1. Discussion of Proposed Amendments

We propose to replace the definition of a “non-client order” or “non-client account” with:

“Dealer Related Person account” means an account that is controlled or directed by: an employee or Approved Person of a Dealer Member, an employee of an affiliate of a Dealer Member, or an employee of a related entity of a Participant whose role or function would have access to: a material fact or material change with respect to an issuer that is in the Dealer Member’s possession and has not been generally disclosed and would reasonably be expected to affect the price of a security of that issuer, or trading-related information that is in the Dealer Member’s possession  that could reasonably be expected to affect interest in the purchase or sale of a security or the execution of a trade where the control or direction is exercised by the employee or Approved Person outside of his or her required role or function. “Dealer Related Person order” means an order for the purchase or sale of a security for a Dealer Related Person account.

The proposed “Dealer Related Person account” definition would focus on two key components:

• access to non-public information, and
• control or direction over the account.

Both components must be present to constitute a “Dealer Related Person account”.

2. Analysis

2.1  Background

The UMIR definitions of “non-client order” and “principal order” have been in place since before 2002. “Non-client order” and “principal order” are separate definitions in UMIR 1.1, and there have been no amendments to these definitions since their implementation.

In January 2012, IIROC introduced a proposed definition of “non-client orders” in the IIROC Rules.412-0005 – Rules Notice – Request for Comments – DMR – Plain language re-write project – Interpretation and standards; Proposed Rules 1100 through 1400 (January 6, 2012).
Attachment A of IIROC Notice 12-0005 proposed a new definition in IIROC Rule 1201(2) of “non-client orders” to mean “Orders from the accounts in which the Dealer Member or an approved person has an interest other than the commission charged.” This “non-client orders” definition was carried forward in the subsequent re-publications of the IIROC Rules in 2016516-0052 – Rules Notice – Request for Comments – DMR - Re-Publication of Proposed IIROC Dealer Member Plain Language Rule Book (March 10, 2016). There was a slight change to the proposed definition in the 2016 re-publication as follows:
“non-client accounts” or “non-client orders” mean accounts or orders in which the Dealer Member or an
Approved Person has a direct or indirect interest other than the commission charged., 20176. and 2018
7.

2.2 Increase consistency between the IIROC Rule definition and UMIR definition

There was a lack of consistency between the IIROC Rule definition of “non-client orders” / “non-client accounts” and the UMIR definitions of “non-client order” and “principal order” because:

• the IIROC Rule definition combines the orders from both a Dealer Member’s proprietary account and an Approved Person’s8 account together as “non-client orders”
• UMIR distinguishes an employee’s order separately from an order for a Participant’s own account. 9Generally speaking, orders from employee accounts are “non-client orders”, whereas orders for a Participant’s proprietary accounts are “principal orders”10.  

The Proposed Amendments would replace the inconsistent definitions of “non-client orders” with a new, consistent definition of “Dealer Related Person order”, which would apply to employees and Approved Persons of Dealer Members, employees of affiliates of Dealer Members and related entities of a Participant.

2.2.1 Introducing a new definition of “Dealer Member account”

The Proposed Amendments would also introduce a new definition of “Dealer Member account” to the IIROC Rules. Similar to the approach taken in UMIR, the IIROC Rules would distinguish an account of an employee or Approved Person from a Dealer Member’s proprietary account as follows:

“Dealer Member account” means an account in which a Dealer Member holds a direct or indirect interest other than an interest in the commission charged on a transaction.

 

1. 1. 1. 1. Impacts to the IIROC Rules from the new definition of a “Dealer Member account”

Under the IIROC Rules, “non-client account” and “non-client order” include the accounts and orders of employees, Approved Persons and Dealer Members. Under the Proposed Amendments, Dealer Members would not be included in the defined term “Dealer Related Person account”. Rather, we are proposing the defined term “Dealer Member account” to refer to a Dealer Member’s account. We are proposing these changes for consistency with UMIR, which distinguishes between:

• “non-client orders”, which captures orders from accounts held by employees , and 
•  “principal order”, which captures orders from a Participant’s (the registered entity) account.

