Five year review committee final report reviewing the Securities Act (Ontario)

PART 3 PARTICIPATION OF MARKET PARTICIPANTS

In carrying out its mandate to protect investors and foster fair and efficient capital markets, the Commission regulates individuals and companies who give advice or trade in securities. The regulatory regime also makes use of SROs that exercise some direct oversight and responsibility for their respective areas of competence. SROs are in turn subject to oversight by the Commission. SROs can be a valuable complement to the Commission in achieving the objectives of regulation. In this part, we examine the role and regulation of key market participants including registrants, SROs and clearing agencies.

Chapter 9 Registration

9.1 Registration

The requirement for dealers and advisers to be registered is one of the fundamental concepts in securities regulation. Registration allows the Commission to impose proficiency and capital requirements on those who play these key roles in the capital markets and to impose and enforce certain standards of conduct. The Act provides that no person may 'trade' in a security without being registered and that no person may act as an 'adviser' without being registered.167

The Committee has focused on two issues in particular in reviewing the registration provisions in the Act. The first relates to the broad net cast by the requirement to be registered to effect a 'trade' in a security. The second is the convergence between trading and advising activity. Businesses and individuals who have been registered to effect trades in securities as dealers and employees of dealers are providing more and more financial advice to their clients before executing a trade. However, the proficiency requirements for dealers and their employees are unchanged and are based on the dealer and its employees primarily providing trade execution services and not financial advice.

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9.2 Should the Requirement to Be Registered to 'Trade' in Securities Be Modified?

The definition of a 'trade' is very broad.168 It includes any act 'in furtherance of a trade.' The Act provides a number of exemptions from the registration requirement for trades where investor protection considerations do not require the involvement of a registrant.169

The Committee considered whether the registration requirement in the Act should be amended to require persons or companies who are 'in the business of trading in securities,' rather than persons who 'trade' in a security,170 to be registered. This would lessen the need for discretionary exemptions from the registration requirement for particular 'trades,' but investor protection concerns would continue to be addressed since registration would be required for those actively involved in the business of trading in securities.

There may be some concern that changing the registration requirement to 'in the business of' trading would introduce uncertainty into the marketplace. There has been little, if any, administrative or judicial consideration of what 'in the business of' means in the securities context. Given that registration to trade is a precondition to a person or company being able to trade in securities, there may be concerns about introducing a change in the fundamental test for registration to one which contains elements of subjectivity. The current test is clear: any trade in securities must be effected by a registrant unless there is an exemption.

On the other hand, there is considerable precedent for regulation only to the extent that activities are carried on by persons 'in the business of' that activity. For example, the adviser requirement is not triggered each time a person gives advice on investing in, buying or selling a security. Instead, the person must be 'engaging in, or holding himself, herself or itself out as engaging in, the business of advising others as to the investing in or buying or selling of securities.' Consequently, there has been little reason for exemptions to the adviser registration requirement; the number of exemptions from the adviser registration requirement is, in fact, quite limited. Similarly, the definition of 'market intermediary,171 which is the underpinning of the universal registration regime in Ontario, is based on the concept of being 'in the business of' trading in securities. Thus, currently in Ontario both advisers and market intermediaries only need to register if they are 'in the business.'

The Committee considered the registration requirements in other jurisdictions of Canada. Most jurisdictions have a registration model for dealers similar to that in Ontario, whereby the trade registration requirement is based on trade activities rather than being in the business of trading. The Committee also considered, on a comparative basis, the registration requirements in the U.S., Australia, Hong Kong and the U.K. In the U.S., Australia and Hong Kong, the requirement to be registered as a dealer is triggered based on a person or organization being 'in the business of' either effecting transactions or buying and selling securities (U.S.) or dealing in securities (Australia and Hong Kong). In addition, each of these jurisdictions has separate registration requirements for advisers.172 Similarly, the requirements to be registered as an adviser in these jurisdictions require the person or organization to be engaged in the business of advisory activities as they are defined under the legislation. The U.K. has very recently moved to a registration requirement for anyone who is in the 'investment business,' which is defined as the business of being engaged in an activity listed on a Schedule to the act, and includes both trading activities and advising activities.

We believe there is significant merit in moving to a requirement to be registered only for persons or companies which are 'in the business of' trading in securities. Moving to a registration requirement based on being in the business of trading would simplify the Act by removing the need for it to contain numerous exemptions for particular types of 'trades.' It is a model that is already familiar because of the adviser and market intermediary registration requirements. It is a model that will be harmonized with the approach in other countries (the U.S., Australia, Hong Kong and the U.K.). The majority of comments we received on this recommendation were generally in favour of changing the trigger for registration to that of being in the business of trading in securities. 173

Our primary consideration in reviewing whether the registration requirement for trading should be changed to an 'in the business of' trigger is that there should be one consistent and intelligible scheme for registration across Canada. Business is frequently conducted in more than one province, and we would not advocate a model which further fragments the registration requirements across the country. We also seek to harmonize the registration requirements with other countries, if that is possible. At this point, a change in the registration requirement would be a marked departure from the scheme in the other Canadian jurisdictions. Therefore, although one commenter on the Draft Report strongly supported moving to this model regardless of whether it was adopted in the other Canadian jurisdictions174, we do not support adopting this model unless it is adopted across the country by the CSA. In matters of registration, national harmonization is ultimately more important than global harmonization.

