CIRO details plans for fund dealer margin accounts

Among other things, the latest set of rule proposals covers client complaint handling, outsourcing arrangements, continuing education, solvency, client assets and custody, recordkeeping and client reporting.

It also sets out CIRO’s approach to allowing mutual fund dealers to offer margin accounts, and to use client free credit cash balances in their operations (such as to finance margin lending) — a policy decision that was included in the previous tranche of rule proposals.

Now, the SRO says that these capabilities will be only allowed for Level 4 dealers.

“… We have limited these additional account services to Level 4 mutual fund dealers because only these mutual fund dealers offer client investment products in nominee name, which allows the dealer the ability to use the positions in the client account as collateral for margin debts,” it said.

Fund dealers that offer margin accounts, or use client free credits, will have to meet the same solvency standards as investment dealers, the notice said, “ensuring that similar activities are regulated in a like manner.”

Firms that decide to offer these kinds of services will have to notify CIRO of their plans in writing, and the SRO will review the proposal, “to ensure the dealer has the appropriate systems, controls and capital to offer margin accounts (or use free credits) and meet the associated rule requirements,” it said.

The notice also reiterated that allowing fund dealers to offer other kinds of accounts — such as discretionary accounts, managed accounts and order execution only accounts — which had previously been considered as part of the rulebook consolidation project, won’t be pursued as part of this effort.

Instead, this change would have to be developed separately, along with the Canadian Securities Administrators (CSA), it noted. And, in the meantime, the SRO is proposing to explicitly prohibit fund dealers from offering these kinds of services.

Additionally, as part of the rulebook consolidation, the SRO is proposing to adopt a uniform financial solvency report that applies the same formula for calculating capital requirements to both fund dealers and investment dealers.

The notice acknowledged that this change, “may have a significant impact on certain mutual fund dealers,” so it’s proposing a phased approach to implementing these changes — and, some differences within the formula, such as the minimum capital requirements, will be preserved, it said.

The proposals are out for comment until June 25.