Since Participants are also Dealer Members, a Participant’s “principal account” under UMIR would also be considered a “Dealer Member account” under the IIROC Rules. By having separate definitions for “Dealer Related Person account” and “Dealer Member account”, the IIROC Rules can be more precise as to which types of accounts a given requirement applies to.

We replaced the “non-client account” or “non-client order” terms in the IIROC Rules with the “Dealer Related Person” and/or the “Dealer Member account” terms, depending on the policy intent of that section.  

We also replaced references to “proprietary”, “principal trading account” and other similar terms in the IIROC Rules with the defined term “Dealer Member account” where we intend to capture the Dealer Member’s account.  For example, in clause 2410(19)(ii), we replaced the term “principal trading account” with the term “Dealer Member account” because we are referring to the introducing broker’s (a Dealer Member) account. Please see Appendices A and B for more details on these changes.

1. 3. Increase Consistency in Identification of Non-Client Accounts

We heard from certain Dealer Members that there is currently some confusion over how to mark orders or accounts as “non-client”. Industry stakeholders recommended that we update the “non-client orders” definition to reflect different corporate structures and business arrangements of Dealer Members and household relationships.

The Proposed Amendments would:

• clarify the scope of accounts that should be captured within the non-client definition
• provide Dealer Members with greater flexibility using a principles-based approach to classify accounts based on the type of information access or controls that are in place at their firm.

3. Consultation with Working Group

IIROC struck a Working Group to provide input on the Proposed Amendments. The Working Group was composed of 19 representatives from a range of Dealer Members that included both Participants and non-Participants, such as bank-owned dealers, dealers providing order-execution only services, dealers that are full service providers for retail accounts, institutional dealers, an independent dealer, and a carrying broker. We surveyed our Working Group Members to better understand how Dealer Members currently identify who is a “pro” and use the “pro” group in their practice. The survey results and consultation with the Working Group helped informed the proposed changes.

4. Changes to the Non-Client Definition
   1. Replacing “non-client” with “Dealer Related Person”

The identification of a “non-client” under our rules is important as it relates to, among other things, client priority. However, the term “non-client” may be confusing as “non-clients” are in fact clients of the Dealer Member. Accordingly, rules such as suitability and best execution apply with respect to “non-clients”. We propose to move away from the term “non-client” in order to eliminate any confusion. We also considered the term “pro” which is often used by Dealer Members; however, “pro” can have different meanings in various contexts and as a consequence may cause confusion.

Accordingly, as suggested by the Working Group, we propose to use the term “Dealer Related Person” in place of “non-client”.

1. 2. Employee
      1. Employee of the “affiliate”[8] of a Dealer Member

We propose including accounts controlled by employees of an “affiliate” of a Dealer Member in the “Dealer Related Person account” definition where the affiliate employee has access to confidential information at the Dealer Member. This is because we heard that services of certain groups (information technology, compliance, administrative, credit, etc.) may be shared between an affiliate and the Dealer Member. In some cases, these groups perform certain functions for the Dealer Member (and may have access to confidential information), but are considered employees of the affiliate (not the Dealer Member).

“Affiliates” can include entities that are not IIROC Dealer Members, such as banks, exempt market dealers or foreign affiliates. By referring to the “affiliate” of the Dealer Member, we intend to capture those employees that also provide services to the Dealer Member and have access to confidential information that are in the possession of the Dealer Member.

1. 1. 2. Employee of a “related entity” of a Participant

The Proposed Amendments carry over the reference to “related entity” from the UMIR 1.1 definition of a “non-client order” to the proposed “Dealer Related Person account” definition. A “related entity” includes a client of an affiliate of a Participant that is a registered dealer or adviser in Canada and has been deemed by IIROC to act in conjunction with that Participant under UMIR 10.4(3)[9].

