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Bulletin #0549-P

For further information, please contact:

Paige Ward
General Counsel, Corporate Secretary and Vice President, Policy
Policy
For Distribution to Relevant Parties within your Firm

Amendments to MFDA By-law No. 1, Rule 2.2.1 (“Know-Your-Client”) and Form 1

The MFDA held its 2012 Annual General and Special Meeting of Members (“AGM”) on November 29, 2012.  At the AGM, Members approved certain amendments to the MFDA By-law No. 1, Rule 2.2.1 (“Know-Your-Client”) and Form 1, as set out below.  

1. Amendments to MFDA By-law No. 1

Amendments to MFDA By-law No. 1 are intended to permit a broader range of persons to be considered as candidates for Public Directors on the MFDA Board and increase Industry Director participation on the Audit Committee to allow for broader industry input.

The amendments have received all requisite approvals and are now effective.  The amended By-law is attached as Schedule “A”.

2. Amendments to MFDA Rule 2.2.1 (“Know-Your-Client”)

Proposed amendments to Rule 2.2.1(c) will clarify that the obligation for Members and Approved Persons to ensure that each order accepted, or recommendation made for any account of a client, is suitable includes recommendations to borrow to invest.  Proposed amendments to Rule 2.2.1(d) will clarify that, where a transaction proposed by the client is not suitable for the client, Member’s and Approved Person’s obligations to advise the client of this fact and maintain evidence of the advice apply to transactions involving the use of borrowed funds.  In addition, proposed Rule 2.2.1(f) will clarify that Members and Approved Persons are required to use due diligence to ensure that the suitability of the use of borrowing to invest is assessed on certain trigger events consistent with the amendments under Rule 2.2.1(e) with respect to investment suitability.

The amendments are awaiting approval of the recognizing securities commissions and will be effective on a date to be subsequently determined by the MFDA. In addition, Member Regulation Notice MR-0069 Suitability Guidelines will be revised in order to reflect the proposed amendments.  To view the proposed amendments, please go to: www.mfda.ca/regulation/propamend.html.

3. Housekeeping Amendments to MFDA Form 1

Proposed amendments to the MFDA Form 1 are intended to update the two Independent Auditor’s Reports contained within Form 1 to comply with MFDA reporting requirements, which are based upon International Financial Reporting Standards (“IFRS”). 

The General Notes and Definitions to Form 1 state that comparative figures on all statements are required at the audit date.  However, for the first fiscal year that Members were required to provide audited financial reports using the new Form 1, a transitional provision was granted allowing comparative balances to be excluded from the statements in the audited Form 1.  As such, the two prescribed Independent Auditor’s Reports within Form 1 did not contain reference to comparative balances. Consequently, the proposed amendments will update: (i) the Independent Auditor’s Report for Statements A, D and E; and (ii) the Independent Auditor’s Report for Statements B, C and F so that auditors can refer to the date of comparative balances as required by the General Notes and Definitions to Form 1.

The amendments are awaiting approval of the recognizing securities commissions and will be effective on a date to be subsequently determined by the MFDA. To view the proposed amendments, please go to: www.mfda.ca/regulation/propamend.html.

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Schedule “A”

1. Definitions

“associate”, where used to indicate a relationship with any person, means:

  1. any corporation of which such person beneficially owns, directly or indirectly, voting securities carrying more than 10 per cent of the voting rights attached to all voting securities of the corporation for the time being outstanding;
  2. a partner of that person acting on behalf of the partnership of which they are partners;
  3. any trust or estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar capacity;
  4. any relative of such person who resides in the same home as that person, including his/her spouse, or his/her spouse who has the same home as such person;
  5. any person who resides in the same home as the person and to whom that person is married, or with whom that person is living in a conjugal relationship outside of marriage; or
  6. any relative of a person mentioned in clause (e) above who has the same home as such person;

but where the Board of Directors orders that two persons shall, or shall not, be deemed to be associates, then such order shall be determinative of their relationships in the application of By-laws, Rules and Forms, with respect to that Member;

“Public Director” means a director who is not:

