Re-publication of Proposed Derivatives Rule Modernization, Stage 1

1. Background

1.1 Initial proposed amendments

We published the Initial publication for comment on November 21, 2019 by way of Rules Notice 19-0200. The Initial publication sets out IIROC’s objectives arising from the Derivatives Rule Modernization project, which primarily aims to establish a harmonized framework for securities and derivatives, whether listed or traded over-the-counter (OTC). Given the extent and the nature of the amendments under this project, the approach adopted was to publish proposed amendments for public comment in two separate stages as follows:

• Stage 1, includes all amendments we propose to make other than those relating to margin requirements, and
• Stage 2 will include the amendments we propose to make to the margin requirements.

The proposed amendments set out under the Initial publication focused on Stage 1 of the project.

1.2 Comments received

We received six comment letters following the Initial publication. A summary of the comments received and our response to these comments is included as Attachment D.

1.3 The IIROC Rules implementation

When we published the Initial publication, the proposed amendments were set out using the version of the IIROC Rules which was published in August 2019. Several rule amendment projects have since been approved and implemented, such as amendments relating to transaction reporting, cybersecurity incident reporting, continuing education, client-focused reforms and bulk account movement exemptions. In October 2021, an updated plain language version of the IIROC Rules incorporating all these amendments was published and implemented on December 31, 2021.

1.4 Republication

In light of the updates to the IIROC Rules since the Initial publication and having considered the comments received, we are republishing for comment the Derivatives Rule Modernization, Stage 1 proposed amendments3 together with the revisions set out in the present Notice.

2. Summary of Revised Proposed Amendments

2.1 Definitions

2.1.1 Definition of “security”

Currently the term “security” is not defined in the IIROC Rules. Any term not defined in the IIROC Rules or other IIROC requirements, will have the same meaning as provided for under securities laws where defined.4

One of the primary objectives of IIROC’s Derivatives Rule Modernization project is to more clearly specify which of the core regulatory obligations apply to securities, listed derivatives and OTC derivatives.  Since certain requirements, current and proposed, are different for securities and derivatives, we believe the main definition section of the IIROC Rules5 should distinguish at the outset securities from derivatives.

To achieve this result, we are proposing that IIROC introduce the following definition of “security” in IIROC Rule subsection 1201(2):

As a result of this revision, the definitions of the term “security” which we proposed to introduce in specific IIROC Rules in the Initial publication have been removed.6

We believe this approach will provide added clarity to the application of the IIROC Rules as it clearly excludes a derivative from the definition of security and it is also consistent with the proposed amendments IIROC published in October 2020, with respect to the establishment of an appropriate framework for the regulation of listed derivatives trading on a marketplace.7

2.1.2 Types of derivatives

In the Initial publication, we proposed to adopt a broader-scope general definition approach for IIROC’s derivatives-related definitions, namely “derivative”, “listed derivative” and “over-the-counter derivative”. We believe these definitions as proposed are harmonized with the definitions set out in provincial securities, derivatives and commodity futures legislation.  

We have not made further changes to these definitions proposed under IIROC Rule subsection 1201(2), except for a minor modification to the definition of the term “derivative” as follows:

Given a futures contract option shares features of a futures contract and that of an option and that as a result, the IIROC Rules make distinct references to futures contract options, we are proposing to add the term “futures contract option” in the definition of “derivative”. This change is intended to align the definition of derivative with the treatment given to futures contract options throughtout the IIROC Rules. For example, when a requirement set out in the IIROC Rules differentiates between a futures contract and an option, depending on the feature being addressed, the rules make a distinct reference to a futures contract option.8

2.1.3 Inclusion of derivatives within the “securities related business” definition

In light of the objective to clearly specify requirements that apply to securities and derivatives respectively and having distinct references to these asset classes, in the Initial publication we had proposed changes to the definition of the term “securities related business” and renamed it to “agent related activities”.

We have considered the comments received on the potential confusion this change could cause, and as a result we are proposing to revise the proposed amendment to the defined term by renaming it to “securities and derivatives related business”.

2.1.4 Revision to “institutional client” definition

To reduce the gap between the definitions used to identify sophisticated clients and to conform as much as possible the definitions used to assess client sophistication for all securities and derivatives business lines, we proposed in the Initial publication changes to the “institutional client” definition. These changes proposed that IIROC:

• retain the approach of using a minimum threshold amount of assets under administration as a proxy for client sophistication,
• extend this “assets under administration” approach to individual clients, subject to certain conditions,
• introduce a hedger concept whereby non-individuals engaging in qualifying hedging activities can be classified as an institutional client for those accounts with qualifying hedging activities and hedge positions.

Other than the minor rule changes outlined in the following table, we are proposing to maintain this approach:

We are proposing changes to the defined term “hedger”:

• by removing reference to “securities” to clarify that the hedging of risk relates to derivatives transactions, and
• by removing the notion of ‘negative correlation’ to address comments we received that this notion had no added value in the definition and to harmonize with the definition proposed by the CSA.9

The proposed guidance note found in Appendix 1 presents our views on how the “hedger” definition should be applied and interpreted and further outlines our expectations and the requirements applicable to all Dealer Members when classifying a hedger as an “institutional client”.

Accordingly, we are proposing a new amendment to IIROC Rule section 3804(2), on the general requirements to maintain records, by adding a “record” type relating to the assessment of a Dealer Member into the qualification of a client as a “hedger” and as an “institutional client”. This proposed amendment aims to clarify the expectation that a Dealer Member must take adequate steps to ensure a client qualifies as a “hedger” and as an “institutional client”, and maintain appropriate records.

2.2 Business Conduct

2.2.1 Business continuity plan

The IIROC Rules require that Dealer Members establish and maintain a business continuity plan that identifies the procedures Dealer Members will take to deal with a significant business disruption.10

In the Initial publication, we proposed new IIROC Rule sections 4710 and 4716 in order to:

• clarify that where there is impairment in client access to their derivatives or securities positions/accounts or to the client’s ability to liquidate or close-out their account positions, this would be considered to be a significant business disruption, and
• specify that the Dealer Member’s business continuity plan must be invoked and IIROC must be notified when any significant business disruption occurs.

After considering the comments received for these proposed amendments and to reinforce on the principal-based approach of the IIROC Rules, we are proposing to remove the proposed requirement mandating a Dealer Member to invoke its business continuity plan when a significant business disruption occurs.

Instead, the revised proposed amendment only requires that a Dealer Member notifies IIROC when it encounters a significant business disruption situation and when it invokes its business continuity plan, regardless of the nature of the trigerring event.

2.2.2 Derivatives-specific business conduct – risk limit

As part of the Initial publication, we proposed to extend the current IIROC Rules derivatives-specific business conduct requirements to apply to all derivatives transactions, positions and accounts. To achieve this result, we proposed amendments to the following parts of the IIROC Rules:

• IIROC Rule 3200 – Client Accounts – Part F – Additional Account Opening Requirements for Options, Futures Contract and Futures Contract Options Trading
• IIROC Rule 3900 – Supervision – Part F – Supervision of options, futures contracts and futures contract option trading account

Among the requirements included under these parts, we proposed to extend the requirement to establish a risk limit (i.e. cumulative loss limit) to all types of derivatives account offering other than a hedging account.

After considering the comments received for this proposed amendments, we are proposing changes to :

• clarify that the risk limit is an integral part of the account opening requirement for derivatives account and is distinct from the suitability determination requirements,
• clarify that the risk limit requirement applies to all account types11 opened to trade derivatives and highly-leveraged securities or derivatives, except if it is a hedging account,
• specify that the risk limit requirement will apply to all derivatives and highly-leveraged securities or derivatives, except for options or similar derivative contracts.

2.3 Client disclosure and periodic client reporting

2.3.1 Risk disclosure statement

The amendments we proposed in the Initial publication to revamp the consolidated derivatives risk disclosure statement12 are twofold:

• replace the current risk disclosure statement with the one set out in Attachment B13 of the Initial publication,
• enact a requirement to disclose the percentage of accounts that were profitable for clients for each of the four most recent quarters for a Dealer Member offering OTC derivatives to retail clients.14

After considering the comments received, we are proposing changes to the risk disclosure statement by adding disclosures on common risks relating to derivatives and specific to trading OTC derivatives. We believe these additional disclosures will complement IIROC’s consolidated derivatives risk disclosure statement by addressing the most common risks related to trading for all types of derivatives. The revised content of the Derivatives risk disclosure statement is set out under Appendix 2.

Regarding the requirement on the percentage of accounts that were profitable for clients, we are proposing changes to clarify that the disclosure must be provided to a retail client together with the risk disclosure statement when opening an order execution only account to trade OTC derivatives. We believe this disclosure will help persons:

• who are not eligible to qualify as institutional clients, and
• who trade in a suitability exempt account,

to have a better awareness of the risk involved when trading OTC derivatives in an order execution only account.

2.3.2 Trade confirmations and Monthly account statements - Give-up agreements

The IIROC Rules require Dealer Members to issue trade confirmations and month-end statements to clients.15 For institutional clients trading under a give-up agreement, these services are generally provided by the Dealer Member acting as a clearing broker under the arrangement. Dealer Members acting as executing brokers under such arrangements, have therefore applied to IIROC in the past to be exempted from the requirement to issue trade confirmations and month-end statement.

Given the comments received and the fact that these arrangements are common with derivatives trading, we are proposing to codify this exemption in the IIROC Rules. To achieve this result, we are proposing to introduce a new subsection under IIROC Rule section 3808 and IIROC Rule section 3816 exempting an executing Dealer Member from the requirement to issue trade confirmations and month-end statements to institutional clients trading under a give-up agreement. These exemptions will be subject to the same conditions under which the reliefs were previously granted and will be embedded in the IIROC Rules as well.

2.3.3 Annual performance and fee/charge reports – Enhanced account statement

IIROC expects that all account positions16 (not just security positions) must be considered when calculating and disclosing annual account compensation and performance information.17 Given the short-term trading focus of some derivatives and that monthly/quarterly information on the performance of positions is more relevant to retail clients, certain Dealer Members offering contracts for difference, foreign exchange contracts and futures contracts to retail clients have applied to IIROC in the past to be exempted from the requirement to issue the annual performance and fee/charge reports.18 The IIROC Board granted the exemptions provided Dealer Members sent client more meaningful information as part of the monthly or quarterly account statement, described as the “enhanced account statement disclosures” in the Initial publication.

We are proposing to codify this exemption in the IIROC Rules for all retail client accounts offering futures contracts, forward contracts, contracts for difference, foreign exchange contracts or similar derivatives contracts with short-term trading focus. We are also proposing to set out “enhanced account statement disclosures” which the Dealer Member must send to those clients on a monthly or quarterly basis as an alternative.

To achieve this result, we are proposing to introduce IIROC Rule subsection 3810(9) in relation to the annual performance report, and subsections 3811(7) and 3811(8) in relation to the fee/charge report.

2.4 Other minor amendments

We have proposed several minor rule changes in the Revised Proposed Amendment. Most of these changes aim to reproduce the proposed amendments set out in the Initial publication using the updated version of IIROC Rules which was implemented on December 31, 2021. They consist of the following:

• renumbering sections of the IIROC Rules,19
• rewording of texts, without any substantial change to the content of the respective section,20
• removing proposed amendments that have already been incorporated in the updated version of the IIROC Rules,21
• adapting the proposed amendments from the Initial publication to reflect the implementation of subsequent rules amendment projects, for example amendments made under the client-focused reforms.22

In a few instances, we have proposed new minor amendments as follows:

• adding reference to “derivatives” under IIROC Rule section 2215,
• changes to IIROC Rule sections 2302 to 2304 to reflect the proposal to use the defined term “securities and derivatives related business”.  

3. Impacts of the Proposed Amendments

As indicated, the Revised Proposed Amendments remain consistent with the objectives and considerations described in the Initial publication. The revisions proposed will have the same effects as described in the Initial publication.23 The revisions proposed do not change the detailed assessment of impact prepared for the Derivatives Rule Modernization, Stage 1 amendments and included in the Initial publication.24

In developing the Revised Proposed Amendments, we have considered the comments we received on the Initial publication. We believe the changes address a number of the suggestions received and alleviate some of the potential negative impacts by:

• adding clarity to some of the proposed requirements and defined terms, and adding details to make the scope within which some requirements will apply clearer,
• modifying some of the proposed amendments to reduce potential confusion related to termininologies used and reinforce on the principle-based approach of the IIROC Rules,
• adding more information to assist Dealer Members to implement effectively some of the obligations arising under the proposed amendments,
• proposing new amendments to address concerns which are currently being considered under the IIROC exemption process, and
• ensuring consistency with the Canadian Securities Administrators’ proposed National Instruments 93-101 and 93-102.

While some of the proposed amendments will introduce incremental costs of compliance to Dealer Members, the proposed amendments will establish relatively consistent regulatory requirements across all of the securities and derivatives related business lines, which would avoid significant cost of compliance increases that would otherwise occur if requirements are materially different.

Overall we continue to believe that the proposed Derivatives Rule Modernization, Stage 1 amendments impose costs and restrictions on the activities of market participants that are proportionate to the goals of the regulatory objectives sought to be realized.

4. Implementation

Subject to the process described in the next section, we intend to implement the Revised Proposed Amendments upon approval by the Canadian Securities Administrators within a one year period.

At such time, we will identify proposed amendments which may become effective at a later date, where we determine Dealer Members will need more time to implement the changes.

5. Policy development process

The Board determined the proposed amendments are not contrary to the public interest and on September 25, 2019 approved them for publication for public comment and approved this republication on March 23, 2022.

Following comments received on the Initial publication we have proposed some changes and updated the proposed amendments to account for changes implemented in the IIROC Rules since the Initial publication.

We classified the revisions to the proposed amendments as a public comment rule proposal due to the substantive nature of the project and some of the revisions proposed, and their importance in achieving the goal of ensuring consistent and materially harmonized regulatory standards across each of the securities and derivatives related business lines.

After considering:

• the comments in response to this Notice, together with any comments of the Canadian Securities Administrators, and
• any changes that are made to proposed NI 93-101 and NI 93-102,

we may recommend futher changes to the proposed amendments. If the revisions and comments received are not of a material nature, 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 Canadian Securities Administrators. If the revisions or comments are material, we will submit the proposed amendments including any revisions to the Board for approval for republication or implementation as applicable.

6. Appendices

Appendix 1 - Applying and interpreting the definitions of “hedger” and “institutional client”

Appendix 2 - Derivatives Risk Disclosure Statement

7. Attachments

Attachment A - Revised Proposed Amendments to the IIROC Rules (Clean)

Attachment B - Revised Proposed Amendments to the IIROC Rules (Blackline) - comparison of the Revised Proposed Amendments to the current version of the IIROC Rules

Attachment C - Revised Proposed Amendments to the IIROC Rules (Blackline) - comparison of the Revised Proposed Amendments to the Initial publication for comment (Notice 19-0200)

Attachment D - Summary of public comments received on the Initial publication and IIROC staff responses

Attachment A - Revised Proposed Amendments to the IIROC Rules (Clean)

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RULE 1200 | DEFINITIONS

1201.     Definitions

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(2) The following terms have the meanings set out when used in the IIROC requirements:

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RULE 1400 | STANDARDS OF CONDUCT

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1402. Standards of conduct

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(2)  Without limiting the generality of the foregoing, any business conduct that:

1. is negligent,
2. fails to comply with a legal, regulatory, contractual or other obligation, including the rules, requirements, and policies of a Regulated Person,
3. displays an unreasonable departure from standards that are expected to be observed by a Regulated Person, or
4. is likely to diminish investor confidence in the integrity of securities or derivatives markets,

may be conduct that contravenes one or more of the standards set forth in subsection 1402(1).

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1403. Applicability

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3. For purposes of section 1402, the obligation of Regulated Persons that are non-Dealer Member users or subscribers of a Marketplace for which IIROC is the regulation services provider is limited to the obligation to transact business openly and fairly when trading on a Marketplace or otherwise dealing in securities or derivatives that are eligible to be traded on a Marketplace.

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RULE 2200 | DEALER MEMBER ORGANIZATION

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PART A.3 - NON-SECURITIES OR NON-DERIVATIVES BUSINESS AND SHARED PREMISES

2215.  Business other than securities or derivatives

1. A Dealer Member must obtain approval from the applicable District Council before carrying on any business other than Dealer Member related activities.
2. A Dealer Member or a Dealer Member’s holding company may, without approval, own an interest in a corporation (other than the Dealer Member) that carries on non-securities or non-derivatives business if:
   1. the Dealer Member is not responsible for any of that corporation’s liabilities, and
   2. (the Dealer Member and its holding company give IIROC notice before acquiring an interest in the non-securities or non-derivatives corporation.
3. A District Council may delegate its authority under this section to a subcommittee of the District Council or to IIROC staff.