1. 3. Confidential information
      1. Access to confidential information

We propose limiting the scope of the “Dealer Related Person account” definition to accounts controlled or directed by employees or Approved Persons that have access to confidential information.

While we would provide guidance[10] on the meaning of access to confidential information, Dealer Members would have the flexibility under a principles-based approach to decide which employees or Approved Persons have the ability to access confidential information pursuant to the firm’s structure, controls and policies.

1. 1. 2. In the possession of the Dealer Member

The proposed “Dealer Related Person account” definition would focus on confidential information that is within the possession of the Dealer Member. For example, if a Dealer Member’s affiliate has confidential information about an issuer listed on a Canadian exchange and the Dealer Member’s employee has access to that information – that employee would not be considered a Dealer Related Person by virtue of access to the affiliate’s information alone. Since the confidential information is not in the Dealer Member’s possession, the Dealer Member could not be expected to track the flow of this confidential information at its affiliate or related entity for the purpose of marking an account as a Dealer Related Person account. The affiliate employee at issue would continue to be subject to other requirements prohibiting him or her from acting on confidential information.[11]

On the other hand, if a Dealer Member has confidential information and an employee of the Dealer Member’s affiliate has access to that information – then that affiliate employee would be considered a Dealer Related Person under clause (i) or (ii) of the proposed “Dealer Related Person account” definition.

1. 1. 3. Scope of confidential information

We intend to capture individuals with access to confidential information under the proposed “Dealer Related Person account” definition. However, we have proposed a more specific term than “confidential information” to focus on information that would affect the price or trading of a security, and not other types of information that may also be considered confidential (e.g. a client’s personal information such as their date of birth or social security number, etc.).

1. “material fact or material change with respect to an issuer that has not been generally disclosed and could reasonably be expected to affect the price of a security of that issuer”

The scope of confidential information with respect to an issuer referred to in clause (i) of the proposed “Dealer Related Person account” definition would be based on securities legislation, and we would rely on the definitions and interpretations of these terms under the applicable statute.[12]

For example, the statutory definition of “security” includes both listed and unlisted securities.[13] By relying on the statutory definition, we would include individuals with access to material non-public information related to new issues (e.g. those in corporate finance or investment banking groups) as well as secondary offerings. For the same reason, the reference to “issuer” includes both an issuer that has outstanding issues, or proposes to issue, a security.[14] 

2. “trading-related information that is in possession of the Dealer Member that could reasonably be expected to affect interest in the purchase or sale of a security or the execution of a trade”

Clause (ii) of the proposed “Dealer Related Person account” definition is meant to capture confidential information about trading, in addition to confidential information about issuers (from subsection 5.3.3(a) above).  Information about trading (e.g. existence of client or principal orders, indications of interest, historical trade and position data, trading strategies) is highly confidential and employees or Approved Persons are prohibited  from acting on that information outside of their work capacity.

1. 4. Control or direction
      1. Control or direction exercised outside of the employee’s or Approved Person’s required role or function

The proposed “Dealer Related Person account” definition would include accounts controlled or directed by an employee or Approved Person that can access confidential information. The “control or direction” over an account relates to an employee’s or Approved Person’s ability to affect trading in accounts outside of his or her required role or function. For example, a trader that handles client orders would have control over client accounts in the normal course of their employment, however those client accounts would not be considered Dealer Related Person accounts. Similarly, a proprietary trader would have the ability to direct trading for a Dealer Member’s principal accounts, however those principal accounts would not be considered Dealer Related Person accounts. The definition only captures situations where an employee or Approved Person exercises control or direction over an account outside of his or her required role or function, which could be held by the employee or Approved Person directly or by someone else.

1. 1. 2. Accounts held by individuals other than the employee or Approved Person

Our survey results indicated that while Dealer Members mainly rely on the concept of “household” when considering whether individuals are connected to a “pro”, they defined or applied the term “household” differently. 

