IIAC Activity Update April Proposed Guidance on Short Sale and Short Marking Exempt Order Designations

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1 IIAC Activity Update April 2012 CSA - SRO Issues CRM and Performance Reporting See Operational Assistance Best Practices and Tools below Proposed Guidance on Short Sale and Short Marking Exempt Order Designations The Association formed a working group to respond to IIROC s guidance in respect to the recently released Short Sale Rule. We are seeking further guidance on matters related to pre-borrowing securities and the means of tracking institutional clients trading patterns to identify non-directional trading. Transparency of Short Selling and Failed Trades An IIAC working group is reviewing the Joint CSA/IIROC proposals relating to transparency of short selling and failed trades. IIAC Working Group on Enforcement-Related Rules The IIAC has formed a Working Group to prepare a response to the request for comments by IIROC on its proposed Enforcement-Related Rules. These rules encompass changes to the current enforcement, procedural, examination and approval rules. Comments are due June 21, Exempt Market Dealer Registration The Association worked with IIROC to provide input to the CSA on changes to the EMD framework to ensure EMDs are not undertaking investment dealer functions without proper IIROC registration. IIAC recommended that the CSA remove the ability for EMDs to conduct trading in the secondary market, and to restrict exempt distributions such that EMDs can only deal with institutional clients. Retail clients must be afforded the protection of an IIROC dealer. 1

2 Minimum Amount and Accredited Investor Exemptions The Association responded to the CSA Request for Comments on the Minimum Amount and Accredited Investor prospectus exemptions. Our response supported the retention of the existing exemptions. However, in light of recent reviews showing that EMDs and other non IIROC dealers are not consistently applying KYC or suitability reviews, or undertaking due diligence to ensure that clients are eligible to use the exemptions, the Association recommended that the exemptions only be available to retail clients purchasing through an IIROC dealer. Proposed Pre-Marketing Rules for Prospectus Distributions IIAC responded to the CSA proposals that are intended to increase the range of permissible premarketing and marketing activities in connection with prospectus offerings, and clarify existing rules. We noted that although most of the amendments are helpful, we have concerns about certain provisions that create burdens without commensurate investor protections. Market-Wide Circuit Breakers for the Canadian Marketplace The Association responded to the IIROC Request for Comments respecting the imposition of new market-wide circuit breakers that correspond to proposed new circuit breakers for the US marketplace. In general, we favoured the simplicity and predictability of continuing to tie market halts to the US thresholds. Our submission included recommendations for situations where the US market is closed, which requires an appropriate means of determining the level of Canadian-only circuit breakers. Point of Sale Stage 2 The CSA published for Comment Stage 2 for Point of Sale Disclosure for Mutual Funds. Stage 2 is an interim stage which proposes that the fund facts document be provided to investors in place of a prospectus which is currently required. The IIAC Point of Sale Working Group submitted a comment letter which generally supports Stage 2 but recommended that the documents which can be attached to or bound with the fund facts document be increased as the proposal severely limits what can be attached. The IIAC continues to have concerns with Stage 3 of the initiative with respect to delivery at or before the point of sale and continues to offer support to the CSA in finding a solution to the issues. IIROC Rule Re-Write Proposed Rule 7200 IIAC has provided comments to IIROC on their proposed changes to existing Debt Market Rules under their plain-language re-write project. While IIROC s proposed Rule does not contain substantive revisions, IIAC expressed concern that some of the language changes may create new obligations for IIAC Members contrary to IIROC s stated objective 2

