The Investment Industry Regulatory Organization of Canada (IIROC) is proposing to create a new category for “restricted dealers” in order to help bring U.S. firms that are currently only registered as exempt market dealers (EMDs), but are carrying out full brokerage activities in Canada, under IIROC’s oversight.
A concept paper published Thursday indicates that there are currently 22 U.S. dealers that are either registered as EMDs, or have applications pending, and that these firms are offering a broad range of services in Canada, including: securities brokerage and trading; prime brokerage and securities lending; execution, clearing and settlement services, and custody; under those EMD registrations. Many of these firms have also obtained exemptive relief from the Canadian Securities Administrators (CSA), which allows them to routinely lend money, extend credit and provide margin to clients.
Last year, the CSA issued a notice indicating that, among other things, regulators are concerned about a number of firms (mainly U.S.-based firms) that are registered as exempt market dealers, but are providing brokerage services to clients that qualify as accredited investors, without the same level of oversight as IIROC dealers.
Regulators worried about exempt market dealers carrying out brokerage activities
IIROC’s paper says that the broad range of activity being conducted under the EMD registration category “raises significant policy and capital market concerns”, including: the potential for regulatory arbitrage and regulatory fragmentation; the possible erosion of longstanding requirements that mandate that all ‘investment dealers’ must be members of IIROC; and, the creation of an unlevel playing field between IIROC firms and these EMDs.
The IIROC paper notes that the CSA shares these concerns, and that its staff support the development of an IIROC framework that can be used to facilitate the migration of these sorts of firms to full IIROC membership. To that end, the concept paper proposes to introduce a new class of IIROC member known as a “restricted dealer” as an interim step to full IIROC membership.
The new category would effectively allow a U.S. broker dealer that’s registered with the Financial Industry Regulatory Authority (FINRA) to directly seek cross-membership with IIROC. Under the proposal, a restricted dealer will be granted exemptions from having to comply with certain financial operations requirements based on their compliance with applicable FINRA requirements. They would otherwise be subject to all other IIROC rules and will be subject to IIROC oversight and compliance reviews. Restricted dealers would be able to participate in IIROC board, district councils, and advisory committees. The new category would not be available to Canadian investment dealers, it could only be used by U.S.-based firms.
Ultimately, these firms would be transitioned to IIROC membership by applying as a restricted dealer through a streamlined membership process. Existing partners, directors, officers, employees and agents would be exempt from IIROC’s minimum proficiency requirements. Although those seeking IIROC approval as a registered rep or investment rep would have to meet the IIROC requirements, and would be given a one-year transition period to do so.
The paper indicates that regulators believe that Canada’s capital markets benefit from the participation of U.S. firms, and that simply curtailing the activities of these firms in Canada, without providing them with a financially viable alternative, could result in them abandoning the Canadian capital markets. It says this, “would be detrimental to many Canadian clients who have relied on these firms to access global markets on an efficient and cost-effective basis.”
The paper is out for a 90-day comment period.