To provide clarity to the proposed “Dealer Related Person account” definition, we are moving away from the concept of household and instead focus on “control or direction” over an account. This approach would avoid capturing accounts of individuals who hold and operate their accounts independently from a non-client, regardless of their relationship or common address. A Dealer Member could determine whether an employee or Approved Person has “control or direction” over an account by looking at whether the person, directly or indirectly, through a contract, arrangement, understanding or relationship or otherwise has or shares investment power. This investment power includes the power to acquire or dispose, or to direct the acquisition or disposition of securities. An example of “control or direction” would be when a trading authorization for an account is in place. This approach also aligns with Dealer Members’ current practice as our survey results indicated that a majority of Working Group Members deem accounts over which an employee has trading authority as “pro” accounts.

1. 1. 3. Accounts over which the employee or Approved Person has no control or direction

We intend to exclude accounts over which the employee or Approved Person has no ability to influence investment decisions (regardless of whether the account is held directly or indirectly by an employee or Approved Person, or by a person that is connected to the employee or Approved Person).

Our survey results indicated that some Dealer Members mark certain types of accounts as “pro”, regardless of whether an employee at the Dealer Member has control or direction over the account.[15]  We propose to use ‘control or direction’ as a way to limit the scope of the proposed “Dealer Related Person account” definition. One example is a fully managed account[16] that is held directly by an employee, where the employee has no control or influence over the trading conducted by that account.

Based on the above, we propose to only include accounts:

• that are held directly or indirectly by:
  • an employee or Approved Person that has access to confidential information, or
  • a person[17] connected to the employee or Approved Person that has access to confidential information
• over which that employee or Approved Person has control or direction.

To exclude accounts from the proposed “Dealer Related Person account” definition, the Dealer Member must be able to document controls that restrict the employee or Approved Person from trading or influencing the trading for the account in question. This may include the execution of a trading authorization or power of attorney. In reviewing whether an account is accurately marked as a “Dealer Related Person account”, IIROC would focus on formal controls and account documentation at the Dealer Member.  (Sections 4 and 5 of the Proposed Guidance also provide clarification on how Dealer Members should determine control or direction.)

5. Additional changes to the IIROC Rules

 

In the IIROC Rules, we propose replacing all references to “non-client account” or “non-client order” with either “Dealer Related Person account” and/or “Dealer Member account”, depending on the policy intent of the applicable requirement. We are also proposing to replace other terms, such as “proprietary”, “pro”, “principal trading”, and certain phrases[18] with the “Dealer Related Person account” and/or “Dealer Member account” defined terms, where consistent with the policy intent of the applicable requirement.  For example, in clause 3960(2)(iii), we replaced “employee or proprietary accounts” with “Dealer Related Person account or Dealer Member account”. Likewise, in subsection 4424(6), we replaced the term “pro” with “Dealer Related Person account or Dealer Member account”. We are making these changes for consistency with our policy intent and to make our rules clearer and more precise. We included a blackline of all such changes in Appendix B.

6. Updating accounts

The proposed “Dealer Related Person account” definition would require Dealer Members to:

•          determine the level of information that their employees or Approved Persons, or employees of their affiliates or related entities, have the ability to access

and 

•          identify any account(s) over which an individual in the above bullet may have control or direction.

Under the proposed “Dealer Related Person account” definition, a Dealer Member would need to perform and document the above analysis and retain the records for seven years. If an employee’s or Approved Person’s role changes, or if their control or direction over an account changes, then the Dealer Member would need to update its records, including account documentation, accordingly and within a reasonable period of time after becoming aware of the change. (Sections 7 and 8 of the Proposed Guidance provides clarification on IIROC’s expectations in relation to updating the status of accounts.)

7. Comparison with other jurisdictions

Other jurisdictions have also recognized the potential conflict between an employee in possession of confidential information and a client without possession of such confidential information, and imposed rules to address this conflict, including restrictions on an employee’s personal trading.