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2216. Shared office premises

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15. Non-registered personnel employed by the Dealer Member or representatives of the financial services entity may not provide the following services on behalf of the Dealer Member:
    1. opening accounts,
    2. distributing or receiving order forms for securities or derivatives transactions,
    3. assisting clients to complete order forms for securities or derivatives transactions,
    4. giving recommendations or any advice on any activity,
    5. completing know-your-client information on an account application, other than biographical information, and
    6. soliciting securities or derivatives transactions.

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PART C - NOTIFICATION REQUIREMENTS

2245. Introduction

1. IIROC may review proposed changes in a Dealer Member’s business, listed in section 2246, to ensure:
   1. the Dealer Member is adequately prepared to make the change without unduly impacting its clients,
   2. the change is carried in accordance with IIROC’s requirements, and
   3. the change is in the public interest.

2246. Dealer Member’s notice of changes to IIROC

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2. A Dealer Member must notify IIROC in writing before making any material change to its business activities.
3. A Dealer Member must notify in writing and receive written approval from IIROC before:
   1. offering retail clients any highly-leveraged securities or derivatives, or
   2. offering retail clients previously approved highly-leveraged securities or derivatives that are to be based on a new underlying interest.

2247. IIROC informs Dealer Member about review when necessary

1. A Dealer Member must not make any of the changes listed in subsection 2246(1) if, within the 20-day notice period, IIROC informs the Dealer Member that it will be submitting the proposed change to the applicable District Council for approval.

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RULE 2300 | PRINCIPAL AND AGENT RELATIONSHIPS

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2302. Principal and agent relationships

1. An individual who conducts securities and derivatives related business on behalf of a Dealer Member must be an employee (which includes an agent) of the Dealer Member.
2. A Dealer Member must not allow a corporation or other non-individual entity to conduct securities and derivatives related business on its behalf.

2303. Written agreement between the Dealer Member and IIROC

1. Before engaging any agents to conduct securities and derivatives related business, a Dealer Member must enter into a written agreement with IIROC.

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4. The written agreement must be in a form similar to the following:

“Agreement between a Dealer Member and IIROC

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4.        Written Disclosure of Respective Responsibilities to Clients

The Dealer Member or the agent must disclose to clients at the time of opening an account:

1. the list of securities and derivatives related business conducted by the agent for which the Dealer Member is responsible, and
2. that the Dealer Member is not responsible for any other business activity conducted by the agent.

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2304. Written agreement between the Dealer Member and its agents

1. The Dealer Member and the agent who conducts securities and derivatives related business must enter into a written agreement.

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7. The written agreement must contain the following minimum terms:

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4. Conduct of the agent’s business
5. The agent agrees to conduct all business in the Dealer Member’s name, subject to sections 2281 through 2283 relating to the use of trade names.
6. The agent agrees to conduct all securities and derivatives related business through the Dealer Member.

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6. Written disclosure to clients

If the Dealer Member and the agent have agreed that the agent will advise the clients directly:

1. the list of securities and derivatives related business conducted by the agent for which the Dealer Member is responsible, and
2. that the Dealer Member is not responsible for any other business activity conducted by the agent,

the Dealer Member agrees to be responsible for ensuring that the agent has done so.

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9. Access to premises

The agent agrees to give the Dealer Member unrestricted access to the premises where the agent conducts securities and derivatives related business on the Dealer Member’s behalf.

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9. Insurance

The Dealer Member agrees to maintain financial institution bond and insurance policies that cover the agent’s conduct relating to the securities and derivatives related business they conduct for the Dealer Member.

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RULE 2500 | DEALER MEMBER DIRECTORS AND EXECUTIVES, AND APPROVAL OF INDIVIDUALS

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PART A - DEALER MEMBER DIRECTORS AND EXECUTIVES

2502. General requirements for Directors

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2. At least 40% of the Dealer Member’s Directors must:
3. either:
4. be actively engaged in the business of the Dealer Member and spend the majority of their time in the securities or derivatives industry, except those on active government service, or who for health reasons are prevented from such active engagement, or

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2503. General requirements for Executives

1. A Dealer Member’s Executives must:
2. be either:
3. actively engaged in the business of the Dealer Member and spend the majority of their time in the securities or derivatives industry, except those on active government service, or who for health reasons are prevented from such active engagement, or

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PART B - APPROVAL OF INDIVIDUALS

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2551. Individual approval

1. An individual is not permitted to act as an Approved Person and a Dealer Member is not permitted to allow an individual to act as an Approved Person unless:
   1. the Dealer Member is registered or licensed (or exempt from such registration or licensing) in the appropriate category under securities laws in each jurisdiction in which clients of the Dealer Member reside or in which the Dealer Member carries on securities and derivatives related business,
   2. the individual, if required to do so under securities laws, is registered or licensed (or exempt from such registration or licensing) in the appropriate category under securities laws in each jurisdiction in which clients of the individual reside or in which the individual carries on securities and derivatives related business, and 
   3. the individual is approved by IIROC in the appropriate Approved Person category, before the individual begins working in that role.

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2553. Approval of Registered Representatives, Investment Representatives, Portfolio Managers and Associate Portfolio Managers and their obligations

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2. A Registered Representative, Investment Representative, Portfolio Manager or Associate Portfolio Manager may not conduct on behalf of a Dealer Member, and a Dealer Member may not permit the Approved Person to conduct on its behalf, the type of business as set out in clause 2553(2)(iv) and deal with a type of customer as set out in clauses 2553(2)(i) and (ii), unless the Dealer Member complies with the following:

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4. The Dealer Member must notify IIROC which of its individuals approved as a Registered Representative, Investment Representative, Portfolio Manager or Associate Portfolio Manager will deal in or advise in:
5. only mutual funds, government or government-guaranteed debt instruments, and deposit instruments issued by a federally regulated bank, trust company, credit union or caisse populaire, except those for which all or part of the interest or return is indexed to the performance of another financial instrument or index,
6. options or similar derivative contracts,
7. futures contracts, forward contracts, contracts for difference, futures contract options or similar derivative contracts, other than in any province where approval is required, and
8. general securities business; including equities, fixed income and other investment products not listed above.

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7. An Associate Portfolio Manager must not advise on securities or derivatives unless, before giving the advice, the advice has been pre-approved by the Portfolio Manager.

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RULE 2600 | PROFICIENCY REQUIREMENTS AND EXEMPTIONS FROM PROFICIENCIES

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PART A - PROFICIENCY REQUIREMENTS

2602. Proficiency requirements for Approved Persons and approved investors

1. An Approved Person must not perform an activity that requires approval unless the Approved Person has the education, training and experience that a reasonable person would consider necessary to perform the activity competently, including understanding the structure, features and risks of each security, derivative and precious metals bullion the Approved Person recommends. 
2. The Dealer Member must ensure that an individual does not perform an activity that requires IIROC approval unless the individual has the education, training and experience that a reasonable person would consider necessary to perform the activity competently, including understanding the structure, features and risks of each security, derivative and precious metals bullion the individual recommends.
3. Each applicant in an Approved Person category or approved investor category must meet the proficiency requirements set out below for that category unless an exemption has been granted from the applicable proficiency requirements before IIROC will grant approval. Unless otherwise stated, the Canadian Securities Institute administers the courses and examinations noted below.

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PART B - EXEMPTIONS FROM PROFICIENCY REQUIREMENTS

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2628. Course validity and exemptions from rewriting courses

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6. An individual is exempt from rewriting the courses as set out in the table below if the individual has met the current status criteria and exemption criteria.

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RULE 2700 | CONTINUING EDUCATION REQUIREMENTS FOR APPROVED PERSONS

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PART A - THE CONTINUING EDUCATION PROGRAM AND CONTINUING EDUCATION REQUIREMENTS

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2704. Continuing education requirements

(1)       In each continuing education program cycle, a continuing education participant must meet the continuing education requirements for the applicable Approved Person category, regardless of product type, as set out in the following table.

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RULE 3100 | DEALING WITH CLIENTS

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PART B – CONFLICTS OF INTEREST

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3118. Tied selling

1. A Dealer Member must not require a client to purchase, use or invest in any product, service, security or derivative as a condition, or on terms that would appear to a reasonable person to be a condition, of supplying, continuing to supply or selling a product, service, security or derivative.

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PART C – BEST EXECUTION OF CLIENT ORDERS AND TRANSACTIONS

3119. Definitions

1. The following terms have the meaning set out below when used in sections 3119 through 3129:

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3120. Best execution obligation

1. A Dealer Member’s policies and procedures must specifically address achieving best execution for client orders and transactions.

3121. Best execution factors for listed security and listed derivative orders

1. The policies and procedures for achieving best execution of client orders in listed securities, foreign-exchange traded securities and listed derivatives must address the following broad factors:
   1. the price of the security or derivative,
   2. the speed of execution of the client order,
   3. the certainty of execution of the client order, and
   4. the overall cost of the transaction, when costs are passed on to clients.
2. In addition to the broad factors listed in subsection 3121(1), the policies and procedures for best execution of client orders for listed securities and foreign-exchange traded securities must address the following specific factors:
   1. the considerations taken into account when determining appropriate routing strategies for client orders,
   2. the considerations for fair pricing of Opening Orders when determining where to enter an Opening Order,
   3. the considerations when not all marketplaces are open and available for trading,
   4. how order and trade information from all appropriate marketplaces, including unprotected marketplaces and foreign organized regulated markets, is taken into account,
   5. the factors related to executing client orders on unprotected marketplaces, and
   6. the factors related to sending client orders to a foreign intermediary for execution.
3. The policies and procedures for best execution must address the factors used to achieve best execution when manually handling a client order for trades on a marketplace, including the following “prevailing market conditions”:
   1. the direction of the market for the security or derivative,
   2. the depth of the posted market,
   3. the last sale price and the prices and volumes of previous trades,
   4. the size of the spread, and
   5. the liquidity of the security or derivative.
4. In addition to the broad factors listed in subsection 3121(1), the policies and procedures for best execution of client orders for listed derivatives must consider whether the individual order is part of a multiple orders trading strategy and, if so, the broad factors in subsection 3121(1) must be addressed as they relate to execution of the overall strategy.

3122. Best execution factors for over-the-counter security and over-the-counter derivative transactions

1. The policies and procedures for achieving best execution of client transactions in over-the-counter securities and over-the-counter derivatives must be designed to ensure fair pricing.
2. Subject to subsection 3122(3), to ensure fair pricing when acting as principal, a Dealer Member must not:
   1. purchase over-the-counter securities for its own account from a client, or
   2. sell over-the-counter securities from its own account to a client, or
   3. transact in over-the-counter derivatives with a client.
3. Subsection 3122(2) does not apply when a transaction is executed at an aggregate price (including any mark-up or mark-down) that is fair and reasonable, taking into consideration all relevant factors, including the following:
   1. in the case of a transaction in over-the-counter securities, the fair market value of the securities and of any securities exchanged or traded in connection with the transaction at the time of the transaction,
   2. in the case of transactions in over-the-counter derivatives:

(a) the fair market value or settlement price of the equivalent listed derivative, and

(b) the fair market value of the derivatives underlying interest and of any related derivatives involved in the same trading strategy, at the time of the transaction,

3. the expense involved in effecting the transaction or transactions,
4. the fact that the Dealer Member is entitled to a profit, and
5. the total dollar amount or dollar amount at risk of the transaction or transactions.
6. To ensure fair pricing when acting as agent, a Dealer Member must not purchase over-the-counter securities, sell over-the-counter securities, or transact in over-the-counter derivatives on behalf of a client for a commission or service charge in excess of a fair and reasonable amount, taking into consideration all relevant factors, including the following:
7. the availability of the securities or derivatives involved in the transaction,
8. the expense involved in effecting the transaction or transactions,
9. the value of the services rendered by the Dealer Member, and
10. the amount of any other compensation received or to be received by the Dealer Member in connection with the transaction.

3123. Best execution process

1. The policies and procedures for best execution must specifically address the process for achieving best execution that includes the following:
2. for the execution of all client orders and transactions:
3. requiring the Dealer Member to consider the instructions of the client, subject to its obligations under IIROC requirements and securities laws, and
4. describing any material conflicts of interest that may arise when sending client orders for handling or execution or when arranging for a client transaction and how these conflicts are to be managed,

and,

2. for the execution of client orders for listed securities and foreign exchange-traded securities that trade on a marketplace:
3. describing the Dealer Member’s order handling and routing practices for achieving best execution,
4. taking into account order and trade information from all appropriate marketplaces,
5. the rationale for accessing or not accessing particular marketplaces, and
6. the circumstances under which a Dealer Member will move an order entered on one marketplace to another marketplace.

3124. Non-executing Dealer Member best execution policies and procedures

1. A Dealer Member that engages another Dealer Member to provide execution services on its behalf may include in its policies and procedures for best execution a link to the executing Dealer Member’s best execution disclosure to comply with its obligations under clause 3123(1)(ii) and sections 3126 and 3129, provided that the non-executing Dealer Member’s policies and procedures for best execution specifically address the following:
   1. the non-executing Dealer Member must conduct an initial review of the best execution disclosure of the executing Dealer Member and a review when material changes are made to the disclosure, to provide reasonable assurance that the executing Dealer Member’s policies and procedures for best execution are complete and appropriate for its clients,
   2. the non-executing Dealer Member must obtain an annual attestation from the executing Dealer Member that it has complied with and tested its policies and procedures on best execution in accordance with sections 3119 through 3129, and
   3. the non-executing Dealer Member must follow-up with the executing Dealer Member if it identifies trade execution results that are inconsistent with the executing Dealer Member’s best execution disclosure and document the results of its inquiry.

3125. Sending orders in bulk to foreign intermediaries

1. A Dealer Member’s policies and procedures for best execution must not include the practice of sending client orders in listed securities in bulk to a foreign intermediary for execution outside of Canada, without considering other liquidity sources, including liquidity sources within Canada.

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3127. Training

1. A Dealer Member must have reasonable assurance its employees involved in the execution of client orders and transactions know and understand how to apply the Dealer Member’s policies and procedures for best execution that they must follow. 

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3128. Compliance with the Order Protection Rule

1. Despite any instruction or consent of the client, best execution of a client order for a listed security is subject to compliance with the Order Protection Rule under Part 6 of the Trading Rules by:

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3129. Disclosure of best execution policies

1. A Dealer Member must disclose to its clients in writing the following:
   1. a description of the Dealer Member’s obligation under section 3120,
   2. a description of the factors the Dealer Member considers for the purpose of achieving best execution of:
2. client orders for listed securities,
3. client orders for foreign-exchange traded securities,
4. client orders for listed derivatives,
5. client transactions in over-the-counter securities, and
6. client transactions in over-the-counter derivatives.

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5. a statement as to:
6. whether fees are paid by the Dealer Member or payments or other compensation is received by the Dealer Member for a client order routed, or a trade resulting from a client order routed, to a marketplace or intermediary identified pursuant to sub-clauses 3129(1)(iii)(a) or 3129(1)(iii)(b) above,
7. the circumstances under which the costs associated with the fees paid by Dealer Member or the compensation received by the Dealer Member will be passed on to the client, and
8. whether routing decisions are made based on fees paid by the Dealer Member or payments received by the Dealer Member,

and,

6. if providing market data as a service to clients, a description of any market data that is missing, including an explanation of the risks of trading with incomplete trading data.
7. A Dealer Member must provide separate disclosure for each class or type of client and each class or type of order or transaction if the factors and order handling and routing practices used for such clients, orders and transactions materially differ.
8. A Dealer Member must identify in the disclosure:
   1. the class or type of client to which the disclosure applies,
   2. the class or type of securities or derivatives order or transaction to which the disclosure applies, and
   3. the date of the most recent changes to the disclosure.

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RULE 3200 | KNOW‐YOUR‐CLIENT AND CLIENT ACCOUNTS

3201.     Introduction

1. Rule 3200 sets out Dealer Members’ obligations when opening new accounts and maintaining existing accounts. Rule 3200 is divided into seven parts as follows:

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Part F – Additional Account Opening and Updating Procedures for Derivatives Trading:

sets out additional account opening and updating procedures for derivatives trading accounts.

