Re: Re Publication of Proposed IIROC Dealer Member Plain Language Rule (PLR) Book

Transcription

1 Via July 8, 2016 Darshna Amin Senior Counsel, Member Regulation Policy Investment Industry Regulatory Organization of Canada Suite 2000, 121 King Street West Toronto, Ontario, M5H 3T9 Market Regulation Ontario Securities Commission 19th Floor, Box Queen Street West Toronto, Ontario, M5H 3S8 Dear Sirs/Mesdames: Re: Re Publication of Proposed IIROC Dealer Member Plain Language Rule (PLR) Book We are writing in response to a request for comments on the IIROC Notice Re Publication of Proposed IIROC Dealer Member Plain Language Rule Book ( PLR Project ) published on March 10, This letter is submitted on behalf of RBC Dominion Securities Inc. (both the Institutional and Retail divisions) and RBC Direct Investing Inc. We appreciate the opportunity to provide our comments related to the PLR Project. We have also assisted with the preparation of IIAC s comment letter, and in addition to the comments below, we support the comments provided by IIAC on behalf of its members. General Comments We regard the project of consolidating existing rules into a single IIROC Rule Book as a unique opportunity for the regulator and registrants to review the existing regulatory framework in its entirety. While we recognize the magnitude of the undertaking and the need to proceed in phases, we are concerned by the fact that no guidance has been published at this time. This is especially of importance in the instances of substantive changes to the existing or new Dealer Member Rules (e.g. Rule Managing Significant Areas of Risk). We strongly urge IIROC to prioritize publication of new or revised guidance documents for public comments as part of the process to finalize the single IIROC Rule Book. Further, for changes that are substantive, IIROC should publish these changes separately from the PLR project, with an appropriate transition period, to allow Dealer Members the opportunity to fully consider and provide comments on the effects and impact of these changes. Alternately, we recommend transition periods for implementation of material rule changes in order to allow industry consultation and development of implementation plans (e.g. supervisory, system or technological changes or upgrades). 1

2 Standards of Conduct Section 1402(2) under Rule 1400 Standards of Conduct appears to have broadened the scope of business conduct that is unbecoming or detrimental to the public interest. Specifically, Rule 1402(2) provides that the scope now includes business conduct that is (i) negligent, (ii) fails to comply with a legal, regulatory, contractual, or other obligation, and (iii) displays an unreasonable departure from standards that are expected to be observed by a Regulated Person. We believe that IIROC should provide additional clarification to Dealer Members by way of guidance regarding the types of contractual obligations or standards that will attract liability. Managing Significant Areas of Risk We recognize that one of the objectives of the PLR Project is to align IIROC rules with National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations ( NI ). As stated in the IIROC Notice related to the PLR Project, conforming amendments to NI include allocating responsibility for key areas of risk to an Approved Person within the Dealer Member. Rule 1500 defines significant area of risk for the 3000 and 4000 series of rules as a function, process or activity within a Dealer Member in which a failure to mitigate or control risk could lead to material harm to the Dealer Member s liquidity, solvency, operational capabilities, clients, client assets and other client positions. While Rule 1500 provides several examples of significant areas of risk, the scope is not limited and we recommend that IIROC provide additional guidance as to what would constitute material harm. Additionally, Rule 1503(3) proposes that the Executive s or Executives responsibility in managing significant areas of risk must include in their review and approval of any changes to the policies and procedures that are used to manage the significant area of risk. Clarification is required regarding the expectations related to the review and approval of any changes to policies and procedures. We recommend that a Dealer Member should be permitted to apply a materiality threshold where only significant changes to policies and procedures would be subject to Executive approval. Arrangements between Dealer Member and a Foreign Affiliate Dealer We note that the new Rule 2485 Agreements that may be executed with a foreign affiliate requires a formal introducing broker/carrying broker agreement type (i.e. introducing Type 1, Type 2, Type 3 or Type 4 arrangements). Current IIROC Rule 35.6 allows for exemptions of arrangements between a Dealer Member and its foreign affiliate pursuant to which the Dealer Member carries accounts of the foreign affiliate or its clients subject to certain criteria. We would appreciate clarification on whether members that have obtained exemptions under the existing regime will be grandfathered. As well, we note that certain business arrangements with foreign affiliates may not fit under the introducing types set out in sections 2470 through 2478, in which case an exemption might be sought. It would be helpful if IIROC confirms that exemption requests would still be considered in the context of alternative back office arrangement with foreign affiliates Registration and Proficiency Related Matters As part of the PLR Project, we note that IIROC has re-introduced Portfolio Manager and Associate Portfolio Manager as formal categories of approval for individuals providing discretionary management for managed accounts. Additionally, IIROC has proposed amendments to the proficiency and experience requirement for both Portfolio Manager and Associate Portfolio Manager. The proposed experience requirement for approval as a Portfolio Manager or Associate Portfolio Manager outlined in Rule 2600 references relevant investment management experience acceptable to IIROC. With the proposed changes to the individual categories of Portfolio Manager and Associate Portfolio Manager, we recommend that IIROC publish guidance for Dealer Members on what IIROC would consider as relevant investment management experience including the factors that IIROC would consider acceptable when assessing an individual s relevant investment management experience. 2