Finally, in its comment letter on the Draft Report, the BCSC agreed with us that the system of registration would benefit from simplification but disagreed with our recommendation that the registration requirement relating to trading should be moved to a model requiring the person or company to be in the business of trading, feeling the benefits would not outweigh the risks. Instead, the BCSC proposes moving to a 'firm-only' registration system. Only firms would need to register, and would keep regulators informed about individuals who represent the firm in trading or advising roles, and of changes in registration information.

We considered but ultimately decided not to endorse a firm-only registration model. While simplifying the registration process is critical, investor protection considerations are paramount when individuals deal with investors and their money. We prefer maintaining the connection between an individual registrant and the regulator which the current system provides. Registrants are reminded of their obligations to their investor clients when they are required to register directly with the regulator. Further, we believe consistent standards and requirements for individuals dealing with investors' money are crucial and will not be achieved if firms are allowed to set and oversee them. We believe that a simpler system of regulation can be achieved without regulators abdicating the oversight responsibility for setting and enforcing standards of fair dealing.

Recommendation:

We recommend that the registration requirement relating to trading in securities should be moved to a model requiring the person or company to be 'in the business' of trading. However, we would only support such a change if it were to be adopted across the country.


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9.3 Does the Requirement to Be Registered to 'Trade' in a Security Properly Capture the Range of Activities in Which Intermediaries Engage?

  1. Changes in Types of Services Provided

    The nature of the services intermediaries provide to their clients, particularly their retail clients, has evolved since the registration provisions in the Act were developed. The following are some of the most significant developments in recent years:

    • Dealers Providing Advice Beyond What Is 'Incidental' - The trading environment has changed significantly as a result of discount dealers who provide no investment advice and charge a much reduced per-transaction fee for trade execution services only. In an effort to distinguish themselves from discount dealers, full service dealers have developed delivery models and fee structures that focus on the advisory services they provide in contrast to the trade execution services provided by discount dealers. Historically, there has been no reason for registered dealers to register as advisers to carry out trade activities accompanied by incidental advisory services. In this business model, the advice they are providing falls within the exemption for adviser registration available when the provision of advice is 'solely incidental to their principal business or occupation.175 A dealer will generally rely on this exemption where it is compensated through trading commissions and is not compensated separately for providing advice. Today, however, dealers are offering more advice along with their trading services, and often are seeking to be compensated on a structured fee basis rather than on a trading commission basis. Arguably, this evolution raises issues about the continued availability of this exemption.

    • Financial Planners - Financial planners are becoming increasingly prevalent in the Canadian marketplace. Financial planners frequently are licensed mutual funds salespersons dually licensed to sell life insurance. In addition to selling these products, they advise clients on other financial matters including mortgages, credit cards, retirement planning and estate planning. As the range of matters on which they advise exceeds the ambit of the Act, securities regulators have been struggling to find an effective model for regulating financial planners.

    • Internet - The Internet also raises issues for registration regimes. Numerous websites offer advice and recommendations concerning securities. To the extent no fees are paid for this advice, it is arguable that persons operating the websites are not 'in the business of' advising others and therefore are not caught by the current definition of 'adviser.'


  2. Incidental Advisory Activities

    As a consequence of these changes in market practice and the increased blending of trading and advising activities in some services offered by dealers (i.e., 'wrap accounts'), the Committee considered whether the requirement to be registered to trade in securities should be refocused to address advisory functions as well as trade execution services.

    As a preliminary matter, we note that any expansion we recommend of the registration requirements applicable to those trading in securities to encompass their expanded advisory activities is not intended to replace the current adviser registration requirements. Advisers registered as investment counsellors and portfolio managers under the Act are subject to some of the most stringent registration requirements of the Act. This is because registration as a portfolio manager permits a person to manage other people's money on a fully discretionary basis. The competency and experience of advisers must be commensurate with these responsibilities. We believe the current proficiency and experience requirements for advisers who are managing portfolio investments are appropriate and should be maintained.

    Instead, we believe that the current registration requirements applicable to dealers should be examined carefully by the Commission and the CSA with a view to ensuring that the applicable regulatory requirements match the expanded role that has developed for 'incidental advising.176 We do not believe that dealers and their employees should be restricted from expanding the services offered to their clients, but the proficiency, experience, suitability and other regulatory requirements which currently apply to brokers must be flexible enough to adapt to these marketplace shifts.

