A Practical Guide for Exempt A Practical Guide for Exempt Market DealersMarket Dealers

September 14, 2010September 14, 2010

Your PanelistsYour Panelists

Brian Prill – Partner, McLean & Kerr LLP; Brian Prill – Partner, McLean & Kerr LLP; President EMDAPresident EMDA

Ian Pember – Senior Vice President, Ian Pember – Senior Vice President, Administration and Compliance, Hillsdale Administration and Compliance, Hillsdale Investment Management Inc.; co-chair Investment Management Inc.; co-chair AIMA Canada Legal & Finance CommitteeAIMA Canada Legal & Finance Committee

David Gilkes – Vice President, Sutton Boyce David Gilkes – Vice President, Sutton Boyce Gilkes Regulatory Consulting Group; Gilkes Regulatory Consulting Group; Director EMDADirector EMDA

Marsha Gerhart – Counsel, Borden Ladner Marsha Gerhart – Counsel, Borden Ladner Gervais LLP; Director EMDAGervais LLP; Director EMDA

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Today’s discussionToday’s discussion

Discussion of practical issues facing EMDsDiscussion of practical issues facing EMDs• OverviewOverview

Filings – Sept. 28, 2010 DeadlineFilings – Sept. 28, 2010 Deadline UDP, CCO and Permitted IndividualsUDP, CCO and Permitted Individuals

• Conduct and compliance requirementsConduct and compliance requirements Capital and insuranceCapital and insurance Internal controls and complianceInternal controls and compliance

• Client relationshipsClient relationships

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What business can an EMD be in?What business can an EMD be in?

Prospectus exemptions• EMD’S may act as a dealer by trading in a

security that is distributed under an exemption from the prospectus requirements

NI-45-106 has 41 prospectus exemptions• 18 are transactions an EMD could potentially

act upon• Not restricted to accredited investors

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Who doesn’t need to be registered as Who doesn’t need to be registered as an EMD?an EMD?

““Northwestern” exemptionNorthwestern” exemption• Financial service providers cannot rely Financial service providers cannot rely

on exemptionon exemption PM who trades in proprietary non-PM who trades in proprietary non-

prospectus qualified investment prospectus qualified investment funds to managed accountfunds to managed account

International dealersInternational dealers

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What you need to fileWhat you need to file

Sept 28/2010 deadlineSept 28/2010 deadline• Firm registration form 33-109F6Firm registration form 33-109F6

Existing EMD’s in Ontario & Newfoundland Existing EMD’s in Ontario & Newfoundland file in other applicable jurisdictionsfile in other applicable jurisdictions

Firms in other jurisdictions acting as EMD’s Firms in other jurisdictions acting as EMD’s file to complete registrationfile to complete registration

• Individual registration form 33-109F4Individual registration form 33-109F4 Dealing reps, UDP and CCO - registrationDealing reps, UDP and CCO - registration Permitted individuals - information onlyPermitted individuals - information only Proficiency requirements for Dealing Reps Proficiency requirements for Dealing Reps

and CCOand CCO

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Ultimate designated person (UDP)Ultimate designated person (UDP)

Must be CEO of the company or the Must be CEO of the company or the registerable business unit or sole registerable business unit or sole proprietorproprietor

ResponsibilitiesResponsibilities• Supervise activities of the firm directed to Supervise activities of the firm directed to

ensuring compliance by firm & individualsensuring compliance by firm & individuals• Promote culture of compliancePromote culture of compliance

Access to Board required at all timesAccess to Board required at all times No prescribed proficiency requirementsNo prescribed proficiency requirements

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Chief Compliance Officer (CCO)Chief Compliance Officer (CCO)

Must be officer or partner of the company or Must be officer or partner of the company or sole proprietor (CCO & UDP can be same sole proprietor (CCO & UDP can be same person)person)

ResponsibilitiesResponsibilities• Establish & maintain policies and procedures to Establish & maintain policies and procedures to

ensure compliance of firm and individualsensure compliance of firm and individuals• Report to UDP Report to UDP • Access to and Annual Report to Board for Access to and Annual Report to Board for

purpose of assessing compliance by firm & purpose of assessing compliance by firm & individualsindividuals

Proficiency – EMP or CSE plus the PDOProficiency – EMP or CSE plus the PDO

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Who are Permitted Individuals?Who are Permitted Individuals?

Individuals who are not registered and Individuals who are not registered and who:who:• Are director, CEO, COO, CFO, (or Are director, CEO, COO, CFO, (or

perform those functions) orperform those functions) or• Have beneficial ownership, or control Have beneficial ownership, or control

over, > 10% of voting securities of a over, > 10% of voting securities of a firmfirm

Submit through NRD Form 33-109F4 Submit through NRD Form 33-109F4 within 7 days of appointmentwithin 7 days of appointment

No proficiency requirementsNo proficiency requirements

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What is your level of capital?What is your level of capital?

