Securities Law & Instruments

 



NOTICE OF PROPOSED CHANGES TO PROPOSED RULE 31-502

PROFICIENCY REQUIREMENTS FOR REGISTRANTS
AND COMPANION POLICY 31-502CP,
AND REVOCATION OF REGULATIONS

Substance and Purpose of Proposed Rule

On August 30, 1996, the Ontario Securities Commission published proposed Rule 31-502 and proposed Companion Policy 31-502CP together with a notice of aproposed rescission of certain policies of the Commission relating to proficiency requirements for registrants. The Commission republished proposed Rule 31-502 and the proposed Companion Policy together with a notice of a proposed rescission of certain policies of the Commission and proposed revocations of andamendments to Regulations on January 23, 1998. The second publication related to proposed changes to the proposed Rule that arose from furtherconsideration of the proposed Rule by the Commission (the "First Proposed Changes"). This Notice relates to proposed changes (the "Second ProposedChanges") to the proposed Rule arising from comments received on the proposed Rule and further consideration of the proposed Rule by the Commission. TheCommission outlined the current requirements under securities legislation, securities directions and administrative practice in the Notice accompanying theproposed Rule and these are not repeated in this Notice.

Through the proposed Rule, the Commission will update, amplify and consolidate the proficiency requirements and codify certain related administrative practicesof Staff for various categories of registration. The proposed Rule updates the proficiency requirements for dealers and advisers currently set out in sections 124and 125 of the Regulation by codifying Staff's administrative practice of accepting certain alternative courses. The proposed Rule also adopts several of theproficiency requirements imposed by the TSE and Investment Dealers Association of Canada (the "IDA") and applies these higher standards to securities dealers.The proposed Rule establishes proficiency requirements for officers and partners of portfolio managers generally so as to avoid the need to register them as botha portfolio manager and an investment counsel in order to rely on subsection 101(2) of the Regulation. The proposed Rule also incorporates the proficiencyrequirements for "associate" officers and partners of portfolio managers and investment counsel, mutual fund dealers trading in LSIF securities and salespersonsof scholarship plan dealers.

The First Proposed Changes to the proposed Rule proposed requiring that persons designated as compliance officers under Rule 31-505 Conditions ofRegistration must be registered and, therefore, in addition to having completed the Partners', Directors' and Senior Officers' Examination, must have completedthe Canadian Securities Course.

The First Proposed Changes also proposed recognizing the course conducted by the Institute of Canadian Bankers and entitled Branch Compliance OfficerCourse as sufficient for the purpose of registration of a mutual fund branch manager. Finally, the First Proposed Changes proposed permitting registration forsalespersons of brokers, investment dealers and securities dealers restricted to the sale of mutual fund securities with the same proficiency as mutual fundsalespersons and the designation of branch managers with mutual fund branch manager proficiency to supervise such restricted salespersons.

The Second Proposed Changes are intended to update the names of course materials designated within the proposed Rule to the current set of names. Inaddition, the proposed proficiency requirements are amended to reflect the current requirements under the IDA by-laws that have been approved by theCommission. The Second Proposed Changes also change the time limit during which proficiency will be considered to be acceptable even though the applicanthas either not been in the industry recently or has satisfied the proficiency requirements sometime in the past. The Second Proposed Changes require that theapplicant must have been registered sometime within the three years prior to the application date. The prior draft required that the applicant have been in theindustry for forty-eight (48) of the prior sixty (60) months. The Commission has determined that that is unnecessarily restrictive and that the approach taken bythe IDA as reflected in the Second Proposed Changes is preferable.

The Second Proposed Changes introduce reduced proficiency for registrants who do not provide advice. This is in line with the current position of the IDA andprovides that salespersons who take unsolicited orders and who do not provide advice in the context of a trade are not required to maintain the same level ofproficiency as salespersons who deal with the public on an advice giving basis.

The Second Proposed Changes also expand the First Proposed Changes in relation to full service dealer representatives who are restricted to the sale of mutualfunds having a lesser proficiency than those who engage in full service activities. The expansion of the concept relates to officers and partners in addition tosalespersons and branch managers as was proposed in the First Proposed Changes.

The Second Proposed Changes also provide a transition period of thirty (30) months for the proposed increase in proficiency in the First Proposed Changes forbranch managers.

The Second Proposed Changes reduce the proficiency requirements for securities advisers on the basis that Staff practice has been to provide exemptions tothese proficiency requirements on a fairly consistent basis. The Second Proposed Changes adopt the status quo in respect of the proficiency imposed at the Stafflevel.

The Second Proposed Changes also adopt the IDA approach with respect to the registration of partners and officers of portfolio managers and investmentcounsel. This is also applied in the "junior" category which has been renamed as an "associate" category.

There are no proposed changes to the proposed Companion Policy.

Summary of Proposed Rule and Companion Policy

The proposed Rule is divided into five parts. Part 1 of the proposed Rule contains defined terms for the Rule and an interpretive section regarding the time limitfor the completion of courses and previous registrations set out in Parts 2 and 3 of the proposed Rule.

Part 2 of the proposed Rule sets out the proficiency requirements for dealers, their salespersons, partners, officers, compliance officers, branch managers andresponsible persons. This Part also includes a section setting out the proficiency requirements for trading in LSIF securities by mutual fund dealers and theirsalespersons.

Part 3 of the proposed Rule sets out the proficiency requirements for advisers and their partners, officers, compliance officers, branch managers and responsiblepersons. This Part also includes a section setting out the proficiency requirements for associate partners and officers of investment counsel and portfoliomanagers.

The First Proposed Changes to the proposed Rule proposed requiring that persons designated as compliance officers under Rule 31-505 Conditions ofRegistration must be registered and, therefore, in addition to having completed the Partners', Directors' and Senior Officers' Examination, have completed theCanadian Securities Course.

The First Proposed Changes also proposed recognizing the course conducted by the Institute of Canadian Bankers and entitled Branch Compliance OfficerCourse as sufficient for the purpose of registration of a mutual fund branch manager. Finally, the First Proposed Changes proposed permitting registration forsalespersons of brokers, investment dealers and securities dealers restricted to the sale of mutual fund securities with proficiency the same as mutual fundsalespersons and the designation of branch managers with mutual fund branch manager proficiency to supervise such restricted salespersons.