  3. The Commission's 'Fair Dealing Model'

    Since we issued the Draft Report, the Commission has launched an interactive website to introduce its proposed new model for regulating dealers and their salespersons, called the Fair Dealing Model.177 The Fair Dealing Model proposes three different relationship models by which registrants will deal with their clients: (i) the 'managed-for-you' relationship, which vests primary investment decision-making responsibility in the registrant; (ii) the 'advisory relationship' whereby investment decision-making responsibility is shared between the registrant and the client; and (iii) the 'self-managed relationship' in which primary responsibility for investment decision-making rests with the client. Under each model the interactions between the registrant and client will vary depending upon where the decision-making concerning investments resides. While all details of the Fair Dealing Model are not yet available, it would appear likely that the levels of education and proficiency required of the registrant will vary depending upon the relationship model involved. If so, this would be consistent with our recommendation that the registration requirements be monitored to ensure they are sufficiently flexible to permit various models of trading/advising services to be delivered while at the same time being sufficiently rigorous to ensure the proper requirements for those who are increasingly delivering advice but relying on the 'incidental advice' exemption to do so.

    Recommendation:

    We believe that the Act should continue to distinguish between the requirement to be registered to advise concerning securities and the requirement to be registered to trade in securities (or, as we propose in our earlier recommendation, to be in the business of trading in securities). However, we recommend that the Commission and CSA carefully review the proficiency, experience and suitability requirements applicable to dealers and employees to ensure that they are sufficiently flexible to permit various models for delivering advice while at the same time ensuring that they are sufficiently rigorous to match the increasingly important role of 'incidental advice' provided by dealers and salespersons.


  4. Trade Execution Only Services

    Some dealers (or business units) have moved to eliminate all ancillary advisory services and to offer trade execution services only. We examined whether there are activities or transactions that should be exempt from the need to involve a regulated entity. We also considered whether the traditional obligations of registrants, such as assessments of suitability and 'know-your-client' obligations, need to be examined in an electronic trading environment.

    In April 2000, the CSA announced that relief from the suitability obligations will be granted on an application basis to dealers who offer only trade execution services to their clients. 178

    Subsequently the IDA amended its regulation to provide that all IDA member dealers do not have to conduct suitability analyses in cases where the client is not provided with a recommendation on a particular transaction. 179

    Early commenters to the Committee on this topic indicated that, if investors feel capable of making an investment decision and knowingly choose to make their decision without any recommendation, advice or suitability analysis from a registrant, there are no investor protection issues that require regulators to prohibit investors from trading without the benefit of all the services provided by a registrant. Such investors will have waived their right to one important basis of recourse in the event of a dispute concerning a trade, because most such disputes centre on the suitability of the trade. It is critical that investors understand they are waiving this one potential remedy when they waive the suitability protections.

    We agree that investors who wish to avail themselves of reduced trading fees should be allowed to trade with dealers who are relieved of the requirement to conduct suitability analyses. However, the 'know-your-client' requirements of securities legislation are at least as important today as they ever were.180 We believe that dealers should always have to know: (i) who their client is - including the ultimate beneficial owner; (ii) that their client has the financial wherewithal to complete the transaction; and (iii) the source of the client's funds. Dealers should be able to transact with clients without determining whether a trade is suitable in certain situations; however, dealers must always know the clients with whom they are conducting business.

  5. Financial Planning Activities

    With respect to the advising activities undertaken by financial planners, the Committee understands the concerns of the Commission and the CSA that persons who are registered in a restricted category of dealer are adopting titles which appear to convey a degree of experience and expertise which may be misleading to the public. We note that the CSA has published MI 33-107 Proficiency Requirements for Registrants Holding Themselves Out as Providing Financial Planning and Similar Advice.181 The Instrument would impose proficiency requirements on any registrant adopting a title that conveys that 'financial planning or similar objective, comprehensive, integrated personal financial advice is offered.182 In Ontario, the Minister returned the Instrument to the Commission for further consideration, and it has not come into force in any jurisdiction in Canada. While the Instrument has not been without controversy, we support what the CSA is trying to achieve through this initiative and the proposition that registrants who wish to be in business to trade in securities and offer ancillary advice in connection with that business must be proficient and qualified to do so.

  6. Financial Portals

    Financial portals, chatrooms and similar discussion forums available through the Internet provide financial and market information and advice concerning investment in securities. The content on these websites typically includes information such as news on industry sectors and trends, company and fund research, earnings estimates, price and news alerts, research reports and lists of stocks that portfolio managers are purchasing. Many of these websites contain on-line discussion forums relating to particular stocks and industries. Some provide model portfolios with specific stock recommendations.

