Proposed Provisions Respecting Order Execution Only Service Eligibility and Adviser Identifiers

1. Discussion of Proposed Amendments

The text of the Proposed DMR Amendments is set out in Appendix A and a blackline of the proposed changes is set out in Appendix B.  As well, the text of the Proposed PLR amendments is set out in Appendix C and a blackline of the proposed changes is set out in Appendix D.

The Proposed Amendments would:

• prohibit an OES Dealer from providing OES to a client that is a registered dealer
• expand the identifier requirement and require OES Dealers to assign unique identifiers to:
  • a registered adviser with control over an OES account
  • a foreign adviser equivalent with control over an OES account
• require OES Dealers to provide IIROC with each unique identifier and the identity of the corresponding registered adviser or foreign adviser equivalent
• require OES Dealers to include unique identifiers on all orders sent to a marketplace for an account over which a registered adviser or foreign adviser equivalent has control.

If approved, we expect the Proposed Amendments to be effective at least 90 days after the publication of the notice of approval.

1.1 Prohibition of Providing OES to a Registered Dealer

The Proposed Amendments would prohibit OES Dealers from providing OES to a registered dealer3 who is acting in the capacity of a registered dealer. 

For example, a registered adviser that is also a registered dealer is eligible for an OES  when acting in its capacity as an adviser and not in its capacity as a registered dealer.  If a dually registered firm uses OES to place trades for its managed account clients, then it would be considered to be using OES in its capacity as an adviser.

1.2 Definition of Adviser and Foreign Adviser Equivalent

The Proposed Amendments introduce two definitions: “adviser” and “foreign adviser equivalent”.

Adviser would include an entity that is acting and, registered or is exempted from registration as an adviser under securities laws.4  

Foreign adviser equivalent would include an entity that is in the business of trading securities in a foreign jurisdiction in manner analogous to an adviser.

1.3 Unique Identifiers

The Proposed Amendments would expand the requirement for identifiers in DMR 3200 and require OES Dealers to:

• assign unique identifiers to any registered adviser or foreign adviser equivalent with control over an OES account
• provide those unique identifiers and the corresponding identity of the registered adviser or foreign adviser equivalent to IIROC
• ensure that each order sent to a marketplace for these accounts contain the assigned unique identifier.

We propose that the unique identifiers would take the form of account numbers. This is the same form we currently require OES Dealers to use to identify registered dealers and advisers under DMR 3200.  We expect that OES Dealers would include the appropriate account number in the ACCOUNT_ID field (also known as FIX tag 1) of each applicable order. 

In the instance of an account where both a client identifier and a unique identifier for a registered adviser or foreign adviser equivalent have been assigned under DMR 3200, we would only expect the unique identifier of the registered adviser or foreign adviser equivalent be included on orders sent for that account. For example, if an OES client has been assigned a client identifier because its trading activity exceeds a daily average of 500 orders per trading day in a calendar month5 and a registered adviser or foreign adviser equivalent has control over that account, the OES Dealer would only need to include the unique identifier of the registered adviser or foreign adviser equivalent on orders sent to a marketplace for that account.  We would also expect that the OES Dealer provide IIROC with the identity of the registered adviser or foreign adviser equivalent.

When providing IIROC with the unique identifier and the corresponding identity of the registered adviser or foreign adviser equivalent, we propose that OES Dealers would use the same process currently in effect for providing client identifiers under DMR 3200.

2. Analysis  

2.1 Eliminating Opportunity for Regulatory Arbitrage

1. Current Requirements

DMR 3200 sets out the requirements for Dealer Members to offer an OES.  An OES allows a Dealer Member to accept orders from a customer without a suitability determination where no recommendation was provided by the Dealer Member.

IIROC believes that electronic orders that are entered through an OES and not directly handled by staff of a Dealer Member may introduce additional risk to the integrity of the market and that this risk is similar to those of other third-party electronic access channels such as DEA and RA.

