Appendix A: NI - 33-102 - Revised Principles of Regulation - National Instrument 33-102 Registrant Dealings with Clients

NOV. 1997DRAFT

REVISEDDRAFT

COMMENTS RECEIVED

CSA RESPONSE

1997 PROPOSED NATIONAL INSTRUMENT 33-102
DISTRIBUTION OF SECURITIES AT FINANCIAL INSTITUTIONS

Section 1.1Definitions

Deleted

A commentator requested clarification onwhat constitutes a branch for the purposesof this instrument. Ongoing technologicaladvancements are already making theconcept of a physical "branch" irrelevant.

The CSA are of the view that itis not necessary to include adefinition of "branch office" inthis national instrument. "Branchoffice" is defined in thesecurities legislation of certainCSA jurisdictions.

Section 1.2Application

Proposed NI33-102

Part 2, Part 3and Part 6

Some commentators indicated theirexpectation that the proposed instrumentswould be applicable only to retail clients. Intheir view, a number the provisions of 1997Proposed National Instrument 33-102 willfurther erode the efficiency with whichcorporate and institutional markets can beserved at a time when Canadian financialinstitutions are facing increasingcompetition from global players not subjectto similar restrictions. It was suggested thatthe proposed instruments be revised so as tolimit their applicability to retail clients,perhaps to be defined as natural persons.

The CSA agree and requiredisclosure regarding the natureof the product, leverage andclient confidentiality to beprovided to retail clients only.

Section 2.1

Branch Office

Deleted

Commentators submitted that the need forfloor to ceiling separation will imposesignificant costs on Canadian financialinstitutions and their related dealers and isnot practical. It was argued that artificialseparation of premises and separatetelephone lines are not effective means ofprotecting the investor or alleviatinginvestor confusion. In their view, there is norationale for making a distinction betweenbank owned dealers and other marketparticipants who offer a broad range offinancial services to their customers allwithin one office.

The CSA are of the opinion thatretail client confusion may beaddressed in a number of ways,including disclosure. Disclosureis required by sections 2.1 and6.2 of the Proposed NationalInstrument. Section 2.2 of theCompanion Policy provides thatit is the registrant'sresponsibility to ensure thatclients understand with whichlegal entity they are dealing.

Section 2.2

Disclosure

Proposed NI33-102

Section 6.2

Commentators agreed that the terms of thedisclosure set out in this section (i.e.securities are not insured by a governmentdeposit insurer, are not insured by the bankand may fluctuate in value) are appropriate.However, given the proliferation ofdisclosure and other documents that clientsreceive when opening accounts, andthereafter, they suggested that a separatedocument not be required. Commentatorswere also not convinced that this disclosureis significantly more important than otherdisclosure such as to require that additionalsteps be required in connection with thisdisclosure, such as obtaining the client'sacknowledgment of the disclosure ormaking inquiries to determine that the clientunderstands the disclosure.

It is the view of the CSA that itis imperative for retail clients toknow and understand thedistinction between bank andother products of financialinstitutions and securities. It isthe responsibility of theregistrant to ensure that theclient knows and understands thedistinction. Consequently, theprovision requiring disclosurehas been maintained. Inaddition, the registrant mustobtain an acknowledgementfrom the retail client that theclient has read the disclosure.

Section 2.3

AdditionalDisclosure

Proposed NI33-102

Sections 2.1and 2.2

Commentators questioned whether clientsare confused about the necessity of repayinga loan borrowed to purchase securities. Itwas suggested that common risk disclosurestatement be required.

Commentators opposed the requirement toask every client on each order if thepurchase is being funded by a loan and if itis to deliver a written statement. It wasthought to be onerous and impractical. Onecommentator stated:

"We would not object to a new requirementto deliver a risk disclosure statementregarding leveraging upon the opening of anew account to ensure clients are awareabout the risks associated with leveragingprovided that this requirement applies to alldealers..."

Commentators requested that dealers bereminded that leveraging is an importantfactor to consider in determining suitabilityand that investment advisors have aresponsibility in this regard.

Commentators requested that this disclosurenot be applicable to situation involvingdealer margin accounts.

The CSA are of the opinion thatexcessive leveraging is aconcern and clients need to beinformed of the risks ofpurchasing securities usingleverage.

The CSA propose to require allregistrants to provide thisdisclosure to a retail client whenthe client is opening an account,the registrant makes arecommendation to purchasesecurities by leverage or if theregistrant is aware of the client'sintent to use leverage.

Registrants are exempted fromthe requirement to provide thisdisclosure when the registranthas provided the disclosurewithin six months of therecommendation or theregistrant is subject to leveragedisclosure requirements of arecognized SRO.

In addition, margin accountshave been exempted becausecomparable language is includedin the opening account form.