    The Committee believes that portals and similar multi-user mechanisms may be engaging in registrable activities depending upon the nature of the portal, the information provided, the role played by the portal 'sponsor' and other fact-specific considerations. The Commission, as the principal regulator under the MRRS, considered these issues in the CanIssue decision.183 This application dealt with a company which was established as a vehicle through which certain dealers would make information regarding corporate debt issues available to institutional investors on a website. The company, owned by the dealers, would not make profits or distributions to shareholders. The company was being used as a mechanism to allow the dealers to share the expense of operating the website. In its decision, the Commission provided an exemption from registration to the company under specific conditions, including the requirement that the dealers participating in the system would be registered as dealers in their respective jurisdictions. We endorse the flexibility inherent in this approach and encourage the Commission to continue to facilitate the use of financial portals when appropriate.

    At the same time we encourage the Commission, together with the CSA, to continue to monitor the use of financial portals and other sites by market participants. Enforcement proceedings are an appropriate regulatory tool to address inappropriate conduct by persons involved in these Internet activities.184 Our recommendation in Chapter 24 to expand the Act's enforcement mechanisms by creating an offence of fraud and market manipulation will enhance the Commission's ability to regulate these activities by enforcement rather than by imposing a new registration requirement.

Recommendation:

We encourage the Commission, together with the CSA, to continue to monitor the use of financial portals by market participants, and to facilitate their development where appropriate. Where portals conduct activity in violation of the requirements of the Act, regulators can address this conduct through enforcement proceedings where appropriate.


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9.4 How Can the Registration System Be Made More Efficient?

The current registration system in Canada suffers from a number of impediments to efficiency. The first is the lack of harmonization of the substantive requirements relating to registration. The second impediment to efficiency is the current cumbersome paper-intensive process for filing registration materials with multiple regulators across the country. A person or company which wishes to be registered to do business in more than one jurisdiction must determine the relevant rules in each separate province and then complete multiple paper applications and supporting documents which are filed separately with the regulator in each applicable jurisdiction. The CSA are proposing to introduce a National Registration Database185 in the spring of 2003. The purpose of the NRD is to require that certain registration information which must be provided to the securities regulatory authorities be submitted to them electronically through the NRD and registration fees will also be payable through the NRD. While the proposed introduction of the NRD will assist in making the registration process more efficient, it will only simplify the procedural aspects of registration. As long as registrants and their advisors need to continue to comply with varying substantive registration requirements in the different provinces, the efficiencies that the NRD promises cannot be fully realized. Registration requirements must be harmonized across the country.

We received a comment letter which suggested that the investing public will benefit from full, true and plain disclosure as to an individual's background and experience at the time an investor opens an account with that individual, including length of experience in the industry, with the current dealer employer and with previous employers; any prior disciplinary proceedings against the individual; and the types of products the individual is licensed to sell.186 We agree, and recommend that modifications be made to the NRD following its launch to permit investors to access this type of information about registrants.187

Recommendation:

We recommend that securities legislation in the provinces be amended to provide consistent substantive registration requirements across the country. We further recommend that the NRD be modified following its launch to permit investors to access relevant information about registrants, including industry experience, any previous disciplinary proceedings to which the registrant was subject, and the products which the registrant is licensed to sell.


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9.5 Universal Registration

The Committee considered whether the concept of universal registration should be eliminated. As noted above, the Act requires any person or company trading in a security to be registered as a dealer, and anyone in the business of advising to be registered as an adviser. The Act also contains exemptions from these registration requirements. In all provinces, and in Ontario and Newfoundland prior to 1987, prospectus and dealer registration exemptions of applicable securities legislation tend to operate in tandem; that is, if there is an exemption from the requirement to prepare a prospectus, there is also an exemption from the requirement to effect the trade in the security through a registrant. The premise underlying these exemptions is that there are certain types of securities, trades and purchasers for which and for whom the protections of the Act, as embodied in the prospectus and registration requirements, are not necessary.

In 1987, however, Ontario introduced a system of universal registration, which was subsequently adopted by Newfoundland but has not been adopted by any other Canadian jurisdiction. With the introduction of universal registration, 'market intermediaries' (as defined) became unable to trade in securities in reliance on the exemptions in the Act.188 The result of the introduction of universal registration was, in effect, to impose an obligation to be registered in some category on every trading participant in the Ontario markets that fell within the definition of 'market intermediary.' As noted above in section 9.2, the philosophy underlying the universal registration requirements is consistent with a 'being in the business' trigger.

Dealers which, prior to the adoption of the universal registration regime, were not required to be registered to deal in exempt securities now must be registered. We note that most are registered in the category of limited market dealer. The category is often criticized because it contains no capital adequacy or reporting requirements; registration is generally granted on the basis of an application and payment of the requisite fee. The universal registration regime is cumbersome and unique to Ontario and Newfoundland.

Commenters to the Committee on the original Issues List had divergent views as to whether the system of universal registration should be eliminated.189 The arguments in favour of abolishing universal registration are that it inhibits regulatory harmonization and that it is complicated. The arguments in favour of maintaining universal registration are based on the need for a level playing field and upon the presumption that investor protection is augmented and solvency risk reduced by regulating participants in the market. However, the limited market dealer category currently appears to be relatively ineffective in achieving these goals. Every commenter on this recommendation in the Draft Report supported the recommendation to eliminate this requirement.