[sections 3250 through 3255]

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PART A – KNOW‐YOUR‐CLIENT AND CLIENT IDENTIFICATION REQUIREMENTS

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3207. Identification exceptions

1. Sections 3203, 3204 and 3206 do not apply to:
   1. An entity registered under securities laws to:
2. engage in the business of trading or advising in securities or derivatives, or
3. act as an investment fund manager,

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PART B – REQUIREMENTS FOR CLIENT ACCOUNTS

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3218. Pre-trade disclosure of charges

1. Before a Dealer Member accepts an instruction from a retail client to purchase or sell a security or precious metals bullion or to transact in derivatives in an account other than a managed account, the Dealer Member must disclose to the client:
   1. the charges the client will be required to pay, directly or indirectly, in respect of the purchase, sale or transaction, or a reasonable estimate if the actual amount of the charges is not known to the firm at the time of disclosure,
   2. in the case of a purchase or other transaction to which deferred charges apply, that the client might be required to pay a deferred sales charge on the subsequent sale or closing transaction and the fee schedule that will apply,
   3. whether the firm will receive trailing commissions, and
   4. whether there are any investment fund management expense fees or other ongoing fees that the client may incur in connection with the security.
2. Subsection 3218(1) does not apply to a Dealer Member in respect of an instruction involving:
   1. a client for whom the Dealer Member purchases, sells or transacts only as directed by a registered adviser acting for the client.

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PART F –  ADDITIONAL ACCOUNT OPENING AND UPDATING PROCEDURES FOR DERIVATIVES TRADING

3250. Rules applicable to derivatives trading accounts

1. For the purposes of Rule 3200, a Dealer Member that opens a derivatives trading account for a retail client must comply with the requirements in Parts A, B and F of Rule 3200, and if applicable, Parts C, D, E and G of Rule 3200.
2. For the purposes of Rule 3200, a Dealer Member that opens a derivatives trading account for an institutional client must:
   1. comply with the requirements in Parts A, B and F of Rule 3200, and if applicable, Parts C, D, E and G of Rule 3200, with the exception of sections 3216 through 3219, and
   2. ensure the sub-account files of an institutional client refer to the documentation contained in the master file to which it is related.
3. A Dealer Member must ensure that persons trading on its behalf or advising clients in derivatives trading accounts meet minimum proficiency requirements.

3251. Additional requirements when opening a derivatives account 

1. Before executing an initial derivatives transaction in an account, whether the account is an advisory account, a discretionary account, a managed account or an order execution only account, a Dealer Member must:
   1. obtain a completed derivatives account application from the client,
   2. obtain a completed and signed derivatives trading agreement from the client,
   3. provide the client with the most recent derivatives disclosure statement or similar disclosure document, and
   4. record the relevant designated Supervisors’ approval in writing.
2. The relevant designated Supervisors must determine whether the risk characteristics of the strategies the client intends to use are appropriate for the client and in keeping with their personal and financial circumstances, investment needs and objectives, investment knowledge, risk profile, investment time horizon and puts the client’s interest first. If they are not, the designated Supervisors should restrict the account from using inappropriate strategies and note on the derivatives account approval any trading restrictions imposed and communicate those restrictions to the Registered Representative, Portfolio Manager or Associate Portfolio Manager assigned to the account.

3252. Derivatives trading agreement

(1) A Dealer Member’s derivatives trading agreement must define the rights and obligations of the Dealer Member and the client and, at a minimum, must include the following:

(i) the time periods during which the Dealer Member accepts orders for execution,

(ii) the Dealer Member’s right to:

(a) exercise discretion in accepting orders,

(b) impose trading or position limits or closeout positions under specified conditions,

(iii) the extent of the Dealer Member’s right to:

(a) use client free credit balances within its own business or to finance other client account debits,

(b) use client account assets as collateral for the clients’ debit and position obligations,

(c) raise money on and pledge assets held in the client’s account

(iv) the conditions under which the Dealer Member may apply the client’s funds, securities or other property in the account or any other accounts of the client to satisfy outstanding debts or margin calls,

(v) the Dealer Member’s obligation to:

(a) if required under any applicable laws or requested to do so, provide information to regulators regarding position limit, exercise limit requirements and reporting derivative positions or derivative transactions related data,

(b) obtain client consent before the Dealer Member may take the other side to the client’s transaction, and document whether the client provides such consent,

(c) address situations when errors and omissions occur,

(vi) where discretionary authority is given to the Dealer Member:

(a) disclosures explaining the discretionary authority that has been given,

(b) the client’s acknowledgement that is has consented to the giving of the authority,

provided the authority given is consistent with the requirements contained within Part G of Rule 3200 and unless the authority is given through the execution of a separate agreement,

(vii) the client’s cumulative loss limit subject to the conditions set out in subsection 3252(2),

(viii) the client’s obligation to:

(a) comply with IIROC requirements and the requirements of any entity through which the derivative is traded, cleared, or issued, including, without limitation, reporting, position limit and exercise limit requirements,

(b) maintain adequate margin collateral and to pay any debts owed to the Dealer Member,

(c) pay commission or other compensation, if any,

(d) pay interest, if any, on account debit balances,

(ix) the client’s acknowledgement of:

(a) receiving the most recent derivatives risk disclosure statement,

(b) their obligation to inform and update the Dealer Member of any circumstances under which they would be considered to be an insider of a reporting issuer or any other issuer whose securities are publicly traded,

(x) any other matter required by a derivatives trading, clearing or issuing entity,

(xi) for options, futures contract options and similar derivatives:

(a) the Dealer Member’s deadlines for a client to submit an exercise notice,

(b) the method the Dealer Member will use to distribute assignment notices,

(c) disclosures indicating that:

(I) the Dealer Member may set maximum limits on short positions,

(II) the Dealer Member may apply cash-only terms during the last 10 days before expiry, and

(III) IIROC may impose other rules affecting existing or subsequent transactions.

(d) the client’s obligation to instruct the Dealer Member to close out positions before expiry,

(xii) for futures contracts, forward contracts, contracts for difference and similar derivatives, disclosures indicating that the Dealer Member requires the client to maintain minimum margin that is the greater of:

(a) the amount the derivatives marketplace or clearing house prescribes,

(b) IIROC’s requirements, or

(c) the Dealer Member’s requirements.

(2) The client’s cumulative loss limit under clause 3252(1)(vii),

(i) applies to an account, where the transactions involve futures contracts, forward contracts, contracts for difference, futures contract options or similar derivative contracts, or highly-leveraged securities or derivatives,

(ii) applies to a trading account, other than a hedging account, whether the account is an advisory account, a discretionary account, a managed account or an order execution only account, and

(iii) must, notwithstanding obligations under Rule 3400, be determined on

(a) a lifetime basis and validated with the client on an annual basis, or

(b) an annual basis and updated annually.

3253. Letter of undertaking

1.  Instead of a derivatives trading agreement, a Dealer Member may obtain a letter of undertaking for accounts where the client is classified as an institutional client.
2.  The letter of undertaking must state:
   1.  that the client agrees to comply with IIROC requirements, any applicable laws, and the requirements of any entity through which the derivative is traded, cleared, or issued, including, without limitation, position limit, exercise limit requirements and reporting derivative positions or derivative transactions related data, and
   2.  if the client has an account that is charged interest on a debit balance, the conditions under which transfers of the client’s funds, securities or other property may be made between accounts, unless these conditions are acknowledged by the client in another document.

3254. Derivatives risk disclosure statement

1. A Dealer Member must:
   1. provide each derivatives retail client with the most recent derivatives risk disclosure statement or other similar document, approved by IIROC before accepting an initial derivatives order from the client,
   2. obtain the client’s acknowledgement of receipt of the statement or document provided under clause 3254(1)(i),
   3. provide each derivatives retail client with any amendments to the statement or document provided under clause 3254(1)(i),
   4. maintain a record of the names and addresses of all clients to whom it has provided the statement or document under clause 3254(1)(i) and any amendments under clause 3254(1)(iii) and the dates on which they were provided, and
   5. include with the risk disclosure statement or other similar document, for each order execution only account offering over-the-counter derivatives to retail clients, a disclosure of the percentage of such accounts that were profitable for each of the four most recent quarters.

3255. Position and exercise limits

1. A Dealer Member must comply with the requirements of any entity through which the derivative is traded, cleared, or issued, including, without limitation, reporting, position limit and exercise limit requirements.

3256. – 3269. Reserved.

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RULE 3400 | SUITABILITY DETERMINATION

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3402. Retail client suitability determination requirements

1. Before a Dealer Member purchases, sells, withdraws, exchanges or transfers‐out securities or precious metals bullion, or transacts in derivatives for a retail client’s account, takes any other investment action for a client, makes a recommendation or exercises discretion to take any such action, the Dealer Member must determine, on a reasonable basis, that the action satisfies the following criteria:

(i) the action is suitable for the retail client, based on the following factors:

(a) the retail client’s information collected in accordance with section 3202,

(b) the Dealer Member’s assessment of and an Approved Person’s understanding of the security, derivative or precious metals bullion, required in accordance with Rule 3300,

(c) the impact of the action on the retail client’s account, including the concentration of securities, derivatives or precious metals bullion, within the account and the liquidity of those securities, derivatives or precious metals bullion,

(d) the potential and actual impact of costs on the retail client’s returns, and

(e) a consideration of a reasonable range of alternative actions available to the Registered Representative, Portfolio Manager, or Associate Portfolio Manager through the Dealer Member at the time the determination is made, and

(ii) the action puts the retail client’s interest first.

2. A Dealer Member must review the retail client’s account and the securities, derivatives or precious metals bullion, in the retail client’s account to determine whether the criteria in subsection 3402(1) are met, and take reasonable steps, within a reasonable time, after any of the following events:
   1. securities, derivatives or precious metals bullion are received or delivered into the client’s account by way of deposit or transfer-in,
   2. a Registered Representative, Portfolio Manager or Associate Portfolio Manager is designated as responsible for the account,
   3. the Dealer Member becomes aware of a change in the retail client’s information collected in accordance with subsection 3202(1) that could result in a security, derivative or precious metals bullion, or the retail client’s account not satisfying subsection 3402(1),
   4. the Dealer Member becomes aware of a change in a security, derivative or precious metals bullion, in the retail client’s account that could result in the security, derivative or precious metals bullion, or account not satisfying subsection 3402(1), or
   5. the Dealer Member reviews the retail client’s information in accordance with subsection 3209(4).

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3403. Institutional client suitability determination requirements

1. Subject to the applicable exemptions and exceptions set out in section 3404, a suitability determination must be made for an institutional client:
   1. before any order is accepted from the client, and
   2.  before a recommendation is made to the client to purchase, sell, exchange or hold a security or precious metals bullion, or transact in any derivative.
2. When a suitability determination must be made for an institutional client pursuant to subsection 3403(1), a Dealer Member must make a determination whether the client is sufficiently sophisticated and capable of making its own investment decisions in order to determine the level of suitability owed to that institutional client. In making a determination whether a client is capable of independently evaluating investment risk and is exercising independent judgment, relevant considerations include:
   1. any written or oral understanding that exists between a Dealer Member and its client regarding the client’s reliance on the Dealer Member,
   2. the presence or absence of a pattern of acceptance of the Dealer Member’s recommendations,
   3. the use by a client of ideas, suggestions, market views and information obtained from other Dealer Members, market professionals or issuers particularly those relating to the same type of securities, derivatives or precious metals bullion,
   4. the use of one or more investment dealers, portfolio managers or other third-party advisors,
   5. the general level of experience of the client in financial markets,
   6. the specific experience of the client with the type of instrument under consideration, including the client’s ability to independently evaluate how market developments would affect the security, derivative or precious metals bullion and ancillary risks such as currency rate risk, and
   7. the complexity of the securities, derivatives or precious metals bullion involved.

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3404. Exemptions from the suitability determination requirements

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3. Other than subsection 3403(4), section 3403 does not apply in respect to:
   1. an account held by a Dealer Member, regulated entity, exempt market dealer, portfolio manager, bank, trust company or insurance company, or
   2. an account held by a non-individual institutional client that:
4. is also a “permitted client”, as defined in National Instrument 31-103,
5. is not a client described in clause 3404(3)(i), and
6. has waived, in writing, the protections offered to them under subsections 3403(1) and 3403(2).
7. Subsection 3403(4) does not apply to an account held by an institutional client who is a Dealer Member, regulated entity, exempt market dealer, portfolio manager, bank, trust company or insurance company.

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RULE 3500 | SALES PRACTICES

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3502. Definitions

1. The following terms have the meaning set out below when used in Rule 3500:

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3503. Client priority

1. A Dealer Member must give priority to client orders or transactions over all other orders or transactions for the same security, derivative or precious metals bullion at the same price.
2. The Dealer Member must not give priority to orders or transactions for an 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.

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RULE 3600 | COMMUNICATIONS WITH THE PUBLIC

3601. Introduction

1. A Dealer Member’s policies and procedures must specifically address communication with the public and the Dealer Member must monitor compliance with these policies and procedures to provide reasonable assurance the Dealer Member, its employees and Approved Persons comply with the policies and procedures.
2. Rule 3600 is divided into the following parts:

Part A – Advertisements, sales literature and correspondence

[section 3602]

Part B – Research reports

[sections 3606 through 3623]

Part C – Misleading Communications

[section 3640]

PART A – ADVERTISEMENTS, SALES LITERATURE AND CORRESPONDENCE

3602. Advertising 

1. A Dealer Member must not issue, participate in or knowingly allow the use of its name in any advertisement, sales literature or correspondence that:
   1. contains an untrue statement or omission of a material fact or is otherwise false or misleading,
   2. contains an unjustified promise of specific results,
   3. uses unrepresentative statistics to suggest unwarranted or exaggerated conclusions, or fails to identify the material assumptions made in arriving at these conclusions,
   4. contains any opinion or forecast of future events which is not clearly labeled as such,
   5. fails to fairly present the potential risks to the client,
   6. is detrimental to the interests of the public, IIROC or its Dealer Members, or
   7. fails to comply with IIROC requirements or any applicable laws. 
2. A Dealer Member’s policies and procedures must specifically address the review and supervision of advertisements, sales literature and correspondence relating to its business.
3. A Dealer Member must ensure that the following items are approved by a designated Supervisor before use or publication:
   1. research reports,
   2. market letters,
   3. telemarketing scripts,
   4. promotional seminar texts (excluding educational seminar texts),
   5. original advertisements or original template advertisements, and
   6. any material containing performance reports or summaries that is used to solicit clients.
4. A Dealer Member must ensure that all advertising, sales literature or correspondence not listed in subsection 3602(3) is reviewed in a manner appropriate to the type of material through:
   1. pre-use approval,
   2. post-use review, or
   3. post-use sampling.
5. A Dealer Member must provide reasonable assurance:
   1. its employees and Approved Persons are familiar with its policies and procedures relating to advertisements, sales literature and correspondence, and
   2. its policies and procedures include specific ongoing measures to provide reasonable assurance its policies and procedures are being complied with.
6. A Dealer Member must retain copies of all advertisements, sales literature and correspondence and all records of supervision for the period set out in section 3803.  These items must be readily available for inspection by IIROC.

3603. – 3605. Reserved.

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RULE 3700 |   REPORTING AND HANDLING OF COMPLAINTS, INTERNAL INVESTIGATIONS AND OTHER REPORTABLE MATTERS

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PART A – REPORTING REQUIREMENTS

3702. Reporting by an Approved Person to the Dealer Member

1. An Approved Person must report to the Dealer Member any of the following matters within two business days:
   1. if there is a change in the Approved Person’s registration information or Form 33-109F4,
   2. if the Approved Person has reason to believe that he or she has or may currently be contravening any IIROC requirements, securities laws, or any applicable laws,
   3. if the Approved Person is the subject of a written client complaint, or
   4. if the Approved Person becomes aware of a client complaint, in writing or other form, about another Approved Person involving allegations of theft, fraud, misappropriation of funds, securities or other property, forgery, money laundering, market manipulation, insider trading, misrepresentation, or unauthorized trading.

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3703. Reporting by a Dealer Member to IIROC

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2. A Dealer Member must report to IIROC any of the following matters, within the time period and using the method prescribed by IIROC:

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4. any time the Dealer Member, or a current or former Approved Person is subject to one of the following in any jurisdiction inside or outside of Canada, while in the employ of the Dealer Member or concerning matters that occurred while in the employ of the Dealer Member:

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(e) subject to a civil claim or arbitration notice involving any of the following:

(I) any matters related to securities, derivatives or precious metals bullion,

(II) any matter related to handling of client accounts or dealings with clients, or

(III) any matter that is the subject of any legislation, rules, regulations, or policies concerning securities, derivatives or precious metals bullion or financial services of any securities, derivatives or financial services regulatory or self-regulatory organization in any jurisdiction,

5. the resolution of any matters set out in clause 3703(2)(iv),
6. any internal disciplinary action that is taken by a Dealer Member against an Approved Person as a result of:
7. a client complaint within the meaning of clause 3703(2)(i),
8. a securities, derivatives or precious metals bullion related civil claim or arbitration notice,

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PART B – INTERNAL INVESTIGATIONS AND INTERNAL DISCIPLINE

3706. Requirement to commence an internal investigation

1. A Dealer Member must conduct an internal investigation if it appears that the Dealer Member or a current or former Approved Person while employed by the Dealer Member engaged in any of the following types of activities in any jurisdiction inside or outside of Canada:
   1. theft,
   2. fraud,
   3. misappropriation of funds, securities or other property,
   4. forgery,
   5. money laundering,
   6. market manipulation,
   7. insider trading,
   8. misrepresentation, or
   9. unauthorized trading.