1. 1. United States

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) in the United States require firms to supervise against insider trading or manipulative trading by “associated persons”.[19] An “associated person” is defined to include individuals such as registered representatives, partners, directors and officers of a broker.[20] When reviewing the personal accounts of “associated persons”, FINRA Rule 3210[21] broadens the category of affected accounts and presumes that associated persons have a beneficial interest in the following accounts (regardless of direct ownership):

• • spouse
  • child that lives in the same household, or is financially dependent on the associated person.

The associated person can rebut the presumption of beneficial interest by demonstrating that he or she has no economic benefit and no control over the account.

However, wherever the associated person has control over an account, the presumption of beneficial interest cannot be refuted, such as accounts held by:

• A related individual whose account is controlled by the associated person.
• Any other person whose account the associated person has control and whose financial support the associated person materially contributes to.

While the FINRA rules and our proposed “Dealer Related Person account” definition both use “control” as a way to identify relevant accounts, the FINRA rules also presume that associated persons have a beneficial interest in certain accounts. Because our goal is to simplify the proposed “Dealer Related Person account” definition using control, we would not embed a presumption of beneficial interest.

1. 2. European Union

The Financial Conduct Authority (FCA) and MiFID have rules on client order handling, which include rules on an employee’s personal account dealing. The rules apply to a “relevant person”, who is prohibited from, among other things, misusing confidential information in their personal transactions.[22] A “relevant person” is defined to include an employee or person involved in providing services to the firm.[23] When reviewing “personal transactions”[24] of a relevant person, the rules[25] also apply to accounts not directly held by the relevant person, such as those held by:

• a spouse, child, relative living at the same household for one year, or
• a person with whom they have “close links”.

 An example of a “close link”[26] would be where the relevant person has a 20% ownership of the voting rights or capital of an undertaking.

The FCA and MiFID rules focus on the ownership of the account, whether it is held directly or indirectly by the employee or someone connected to the employee. Based on consultation with the Working Group, we propose to focus on who has investment authority in the account (in the form of control or direction), rather than the ownership of the account.

8. Technological Implications and Implementation Plan

Dealer Members and vendors may be required to undergo the following changes to support the Proposed Amendments:

• make any necessary systems and operational changes to accommodate the new definitions of “Dealer Related Person account” and “Dealer Member account”, such as possible changes to:
  • account documentation and/or ranges
  • order routing arrangements
• review supervision and compliance policies to ensure they continue to be appropriate in light of the new definitions.

If approved, the Proposed Amendments would be effective at least 180 days after the publication of the Notice of Approval.

9. Policy Development Process
   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.

1. 2. Regulatory Process

The Board has determined the Proposed Amendments to be in the public interest and on June 25, 2019 approved them for public comment.

IIROC Staff has consulted with the Non-Client Working Group, the Market Rules Advisory Committee, the CCLS Order Execution Only Sub-Committee and the CCLS Institutional Sub-Committee regarding the Proposed Amendments.

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

10. Questions

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

1. Would replacing the “non-client orders” definition with an alternate term, such as “Dealer Related Person order”, be helpful to Dealer Members in clarifying the meaning and scope of the Proposed Amendments?
2. What are the impacts to Dealer Members in terms of implementing the Proposed Amendments?
3. IIROC is proposing that the implementation date be at least 180 days following the publication of the Notice of Approval. Is this time period sufficient to make any necessary operational and technological changes? Are there any specific considerations which IIROC should take into account in establishing an implementation deadline?
4. To minimize the impact on Dealer Members, should IIROC take a phased approach to the implementation of the Proposed Amendments, such as having separate phases for new and existing accounts? For example, Phase 1 would apply to new accounts opened on or after the publication of the Notice of Approval, and Phase 2 would apply to all other accounts. What specific considerations should IIROC take into account in establishing the implementation period for each phase?
5. Should the requirement to update with respect to the status of Dealer Related Person accounts be specific to the type of account, or should there be one standard for all accounts?

If we set one standard for all accounts at an annual basis, would this align with Dealer Members’ current practices?