However, today registered dealers (which include exempt market dealers and restricted dealers) may conduct investment dealer-type activity through an OES without the oversight and application of IIROC rules as imposed on a Dealer Member.  This is inconsistent with requirements for other electronic access channels, namely DEA and RA, which are not available to registered dealers, and presents a regulatory arbitrage opportunity.6  Under UMIR, Participants may not:

• grant DEA to a registered dealer7
• enter into an RA with a registered dealer other than with an investment dealer or foreign dealer equivalent.8

2. Effect of Proposed Prohibition

Preventing registered dealers from receiving OES access would eliminate this regulatory arbitrage opportunity by precluding registered dealers that are not investment dealers from conducting investment dealer-type trading on a marketplace.  Instead, prohibiting OES Dealers from providing an OES to a registered dealer would help ensure registered dealers:

• use an appropriate channel to access marketplaces for their registration category
• do not have the ability to use marketplace access channels where they are not subject to the full set of IIROC rules when conducting dealer-type activity on a marketplace.

We note that the Proposed Amendments would also prohibit investment dealers from getting OES access.  As RA requirements were specifically designed to facilitate trading by investment dealers, we believe that this electronic market access channel is most appropriate for such dealers. 

2.2 Improving Oversight of Registered Adviser and Foreign Adviser Equivalent Trading

1. Current Requirements

IIROC believes that trading through an OES may present risks similar to those of other third-party electronic access channels such as DEA and RA. DEA and RA requirements mandate that:

• DEA and RA clients be assigned unique identifiers
• IIROC be provided with these identifiers and the corresponding client name
• DEA and RA client identifiers be included on orders entered by that client via DEA or RA.9

Similarly, DMR 3200 currently requires OES Dealers to assign a unique client identifier where the client is, among others:

• registered as a dealer or adviser in accordance with securities law
• an entity in the business of trading securities in a foreign jurisdiction in a manner analogous to a dealer (foreign dealer equivalent) or a foreign adviser equivalent.

OES Dealers must also provide IIROC with the unique client identifier and corresponding identity of the client and include the client identifier on orders sent by or on behalf of that client through an OES.

2. Registered Advisers and Foreign Adviser Equivalents with Control Over OES Accounts

We understand certain OES clients have granted registered advisers control over their OES accounts which allows these registered advisers to trade on behalf of their clients through an OES.  This presents an issue as IIROC is currently not aware when trading in an OES account is conducted by a registered entity unless the account is held directly by a registered adviser or foreign adviser equivalent.

Identifying registered advisers and foreign adviser equivalents with control over an OES account on orders sent for that account to a marketplace would:

1. improve our surveillance capability over registered advisers and foreign adviser equivalents and help us better detect unusual orders and trading patterns
2. be consistent with the current requirements for DEA and RA, thereby ensuring that similar requirements exist regardless of the marketplace access channel used10
3. better address the risks of electronic trading. 

3. Proposed Client Identifier Changes

In Rules Notice 18-0122 Re-Publication of Proposed Provisions Respecting Client Identifiers published on June 28, 2018, we proposed amendments to DMR 3200 (Proposed Client Identifier Changes).  If the Proposed Amendments are approved, they would be incorporated into any final rule pertaining to client identifiers.  If both the Proposed Amendments and Proposed Client Identifier Changes are approved, OES Dealers would:

• need to include the legal entity identifier (LEI) of the registered adviser or foreign adviser equivalent on each order for an account over which they have control
• no longer have to provide IIROC with the corresponding identity.  

4. Impacts of the Proposed Amendments

We believe the Proposed Amendments do not impose:

• burdens or constraints on competition or innovation that outweigh the benefits of IIROC’s regulatory objectives
•  costs or restrictions on the activities of market participants (including Dealer Members and non-Dealer Members) that are disproportionate to the goals of our regulatory objectives.

4.1 OES Dealers

OES Dealers will be required to develop policies and procedures to:

• ensure they do not provide registered dealers with OES access
• identify registered advisers and foreign adviser equivalents that have control over an OES account
• assign unique identifiers to those identified registered advisers and foreign adviser equivalents
• provide IIROC with the unique identifier and the identity of the corresponding registered adviser or foreign adviser equivalent
• ensure the unique identifier is included on each order sent to a marketplace for each account over which a registered adviser or foreign adviser equivalent has control.

4.2 Registered Dealers

Any investment dealer trading through OES would need to explore entering into a routing arrangement with a Participant. Any other registered dealers trading through OES would need to change their work-flow to trade through a Participant on an intermediated basis (where orders are directly handled by registered staff).  If trading on an intermediated basis is unsuitable, they would have the option of pursuing registration as an investment dealer and becoming an IIROC member.