If the registration model is amended as we propose to a 'being in the business' trigger as opposed to a trade-triggered approach, then we would accomplish directly what universal registration was intended to accomplish indirectly. The need for universal registration would, therefore, be obviated. Even if the registration model is not amended as we propose, we believe that the universal registration requirements should be eliminated from the Act because, in view of the way they have been implemented, they do not bring any real investor protection or address any matters of systemic risk. Further, they are out of step with regulation in the rest of the country.

Recommendation:

We recommend the Act be amended to eliminate the universal registration requirements.


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Chapter 10 Self-Regulation

10.1 Overview

Part VIII of the Act is entitled 'Self-Regulation.' Self-regulation allows an industry organization (rather than the Commission) to supervise the conduct of certain market participants, subject to general oversight by the Commission. Part VIII deals with certain organizations which play a role in the self-regulation of Ontario's markets, including SROs, stock exchanges,190 clearing agencies191 and QTRSs.192

Currently, stock exchanges are the only organizations engaged in the self-regulatory process in Ontario which must be recognized by the Commission in order to carry on their activities in Ontario; the other organizations may choose to be recognized but do not have to be recognized to carry on their activities. When an organization is 'recognized' by the Commission, it becomes subject to oversight by the Commission to the extent that it regulates the operations and standards of practice and business conduct of its members.193 The Commission has the authority to review any of the organization's directions, decisions, orders or rulings.194 In addition, when an entity is 'recognized' by the Commission, it becomes a 'market participant.' Among other things, this makes the entity subject to provisions of the Act other than Part VIII such as financial examination orders (section 12), the power of an investigation examiner (section 13), compliance reviews (section 20), public interest orders (section 127) and applications to court (section 128).

In this chapter we consider whether any of the organizations regulated by Part VIII, other than stock exchanges, should have to be recognized by the Commission. We also consider other important issues relating to self-regulation.

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10.2 Should SROs Be Required to Be Recognized?

An SRO is 'a person or company that represents registrants and is organized for the purpose of regulating the operations and the standards of practice and business conduct of its members and their representatives with a view to promoting the protection of investors and the public interest.195 SROs may apply for recognition, but they are not obliged to be recognized. Some SROs are voluntary in the sense that their members are not required to join as a condition of registration under the Act. Only the IDA, the MFDA and RS Inc.196 have been recognized by the Commission as SROs. Every securities dealer, investment dealer, and broker is required to be a member of a recognized SRO (currently, the IDA).197 Every mutual fund dealer is required to be a member of the MFDA.198 Every ATS is required to retain a regulation services provider to set and enforce requirements governing the ATS and its subscribers (RS Inc).199

Under the Act, it is possible for an organization whose purpose is to regulate the operations and standards of practice of its members to establish itself as an SRO without being recognized. In fact, the IDA acted for decades as an SRO until it was formally recognized by the Commission in 1995. In our Draft Report we recommended that the Act should be amended to require that all SROs be recognized. We received strong opposition to this recommendation.200 One commenter suggested that there should be a role for voluntary organizations which 'do not desire to duplicate the activities of a regulatory authority or serve as an agent of the state.201 Another stated that 'any organization of registrants which seeks to establish standards for its members should not be discouraged.202

There is an important role for self-regulation in the securities industry. Self-regulation permits the Commission to assign certain regulatory responsibility for setting and enforcing standards of behaviour of registrants to an organization established by such registrants. Self-regulation permits individuals with the most knowledge about an industry to develop policies and rules for that industry. Enforcement of the rules is likely to be more effective as well, as the regulated entities are more likely to accept rules drawn up by the people with the most experience and expertise in the area.

However, there is always conflict inherent in self-regulation. An SRO may be more inclined to enact less stringent rules than would an arm's-length or government agency. There is also the possibility that an SRO could be less rigorous than an arm's-length party in enforcing compliance with such rules. Therefore, if the purpose of an SRO is to assume certain of the Commission's regulatory functions with respect to a group of registrants, it is imperative that the Commission is able to oversee the rules, procedures and processes of that SRO to ensure that the possible conflicts inherent in self-regulation are addressed.

In light of the concerns we heard from commenters, we have reconsidered our original recommendation that every SRO in Ontario must be recognized. We believe flexibility in the legislation is important and we recognize that a legislative requirement that SROs be recognized will be appropriate in some situations, but not all. However, we also believe that those SROs that wish to assume certain of the Commission's regulatory functions with respect to a group of registrants must be recognized so as to give the Commission oversight capability. The legislation currently authorizes SROs to apply for recognition. We recommend that the legislation be amended to also expressly authorize the Commission to require SROs to apply for recognition where recognition would be in the public interest. By this we mean that where an SRO is taking on activities which are properly discharged by, or under the oversight of, the Commission, and that SRO does not apply for recognition before conducting such activities, the Commission should have the ability to require the SRO to become recognized so as to be subject to the Commission's oversight.

