1. Background

1. Timing of implementation of IIROC 2015 and 2016 CRM2 Amendments

On January 19, 2015 IIROC announced through the issuance of Rules Notice 15-0013 that amendments to Dealer Member Rule 200 and to Dealer Member Form 1 (collectively the “IIROC 2015 and 2016 CRM2 Amendments”) had been approved by the Canadian Securities Administrators (“CSA”) and that these rules would be implemented in two stages on July 15, 2015 and July 15, 2016.

The notice also indicated that comments had been received through IIROC’s public comment process requesting that IIROC delay the implementation dates for the 2015 and 2016 IIROC CRM2 amendments 5½ months to December 31, 2015 and December 31, 2016, respectively and that this request was being considered. 

On June 11, 2015 IIROC announced through the issuance of Rules Notice 15-0128 housekeeping revisions to and changes to the effective dates of the IIROC 2015 and 2016 CRM2 Amendments.  The revised effective dates announced are as follows:

• For the 2015 CRM2 Amendments, December 31, 2015
• For the 2016 CRM2 Amendments:
  • July 15, 2016 for Dealer Members that do not intend to prepare annual reports on a calendar year basis
  • December 31, 2016 for Dealer Members that do intend to prepare annual reports on a calendar year basis

1. IIROC’s willingness to consider exemption requests

Because many Dealer Members do not support the holding of off-book client named assets and/or hold immaterial quantities of such assets for clients, IIROC first announced on September 18, 2014 through the issuance of Rules Notice 14-02141 that exemptions from the new obligation to provide clients with a quarterly “Report on client positions held outside of the Dealer Member” [scheduled to come into effect for the quarter ended December 31, 2015] would be considered. Specifically, this notice stated that:

“to ensure that the introduction of the new “Report on client positions held outside of the Dealer Member” does not result in Dealer Members having to build a new capability to report on off-book positions to an immaterial number of clients and/or to report on an immaterial dollar amount of off-book client positions, IIROC will consider exemption requests from Dealer Members who can demonstrate that the costs of building and administering this new client reporting capability significantly outweigh the benefits to the client of also receiving off-book position information from their “dealer of record”2.  In considering each exemption request, IIROC will need to be satisfied that the Dealer Member:

• has made a good faith effort to convert off-book client name positions into on-book nominee name positions;
• does not maintain material number or amount of off-book client named positions;
• is not promoting, or otherwise actively making available, the option of holding client-named positions off-book3; and
• does not receive any ongoing compensation on the off-book client named positions.”

1. IIROC survey to determine number of Dealer Members likely to apply for an exemption

In March, IIROC conducted a survey to determine the likely number of Dealer Members that would be applying to be exempted from the new requirement to provide clients with a quarterly “Report on client positions held outside of the Dealer Member”. The survey results at that time indicated that approximately 50 Dealer Members would be applying.

1. Exemption applications received and Board decisions made

1. Board review of exemption applications

On June 25, 2015, September 10, 2015 and November 19, 2015, the IIROC Board of Directors (the “Board”) reviewed and approved 44 applications (covering 46 Dealer Members) to be exempted from the following IIROC rule provisions:

• the new requirement to provide clients with a quarterly “Report on client positions held outside of the Dealer Member” set out in Dealer Member Rule sub-section 200.2(e); and
• the new requirement to consider off-book client-named holdings in the preparation of the client’s performance report as mandated under Dealer Member Rule sub-section 200.2(f).

The remainder of this Rules Notice summarizes the decisions taken by the Board on these exemption applications.

1. Firms meeting all “general exemption conditions”

Of the 46 firms that submitted a rule exemption application, 29 firms were able to demonstrate that they:    

• have made a good faith effort to convert off-book client name positions into on-book nominee name positions;
• do not maintain material number or amount of off-book client named positions;
• are not promoting, or otherwise actively making available, the option of holding client-named positions off-book; and
• do not receive any ongoing compensation on the off-book client named positions.

and, as a result, are currently compliant with the four “general exemption conditions” publicly announced by IIROC in September 2014 and January 2015. Based on this information, the Board approved the issuance of an exemption order for each of these 29 firms. The order issued requires that the firm:

• comply with the “general exemption conditions” at all times
• make reasonable efforts to reduce its level of off-book client name holdings each year; and
• provide IIROC with an annual report detailing the firm’s current level of off-book holdings and, where the level has increased year over year:
  • provide the reason(s) for the increase; and
  • set out the firm’s plans to eliminate this increase and reduce its level of off-book client name holdings

As is standard for exemption orders of this type, the exemption order issued to each of these firms also specified that:

• the Board can revoke the exemption order issued at any time; and
• the exemption order is void on the date that any amendments are made to the rules by IIROC or the provincial securities commissions relating to reporting on off-book client holdings.