In addition, the First Proposed Changes provided for the deletion of the reference to the revocation of the deemed rule In the Matter of Trading in Securities ofLabour Sponsored Investment Fund Corporations (1994), 17 OSCB 5505, now a rule, (the "Deemed Rule") which will expire when the proposed Rule becomeseffective.

The Second Proposed Changes are intended to update the names of course materials designated within the proposed Rule to the current set of names. Inaddition, the proposed proficiency requirements are amended to reflect the current requirements under the IDA by-laws that have been approved by theCommission. The Second Proposed Changes also change the time limit during which proficiency will be considered to be acceptable even though the applicanthas either not been in the industry recently or has taken the proficiency sometime in the past. The Second Proposed Changes require that the applicant must havebeen registered sometime within the three years prior to the application date. The prior draft required that the applicant have been in the industry for forty-eight(48) of the prior sixty (60) months. The Commission has determined that that is unnecessarily restrictive and that the approach taken by the IDA as reflected inthe Second Proposed Changes is preferable.

The Second Proposed Changes introduce reduced proficiency for registrants who do not provide advice. This is in line with the current position of the IDA andprovides that salespersons who take unsolicited orders and who do not provide advice in the context of a trade are not required to maintain the same level ofproficiency as salespersons who deal with the public on an advice giving basis.

The Second Proposed Changes also expand the First Proposed Changes in relation to full service dealer representatives who are restricted to the sale of mutualfunds having a lesser proficiency than those who engage in full service activities. The expansion of the concept relates to officers and partners in addition tosalespersons and branch managers as was proposed in the First Proposed Changes.

The Second Proposed Changes also provide a transition period of thirty (30) months for the proposed increase in proficiency in the First Proposed Changes forbranch managers.

The Second Proposed Changes reduce the proficiency requirements for securities advisers on the basis that Staff practice has been to provide exemptions tothese proficiency requirements on a fairly consistent basis. The Second Proposed Changes adopt the status quo in respect of the proficiency imposed at the Stafflevel.

The Second Proposed Changes also adopt the IDA approach with respect to the registration of partners and officers of portfolio managers and investmentcounsellors. This is also applied in the "junior" category which has been renamed as an "associate" category.

Related Instruments

The proposed Rule is related to proposed Companion Policy 31-502CP. The proposed Rule is related to Rule 31-504 Applications for Registration, whichestablishes requirements relating to proof of satisfaction of proficiency requirements, and Rule 31-505 Conditions of Registration, which establishes therequirements for dealers and advisers to designate compliance officers and branch managers.

The proposed Rule is also related to Rule 91-502 Trades in Recognized Options, which establishes proficiency requirements for trading or advising in recognizedoptions, as defined in that rule.

Summary of Written Comments Received by the Commission

The Commission received seven comments on the second publication of the proposed Rule. The commentators were:
    (i) the Investment Dealers Association of Canada;
    (ii) the Canadian Securities Institute;
    (iii) the Canadian Bankers Association;
    (iv) CIBC Investor Services;
    (v) Berkshire Investment Group Inc.;
    (vi) Osler, Hoskin & Harcourt; and
    (vii) the Investment Funds Institute of Canada.

The commentators were generally positive with respect to the proposed Rule and the First Proposed Changes. Generally speaking the concept of increasingproficiency was acknowledged as a necessary and positive step. Most of the commentators pointed out that some of the courses referred to in the Rule had beenrenamed. The Commission is proposing amending the proposed Rule to reflect these changes. Several commentators suggested changes to proficiencyrequirements for various categories of registrants and various positions within registrants. The Commission has adopted those comments which it believes areappropriate including the following:

    (i) Providing for reduced proficiency for salespersons who do not advise or deal only with non-retail clients;

    (ii) Providing for reduced proficiency for officers and partners of dealers who are restricted to the sale of mutual funds;

    (iii) Revising the experience requirements for partners and officers of advisers;

    (iv) Increasing the portfolio size in respect of experience for partners and officers of advisers;

    (v) Providing alternate proficiency for partners, officers, branch managers, compliance officers and salespersons to include the U.S. Series 7 Examination and theNew Entrants Examination;

    (vi) Providing a transition period for branch managers to obtain the new proficiency requirements; and

    (vii) Harmonizing certain proficiency requirements with proficiency requirements of the IDA.

Some of the revisions to proficiency which have not been adopted by the Commission are as follows:
    (i) Some commentators suggested that the Canadian Investment Management Program and the Canadian Financial Analysts Examination Program are equivalentcourses.

    The Commission does not agree with that position and has not amended the rule to reflect that comment.

    (ii) One commentator was concerned that the non-resident adviser regime under Ontario securities laws was not included in the proposed Rule.

    The Commission is dealing with non-resident advisers and other non-resident issues as a separate matter. The Rule does provide for proficiency, subject toalternate proficiency in Ontario securities law.

    (iii) A commentator was concerned that the Canadian Branch Managers Qualifying Examination, which includes options, was inappropriate for all branchmanagers as a proficiency threshold. The view was that part 1 of the Canadian Branch Managers Qualifying Examination would be sufficient for all branchmanagers who do not trade in options.

    The Commission has not reflected this change in the proposed Rule as the course will be redesigned to deal with this issue.

    (iv) One commentator suggested that since the IDA is proposing changes to its proficiency requirement that the Commission update the Rule to take intoaccount any other proposed changes in proficiency.

    The Commission will do so as part of a Rule amendment when and if the proposed changes in proficiency are approved by the Commission as part of a Ruleamendment.

    (v) One commentator suggested that the Commission retain as much flexibility as possible in the Rule in order not to have to amend the Rule as proficiency itemsare changed.

    The Commission is of the view that the specificity of the proficiency requirements is important from a regulatory perspective and it should continue to deal withnew proficiency requirements as they come forward through the Rule amendment process.

    (vi) Some commentators suggested alternative proficiency requirements for various categories of registration.

    The Commission has determined that the proficiency requirements set forth in the Rule are the appropriate proficiency and will consider other proficiencyregimes on a case-by-case application.

