International Money Management Institute

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• International Money Management Institute
• February 5, 2009

Paul C. Bourque Senior Vice-President,
Enforcement, Policy Registration
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• IIROC Who We Are
• Supervision of Fee-based Accounts
• Financial Planning Rule
• Short Selling
• Client Relationship Model

3
Canadas Regulatory Landscape

• Investment Industry Regulatory Organization of
  Canada
• IIROC
• We are a self-regulatory organization.

4
IIROC A Snapshot

• IIROC is a non-profit, non-share corporation.
• Number of Dealer Members
• 215
• Number of Approved Persons
• 31,000
• Number of Marketplaces that have retained
• IIROC as their RSP
• 10

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Organization Structure

• Enforcement, Policy Registration
• Surveillance Compliance
• Finance Administration
• General Counsel Corporate Secretary
• Public Affairs
• Total staff
• 392

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IIROC Mandate

• IIROCs Mandate
• We set high quality regulatory and investment
  industry standards, protect investors and
  strengthen market integrity while maintaining
  efficient and competitive capital markets.

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IIROC What We Do

• Regulate business and trading conduct
• Monitor operational and financial adequacy
• Approve and register Dealer Members (including
  ATSs) and their partners, directors, officers
  and employees
• Set proficiency and education requirements for
  individuals
• Regulate ATS subscribers and access persons
  that participate directly in a Canadian
  marketplace which has contracted IIROC as their
  RSP

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Fee-based Accounts

• IIROC rules were written to supervise account
  transactions that generated commission revenue
• Rule 2500 Minimum Standards for Retail Account
  Supervision
• Member must develop supervisory policies for the
  review of accounts where no commission is
  generated (such as fee based accounts)
• Rule 1300 Discretionary and Managed Accounts
• Discretionary
• Unsolicited
• 12 months duration
• Managed Accounts
• Solicited
• Continuing
• Discretion exercised by a qualified Portfolio
  Manager

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Fee-based Accounts

• Two Basic Types

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Fee-based Accounts

• Decision-making vested in Appointee
• Appointee accountable for performance

• Affects critical supervisory assumptions
• Which developments might be significant?
• What will constitute a duly diligent follow-up?
• What skills are needed?
• What tools are needed?
• Do they currently exist?

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Fee-based Accounts

• Fee-based advisory relationship
• Remuneration Motivation
• Remuneration Service
• Service Motivation
• But what are those services, exactly?
• And wheres the evidence?

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Fee-based Accounts

• New basis, new problems
• Transaction-based supervisory systems no longer
  adequate
• Transaction-based sales/supervisory skills no
  longer adequate
• Activities not previously recorded and/or
  measured no longer off the radar

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Fee-based Accounts

• New problems
• Disclosure of Alternatives
• In-house transfers between identically-owned
  accounts
• Multiple accounts
• Double-dipping embedded product fees
• Inbound account transfers illiquid security
  valuation
• Account inactivity

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Fee-based Accounts

• New solutions require new standards
• The IDA (now IIROC) has assembled an industry
  working group to help end the compliance logjam
  by establishing viable and effective,
  principle-based standards.
• With the standards-gap filled, firms can fashion
  and implement solutions with greater certainty
  and the SRO can enforce compliance fairly and
  confidently.

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Proposed Financial Planning Rule

• Proposed rule features
• Defines financial planning broadly, but excludes
  advice directed primarily at making investment
  recommendations
• Comprehensive process of determining how clients
  can meet their financial goals
• Requires Dealer Members to have in place written
  policies for the supervision of employees and
  agents providing financial planning services
• Requires financial planners to meet a minimum
  proficiency standard

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Proposed Financial Planning Rule

• Rationale
• IIROC has a mandate to regulate all securities
  related activities of its members
• Securities related activities means acting as a
  securities dealer and carrying on any business
  which is incidental to or a necessary part of
  such activity
• To the extent financial planning activities
  involve investment products and investment advice
  is it a securities related activity
• Status
• Published for comment August 8, 2008 Comment
  period closed October 8, 2008
• Awaiting CSA approval

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Proposed Financial Planning Rule

• Comments received
• The most common comments received were as
• follows
• The exemption for advice primarily directed
  towards investment recommendations is too broad
  and unclear.
• Response If an employee or agent provides
  planning beyond simple investment
  recommendations, it will be deemed to be
  financial planning under the rule.

