. 2”), tasks and procedures may be delegated to knowledgeable and qualified
individuals, but not responsibility. Those who are delegated tasks must have the qualifications
and required proficiency to perform the tasks and should be advised in writing of their duties.
Supervisors remain responsible for the performance of the supervisory activities delegated to
compliance personnel, and must conduct sufficient follow up and review to ensure that the
person to whom functions have been delegated is properly executing them.

In some instances, the CCO may also have supervisory responsibility, for example as an UDP.

Role of the Member, Board of Directors, Management, and Other
Individuals

I. The
Member

The Member is responsible for establishing, implementing, communicating, and maintaining
effective compliance programs to ensure compliance with MFDA requirements and applicable
laws. This responsibility extends to all directors of the Member with respect to their corporate
governance responsibilities, and all officers of the Member with regard to areas of their
management responsibility.

II.
The Board of Directors

The Board of Directors (or equivalent) must ensure that the Member maintains a compliance
program that identifies and addresses material risks of non-compliance and that appropriate
supervision and compliance procedures to manage those risks have been implemented.
Consistent with MFDA Rule 2.5.3, the Board of Directors must review the reports and
recommendations of the CCO and any other information respecting instances of material non-
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compliance that comes to their attention to determine what actions are necessary to rectify any
compliance deficiencies noted in the report, or of which they otherwise become aware, and
ensure that such actions are carried out.

III. Management

All members of a Member’s management are responsible for supervising and directing the
activities of the Member, as well as the individuals within the Member, in order to ensure
compliance with MFDA requirements and applicable laws with respect to areas of their
management responsibility. Certain management members, such as the UDP and CCO, have
specific responsibilities under NI 31-103 and MFDA Rules.

The specific roles and responsibilities of the UDP, CCO and others are set out below:

(a)
The Ultimate Designated Person

As noted in NI 31-103 and MFDA Rule 2.5.2, the UDP must supervise the activities of the
Member that are directed towards ensuring compliance with MFDA requirements and applicable
securities legislation by the Member and the individuals acting on its behalf. The UDP must also
promote compliance by the Member and individuals acting on its behalf with all MFDA
requirements and applicable securities legislation.

A firm’s UDP is responsible for the compliance culture at the firm, including the establishment
and maintenance of an effective compliance system. The UDP is expected to communicate and
reinforce the importance of compliance within the firm on an ongoing basis. Furthermore, as part
of his or her ultimate responsibility for compliance at a firm, the UDP is responsible for ensuring
that the Compliance Department is consulted on all relevant matters. To ensure the effectiveness
of the compliance system, the UDP is also expected to ensure that there are effective procedures
for escalating all instances of non-compliance. The UDP should ensure all instances of non-
compliance are resolved in a timely and effective manner.

(b)
The Chief Compliance Officer

The CCO is an integral part of a Member’s senior management team. As such, the CCO must
establish and maintain policies and procedures for assessing compliance by the Member and the
individuals acting on its behalf, as set out under NI 31-103 and MFDA Rule 2.5.3. The CCO is
responsible for monitoring and assessing compliance with all MFDA requirements and
applicable securities legislation, and must report the results of this assessment to the Board of
Directors (or equivalent) as frequently as necessary and not less than annually.

The MFDA expects the CCO’s annual report to the Board to identify and discuss material
findings or issues relating to: capital and insurance, regulatory examinations,
investigations, disciplinary proceedings and other actions, client complaints and legal
proceedings and the operations of the compliance and supervisory functions, as well as any other
material issues that occurred during the period covered by the report. Where an issue remains
unresolved, the report should outline steps that will be taken to resolve the issue.
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The mandate of the CCO is to provide the Board of Directors (or equivalent) with reasonable
assurance that all standards and requirements under MFDA requirements and applicable
securities legislation are being met.

The CCO must report all material incidents of non-compliance to the firm’s UDP as soon as
possible after becoming aware of the matter, including any incidents of non-compliance that
create a reasonable risk of harm to clients or the capital markets, or where there is a pattern of
non-compliance. In light of this obligation, the CCO must, therefore, have direct access to the
UDP and the Board of Directors (or equivalent) as needed to report significant issues as they
arise.

Where the CCO reports to other individuals at the Member or an affiliate organization, in
addition to the UDP, such reporting must not impair or impede the reporting by the CCO to the
UDP in the manner prescribed under MFDA Rules and applicable securities legislation.

IV. Other
Individuals

As previously noted, compliance is a firm-wide responsibility. Accordingly, everyone in the firm
should understand the standards of conduct applicable to their role. More specifically:

(a)
Compliance Officers

Although compliance officers are not typically registrants with the securities commissions, they
have certain responsibilities in executing their function as a compliance officer. These
responsibilities are in addition to any other responsibilities that a compliance officer may have as
a result of holding other roles (e.g. where, in accordance with MFDA Rules, a compliance officer
is performing a supervisory function in addition to their compliance role).

Compliance officers are responsible for monitoring compliance, but they cannot simply identify
compliance issues. Compliance officers must also take appropriate steps to assist in ensuring that
corrective measures are taken by supervisors or managers to remedy any compliance issues that
have been identified. Compliance officers should, therefore, after communicating their findings
to the appropriate supervisor(s) who have the authority to effect the changes necessary to address
the compliance issue, monitor the corrective measures taken. If supervisors fail to adequately
address an issue identified by a compliance officer, the compliance officer must escalate the
issue as appropriate. Escalation procedures should be detailed in the Member’s internal
procedures. In some cases, the compliance officer may raise the issue with a higher level
supervisor, in others, with the CCO who, in turn, should address the issue with management or,
where appropriate, with the UDP or Board of Directors. The steps taken by compliance officers
and corrective actions taken by supervisors must be documented, maintained, and verifiable.