The Commission also received the following comments:

    (i) One commentator was concerned that non-trading partners, directors and officers would not continue to be approved without having completed theproficiency requirements necessary to be registered as a partner, director or officer.

    The Rule does not change the current regime of the Commission which is consistent with IDA approach on this matter.

    (ii) There was a concern that the exemption authority in the Rule would not be available for self-regulatory organization to which registration functions weredelegated by the Commission.

    Section 21.5 of the Act deals with the ability of the Commission to assign the powers and duties of the Commission under the Act and the regulations (includingthe rules) to self-regulatory organizations.

    (iii) One commentator suggested that the structure relating to the functions of the compliance officer are not in accordance with industry practice.

    The Commission has amended the Rule to reflect industry practice.

Regulations to be Revoked

Subsections 101(2), 124(5), 125(2) and section 236 of the Regulation are proposed to be revoked by the Commission on the basis that they will directly conflictwith the proposed Rule.

The Commission proposes to revoke subsections 124(1) to 124(4), 124(6), 125(1) and 125(3) of the Regulation as they will be replaced by the provisions of theproposed Rule that update and consolidate the proficiency requirements related to certain dealer and adviser registrations.

The Commission proposes to revoke section 126 of the Regulation on the basis that it will be replaced by the provision in the proposed Rule that providesdiscretion to the Director to grant exemptions to the Rule.

The Commission also proposes to revoke certain definitions in section 96 of the Regulation and the definition of Labour Sponsored Investment Fund Course insection 234 of the Regulation on the basis that the definitions will be replaced by definitions in the proposed Rule.

Finally, the Commission proposes to amend subsection 130(1) of the Regulation to remove the inconsistency between subsection 130(1) of the Regulation andsubsection 2.1(1) of the proposed Rule regarding the duration of certain renewals of registration. Subsection 2.1(2) of the proposed Rule provides that in certaincircumstances, a registration will be suspended 30 months from the date the registration was granted, despite any renewals in the interim.

The Deemed Rule expires on the date the proposed Rule becomes effective.

Comments

Interested parties are invited to make written submissions with respect to the proposed changes to the proposed Rule. Submissions received by September 21,1998 will be considered.

Submissions should be made in duplicate to:

    Daniel P. Iggers, Secretary
    Ontario Securities Commission
    20 Queen Street West
    Suite 800, Box 55
    Toronto, Ontario M5H 3S8

A diskette containing the submissions (in DOS for Windows format, preferably WordPerfect) should also be submitted. As the Act requires that a summary ofwritten comments received during the comment period be published, confidentiality of submissions cannot be maintained.

Questions may be referred to:

    Nancy Ross
    Legal Adviser, Registration
    Ontario Securities Commission
    (416) 593-8154

Proposed Rule

The text of the proposed Rule including the proposed changes follows.

DATED: August 21, 1998.

 

 

ONTARIO SECURITIES COMMISSION RULE 31-502
PROFICIENCY REQUIREMENTS FOR REGISTRANTS

TABLE OF CONTENTS

PART TITLE
PART 1 DEFINITIONS AND INTERPRETATION
1.1 Definitions
1.2 Time Limits on Completion of Courses and Previous Registrations

PART 2 PROFICIENCY REQUIREMENTS FOR DEALERS
2.1 Salespersons of Brokers, Investment Dealers and Securities Dealers
2.2 Salespersons of Mutual Fund Dealers
2.3 Salespersons of Scholarship Plan Dealers
2.4 Brokers, Investment Dealers, Securities Dealers and their Partners, Officers, Branch Managers and Compliance Officers
2.5 Mutual Fund Dealers and their Partners, Officers, Branch Managers and Compliance Officers
2.6 Trading in LSIF Securities by Mutual Fund Dealers

PART 3 PROFICIENCY REQUIREMENTS FOR ADVISERS
3.1 Securities Advisers and their Partners, Officers, Branch Managers and Compliance Officers
3.2 Investment Counsel and Portfolio Managers and their Partners, Officers, Branch Managers and Compliance Officers
3.3 Associate Partners and Officers of Investment Counsel and Portfolio Managers

PART 4 EXEMPTION
4.1 Exemption

 

 

ONTARIO SECURITIES COMMISSION RULE 31-502
PROFICIENCY REQUIREMENTS FOR REGISTRANTS

PART 1 DEFINITIONS AND INTERPRETATION

1.1 Definitions - In this Rule

"Branch Compliance Officer Course" means the course prepared and conducted by the Institute of Canadian Bankers and so named on the effective date andevery successor to that course that does not narrow the scope of the significant subject matter of the course;

"Canadian Branch Managers Qualifying Examination" means the examination prepared and conducted by the Canadian Securities Institute and so named on theeffective date, every predecessor to that examination and every successor to that examination that does not narrow the scope of the significant subject matter ofthe examination;

"Canadian Investment Funds Course" means the course prepared and conducted by the Education Division of The Investment Funds Institute of Canada and sonamed on the effective date, every predecessor to that course and every successor to that course that does not narrow the scope of the significant subject matterof the course;

"Canadian Investment Management Program"(1) means the program prepared and conducted by the Canadian Securities Institute and so named on the effectivedate, every predecessor to that program and every successor to that program that does not narrow the scope of the significant subject matter of the program;

"Canadian Securities Course" means the course prepared and conducted by the Canadian Securities Institute and so named on the effective date, everypredecessor to that course and every successor to that course that does not narrow the scope of the significant subject matter of the course;

"Chartered Financial Analyst Examination Program" means the program prepared and conducted by the Association for Investment Management and Researchand so named on the effective date, every predecessor to that program and every successor to that program that does not narrow the scope of the significantsubject matter of the program;

"Conduct and Practices Course"(2) means the course prepared and conducted by the Canadian Securities Institute and so named on the effective date, everypredecessor to that course and every successor to that course that does not narrow the scope of the significant subject matter of the course;

"effective date" means the date on which this Rule comes into force;

"Investment Funds in Canada Course" means the course prepared and conducted by the Institute of Canadian Bankers and so named on the effective date, everypredecessor to that course and every successor to that course that does not narrow the scope of the significant subject matter of the course;

