Amendments to General Notes and Definitions of the Joint Regulatory Financial Questionnaire and Report (Form 1)

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1 Contact: Sylvain Racine Manager, Regulatory Policy (416) For distribution to relevant parties within your firm BULLETIN #2630 September 27, 1999 By-Laws and Regulations Amendments to General Notes and Definitions of the Joint Regulatory Financial Questionnaire and Report (Form 1) The Board of Directors of the Association has approved the following attached amendments to the General Notes and Definitions to Form 1, to be effective October 1 st, 1999: Commissions Receivable Considered as an Allowable Asset The purpose of this amendment to the Notes and Instructions for Line 12 of Statement A to Form 1, is to expand the circumstances under which a Member firm may record the salesperson's portion of a commissions receivable balance as an allowable asset. Currently, the Notes and Instructions for Line 12 of Statement A of the JRFQ&R allow, in the case of commissions receivable from mutual funds, that the salespersons' portion of the commissions receivable be presented as an allowable asset, provided appropriate documentation has been received. The logic behind this exception is that if there is an agreement or written documentation between the Member firm and the salesperson that requires the Member firm to pay the salesperson's commission only when it is received from the mutual fund company, the commission liability to the salesperson is considered a limited recourse liability. On this basis, the salesperson's portion of any commissions receivable balance may be recorded as an allowable asset. This amendment expands the current exception treatment of mutual fund commissions receivable to allow the salesperson's portion of any type of commissions receivable to be reported as an allowable asset provided appropriate documentation has been received. Definition of "Acceptable Securities Locations" The purpose of this amendment to the definition of "Acceptable Securities Locations", as set out in the General Notes and Definitions to Form 1, is to permit all regulated entities (as defined in the General Notes and Definitions section of Form 1) to be considered acceptable securities locations. The current definition of "acceptable securities locations" sets out a list of entities that the Member may use as an acceptable securities location without capital impact, provided a custody agreement is executed. In many cases, this list is restrictive and in most instances this is necessary to ensure that securities held for Member are kept in safe custody. However, one such restriction essentially requires a securities dealer to be covered by either: The Canadian Investor Protection Fund ("CIPF"); or

2 The Securities Investor Protection Corporation ("SIPC") to be considered an acceptable securities location. The definition of regulated entities was recently amended (see Bulletin #2532, issued November 16, 1998) to include a set of standards to be met by the various exchanges or associations Members of the qualifying exchanges/associations to be considered as "regulated entities". One of these new standards is as follows: "1. The exchange or association maintains or is a Member of an investor protection regime equivalent to the Canadian Investor Protection Fund;" Therefore, under these new standards, in order to be considered a regulated entity, an entity must be a Member of an investor protection regime similar to CIPF. Thus, the existing requirement in the definition of acceptable securities locations that a securities dealer must be a Member of either CIPF or SIPC is no longer necessary. Consequently, this amendment permits that all regulated entities be considered acceptable securities locations and expands the number of securities locations to include futures dealers within North America and securities dealers outside of North America that otherwise qualify as regulated entities. Lyn M. Gilchrist Association Secretary

3 INVESTMENT DEALERS ASSOCIATION OF CANADA NOTES AND INSTRUCTIONS TO STATEMENT A OF FORM 1 THE BOARD OF DIRECTORS of the Investment Dealers Association of Canada hereby makes the following amendments to the By-laws, Regulations, Forms and Policies of the Association: 1. The Notes and Instructions to Line 12 of Statement A of Form 1 are repealed and replaced as follows: "Line 12 - In the case of introducing brokers (pursuant to an approved introducing/carrying broker agreement) unsecured balances receivable from their carrying brokers, such as net commissions and deposits in the form of cash, should be reported on this line. Unsecured balances should only be included to the extent they are not being used by the carrying broker to reduce client margin requirements. Securities on deposit (and related margin) should be included in balances reported on Inventory Schedule 2 and disclosed separately on line 11 of Schedule 2. In the case of the salespersons' portion of commissions and fees receivable, as recorded on line 22, to the extent that there is written documentation that the broker does not have a liability to pay the salespersons' commission until it is received, the salespersons' portion of the commission receivable is an allowable asset."