Recommendation:

We recommend that the Act be amended to authorize the Commission to require SROs to apply for recognition where an SRO is taking on activities which are properly discharged by, or subject to the oversight of, the Commission if the SRO has not otherwise applied to be recognized.


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10.3 Should Recognition Be Required for Clearing Agencies?

A clearing agency is a 'person or company that acts as an intermediary in paying funds or delivering securities, or both, in connection with trades in securities and that provides centralized facilities for the clearing of trades in securities.' Clearing agencies may carry on business without being recognized by the Commission.203 Currently, the Canadian Depository for Securities is recognized by the Commission as a clearing agency.

The Committee considered the important role that clearing agencies perform in securities transfers. Clearing agencies act as depositories, settle transactions on a delivery against payment basis, and assume settlement obligations. Prompt and accurate clearance and settlement of securities transactions is necessary to enhance the efficiency of the capital markets and to protect investors. In addition, inefficient procedures for clearance and settlement impose unnecessary costs on investors and create systemic risk.204

In light of the important role played by clearing agencies in establishing confidence in the capital markets,205 the Committee believes that they should be required to obtain recognition. Requiring all agencies that carry on a clearing and settlement business in Ontario to be recognized subjects them to regulatory oversight and provides regulators with the necessary tools to impose minimum standards on those that perform this critical role. Finally, requiring clearing agencies to obtain recognition is in the public interest not only in terms of protecting investors and enhancing the efficiency of capital markets, but also in terms of safeguarding securities and maintaining fair competition.206

However, while we believe that clearing agencies should be required to be recognized by the Commission, we are not convinced that the current definition of 'clearing agency' in the Act is precise enough or clearly captures the activities which a clearing agency engages in. The definition refers to intermediaries that pay funds or deliver securities in connection with securities trades and provides centralized facilities for the clearing of trades.207 We recommend that the Commission reconsider this definition. We suggest looking for guidance to the definitions contained in U.S. legislation, which define a multilateral clearing organization as a 'system utilized by more than two participants in which the bilateral credit exposures of market participants arising from the transactions cleared are effectively eliminated and replaced by a system of guarantees, insurance or mutualized risk of loss.208 The U.S. definition appears to reflect more precisely that clearing agencies assume settlement obligations.

Recommendation:

We recommend that clearing agencies should be required to obtain recognition through an amendment to section 21.2 of the Act to provide that 'No person or company shall carry on business as a clearing agency unless recognized by the Commission.' We also recommend that the Commission re-examine the definition of 'clearing agency' in section 1.1 of the Act to ensure that it properly captures the activities which should trigger the requirement to be recognized. In this regard, we suggest that consideration be given to the definition of 'clearing agency' under U.S. legislation.


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10.4 Should Recognition Be Required for QTRS?

The Committee also considered whether a person should be required to be recognized to carry on business as a QTRS.209 A QTRS is defined in the Act as a 'person or company that operates facilities that permit the dissemination of price quotations for the purchase and sale of securities and reports of completed transactions in securities for the exclusive use of registered dealers.'

The definition of QTRS was developed when CDN was operating and was, we understand, intended to describe all of the activities in which CDN was engaged, including over-the-counter trading. As discussed more fully in section 10.5 below, CDN ceased operations as part of the reorganization of Canada's stock exchanges. In light of the changes to the market, we question whether the definition of QTRS continues to make sense and urge the Commission to re-examine this definition in a broader context.

We understand that the regulatory framework relating to QTRSs was developed at a time when technology did not facilitate dealer markets to execute orders electronically. However, because of significant technological advances, users of most QTRSs can electronically execute their orders. As a result, QTRSs and exchanges have become more functionally equivalent. We believe that it is important for QTRSs to maintain high standards in their operations and that the proper functioning of these entities is fundamental to investor confidence. We note that NI 21-101 Marketplace Operation (the 'ATS Rule') contains many requirements for recognized QTRSs that are identical to the requirements applicable to exchanges, but, unlike exchanges, there is no specific requirement in the Act that a QTRS be recognized.

The Memorandum of Understanding on Exchanges and QTRSs also contemplates the establishment of an oversight program to ensure that each recognized exchange and QTRS meets appropriate standards for market operation and regulation.210 We ask that the Commission consider whether QTRSs should be required to obtain recognition. We also urge the Commission to work with other Canadian jurisdictions to develop a harmonized approach to QTRSs.211 In this regard, we note that several commenters on the Draft Report were in favour of requiring QTRSs to obtain recognition.212 In particular, one commenter noted:

We believe that mandatory recognition of QTRSs ... is essential in developing a harmonized approach to protecting the public interest. Primarily, our concern relates to smaller, illiquid issuers typically traded on QTRSs ... . Without a requirement to obtain recognition under securities legislation and oversight by the Commission and/or CSA, we are concerned that investors may not have adequate protection against fraudulent and manipulative practices, which may impact detrimentally on all Canadian capital markets.213
Recommendation:

We recommend that the Commission and the CSA consider whether to require QTRSs to obtain recognition under securities legislation and to develop a harmonized approach to QTRSs, including re-examining the current definition of a QTRS in the Act.