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PART E – CLIENT COMPLAINTS – RETAIL CLIENTS

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3721. Application

1. Part E of Rule 3700 applies to complaints submitted by a retail client or a person authorized to act on behalf of a retail client in the following form:
   1. a recorded expression of dissatisfaction with a Dealer Member or employee alleging misconduct, or
   2. a verbal expression of dissatisfaction with the Dealer Member or employee alleging misconduct where a preliminary investigation indicates that the allegation may have merit.
2. For the purpose of subsections 3720(1) and 3721(1), alleged misconduct includes, but is not limited to:
   1. allegations of breach of confidentiality, theft, fraud, misappropriation or misuse of funds, securities or other property, forgery, unsuitable investments, misrepresentation, or unauthorized trading relating to the client’s account,
   2. other inappropriate financial dealings with clients, or
   3. engaging in Dealer Member related activities outside of the Dealer Member.

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3728. Client complaint file

1. A Dealer Member must retain the following information in accordance with section 3786 for each client complaint:
   1. the complainant’s name,
   2. the date of the complaint,
   3. the nature of the complaint,
   4. the name of the individual who is subject of the complaint,
   5. the securities, derivatives, other property or services which are the subject of the complaint,

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RULE 3800 | DEALER MEMBER RECORDS AND CLIENT COMMUNICATIONS

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3802. Definitions

1. The following terms have the meaning set out below when used in Rule 3800:

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3804. General requirements to maintain records

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2. The records required under subsection 3804(1) include, but are not limited to, records that do the following:

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6. permit the identification and segregation of client cash, securities, precious metals bullion and other property,
7. identify all transactions conducted on behalf of the Dealer Member and each of its clients, including the parties to the transaction and the terms of the purchase or sale,
8. provide an audit trail for:
9. client instructions, orders and transactions, and
10. each trade transmitted or transaction executed for a client or by the Dealer Member on its own behalf,
11. permit the generation of account activity reports for clients,
12. provide securities, derivatives and precious metals bullion pricing as may be required by securities laws,

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15. document compliance, training, and supervision actions taken by the Dealer Member,

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18. demonstrate compliance with misleading communications requirements,
19. demonstrate compliance with the conditions for temporary holds, and
20. demonstrate determination undertaken to classify a client as a hedger and as an institutional client.

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3805. Trade blotters (records of original entry)

1. A Dealer Member must maintain blotters or other records of original entry by itemizing daily, the following:
   1. all purchases and sales of securities and precious metals bullion,
   2. all receipts and deliveries of securities (including certificate numbers) and precious metals bullion,
   3. all transactions in derivatives,
   4. all receipts and disbursements of cash, and
   5. all other debits and credits.
2. The blotters or records of original entry must contain, at a minimum, the following:

(i) in the case of trades in securities and precious metals bullion:

(a) the description, class and designation of securities and precious metals bullion,

(b) the number, value or amount of securities and precious metals bullion and the unit and aggregate purchase or sale price (if any),

(c) the name or other designation of the person from whom or to whom the securities and precious metals bullion were purchased or received or sold or delivered,

(d) the trade dates, and

(e) the applicable account in which each transaction was effected,

(ii) in the case of transactions in futures contracts, forward contracts, contracts for difference and similar derivative contracts:

(a) the contract underlying interest,

(b) the contract quantity bought or sold,

(c) if applicable, the quantity of the underlying interest bought or sold,

(d) the contract delivery date,

(e) the price at which the contract was entered into,

(f) the transaction dates,

(g) the applicable account in which each transaction was effected,

(h) if applicable, the name of the derivatives marketplace,

(i)  if applicable, the name of the dealer, used by the Dealer Member as its agent to effect the transaction, and

(j)  if applicable, whether the transactions are opening or closing transactions (where required by the marketplace),

(iii) in the case of transactions in options contracts, futures contract options and similar derivative contracts:

(a) the contract underlying interest,

(b) the contract quantity bought or sold,

(c) the contract type,

(d) the contract premium,

(e) the contract exercise or striking price,

(f) the contract declaration date,

(g) the transaction dates,

(h) the applicable account in which each transaction was effected,

(i) if applicable:

(I) the futures contract that is the subject of the futures contract option,

(II) the delivery month and year of the futures contract that is the subject of the futures contract option,

(j) if applicable, the name of the derivatives marketplace,

(k) if applicable, the name of the dealer used by the Dealer Member as its agent to effect the transaction, and

(l)  if applicable, whether the transactions are opening or closing transactions (where required by the marketplace).

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3807. Itemized client ledger accounts

1. A Dealer Member must maintain ledger accounts (or other records) itemizing separately as to each cash and margin account of every client, all purchases, sales, receipts, deliveries and other transactions of securities, derivatives and precious metals bullion for such account and all other debits and credits to such account.
2. When a Dealer Member receives securities and property to margin, guarantee, or secure the trades or transactions of a client’s account, the ledger must contain, at a minimum, the following:
   1. a description of the securities, precious metals bullion or property received,
   2. the date when received,
   3. the identity of any deposit institution where such securities, precious metals bullion or property are segregated,
   4. the dates of deposit and withdrawal from such institutions, and
   5. the date of return of such securities, precious metals bullion or property to the client or other disposition thereof, together with the facts and circumstances of such other disposition.

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3808. Client account statements

1. A Dealer Member must send a daily statement to each retail client who at the end of the day has in their account:
   1. an open futures contract, forward contract, contract for difference or similar derivative contract position, or
   2. an unexpired and unexercised option contract, futures contract option or similar derivative contract position.
2. A Dealer Member must send a monthly statement to each client who:
   1. requests to receive a client account statement on a monthly basis, or
   2. at the end of the month has in their account:
3. had a transaction during the month,
4. has experienced a cash or account position modification, other than dividend or interest payments,
5. an unexpired and unexercised option contract, futures contract option or similar derivative contract position, or
6. an open futures contract, forward contract, contract for difference or similar derivative contract position.
7. A Dealer Member must send a quarterly statement to each client who, at the end of the quarter has:
   1. a debit or credit balance, or
   2. one or more securities, derivatives or precious metals bullion (including securities or precious metals bullion held in safekeeping or in segregation), in their account.
8. The statement must include all of the following information about the client’s account at the end of the period for which the statement is made:
   1. the opening cash balance in the account,
   2. all deposits, credits, withdrawals and debits made to the account,
   3. the closing cash balance in the account,
   4. the description and quantity of each security, derivative and precious metals bullion position in the account,
   5. for each security, derivative and precious metals bullion position in the account:

(a) where the market value is determinable:

(I) the market value,

(II) the total market value, and

(III) if applicable, the notification required pursuant to either clause (i)(b) or clause (ii)(b) of the definition of market value in subsection 1201(2)

(b) where the market value is not determinable, the notification required pursuant to either clause (ii)(b) or clause (ii)(c) of the definition of market value in subsection 1201(2),

6. where the client is a retail client and the statement is a quarterly statement, the statement must also include:

(a) for each security, derivative and precious metals bullion position in the account:

(I) where the cost is determinable, either the cost or the total cost, and

(II) where the cost is not determinable, the notification required pursuant to clause (iii) of the definition of cost in subsection 3802(1),

and

(b) a notation setting out the definitions of the calculation methodologies used to calculate the individual position cost information included in the statement, provided that where the individual position cost information included in the statement is calculated using:

(I) the book cost calculation methodology, the language set out in the definition of book cost in subsection 3802(1) or language that is substantially similar must be used as the notation, and

(II) the original cost calculation methodology, the language set out in the definition of original cost in subsection 3802(1) or language that is substantially similar must be used as the notation,

7. the total market value of all cash, security, derivative and precious metals bullion positions in the account, and
8. where the client is a retail client and the statement is a quarterly statement, the total cost of all cash, security, derivative and precious metals bullion positions in the account.
9. In the case of clients with any security, derivative and precious metals bullion positions which might be subject to a deferred sales charge if they are sold, a notation identifying each position that might be subject to a deferred sales charge.
10. In the case of clients with any open futures contracts, forward contracts, contracts for difference or similar derivative contracts, the daily and monthly statements must contain, at a minimum, the following:
    1. the description and quantity of each open contract, and
    2. the price at which each open contract was entered into.
11. In the case of clients with any unexpired and unexercised option contracts, futures contract options or similar derivative contracts, the daily and monthly statements must contain, at a minimum, the following:
    1. the description and quantity of each unexpired and unexercised contract, and
    2. the exercise or striking price of each unexpired and unexercised contract.
12. In the case where a Dealer Member has acted as an agent in connection with a liquidating transaction in a futures contract or similar listed derivative contract, the monthly statement must contain, at a minimum, the following:
    1. the dates of the initial transaction and liquidating trade,
    2. the commodity and quantity bought and sold,
    3. the futures marketplace upon which the contract was traded,
    4. the delivery month and year,
    5. the prices on the initial transaction and on the liquidating trade,
    6. the gross profit or loss on the transactions,
    7. the commission, and
    8. the net profit or loss on the transactions.
13. In the case of transactions involving:
    1. securities of the Dealer Member, or
    2. securities of a related issuer of the Dealer Member, or
    3. securities of a connected issuer of the Dealer Member, or
    4. securities referenced in clauses 3808(9)(i) through 3808(9)(iii) that are in the course of a distribution to the public, or
    5. derivatives whose underlying interest is referenced in clauses 3808(9)(i) through 3808(9)(iv),
       the monthly statement must indicate that the transactions involve securities of the Dealer Member, a related issuer of the Dealer Member or a connected issuer of the Dealer Member or a derivative whose underlying interest is a security of the Dealer Member, a related issuer of the Dealer Member or a connected issuer of the Dealer Member, as the case may be.
14. If a Dealer Member does not deposit clients’ free credit balances in a trust bank account, the client statement must include the following notation:
    "Any free credit balances (except for RRSP funds held in trust) represent funds payable on demand which, although properly recorded in our books, are not segregated and may be used in the conduct of our business."
15. In the case of derivatives transactions executed for an institutional client under a give-up agreement, the executing Dealer Member shall not be required to send a monthly statement, provided
    1. the client, executing Dealer Member and Dealer Member responsible to clear and settle the transaction are parties to the give-up agreement
    2. the clearing Dealer Member is responsible, under the give-up agreement, for sending a monthly statement to the client, and
    3. the executing Dealer Member:
16. executes the transaction in accordance with the client’s instructions to give up such transaction to the clearing Dealer Member,
17. provides limited transaction execution service to the client under the give-up agreement and does not maintain client account documentation, or receive the client’s money, securities, margin or collateral, and
18. provides the clearing Dealer Member a monthly invoice with details of the give-up transactions of the client and the clearing Dealer Member reconciles the transactions details with its own record.  

3809. Report on client positions held outside of the Dealer Member

1. A Dealer Member must send a quarterly report on outside holdings (report to be called “Report on client positions held outside of the Dealer Member”) to each retail client who, at the end of the quarter holds outside of the Dealer Member’s control, either in book-based client name or physical client name, one or more positions:
   1. in securities issued by a scholarship plan, a mutual fund or an investment fund that is a labour sponsored investment fund corporation, or labour sponsored venture capital corporation, under applicable laws and the Dealer Member is the dealer of record for the client on the records of the issuer of the security or the records of the issuer’s investment fund manager, and
   2. in any other security, derivative or precious metals bullion positions on which the Dealer Member receives continuing compensation payments related to the client’s ownership of the position from the issuer of the position, the investment fund manager of the issuer or any other party.
2. The report must include all of the following information about the client’s outside holdings at the end of the period for which the report is made:
   1. the name and quantity of each position,
   2. for each position where the market value is:
3. determinable:

(I) the market value,

(II) the total market value, and

(III) if applicable, the notification required pursuant to clause (i)(b) of the definition of market value in subsection 1201(2), and

2. not determinable, the notification required pursuant to clause (i)(c) of the definition of market value in subsection 1201(2),
3. for each position where the cost is:
4. determinable, either the cost or the total cost, and
5. not determinable, the notification required pursuant to clause (iii) of the definition of cost in subsection 3802(1),
6. a notation setting out the definitions of the calculation methodologies used to calculate the individual position cost information included in the statement, provided that where the individual position cost information included in the statement is calculated using:
7. the book cost calculation methodology, the language set out in the definition of book cost in subsection 3802(1) or language that is substantially similar must be used as the notation, and
8. the original cost calculation methodology, the language set out in the definition of original cost in subsection 3802(1) or language that is substantially similar must be used as the notation,
9. the total market value of all positions,
10. the total cost of all positions, and
11. the name of the party that holds or controls each position and a description of the way it is held.
12. In the case of clients with any outside holdings which might be subject to a deferred sales charge if they are sold, the report must include a notation identifying each position that might be subject to a deferred sales charge.
13. The report must indicate:
    1. that the client’s outside holdings are not covered by the Canadian Investor Protection Fund, and
    2. whether the client’s outside holdings are covered under any other investor protection fund approved or recognized by a Canadian securities regulatory authority and, if they are, the name of the fund.

3810. Performance report

(1) A Dealer Member must send an annual performance report to each retail client who, at the end of the 12-month period covered by the report has:

(i) an account with:

(a) a debit or credit balance, or

(b) one or more security, derivative or precious metals bullion positions (including security or precious metals bullion positions held in safekeeping or in segregation), or

(ii)  holds one or more outside holdings for which quarterly reporting pursuant to section 3809 is required,

and

(iii) there is at least one position in the account or at least one outside holding for which quarterly reporting pursuant to section 3809 is required, for which a market value can be determined pursuant to either clause (i) or clause (ii) of the definition of market value in subsection 1201(1),

and

(iv) the client’s account was opened at least 12 months ago. 

(2) The annual performance report must include all of the following combined information about the client’s account and outside holdings at the end of the period for which the report is made:

(i) the total combined market value of all cash, security, derivative and precious metals bullion positions:

(a) as at July 15, 2015 or, where the account was opened prior to July 15, 2015 and the information is available, as at the account opening date,

(b) as at the beginning date of the 12-month period covered by the report, and

(c) as at the end date of the report,

(ii) the total combined market value of all deposits and transfers in of cash, security, derivative and precious metals bullion positions:

(a) in the period from July 15, 2015 or, where the account was opened prior to July 15, 2015 and the information is available, the period from the account opening date, to the end date of the report, and

(b) in the 12-month period covered by the report,

(iii) the total combined market value of all withdrawals and transfers out of cash, security, derivative and precious metals bullion positions:

(a) In the period from July 15, 2015 or, where the account was opened prior to July 15, 2015 and the information is available, the period from the account opening date to the end date of the report, and

(b) In the 12-month period covered by the report,

(iv) the total combined change in market value of all cash, security, derivative and precious metals bullion positions:

(a) for the period from July 15, 2015 or, where the account was opened prior to July 15, 2015 and the information is available, the period from the account opening date to the end date of the report, determined using the following formula:

Total market value change from account opening

=       Closing market value
[Sub-clause 3810(2)(i)(c)]
-        Account opening market value
[Sub-clause 3810(2)(i)(a)]
-        Deposits and transfers in
[Sub-clause 3810(2)(ii)(a)]
+       Withdrawals and transfers out
[Sub-clause 3810(2)(iii)(a)], and

(b) for the 12-month period covered by the report, determined using the following formula:

Total 12-month market value change

=       Closing market value
[Sub-clause 3810(2)(i)(c)]
-        Account opening market value
[Sub-clause 3810(2)(i)(b)]
-        Deposits and transfers in
[Sub-clause 3810(2)(ii)(b)]
+       Withdrawals and transfers out
[Sub-clause 3810(2)(iii)(b)],

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(5) For the purposes of this section 3810, the information in respect of cash, security, derivative and precious metals bullion positions of a client required to be reported under section 3808 must be provided in a separate report for each of the client’s accounts.

(6) For the purposes of this section 3810, the information in respect of cash, security, derivative and precious metals bullion positions of a client required to be reported under section 3809 must be included in the report for each of the client’s accounts through which these positions were transacted.