4 INVESTMENT DEALERS ASSOCIATION OF CANADA NOTES AND INSTRUCTIONS TO STATEMENT A OF FORM 1 THE BOARD OF DIRECTORS of the Investment Dealers Association of Canada hereby makes the following amendments to the By-laws, Regulations, Forms and Policies of the Association: 1. The Notes and Instructions to Line 12 of Statement A of Form 1 are repealed and replaced as follows: "Line 12 - In the case of introducing brokers (pursuant to an approved introducing/carrying broker agreement) unsecured balances receivable from their carrying brokers, such as net commissions and deposits in the form of cash, should be reported on this line. Unsecured balances should only be included to the extent they are not being used by the carrying broker to reduce client margin requirements. Securities on deposit (and related margin) should be included in balances reported on Inventory Schedule 2 and disclosed separately on line 11 of Schedule 2. In the case of commission receivables from mutual funds.the salespersons' portion of the commissions and fees receivable, as recorded on line 22, to the extent that there is written documentation that the broker does not have a liability to pay the salespersons' commission until it is received from the mutual fund company, the salespersons' portion of the commission receivable is an allowable asset."

5 INVESTMENT DEALERS ASSOCIATION OF CANADA AMENDMENT OF DEFINITION OF ACCEPTABLE SECURITIES LOCATIONS THE BOARD OF DIRECTORS of the Investment Dealers Association of Canada, hereby makes the following amendments to the By-laws, Regulations, Forms and Policies of the Association: 1. The definition of "acceptable securities locations" set out in the General Notes and Definitions to Form 1 is repealed and replaced as follows: (d) "acceptable securities locations" means those entities considered suitable to hold securities on behalf of a Member, for both inventory and client positions, without capital penalty, given that the locations meet the requirements outlined in the segregation bylaws, rules or regulations of the Joint Regulatory Bodies including, but not limited to, the requirement for a written custody agreement outlining the terms upon which such securities are deposited and including provisions that no use or disposition of the securities shall be made without the prior written consent of the Member and the securities can be delivered to the Member promptly on demand. The entities are as follows: 1. Depositories (a) (c) Canada The Canadian Depository for Securities Limited West Canada Depository Trust Company Trans Canada Options, Incorporated United States Depository Trust Company Pacific Securities Depository Trust Company Midwest Securities Trust Company Stock Clearing Corporation of Philadelphia Options Clearing Corporation Other Foreign Foreign securities depositories or clearing agencies incorporated or organized under the laws of the foreign country and operating a central system for handling securities or equivalent book-based entries in that country and subject to enabling legislation by a central government authority in the country of operation that provides for compliance and powers of enforcement over its Members. The SROs will maintain and regularly update a list of those foreign depositories or clearing agencies that comply with these criteria. 2. (a) Acceptable Institutions which in their normal course of business offer custodial security services; or Subsidiaries of Acceptable Institutions provided that each such subsidiary, together with the Acceptable Institution, has entered into a custodial agreement with the Member containing a legally enforceable indemnity by the Acceptable Institution in favour of the Member covering all losses, claims, damages, costs and liabilities in respect of securities and other property held for the Member and its clients at the subsidiary's location. 3. Acceptable Counterparties - with respect to security positions maintained as a book

6 entry of securities issued by the Acceptable Counterparty and for which the Acceptable Counterparty is unconditionally responsible. 4. Banks and Trust Companies otherwise classified as Acceptable Counterparties - with respect to securities for which they act as transfer agent (in such case, a written custody agreement is not required). 5. Mutual Funds or their Agents - with respect to security positions maintained as a book entry of securities issued by the mutual fund and for which the mutual fund is unconditionally responsible. 6. Regulated entities. 7. Foreign institutions and securities dealers that satisfy the following criteria: (a) the paid-up capital and surplus according to its most recent audited balance sheet is in excess of CDN $150 million as evidenced by the audited financial statements of such entity; in respect of which a foreign custodian certificate has been completed and signed in the prescribed form by the Member's board of directors or authorized committee thereof; provided that: (c) (d) a formal application in respect of each such foreign location is made by the Member to the relevant joint regulatory authority in the form of a letter enclosing the financial statements and certificate described above; and the Member reviews each such foreign location annually and files a foreign custodian certificate with the appropriate joint regulatory authority annually. and such other locations which have been approved as acceptable securities locations by the Joint Regulatory Body having prime jurisdiction over the Member.

