FAIR Canada has made a submission in response to IIROC’s Concept Proposal to facilitate the migration of certain registrant firms to a new “Restricted Dealer Member” category. Our understanding is that certain Exempt Market Dealers (“EMDs”) and Restricted Dealers are carrying on brokerage activities in Canada while not physically present in Canada and are U.S. securities firms that are members of the U.S. Financial Industry Regulatory Authority (“FINRA”). These firms are conducting a broad range of dealer-related activities in Canada including securities brokerage, trading prime brokerage and securities lending. Through exemptions granted by provincial securities regulators, many of the firms are able to lend money, extend credit and provide margin to many of their clients. This broad range of activities has generally only been permitted through investment dealers who are members of IIROC and who are subject to additional regulatory requirements and supervision and enhanced investor protection.
Provide Retail Clients with a Warning Notice
Given the length of time that will pass before the potential implementation of any of the proposed changes contemplated in the Concept Proposal, FAIR Canada recommends that all EMDS and Restricted Dealers carrying out brokerage activities with Canadian retail clients be required by the relevant securities regulators to provide a Warning Notice to their clients, in plain language, which advises them of the limitations of the protections currently afforded to them, including the inability:
- To access Canadian Investor Protection Fund (“CIPF”) compensation fund coverage in the event of insolvency (unlike an IIROC dealer member);
- To access the Ombudsman for Banking Services and investments (“OBSI”) in the event there is an unresolved customer complaint; and
- To access (or uncertainty in access) the Canadian courts in the event of wrongdoing given the lack of any physical presence by these EMDs and Restricted Dealers in Canada, the fact they are not incorporated in any jurisdiction in Canada and the lack of any attornment to the Canadian courts.
Full Dealer Member Status Should be Required If Permitted to Have Accredited Investor Clients
In order to provide adequate investor protection, FAIR Canada believes that the FINRA firms should be required to transition to full IIROC Dealer Member status if permitted (or permitted to continue) to have retail clients who are “accredited investors” as defined under National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”).
Restricted Dealer Members Should Only Deal with Permitted Clients and Additional Disclosure Necessary
FAIR Canada is of the view that if it is determined that the FINRA firms should be migrated to a new “Restricted Dealer Member” category, they should only be allowed to deal with institutional investors and retail investors who qualify as Permitted Clients, as defined in NI 31-103. What is an appropriate retail customer for this new category should be determined on a basis that is not inconsistent with the CSA’s current review of the accredited investor exemption. In addition, the following disclosure requirements should be imposed (beyond those contained in the Concept Proposal):
- Provide written and oral disclosure to each client confirming the extent of the coverage provided to Canadian clients by the Securities Investor Protection Corporation (“SIPC”) and an explanation of how such coverage differs from what they would receive from the CIPF;
- Provide a statement in plain language setting out the client’s potential options for redress, including litigation rights in the US and Canada; and
- Advise of the ability to access OBSI (or not).
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