1. Firms meeting most “general exemption conditions”

The remaining 17 firms, because they did not currently comply with all “general exemption conditions” and/or they were asking that certain exceptions be made to the “general exemption conditions”, were reviewed by the Board on a case-by-case basis.

1. Firms with material off-book holdings

One firm with current material off-book client named holdings offered as part of their application to:

• submit to IIROC a monthly report detailing the firm’s current level of off-book client named holdings; and
• provide their clients all of the periodic reporting required under IIROC Dealer Member Rule section 200.2

until such time as IIROC is satisfied that their off-book client named holdings are immaterial.  Because in the interim this firm was in essence offering to comply with all IIROC client reporting rules (including the off-book position reporting requirements when they come into effect on December 31, 2015), the Board approved this firm’s request and issued an exemption order that included the same compliance, reporting, revocation and “sunset” conditions previously discussed above in the section “Firms meeting all exemption conditions”.

A second firm with current material off-book client named holdings associated with a small number of client accounts (i.e. less than 10 accounts) was reviewed as part of the review of firms asking for specific off-book business line exceptions (discussed below).

1. Firms asking for specific off-book business line exceptions

16 firms requested that an exception be made to enable them to retain compensation received on one or more of the following off-book business lines:  

• off-book Registered Disability Savings Plan (“RDSP”) assets [11 firms]
• off-book Registered Education Savings Plan (“RESP”) assets [10 firms]
• off-book group Registered Retirement Savings Plan (“RRSP”) assets [3 firms]
• other off-book savings plan assets [3 firms]
• off-book managed Retail Customer assets [3 firms]
• 3 firm-specific off-book business line situations

without having to report on the associated off-book client named positions.

Of the above requests, the only requests for which the Board granted an exception to all that asked for it was for off-book RDSP and RESP assets. Agreeing to the off-book RDSP and RESP asset exceptions for all firms that asked for it was considered warranted by the Board as:

• there are relatively few off-book RDSP and RESP arrangements put in place and in virtually all cases the parents and others that are contributing to these plans are pre-existing clients of the firm who wish to access advice from their existing account advisor;

• these arrangements involve relatively small dollar amounts due to the government-imposed limits on the lifetime contributions that may be made to these plans4; and
• because of the government-sponsored grants and bonds that are annually available to plan beneficiaries under these arrangements, significant changes would need to be made to existing on-book account systems and administrative processes to:
  • collect and update plan beneficiary and beneficiary family information; and
  • ensure that applications are submitted for all grants and bonds for which the beneficiary is eligible.

With respect to the remaining exception requests, the Board granted certain individual firm exceptions in instances where:

• clients that were neither Canadian citizens nor Canadian residents were involved;
• foreign pension plan assets were involved and the on-book movement of such assets would result in a client tax liability; or
• additional time was needed to either move the client assets on-book or move the client assets to another dealer.

In the latter instance, the Board gave two firms until June 30, 2016 to facilitate the move of off-book client assets.

In summary, the Board approved the issuance of an exemption order for each of these remaining 16 firms that:

• included the same compliance, reporting, revocation and “sunset” conditions previously discussed above in the section “Firms meeting all exemption conditions”; and
• granted one or more of the Board-approved business line exceptions,

1. Key statistics for Dealer Members receiving exemptions

Attached are statistics relating to the dollar value of off-book client named assets held and the number of clients holding off-book assets for the 46 firms that received exemptive relief.

1. Questions / further information

For questions or further information concerning this notice contact:

Ricchard J. Corner
Vice President and Chief Policy Advisor, Member Regulation
Telephone: 416.943.6908
E-mail:    rcorner@iiroc.ca

Key statistics
Type of exemption application	Dollar amount of client off-book holdings (off-book client name - amounts in millions)	Dollar amount of all client holdings (nominee, on-book client name and off-book client name - amounts in millions)	Off-book percentage - based on dollar values	Number of clients with one of more off-book holdings	Total number of clients	Percentage of clients with one or more off-book positions
Firms meeting all of the “general exemption conditions”	$334.65	$687,063.61	0.049%	23,245	5,000,740	0.465%
Firms meeting most of the “general exemption conditions”	$1,859.38	$711,290.54	0.261%	76,936	2,985,727	2.577%
Subtotal for all applications	$2,194.03	$1,398,354.15	0.157%	100,181	7,986,467	1.254%

• 1IIROC Rules Notice 15-0013 issued on January 19, 2015 also included this same announcement.
• 2In the case of off-book client named mutual fund positions, clients already receive annual position information from the investment fund manager for the mutual fund.
• 3Exceptions will be made under certain circumstances for certain accounts such as Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs) where some client positions may only be held in client name. 
• 4The lifetime contribution limits are $200,000 and $50,000 for RDSPs and RESPs, respectively.