"LSIF course" means a course designated by the Commission as an LSIF course that provides instruction about LSIFs and their securities that is relevant to aperson engaged in trading in the securities of LSIFs;

"Mutual Fund Branch Managers' Course" means the course prepared and conducted by the Education Division of The Investment Funds Institute of Canada andnamed the "Branch Managers' Course" on the effective date, every predecessor to that course and every successor to that course that does not narrow the scopeof the significant subject matter of the course;

"Mutual Fund Officers', Partners' and Directors' Course" means the course prepared and conducted by the Education Division of The Investment Funds Instituteof Canada and named the "Officers', Partners' and Directors' Course" on the effective date, every predecessor to that course and every successor to that coursethat does not narrow the scope of the significant subject matter of the course;

"New Entrants Examination" means an examination prepared and conducted by the Canadian Securities Institute for new entrants to the securities industry andso named on the effective date, every predecessor to that examination and every successor to that examination that does not narrow the scope of the significantsubject matter of the examination;

"Partners', Directors' and Senior Officers' Qualifying Examination" means the examination prepared and conducted by the Canadian Securities Institute and sonamed on the effective date, every predecessor to that examination and every successor to that examination that does not narrow the scope of the significantsubject matter of the examination;

"Professional Financial Planning Course"(3) means the course prepared and conducted by the Canadian Securities Institute and so named on the effective date andevery predecessor to that course and every successor to that course that does not narrow the scope of the significant subject matter of the course;

"restricted representative" means a salesperson, partner or officer of a broker, investment dealer or securities dealer whose registration is restricted to

    (a) the sale of mutual fund securities, or

    (b) accepting unsolicited trade orders from client's provided no advice is provided to clients on the trade order;

"scholarship plan dealers' course" means a course designated by the Commission as a scholarship plan dealers' course that provides instruction about scholarshipplans and their securities that is relevant to a person engaged in trading in the securities of scholarship plans; and

"U.S. Series 7 Examination" means the examination prepared and conducted by securities regulators in the United States of America and so named on theeffective date and every predecessor to that examination and every successor to that examination that does not narrow the scope of the significant subject matterof the examination.

1.2 Time Limits on Completion of Courses and Previous Registrations

    (1) For the purposes of satisfying Parts 2 and 3, except subsection 2.1(2), an applicant for registration or reinstatement of registration must have completed aspecified course or examination not more than five years before the date of the applicant's application for registration or reinstatement of registration, or havebeen previously registered in the relevant category at any time during the three year period immediately before the date of the applicant's application forregistration or reinstatement of registration.

    (2) Despite subsection (1), if a person or company completes, within the five-year period referred to in subsection (1), a specified course or examination forwhich another specified course or examination is a prerequisite, the specified course or examination that is the prerequisite need not have been completed duringthe five-year period.

PART 2 PROFICIENCY REQUIREMENTS FOR DEALERS

2.1 Salespersons of Brokers, Investment Dealers and Securities Dealers

    (1) Except as provided in Ontario securities law, an individual shall not be granted registration as a salesperson of a broker, investment dealer or securities dealerunless the individual has

      (a) been granted registration previously as a salesperson, partner or officer of a broker or investment dealer or as a broker or investment dealer;

      (b) been granted registration after the effective date as a salesperson, partner or officer of a securities dealer or as a securities dealer;

      (c) completed either

      (i) each of

      (A) the Canadian Securities Course, and

      (B) the Conduct and Practices Course or the Partners', Directors' and Senior Officers' Qualifying Examination; or

      (ii) the New Entrants Examination and the U.S. Series 7 Examination;(4) or

      (d) been granted registration as such by his or her principal regulator, as that term is defined in National Instrument 31-101 National Registration System, andthat registration has not been suspended or terminated.

    (2) A registration as a salesperson of a broker, investment dealer or securities dealer granted after the effective date is suspended thirty months after the date theregistration was granted, despite any renewals in the interim, unless the salesperson has

      (a) completed the Professional Financial Planning Course or the first course of the Canadian Investment Management Program before the registration wasgranted; or

      (b) before the end of the thirty month period

      (i) completed the Professional Financial Planning Course or the first course of the Canadian Investment Management Program, and

      (ii) delivered a notice to the Director disclosing the completion of the proficiency in the form required by Ontario securities law for changes to registrationinformation.

    (3) Despite subsection (1), an individual that does not meet the requirements for registration set out in that subsection may be granted registration as asalesperson of a broker, investment dealer or securities dealer if

      (a) the registration is restricted to the sale of mutual fund securities; and

      (b) the individual has

      (i) been granted registration previously as a salesperson, partner or officer of a mutual fund dealer or as a mutual fund dealer, or

      (ii) completed any one of the Canadian Securities Course, the Canadian Investment Funds Course or the Investment Funds in Canada Course.

    (4) Subsection (2) does not apply to a restricted representative.

    2.2 Salespersons of Mutual Fund Dealers - An individual shall not be granted registration as a salesperson of a mutual fund dealer unless the individual has

      (a) been granted registration previously as a salesperson, partner or officer of a broker, investment dealer, securities dealer or mutual fund dealer or as a broker,investment dealer, securities dealer or mutual fund dealer; or

      (b) completed any one of the Canadian Securities Course, the Canadian Investment Funds Course or the Investment Funds in Canada Course.

    2.3 Salespersons of Scholarship Plan Dealers - An individual shall not be granted registration as a salesperson of a scholarship plan dealer unless the individualhas

      (a) been granted registration previously as a salesperson of a scholarship plan dealer; or

      (b) completed a scholarship plan dealers' course.

2.4 Brokers, Investment Dealers, Securities Dealers and their Partners, Officers, Branch Managers and Compliance Officers

    (1) An individual shall not be granted registration as a broker, investment dealer or securities dealer or as a partner or officer of a broker, investment dealer orsecurities dealer or designated as the compliance officer under section 1.3 of Rule 31-505 Conditions of Registration unless the individual has

      (a) been granted registration previously as a partner or officer of a broker or investment dealer or as a broker or investment dealer;

      (b) been granted registration after the effective date as a partner or officer of a securities dealer or as a securities dealer;

      (c) completed the Partners', Directors' and Senior Officers' Qualifying Examination and

        (i) the Canadian Securities Course, or

        (ii) the New Entrants Examination and the U.S. Series 7 Examination; or

      (d) been granted registration as such by his or her principal regulator, as that term is defined in National Instrument 31-101 National Registration System, andthat registration has not been suspended or terminated.