Capital requirementCapital requirement• Minimum required working capital is $50,000Minimum required working capital is $50,000• Cannot be less than zero for 2 consecutive Cannot be less than zero for 2 consecutive

days – if less than zero notify regulator asapdays – if less than zero notify regulator asap• Working capital calculated on unconsolidated Working capital calculated on unconsolidated

basis – Form 31-103F1basis – Form 31-103F1• Basically current assets less current liabilities, Basically current assets less current liabilities,

with adjustmentswith adjustments Warning! – If you are borderline this could Warning! – If you are borderline this could

require close monitoringrequire close monitoring

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How’s your insurance?How’s your insurance?

• Maintain bond insurance with specified Maintain bond insurance with specified clauses & double aggregate limitclauses & double aggregate limit

• Bond insurance – highest ofBond insurance – highest of Lesser of $50,000/employee or $200,000Lesser of $50,000/employee or $200,000 Lesser of 1% of total client assets under Lesser of 1% of total client assets under

management or $25mmmanagement or $25mm Lesser of 1% of dealer assets or $25mmLesser of 1% of dealer assets or $25mm Amount as determined by directorsAmount as determined by directors

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Financial reportingFinancial reporting

Capital requirement reportingCapital requirement reporting• Must file Form 31-103F1 annually with Must file Form 31-103F1 annually with

regulators within 90 days of year endregulators within 90 days of year end• Not need for EMDs to file interim Not need for EMDs to file interim

financials or interim Form 31-103F1financials or interim Form 31-103F1

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And more Financial ReportingAnd more Financial Reporting

Annual financial statementsAnnual financial statements• Must be prepared in accordance with Must be prepared in accordance with

GAAP (IFRS effective Jan 1/2011)GAAP (IFRS effective Jan 1/2011)• Standard audit opinion amended for Standard audit opinion amended for

non-consolidation if applicablenon-consolidation if applicable• Warning! – To control costs assess if Warning! – To control costs assess if

there is any requirement for audited there is any requirement for audited consolidatedconsolidated financial statements financial statements

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Internal controls & compliance are Internal controls & compliance are importantimportant

Internal controls & systemsInternal controls & systems• Do you have an adequate system of Do you have an adequate system of

controls & supervision to meet controls & supervision to meet regulatory requirements?regulatory requirements?

• Is your compliance system effective?Is your compliance system effective?• Do your records achieve the desired Do your records achieve the desired

regulatory outcome? regulatory outcome?

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How do you create an effective How do you create an effective compliance regime?compliance regime?

Some considerationsSome considerations• Determine resources available or requiredDetermine resources available or required• Establish a “Culture of Compliance” (“Tone at the top”)Establish a “Culture of Compliance” (“Tone at the top”)• Understand the applicable rules and regulationsUnderstand the applicable rules and regulations• Determine a framework for risk identification and Determine a framework for risk identification and

assessmentassessment• Determine the internal controls to be used to manage Determine the internal controls to be used to manage

risks – includes accountabilities and responsibilities risks – includes accountabilities and responsibilities (who, when, how)(who, when, how)

• Establish mechanisms for supervision and oversight Establish mechanisms for supervision and oversight (action and result)(action and result)

Management action in addressing mattersManagement action in addressing matters Reporting and escalationReporting and escalation

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Develop an effective Risk Assessment Develop an effective Risk Assessment FrameworkFramework

You cannot manage risks if they are not You cannot manage risks if they are not identifiedidentified• Identify the risks - Create a regulatory Identify the risks - Create a regulatory

summary, tailored to your firmsummary, tailored to your firm• Consider law firm checklists as a start pointConsider law firm checklists as a start point• Review regulatory commentaries or advisoriesReview regulatory commentaries or advisories• Keep up on developmentsKeep up on developments

• Categorize risks – e.g. reputational, Categorize risks – e.g. reputational, operational, regulatoryoperational, regulatory

• Assess potential impact – high, medium, lowAssess potential impact – high, medium, low• Determine response – accept, share, mitigate Determine response – accept, share, mitigate

& who is responsible?& who is responsible?

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Client Relationships - Things you must Client Relationships - Things you must tell your clients (in writing)tell your clients (in writing)

Relationship disclosure Relationship disclosure informationinformation• deliver to a client, deliver to a client, beforebefore any advice any advice

given or security purchased or sold, all given or security purchased or sold, all information that a reasonable investor information that a reasonable investor would consider important about would consider important about relationship (prescribed information)relationship (prescribed information)

• Then notify client on timely basis of any Then notify client on timely basis of any significant changes.significant changes.

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Do you know your client?Do you know your client?

KYC obligationsKYC obligations• Gatekeeper KYCGatekeeper KYC

Determine who is the client and who has Determine who is the client and who has responsibility for KYC & suitabilityresponsibility for KYC & suitability

Maintain a/c opening & client documentation and Maintain a/c opening & client documentation and make reasonable efforts to keep currentmake reasonable efforts to keep current

• Suitability KYCSuitability KYC Investment needs & objectivesInvestment needs & objectives Investment knowledge & experienceInvestment knowledge & experience Risk toleranceRisk tolerance Investment horizonInvestment horizon Income level & net worthIncome level & net worth

Do you know your product?Do you know your product?