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Proposed Financial Planning Rule

• Comments received (continued)
• The rule will require Dealer Members to supervise
  non securities-related activities.
• Response Dealer Members will only be
  responsible for financial planning conducted
  through the Dealer Member by their employees or
  agents.

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Proposed Financial Planning Rule

• Comments received (continued)
• The proficiency standards set out in the
  guidelines are inconsistent and unequivalent to
  each other.
• Response The purpose of the rule and guidance
  is not to enumerate qualifications, but to
  require that financial planners possess minimum
  qualifications to provide financial planning
  advice. It is not the intent to weigh in on the
  relative merits of one designation or course of
  training over another.

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Short Sales and Failed Trades

• Naked Short Selling
• July 15, 2008 SEC Emergency Order temporarily
  imposed enhanced requirements on short sales in
  stocks of certain financial firms due to concerns
  about naked short selling based on unfounded
  rumours
• UMIR and NI 24-101 prohibit the entry of any
  order without a reasonable expectation of
  settling any trade that results from the
  execution of the order

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Short Sales and Failed Trades

• Naked Short Selling
• September 19th 2008 OSC issues Temporary Order
  prohibiting short sales in 13 inter-listed
  financial sector issuers to avoid regulatory
  arbitrage
• No evidence of a similar problem
• Manipulative naked short selling based on false
  rumours
• Relatively low level of failed trades and the
  number of failed trades as a of all trades has
  been falling

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Short Sales and Failed Trades

• Proposals Approved for immediate implementation
  October 2008
• Notice be provided to IIROC if, after the
  execution of a trade, the trade is varied (with
  respect to price, volume or settlement date) or
  cancelled
• Enable IIROC to designate particular securities
  or class of securities as being ineligible for
  short selling
• Define failed trade and require a report of a
  failed trade be made to IIROC if the fail is
  not resolved within 10 trading days following the
  original settlement date (3)

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Short Sales and Failed Trades

• Proposals Deferred
• Pre-borrow Requirement
• Dealer will not be able to enter a short sale for
  a client who has previously failed
• Dealer will not be able to enter a short sale for
  a stock the dealer has previously failed in
• Repeal of the restrictions on the price at which
  a short sale may be made
• IOSCO - Short Selling Task Force to report by
  spring 2009
• Incoming Chair of the SEC, Mary Schapiro favours
  restoration of the tick test

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Client Relationship Model

• Relationship Disclosure
• New disclosures
• A description of products and services offered
• A description of the account relationship
• A description of the process used by the Dealer
  Member used to assess investment suitability
• A description of the client account reporting the
  Dealer Member will provide (including performance
  reporting)
• Existing disclosures relating to conflicts,
  costs, account documents and complaint handling
  procedures can be incorporated in the
  relationship disclosure information by reference

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Client Relationship Model

• Conflicts
• If conflict cannot be avoided, all such conflicts
  must be disclosed and addressed in a manner that
  is consistent with the best interests of the
  client
• Immaterial conflict situations will be excluded
  from disclosure requirement where the client
  would not consider the conflict important
  either prior to account opening or prior to
  entering into a transaction

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Client Relationship Model

• Suitability
• Currently suitability only for trades accepted
  and recommendations made
• Account suitability review must be performed when
  certain trigger events occur transfer in,
  material change, new advisor
• After the performance of the proposed trigger
  event suitability review, the client must
  receive advice in response
• Performance reporting
• Security position cost disclosure - Individual
  position cost reporting to be original cost
  information and will continue to apply to all
  positions (both client and nominee named) on
  which the customer continues to receive
  compensation

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Client Relationship Model

• Performance reporting (continued)
• Account activity disclosure - annual disclosure
  of cumulative realized and unrealized income and
  capital gains on the account
• Account percentage return disclosure members
  must disclose whether they provide return
  information and, where provided, percentage
  return information must be calculated using a
  method acceptable to IIROC
• IIROC intends to continue to study the cost and
  implementation issues with the objective of
  requiring this information be provided to clients
• Status consideration for approval for
  publication for comment January 2008