    (2) An individual shall not be designated as a branch manager under section 1.4 of Rule 31-505 Conditions of Registration by a broker, investment dealer orsecurities dealer unless the individual has completed

      (a) the Canadian Securities Course and the Canadian Branch Managers Qualifying Examination; and

      (b) either the Conduct and Practices Course or the Partners', Directors' and Senior Officers' Qualifying Examination.

    (3) Despite subsection (2), an individual that does not meet the requirements of subsection (2) for designation as a branch manager under section 1.4 of Rule 31-505 Conditions of Registration may be so designated if the individual meets the requirements set forth in subsection 2.5(2) and if the designation is restricted tobeing a branch manager for the purpose of

      (a) opening new accounts by salespersons whose registration is restricted to the sale of mutual fund securities;

      (b) supervising trades made for or with clients by salespersons whose registration is restricted to the sale of mutual fund securities; and

      (c) supervising advice provided to clients by salespersons whose registration is restricted to the sale of mutual fund securities.

    (4) Despite subsection (2), an individual that does not meet the requirements of subsection (2) for registration as a partner or officer of a broker, investmentdealer or securities dealer may be so registered if

      (a) the individual meets the criteria set forth in subsection 2.5(1); and

      (b) the individual's registration is restricted to the sale of mutual fund securities.

    (5) Despite paragraph (2)(a), an individual that is designated as branch manager on the effective date may continue to be so designated until a date that is thirtymonths after the effective date without successfully completing the Canadian Securities Course and the Canadian Branch Managers Qualifying Examination.

2.5 Mutual Fund Dealers and their Partners, Officers, Branch Managers and Compliance Officers

    (1) An individual shall not be granted registration as a mutual fund dealer or as a partner or officer of a mutual fund dealer or designated as the complianceofficer under section 1.3 of Rule 31-505 Conditions of Registration by a mutual fund dealer unless the individual has

      (a) been granted registration previously as a partner or officer of a broker, investment dealer, securities dealer or mutual fund dealer or as a broker, investmentdealer, securities dealer or mutual fund dealer; or

      (b) completed

      (i) any one of the Canadian Securities Course, the Canadian Investment Funds Course or the Investment Funds in Canada Course, and

      (ii) either the Partners', Directors' and Senior Officers' Qualifying Examination or the Mutual Fund Officers', Partners' and Directors' Course.

    (2) An individual shall not be designated as a branch manager under section 1.4 of Rule 31-505 Conditions of Registration by a mutual fund dealer unless theindividual has

      (a) been granted registration previously as a partner or officer of a broker, investment dealer, securities dealer or mutual fund dealer or as a broker, investmentdealer, securities dealer or mutual fund dealer; or

      (b) completed

      (i) any one of the Canadian Securities Course, the Canadian Investment Funds Course or the Investment Funds in Canada Course, and

      (ii) any one of the Canadian Branch Managers Qualifying Examination, the Mutual Fund Branch Managers' Course or the Branch Compliance Officer Course.

    2.6 Trading in LSIF Securities by Mutual Fund Dealers

    (1) A mutual fund dealer shall not trade in the securities of an LSIF unless

      (a) the trade is made through one of its registered salespersons, partners or officers who satisfies the proficiency requirements in subsection (2);

      (b) the mutual fund dealer has delivered a notice to the Director stating the names of each of its registered salespersons, partners and officers who will be tradingin the securities of an LSIF and the date on which the applicable course referred to in subsection (2) was completed by each individual; and

      (c) on renewal of registration, the mutual fund dealer delivers a notice to the Director stating the names of each of its registered salespersons, partners andofficers who will be trading in the securities of an LSIF and the date on which the applicable course was completed by each individual.

    (2) A registered salesperson, partner or officer of a mutual fund dealer shall not trade in the securities of an LSIF on behalf of a mutual fund dealer unless thesalesperson, partner or officer has completed

      (a) an LSIF course;

      (b) the Canadian Securities Course on or after October 25, 1993; or

      (c) the Canadian Securities Course before October 25, 1993 and has been registered and employed as a registrant at any time during the three year periodimmediately before the trade.

PART 3 PROFICIENCY REQUIREMENTS FOR ADVISERS

3.1 Securities Advisers and their Partners, Officers, Branch Managers and Compliance Officers

    (1) An individual shall not be granted registration as a securities adviser or a partner or officer of a securities adviser unless

      (a) the individual has been granted registration previously as a partner or officer or an associate partner or officer of a securities adviser, investment counsel orportfolio manager or as a securities adviser, investment counsel or portfolio manager;

      (b) the individual has

      (i) completed the Canadian Investment Management Program or the first year of the Canadian Financial Analyst Examination Program, and

      (ii) established that the individual performed research involving the financial analysis of investments for at least two years under the supervision of a registeredadviser; or

      (c) the individual has been granted registration as such by his or her principal regulator, as that term is defined in National Instrument 31-101 NationalRegistration System, and that registration has not been suspended or terminated.

    (2) An individual shall not be designated by a securities adviser as the compliance officer under section 1.3 of Rule 31-505 Conditions of Registration or as abranch manager under section 1.4 of Rule 31-505 Conditions of Registration unless the individual has been granted registration previously as a partner or officerof a securities adviser, investment counsel or portfolio manager.