 

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[1]     IIROC Notice No. 12-0005 – Rules Notice – Request for Comments – DMR – Plain language re-write project – Interpretation and standards; Proposed Rules 1100 through 1400 (January 6, 2012).

Attachment A of IIROC Notice 12-0005 proposed a new definition in IIROC Rule 1201(2) of “non-client orders” to mean “Orders from the accounts in which the Dealer Member or an approved person has an interest other than the commission charged.”

[2]     IIROC Notice No. 16-0052 – Rules Notice – Request for Comments – DMR - Re-Publication of Proposed IIROC Dealer Member Plain Language Rule Book (March 10, 2016). There was a slight change to the proposed definition in the 2016 re-publication as follows:

“non-client accounts” or “non-client orders” mean accounts or orders in which the Dealer Member or an

Approved Person has a direct or indirect interest other than the commission charged.

[3]     IIROC Notice No. 17-0054 – Rules Notice – Request for Comments – DMR - Re-Publication of Proposed IIROC Dealer Member Plain Language Rule Book (March 7, 2017).

[4]     IIROC Notice No. 18-0014– Rules Notice – Request for Comments – DMR - Re-Publication of Proposed IIROC Dealer Member Plain Language Rule Book (January 18, 2018).

[5]     IIROC Rule 1201(2) defines “Approved Persons” to mean individuals approved by IIROC under the IIROC requirements to carry out a function for a Dealer Member, namely, the following individuals:

(i) Associate Portfolio Manager

(ii) Chief Compliance Officer

(iii) Chief Financial Officer

(iv) Director

(v) Executive

(vi) Investment Representative

(vii) Portfolio Manager

(viii) Registered Representative

(ix) Supervisor

(x) Trader

(xi) Ultimate Designated Person.

[6]     UMIR 1.1 defines a “non-client order” to mean an order for the purchase or sale of a security received or originated by a Participant for an account:

(a) for a partner, director, officer or a person holding a similar position or acting in a similar capacity of the Participant or of a related entity of the Participant;

(b) for an employee of the Participant or of a related entity of the Participant who holds approval from an Exchange or a self-regulatory entity; or

(c) which is considered to be an employee account or a non-client account by a self-regulatory entity, but does not include a principal account.

[7]     UMIR 1.1 defines a “principal order” to mean an order for the purchase or sale of a security received or originated by a Participant for a principal account. A “principal account” is defined to mean “an account in which a Participant or a related entity of the Participant holds a direct or indirect interest other than an interest in the commission charged on a transaction.”

[8]     We would rely on the definition of “affiliate” in IIROC Rule 1201(2), which in our view is consistent with the meaning of “affiliated entity” in section 1.3(1) of NI 21-101.

• IIROC Rule 1201(2) definition of “affiliate” provides that where it is used to indicate a relationship between two corporations, means:

(i) one corporation is a subsidiary of the other corporation;

(ii) both corporations are subsidiaries of the same corporation; or

(iii) both corporations are controlled by the same person.

• Section 1.3(1) of NI 21-101 provides that a person or company is considered to be an affiliated entity of another person or company if one is a subsidiary entity of the other or if both are subsidiary entities of the same person or company, or if each of them is a controlled entity of the same person or company.

 

[9]     UMIR 10.4(3) provides that “(i)f, in the opinion of a Market Regulator, a particular person to whom UMIR applies, including any particular person to whom UMIR has been extended in accordance with subsection (1) and (2), has organized their business and affairs for the purpose of avoiding the application of any provision of UMIR, the Market Regulator may designate any person involved in such business and affairs as a person acting in conjunction with the particular person.”

[10]   IIROC Notice 19-0158 - Rules Notice – Request for Comments – UMIR and the IIROC Rules – Proposed Guidance Respecting Non-Clients (September 5, 2019).

[11]   For example, subsection 76(1) of the Securities Act (Ontario) provides that “(n)o person or company in a special relationship with an issuer shall purchase or sell securities of the issuer with the knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed.”