3 Rule 2600 sets out the minimum education and experience requirements for individuals requiring IIROC approval. We note that there have been a number of changes to the proficiency requirements for Supervisors and Designated Supervisors. The proposed changes to Rule 2600 require that a Supervisor responsible for the supervision of Retail or Institutional Registered Representatives complete the Effective Management Seminar ( EMS ). Historically, the EMS has been a requirement for Supervisors responsible for Registered Representatives servicing retail clients. Based on the proposed amendments, it is unclear whether the content of the EMS has been modified to deal with institutional matters or whether it is considered a professional development course. While we do not object to introducing a new course requirement for Supervisors responsible for the supervision of Registered Representatives operating in an institutional environment, we believe that the content of the course should be reviewed to ensure that the material remains relevant for both the retail and institutional segments of the marketplace. The PLR Project also introduces new proficiency, experience and continuing education requirements for both the Designated Supervisor responsible for the pre-approval of advertising, sales literature and correspondence and the Designated Supervisor responsible for the supervision of research reports. We are concerned with the experience requirements outlined in proposed Rule 2600 as it relates to the Designated Supervisor responsible for the supervision of research reports. More specifically, proposed Rule 2600 indicates that the Designated Supervisor responsible for research reports must be a Director, Partner, Executive and/or Corporate Officer. We believe that individuals involved in the mind and management of a Dealer Member are generally not the same individuals who would be involved in the review and approval of research reports. We recommend that proposed Rule 2600 should provide flexibility as to whether the Designated Supervisor responsible for research reports should be a Director, Partner, Executive or Corporate Officer of the Dealer Member. Section 2603 of Rule 2600 indicates that individuals approved as of the effective date of the PLR Rule are exempt from any new proficiency requirements introduced in the Rule provided the person continues in the same role. The IIROC Notice related to the PLR Project advises that section 2603 is intended to clarify that individuals approved as of the date of the effective change of the PLR Rule, will not be subject to the new proficiency or experience requirements, where applicable, provided they continue in the same role. We recommend that IIROC amend Section 2603 to reflect IIROC s intention, as stated in the PLR Notice, to exempt individuals from not only the proficiency requirements but also the experience requirements. Continuing Education Requirements One of the more substantive changes being proposed by IIROC as part of the PLR Project is a change to the continuing education requirements for Approved Persons, more specifically the length of the cycle from three to two years. While we do not object to this change, we would recommend that IIROC ensure that an appropriate transition period is in place to allow Dealer Members to implement the necessary technological and procedural changes related to the length of the continuing education cycle. Further to our comments above, Section 2658(1) indicates that an Approved Person enters the current continuing education program upon approval unless the approval is within six months of the end of the current cycle then the continuing education requirements commence in the next cycle. While we support this approach for those individuals who are approved within the last six months of the end of the current cycle, we believe that IIROC should also consider pro-rating the continuing education credits for those individuals who are approved within the first half of the second year of the cycle since IIROC has proposed to eliminate the current entry requirements. By not pro-rating continuing education requirements, we believe those individuals who become newly registered in the first few months of the second year of the current cycle may be at a disadvantage over those who are approved in the second half of the second year of the cycle. 3