3.2 Investment Counsel and Portfolio Managers and their Partners, Officers, Branch Managers and Compliance Officers

    (1) An individual shall not be granted registration as an investment counsel or portfolio manager or as a partner or officer of an investment counsel or portfoliomanager unless the individual

      (a) has been granted registration previously as a partner or officer of an investment counsel or portfolio manager or as an investment counsel or portfoliomanager, other than in reliance on section 3.3 or under a registration subject to terms and conditions requiring the individual's advising activities to be supervised;

      (b) has

      (i) completed either

      (A) the Canadian Investment Management Program and the first year of the Chartered Financial Analysts Examination Program; or(5)

      (B) the Chartered Financial Analyst Examination Program, and(6)

      (ii) established that the individual has been employed for five years performing research involving the financial analysis of investments, and that three of the fiveyears have been under the supervision of a registered adviser having the responsibility on a discretionary basis(7) for the management or supervision of investmentportfolios having an aggregate value of not less than $5,000,000;(8)

      (c) has established that

      (i) the individual has(9)

      (A) had three years experience as an associate partner or officer of an investment counsel or portfolio manager;

      (B) had three years experience as a registered salesperson of a broker, investment dealer or securities dealer and two years experience as an associate partner orofficer of an investment counsel or portfolio manager;

      (C) had three years experience as a research analyst for a broker or investment dealer and two years experience as an associate partner or officer of an investmentcounsel or portfolio manger; or

      (D) been responsible for the management or supervision of investment portfolios on a discretionary basis having an aggregate value of not less than $5,000,000for a period of five years while employed by a Canadian financial institution or a pension fund; and

      (ii) the individual has, at the time of application for registration, and has had for a period of one year prior to the time of application, under his or her directadministration on a discretionary basis investment portfolios having an aggregate value of not less than $5,000,000; or

      (d) has been granted registration as such by his or her principal regulator, as that term is defined in National Instrument 31-101 National Registration System,and that registration has not been suspended or terminated.

      (2) An individual shall not be designated by an investment counsel or portfolio manager as the compliance officer under section 1.3 of Rule 31-505 Conditions ofRegistration or as a branch manager under section 1.4 of Rule 31-505 Conditions of Registration unless the individual has been granted registration previously asa partner or officer of an investment counsel or portfolio manager, other than in reliance on section 3.3 or under a registration subject to terms and conditionsrequiring the individual's advising activities to be supervised, or as an investment counsel or portfolio manager.

3.3 Associate Partners and Officers of Investment Counsel and Portfolio Managers(10)

    (1) An individual may be granted registration as an associate partner or officer of an investment counsel or portfolio manager if the individual has

      (a) completed

      (i) Parts I and II of the Canadian Investment Management Program and the first year of the Chartered Financial Analyst Examination Program, or

      (ii) the Chartered Financial Analyst Examination Program; and

      (b) been employed for

      (i) two years performing research involving the financial analysis of investments, or

      (ii) two years as a registered salesperson of a broker, investment dealer or securities dealer.

    (2) An individual who is registered as an associate partner or officer of an investment counsel or portfolio manager shall not give advice unless the advice hasbeen approved by a designated registered partner or officer of the investment counsel or portfolio manager that employs the individual.

    (3) An investment counsel or portfolio manager that employs an associate partner or officer shall designate a partner or officer that is not an associate partner orofficer to approve advice given by an associate partner or officer.

    (4) The designated partner or officer described in subsection (3) shall be employed at the same location as the associate partner or officer whose advice must beapproved.

PART 4 EXEMPTION

4.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictions as may be imposed in theexemption.

ONTARIO SECURITIES COMMISSION COMPANION POLICY 31-502CP
PROFICIENCY REQUIREMENTS FOR REGISTRANTS

PART 1 PROFICIENCY REQUIREMENTS FOR REGISTRANTS

1.1 Alternative Qualifications for LSIF Salespersons - The Director will consider granting an exemption to section 2.6 of Rule 31-502 ProficiencyRequirements for Registrants to any person or company if the Director is satisfied that to do so would not be prejudicial to the public interest, having regard tothe spirit and intent of the Community Small Business Investment Funds Act.

1.2 Alternative Qualifications - The Director will consider granting an exemption to any of sections 2.1 to 2.5 and 3.1 to 3.3 of the Rule to any person orcompany if the Director is satisfied that the person or company has qualifications or experience that are equivalent to, or more appropriate in the circumstancesthan, the qualifications or experience required under the section.

1.3 Supervision by Non-Registered Advisers - For the purposes of establishing experience that is equivalent to, or more appropriate in the circumstances than,the experience under the supervision of a registered adviser in paragraph 3.1(1)(b) and subparagraph 3.2(1)(b)(iii) of the Rule, the Director will considerexperience under the supervision of

    (a) an unregistered investment manager of an Ontario financial institution;

    (b) an adviser that is registered in a jurisdiction other than Ontario or a foreign jurisdiction; or

    (c) an adviser that is not required to be registered under the laws of the jurisdiction or foreign jurisdiction in which the adviser carries on business.

 

 

NOTICE OF PROPOSED CHANGES TO PROPOSED
RULE 31-505 CONDITIONS OF REGISTRATION AND
REVOCATION OF REGULATIONS

Substance and Purpose of Proposed Rule

On August 30, 1996, the Ontario Securities Commission published proposed Rule 31-505 together with a notice of proposed regulations to be revoked. TheCommission republished proposed Rule 31-505 on January 23, 1998. This notice relates to proposed changes to proposed Rule 31-505 arising from furtherconsideration of the proposed Rule by the Commission.

The substance and purpose of the proposed Rule is to consolidate current requirements of the Regulation which establish conditions of registration with relatedrequirements arising from the administrative practice of the Director, and to expand such requirements in order to provide certainty for applicants for registrationand appropriate authority for certain enforcement matters for the Commission. In particular the Commission is using its rule making authority to reinstate in theproposed Rule the provisions of sections 221 and 222 of the Regulation. Subsection 222(1) of the Regulation was struck down in the decision of the OntarioCourt of Justice (Provincial Division) R. v. Haldenby (1994), 17 OSCB 4311 as outside the then regulation making power under the Securities Act (the "Act").

The proposed changes to the proposed Rule published on January 23, 1998 (the "First Proposed Changes") combine the concept of responsible person andcompliance officer into one position and permit delegation of administrative functions relating to the combined position to certain persons.

The proposed changes to the proposed Rule published today (the "Second Proposed Changes") permit the compliance officer to delegate supervisory functionsand codify staff practice of requiring branch managers to be registered for trading.

Summary of Proposed Rule

Section 114 of the Regulation currently contains requirements relating to the opening and supervision of accounts by registered dealers and advisers. Theproposed Rule expands the scope of subsection 114(1) of the Regulation to require that the supervision relate to advice provided to clients. The proceduresmust be in writing and the registered dealer and adviser must send written notice to the Commission designating an individual responsible for opening newaccounts and supervising trades made for or with clients and advice provided to clients.