3 Ombudsman Process IIAC, along with members of the Canadian Bankers Association and the Investment Fund Institute of Canada, continue to work with OBSI and the regulators in respect of specific issues affecting industry confidence in the OBSI structure and operations. Our working group has developed a response to the recommendations contained in the independent report commissioned to review OBSI s structure and operations, and are waiting for OBSI and the regulators to respond. We continue to provide input on ongoing budget, planning and operational issues, including loss calculation methodology Montreal Exchange/Bourse Regulatory Division (MX-R) Large Open Position Reporting (LOPR) The MX-R mandated LOPR implementation on July 25, 2011 despite members concerns with privacy matters, confidentiality of the information being transmitted, systems and operational issues and tight implementation date. IIAC staff, on behalf of the LOPR Working Group, sent two formal letters to the MX, requesting changes. Following frequent meetings and correspondence, IIAC was successful in deferring implementation but significant privacy and systems/operational issues remain, especially an 8:00 a.m. reporting time and account data aggregation. As well, IIAC is now working with the TMX Group IT department to address some possible systems fixes. Following a further meeting with the Regulatory Division in February, IIAC know understands that when notice of implementation is given again, it will provide 90 days notice (up from 30 and later 60 days). We have also informed the Autorité de marches financiers that there are outstanding issues. Cross-Border Settlement and Clearing Issues IIAC, together with legal advisors, Arnold & Porter LLP, and working with representatives of our member firms, succeeded in obtaining a carve out to FINRA Rule 1230 (b)(6) for DAP institutional transactions involving foreign securities in foreign markets. This exemption from Rule 1230 (b)(6) came into effect on October 17, The Association and our legal advisors continue in discussion with FINRA and the SEC to clarify the cross-border clearing and settlement arrangements that are in place for Canadian securities transactions with institutional clients. Government and Tax Issues Retirement Savings Reform Pooled Registered Pension Plans (PRPPs) In late 2011, the Federal Government released draft Income Tax Legislation for comment and introduced Bill C-25 (the PRPP Act ) in the House of Commons. This federal legislation would enable federally regulated PRPPs. It is anticipated that provincial legislation will be tabled by mid- 2012, and that both federal and provincial regulations will be finalized by the end of While supposed to target those without workplace pensions and retirement savings, PRPPs may accept transfers from RRSPs and other pension plans, which has led to some concerns. IIAC will continue to comment on the legislative process to ensure a level playing field between registered products and PRPPs and other registered pension plans and also between IIAC members and other types of financial institutions. IIAC submitted a further letter to the Finance Department on February 16 and to the House of Commons Finance Committee on March 5, 2012, arguing the need for flexibility and a level playing field between tax-advantaged retirement products. 3

4 Anti-Money Laundering Consultation Papers The Department of Finance has released two Consultation Papers relating to AML. The first paper was released in November 2011 surrounding the regulations with respect to Ascertaining Identity. The IIAC submitted its comments in December, In December 2011, the second consultation paper was issued seeking views on various proposals for strengthening Canada s AML and ATF Regime. The IIAC s AML Sub-Committee submitted a response on February 29, In March 2012, the IIAC met with the Department of Finance to continue to request an exemption from the recordkeeping and identity ascertaining requirements for foreign regulated entities. The IIAC also made a similar request in March 2012 before the Standing Senate Committee on Banking, Trade and Commerce. Federal Red Tape Reduction Commission In September 2011, the IIAC participated in a roundtable organized by the Red Tape Reduction Commission to provide additional feedback on the points outlined the Commission s Fall 2011 interim report entitled What We Heard.. A final report was tabled in January 2012 reflecting some of IIAC s recommendations. The IIAC will use the report to press for a reduction in federal red tape, mostly in the area of the Canada Revenue Agency. IIAC met with the Minister of Revenue on March 1 and is following up on a number of initiatives. Budget Matters IIAC attended the lock-ups and issued media releases with respect to the B.C., Quebec, Ontario and federal budgets. IIAC also provided summaries of budget measures relevant to members business. Mitigating RRSP/RRIF Anti-Avoidance Rules The March 22, 2011 federal budget announced the government s intention to replicate some of the anti-avoidance aspects of TFSA rules to RRSPs and RRIFs. The industry identified significant problems that the amendments will cause IIAC members and their clients. IIAC and members e have written to and spoke with Finance and CRA on multiple occasions. IIAC is pursuing additional grandfathering and administrative relief for members and their clients as problems and potential issues continue to be raised. CRA Forms NR301, 302 and 303 Implementation IIAC wrote to the CRA to request an 18-month delay in the required implementation of new nonresident reporting requirements relating to forms NR301, NR302, and NR303 Declaration of eligibility for benefits under a tax treaty for a non-resident taxpayer, a partnership with non-resident partners and a hybrid entity respectively. Non-resident recipients of certain types of payments made by a resident of Canada are required to provide the payor with the applicable form within a transitional period ending or, if the forms were not used, each payor must have or obtain recent and sufficient information by December 31, IIAC obtained transitional relief for members until December 31, 2012 and is holding a videoconference meeting with the CRA on April 12. 4

