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Bulletin #0606-P

Policy
For Distribution to Relevant Parties within your Firm

Approval of Phase 1 CRM2 Amendments to Rules 2.2.5 (Relationship Disclosure), 2.4.4 (Transaction Fees or Charges) and 5.4.2 (Trade Confirmations – Automatic Payment Plans)

Background

On March 28, 2013, the Canadian Securities Administrators (“CSA”) published Client Relationship Model Phase 2 (“CRM2”) amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) and the Companion Policy to the Instrument. The CRM2 amendments introduce requirements under NI 31-103 in the areas of client statements, charges and compensation disclosure and performance reporting. These amendments came into force on July 15, 2013. Transition periods of one, two or three years have been provided for most of the new requirements.

MFDA Conforming Amendments – Phase 1

Conforming amendments are required to MFDA Rules to make them consistent with requirements under NI 31-103. MFDA staff is addressing conforming amendments to MFDA Rules in two phases.

Phase 1 amendments relate to requirements under MFDA Rules 2.2.5 (Relationship Disclosure) and 2.4.4 (Transaction Fees or Charges). Conforming changes were also made to Rule 5.4.2 (Trade Confirmations – Automatic Payment Plans).

The securities regulatory authorities in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island and Saskatchewan (the “Recognizing Regulators”) have approved/not objected to these public interest amendments. The amendments to Rules 2.2.5, 2.4.4 and 5.4.2 have now received all requisite approvals and will come into effect on July 15, 2014.

The amendments to Rules 2.2.5, 2.4.4 and 5.4.2 are attached to this Bulletin as Schedules “A”, “B” and “C”, respectively.

Exemption from Similar Requirements under NI 31-103

The Recognizing Regulators have issued parallel orders that provide MFDA Member firms with relief from the relevant provisions of NI 31-103, provided that Members comply with corresponding MFDA requirements. The CSA have also published CSA Staff Notice 31-339 Omnibus/Blanket Orders Exempting IIROC and MFDA Registrants from Certain Provisions of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

To view CSA Staff Notice 31-339, please go to:

http://www.osc.gov.on.ca/documents/en/Securities-Category3/csa_20140529_31-339_omnibus-blanket-orders-iiroc.pdf

MFDA Conforming Amendments – Phase 2

Phase 2 CRM2 amendments will address requirements under NI 31-103 in the areas of client statements, charges and compensation disclosure and performance reporting. Client statement requirements are subject to a two year transition period (i.e. scheduled to come into force on July 15, 2015). Requirements in respect of charges and compensation disclosure and performance reporting are subject to a three year transition period (i.e. scheduled to come into force on July 15, 2016).

Under the Phase 2 amendments, conforming changes are required to MFDA Rules 2.8.3 (Rates of Return), 5.3 (Client Reporting) and 5.4 (Trade Confirmations). In early June, 2014, these conforming changes to MFDA Rules will be brought forward to the MFDA Board of Directors for approval. Following such approval, the proposed amendments will be submitted to the Recognizing Regulators for review and will, subsequently, be published for comment.

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SCHEDULE “A”

MFDA Rule 2.2.5

2.2.5 Relationship Disclosure. For each new account opened, the Member shall provide written disclosure to the client:

(a) describing the nature of the advisory relationship;

(b) describing the products and services offered by the Member;

(c) describing the Member’s procedures regarding the receipt and handling of client cash and cheques. In the case of a Level 2 dealer, the disclosure must include an explanation that all client cheques shall be payable to the issuer or carrying dealer, as applicable;

(d) describing the Member’s obligation to ensure that each order accepted or recommendation made for any account of a client is suitable for the client in accordance with Rule 2.2.1 and advising when the Member will assess the suitability of the investments in the client’s account;

(e) defining the various terms with respect to the know-your-client information collected by the Member and describing how this information will be used in assessing investments in the account;

(f) describing the content and frequency of reporting for the account; and

(g) describing the nature of the compensation that may be paid to the Member and referring the client to other sources for more specific information; and

(h) including a general explanation of how investment performance benchmarks might be used to assess the performance of a client’s investments and any options for benchmark information that might be available to clients by the Member.


SCHEDULE “B”

MFDA Rule 2.4.4

2.4.4 Transaction Fees or Charges. Prior to the acceptance of any order in respect of a transaction in a client account, the Member shall disclose to inform the client:

(a) of any sales charge, service charge or any other fees or charges to be deducted in respect of the transaction, or a reasonable estimate if the actual amount of the charges is not known to the Member at the time of the disclosure;

(b) in the case of a purchase to which deferred charges may apply, that the client might be required to pay a deferred sales charge on the subsequent sale of the security and the fee schedule that will apply; and

(c) whether the Member will receive trailing commissions in respect of the security.


SCHEDULE “C”

MFDA Rule 5.4.2

5.4.2 Automatic Payment Plans. Where a transaction relates to a client’s participation in an automatic payment plan that provides for systematic trading in the securities of a mutual fund on a monthly or more frequent basis, and the Member registers the mutual funds pursuant to the plan, the Member is required to send a trade confirmation for the initial transaction purchase only.