(7) Subsections 3810(5) and 3810(6) do not apply if the Dealer Member sends a single report to the client that consolidates the required information for more than one of a client’s accounts and any outside holdings of a client required to be reported under section 3809 provided:

(i) the client has consented in writing to receiving a consolidated report,

and

(ii) the report that is sent specifies the accounts and outside holdings for which the consolidated information is being provided.

(8) All annual performance reports that are sent to a client, whether prepared for an individual account or prepared on a consolidated account basis pursuant to subsection 3810(7), must:

(i) be prepared for the same 12-month period, and

(ii) include aggregated information for the same accounts and outside holdings,

as the annual fee/charge reports that are sent to the same client.

(9) Where a retail client has an account with positions in futures contracts, forward contracts, contracts for difference, foreign exchange contracts and similar derivative contracts, the Dealer Member shall not be required to send an annual performance report under this section 3810, provided the Dealer Member sends the client a monthly or quarterly statement which includes the following information about the client’s account in addition to the requirements set out under section 3808:

(i) the total profit or loss realized on positions exercised, expired or closed during the period covered,

(ii) the unrealized profit or loss for each opened position at the end of the period covered,

(iii) the profit or loss realized for each positions exercised, expired or closed during the period covered, and

(iv) a disclosure explaining to the client that for the period covered, the statement does not provide information on the changes in market value that occurred during the period covered, but provides the client with:

(a) profit or loss realized on positions exercised, expired or closed, and

(b)unrealized profit or loss for opened position at the end of the period covered.

(10) For purposes of subsection 3810(9), all deposits, credits, withdrawals and debits made in the account can be disclosed as a single net deposit or net withdrawal in the statement.

3811. Fee/charge report

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2. The annual fee/charge report must include all of the following combined information about the client’s account and outside holdings at the end of the period for which the report is made:

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4. the total amount of each type of transaction charge related to the purchase or sale of securities and precious metals bullion and transactions in derivatives paid by the client during the period covered by the report,

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8. the total amount of each type of payment, other than trailing commissions, that is made to the Dealer Member or any of its registered individuals by a securities or derivatives issuer or another registrant in relation to registerable services provided to the client during the period covered by the report, accompanied by an explanation of each type of payment, and

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3. For the purposes of this section 3811, the information in respect of security, derivative and precious metals bullion positions of a client required to be reported under section 3808 must be provided in a separate report for each of the client’s accounts.
4. For the purposes of this section 3811, the information in respect of outside holdings of a client required to be reported under section 3809 must be included in the report for each of the client’s accounts through which these positions were transacted.
5. Subsections 3811(3) and 3811(4) do not apply if the Dealer Member sends a single report to the client that consolidates the required information for more than one of a client’s accounts and any outside holdings of a client required to be reported under section 3809 provided:
   1. the client has consented in writing to receiving a consolidated report, and
   2. the report that is sent specifies the accounts and outside holdings for which the consolidated information is being provided.
6. All annual fee/charge reports that are sent to a client, whether prepared for an individual account or prepared on a consolidated account basis pursuant to subsection 3811(5), must:
   1. be prepared for the same 12-month period, and
   2. include aggregated information for the same accounts and outside holdings,
      as the annual performance reports that are sent to the same client.
7. Where a retail client has an account with positions in futures contracts, forward contracts, contracts for difference, foreign exchange contracts and similar derivative contracts, the Dealer Member shall not be required to send an annual fee/charge report under this section 3811, provided the Dealer Member sends the client a monthly or quarterly statement which includes the following information about the client’s account for the period covered:
   1. itemized transaction charge and operating charge information in accordance with this section 3811, and
   2. if applicable, itemized information on compensation received by the Dealer Member in connection with a transaction.
8. For purposes of clause 3811(7)(ii), the following information will be acceptable where the compensation received by the Dealer Member relates to a bulk distribution arrangement:
   1. a calculated product distribution compensation amount, or
   2. where the distribution compensation amount cannot be unbundled from the manufacturer compensation amount,

(I) the entire compensation amount, and

(II) a note explaining that the amount disclosed is the entire product compensation amount.

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3813. Securities and precious metals bullion record

1. A Dealer Member must maintain a record or a ledger, as of the trade or settlement dates (including positions in safekeeping) for each long and short security and precious metals bullion position maintained for the Dealer Member's account or for the account of clients.
2. The record or ledger must contain the following:
   1. the location of all long positions,
   2. the offsetting position to all short positions, and
   3. the name or designation of the account in which each position is maintained.

3814. Derivatives record

1. A Dealer Member must maintain a record or ledger, as of the transaction date, for each long and short derivatives position maintained for the Dealer Member's account or for the account of clients.
2. The record or ledger must contain the name or designation of the account in which each position is maintained.

3815. Memoranda of orders, transactions and other instructions

1. A Dealer Member must maintain an adequate record of each order, transaction or other instruction given or received for all purchases and sales of securities and precious metals bullion and transactions in derivatives, whether executed or unexecuted, showing at a minimum the following:
   1. the terms and conditions of the order, transaction or instruction and of any modification or cancellation thereof,
   2. the account to which the order, transaction or instruction relates,
   3. the time of entry of the order, transaction or instruction and, where it is entered pursuant to the exercise of discretionary power of a Dealer Member, a statement to that effect,
   4. where the order, transaction or instruction relates to an omnibus account, the component accounts within the omnibus account on whose behalf it is to be executed, and the allocation among the component accounts intended on execution,
   5. to the extent feasible, the time of execution or cancellation,
   6. the price at which the order, transaction or instruction was executed,
   7. the time of report of execution, and
   8. whether the transactions are opening or closing transactions (where required by the marketplace).
2. A Dealer Member must record the name, sales number, or designation of the person placing the order, transaction or instruction, if it is placed by an individual other than:
   1. the account holder, or
   2. an individual authorized in writing to direct orders or instructions for the account.

3816. Trade confirmations

1. A Dealer Member must promptly send the client a written confirmation of all purchases and sales of securities and precious metals bullion and transactions in derivatives, and copies of notices of all other debits and credits of money, securities, property, proceeds of loans and other items for the client’s account.
2. The written confirmation must contain, at a minimum, the day and the marketplace or marketplaces where the trade took place, or marketplace disclosure language acceptable to IIROC; the fee or other charge, if any, levied by any securities regulatory authority in connection with the trade; the name of the salesperson, if any, involved in the transaction; the name of the dealer, if any, used by the Dealer Member as its agent to effect the trade, the settlement date of the trade:

and

1. in the case of trades in securities and precious metals bullion:
2. the quantity and description,
3. the consideration,
4. whether or not the person or company that executed the trade acted as principal or agent, and
5. must maintain and make available to the client or IIROC, upon request, the name of the person or company from or to or through whom the security or precious metals bullion was bought or sold, if acting as an agent in a trade upon an equity marketplace,

and

2. in the case of transactions in futures contracts, forward contracts, contracts for difference, foreign exchange contracts and similar derivative contracts:
3. the contract underlying interest,
4. the contract quantity bought or sold,
5. if applicable, the quantity of the underlying interest bought or sold,
6. the contract delivery date, and
7. the price at which the contract was entered into,

and

3. in the case of transactions in options contracts, futures contract options and similar derivative contracts:
4. the contract underlying interest,
5. the contract quantity bought or sold,
6. the contract type,
7. the contract premium,
8. the contract exercise or striking price,
9. the contract declaration date,
10. if applicable:

(I) the futures contract that is the subject of the futures contract option,

(II) the date of the futures contract that is the subject of the futures contract option,

and

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5. in the case of transactions in over-the-counter securities other than debt securities:
6. where the confirmation is sent to a retail client:

(I)  the amount of each transaction charge, deferred sales charge or other charge in respect of the transaction, and

(II) the total amount of all charges in respect of the transaction, 

2. where the confirmation is sent to an institutional client:

(I) the commission, if any, charged in respect of the transaction,

and

6. in the case of transactions in debt securities:
7. in the case of a purchase, where the debt security is a stripped coupon or a residual debt instrument:

(I) the yield thereon calculated on a semi-annual basis in a manner consistent with the yield calculation for the debt instrument which has been stripped, and

(II) the yield thereon calculated on an annual basis in a manner consistent with the yield calculation for other debt securities which are commonly regarded as being competitive in the market with such coupons or residuals such as guaranteed investment certificates, bank deposit receipts and other indebtedness for which the term and interest rate is fixed,

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and

7. in the case of transactions in
8. over-the-counter securities, other than debt securities or a security that is undergoing a primary market transaction, and over-the-counter derivatives other than contracts with non-standardized terms that are customized to the needs of a particular client and for which there is no secondary market, and
9. the confirmation is being sent to a retail client, either of the following:

(I) the total amount of any mark-up or mark-down, commission or other service charges the Dealer Member applied to the transaction,

(II) one of the following notifications or a notification that is substantially similar:

“Dealer firm remuneration has been added to the price of this security (in the case of a purchase) or deducted from the price of this security (in the case of a sale).”

“Dealer firm remuneration has been included as an adjustment to the price of this derivatives transaction.”,

and

8. in the case of transactions involving:
9. securities of the Dealer Member, or
10. securities of a related issuer of the Dealer Member, or
11. securities of a connected issuer of the Dealer Member, or
12. securities referenced in sub-clauses 3816(2)(viii)(a) through 3816(2)(viii)(c) that are in the course of a distribution to the public, or
13. derivatives whose underlying interest is referenced in sub-clauses 3816(2)(viii)(a) through 3816(2)(viii)(d),

the trade confirmation must indicate that the transactions involve securities of the Dealer Member, a related issuer of the Dealer Member or a connected issuer of the Dealer Member or a derivative whose underlying interest is a security of the Dealer Member, a related issuer of the Dealer Member or a connected issuer of the Dealer Member, as the case may be,

and

9. in the case of a Dealer Member controlled by or affiliated with a financial institution, the relationship between the Dealer Member and the financial institution shall be disclosed on each trade confirmation issued in connection with a trade in securities of a mutual fund sponsored by the financial institution or a corporation controlled by or affiliated with the financial institution, except where the names of the Dealer Member and the mutual fund are sufficiently similar to indicate that they are controlled by or affiliated with the same financial institution,

and

10. notwithstanding the provisions of this section 3816, a Dealer Member shall not be required to provide a confirmation to a client in respect of:
11. a trade in a managed account, provided:

(I) prior to the trade, the client has consented in writing to waive the trade confirmation requirement,

(II) the client may terminate a waiver by notice in writing.  The termination notice shall be effective upon receipt of the written notice by the Dealer Member, for trades following the date of receipt,

(III) the provision of a confirmation is not required under any securities laws of the jurisdiction in which the client resides or the Dealer Member has obtained an exemption from any such applicable laws by the responsible securities regulatory authority, and

(IV) where:

(A) a person other than the Dealer Member manages the account:

1. a trade confirmation has been sent to the manager of the account, and
2. the Dealer Member complies with section 3808, or

(B) the Dealer Member manages the account:

1. the account is not charged any commissions or fees based on the volume or value of transactions in the account,
2. the Dealer Member sends to the client a monthly statement that is in compliance with section 3808 and contains all of the information required to be contained in a confirmation under this section 3816 except:
3. the day and the marketplace or marketplaces upon which the trade took place, or marketplace disclosure language acceptable to IIROC,
4. the fee or other charge, if any, levied by any securities regulatory authority in connection with the trade,
5. the name of the salesperson, if any, in the transaction,
6. the name of the dealer, if any, used by the Dealer Member as its agent to effect the trade, and
7. must maintain and make available to the client or IIROC, upon request, the name of the person or company from or to or through whom the security was bought or sold, if acting as an agent in a trade upon an equity marketplace,
8. the Dealer Member maintains the information not required to be in the monthly statement pursuant to sub-paragraph 3816(2)(x)(a)(IV)(B)(ii) and discloses to the client on the monthly statement that such information will be provided to the client on request.
9. a trade in a delivery against payment or receipt against payment trade account, provided:

(I) the trade is either subject to or matched in accordance with broker-to-broker or institutional trade matching requirements under IIROC requirements or securities laws,

(II) the Dealer Member maintains an electronic audit trail of the trade under IIROC requirements or securities laws,

(III) prior to the trade, the client has agreed in writing to waive receipt of trade confirmations from the Dealer Member,

(IV) the client is either:

(A) another Dealer Member who is reporting or affirming trade details through an acceptable trade matching utility in accordance with sections 4751, 4753, 4754, 4755 and 4756, or

(B)  an institutional client who is matching delivery against payment/ receipt against payment account trades (either directly or through a custodian) in accordance with National Instrument 24-101,

(V)   the Dealer Member and the client have real-time access to, and can download into their own system from the acceptable trade matching utility’s or the matching service utility’s system, trade details that are similar to the prescribed information under this section 3816, and

(VI) for trades subject to broker-to-broker trade matching, the Dealer Member for the last four quarters:

(A) has not filed more than two reports under section 4756 informing IIROC that it has not met the quarterly compliant trade percentage; and

(B) none of the reports it filed under section 4756 informing IIROC that it has not met the quarterly compliant trade percentage has a quarterly compliant trade percentage of less than 85%.

(VII)    for trades subject to institutional trade matching, the Dealer Member has a quarterly compliant trade percentage of greater than or equal to 85% for at least two of the last four quarters.

A client may terminate their trade confirmation waiver, referred to in sub-clause 3816(2)(x)(b), by providing a written notice confirming this fact to the Dealer Member. The termination notice takes effect upon the Dealer Member’s receipt of the notice.

3.  a swap transaction, provided:

(I) the Dealer Member enters into a standard industry agreement with the client that is acceptable to IIROC, and

(II) the agreement sets out the terms for a client to receive a confirmation of a swap transaction and the key terms of the confirmation.

4. a derivatives transaction where the Dealer Member is the executing broker and the transaction is executed for an institutional client under a give-up agreement, provided

(I) the client, executing Dealer Member and Dealer Member responsible to clear and settle the transaction are parties to the give-up agreement

(II)  the clearing Dealer Member is responsible, under the give-up agreement, for issuing the transaction confirmation to the client, and

(III)  the executing Dealer Member:

(A)  executes the transaction in accordance with the client’s instructions to give up such transaction to the clearing Dealer Member,

(B)  provides limited transaction execution service to the client under the give-up agreement and does not maintain client account documentation, or receive the client’s money, securities, margin or collateral, and

(C)  provides the clearing Dealer Member a monthly invoice with details of the give-up transactions of the client and the clearing Dealer Member reconciles the transactions details with its own record.

3817. Options and similar derivative contracts is which the Dealer Member has an interest

1. A Dealer Member must maintain a record of all puts, calls, spreads, straddles and other options or similar derivative contracts in which the Dealer Member has any direct or indirect interest or which the Dealer Member has granted or guaranteed, and the record must contain, at the minimum, an identification of the security or other underlying interest and the number of units involved.

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RULE 3900 | SUPERVISION

3901. Introduction

1. Rule 3900 sets out the Dealer Member’s obligation to supervise its business and operations. The rule is divided into seven parts as follows:

Part A –  General supervision requirements

[sections 3904 through 3918]

Part B –  Supervision of all accounts

[sections 3925 through 3927]

Part C –  Supervision of retail client accounts

[sections 3945 through 3948]

Part D –  Supervision of institutional client accounts

[sections 3950 and 3951]

Part E –   Supervision of order execution only accounts

[section 3955]

Part F –  Supervision of derivatives trading accounts

[sections 3960 through 3964]

Part G -  Supervision of discretionary accounts and managed accounts

[sections 3970 through 3973]

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PART C – SUPERVISION OF RETAIL CLIENT ACCOUNTS

3945. Daily and monthly trade supervision

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2. In addition to meeting the Dealer Member’s general supervisory obligations and any relevant obligations relating to trading, the policies and procedures relating to the supervision of retail client accounts must specifically address the detection of:
   1. unsuitable trading,
   2. undue concentration of securities, derivatives or precious metals bullion in a single account or across accounts,
   3. excessive trading,
   4. trading in restricted securities or transacting in derivatives whose underlying interest is a restricted security,
   5. conflict of interest between Registered Representative, Investment Representative, Portfolio Manager and Associate Portfolio Manager and client trading activity,
   6. excessive transaction transfers and trade cancellations indicating possible unauthorized trading,
   7. inappropriate or high risk trading strategies,
   8. deterioration of the quality of client holdings in an account,
   9. excessive or improper crosses of securities, derivatives or precious metals bullion between clients,
   10. improper or excessive employee trading,
   11. front running,
   12. account number changes,
   13. late payment,
   14. outstanding margin calls,
   15. undisclosed short sales,
   16. manipulative and deceptive activities, and
   17. insider trading.