5 Goods and Services Tax Change: Finders Fees May Be Taxable In February 2011, the Canada Revenue Agency (CRA) issued updated guidance Tax Interpretation Bulletin (TIB) B-105 replacing the June 2010 GST/HST Notice 250 and the much longer-standing Policy 239 regarding the arranging for clause in the Excise Tax Act definition of financial service. One of two amendments in TIB B-105 was to tax finders fees, long treated as exempt by the industry. IIAC has sent a response to the CRA arguing for confirmation of the exempt treatment of finders fees for non-brokered private placements and, if not, for acceptance that the change is effective only as of February CRA has confirmed receipt of our letter; a response is expected in late 2012 or early Goods and Services Tax/HST Review The federal government began work, once the Ontario and B.C. harmonized sales taxes were implemented, on the application of GST to financial services, which has gone unreviewed in the 20 years since the GST s inception. It now appears that an expected discussion paper on a number of issues will not be published, however, the Finance Minister is still being pressed by the fund industry for some relief from the heavier taxation of fund products through the virtually full taxation of the MER. IIAC continues to monitor the issue. Other value-added tax issues being monitored to determine the implications for the securities industry are: Full harmonization of the sales tax in Quebec with the federal GST, given the federal promise to provide Quebec with the same $1-$2 billion incentive for harmonizing that other harmonizing provinces had received. This would mean that the current zero-rating of financial services with a compensatory tax instead will likely be superseded by exempt or taxable treatment as in Ontario. A reversal of sales tax harmonization in B.C. due to the outcome of the recent provincial referendum in that province. U.S. Tax Reporting and Withholding IIAC continues to participate in a joint industry association working group (with CBA, IFIC and CLHIA) to provide the Canadian Department of Finance with proposals on possible Intergovernmental Agreements to implement FATCA. The joint association working group will also be drafting a Canadian financial industry response to the proposed FATCA regulations released for comment on February 8. IIAC s FATCA Capital Markets Working Group has made a number of submissions to Treasury and the IRS outlining the impact that FATCA will have on OTC derivatives and other payments made pursuant to master agreements, as well as securities lending. IIAC has asked for an extension of the March 18, 2012 grandfathering date in the FATCA legislation, limiting its impact on pre-existing agreements. This working group will also be submitting comments on the proposed regulations, specifically on issues relating to capital markets businesses. 5

6 Do Not Legislation The Association submitted a response in respect of the proposed federal and CRTC regulations to Bill C-28 Fighting Internet and Wireless Spam Act. The Act, which was re-introduced last spring, could drastically limit the ability of investment advisors to contact potential clients, including those who have been referred by personal contacts and existing clients. The Regulations also fail to take into account the use of texting, instant messaging, and social media as accepted business communication vehicles. The Regulations were withdrawn pending further consultation with industry. The CRTC Regulations have been re-released, and the Industry Canada Regulations are expected to be released for comment in the Spring of Tax Agreement with Hong Kong: IIAC encouraged the federal government in February 2011 to accelerate completion of a double taxation agreement between Canada and Hong Kong to benefit Canadian financial firms expanding their wealth management business in the Far East and encourage Asian companies to establish subsidiaries in Canada given the opportunity to repatriate dividends cost-effectively to Canada and Hong Kong respectively. Finance has indicated that an announcement is expected in the near future. Tax Treatment of Broker Warrants: IIAC wrote to Finance in February 2011 requesting an exemption from mark-to-market treatment for broker warrants. Finance staff have confirmed that the issue remains under active consideration within Finance. Goods and Services Tax Change: Trade Execution Fees May Be Exempt: In February 2011, an IIAC member advised that alternative trading systems Alpha and CNSX had obtained a CRA ruling that trade execution was GST-exempt, despite TSX execution fees having been taxable since the GST s inception in IIAC staff followed up with the TSX representative, who said that that the TSX would pursue a similar ruling. The review process is expected to take a year Operational Assistance Best Practices and Tools Client Relationship Model (CRM) Member Support With the imminent release of three of the final CRM rules, IIAC has ramped up its Member Support program, including a web page for easy access to useful information. IIAC is working with IIROC where possible and the two organizations expect to provide a number of events together. IIAC has: Held an enhanced suitability automation and standardization event Updated a conflict of interest template based on IIROC input ( non-disapproval awaited) Begun organizing joint IIAC/IIROC CRM information events to be held in June in Vancouver, Calgary, Toronto and Montreal. Cross-Border Settlement and Clearing IIAC, with CDS, are briefing FINRA staff on the benefits of the ACT trade reporting and reconciliation service in an effort to ensure continued Canadian member access to this service. 6