Essential for suitability Essential for suitability Know features and risksKnow features and risks Due diligence in selection of issuerDue diligence in selection of issuer KYP is proposed as an amendment to KYP is proposed as an amendment to

the overarching proficiency the overarching proficiency requirement in NI 31-103requirement in NI 31-103

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Obligations differ for some clientsObligations differ for some clients

“ “Permitted Client” Permitted Client” • Governments, banks & trust companiesGovernments, banks & trust companies• Other Cdn registrants and funds managed or advised by Other Cdn registrants and funds managed or advised by

themthem• Pension funds or wholly owned subs regulated by OSFI Pension funds or wholly owned subs regulated by OSFI

or provinceor province• Individual with financial assets > $5mmIndividual with financial assets > $5mm• Person or company with net assets > $25mmPerson or company with net assets > $25mm

Permitted clients can waive certain Permitted clients can waive certain requirements (in writing)requirements (in writing)

Requirements N/A if client is registered Requirements N/A if client is registered firm, Cdn FI or Sched III bankfirm, Cdn FI or Sched III bank

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Conflicts of Interest – how will you Conflicts of Interest – how will you respond?respond?

Conflicts of interestConflicts of interest• Identify all current & potential material Identify all current & potential material

conflicts to client in timely mannerconflicts to client in timely manner• AvoidAvoid• RespondRespond• DiscloseDisclose

Related issuerRelated issuer Restrictions on managed account Restrictions on managed account

transactionstransactions

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Do you enter into referral Do you enter into referral arrangements?arrangements?

Referral arrangementsReferral arrangements• ““Referral fee” is any form of compensation paid for the Referral fee” is any form of compensation paid for the

referral of a client to or from a registrantreferral of a client to or from a registrant• ““Referral arrangement” is any arrangement agreeing to Referral arrangement” is any arrangement agreeing to

pay or receive a feepay or receive a fee• Must be a written agreement between registrant &

person or company making or receiving referral• Registrant making referral must take reasonable steps

to ensure that receiving company qualified, & registered if necessary, to provide services

Referral arrangementsReferral arrangements• Must disclose to client Must disclose to client beforebefore account opening or any account opening or any

servicesservices

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What happens when your client makes What happens when your client makes a complaint?a complaint?

• Document & effectively & fairly respond to Document & effectively & fairly respond to client complaints and have written policies and client complaints and have written policies and procedures in placeprocedures in place

• By Sept 28/11 ensure an independent dispute By Sept 28/11 ensure an independent dispute resolution or mediation service is made resolution or mediation service is made available, at firm’s expense, to clientsavailable, at firm’s expense, to clients

• When a complaint is received the client must When a complaint is received the client must be informed asap how to contact the service.be informed asap how to contact the service.

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Other things you must provideOther things you must provide

Trade confirmations & client statementsTrade confirmations & client statements• EMD that has acted on behalf of client for EMD that has acted on behalf of client for

purchase or sale of security must promptly purchase or sale of security must promptly deliver a written confirmation of the deliver a written confirmation of the transaction with specified informationtransaction with specified information

• EMD must deliver statement to client at least EMD must deliver statement to client at least once every 3 months, or for month in which once every 3 months, or for month in which transaction occurs (monthly if requested by transaction occurs (monthly if requested by client)client)

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A few things to rememberA few things to remember

Prohibition on lending, extending Prohibition on lending, extending credit or margin to a clientcredit or margin to a client

Any client assets held must be Any client assets held must be segregated and in trust for clientsegregated and in trust for client

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Looming deadlinesLooming deadlines

Sept 28/2010Sept 28/2010• File Form 33-109F6 to register as File Form 33-109F6 to register as

EMD in all applicable jurisdictionsEMD in all applicable jurisdictions• Dealing representatives must meet Dealing representatives must meet

proficiency requirementsproficiency requirements• Meet capital requirementsMeet capital requirements• Relationship disclosure information Relationship disclosure information

to be delivered to all clientsto be delivered to all clients

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Not so looming deadlineNot so looming deadline

Sept 28/2011Sept 28/2011• Independent dispute resolution or Independent dispute resolution or

mediation service must be in placemediation service must be in place

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Regulations to keep in mindRegulations to keep in mind

• NI 31-103 Registration Requirements NI 31-103 Registration Requirements • NI 33-109 Registration Information NI 33-109 Registration Information

RequirementsRequirements• NI 45-106 Prospectus and Registration NI 45-106 Prospectus and Registration

ExemptionsExemptions• NI 81-102 Mutual Funds and NI 81-107 NI 81-102 Mutual Funds and NI 81-107

Independent Review Committee for Investment Independent Review Committee for Investment FundsFunds

• NI 23-101 Trading RulesNI 23-101 Trading Rules• NI 23-102 Use of Client Brokerage NI 23-102 Use of Client Brokerage

Commissions as Payment for Order Execution Commissions as Payment for Order Execution Services or Research ServicesServices or Research Services