The proposed Rule expands the current provision in subsection 114(2) of the Regulation to allow investment dealers or brokers to comply with the applicableby-law, rule, regulation, policy, procedure, interpretation or practice of the Investment Dealers Association or The Toronto Stock Exchange in satisfaction of therequirements of Part 1 of the proposed Rule respecting new accounts and account supervision.

The proposed Rule incorporates the requirement to know your client and assess suitability currently established in subsection 114(4) of the Regulation. Thisprovision has been expanded to ensure that individual registrants are also required to comply with the know your client and suitability rules.

The proposed Rule incorporates the exceptions to the know your client and suitability requirements of section 114 of the Regulation that relate to execution oftrades on the instructions of registered advisers and opening of accounts by registered advisers.

The proposed Rule incorporates the provisions currently contained in subsection 114(3) of the Regulation which require registrants to designate a personresponsible for the opening and supervision of accounts and the proposed change to the proposed Rule combines that provision with the provisions of section125 of the Regulation which require dealers and certain advisers to designate a compliance officer.

The proposed Rule expands each of these provisions to ensure that they relate to all categories of advisers.

The proposed Rule incorporates the provisions of sections 221 and 222 of the Regulation except as they applied to "registered directors" as section 25 of the Actdoes not contemplate the registration of directors.

The proposed Rule imposes an obligation on registered dealers and advisers to supervise their registered salespersons, officers and partners in accordance withOntario securities law and any supervisory terms or conditions imposed on their registered salespersons, officers or partners. The proposed Rule does notspecify the necessary level of supervision but does require that a branch manager be responsible for oversight of each branch either from within the branch orfrom another location.

The Second Proposed Changes permit the compliance officer to delegate supervisory functions and codify staff practice of requiring branch managers to beregistered for trading.

Summary of Comments Received by the Commission

The Commission received three comments on the First Proposed Changes from the Canadian Bankers Association, Osler, Hoskin & Harcourt and TD AssetManagement Inc.

    (i) One commentator's comments were made almost exclusively in the context of the treatment of foreign and non-resident advisers.

    The Commission is dealing with Policy 4.8 - Non-Resident Advisers and the Rule entitled "In the Matter of Certain Advisers" (1992), 15 OSCB 1995 and theother matters relating to residency as a separate project.

    (ii) One commentator was concerned that the Commission has not defined the word "branch". The Commission has determined to defer the issue of defining"branch" in order to attempt to co-ordinate a national regulatory response to the issue.

    (iii) One of the commentators took the position that the engaging in "administrative functions" did not require any type of registration or regulated proficiencyand was of the view that the compliance officer should be able to delegate those functions to non-regulated persons who are not required to have any level ofproficiency under the legislation.

    Another commentator was concerned that the compliance officer's functions outlined in the Rule should be left for the current industry sub-committee workingwith the Investment Dealers Association of Canada.

    The Commission has revised the Rule to allow for the delegation of "supervisory" functions to persons who have salespersons level proficiency who report to thecompliance officer. This is intended to remove unnecessary workload burdens on the compliance officer.

    (iv) A commentator suggested that the use of the words "Ontario financial institution" be replaced with "Canadian financial institution".

    The Commission has determined to retain the definition "Ontario financial institution" which should be read with its normal meaning being a financial institutionregulated by Ontario legislation.

Regulations to be Revoked

The Commission proposes to revoke sections 114, 125, 221 and 222 of the Regulation.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by September 21, 1998 will be considered.

Submissions should be made in duplicate to:

    Daniel P. Iggers, Secretary
    Ontario Securities Commission
    20 Queen Street West
    Suite 800, Box 55
    Toronto, Ontario M5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As the Act requires that a summary ofwritten comments received during the comment period be published, confidentiality of submissions cannot be maintained.

Questions may be referred to:

    Nancy Ross
    Legal Adviser, Registration
    Ontario Securities Commission
    (416) 593-8154

Proposed Rule

The text of the proposed Rule follows including the proposed changes.

DATED: August 21, 1998.

 

 

ONTARIO SECURITIES COMMISSION RULE 31-505
CONDITIONS OF REGISTRATION
TABLE OF CONTENTS

PART TITLE

PART 1 NEW ACCOUNTS AND SUPERVISION
1.1 Recognized Self-Regulatory Organization and Recognized Stock Exchange Member
1.2 Dealing with Clients
1.3 Designation of Compliance Officer
1.4 Branch Manager
1.5 Know your Client and Suitability
1.6 Managed Accounts
1.7 Execution of Trades and Instruction

PART 2 GENERAL DUTIES
2.1 General Duties

PART 3 SUPERVISORY TERMS
3.1 Supervisory Terms

PART 4 EXEMPTION
4.1 Exemption

ONTARIO SECURITIES COMMISSION RULE 31-505
CONDITIONS OF REGISTRATION

PART 1 NEW ACCOUNTS AND SUPERVISION

1.1 Recognized Self-Regulatory Organization and Recognized Stock Exchange Member

    (1) A member of The Toronto Stock Exchange may comply with a requirement of this Part by complying with a by-law, rule, regulation, policy, procedure,interpretation or practice of The Toronto Stock Exchange dealing with the same subject matter as that requirement that has been approved by the Commissionand published by The Toronto Stock Exchange.

    (2) A member of the Investment Dealers Association of Canada may comply with a requirement of this Part by complying with a by-law, rule, regulation, policy,procedure, interpretation or practice of the Investment Dealers Association of Canada dealing with the same subject matter as that requirement that has beenapproved by the Commission and published by the Investment Dealers Association of Canada.

1.2 Dealing with Clients - A registered dealer or adviser shall establish and enforce written procedures for dealing with clients that conform with prudentbusiness practice and enable the dealer or adviser to serve its clients adequately.

1.3 Designation of Compliance Officer

    (1) A registered dealer or adviser shall designate a registered partner or officer as the compliance officer who is responsible for discharging the obligations of theregistered dealer or adviser under Ontario securities law.