  1. an officer (other than the Chair or a Vice-Chair) or an employee of the Corporation;
  2. a current partner, director, officer, employee or person acting in a similar capacity of, or the holder of a Significant Interest in:
    1. a Member;
    2. an associate of a Member; or
    3. an affiliate of a Member; or
  3. an associate of a partner, director, officer, employee or person acting in a similar capacity of, or the holder of a Significant Interest in, a Member.
  4. who is not a current director (other than a Public Director), officer or employee of, or of an associate or affiliate of:
    1. the MFDA;
    2. any protection or contingency fund in which Members (at the time the director holds the relevant office) are required to participate; or
    3. the Investment Funds Institute of Canada or the Investment Dealers Association of Canada;
  5. who is not a current director, partner, significant shareholder, officer, employee or agent of a Member, or of an associate or affiliate of a Member, of:
    1. the MFDA;
    2. any protection or contingency fund in which Members (at the time the director holds the relevant office) are required to participate; or
    3. the Investment Funds Institute of Canada or the Investment Dealers Association of Canada;
  6. who is not a current employee of a federal, provincial or territorial government or a current employee of an agency of the Crown in respect of such government;
  7. who is not a current member of the federal House of Commons or member of a provincial or territorial legislative assembly;
  8. who has not, in the two years prior to election as a Public Director, held a position described in (a)-(d) above;
  9. who is not:
    1. an individual who provides goods or services to and receives direct significant compensation from, or
    2. an individual who is a director, partner, significant shareholder, officer or employee of an entity that receives significant revenue from services the entity provides to, if such individual’s compensation from that entity is significantly affected by the services such individual provides to, the MFDA or any protection or contingency fund in which Members are required to participate, or a Member of the MFDA; and
  10. who is not a member of the immediate family of the persons listed in (a)-(f) above.

For the purposes of this definition:

  1. “significant compensation” and “significant revenue” means compensation or revenue the loss of which would have, or appear to have, a material impact on the individual or entity;
  2. “significant shareholder” means an individual who has an ownership interest in the voting securities of an entity, or who is a director, partner, officer, employee or agent of an entity that has an ownership interest in the voting securities of another entity, which voting securities in either case carry more than 10% of the voting rights attached to all voting securities for the time being outstanding.

“Significant Interest” means in respect of any person the holding, directly or indirectly, of the securities of such person carrying in aggregate 10% or more of the voting rights attached to all of the person’s outstanding voting securities.

3. Directors

3.2 COMPOSITION OF THE BOARD OF DIRECTORS

The Board of Directors shall be composed of 6 Public Directors, 6 Industry Directors and the President and Chief Executive Officer. The members of the Board of Directors (other than the President and Chief Executive Officer) shall collectively and over time be nominated and elected on the basis that there will be timely and appropriate regional representation on the Board of Directors of Members of the Corporation across Canada, provided that at any time (subject to the occurrence of vacancies) not less than 4 of the directors shall represent regions other than the Provinces of Ontario and Quebec. In addition, at any time (subject to the occurrence of vacancies) five of the Industry Directors shall be officers or employees of a Member of the Corporation or of an affiliate or associated corporation which is an associate of a Member. No Member, affiliate or associated corporation which is an associate of a Member shall have more than 1 director, officer, employee or other representative on the Board of Directors and, if such event should occur, the Board of Directors in its discretion may request the resignation of or remove as a director, any director or directors in order that the requirements of this section are satisfied. Each director shall be at least 18 years of age.

3.6 COMMITTEES

3.6.1 Governance Committee

The Board of Directors shall establish a Governance Committee composed of 2 Public Directors and 2 Industry Directors. The 2 Industry Director members of the Governance Committee shall be officers or employees of a Member of the Corporation or of an affiliate or associated corporation which is an associate of a Member. The Chair of the Governance Committee shall be 1 of the 2 Public Directors as selected by the Board of Directors. The Governance Committee shall be responsible for identifying and recommending to the Board of Directors Public and Industry Directors for election to the Board of Directors in accordance with the By-laws and the terms of reference adopted for the Governance Committee by the Board of Directors. In addition, the Governance Committee shall perform such other duties as the Board of Directors may delegate or direct from time to time. 1 Public Director and 1 Industry Director shall constitute a quorum of the Governance Committee.

3.6.2 Audit Committee

The Board of Directors shall establish an Audit Committee composed of 23 Public Directors and 12 Industry Directors. The Chair of the Audit Committee shall be 1 of the 23 Public Directors as selected by the Board of Directors. The Audit Committee shall review and report to the Board of Directors on the annual financial statements of the Corporation and shall perform such other duties as the Board of Directors may delegate or direct from time to time. 12 Public Directors and 1 Industry Director shall constitute a quorum of the Audit Committee.