Notice: NI - 33-103 - Distribution Networks

 

NOTICE OF PROPOSED NATIONAL INSTRUMENT 33-103

DISTRIBUTION NETWORKS

Substance and Purpose of Proposed National Instrument

The substance and purpose of the proposed National Instrument are to set out conditions to the operation of toll-free telephone lines and the electronic trading ofsecurities by registered dealers.

The proposed National Instrument implements current Staff practice in a number of jurisdictions and the conditions imposed relating to the operation of toll-freetelephone lines are substantially similar to those set out in The Principles of Regulation Re: Distribution of Mutual Funds by Financial Institutions that itreplaces. However, the proposed National Instrument is not restricted to the sale of mutual funds nor to trades by dealers related to financial institutions.

The proposed National Instrument does not provide an exemption from any of the normal conditions of registration including the "know your client" andsuitability rules nor does it provide an exemption from the requirement in Canadian securities legislation to deliver a prospectus.

As a result of amendments to Canadian securities legislation in 1987 relating to the removal of ownership restrictions on registrants, a number of financialinstitutions invested in existing registrants or incorporated registrants as subsidiaries. The Canadian Securities Administrators (the "CSA") expressed regulatoryconcerns about the arrangements between a financial institution and its related registrants in relation to conducting securities activities within retail offices of thefinancial institution, in particular the sale of mutual fund securities and other relationships of registrants to clients common to the financial institution and theregistrants.

In 1987, the CSA established a subcommittee to review these regulatory issues and provide recommendations to the CSA. The subcommittee consulted withrepresentatives of financial institutions, registrants related to financial institutions, self-regulatory organizations, the Canadian Bankers Association, The TrustCompanies Association of Canada, the Investment Funds Institute of Canada and the Office of the Superintendent of Financial Institutions. The subcommitteethen put forward to the CSA for consideration a series of "Principles of Regulation" commencing in 1988.

In November 1988 most of the CSA adopted The Principles of Regulation Re: Distribution of Mutual Funds by Financial Institutions, which permit the sale ofmutual fund securities issued by a mutual fund that is sponsored by the financial institution or an affiliate of the financial institution, in retail offices of thefinancial institution by persons who are dually employed by the financial institution and the registrant. These Principles also establish conditions to the sale ofmutual funds in this manner that are intended to limit potential public confusion and conflicts of interest.

The CSA also adopted The Principles of Regulation Re: Full Service and Discount Brokerage Activities of Securities Dealers in Branches of Related FinancialInstitutions in November 1988. These Principles permit dealers to carry on securities activities in retail offices of related financial institutions subject toconditions that are intended to limit potential public confusion and conflicts of interest.

In June 1990 the CSA adopted The Principles of Regulation Re: Activities of Registrants Related to Financial Institutions, which deal with several issues arisingout of the ownership by financial institutions of registrants, including selling arrangements, disclosure of confidential client information and settling of securitiestransactions through a client's account at a related financial institution. These Principles also established a national clearing system for review of networkingnotices submitted to the CSA.

In 1994, Glorianne Stromberg, a Commissioner of the Ontario Securities Commission, was requested to undertake a review of the investment fund industry inCanada. Ms. Stromberg consulted extensively with industry participants, their advisers, the regulators and industry organizations prior to preparing a report (the"Stromberg Report") which was submitted to the CSA in January 1995. The Stromberg Report was also made available to the public for consideration. The CSAhas established a number of industry and regulatory working groups to consider the recommendations made in the Stromberg Report. One of therecommendations in the Stromberg Report was that there should be no restrictions on the use by investors of toll-free lines or on the use by existing clients ofdealers of electronic systems provided certain conditions are met. These conditions included the following: trades must be effected subject to the "know yourclient" and suitability requirements of Canadian securities legislation; a prospectus, if required, must have been previously delivered to the client; the system hascontrols relating to the suitability range for the account holder and limits the opportunity for fraud; and a client's account is only accessible by the client.

The proposed National Instrument, together with proposed National Instrument 33-102 Distribution of Securities at Financial Institutions and its CompanionPolicy 33-102CP, proposed National Policy 33-201 Networking and Selling Arrangement Notices and proposed National Instrument 33-104 SellingArrangements and its Companion Policy 33-104CP replace the Principles of Regulation.

The proposed National Instrument is an initiative of the CSA, and is expected to be adopted as a rule in British Columbia, Alberta, Ontario and Nova Scotia, as aCommission regulation in Saskatchewan and as a policy in each other jurisdiction represented by the CSA.

The proposed National Instrument and Companion Policy implement, in part, the recommendation of the CSA Task Force on Operational Efficiencies thatCanadian securities regulatory authorities increase the co-ordination of regulation, including standardization of requirements.

