Update on the project to develop rule amendments relating to the proposed adoption of an incorporated advisor compensation option

Introduction

We are publishing this Bulletin to provide background information on the project to develop rule amendments relating to the proposed adoption of an incorporated advisor compensation option and to provide an update on recent project work that has been performed.

Background

The Canadian Investment Regulatory Organization (CIRO) commenced operations on January 1, 2023, when it assumed the regulatory functions of the former Investment Industry Regulatory Organization of Canada and Mutual Fund Dealers Association of Canada. CSA Position Paper 25-404 New Self-Regulatory Organization Framework included several specific solutions to support CIRO, one of which was pursuing further policy work within CIRO’s regulatory jurisdiction related to the possible harmonization of allowable individual advisor relationships and related compensation approaches across individual advisors sponsored by investment dealers and mutual fund dealers. CIRO assumed primary responsibility for determining the most appropriate harmonized approach and to develop and propose rules, with the CSA continuing to monitor CIRO’s efforts as part of its standard oversight activities.

The current allowable advisor compensation approaches are different for an advisor sponsored by an investment dealer versus an advisor sponsored by a mutual fund dealer. In the case of an individual advisor sponsored by:

• an investment dealer, their current options under the Investment Dealer and Partially Consolidated (IDPC) Rules are to be compensated directly as either an employee or individual agent of their sponsoring dealer1
• a mutual fund dealer, their current options under the current Mutual Fund Dealer (MFD) Rules are:
  • to be compensated directly as either an employee or individual agent of their sponsoring dealer2^,3, or
  • under certain conditions, for a portion of their compensation that is not paid to them directly to be paid to the advisor’s personal corporation for activities carried out by the corporation on the sponsoring dealers behalf.4

Objectives of the project

CIRO intends to pursue rule amendments that will:

• harmonize the allowable compensation options that can be made available to individual advisors sponsored by investment dealers or mutual fund dealers
• improve the consistency of compensation approach options available to individuals that provide both investment advice and other forms of regulated financial advice to clients
• ensure that the investor protection-related regulatory obligations owed to clients:
  • remain as obligations of the sponsoring dealer and the relevant individual sponsored advisors
    
    and
  • are extended to the sponsored advisor’s personal corporation (and in some cases the personal corporation’s employees and shareholders), where the proposed incorporated advisor compensation approach is used
• ensure that the dealer is responsible for the supervision of activities that are conducted on their behalf by the advisor and the advisor’s corporation
• recognize that the provision of investment services by sponsored advisors is a profession and, like other professions, many of these advisors wish to be compensated in a manner that is more consistent with how they provide these services to their clients on behalf of the sponsoring dealer (i.e., as a self-employed business separate from the business of their sponsoring dealer)

and

• promote greater investor access to regulated advice, by permitting a compensation approach that makes it more financially viable for more sponsored advisors to enter into or stay in the investment advice profession.5

Project work performed to date

Publication of position paper

In January 2024, CIRO issued a position paper entitled “Policy options for leveling the advisor compensation playing field” setting out three personal corporation-related policy options for comment as follows: (1) an Enhanced Directed Commission approach, (2) an Incorporated Approved Person approach, and (3) a Registered corporation approach. Commenter responses to this paper indicated a clear preference to pursuing an approach that allowed the personal corporation to engage in all activities the advisor and their staff perform for their sponsoring dealer (not just non-registerable activities).

CIRO staff have focused their recent work on developing a detailed proposal and are working to finalize a proposal that is compliant with applicable regulatory and tax requirements.

Specific proposal features

The following are some of the current specific features of the proposal:

• the use of personal corporations would be limited by CIRO to client-facing Approved Persons6 of the sponsoring dealer
• the advisor corporation would need to be approved by CIRO under a new non-individual category of Approved Person, “Incorporated Approved Person”, to ensure that CIRO has jurisdiction over the registerable activities conducted within it
• the shareholders of the advisor corporation would be limited by CIRO to client-facing individual Approved Persons sponsored by the dealer, individual advisors who provide other qualifying regulated financial services to clients through the same corporation and members of their immediate families
• voting ownership of the advisor corporation must be controlled by the individual advisors that provide qualifying regulated financial services (including investment services) to clients through the corporation

and

• a written agreement must be executed between the dealer, the advisor corporation and the individual advisors acting on their behalf detailing each party’s obligations, including the requirements:
  • that the individual advisor conducts all activities it conducts for the sponsoring dealer through their corporation,
  • for the dealer to be responsible for supervision of the individual advisor’s and the advisor’s corporation activities that are conducted for the sponsoring dealer, and
  • for the advisor’s corporation to obtain dealer approval before engaging in activities other than those conducted on behalf of the dealer.

Submission to the CRA

CIRO staff have also developed and filed with the Canada Revenue Agency (CRA) a submission for their consideration and response. This submission:

• details why CIRO is pursuing its incorporated advisor proposal
• lists significant elements of the CIRO proposal
• reviews certain tax considerations relating to the proposal
• asks a number of questions relating to these tax considerations for which CIRO would like to receive a CRA response.

The questions asked are focused on assisting CIRO with the finalization of its rule amendment proposals. As such, the questions that have been asked do not delve into areas relating to differences in business models that may exist from one dealer to the next.

Next steps

CIRO’s next steps on this project are:

• to receive back CRA responses to our submission questions and other feedback relating to our proposals
• to finalize our proposed rule amendments (including our recommended possible amendments to securities legislation to accommodate the use of personal corporations), taking into consideration the CRA feedback, and publish them for public comment in accordance with our normal publication process
• to seek CSA approval of our proposed amendments
• if approved, to announce implementation of the amendments with an adequate implementation period for dealers and advisors to transition to the harmonized advisor compensation rules.

The exact timing of these next steps is not yet known but we will keep dealers updated as work progresses.

• 1Refer to IDPC Rule section 2302.
• 2Refer to MFD Rule section 1.1.4 for requirements that apply to advisors who conduct business for mutual fund dealers as employees.
• 3Refer to MFD Rule section 1.1.5 for requirements that apply to advisors who conduct business for mutual fund dealers as agents.
• 4Refer to MFD Rule section 2.4.1 for conditions that must be met to be able to direct a portion of the sponsoring dealer-related remuneration to an unregistered corporation.
• 5Further, as CIRO views investor access to regulated advice to be an investor protection issue, if greater investor access to regulated advice is achieved, our view is that investor protection would be enhanced by pursuing these amendments.
• 6Amongst other things, individual advisors must be both registered and approved in the appropriate individual registration and approval categories in order to conduct registerable activities for their sponsoring dealer and are referred to within the CIRO rules as “Approved Persons”. Client-facing Approved Persons are individual Approved Persons who are approved within one or more of the following individual Approved Person categories: (1) Associate Portfolio Manager, (2) Investment Representative, (3) Portfolio Manager, and (4) Registered Representative.