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10.5 Over-the-Counter Trading

As part of the reorganization of Canada's stock exchanges, CDN ceased operations on quoted and unquoted (reported) securities.214 Companies that were 'quoted' on CDN at the time were invited to list on the TSX Venture Exchange's Tier 3. Companies that were 'reported' to CDN were not invited to list on the TSX Venture Exchange. Dealers that had been reporting trades in these securities to CDN were required to continue to report trades to the newly created CUB, a wholly owned subsidiary of the TSX Venture Exchange.

At the time CDN ceased operations, the Commission decided that reported over-the-counter transactions would be collected and maintained by CUB for its surveillance and the Commission's enforcement purposes only and would not be made public.215 Prior to this decision, information concerning last trade price visibility had previously existed on CDN. In deciding to remove last trade price visibility, it appears that the Commission was persuaded that 'the reporting of last sale price afforded investors limited transparency that may not have been related to the actual value of securities because of the extremely low volume of trading in these securities.216 Also, the Commission was 'concerned that such limited transparency gave investors a false comfort in the liquidity and value of the securities and created an opportunity for market manipulation.217

We received one comment letter on our Draft Report that specifically objected to the removal of last trade price visibility that had existed on CDN. The commenter noted:

Without the existence of [a] published market, it is impossible for an [unlisted and unquoted] issuer to raise funds through equity financings, including a prospectus financing or private placements, ... grant employee stock options under favourable income tax treatment, as the options must be granted at market price or at a premium to the market, and enter into business combination agreements that are fair and reasonable to the shareholders of the issuer, with no value to be given to the market value of the issuer.218

We understand that the Commission has asked staff to monitor the transparency issue and to report back to it.219 As noted in our Draft Report, we continue to believe that the over-the-counter market and, in particular CUB, merit regulatory review. We urge the Commission to complete its review of CUB as soon as possible, focusing particular attention on concerns relating to transparency and reducing CUB's exposure to abuse.

Recommendation:

We believe that CUB merits regulatory review and urge the Commission to complete its review of CUB as soon as possible, focusing particular attention on concerns relating to transparency and reducing CUB's exposure to abuse.


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10.6 Enforcing Their Own Rules

In our Issues List, we asked whether recognized SROs and exchanges should have legislated enforcement powers with respect to their own rules. We asked this question because we are aware of a perception that it is sometimes difficult for these organizations to impose meaningful sanctions on their members, particularly if members resign from the SRO. Further, in the U.S. the 1934 Act explicitly permits an SRO to suspend or revoke a member's registration, to censure or impose limitations on the member, or to remove from office or censure any officer or director of a member if doing so would be in the public interest.220

In response, the IDA stated that: 'SROs currently derive their authority from a contractual relationship with their members. We believe that this current relationship has worked satisfactorily and see no compelling reason to change it by legislating that relationship.' TSX Venture Exchange stated that it would 'encourage the adoption of legislation and rules which would improve the enforcement abilities of SROs, such as a subpoena power.'

Recognized SROs and exchanges have the ability to establish codes of behaviour and practice, and establish sanctions for breach of these rules, both through contractual agreements with their members and through their by-laws. In our Draft Report we concluded that the Act does not need to be amended to provide SROs and exchanges with powers to do that which they can do contractually. We also noted, however, that there may be a need to give SROs statutory authority to conduct investigations and obtain evidence from non-members and specifically invited comment on this issue. We received several submissions on this point.

Ontario's SROs made a joint submission221 that reiterated their earlier comments that in the majority of cases, contractual jurisdiction has been sufficient to fulfil their mandates. The Ontario SROs noted, however, that 'as a result of undertaking more complex files, the increasing complexity of the capital markets, and instituting a risk-based approach to regulation, they require additional legislative support for [their] jurisdiction as well as [their] investigation and discipline process,' including the enforcement of disciplinary orders. The Ontario SROs expressed concern that if they 'cannot vindicate the public interest in their discipline process because jurisdiction is problematic, documents or witnesses are unavailable, or just and appropriate sanctions cannot be enforced,' then the credibility of our regulatory regime will suffer, which may negatively impact investor confidence. In this regard, the Ontario SROs recommended that the Act be amended to give SROs the following statutory powers:

  • jurisdiction over current and former members or 'regulated persons' (as defined in the Universal Market Integrity Rules, other than a 'marketplace') and their current and former directors, officers, partners and employees;

  • the ability to compel witnesses to attend and produce documents at disciplinary hearings (currently Ontario SROs can compel documents and testimony only from registrants subject to agreements);

  • the ability to file decisions of disciplinary panels as decisions of the court;

  • statutory immunity for SROs and their staff from civil liability arising from acts done in good faith in the conduct of their regulatory responsibilities;

  • and the power to seek a court-ordered 'monitor' for firms that are in chronic and systemic non-compliance, close to insolvency or for other appropriate public interest criteria (only for the IDA and MFDA).