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(b)
Others

All other individuals at the Member, regardless of whether they are registered with the securities
commissions or are MFDA Approved Persons, must comply with MFDA requirements and all
applicable laws, as well as the Member’s internal policies and procedures, including its
compliance program.
Pursuant to the Companion Policy to NI 31-103, the existence of an UDP and CCO, or a
Compliance Department and/or other supervisory staff, does not relieve anyone else in the firm,
whether registered or not, of the obligation to act on or escalate compliance issues.

When Individuals Will be Subject to Enforcement Action by the MFDA

Under appropriate circumstances, the MFDA may initiate enforcement proceedings relating to
compliance or supervisory matters against one or more of a Member’s directors, management,
UDP, CCO, supervisors, compliance officers, or anyone else with supervision or compliance
responsibilities if:

• they violate MFDA requirements and/or applicable securities laws, or aid and abet
another in such violations; or
• they fail to supervise, if they have been specifically delegated, or have assumed,
supervisory authority for particular business activities or situations and, therefore, have
the requisite degree of responsibility, ability, or authority to affect the conduct of the
individual in the Member firm whose behaviour is at issue.

In addition to the foregoing general circumstances, the MFDA may initiate enforcement
proceedings against a compliance officer:

• for failing to identify violations of MFDA requirements and/or applicable securities laws
according to the standard of a reasonably proficient and diligent compliance officer; or
• if, after identifying the violation, he or she fails to sufficiently escalate and follow up the
issue with the appropriate supervisor or management in accordance with the standard of a
reasonably proficient and diligent compliance officer. The question of whether escalation
and follow up was sufficient will be fact-specific.

In each case, the individual’s conduct will be judged by reference to a reasonably proficient and
diligent individual holding the same position. Given that the standard is objective, it is not what
the respondent actually knew or did, but rather what he or she ought to have known or done. It is
always open to an individual to demonstrate that they exercised due diligence to prevent the
harm that occurred.

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Creating an Effective Compliance Program

In order to be effective, compliance programs must be reasonably designed to identify and
control the risk of compliance failure that could result in investor and/or market harm and
financial losses and reputational damage to the Member.

Members have an obligation to establish, maintain, and apply policies and procedures that
establish an effective compliance system that provides assurance that the firm and individuals
acting on its behalf comply with MFDA requirements and applicable securities legislation and
manage business risk in accordance with prudent business practice. This includes: allocating
sufficient resources, creating measures and systems that encourage and reward compliant
behaviour and discourage non-compliant behaviour, and ensuring that compliance officers have
appropriate access to supervisors and senior management. There are many steps that a Member
can take to promote the importance of compliance, including the following:

(i)
Promote a culture of compliance by clearly identifying, prioritizing and communicating
compliance goals.
(ii)
Insist on compliance and high ethical standards throughout the Member, with senior
management leading by example.
(iii)
Ensure that effective execution of compliance and supervisory roles is an explicit element
of compensation and promotion decisions.
(iv)
Ensure that others in the firm have a clear understanding of the role of compliance within
the firm, including the roles of the UPD, CCO, compliance officers, and the Compliance
Department.
(v)
Communicate compliance and regulatory information to individuals within the Member.
Emphasize compliance and regulatory subjects in training. Training should include
educating individuals about their compliance responsibilities on an ongoing basis.
(vi)
Make available to all individuals an effective means of communicating (confidential or
anonymous, if appropriate) compliance, regulatory, or ethical concerns to compliance
officers, supervisors, senior management, or the Board of Directors, if necessary, without
fear of retaliation.
(vii) Encourage the development, training, professionalism, and retention of the Member’s
compliance officers with compensation, benefits, and recognition in keeping with their
contributions, and implement sanctions or other corrective actions for non-compliant
behaviour. Further, staff the Compliance Department with sufficient, qualified,
experienced, and knowledgeable professionals.
(viii) Ensure sufficient access to information for compliance officers to enable them to carry
out their responsibilities.
(ix)
Develop a cooperative relationship between regulators and Members.

Tips for Compliance Officers

There are many steps that compliance officers can take to ensure that they have discharged their
responsibilities in connection with regulatory expectations, including the following:

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(i)
Ensure that they have a clear understanding of the nature of their responsibilities. This
includes having a detailed job description with clearly established reporting lines and a
clear understanding of whether they are expected to act in a supervisory capacity.
(ii)
Maintain written records that detail all steps that were taken to correct, report, or escalate
issues that were identified, along with any supporting documentation that demonstrates
actions taken.
(iii)
Lawyers who perform compliance functions in addition to legal functions should make it
clear to other individuals when they are acting as legal counsel and providing legal
advice.
(iv)
Compliance officers should be active in promoting compliance-related initiatives both
inside and outside of the Member, and be available to individuals within the Member for
consultation on compliance issues.
(v)
Ensure that steps in the compliance process are appropriately tailored to the size and
nature of the Member’s business, and that they are tested to ensure that they adequately
address any compliance gaps.
(vi)
Ensure that MFDA Rule/Policy changes, bulletins, and notices are reviewed and
incorporated into the Member’s compliance policies and procedures in a timely and
effective manner that addresses the nature and size of the Member’s business.
(vii)
Test compliance policies and procedures to ensure that existing procedures continue to
effectively reflect the business practices of the Member and are in compliance with new
MFDA requirements, or new requirements under applicable securities legislation.
(viii) Periodically
review the websites of provincial regulators and the MFDA and, where
possible, attend MFDA meetings or seminars devoted to regulatory issues. Doing so will
give compliance officers advance notice of proposed and imminent changes under
MFDA requirements and/or applicable securities legislation that may affect the
compliance officer and the Member firm.
(ix)
Develop a cooperative relationship between regulators and Members.

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