The rule amendments address risks that may arise when firms not regulated by IIROC or the MFDA are involved in the custody of client assets
The Canadian Securities Administrators (CSA) is introducing new regulatory requirements that aim to enhance investor protection by bolstering the requirements on certain firms, such as exempt-market dealers (EMDs), for ensuring that client assets are held safely.
Specifically, the CSA published a set of rule changes on Thursday designed to enhance custody requirements for firms such as EMDs that are directly regulated by the provincial securities commissions.
According to a CSA notice, the rule amendments will address risks that may arise when firms that are not regulated by one of the industry’s self-regulatory organizations (SROs) — the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) — are involved in the custody of client assets. IIROC and the MFDA already impose custodial requirements on their members.
The CSA’s new requirements will codify existing best practices of non-SRO firms, enhance the protection of client assets and clarify the activities that firms such as EMDs can engage in when it comes to trading prospectus-qualified securities.
The changes also expand an existing exemption from the dealer registration requirement that, the CSA says, allows registered advisors to trade investment funds that it, or an affiliate, manages.
The package of changes also includes some tweaks to the second phase of the client relationship model (CRM2) requirements, such as bolstering regulators’ guidance on certain relationship disclosure requirements; adding guidance about market valuation for client reporting; and adding guidance to clarify the regulators’ expectations concerning certain of the information required to be included in investment performance reports.
However, the CSA has backed off from other proposed changes to the CRM2 requirements, such as measures to require disclosure of non-cash sales incentives, and to require disclosure of embedded fees paid to the issuers of securities.
Although the CSA is not pursuing changes in these areas as part of the changes adopted on Thursday, the CSA says it will “continue to consider issues” related to non-cash incentives, embedded fees and the conflicts of interest they both create as part of other ongoing reform efforts.
“These amendments aim to enhance market efficiencies while maintaining strong investor protections. They also address market participants’ desire for clarity on certain regulatory requirements,” says Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers, in a statement.
If the required ministerial approvals are obtained, the amendments, other than the custody amendments, come into force on Dec. 4. The custody amendments would come into force on June 4, 2018.