    (2) The person designated under subsection (1) by a registered dealer or adviser shall also be responsible for opening each new account, supervising trades madefor or with each client and supervising advice provided to each client or, if a branch manager is designated under subsection 1.4(1), for supervising the branchmanager's conduct of the activities specified in subsection 1.4(2).

    (3) Despite subsections (1) and (2), the designated compliance officer may delegate supervisory functions to an individual who reports to the compliance officerand who meets the proficiency requirements under Rule 31-502 Proficiency Requirements for Registrants for a salesperson in the same category of registrationas the dealer or an officer in the same category of registration as the adviser, that has in each case designated the compliance officer.

    (4) An applicant for registration or reinstatement of registration as a dealer or adviser shall deliver to the Commission, with the application, written notice of thename of the person proposed to be designated under subsection (1).

1.4 Branch Manager

    (1) If a registered dealer or adviser operates a branch office, the registered dealer or adviser shall designate a registered salesperson, officer or partner(11) as thebranch manager for the branch.

    (2) A branch manager is responsible for the branch for opening new accounts, supervising trades made for or with each client and supervising advice provided toeach client and shall report directly to the compliance officer designated under section 1.3.

    (3) An applicant for registration or reinstatement of registration as a dealer or adviser that proposes to operate a branch office shall deliver to the Commission,with the application, written notice of the name of the person proposed to be designated under subsection (1).

    (4) Despite subsection (1), a mutual fund dealer that has appointed an administration officer for a branch in accordance with the Policy of the Commissionentitled "Principles of Regulations Re: Distribution of Mutual Funds by Financial Institutions" is not required to designate a branch manager for the branch untilthe date on which the Commission makes a rule replacing the Policy.

1.5 Know your Client and Suitability

    (1) A person or company that is registered as a dealer or adviser and an individual that is registered as a salesperson, officer or partner of a registered dealer or asan officer or partner of a registered adviser shall make such enquiries about each client of that registrant as

      (a) subject to section 1.6, enable the registrant to establish the identity and the creditworthiness of the client, and the reputation of the client if information knownto the registrant causes doubt as to whether the client is of good reputation; and

      (b) subject to section 1.7, are appropriate, in view of the nature of the client's investments and of the type of transaction being effected for the client's account, toascertain the general investment needs and objectives of the client and the suitability of a proposed purchase or sale of a security for the client.

    (2) Despite paragraph (1)(a) a registrant is not required to make enquiries as to the creditworthiness of a client if the registrant is not financing the acquisition ofsecurities by the client.

1.6 Managed Accounts

    (1) For each account with a registered dealer opened and traded by a registered adviser on behalf of a client, each of the dealer, and a salesperson, officer orpartner responsible for the account, shall determine that the adviser is creditworthy, but does not have any responsibility under paragraph 1.5(1)(a) if the adviserexecutes orders in the adviser's name or identifies its client by means of a code or symbols or guarantees the account.

    (2) For each account with a registered dealer opened and traded by a registered adviser on behalf of a client with no agreement that payment of the account isguaranteed by the adviser, each of the dealer that executes orders in the name of the client, and a salesperson, officer or partner responsible for the account, doesnot have any responsibility under paragraph 1.5(1)(a), but shall obtain

      (a) full information concerning the client to enable the registrant to establish the identity and the creditworthiness of the client; or

      (b) from the adviser

        (i) a letter confirming the familiarity of the adviser with applicable Ontario securities law, requirements of self-regulatory organizations and requirements of theadviser for account supervision, and

        (ii) a written undertaking to make the investigations contemplated by those requirements and to advise, if known, whether the client is an insider of a reportingissuer or an employee, director, officer or partner of a person or company engaged in the securities business and the details of the relationship.

    (3) An adviser shall for each account with a registered dealer opened and traded by the registered adviser on behalf of a client ask the client if the client is aninsider of a reporting issuer or an employee, director, officer or partner of a person or company engaged in the securities business and the details of therelationship.

1.7 Execution of Trades and Instruction - Paragraph 1.5(1)(b) does not apply to a registered dealer or a registered salesperson, partner or officer of aregistered dealer that executes a trade on the instruction of a registered adviser, another registered dealer or an Ontario financial institution.

PART 2 GENERAL DUTIES

2.1 General Duties

    (1) A registered dealer or adviser shall deal fairly, honestly and in good faith with its clients.

    (2) A registered salesperson, officer or partner of a registered dealer or a registered officer or partner of a registered adviser shall deal fairly, honestly and ingood faith with his or her clients.

    (3) A registered salesperson, officer or partner of a registered dealer or a registered officer or partner of a registered adviser shall not act on behalf of the dealeror adviser in a transaction of the dealer or adviser that is not in compliance with Part XIII of the Regulation and Multilateral(12) Instrument 33-105 UnderwritingConflicts or this Rule.

PART 3 SUPERVISORY TERMS

3.1 Supervisory Terms - A registered dealer shall supervise each of its registered salespersons, officers and partners and a registered adviser shall supervise eachof its registered officers and partners in accordance with Ontario securities law and terms or conditions imposed by the Director or the Commission on theregistration of the salesperson, officer or partner of the dealer or the officer or partner of the adviser requiring that the actions of the registered salesperson,officer or partner of the registered dealer or the registered officer or partner of the registered adviser be supervised in a particular manner.

PART 4 EXEMPTION

4.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictions as may be imposed in theexemption.

 

Footnotes


1. The name was changed to reflect proper name.

2. The name was changed to reflect proper name.

3. The name was changed to reflect proper name.

4. This provision is new and is derived from IDA By-law 500.4(ii).

5. The Canadian Securities Course has been deleted as its content is subsumed by the other proficiency requirements.

6. This is new and provides an alternate proficiency regime which the Commission considers equivalent.

7. The language has been added for clarity.

8. The amount has been increased from $1,000,000 to reflect the Commission's view on the appropriate level of sophistication of portfolio management.

9. These alternative proficiency requirements are new and are substantially similar to the provisions of the IDA governing investment counsel registration.

10. The name has been changed to match the terminology used by the IDA. The proficiency has also been revised to match the proficiency requirements of the IDA.

11. This clarifies staff practice of requiring branch managers to be registered for trading.

12. Title changed to reflect paper terminology.