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3946. Additional supervisory responsibilities

1. In addition to transactional activity, the Dealer Member’s policies and procedures must specifically address identifying, dealing with and informing the appropriate Supervisors of other client related matters, including:
   1. client complaints,
   2. cash account violations,
   3. transfers of funds and positions between unrelated accounts or between non-client accounts and client accounts or deposits from non-client accounts to client accounts, and
   4. trading while the account is under margined.

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PART D – SUPERVISION OF INSTITUTIONAL CLIENT ACCOUNTS

3950. Supervisory policies and procedures for institutional client accounts

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2. In addition to meeting the Dealer Member’s general supervisory obligations, including any relevant obligations relating to trading in securities, derivatives and precious metals bullion and the policies and procedures relating to the supervision of institutional client accounts must specifically address detecting improper or suspicious account activity including:
   1. manipulative and deceptive activities,
   2. trading in securities on the Dealer Member’s restricted list,
   3. transacting in derivatives whose underlying interest is on the Dealer Member’s restricted list,
   4. front running by employee or proprietary accounts,
   5. trading in securities that have restrictions on their transfer,
   6. transacting in derivatives whose underlying interest has restrictions on their transfer, and
   7. exceeding derivative position or exercise limits.

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PART E – SUPERVISION OF ORDER EXECUTION ONLY ACCOUNTS

3955. Supervision of order execution only accounts

1. A Dealer Member that is approved by IIROC to provide order execution only accounts within a separate legal entity or within a separate business unit must have policies and procedures in place to:
   1. meet the Dealer Member’s general supervisory obligations and any relevant obligations relating to transacting in securities, derivatives and precious metals bullion,  

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PART F –SUPERVISION OF DERIVATIVES TRADING ACCOUNTS

3960. Supervision of derivatives accounts

1. A Dealer Member that transacts in or advises on derivatives must, where applicable:
   1. appoint a designated Supervisor to supervise its activities that involve options contracts or similar derivative contracts, and
   2. appoint a designated Supervisor to supervise its activities that involve futures contracts, forward contracts, contracts for difference, futures contract options or similar derivative contracts.
2. The designated Supervisors must have the qualifications and experience required to supervise the Dealer Member’s derivatives activities. 
3. The Dealer Member must appoint one or more alternate Supervisors if necessary to ensure continuous supervision of its derivatives activities.
4. An alternate Supervisor must assume all or part of the designated Supervisor’s responsibilities if:
   1. the relevant designated Supervisor is absent or unable to carry out their duties, or
   2. a Dealer Member’s trading activity requires additional qualified individuals to supervise the Dealer Member's derivatives-related activities.

3961. Responsibility of designated Supervisors for derivatives accounts

1. The designated Supervisors are responsible for:
   1. approving new derivatives accounts, and
   2. ensuring that the handling of clients’ derivatives account trading complies with IIROC requirements.

3962. Supervision of retail derivatives accounts

1. The designated Supervisors for retail derivatives accounts are responsible for:
   1. reviewing and approving client loss limits when they are set annually or updated, taking into consideration previous losses,
   2. ensuring that all recommendations made for an account are and continue to be suitable for the client; and
   3. put the client’s interest first.
2. The Dealer Member must ensure that Registered Representatives, Investment Representatives, Portfolio Managers and Associate Portfolio Managers only trade in or advise on those derivatives included in their approval category.
3. On a daily and monthly basis, the designated Supervisor must review all derivatives accounts that are designated as discretionary accounts and managed accounts.
4. The Dealer Member must have policies and procedures that specifically address notifying clients of:
   1. approaching expiry dates,
   2. significant changes in derivative contracts resulting from changes in the underlying interest,
   3. any changes in the Dealer Member’s business policy, and
   4. any new developments in the trading or regulation of derivatives that may impact clients.
5. The Dealer Member must have policies and procedures that specifically:
   1. require the designated Supervisor to approve the solicitation of clients to use derivatives programs, as well as clients’ actual use of derivatives,
   2. prevent a client from transacting in derivatives without executing a derivatives trading agreement with the Dealer Member,
   3. address the handling of futures contracts, forward contracts and similar derivative contracts with pending delivery months,
   4. address detection of derivatives trading by a client who is an insider of a reporting issuer or any other issuer whose securities are publicly traded to avoid insider trading restrictions,
   5. prevent a retail client from holding contracts for difference or similar derivatives positions representing more than 0.5% of the float of a reporting issuer or any other issuer whose securities are publicly traded on an intra day or short term basis, and
   6. prohibit the offering of contracts for difference or similar derivatives to a retail client that confer the right or obligation to acquire or deliver the underlying interest or confer any other rights of shareholders, such as voting rights.

3963. Supervision of retail derivatives account trading activity

1. In addition to IIROC requirements relating to account supervision, the Dealer Member’s policies and procedures must specifically address the review of derivative transactions to detect the following:
   1. excessive intra-day and short-term transactions,
   2. transacting while the account is under-margined,
   3. transacting beyond margin or credit limits,
   4. cumulative losses exceeding approved client loss limits in trading accounts determined in accordance with clause 3252(1)(vii) and subsection 3252(2),
   5. exceeding derivative position or exercise limits,
   6. speculative transactions in hedging accounts,
   7. transactions in derivatives whose underlying interest is on the Dealer Member’s restricted list,
   8. transactions in derivatives whose underlying interest has restrictions on their transfer,
   9. transacting in derivatives to avoid insider trading restrictions,
   10. exposures arising out of uncovered option positions, and
   11. exposures to delivery obligations through the holding of futures contracts, forward contracts and similar derivative contracts into the delivery month.

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3964. Access to Approved Persons qualified in derivatives

1. The Dealer Member’s policies and procedures must specifically address that derivatives clients have access, during normal business hours, to a Registered Representative, Investment Representative, Portfolio Manager or Associate Portfolio Manager qualified to deal in, where applicable:
   1. options contracts and similar derivative contracts, or
   2. futures contracts, forward contracts, contracts for difference, futures contract options or similar derivative contracts, or
   3. all derivative contracts.

3965. - 3969. Reserved.

PART G –SUPERVISION OF DISCRETIONARY ACCOUNTS AND MANAGED ACCOUNTS

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3971. Supervision of managed accounts

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2. In addition to meeting the Dealer Member’s general supervisory obligations and any relevant obligations relating to trading in securities, derivatives and precious metals bullion, the Dealer Member’s policies and procedures dealing with the supervision of managed accounts must specifically address:
   1. identifying when a Portfolio Manager or sub-adviser, as described in section 3279, has contravened managed account conflict of interest related requirements set out in section 3280, and
   2. ensuring fairness in the allocation of investment opportunities among its managed accounts. 

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RULE 4100 |       GENERAL DEALER MEMBER FINANCIAL STANDARDS – MINIMUM CAPITAL, EARLY WARNING, FINANCIAL REPORTS AND AUDITORS

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PART D - APPOINTMENT OF AUDITORS AND AUDIT REQUIREMENTS

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4174. No limitation on scope or procedures

1. Nothing in Part D of Rule 4100:
   1. limits the scope of the audit, or
   2. allows the Dealer Member's auditor to omit any additional audit procedure that it considers necessary under the circumstances.

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4177. Account for all securities, derivatives, precious metals bullion, currencies, and other like assets

1. The Dealer Member's auditor must account for all securities, derivatives, precious metals bullion, currencies and other like assets, including those held in safekeeping or in segregation, on hand, in a vault, or otherwise in the Dealer Member’s physical possession.
2. The Dealer Member's auditor must physically examine all assets in the Dealer Member’s physical possession and compare them with the Dealer Member’s records.
3. If a Dealer Member has employees who are independent of its employees who handle or record securities, derivatives, precious metals bullion, currencies and other like assets, those independent employees may conduct all or part of the count and examination under the supervision of the Dealer Member's auditor.
4. The Dealer Member's auditor must test count and compare sufficient security, derivative, precious metals bullion, currency and other like asset counts with the independent employees’ counts, if applicable, and with the position records, to be satisfied that the entire count was materially correct.
5. The Dealer Member’s auditor must maintain control over the assets until the physical examination has been completed.

4178. Verify positions in transfer and in transit

1. On a test basis, the Dealer Member's auditor must verify positions in transfer and in transit between the Dealer Member’s offices.

4179. Review the Dealer Member’s position balancing and account reconciliations

1. The Dealer Member's auditor must review the Dealer Member’s:
   1. balancing of all security, derivative and precious metals bullion positions,

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4181. Review custodial agreements and approvals

1. The Dealer Member's auditor must:
   1. ensure that all custodial agreements in the form prescribed by IIROC, are in place for securities and precious metals bullion lodged with acceptable securities locations, and
   2. annually obtain evidence of a Dealer Member’s board of directors’ or authorized board committee’s approval of other foreign acceptable securities locations. These approvals must be documented in the meeting minutes.

4182. Obtain written positive confirmations

1. The Dealer Member’s auditor must obtain written confirmation for all accounts and security, precious metals bullion and derivative positions.
2. The Dealer Member’s auditor must obtain written positive confirmation of:
   1. all bank balances and other deposits including hypothecated securities,
   2. all money and security, precious metals bullion and derivative positions, including with clearing houses, similar organizations, and issuers of non-certificated instruments,
   3. all money and securities loaned or borrowed (including subordinated debt) and details of collateral received or pledged, if any,
   4.  a sample of accounts of, or with, brokers or dealers representing regular, joint, and contractual commitment positions including money and security, precious metals bullion and derivative positions,
   5. all accounts of Directors and officers or partners, including money and security, precious metals bullion and derivative positions,
   6. a sample of client, employee, and shareholder accounts, including money and security, precious metals bullion and derivative positions,
   7. a sample of the guarantee and guarantor accounts, in cases where a margin reduction has been taken in the accounts for which the guarantee has been provided during the year or as at the end of the fiscal year,
   8. statements from the Dealer Member's lawyers as to the status of lawsuits and other legal matters pending which, if possible, should disclose an estimate of the extent of the liabilities, and
   9. all other accounts which, in the opinion of the Dealer Member's auditor, should be confirmed.

4183. Selection of accounts for positive confirmation

1. For accounts in subsection 4182(2) the Dealer Member’s auditor:
   1. must send a positive confirmation request,
   2. has the option to send a second positive confirmation request where a reply to the initial request sent in clause 4183(1)(i) has not been received, and
   3. must use appropriate alternative verification procedures, to obtain relevant and reliable audit evidence, where the second positive confirmation request in clause 4183(1)(ii) is not sent or where a reply to second positive confirmation request has not been received.
2. For accounts in clauses 4182(2)(iv), 4182(2)(vi), and 4182(2)(vii), the Dealer Member's auditor must:
   1. select specific accounts for positive confirmation based on:
3. account size (all accounts with net equity exceeding a certain dollar value, based on the level of materiality), and
4. other characteristics such as accounts in dispute, accounts that are significantly under margined, nominee accounts, and accounts that would require significant margin during the year or as at the fiscal year-end without an effective guarantee,
5. select a sufficiently representative sample from all other accounts to provide reasonable assurance that any material error will be detected, and
6. send out negative confirmation requests for all remaining accounts that have not been selected for positive confirmation. The negative confirmation request must include instructions that any differences be reported directly to the auditor.

4184. Written confirmation of clients’ accounts with no balance

1. The Dealer Member's auditor must, using positive or negative written confirmation procedures, confirm on a test basis client accounts with no balance and client accounts closed since the last fiscal year-end audit date. The Dealer Member's auditor must consider the adequacy of the Dealer Member’s internal control system to decide the extent of these procedures.

4185. Effect on capital if no positive written confirmation received for a guarantee

1. If the Dealer Member's auditor does not receive a reply to a positive confirmation request for accounts within a guarantee arrangement made under clause 4182(2)(vii), the guarantee agreement must not be accepted for margin reduction purposes for the accounts guaranteed until:
   1. the Dealer Member's auditor (or the Dealer Member, if after the Form 1 filing) receives positive written confirmation of the guarantee arrangement, or
   2. the parties sign a new account guarantee agreement.
2. If in response to a positive or negative confirmation request, a guarantor disputes the validity or extent of the guarantee, that guarantee must not be accepted for margin reduction purposes until:
   1. the dispute is resolved, and
   2. the guarantor provides a confirmation of the account guarantee arrangement as set out in clause 4185(1)(i) or 4185(1)(ii).

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4188. Test statements for a description of securities and precious metals bullion held in safekeeping

1. The Dealer Member's auditor must check on a test basis whether the Dealer Member's position record and client statements accurately describe the securities and precious metals bullion held in safekeeping.

4189. Dealer Member obligations to auditor

1. A Dealer Member must fully disclose all material facts and issues about its business and operations that relate to the fairness of the regulatory financial statements, in a representation letter from the Dealer Member’s appropriate Executives to the Dealer Member's auditor.
2. A Dealer Member must provide its auditor with unrestricted access to all of the Dealer Member’s records.
3. A Dealer Member must not interfere with the audit process, nor conceal, withhold, or destroy any records reasonably required for the audit.

4190. Calculations for Form 1 and other reporting

1. The Dealer Member's auditor must perform the procedures identified in the “Report on Compliance for Insurance, Segregation, and Guarantee/Guarantor Relationships Relied Upon to Reduce Margin Requirement During the Year” in Form 1 and report on the results as at the fiscal year-end audit date.

4191. Auditor’s records

1. The Dealer Member's auditor must retain a final copy of Form 1 and all audit working papers for six years.
2. All audit working papers for the two most recent years must be readily accessible.
3. The Dealer Member's auditor must make all working papers available for review by IIROC and the Canadian Investor Protection Fund.

4192. Auditor’s obligation to report to IIROC

1. If during the regular conduct of an audit, the Dealer Member's auditor observes any material breach of IIROC requirements related to:
   1. calculating the Dealer Member's financial position,
   2. handling and custody of securities and precious metals bullion, or
   3. maintaining adequate records,
      the Dealer Member's auditor must report that breach to IIROC.
2. The Dealer Member's auditor must report on any subsequent events, to date of filing, which have had material adverse effect on the Dealer Member’s risk adjusted capital level.

4193. - 4199.  Reserved.

RULE 4200 | GENERAL DEALER MEMBER FINANCIAL STANDARDS – DISCLOSURE, INTERNAL CONTROLS, CALCULATIONS OF PRICES AND PROFESSIONAL OPINIONS

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PART C - PRICING INTERNAL CONTROL REQUIREMENTS

4240. Introduction

1. Part C of Rule 4200 sets internal control requirements so that a Dealer Member can ensure that securities, derivatives and precious metals bullion are valued using prices from objective and verifiable sources, and independent management oversight exists to ensure reasonability of prices used.

4241. Pricing procedures

1. A Dealer Member must consistently and accurately price all securities, derivatives and precious metals bullion. In Part C of Rule 4200, references to:
   1. securities include client and inventory positions in securities and securities used in financing transactions such as security borrow and lend, repurchase agreement and reverse repurchase agreement transactions,
   2. derivatives include client and inventory positions in derivatives, and
   3. precious metals bullion include client and inventory positions in precious metals bullion.
2. On a daily basis, a Dealer Member must consistently and accurately mark to market its:
   1. long and short security positions,
   2. long and short derivative positions, and
   3. long precious metals bullion positions,
      to ensure accurate profit and loss reporting in accordance with IIROC requirements.
3. A Dealer Member’s policies and procedures must specifically address consistently pricing and verifying prices of securities, derivatives and precious metals bullion.
4. A Dealer Member’s policies and procedures must specifically address appropriate pricing in security, derivatives and precious metals bullion records that it uses to prepare management reports for monitoring:
   1. inventory profit and loss,
   2. its regulatory capital position, and
   3. segregation.
5. A Dealer Member must assign knowledgeable employees, who are independent of its trading functions, to prepare the reports in subsection 4241(4), and must supervise the reports’ preparation. Conflicted employees must not be involved in security and precious metals bullion pricing or, failing that, the Dealer Member must adopt compensating procedures to ensure appropriate pricing.

4242. Independent price verification and adjustment

1. A Dealer Member must verify its security and precious metals bullion prices at each month-end by comparing them with independent (third-party) pricing sources.
2. The verification work must detect and quantify all pricing differences (distinguishing adjusted and unadjusted differences).
3. An appropriate Executive must:
   1. on a monthly basis, approve the resolution of all material differences, and
   2. on an annual basis, review and verify the continued appropriateness of the existing pricing sources. Where appropriateness is identified as a material concern, the pricing sources used must be changed.

4243. Retention of supporting documents

1. A Dealer Member must retain supporting documents to show that it has verified security and precious metals bullion pricing and made appropriate adjustments.