Subsections3.1

ProhibitedActivities in aBranch Office

Deleted

In the opinion of one commentator, theprovision of integrated financial services isa reality for all market participants, not justdealers in financial institution branches.Commentators stated that to require a clientto physically shift locations in the branch ofthe financial institution to obtain differenttypes of investment products is inefficientand not conducive to client needs. Havingthe client move may provide a facade ofclient protection, but, in their view, clientsare better protected by disclosure madeavailable by the dealer.

The CSA agree that the clientprotection can be achievedthrough the use of disclosure andthe general rules regardingregistrable activities.

Section 3.2

Opening ofAccounts in aBranch Office

Deleted

One commentator submitted that the currentpractice that requires all forms to bereviewed and approved by registeredpersonnel is sufficient.

The CSA are of the opinion thatthe general rules regarding whocan conduct registrable activitiesare sufficient.

Section 3.3

RovingRegistrants

Deleted

ProposedPolicy 33-102CPSection 2.3

Commentators questioned the rationalebehind this provision. In their view, therestrictions are unnecessary and make itmore difficult for financial institutions andrelated dealers to service clients in a costeffective manner relative to the needs of aparticular market that may not support full-time staffing of a dealer branch premises.

The CSA have deleted thisprovision and has provided someguidance in section 2.3 ofProposed Policy 33-102CPregarding supervision. Therestriction regarding how oftensomeone may be in a branch toprovide investment services tocustomers has been deleted.

Section 3.4

Registrationnot Required

Deleted

Commentators questioned the distinctionbetween dealer branches operating infinancial institutions from other dealers.While one stated that clients should onlydeal with someone who is registered for allbusiness regarding securities or the openingof an account, most commentators statedthat non registered personnel should be ableto provide administrative and supportingservices outlined in the proposal.

The CSA have deleted the list ofnon-registrable activities. It is upto the registrant to determinewhat activities shouldappropriately and legally beconducted by non-registeredpersonnel.

Section 4.1

DualEmployment

Deleted

Commentators argued that the provisionignores the fact that inherent conflicts ofinterest exist in all salesperson/investorrelationships and are not unique to dealerswho have dually employed personnel. Onecommentator submitted that as long as arepresentative is a full-time employee of thefinancial institution group, and sellsfinancial products full-time, she should bepermitted to be dually employed.

Commentators also indicated that theprovision would create problems for boardsof directors by precluding financialinstitution directors from being on the boardof a related securities dealer.

All local rules regardingdual/part-time employmentapply to all registrants whetheror not they are operating in afinancial institution branch. Inaddition, the CSA note that therequirement to implementprudent business guidelines toaddress potential conflicts ofinterest is present in securitieslegislation and the CSA do notintend to develop modelguidelines at this time.

Dual employment is alsodiscussed in CSA Notice 33-304CSA Distribution StructuresCommittee: Position Paperpublished at (1999), 22 OSCB5257.

Section 4.2

Compensation

Deleted

This provision is covered inNational Instrument 81-105Mutual Fund Sales Practices

Section 4.3

Restriction onDualEmployment

Deleted

Commentators indicated that the restrictionson dual employment go far beyond anyneed to prevent customer confusion orconflicts.

Commentators stated that the lack oflegislative harmony is unnecessary andburdensome and urged consistency betweenthe requirements across the provinces.

All local rules regardingdual/part-time employmentapply to all registrants whetheror not they are operating in afinancial institution branch.

Section 5.1

Referral Fees

Deleted

This is dealt with in CSA Notice33-304 CSA DistributionStructures Committee: PositionPaper published at (1999), 22OSCB 5257, and, in somejurisdictions, by legislation.

Part 6

ConfidentialClientInformation

Proposed NI33-102, Part3

ProposedPolicy 33-102CP

Section 4.1

Commentators acknowledged theimportance the confidentiality of clientinformation and respecting the client's rightto privacy. However, they expressedconcern about that the tighter rules do notreflect business realities that have comeabout in compliance with the Principles ofRegulation. Commentators stated that theintegration of financial services distributionis a reality. Common back offices andcentralized administrative services, whichmay use common systems to hold therecords of a variety of financial products,are in place throughout the financialservices industry. Client information ishoused on financial institution computersystems and employees handling backoffice processing are employees of thefinancial institution and not the dealer. Inthe view of the commentators, makingchanges would be costly and take aconsiderable amount of time. Commentatorsstated that the new rules would not permit adealer to decline to serve any client whorefused to consent to the informationsharing necessary to conduct administrative,processing, risk management and similaractivities. and therefore, dealers would beforced to develop duplicative back officesand administrative units to accommodatethese customers.

Commentators also requested that impliedand oral consent be sufficient to complywith the requirement in certaincircumstances.

One commentator expressed concern abouthaving the rules be more restrictive withrespect to sharing information with financialinstitutions.

The CSA have retained therequirement that consent of theretail client must be acquired todisclose confidential informationand has extended therequirement to all third parties,not just financial institutions.The requirement applies to retailclients at the time of opening ofan account.

