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Bulletin #0637-P

For further information, please contact:

Aamir Mirza
Senior Legal and Policy Counsel
Policy
For Distribution to Relevant Parties within your Firm

Approval of Housekeeping Amendments to MFDA Rule 2.4.2 (Referral Arrangements)

Background

On September 28, 2009 National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) came into force. NI 31-103 introduced new requirements in the area of referral arrangements. Referral arrangement requirements under NI 31-103 superceded requirements under MFDA Rule 2.4.2.

Changes were required to Rule 2.4.2 to ensure that it was consistent with similar requirements under NI 31-103. These changes were housekeeping in nature and directly adopt referral arrangement requirements under the Instrument. On March 19, 2015, the Recognizing Regulators published a Notice in which they approved / did not object to these housekeeping amendments to Rule 2.4.2.

A blacklined version of Rule 2.4.2, that shows changes made to the original Rule, is attached as Schedule “A” to this Bulletin.

To view the text of Rule 2.4.2, as revised, please go to: https://mfda.ca/regulation/rules/RulesApr-8-15.pdf

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Schedule “A”

2.4.2 Referral Arrangements

  1. Definitions. For the purpose of this Rule 2.4.2:
    1. “client” includes a prospective client;
    2. “referral arrangement” means any arrangement in which a Member or Approved Person agrees to pay or receive a referral fee; and
    3. “referral fee” means any form of compensation, direct or indirect, paid for the referral of a client to or from a Member or Approved Person.
    1. a “referral arrangement” is an arrangement whereby a Member is paid or pays a fee, including fees based on commissions or sharing a commission, for the referral of a client to or from another person; and
    2. a referral arrangement does not include any payment to a third party service provider where the service provider has no direct contact with clients and where the services do not constitute securities related business.
  2. Permitted Referral Arrangements. A Member or Approved Person must not participate in a referral arrangement with another person or company unless: Referral arrangements may only be entered into on the following basis:
    1. before a client is referred by or to the Member or Approved Person, the terms of the referral arrangement are set out in a written agreement between the Member and the person or company; the referral arrangement is only between a Member and another Member or between a Member and an entity that is (A) licensed or registered in another category pursuant to applicable securities legislation, (B) a Canadian financial institution for the purposes of National Instrument 14-101, (C) insurance agents or brokers, or (D) subject to such other regulatory system as may be prescribed by the Corporation;
    2. the Member records all referral fees; and there is a written agreement governing the referral arrangement prior to implementation;
    3. the Member or Approved Person ensures that the information prescribed under Rule 2.4.2(d)(i) is provided to the client in writing before the party receiving the referral either opens an account for the client or provides services to the client. all fees or other form of compensation paid as part of the referral arrangement, to or by the Member, must be recorded on the books and records of the Member; and
    4. written disclosure of referral arrangements must be made to clients prior to any transactions taking place. The disclosure document must include an explanation or an example of how the referral fee is calculated, the name of the parties receiving and paying the fee, and a statement that it is illegal for the party receiving the fee to trade or advise in respect of securities if it is not duly licensed or registered under applicable securities legislation to so trade or advise.
  3. Verifying the Qualifications of the Person or Company Receiving the Referral. A Member or Approved Person must not refer a client to another person or company unless the Member first takes reasonable steps to satisfy itself that the person or company has the appropriate qualifications to provide the services, and if applicable, is registered to provide those services.
  4. Disclosing Referral Arrangements to Clients
    1. The written disclosure of the referral arrangement required under Rule 2.4.2(b)(iii) must include the following:
      1. the name of each party to the agreement referred to under Rule 2.4.2(b)(i);
      2. the purpose and material terms of the agreement, including the nature of the services to be provided by each party;
      3. any conflicts of interest resulting from the relationship between the parties to the agreement and from any other element of the referral arrangement;
      4. the method of calculating the referral fee and, to the extent possible, the amount of the fee;
      5. the category of registration of each registrant that is a party to the agreement with a description of the activities that the registrant is authorized to engage in under that category and, giving consideration to the nature of the referral, the activities that the registrant is not permitted to engage in;
      6. if a referral is made to a registrant, a statement that all activity requiring registration resulting from the referral arrangement will be provided by the registrant receiving the referral; and
      7. any other information that a reasonable client would consider important in evaluating the referral arrangement.
    2. If there is a change to the information set out under Rule 2.4.2(d)(i), the Member or Approved Person must ensure that written disclosure of that change is provided to each client affected by the change as soon as possible and no later than the 30th day before the date on which a referral fee is next paid or received.