[12]   Subsection 1(1) of the Securities Act (Ontario) defines “material change” and “material fact” to mean:

• Definition of “material change”:

(a) when used in relation to an issuer other than an investment fund, means,

(i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or

(ii) a decision to implement a change referred to in subclause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, and

(b) when used in relation to an issuer that is an investment fund, means,

(i) a change in the business, operations or affairs of the issuer that would be considered important by a reasonable investor in determining whether to purchase or continue to hold securities of the issuer, or

(ii) a decision to implement a change referred to in subclause (i) made,

(A) by the board of directors of the issuer or the board of directors of the investment fund manager of the issuer or other persons acting in a similar capacity,

(B) by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, or

(C) by senior management of the investment fund manager of the issuer who believe that confirmation of the decision by the board of directors of the investment fund manager of the issuer or such other persons acting in a similar capacity is probable;

• Definition of “material fact”:

When used in relation to securities issued or proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities.

 

[13]   Subsection 1(1) of the Securities Act (Ontario) provides that the meaning of “security” includes securities relating to an issuer or proposed issuer.

[14]   Subsection 1(1) of the Securities Act (Ontario) defines an “issuer” to mean “a person or company who has outstanding, issues or proposes to issue, a security.”

[15]  Survey results indicate that some Dealer Members would mark these types of accounts as “pro”, regardless of whether the pro had control or direction over the account:

• Accounts held directly or indirectly by the pro:
  • accounts over which the pro has a financial interest or beneficial ownership
  • joint accounts or family accounts
  • accounts for personal holding companies, joint companies, estates, trusts etc.
• Accounts held by persons connected to the pro, such as:
  • individuals living at the same physical household
  • individuals for which the pro provides material financial support
  • spouse or domestic partner, minor children or children that are financially dependent on the pro.

[16]   A “managed account” is defined in IIROC Rule 1201(2) to mean “(a)n account which is subject to a suitability obligation where:

(i) investment decisions are made on a continuing basis by a Portfolio Manager or an Associate Portfolio Manager or a third party hired by the Dealer Member, and

(ii) the Dealer Member, or a third party hired by the Dealer Member, and the Portfolio Manager or Associate Portfolio Manager are responsible for all investment decisions made.”

 

[17]   A “person” is defined in IIROC Rule 1201(2) as “An individual, a partnership, a corporation, a government or any of its departments or agencies, a trustee, an incorporated or unincorporated organization, an incorporated or unincorporated syndicate or an individual’s heirs, executors, administrators or other legal representatives”.

[18]   See for example the proposed amendments to section 3503 of the IIROC Rules in Appendix B. We propose replacing the phrase “account in which the Dealer Member or an employee or Approved Person of the Dealer Member has a direct or indirect interest, other than an interest in the commission charged” with “Dealer Related Person account  or Dealer Member account”.

[19]   Section 15(g) of the Exchange Act requires registered broker or dealer to have written policies and procedures to prevent the misuse of material non-public information by an associated person.

FINRA Rule 3100(d) also requires firms, when reviewing securities transactions, to have processes that are reasonably designed to identify trades that may violate the Exchange Act or FINRA rules prohibiting insider trading and manipulative and deceptive devices that are effected for accounts subject to FINRA Rule 3210. (See FINRA Regulatory Notice 14-10, Consolidated Supervision Rules (March 2014).)

[20]   Paragraph (rr) of Article I of the FINRA By-Laws defines a "person associated with a member" or "associated person of a member" to mean:

(1) a natural person who is registered or has applied for registration under the Rules of the Corporation;

(2) a sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the Corporation under these By-Laws or the Rules of the Corporation; and

(3) for purposes of Rule 8210, any other person listed in Schedule A of Form BD of a member.

[21]   FINRA Regulatory Notice 16-22, Accounts At Other Broker-Dealers and Financial Institutions (June 2016).

[22]   COBS 11.3.5A of the FCA Handbook and Article 67(3) of the MiFID Org Regulation (Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing MiFID of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive) sets out requirements concerning the use of information relating to pending client orders.