The CSA acknowledge thatdisclosure of confidential clientinformation is necessary forsome products. Consequently,section 3.2 of the ProposedNational Instrument providesthat a registrant cannot make it ageneral condition of opening anaccount that the retail clientconsent to the dealer disclosingthat client's confidentialinformation, but the dealer mayrequire it if disclosure of theinformation is reasonablynecessary to provide a specificproduct or service requested bythe client. In the opinion of theCSA, this exemption addressesthe concerns of commentators.

Section 7.1

SettlingSecuritiesTransactions

Proposed NI33-102 Part 4

Commentators indicated that advances intechnology have led to products relying onand priced according to the efficiency oftheir technology linkages. The proposedrule is a significant change from thePrinciples of Regulation and will make itimpossible for dealers to comply withrespect of certain services which rely onemerging technologies. For example,Internet trading services usually require thatthe dealer be able to access a financialinstitution account of the client for purposesof settling trades. These accounts aretypically with a related financial institution.

In response to comments made,the CSA have provided anexception that indicates that theregistrant may require thismethod of settling if it isreasonably necessary to providethe service or product requestedby the client.

Section 8.1

No Notice

Deleted

The CSA have decided to deletethe requirement to filenetworking notices from theregulations/policies of thejurisdictions.

1997 PROPOSED COMPANION POLICY 33-102CP
DISTRIBUTION OF SECURITIES AT FINANCIAL INSTITUTIONS

Part 1

NetworkingNotices

Deleted

The CSA intend to take thenecessary actions to repeal oramend the requirement to filenetworking notices.

Part 2

Branch Office

Deleted

See comments under 1997 NI33-102 section 3.1.

Part 3

DualEmployment

Deleted

See comments under 1997 NI33-102 section 4.1

Part 4

ComplianceandSupervisoryActivities

ProposedPolicy 33-102CP

Section 2.3

It is the view of the CSA that thecontent of the deleted provisionsare covered by existingsecurities legislation. Onlysection 4.5 regardingsupervision has been maintained.

Part 5

RecordKeeping

ProposedPolicy 33-102CP Part 3

It is the view of the CSA that thecontent of the deleted provisionis covered by existing securitieslegislation. Only section 5.2regarding safeguards againstaccess to records by third partieshas been maintained.

Part 6

Reporting byCanadianFinancialInstitutions

Deleted

Commentators noted that this provisionconflicts with confidentiality of clientinformation provisions.

This issue is indirectly dealt withby the CSA Notice 33-304 CSADistribution StructuresCommittee: Position Paperpublished at (1999), 22 OSCB5257.

Part 7

RegistrableActivities

Deleted

See comments under 1997 NI33-102 section 3.4

Part 8

Referral feeArrangements

Deleted

See comments under 1997 NI33-102 section 5.1

1997 PROPOSED NATIONAL INSTRUMENT 33-103
DISTRIBUTION NETWORKS

Part 1

Definitions

Deleted

Part 2

Toll-free lines

Deleted

Commentators questioned the need formultiple registration, as it would be difficultto ensure that each call is routed to correctlyregistered personnel. They argued that thereis no policy reason to require residencyrequirements in addition to separateregistration requirements.

The CSA are currently workingon a mutual reliance/nationalregistration database that wouldseek to harmonize and simplifyresidency and officerequirements where services areprovided to residents of morethan one jurisdiction.

Part 3

ElectronicTrades ofSecurities

Deleted

Commentators asked for clarity regardingall aspects of electronic trading.

Trading through electronicsystems is not prohibited. TheCSA remind registrants that allresponsibilities, includingmaintenance of clientconfidentiality, suitability, areunchanged when using anelectronic system.

Part 4

No Notice

Deleted

This section is not necessarybecause the CSA intend torepeal or amend the requirementfor filing networking notices.

1997 PROPOSED NATIONAL INSTRUMENT 33-104 SELLING ARRANGEMENTSAND
1997 PROPOSED COMPANION POLICY 33-104CP SELLING ARRANGEMENTS

1997 NI 33-104 and 1997CP 33-104CP

Deleted

Proposed NI33-102 Part 5and ProposedPolicy 33-102CP Part 4

Commentators requested that the proposedinstrument be limited to tied-selling typearrangements where there could be seen tobe some form of coercive power. Inaddition, they requested provincial harmonywith respect to selling arrangements.

The CSA have replaced theseinstruments with provisions thattrack the language prohibitingtied selling in NationalInstrument 81-105 Mutual FundsSales Practices

PROPOSED NATIONAL POLICY 33-201
NETWORKING AND SELLING ARRANGEMENT NOTICES

1997 NationalPolicy 33-201

Deleted

Commentators argued that because themarket has evolved since the Principles ofRegulation were adopted, they see littleneed for most networking arrangements tobe filed or reviewed.

The CSA intend to take thenecessary actions to repeal oramend the requirement to filenetworking notices.