discussion and explanation of this policy is needed to ensure
EMDs and the industry can appreciate the important distinction
the CSA would now be making.
We recognize that EMDs generally are not able to directly
participate in secondary trading in listed securities since they are
not participating members of an exchange or a CDS participant;
however, EMDs should still have the right to do so, indirectly
through an IIROC dealer , at the request of their investor/clients.
EMDs should be permitted to receive referral fees for trades
of listed securities in the secondary market in Canada
Although we understand that securities of a reporting issuer
sold by an EMD under a prospectus exemption are often registered
and held by an IIROC dealer as custodian (or by a third party
custodian), PCMA Canada submits that EMDs should have the
right to indirectly participate and be compensated for the resale
of listed securities in the secondary market in Canada through
a referral arrangement, made in accordance with the referral
arrangement rules under NI 31-103.
PCMA Canada believes EMDs should be encouraged to
work with other registrants, including portfolio managers and
IIROC dealers, consistent with CSA statements emphasizing the
need for registrants to ensure that investments are suitable for
their investor/clients, particularly in the private capital markets.
It is important for investors to have a diversified portfolio of
investments that include public and private market securities and,
in order to achieve diversification, EMDs are increasingly entering
into referral arrangements with portfolio managers and IIROC
dealers. Such referral arrangements provide an EMD’s investor/
clients access to prospectus-offered securities in the secondary
market in exchange for the payment of a referral fee in compliance
with the referral arrangement rules under NI 31-103. This would
include the resale of securities traded on a domestic marketplace
such as a stock exchange.
PCMA Canada is concerned that the Proposed Amendments
involving new Section 7.1( 5) of NI 31-103 and its related
Companion Policy would prohibit EMDs from entering into such
referral arrangements since EMDs would indirectly (through a
portfolio manager or IIROC dealer) be participating in the resale of
securities that are publicly listed on a marketplace. PCMA Canada
believes investor interests are better served by allowing EMDs
to enter into referral arrangements with any registrant, including
a portfolio manager or IIROC dealer, and earn a referral fee for
trades made by that other registrant in any securities that are
publicly listed on a domestic marketplace.
IV CLARIFICATION OF THE DEFINITION OF “MARKETPLACE”
IN SECTION 7.1( 5) OF NI 31-103
We request the CSA to clarify its use of the term
“marketplace” in Proposed Section 7.1( 5) of NI 31- 103 to ensure
there is no uncertainty. For example, we note that FundSERV Inc.
is recognized not as a “marketplace” but as a “clearing agency”
under subsection 21.2 of the Securities Act (Ontario) and under
comparable legislation in all other CSA jurisdictions, as evidenced
by the OSC exemptive relief order provided to FundSERV in April
2012. However, we are unclear whether the broad language in
the definition of “marketplace” in the Securities Act (Ontario) in
fact excludes FundServ Inc. and generally, the CSA’s intended
definition of this term in connection with Proposed Section 7.1( 5).
Whether FundServ is expressly included or excluded from the
application of this proposed section may have a material impact
on its interpretation and our views on this matter.
V PROPOSED EXPERIENCE REQUIREMENT FOR EMD CCOs
Proposed Experience Requirement is too subjective
The Proposed Experience Requirement, although generally
helpful in encouraging high standards in the industry, is not related
or tailored to the functions and responsibilities of an EMD CCO. We
are concerned that what is relevant and, equally important, sufficient
‘securities industry experience’ is not well articulated by the CSA,
other than as set out in the Companion Policy to NI 31-103.
Imposing the Proposed Experience Requirement is a possible
barrier to entry
We are concerned that imposing the Proposed Experience
Requirement could act as a barrier to entry for new EMDs if there
is an insufficient number of available CCO candidates who satisfy
Experience Requirement. We are also not aware of any
cost benefit analysis involving the introduction of the Proposed
Experience Requirement and understand this is required by
Section 143.2 of the Securities Act (Ontario). Such information
would be helpful to all capital market participants.
Moreover, the implementation of NI 31-103 and its new
business trigger test, has resulted in the need for more issuers to
become registered (when an exemption is not available or they do
not seek to engage a registered dealer) and these firms may not
have personnel with such “relevant securities industry experience”.
Better alternative is to introduce a mandatory EMD CCO Course
The CSA states in the Proposed Amendments that “CCOs
must have a good understanding of the regulatory requirements
applicable to the firm and individuals acting on its behalf. CCOs
must also have the knowledge and ability to design and implement
an effective compliance system.” (the CCO Requirements).
PCMA Canada believes a better way to satisfy the CCO
Requirements is to mandate that all CCO candidates for EMDs take
a mandatory CCO course and successfully pass an examination.
We believe a mandatory EMD CCO Course specifically designed
for CCOs of EMDs would ensure a more consistent level of