4244. Access to records

1. Dealer Member employees involved in security and precious metals bullion trading must not have access to back-office security and precious metals bullion price records.

4245. - 4259.  Reserved.

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RULE 4300 |       PROTECTION OF CLIENT ASSETS – SEGREGATION, CUSTODY AND CLIENT FREE CREDIT BALANCES

4301. Introduction

1. Rule 4300 sets out the following Dealer Member requirements relating to the protection of client assets:

Part A - Segregation and related internal control requirements:

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Part A.3 - Security and precious metals bullion usage restrictions and correcting segregation deficiencies

[sections 4320 through 4326]

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PART A - SEGREGATION AND RELATED INTERNAL CONTROL REQUIREMENTS

4310. Definitions

1. The following terms have the meaning set out below when used in Part A of Rule 4300:

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PART A.1 - GENERAL SEGREGATION REQUIREMENTS

4311. Introduction

1. The general segregation requirements set out the requirements for a Dealer Member to segregate client fully paid and excess margin securities and precious metals bullion.

4312. Fully paid and excess margin securities and precious metals bullion

1. A Dealer Member holding fully paid or excess margin securities and precious metals bullion for a client must:
   1. segregate those securities and precious metals bullion, and
   2. identify those securities and precious metals bullion as being held in trust for that client.
2.  A Dealer Member must not use securities and precious metals bullion held in segregation for its own purposes except with the express written approval of its client under the terms of a cash and securities loan agreement as detailed in section 5840.
3. IIROC may prescribe how segregated securities and segregated precious metals bullion are held, and how the amount or value of securities and segregated precious metals bullion to be segregated must be calculated.

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4314. Segregation of client securities and precious metals bullion

1. A Dealer Member holding segregated securities and segregated precious metals bullion must:
   1. segregate those securities and segregated precious metals bullion in bulk in accordance with sections 4315 through 4319, or
   2. segregate specific securities and segregated precious metals bullion for each client.
2. A Dealer Member must not segregate in bulk client securities and segregated precious metals bullion that are subject to a written safekeeping agreement.

PART A.2 - BULK SEGREGATION CALCULATION

4315. Steps for bulk segregation calculation

1. A Dealer Member that segregates securities and segregated precious metals bullion in bulk must, in accordance with sections 4316 through 4319:
   1. determine the net loan value and market value of securities and segregated precious metals bullion held in a client’s account,
   2. calculate the number of segregated securities and segregated precious metals bullion to be segregated in bulk,
   3. determine the securities and segregated precious metals bullion to use to satisfy segregation requirements, and
   4. perform regular calculations and compliance reviews.

4316. Net loan value and market value of securities and precious metals bullion in a client’s account

1. A Dealer Member holding securities and precious metals bullion in bulk segregation must determine for all securities and precious metals bullion held for all accounts of each client:
   1. the number or quantity of securities and precious metals bullion that are part of a qualifying hedge position,
   2. the net loan value of securities and precious metals bullion (excluding securities and precious metals bullion that are part of a qualifying hedge position) less the aggregate debit cash balance in accounts (or plus in the case of a credit), and
   3. the market value of securities and precious metals bullion (excluding securities and precious metals bullion that are part of a qualifying hedge position) not eligible for margin less the aggregate amount, if any, by which those accounts are under margined as calculated in clause 4316(1)(ii).
2. A Dealer Member must segregate the net loan value of securities and precious metals bullion calculated in clause 4316(1)(ii) and the market value of securities and precious metals bullion calculated in clause 4316(1)(iii) for each client account.
3. A Dealer Member is not required to segregate an amount of securities and precious metals bullion greater than the market value of the securities and precious metals bullion held for those accounts.

4317. Calculating the number of client securities to be segregated in bulk

1. A Dealer Member that chooses to satisfy its segregation obligations under section 4312 by segregating in bulk must segregate in bulk for all its clients the number of securities calculated as follows:
2. Equity securities

2. Debt securities

4318. Determining securities and precious metals bullion to comply with segregation requirements

1. A Dealer Member may choose any securities or precious metals bullion from a client’s accounts to satisfy the segregation requirements for that client’s positions, subject to the restrictions of applicable securities laws including, without limitation, a requirement that fully paid securities or precious metals bullion in a cash account be segregated before unpaid securities or precious metals bullion.
2. A Dealer Member that sells securities or precious metals bullion required to be segregated for a client must keep them segregated until one business day prior to settlement or value date.
3. Securities or precious metals bullion required to be segregated for a client must not be removed from segregation as a result of the purchase of any securities or precious metals bullion by that client until settlement or value date.

4319. Frequency and review of bulk segregation calculation

1. At least twice weekly, a Dealer Member must determine the securities or precious metals bullion required to be segregated according to the calculations in Part A.2 of Rule 4300.
2. A Dealer Member must conduct a daily review of securities or precious metals bullion segregated for clients to identify any deficiencies that exist between the actual amounts segregated and the amounts, determined in accordance with subsection 4319(1), that are required to be segregated. Where a deficiency exists, the Dealer Member must correct it in accordance with the requirements of sections 4320 through 4326.

PART A.3 - SECURITY AND PRECIOUS METALS BULLION USAGE RESTRICTIONS AND CORRECTING SEGREGATION DEFICIENCIES

4320. General restrictions

1. A Dealer Member must:
   1. ensure that a segregation deficiency is not knowingly created or increased, and
   2. not deliver securities or precious metals bullion it holds against payment for the account of any client if those securities or precious metals bullion are required to satisfy the Dealer Member’s segregation requirements.

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4322. Call loan segregation deficiency

1. A Dealer Member that determines it has a call loan segregation deficiency must recall the securities or precious metals bullion within the business day following the day it determines the deficiency exists.

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4326. Fails – client or other Dealer Members

1. If a Dealer Member has failed to receive securities or precious metals bullion within 15 business days of settlement date from a client or another Dealer Member, the Dealer Member must:
   1. borrow the same issue of securities or precious metals bullion to cover the deficiency, or
   2. undertake to buy-in the securities or precious metals bullion.

PART A.4 - MINIMUM SEGREGATION POLICIES AND PROCEDURES

4327. General

1. A Dealer Member must, at a minimum, comply with the policies and procedures for segregated securities and segregated precious metals bullion in sections 4328 through 4332 and the supervision requirements in Rule 3900.

4328. Records of segregated securities and precious metals bullion

1. Segregated securities and segregated precious metals bullion must be described as being held in segregation on a Dealer Member’s security and precious metals bullion position record (or related records) and client ledger and statement of account. This description must be in substance a fair representation of how the securities and precious metals bullion are being held in segregation at the custodian and therefore, the box locations of the Dealer Member must have a direct mapping (or relationship) to custody accounts set up at the custodian on behalf of the Dealer Member.

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4331. Authorized employees to move securities and precious metals bullion

1. A Dealer Member must limit who can move segregated securities and segregated precious metals bullion into or out of segregation to only authorized employees.

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PART B - CUSTODY AND RELATED INTERNAL CONTROL REQUIREMENTS

PART B.1 - GENERAL CUSTODY REQUIREMENTS

4340. Introduction

1. A Dealer Member takes on certain operational risks when it has custody of securities and precious metals bullion. These risks arise in connection with the location where and by whom they are held and whether a Dealer Member has adequate internal controls to deal with these risks. Part B of Rule 4300 prescribes IIROC requirements for managing the risks related to securities and precious metals bullion custody. As these risks are quantifiable, they are treated as margin charges when calculating Dealer Member risk adjusted capital. This Part B of Rule 4300, in conjunction with Form 1, prescribes these charges.

4341. Definitions

1. The following terms have the meaning set out below when used in Part B of Rule 4300:

4342. Hold securities and precious metals bullion in an acceptable securities location

1. A Dealer Member must hold securities and precious metals bullion, including book-based securities, in an acceptable securities location as prescribed in Rule 4300 and Form 1. Acceptable securities locations can either be internal acceptable securities locations, which include acceptable transfer locations; or external acceptable securities locations, which in Form 1 are simply referred to as “acceptable securities locations”.

4343. Timely deposit

1. A Dealer Member must deposit securities and precious metals bullion requiring segregation in an acceptable securities location on a timely basis.

PART B.2 - ACCEPTABLE SECURITIES LOCATIONS

4344. Acceptable internal storage location

1. Securities and precious metals bullion in a Dealer Member’s physical possession must be held in an internal storage location that meets the requirements in section 4345, in order for the internal storage location to be an internal acceptable securities location.

4345. Acceptable internal storage location requirements

1. A Dealer Member’s internal storage location must:
   1. be subject to ongoing adequate internal controls and systems for safeguarding securities and precious metals bullion, and
   2. hold all unencumbered securities and precious metals bullion positions in the physical possession of the Dealer Member.

4346. Acceptable transfer locations

1. Securities and precious metals bullion in transfer must be in the possession of a registered or recognized transfer agent and a Dealer Member must comply with the applicable confirmation requirements in sections 4356 through 4360, in order for the transfer location to be an acceptable transfer location.

4347. Securities not under a Dealer Member’s physical possession

1. Securities and precious metals bullion not under a Dealer Member’s physical possession but which are under a Dealer Member’s control must be held in an external acceptable securities location or the Dealer Member must comply with the client waiver requirements in section 4352.

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4350. Application to IIROC for approval of foreign institutions and foreign securities dealers

1. A Dealer Member must apply in writing to IIROC for review and approval of a foreign institution or foreign securities dealer as an acceptable securities location.
2. Prior to submission to IIROC the application must be approved by the Dealer Member’s board of directors or by a committee of the Dealer Member’s board of directors.
3. The application to IIROC must include the following:

4351. Annual approval of foreign institutions and foreign securities dealers as acceptable securities locations

3. The annual approval by the Dealer Member’s board of directors or a committee of the Dealer Member’s board of directors must be given as follows:

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4352. Obtaining a client waiver when an external acceptable securities location is unavailable

1. If a Dealer Member holds client securities and precious metals bullion in a foreign jurisdiction where:
   1. applicable laws and circumstances may restrict the transfer of securities and precious metals bullion from that jurisdiction, and
   2. the Dealer Member cannot arrange to hold the client’s securities and precious metals bullion in the jurisdiction at an external acceptable securities location,
      the Dealer Member must obtain a waiver from the client.
2. The client’s waiver in approved form must be obtained for each transaction.
3. In the waiver, the client must:
   1. consent to the arrangement,
   2. acknowledge the risks associated with holding securities and precious metals bullion at the specified foreign custodian on behalf of the Dealer Member in the specified country, and
   3. waive any claims it may have against the Dealer Member and hold the Dealer Member harmless if the foreign custodian loses the securities and precious metals bullion.
4. On obtaining the waiver, a Dealer Member may hold those client securities and precious metals bullion at a custodian in the foreign jurisdiction if the Dealer Member has a written custodial agreement with the custodian.

PART B.3 - WRITTEN CUSTODIAL AGREEMENT REQUIREMENT

4353. Agreement with each external securities location

1. As required in Form 1, a Dealer Member must execute a written custodial agreement with each external custodian. In order for the external custodian to qualify as an external acceptable securities location the written custodial agreement must state that:
   1. the Dealer Member must give prior written consent to any use or disposal of the securities and precious metals bullion,
   2. security certificates can be delivered promptly on demand or, if certificates are not available and the securities are book-based, must be transferable either from the location or to another person at the location promptly on demand,
   3. the securities and precious metals bullion are held in segregation for the Dealer Member or its clients free and clear of any charge, lien, claim or encumbrance in favour of the custodian, and
   4. the custodian indemnifies the Dealer Member against losses due to the custodian’s failure to return any securities, precious metals bullion or other property it holds to the Dealer Member. However, the custodian’s liability is limited to the market value of the securities, precious metals bullion and other property at the time it was required to deliver them to the Dealer Member.

When custody is secured by a global custodial agreement, including where the custodian uses a subcustodian, the custodian’s indemnity must:

1. meet standard industry practice,
2. be legally enforceable, and
3. be of sufficient scope and in a form that is acceptable to IIROC.

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PART B.4 - CONFIRMATION AND RECONCILIATION REQUIREMENTS

4355. Securities in transit

1. If securities or precious metals bullion are in transit between internal storage locations:
   1.  for which there are no adequate internal controls maintained, or
   2.  for more than five business days,

those securities or precious metals bullion are not considered to be under the Dealer Member’s control or physical possession for purposes of good segregation.

4356. Confirmations from external acceptable securities locations

1. A Dealer Member must receive a positive confirmation of all securities or precious metals bullion positions annually at its fiscal year-end audit date from each external acceptable securities location.
2. If a Dealer Member does not receive a positive fiscal year end audit confirmation of a securities or precious metals bullion position from an external acceptable securities location, then the Dealer Member must transfer the position to its difference account.

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PART B.5 - MARGIN REQUIREMENTS

4362. Acceptable securities location

1. For securities or precious metals bullion a Dealer Member holds at an acceptable securities location, custodial related margin requirements only apply to unresolved differences.

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4364. Non-acceptable internal storage and non-acceptable securities location

1. If securities or precious metals bullion are:
   1. not considered to be under the Dealer Member’s control or physical possession for purposes of good segregation under section 4355, or
   2. not under a Dealer Member’s physical possession and are held at a non-acceptable securities location because:
2. the location does not meet the criteria for an internal acceptable securities location as specified in section 4345, or
3. the location does not meet the criteria for an external acceptable securities location as specified in section 4348, or
4. there is no annual written approval of a foreign institution or foreign securities dealer as an acceptable securities location as specified in section 4351,

then, when it calculates risk adjusted capital, a Dealer Member must deduct 100% of the market value of the securities or precious metals bullion held in custody with the non-acceptable securities location.

4365. No confirmation from location

1. Security and precious metals bullion positions where the Dealer Member has not received:
   1. a positive fiscal year end audit confirmation under subsection 4356(2) or where an adequate month-end reconciliation process is not performed by the Dealer Member,
   2. a confirmation from a transfer agent, within the required time period, under subsection 4357(3), 4358(3) or 4359(3), or
   3. a confirmation of a related stock split or stock dividend under subsection 4360(2)
      are not considered to be under the Dealer Member’s control or physical possession for purposes of good segregation and must be transferred to a Dealer Member’s difference account.
2. For difference account positions in subsection 4365(1), the Dealer Member must:
   1. provide for the purposes of calculating risk adjusted capital, as an amount required to margin, the sum of the security and precious metals bullion position market value and the normal inventory margin, and
   2. undertake to borrow or buy-in the position pursuant to section 4368.

4366. No written custodial agreement

1. If a Dealer Member does not have a written custodial agreement with a custodian, and that entity would otherwise qualify as an acceptable securities location, it must provide margin on the security and precious metals bullion positions held in custody at that custodian in accordance with subsections 4366(2) and 4366(3).
2. Dealer Member has no set-off risk with the custodian
   1. If the Dealer Member has no set-off risk with the custodian, in determining its early warning excess and early warning reserve, the Dealer Member must deduct as a margin requirement 10% of the market value of the security and precious metals bullion positions held in custody at the custodian.
3. Dealer Member has set-off risk with the custodian
   1. If the Dealer Member has set-off risk with the custodian, in determining:

(a) its risk adjusted capital, the Dealer Member must deduct as a margin requirement the lesser of:

(I) 100% of the set-off risk exposure, and

(II) 100% of the market value of the security and precious metals bullion positions held in custody

and

(b) its early warning excess and early warning reserve, the Dealer Member must deduct as a margin requirement the lesser of:

(I) 10% of the market value of security and precious metals bullion positions held in custody at the custodian, and

(II) 100% of the market value of security and precious metals bullion positions held in custody at the custodian less amount required in sub-clause 4366(3)(i)(a).

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4368. Difference accounts

1. A Dealer Member must maintain a difference or suspense account to record all security and precious metals bullion positions not received due to unreconcilable differences or errors in any accounts.
2. If a Dealer Member has not received the security and precious metals bullion positions recorded in a difference account within 30 business days of recording the deficiency, the Dealer Member must:
   1. borrow the security or precious metals bullion position to cover the deficiency, or
   2. undertake to purchase the securities or precious metals bullion immediately.

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PART C - CLIENT FREE CREDIT BALANCE REQUIREMENTS

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4381. Dealer Member’s use of client free credit balances

1. A Dealer Member may use its clients’ free credit balances in its business only in accordance with Part C of Rule 4300.

4382. Notation on client account statements

1. A Dealer Member that does not keep its clients’ free credit balances:
   1. segregated in trust for clients in an account with an acceptable institution, and
   2. separate from other money the Dealer Member receives, must clearly write the following or equivalent on all statements of account it sends to clients:

“Any free credit balances represent funds payable on demand which, although properly recorded in our books, may not be segregated and may be used in the conduct of our business.”