7 Referral Letters IIAC has developed disclosure templates and an agreement to comply with the provisions relating to referrals in National Instrument Registration Requirements. Guidance on Compliance with CRTC Telemarketing Regulation The Association has issued guidance to assist members comply with the CRTC ruling that communication between investment advisors and their existing clients is now subject to the Telemarketing Rules. Guidance Notes Added to IIAC New Issue Practices Handbook (formerly Syndicate Practices Handbook) IIAC has added three new guidance notes to the New Issues Practices Handbook. The guidance notes were developed by IIAC Investment Banking Committee and relate to the following topics: 1. Effect of Publication of Research under a Regulation D Distribution 2. US 10b-5 Opinions Suggested Practices with Regard to Offerings into the United States 3. US Category 2 Issuers Suggested Representation in the Underwriting Agreement IIAC Guidance Notice on the Québec Derivatives Act IIAC has developed a Guidance Notice on the Québec Derivatives Act to assist our members. The Notice provides firms and their CCOs with suggestions on practical ways of controlling and supervising the access to the exemption granted by section 7 of the Act for OTC derivatives and to generally support the development of benchmark standards to evaluate the quality of the various compliance procedures that members have in place. Anti-Money Laundering (AML) Requirements IIAC has developed a sample agency appointment to satisfy the new AML requirements which require that members must enter into a written agreement when they use an agent to verify original identification documents of clients. Members are not obligated to use this sample agreements but it is a tool developed by IIAC to assist members in complying with their AML requirements. The template is available under the Member Support page at Marketplace Communications Protocol The Association facilitated a working group of the Canadian marketplaces which developed a standardized communications protocol to provide market participants with clarity and predictability in respect of the information that they will be provided with in the event of a disruption of service. 7

8 Product Due Diligence In March 2009, IIROC released a final version of its earlier draft Best Practices for product due diligence. IIAC was pleased that IIROC responded to a number of comments made by our Product Due Diligence Working Group. IIAC drafted a guidance document to assist members in meeting their obligation under the IIROC Notice. This document was updated in September 2010 to reflect the findings of an IIROC regulatory review published in August IIAC also has a Webinar on this topic, which can be found on the IIAC website. Non Brokered Private Placement Best Practices An IIAC industry committee has developed a best practices template for member firms facilitating non brokered private placements. The template, which is principles based, and will provide guidance on factors firms must consider when facilitating these transactions is available on our website. Outside Business Activities Template IIAC has developed a template in conjunction with our Compliance Committee to help members comply with IIROC Member Regulation Notice 0434 dealing with Other Business Activities. The template is now available under the Member Support page at Fixed Income Central Counterparty and Netting Utility Canada s new central counterparty and netting facility for domestic fixed income markets launched on February 21 st, IIAC and its Repo Committee are working with the Canadian Derivatives Clearing Corporation (CDCC) and other industry stakeholders on future phases of development. Meetings between stakeholders and CDCC have been ongoing. Model Securities Account Control Agreement The Association has developed and made available on its website a Master Securities Account Control Agreement and an accompanying tool kit to permits lenders (e.g., banks) to obtain perfected first-priority security interests in client securities held with dealers.while limiting dealer review of legal documentation by enabling them to rely on a standard agreement. Due Bill In February 2012, CDS introduced enhancements on the way in which certain corporate action events, most notably stock splits and spin offs, get processed in client accounts. The initiative, known as Due Bill also harmonizes Canadian and and U.S practices which will lead to increased efficiencies in the way in which corporate action events for dual-listed securities get processed. The IIAC and its Due Bills Working Group played a key role in the initiative. The IIAC has also prepared a short plain language brochure members can use in educating advisors, staff and clients. The document is available on the IIAC website. 8