7 INVESTMENT DEALERS ASSOCIATION OF CANADA AMENDMENT OF DEFINITION OF ACCEPTABLE SECURITIES LOCATIONS THE BOARD OF DIRECTORS of the Investment Dealers Association of Canada, hereby makes the following amendments to the By-laws, Regulations, Forms and Policies of the Association: 2. The definition of "acceptable securities locations" set out in the General Notes and Definitions to Form 1 is repealed and replaced as follows: (d) "acceptable securities locations" means those entities considered suitable to hold securities on behalf of a Member, for both inventory and client positions, without capital penalty, given that the locations meet the requirements outlined in the segregation bylaws, rules or regulations of the Joint Regulatory Bodies including, but not limited to, the requirement for a written custody agreement outlining the terms upon which such securities are deposited and including provisions that no use or disposition of the securities shall be made without the prior written consent of the Member and the securities can be delivered to the Member promptly on demand. The entities are as follows: 1. Depositories (a) (c) Canada The Canadian Depository for Securities Limited West Canada Depository Trust Company Trans Canada Options, Incorporated United States Depository Trust Company Pacific Securities Depository Trust Company Midwest Securities Trust Company Stock Clearing Corporation of Philadelphia Options Clearing Corporation Other Foreign Foreign securities depositories or clearing agencies incorporated or organized under the laws of the foreign country and operating a central system for handling securities or equivalent book-based entries in that country and subject to enabling legislation by a central government authority in the country of operation that provides for compliance and powers of enforcement over its members. The SROs will maintain and regularly update a list of those foreign depositories or clearing agencies that comply with these criteria. 2. (a) Acceptable Institutions which in their normal course of business offer custodial security services; or Subsidiaries of Acceptable Institutions provided that each such subsidiary, together with the Acceptable Institution, has entered into a custodial agreement with the Member containing a legally enforceable indemnity by the Acceptable Institution in favour of the member covering all losses, claims, damages, costs and liabilities in respect of securities and other property held for the member and its clients at the subsidiary's location. 3. Acceptable Counterparties - with respect to security positions maintained as a book

8 entry of securities issued by the Acceptable Counterparty and for which the Acceptable Counterparty is unconditionally responsible. 4. Banks and Trust Companies otherwise classified as Acceptable Counterparties - with respect to securities for which they act as transfer agent (in such case, a written custody agreement is not required). 5. Mutual Funds or their Agents - with respect to security positions maintained as a book entry of securities issued by the mutual fund and for which the mutual fund is unconditionally responsible. 6. Members covered by the Canadian Investor Protection Fund and brokers or dealers which are members of the Securities Investor Protection Corporation or members of a national securities exchange registered with the Securities and Exchange Commission, and which are required to comply with Regulation c3-3 made pursuant to the Securities Exchange Act of 1934 with respect to security positions held for the Member, provided that such locations are only acceptable for securities of each client of a Member to the extent that protection by SIPC or from any additional or substantially similar protection or insurance applies to the securities of each such client. Regulated entities. 7. Foreign institutions and securities dealers that satisfy the following criteria: (a) the paid-up capital and surplus according to its most recent audited balance sheet is in excess of CDN $150 million as evidenced by the audited financial statements of such entity; in respect of which a foreign custodian certificate has been completed and signed in the prescribed form by the Member's board of directors or authorized committee thereof; provided that: (c) (d) a formal application in respect of each such foreign location is made by the Member to the relevant joint regulatory authority in the form of a letter enclosing the financial statements and certificate described above; and the Member reviews each such foreign location annually and files a foreign custodian certificate with the appropriate joint regulatory authority annually. and such other locations which have been approved as acceptable securities locations by the Joint Regulatory Body having prime jurisdiction over the Member.