4383. Calculating usable free credit balances

1. A Dealer Member must not use in its business an amount of clients’ free credit balances that totals more than the greater of:
   1. general free credit limit:
      twelve times the Dealer Member’s early warning reserve amount, or
   2. margin lending adjusted free credit limit:
      twenty times the Dealer Member’s early warning reserve amount for margin lending purposes plus twelve times the remaining early warning reserve amount for all other purposes, where the remaining early warning reserve amount equals the early warning reserve amount minus 1/20th of the total settlement date client margin debit amount.
2. A Dealer Member must segregate clients’ free credit balances in excess of the amount calculated in subsection 4383(1) either:
   1. in cash held in trust for clients in a separate account with an acceptable institution, and this trust property must be clearly identified as such at the acceptable institution or
   2. in Canadian bank paper with an original maturity of one year or less and bonds, debentures, treasury bills, and other securities with a maturity of one year or less of, or guaranteed by, the Government of Canada, a province of Canada, the United Kingdom, the United States, or any other national foreign government that is on the List of Basel Accord Countries (provided such other foreign government securities are currently rated Aaa or AAA by Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively).

As described in IIROC Notice 21-0028, effective September 1, 2022, clause 4384(2)(ii) will be repealed and replaced with the following:

(ii) in the following securities:

4384. Weekly calculation

1. At least weekly, but more frequently if required, a Dealer Member must calculate the amounts that must be segregated under section 4383.

4385. Daily compliance review

1. Every day, a Dealer Member must compare the amount of client free credit balances it has segregated to the amount subsection 4383 (2) requires to be segregated.
2. A Dealer Member must identify and correct any deficiency in amounts of free credit balances required to be segregated within five business days following the determination of the deficiency.

4386. - 4399.  Reserved.

RULE 4400 | PROTECTION OF CLIENT ASSETS – SAFEKEEPING CLIENT ASSETS, SAFEGUARDING CASH AND SECURITIES, AND INSURANCE

4401. Introduction

1. Rule 4400 sets out the following Dealer Member requirements relating to the protection of client assets:

Part A - Safekeeping requirements

[sections 4402 through 4407]

Part B - Internal controls requirements for safeguarding cash, securities and precious metals bullion

[sections 4420 through 4433]

Part C - Insurance requirements

[sections 4450 through 4468]

PART A - SAFEKEEPING REQUIREMENTS

4402. Introduction

1. Part A of Rule 4400 requires a Dealer Member to have adequate safekeeping arrangements in place to protect its clients’ assets.

4403. Written safekeeping agreement

1. A Dealer Member with securities or precious metals bullion held for safekeeping must have a written safekeeping agreement with each client it holds securities or precious metals bullion for.

4404. Securities free from encumbrance

1. A Dealer Member must keep securities or precious metals bullion held for safekeeping free from any encumbrance.

4405. Procedures to keep securities apart

(1)       A Dealer Member must keep securities or precious metals bullion held for safekeeping separate from all other positions and must have procedures in place to ensure this separation.

4406. Identifying securities held for safekeeping in records

1. A Dealer Member must specifically identify and record securities or precious metals bullion held for safekeeping in its securities or precious metals bullion position records and client’s ledger and statement of account.

4407. Release of securities held in safekeeping

1. A Dealer Member may release securities or precious metals bullion held for safekeeping to others only when the client so instructs.

4408. - 4419.  Reserved.

PART B - INTERNAL CONTROL REQUIREMENTS FOR SAFEGUARDING CASH, SECURITIES AND PRECIOUS METALS BULLION

4420. Introduction

1. Part B of Rule 4400 requires a Dealer Member to have policies and procedures to prevent loss of its clients’ and its own assets.

4421. Safeguarding client and Dealer Member cash, securities and precious metals bullion

1. A Dealer Member must safeguard its clients’ and its own cash, securities and precious metals bullion:
   1. to protect them against material loss, and
   2. to detect and account for potential losses (for regulatory, financial and insurance purposes) on a timely basis.
2. A Dealer Member’s policies and procedures must specifically address the minimum requirements for safeguarding cash, securities and precious metals bullion as described in sections 4422 through 4433.
3. IIROC recognizes that a Dealer Member with a small operation may be unable to comply with Rule 4400 requirements to segregate duties. If these minimum requirements are inappropriate because of a Dealer Member’s small size, it must implement alternative control procedures that IIROC approves.

4422. Receipt and delivery of securities and precious metals bullion

1. Employees who receive and deliver physical securities and precious metals bullion must not have access to the Dealer Member’s securities and precious metals bullion records.
2. The Dealer Member must handle securities and precious metals bullion in a restricted and secure area.
3. The receipt and delivery of securities and precious metals bullion must be promptly and accurately recorded (including certificate numbers, registrations, and coupon numbers).
4. A Dealer Member using mail service must send negotiable certificates by registered mail.
5. A Dealer Member must obtain signed receipts from the client or agent for all securities and precious metals bullion not delivered against payment.

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4425. Protecting securities and precious metals bullion

1. A Dealer Member must assess the risk of any location that holds securities or precious metals bullion for it and for the accounts of its clients.
2. A Dealer Member’s processing controls must separate duties for recording entries from duties for initiating transfers on depository records (for instance, transfers between the “free” and “seg” boxes).
3. At least monthly, a Dealer Member must reconcile its records of security, precious metals bullion and other asset positions to the custodian’s records where the positions are held. The Dealer Member must investigate differences and make appropriate adjustment entries as necessary.
4. A Dealer Member must have a proper written custody agreement with each custodian where securities and precious metals bullion are held.

4426. How to handle security records

1. Employees maintaining and balancing securities and precious metals bullion records must not be involved in handling physical securities and precious metals bullion.
2. A Dealer Member must promptly update its securities and precious metals bullion records to reflect changes in location and ownership of securities and precious metals bullion under its control.
3. Journal entries made to securities and precious metals bullion records must be clearly identified and a Dealer Member must review and approve adjustments before processing.

4427. Rules for counting securities

1. At least once a year, a Dealer Member must count physical securities and precious metals bullion held:
   1. in segregation, and
   2. for safekeeping,
      in addition to its annual external audit physical securities and precious metals bullion count.
2. At least monthly, a Dealer Member must count physical securities and precious metals bullion held in current boxes.
3. Only employees who do not handle securities and precious metals bullion may conduct physical securities and precious metals bullion counts.
4. Count procedures must include all physical securities and precious metals bullion held in the box location subject to the count and must simultaneously verify related positions such as positions in transit or in the process of being transferred.
5. During a physical securities and precious metals bullion count, both the description of the security and the quantity must be compared to the Dealer Member’s records. Any discrepancies must be investigated and corrected promptly. Positions not reconciled within a reasonable period must be promptly reported to the Dealer Member’s appropriate Executives and accounted for.

4428. Moving certificates, securities and precious metals bullion between branches

1. A Dealer Member must record the location of certificates in transit between its offices in separate transit accounts on its security position records. The Dealer Member must reconcile these accounts monthly.
2. When securities or precious metals bullion are in transit, a Dealer Member must book out the securities or precious metals bullion from the branch account and book them into the transit account. When the securities or precious metals bullion are physically received at a branch, the Dealer Member must book them out of the transit account and into the receiving branch’s account.
3. The receiving branch must check securities or precious metals bullion received against the accompanying transit sheet.
4. The methods of transportation a Dealer Member chooses for securities or precious metals bullion in transit must:
   1. comply with insurance policy terms, and
   2. take into account the value, negotiability, urgency, and cost factors.

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4433. Cash

1. The department manager or another appropriate manager must review and approve all bank reconciliations.
2. At least monthly, a Dealer Member must reconcile bank accounts in writing, identifying and dating all reconciling items.
3. Journal entries to clear reconciling items must be made on a timely basis and approved by a department manager or another appropriate manager.
4. Bank accounts must be reconciled by employees who do not have:
   1. access to funds, either receipts or disbursements, or
   2. access to security, precious metals bullion or derivative positions, or
   3. record keeping responsibilities that include the authority to write or approve journal entries.

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4434. - 4449.  Reserved.

PART C - INSURANCE REQUIREMENTS

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4451. Definitions

1. The following terms have the meanings set out below when used in Part C of Rule 4400:

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4456. Financial institution bond

1. A Dealer Member must have and maintain insurance against losses, using a financial institution bond with a discovery rider attached or discovery provisions incorporated in the financial institution bond. The five types of losses the insurance must cover are:
   1. Fidelity - Any loss, including loss of property, from a dishonest or fraudulent act of a Dealer Member’s employees:
2. committed anywhere, and
3. committed alone or with others.
4. On premises - Any loss of money, securities, precious metals bullion, or other property through robbery, burglary, theft, hold-up or other fraudulent means, mysterious disappearance, damage, or destruction while in any of:
5. the insured’s offices,
6. a banking institution’s offices,
7. a clearing house, or
8. a recognized place of safe-deposit,
   all as defined in the standard form financial institution bond.
9. In transit - Any loss of money and negotiable or non-negotiable securities, precious metals bullion or other property, while in transit. The value of securities, precious metals bullion in transit in an employee’s or agent’s custody must not exceed the protection under this clause. In transit coverage must be calculated on a dollar for dollar basis. A Dealer Member must provide, for IIROC approval, a list of exceptions to the money, securities, precious metals bullion, or other property protected under this clause.

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RULE 4700 | OPERATIONS – BUSINESS CONTINUITY AND GENERAL TRADING AND DELIVERY STANDARDS

4701. Introduction

1. Rule 4700 sets out the following requirements relating to Dealer Member operations:

Part A - Business continuity plan

[sections 4710 through 4716]

Part B - General trading and delivery standards applicable to all transactions

[sections 4750 through4761]

4702. - 4709.  Reserved.

PART A - BUSINESS CONTINUITY PLAN

4710. Definitions

1. The following terms have the meanings set out below when used in Part A of Rule 4700:

4711. Introduction

1. To manage risk prudently and maintain investor confidence, Dealer Members must ensure they can continue to carry on business after a significant business disruption and provide clients with prompt access to their assets.

4712. Creating a business continuity plan

1. A Dealer Member must establish and maintain a business continuity plan.

4713. Business continuity plan procedures

1.  A Dealer Member’s business continuity plan must identify the procedures it will take to deal with a significant business disruption.
2.  The procedures in subsection 4713(1) must be based on the Dealer Member’s assessment of its key business functions and required levels of operation during and following a disruption.
3.  The procedures in subsection 4713(1) must provide reasonable assurance the Dealer Member stays in business long enough to meet its obligations to its clients and capital markets counterparties after a significant business disruption.

4714. Update business continuity plan

1. A Dealer Member must update its business continuity plan to reflect any significant change in any of its operations, structure, business, or locations.

4715. Annual review and test

1. Every year:
   1. a Dealer Member must review and test, and
   2. an appropriate Executive must approve,
      its business continuity plan.
2. During its annual review, a Dealer Member must make any modifications to its business continuity plan that are necessary due to changes in its operations, structure, business, or locations.
3. IIROC may require a qualified third party to carry out the annual review and test.

4716. Notice of disruption and invoking the business continuity plan

1. Where a significant business disruption occurs, the Dealer Member must
   1. notify IIROC of this incident as soon as possible after its discovery of the disruption.,
   2. include in the notice, details on the disruption and the Dealer Member’s proposed course of action to address and resolve the disruption, as well as resulting consequences of the disruption,
   3. indicate in the notice whether the Dealer Member intends to invoke its business continuity plan, and
   4. inform IIROC of any changes and provide timely updates on the actions set out in the notice, and provide any additional information requested by IIROC.
2. When a Dealer Member invokes its business continuity plan, it must
   1. notify IIROC as soon as possible,
   2. provide details on the circumstances leading the Dealer Member to invoke its business continuity plan and its proposed course of action, and
   3. inform IIROC of any changes and provide timely updates on the actions set out in the notice, and provide any additional information requested by IIROC.

4717. – 4749. Reserved.

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RULE 4900 | OTHER INTERNAL CONTROL REQUIREMENTS – DERIVATIVES RISK MANAGEMENT

4901. Introduction

1. Rule 4900 sets out the internal control requirements for derivative risk management.

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DERIVATIVES RISK MANAGEMENT

4910. Introduction

1. A Dealer Member must have an independent risk management function to:
   1. manage the risks resulting from its use of derivatives, which include listed derivatives and over-the-counter derivatives,
   2. ensure that an appropriate Executive that reports to the board of directors understands all risks, and
   3. ensure that its risk adjusted capital is calculated properly.

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4915. Pricing

1. In addition to the requirements in Part C of Rule 4200, a Dealer Member must comply with the requirements in subsections 4915(2) through 4915(4) in pricing derivatives.
2. Derivative positions must be marked to market at least daily.

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Attachment D - Summary of public comments received on the Initial publication and IIROC’s staff response

Comments received in response to IIROC Notice 19-0200 - Proposed Derivatives Rule Modernization, Stage 1

On November 21, 2019, IIROC issued Notice 19-0200 requesting comments on amendments to the IIROC Rules (IIROC Proposals) relating to the modernization of IIROC’s derivatives-related rules. IIROC received six comment letters from the following commenters:

• Bourse de Montréal Inc. (MX)
• Canadian Advocacy Council of CFA Societies Canada (CFA)
• CMC Markets Canada Inc. (CMC)
• Investment Industry Association of Canada (IIAC)
• Questrade, Inc. (Questrade)
• Toronto Futures Options Swaps Exchange Inc. (tFOSE)

Copies of these letters are publicly available on IIROC’s website (www.iiroc.ca). The following table summarizes these comments and our responses:

• 3See IIROC Rules Notice 19-0200, published on November 21, 2019.
• 4IIROC Rule subsection 1201(1).
• 5IIROC Rule subsection 1201(2).
• 6See previously proposed amendments to IIROC Rule 3800; Part D of IIROC Rule 4100; Part C of IIROC Rule 4200; IIROC Rule 4300; IIROC Rule 4400; IIROC Rule 4700; IIROC Rule 4800.
• 7See IIROC Rules Notice 20-0202, published on October 8, 2020.
• 8For example, as part of the proficiency requirements, a futures contract option is classified together with a futures contract as opposed to an option.
• 9See Proposed National Instrument 93-101 respecting Derivatives: Business Conduct (published on January 20, 2022).
• 10IIROC Rule 4700, Part A.
• 11Namely an advisory account, order execution only account, discretionary account or managed account.
• 12See section 1.3.1 of Rules Notice 19-0200.
• 13This change would also require rule amendments by most CSA jurisdictions given that the current risk disclosure text is also prescribed through rules and regulations in those provinces.
• 14The addition of this requirement would be in line with requirements applicable under the Québec Derivatives Act; see s. 11.36 of the Quebec Derivatives Regulation; Retail foreign exchange dealers, futures commission merchants and introducing brokers offering Forex to retail clients are also subject to this requirement under U.S. Commodity Futures Trading Commission regulations; see 17 CFR 1 § 5.5(e). This disclosure requirement is also part of the measures set by other jurisdictions / bodies; see OICV-IOSCO, FR17/2018: Report on Retail OTC Leveraged Products, September 2018; ESMA 35-43-1000 Additional Information on the Agreed Product Intervention Measures relating to Contracts for Differences and Binary Options, March 27, 2018 (expired in July 2019, as members have implemented measures at least as stringent, ex. FCA UK); Financial Conduct Authority, PS 19/38: Restricting contract for difference products sold to retail clients, July 2019.
• 15IIROC Rule sections 3816 and 3808 respectively.
• 16The one exception would be account positions in insurance products (such as segregated funds) which are not to be sold to clients through an investment dealer but may be held in custody by the investment dealer for the client. These positions should be excluded from all client reporting other than account statement reporting, as the investment dealer is not responsible for the suitability of these account positions.
• 17IIROC Guidance Note GN-3800-21-10.
• 18See IIROC Rules Notice 17-0006.
• 19IIROC Rule sections 2253, 2602, 3121, 3122 and 3805; IIROC Rule clause 3962(1)(iii).
• 20IIROC Rule clause 3962(5)(iv); We have also proposed some minor changes, editorial in nature, in the French version of the IIROC Rules to align the texts with the English version.
• 21IIROC Rule sections 1105, 2207, 2248, 2701, 3206, 3211, 3220 and 3240.
• 22See IIROC Rules Notice 21-0148 (amendments to IIROC Rule sections 3402 to 3404).
• 23See section 3.4 of IIROC Rules Notice 19-0200.
• 24See Attachment C of IIROC Rules Notice 19-0200.