4.3 Other Dealer Members

Participants that execute for OES Dealers would be required to make any necessary changes to their systems to accommodate the use of the proposed expanded use of identifiers on orders originating from an OES Dealer.

4.4 Marketplace Impacts

We do not believe the Proposed Amendments would impose any technological implications on marketplaces.

5. Implementation

We would expect the Proposed Amendments to become effective at least 90 days after the publication of the notice of approval but are specifically requesting comments on an appropriate implementation period.

6. Questions

We welcome comments on all aspects of the Proposed Amendments, but specifically request comments on the following questions:

1. We anticipate using account numbers as the unique identifiers that are proposed in the Proposed Amendments.  We note that client account numbers are currently used to identify registered dealers and advisers under DMR 3200.  Is there a better identifier that could be used that would have less impact on market participants?
2. What are the greatest impacts of the Proposed Amendments on Dealer Members?
3. What would be an appropriate length for the implementation period of the Proposed Amendments?

7. Policy Development Process

7.1 Regulatory Purpose

The Proposed Amendments would:

• establish and maintain rules that are necessary or appropriate to govern and regulate all aspects of IIROC’s functions and responsibilities as a self-regulatory entity
• ensure compliance with securities laws
•  prevent fraudulent and manipulative acts and practices
• foster fair, equitable and ethical business standards and practices
• promote the protection of investors.

7.2 Regulatory Process

The Board of Directors of IIROC (Board) has determined the Proposed Amendments to be in the public interest and on May 24, 2018 approved them for public comment.  The Market Rules Advisory Committee of IIROC considered this matter in concept as proposed by IIROC staff.  MRAC is an advisory committee comprised of representatives of each of the marketplaces for which IIROC acts as a regulation services provider, Dealer Members, institutional investors and subscribers and the legal and compliance community.11

After considering the comments on the Proposed Amendments received in response to this Request for Comments together with any comments of the CSA, IIROC may recommend that revisions be made to the applicable proposed amendments.  If the revisions and comments received are not material, the Board has authorized the President to approve the revisions on behalf of IIROC and the proposed amendments as revised will be subject to approval by the CSA.  If the revisions or comments are material, the Proposed Amendments including any revisions will be submitted to the Board for approval for republication or implementation, as applicable.

8. Appendices

Appendix A – Proposed DMR Amendments

Appendix B – Blackline of Proposed DMR Amendments

Appendix C – Proposed PLR Amendments

Appendix D – Blackline of Proposed PLR Amendments

• 3This would include any entity that is acting and, registered or exempted from registration such as an investment dealer, exempt market dealer, restricted dealer or any other dealer category included in section 7.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
• 4This would include a portfolio manager or restricted portfolio manager registered under section 7.2 of NI 31-103.
• 5Paragraph 3241(4)(i) of DMR 3200 currently requires Dealer Members to ensure that a client identifier is assigned to each client that trades on a marketplace whose trading activity on marketplaces exceeds a daily average of 500 orders per trading day in any calendar month.
• 6A similar form of regulatory arbitrage was addressed in National Instrument 23-103 Electronic Trading and Direct Access to Marketplaces (NI 23-103). Subsection 4.2(2) of NI 23-103 specifically prohibits a Participant from providing DEA to clients that are acting and registered as dealers. The CSA states in section 4.2 of 23-103CP that dealers that are acting as and registered in dealer categories other than “investment dealer” should not have DEA to marketplaces through a Participant unless they themselves are investment dealers and subject to IIROC rules. This prohibition was premised on the view that dealers should not be able to “opt-out” from the application of IIROC rules and that if a dealer wants to engage in investment dealer-type activity, then it should be held to the requirements of acting as an investment dealer.
• 7UMIR Rule 7.13(1)(b)
• 8UMIR Rule 1.1 definition of “routing arrangement”
• 9UMIR Rule 7.13
• 10Under UMIR Rule 10.15: (i) clients that trade using DEA, and (ii) clients, dealers and foreign dealer equivalents that trade through a routing arrangement, must be assigned a unique identifier.
• 11Consideration by MRAC should not be construed as approval or endorsement of the Proposed Amendments. Members of MRAC are expected to provide their personal advice on topics and that advice may not represent the views of their respective organizations as expressed during the public comment process.