The Investment Industry Regulatory Organization of Canada (IIROC) is abandoning plans to create a new registration category for U.S. dealers that are serving Canadian clients through exempt market dealer (EMD) registrations.
IIROC Thursday that it is scrapping plans that were proposed last summer that would have seen the creation of a new “restricted dealer” category for U.S. dealers that are currently only registered as EMDs, but are providing brokerage services to accredited investors — a practice regulators are concerned about because these clients aren’t being afforded the same level of investor protection as those using IIROC dealers, and it creates an unlevel playing field between Canadian and U.S. dealers.
Last summer, IIROC proposed to address this by creating a new registration category that would require these firms to comply with certain IIROC rules, but would rely on their compliance with US. financial operations rules. The idea was to give them an interim step on the way to full IIROC membership.
IIROC proposes “restricted dealer” class for EMDs providing brokerage services
However, many in the industry criticized the proposal, saying that it gave these firms an unfair competitive advantage, and that U.S. regulators aren’t offering the same sort of deal to Canadian firms. In light of those comments, IIROC is now not moving ahead with that proposal; and, instead, the Canadian Securities Administrators (CSA) will be proposing rule amendments to prohibit EMDs from providing brokerage services, and requiring firms that do offer these services to do so under IIROC oversight.
“In general, the vast majority of commenters did not support the restricted dealer member proposal,” IIROC says in a notice published today. “Several overarching themes emerged from these submissions that call into question the viability of the proposal. These comments resonated with us and as a result we will not be pursuing the restricted dealer member proposal.”
Yet, that decision doesn’t resolve the regulatory worries with EMDs providing brokerage services. Indeed, IIROC indicates in its notice that it continues to have “serious concerns with the current scope of brokerage activities being conducted by certain firms through the EMD registration category”, and it stresses its belief that brokerage activities should be carried out through full IIROC members. So, the CSA will now be changing its rules to make that the case.
In a notice of its own, the CSA says it will be publishing proposed amendments to the registration rules “later in 2013 in order to prohibit EMDs from conducting brokerage activities.” It says that EMDs that are currently conducting brokerage activities “may continue to conduct these activities” until the amendments come into force, but after that they will be required to restrict their activities to those permitted by the EMD category.
“Impacted firms may wish to consider how they will conduct brokerage activities in the future,” it says. “Options include transferring their brokerage activities to a Canadian incorporated IIROC firm, tailoring their activities to fit solely within the EMD category, or relying upon the international dealer exemption.”