A practical guide for exempt market dealers
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A Practical Guide for Exempt Market Dealers. September 14, 2010. Your Panelists. Brian Prill – Partner, McLean & Kerr LLP; President EMDA Ian Pember – Senior Vice President, Administration and Compliance, Hillsdale Investment Management Inc.; co-chair AIMA Canada Legal & Finance Committee

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Your Panelists

Brian Prill – Partner, McLean & Kerr LLP; President EMDA

Ian Pember – Senior Vice President, Administration and Compliance, Hillsdale Investment Management Inc.; co-chair AIMA Canada Legal & Finance Committee

David Gilkes – Vice President, Sutton Boyce Gilkes Regulatory Consulting Group; Director EMDA

Marsha Gerhart – Counsel, Borden LadnerGervais LLP; Director EMDA

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Today’s discussion

  • Discussion of practical issues facing EMDs

    • Overview

      • Filings – Sept. 28, 2010 Deadline

      • UDP, CCO and Permitted Individuals

    • Conduct and compliance requirements

      • Capital and insurance

      • Internal controls and compliance

    • Client relationships

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What business can an EMD be in?

  • Prospectus exemptions

    • EMD’S may act as a dealer by trading in a security that is distributed under an exemption from the prospectus requirements

  • NI-45-106 has 41 prospectus exemptions

    • 18 are transactions an EMD could potentially act upon

    • Not restricted to accredited investors

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Who doesn’t need to be registered as an EMD?

“Northwestern” exemption

Financial service providers cannot rely on exemption

PM who trades in proprietary non-prospectus qualified investment funds to managed account

International dealers


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What you need to file

Sept 28/2010 deadline

Firm registration form 33-109F6

Existing EMD’s in Ontario & Newfoundland file in other applicable jurisdictions

Firms in other jurisdictions acting as EMD’s file to complete registration

Individual registration form 33-109F4

Dealing reps, UDP and CCO - registration

Permitted individuals - information only

Proficiency requirements for Dealing Reps and CCO


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Ultimate designated person (UDP)

Must be CEO of the company or the registerable business unit or sole proprietor


Supervise activities of the firm directed to ensuring compliance by firm & individuals

Promote culture of compliance

Access to Board required at all times

No prescribed proficiency requirements


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Chief Compliance Officer (CCO)

Must be officer or partner of the company or sole proprietor (CCO & UDP can be same person)


Establish & maintain policies and procedures to ensure compliance of firm and individuals

Report to UDP

Access to and Annual Report to Board for purpose of assessing compliance by firm & individuals

Proficiency – EMP or CSE plus the PDO


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Who are Permitted Individuals?

Individuals who are not registered and who:

Are director, CEO, COO, CFO, (or perform those functions) or

Have beneficial ownership, or control over, > 10% of voting securities of a firm

Submit through NRD Form 33-109F4 within 7 days of appointment

No proficiency requirements


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What is your level of capital?

Capital requirement

Minimum required working capital is $50,000

Cannot be less than zero for 2 consecutive days – if less than zero notify regulator asap

Working capital calculated on unconsolidated basis – Form 31-103F1

Basically current assets less current liabilities, with adjustments

Warning! – If you are borderline this could require close monitoring


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How’s your insurance?

Maintain bond insurance with specified clauses & double aggregate limit

Bond insurance – highest of

Lesser of $50,000/employee or $200,000

Lesser of 1% of total client assets under management or $25mm

Lesser of 1% of dealer assets or $25mm

Amount as determined by directors


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Financial reporting

Capital requirement reporting

Must file Form 31-103F1 annually with regulators within 90 days of year end

Not need for EMDs to file interim financials or interim Form 31-103F1


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And more Financial Reporting

Annual financial statements

Must be prepared in accordance with GAAP (IFRS effective Jan 1/2011)

Standard audit opinion amended for non-consolidation if applicable

Warning! – To control costs assess if there is any requirement for audited consolidated financial statements


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Internal controls & compliance are important

Internal controls & systems

Do you have an adequate system of controls & supervision to meet regulatory requirements?