Article 67(3) provides that “(a)n investment firm shall not misuse information relating to pending client orders, and shall take all reasonable steps to prevent the misuse of such information by any of its relevant persons.”

[23]   The FCA Handbook defines a “relevant person” to include:

• director, partner or equivalent, manager or appointed representative of the firm,
• employee of the firm
• natural person that is directly involved in the provision of services to the firm or to its appointed representative.

[24]   The FCA Handbook defines a “personal transaction” to include a trade in a designated investment for a relevant person’s own account, or an account held by:

• a spouse
• a dependent child
• a relative with whom the relevant person has shared the same household for at least one year on the date of the personal transaction
• any person with whom he has close links.

[25]      COBS 11.7.1 of the FCA Handbook is the rule on personal account dealing, which provides:

A firm that conducts designated investment business must establish, implement and maintain adequate arrangements aimed at preventing the following activities in the case of any relevant person who is involved in activities that may give rise to a conflict of interest, or who has access to inside information as defined in the Market Abuse Regulation3 or to other confidential information relating to clients or transactions with or for clients by virtue of an activity carried out by him or her on behalf of the firm:

(1) entering into a personal transaction which meets at least one of the following criteria:

(a) that person is prohibited from entering into it under the Market Abuse Regulation;

(b) it involves the misuse or improper disclosure of that confidential information;

(c) it conflicts or is likely to conflict with an obligation of the firm to a customer under the regulatory system or any other obligation of the firm under MiFID or the UCITS Directive;

(2) advising or procuring, other than in the proper course of his employment or contract for services, any other person to enter into a transaction in designated investments which, if a personal transaction of the relevant person, would be covered by (1) or a relevant provision;

(3) disclosing, other than in the normal course of his or her employment or contract for services, any information or opinion to any other person if the relevant person knows, or reasonably ought to know, that as a result of that disclosure that other person will or would be likely to take either of the following steps:

(a) to enter into a transaction in designated investments4 which, if a personal transaction of the relevant person, would be covered by (1) or a relevant provision;

(b) to advise or procure another person to enter into such a transaction.

[26]      See definition of “close links” in FCA Handbook.

• 4IIROC Notice No.
• 5IIROC Notice No.
• 6IIROC Notice No. 17-0054 – Rules Notice – Request for Comments – DMR - Re-Publication of Proposed IIROC Dealer Member Plain Language Rule Book (March 7, 2017).
• 7IIROC Notice No. 18-0014– Rules Notice – Request for Comments – DMR - Re-Publication of Proposed IIROC Dealer Member Plain Language Rule Book (January 18, 2018).
• 8IIROC Rule 1201(2) defines “Approved Persons” to mean individuals approved by IIROC under the IIROC requirements to carry out a function for a Dealer Member, namely, the following individuals:
  (i) Associate Portfolio Manager
  (ii) Chief Compliance Officer
  (iii) Chief Financial Officer
  (iv) Director
  (v) Executive
  (vi) Investment Representative
  (vii) Portfolio Manager
  (viii) Registered Representative
  (ix) Supervisor
  (x) Trader
  (xi) Ultimate Designated Person.
   
• 9UMIR 1.1 defines a “non-client order” to mean an order for the purchase or sale of a security received or originated by a Participant for an account:
  (a) for a partner, director, officer or a person holding a similar position or acting in a similar capacity of the Participant or of a related entity of the Participant;
  (b) for an employee of the Participant or of a related entity of the Participant who holds approval from an Exchange or a self-regulatory entity; or
  (c) which is considered to be an employee account or a non-client account by a self-regulatory entity, but does not include a principal account.
• 10UMIR 1.1 defines a “principal order” to mean an order for the purchase or sale of a security received or originated by a Participant for a principal account. A “principal account” is defined to mean “an account in which a Participant or a related entity of the Participant holds a direct or indirect interest other than an interest in the commission charged on a transaction.”