9 New York No-Action Letters Where Canadian resident clients move to New York state, Canadian firms (broker-dealers and their advisors), may continue to service these clients by requesting a No-Action Letter from the New York Investor Protection and Securities Bureau (NYPSB). IIAC has provided templates for these written requests on its members-only website. New Disclosure Requirements for Segregated Funds IIAC has prepared a summary of the changes with respect to the new disclosure requirements for purchases of individual variable insurance contracts (IVICs) relating to segregated funds, which the Canadian Council of Insurance Regulators (CCIR) recently finalized. The new requirements come into force on January 1, A summary of the major changes can be found on the Members-Only section of the website. Third Party Determination Comfort Letter IIAC is providing a third party determination comfort letter template, which was developed by the CLS AML Sub-Committee to assist our members in complying with the requirements under Section 9 of The Proceeds of Crime (Money Laundering) and Terrorist Financing ("PCMLTF") Regulations. The PCMLTF requires that reasonable measures be taken to determine if an account is being used by or on behalf of a third party. The comfort letter is a good tool (use is optional) to assist IIAC members when dealing with a foreign securities dealer which is located in a non-financial Action Task Force Country, to obtain assurance that they have an adequate anti-money laundering/terrorist financing program in place. Debt Syndication Practices IIAC is working with members active in the debt syndication market on developing a Syndication Practices document that outlines current industry practices and conventions pertaining to the issuance of government and corporate debt. Legal Entity Identifiers (LEIs) The IIAC is participating alongside other global trade associations and regulators on an initiative to introduce a global standard for identifying parties to financial transactions. The lack of a common standard makes it difficult for financial firms to develop a consistent and integrated view of their exposures to counterparties. It also poses challenges to regulators trying to aggregate and share information effectively across the borders. Registered Plans Committee The IIAC has recently created a new standing committee comprised of representatives from over a dozen Member firms. The committee will focus on addressing issues impacting our Members registered plans areas including RRSPs, RRIFs, RESPs TFSAs and the various locked-in plans. The committee will be a valuable resource to the IIAC in advancing future advocacy initiatives. 9

10 Publications Securities Industry Savings-to-Investment Prosperity Cycle: Synopsis to help government, media and other audiences understand the role of the securities industry. Providing a snapshot of the securities industry, it highlights the members support for retail and institutional clients, and how the industry connects savers and investors to help generate economic activity and jobs. Retail Publications IIAC has issued a number of retail publications. The Retirement Planning Guide, Bonds: An introduction to bond investing, Bonds: More on bond investing, the IIROC Registered Advisor Advantage and the 5Ws of investing, Answering Your Questions are available on the Publications page of The Security in the Securities Industry Brochure: An investor awareness piece that summarizes some of the major regulatory and structural elements unique to the Canadian securities industry which safeguard investors. The two-page piece touches on the roles of IIROC, CIPF, securities commissions and the clearing agencies. Equity Capital Markets New Issue Practices (formerly Syndicate Practices Handbook) IIAC has published the New Issue Practices which will help firms in improving the efficiency of the underwriting process, especially in the execution of bought deals. It will also provide firms with a better understanding of their responsibilities in underwriting and selling newly issued securities to the public by providing a baseline reference point for syndicate managers to indicate possible differences from the normal practice. Upcoming Seminars / Events Industry AM Seminar, Toronto April 24, Social Media Seminar and Roundtable: An Investment Industry Perspective. Industry AM Seminar, Toronto May 23, 2012 In Trust Accounts: What Ever Advisor Should Know Small Dealer Symposium, Toronto, June at St Andrews Conference Centre, 147 University Avenue, Toronto, Ontario 10