Is your compliance system effective?

Do your records achieve the desired regulatory outcome?


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How do you create an effective compliance regime?

Some considerations

Determine resources available or required

Establish a “Culture of Compliance” (“Tone at the top”)

Understand the applicable rules and regulations

Determine a framework for risk identification and assessment

Determine the internal controls to be used to manage risks – includes accountabilities and responsibilities (who, when, how)

Establish mechanisms for supervision and oversight (action and result)

Management action in addressing matters

Reporting and escalation


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Develop an effective Risk Assessment Framework

You cannot manage risks if they are not identified

Identify the risks - Create a regulatory summary, tailored to your firm

Consider law firm checklists as a start point

Review regulatory commentaries or advisories

Keep up on developments

Categorize risks – e.g. reputational, operational, regulatory

Assess potential impact – high, medium, low

Determine response – accept, share, mitigate & who is responsible?


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Client Relationships - Things you must tell your clients (in writing)

Relationship disclosure information

deliver to a client, before any advice given or security purchased or sold, all information that a reasonable investor would consider important about relationship (prescribed information)

Then notify client on timely basis of any significant changes.


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Do you know your client? writing)

KYC obligations

Gatekeeper KYC

Determine who is the client and who has responsibility for KYC & suitability

Maintain a/c opening & client documentation and make reasonable efforts to keep current

Suitability KYC

Investment needs & objectives

Investment knowledge & experience

Risk tolerance

Investment horizon

Income level & net worth


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Do you know your product? writing)

Essential for suitability

Know features and risks

Due diligence in selection of issuer

KYP is proposed as an amendment to the overarching proficiency requirement in NI 31-103

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Obligations differ for some clients writing)

“Permitted Client”

Governments, banks & trust companies

Other Cdn registrants and funds managed or advised by them

Pension funds or wholly owned subs regulated by OSFI or province

Individual with financial assets > $5mm

Person or company with net assets > $25mm

Permitted clients can waive certain requirements (in writing)

Requirements N/A if client is registered firm, Cdn FI or Sched III bank


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Conflicts of Interest – how will you respond? writing)

Conflicts of interest

Identify all current & potential material conflicts to client in timely manner




Related issuer

Restrictions on managed account transactions


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Do you enter into referral arrangements? writing)

Referral arrangements

“Referral fee” is any form of compensation paid for the referral of a client to or from a registrant

“Referral arrangement” is any arrangement agreeing to pay or receive a fee

Must be a written agreement between registrant & person or company making or receiving referral

Registrant making referral must take reasonable steps to ensure that receiving company qualified, & registered if necessary, to provide services

Referral arrangements

Must disclose to client before account opening or any services


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What happens when your client makes a complaint? writing)

Document & effectively & fairly respond to client complaints and have written policies and procedures in place

By Sept 28/11 ensure an independent dispute resolution or mediation service is made available, at firm’s expense, to clients

When a complaint is received the client must be informed asap how to contact the service.


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Other things you must provide writing)

Trade confirmations & client statements

EMD that has acted on behalf of client for purchase or sale of security must promptly deliver a written confirmation of the transaction with specified information

EMD must deliver statement to client at least once every 3 months, or for month in which transaction occurs (monthly if requested by client)


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A few things to remember writing)

Prohibition on lending, extending credit or margin to a client

Any client assets held must be segregated and in trust for client


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Looming deadlines writing)

Sept 28/2010

File Form 33-109F6 to register as EMD in all applicable jurisdictions

Dealing representatives must meet proficiency requirements

Meet capital requirements

Relationship disclosure information to be delivered to all clients


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Not so looming deadline writing)

Sept 28/2011

Independent dispute resolution or mediation service must be in place


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Regulations to keep in mind writing)

NI 31-103 Registration Requirements

NI 33-109 Registration Information Requirements

NI 45-106 Prospectus and Registration Exemptions

NI 81-102 Mutual Funds and NI 81-107 Independent Review Committee for Investment Funds

NI 23-101 Trading Rules

NI 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research Services