Summary of Proposed National Instrument

The proposed National Instrument establishes conditions to the operation by a registered dealer of toll-free telephone lines and the electronic trading of securities

The proposed National Instrument requires that a call made by an individual for a securities transaction or advice on a securities transaction on a toll-free lineoperated by a registered dealer must be dealt with by an individual registered in the jurisdiction in which the call originates.

The registration provision requires dealers that offer their services in more than one jurisdiction over toll-free lines to bear the costs of registration in eachjurisdiction. To meet all the registration requirements, the dealer may also incur other costs such as having to operate more than one call centre to meet residencyrequirements. The CSA requests comment on whether the registration requirement should be relaxed so that salespersons only have to be registered in thejurisdiction in which the call centre is located.

The proposed National Instrument also permits trades by registered dealers through an electronic system provided that the system: limits access to a client'saccount to the client; does not accept transactions outside the suitability range for the client established by the dealer; refers to a registered director, partner,officer or salesperson of the dealer any order to purchase or sell securities outside the suitability range; and cannot be used to open an account. This reverses theprohibition on the sale of securities through electronic means set out in The Principles of Regulation Re: Distribution of Mutual Funds by Financial Institutions.

The proposed National Instrument permits registrants to obtain account opening information from clients electronically.

Authority for Proposed National Instrument

In those jurisdictions in which the National Instrument is to be adopted or made as a rule or regulation, the securities legislation in each of those jurisdictionsprovides the securities regulatory authority with rule-making or regulation-making authority in respect of the subject matter of the proposed National Instrument.

In Ontario, the following provisions of the Securities Act (Ontario) (the "Ontario Act") provide the Ontario Securities Commission (the "Ontario Commission")with authority to make the proposed National Instrument. Paragraph 143(1)2 of the Ontario Act authorizes the Ontario Commission to make rules prescribingthe conditions of registration or other requirements for registrants or any category or sub-category of registrant including standards of practice and businessconduct of registrants and requirements that are advisable for the prevention or regulation of conflicts of interest. Paragraph 143(1)13 of the Ontario Actauthorizes the Ontario Commission to make rules regulating trading or advising in securities to prevent trading or advising that is fraudulent, manipulative,deceptive or unfairly detrimental to investors.

Alternatives Considered

The proposed National Instrument replaces in part The Principles of Regulation Re: Distribution of Mutual Funds by Financial Institutions. The CSA believethese Principles have worked well to date and did not consider any alternatives.

Unpublished Materials

In proposing the National Instrument, the CSA have not relied on any significant unpublished study, report or other written materials.

Anticipated Costs and Benefits

The proposed National Instrument allows the use of technology to effect trading activities that may reduce the costs of these activities to investors and dealersand increases the ease of access by investors to dealers. The proposed National Instrument may impose costs on registered dealers in designing systems to meetthe security requirements in the proposed National Instrument. The CSA believe the benefits outweigh the cost.

Regulation to be Amended

The Ontario Commission will amend subsection 229(1) of the Ontario Regulation to refer to the proposed National Instrument rather than the Blanket Order (the"Blanket Order") of the Ontario Securities Commission In the Matter of Networking Arrangements Governed by the Principles of Regulation (1993), 16 OSCB6168 (the "Ontario Deemed Rule"), now a rule that it replaces.

The Ontario Deemed Rule duplicates the proposed National Instrument and expires on the date the National Instrument becomes effective.

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument. Submissions received by February 27, 1998 will beconsidered.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission in duplicate, asindicated below.

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Securities Registry, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territory

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

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows:

Claude St. Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3

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

Questions may be referred to any of:

Ross McLennan
Director, Registration
British Columbia Securities Commission
(604) 899-6500

David Sheridan
Legal Counsel
Alberta Securities Commission
(403) 297-2630

Barbara Shourounis
Director
Saskatchewan Securities Commission
(306) 787-5645

David Cheop
Counsel
Manitoba Securities Commission
(204) 945-2548

Tanis MacLaren
Associate General Counsel
Ontario Securities Commission
(416) 593-8259

Renée Piette
Financial Analyst
Commission des Valeurs Mobilières du Québec
(514) 873-5009

Elaine Anne MacGregor
Deputy Director, Capital Markets
Nova Scotia Securities Commission
(902) 424-7768

Ruth DeMone
Registrations Officer
Prince Edward Island Securities Commission
(902) 368-4550
Proposed National Instrument

 

The text of the proposed National Instrument follows, together with footnotes that are not part of the National Instrument but have been included to providebackground and explanation.

DATED: November 28, 1997.