4 Managed Accounts Conflict of Interest Rule 3284(3) as currently drafted prohibits transactions between a Portfolio Manager (PM), an Associate Portfolio Manager (APM) or a Dealer Member and account of a PM, an APM or an associate of a PM or an APM without written consent of the client. We believe that this is a drafting error, and that the intent was to prohibit transactions between a client managed account and a responsible person, or an associate of a responsible person without client consent on a transaction-by-transaction basis. We further submit that the language from Section (1) - knowingly permit or arrange any - should also be incorporated into Section (3) so that its application is limited to intentional trades. Client Priority Rule 3503 Sales Practices, section 3503 Client priority states that a Dealer Member must give priority to client orders over all other orders for the same security at the same price. The proposed language is overly broad and potentially conflicts with UMIR, which, for example, currently provides for an exception of client consent, or of trading in managed accounts of clients and employees managed by the same person. Additional clarifications are requested to ensure that the exceptions currently provided for under UMIR are accommodated in the rule re-write process. Client Complaints Proposed Rule 3722 Handling Client Complaints specifies that complaints must be handled by a Supervisor and that the Dealer Member must appoint an individual who is a Supervisor to act as the designated complaints officer. Currently, Rule 2500B(3) indicates that the Dealer Member must appoint an individual to act as the designated complaints officer. We believe that IIROC should provide Dealer Members with the flexibility to appoint either a business Supervisor or a Compliance representative who has the experience and authority to oversee the compliant handing process to act as a liaison with IIROC. By allowing Dealers Members the ability to appoint a Compliance representative, we believe that this would further ensure that IIROC s expectations are being met as it relates to a Dealer Member s obligation to independently evaluate and investigate client complaints, specifically where a client complaint alleges misconduct. Supervision Proposed Rule 3901, which is the overview of the series of supervision rules, provides that Dealer Members have an obligation to fully and properly supervise its business and operations. Additional clarification should be provided to Dealer Members as to what fully and properly means. Proposed Rule 3905(5) indicates that a Dealer Member must take reasonable steps to ensure that all of its Supervisors and Executives are fully proficient and understand the products that individuals under their supervision trade in or advise on, as well as the services these individuals provide, to the degree necessary to properly supervise those individuals. Although this requirement previously existed, it only applied to Supervisors. The extent to which Executives will need to understand products and services in order to discharge this responsibility is currently unclear. Proposed Rule 3980 outlines that Dealer Members who provide order execution-only accounts must have written policies, procedures and systems to review customer trading and accounts based on the concerns listed in Rule 3900 other than those relating to suitability requirements. As drafted, it is unclear whether Dealer Members have an obligation to monitor order execution-only accounts for the concerns listed in Rule 3945, which includes issues such as undue concentration, excessive trading activity and inappropriate/high-risk trading strategies. These concerns should not apply to order execution-only accounts and we request clarification of this in Rule

5 Record Keeping and Record Retention Requirements Proposed Section 3220(4) indicates that a Dealer Member must maintain a record of persons with trading authorizations over one or more client account and must ensure that such record is sufficient to allow the Dealer Member to identify any persons with trading authorization for multiple clients or client accounts. We note that the IIROC Notice related to the PLR Project clarified that the purpose of this rule is to allow Dealer Members to identify anyone who may be carrying out registerable activities without being appropriately registered. Although, we do not object to the proposed requirement, we believe that IIROC should consider limiting the scope to persons with trading authorization over client accounts that are unrelated to the client rather than of all persons. Alternatively we would suggest that IIROC consider amending the requirement to include a threshold where a Dealer Member would be required to maintain a record of persons with trading authorization over five or more accounts. Proposed Rule 3803 specifies general requirements for record retention periods which include a requirement that Dealer Members retain copies of all records required under the IIROC requirements, in an accessible form, for a minimum of seven years. Since many of the sections in the proposed rule book do not include specific record retention requirements, application of the general provision in Rule 3803 presents a significant change in record retention practices. For example, current rule 29.7(5) which applies to all advertisements, sales literature and related documents requires retention of two years from the date of creation and all correspondence and related documents for a period of five years from the date of creation. Additional clarification should be provided to Dealer Members regarding the practical implications related to the proposed general retention requirement and how it would reconcile with existing record retention provisions. ******** Thank you for the opportunity to express our views and recommendations regarding the PLR Project. Should you require any further information or have any concerns regarding the foregoing, please do not hesitate to contact us. Kevin Bresler Kevin Bresler Chief Compliance Officer, RBC Direct Investing Inc. Nick Cardinale Nick Cardinale Chief Compliance Officer, RBC Dominion Securities Inc. (Retail) Kelley Hoffer Kelley Hoffer Chief Compliance Officer, RBC Dominion Securities Inc. (Institutional) 5