The Ontario SROs noted that similar provisions exist in the Alberta Act and urged the Committee to consider recommending similar reforms in Ontario. Two other commenters supported, in part, the Ontario SROs' submissions.222

In considering these issues, the Commission should consider what checks and balances, if any, are necessary to ensure procedural fairness and protections are available to those who will be subject to the new statutory powers. We believe that the Ontario SROs' submissions merit further study and consideration. Our securities regulatory regime relies heavily on the enforcement capability and regulatory expertise of recognized SROs.223 In this regard we believe that it is critical that SROs have the necessary tools to ensure efficient and timely investigations and enforcement actions. We also believe, however, that in considering these issues, particular attention must be paid to ensuring fairness and justice in the administration of any statutory power granted to the SROs.224 In this regard it may be necessary, for example, to build into the system appropriate checks and balances to ensure that statutory protections are afforded to those subject to the SROs' new statutory powers.

Recommendation:

We recommend that the Commission study whether the Act should be amended to give SROs the following statutory powers:
  • jurisdiction over current and former members or 'regulated persons' and their current and former directors, officers, partners and employees;

  • the ability to compel witnesses to attend and to produce documents at disciplinary hearings;

  • the ability to file decisions of disciplinary panels as decisions of the court;

  • statutory immunity for SROs and their staff from civil liability arising from acts done in good faith in the conduct of their regulatory responsibilities; and

  • the power to seek a court-ordered 'monitor' for firms that are in chronic and systemic non-compliance, close to insolvency or for other appropriate public interest criteria.
In considering these issues, the Commission should consider what checks and balances, if any, are necessary to ensure procedural fairness and protections are available to those who will be subject to the new statutory powers.


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10.7 Enforcing Compliance with Securities Laws

In the U.S., SROs are required to enforce the 1934 Act.225 The Committee considered whether recognized SROs should have the explicit authority and obligation to enforce Ontario securities law. Section 21.6 of the Act states that no by-law, rule, regulation, policy, procedure, interpretation or practice of a recognized entity may contravene Ontario securities law, although the recognized SRO may impose more stringent requirements. As a result of this provision, SRO rules often build upon existing securities law. The recognized entity thus indirectly enforces Ontario securities law when it enforces SRO rules.

There would be certain efficiencies to be gained from involving SROs in compliance. SROs already perform a monitoring function with respect to their members, including monitoring to ensure compliance with the SRO's own rules and regulations.

The Committee received comments on this point prior to and following the issuance of the Draft Report. The IDA opposes requiring SROs to enforce securities law. It contends that this would result in confusion as to these roles and could further result in 'double jeopardy' for registrants.226 TSX Venture Exchange echoed this view, stating: 'it is not appropriate to delegate responsibility for enforcement of securities legislation to SROs ... . SROs, not being government bodies, have different burdens of proof, different evidentiary standards and different procedures than do securities Commissions.227 TSX Venture Exchange stated that the roles of securities commissions and SROs should be kept distinct.

The Committee concluded that stock exchanges and SROs should not be required to enforce Ontario securities law for the reasons articulated by the IDA and TSX Venture Exchange. However, the Committee believes that stock exchanges and recognized SROs should be required to report immediately to the Commission any activity which appears to the SRO to contravene Ontario securities law. This would prevent stock exchanges and recognized SROs from turning a blind eye to breaches or possible breaches of the Act. In our view, this requirement should be contained in the terms and conditions of the stock exchange's or SRO's recognition order.

Recommendation:

We recommend that stock exchanges and recognized SROs be required to report to the Commission any breaches or possible breaches of securities law that they believe have occurred or may have occurred.


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10.8 The Separation of Self-Interest and Self-Regulation

Recommendation: In our Draft Report we observed that a pressing issue surrounding the self-regulatory regime in Ontario is the potential conflict of interest between the regulatory/public interest role of an SRO and its commercial objectives. For example, in Canada the IDA is both an SRO and a trade association for investment dealers. As an SRO, the IDA regulates the capital adequacy and business conduct of investment dealers and takes enforcement action against member firms and individual salespeople for breaches of the IDA rules. It also assists regulatory authorities in developing policies designed to achieve investor protection and market efficiency.228 As a trade association, the IDA represents the interests of member firms to federal and provincial governments and their agencies in areas such as financial institution legislation, securities regulation, and fiscal and monetary policy.229 The IDA fulfils an advocacy function on behalf of its members and seeks 'to achieve more narrow commercial objectives on the part of our members, with less focus on the broader public interest.230

The dual role of SROs presents a potential for conflict. Trade associations advocate on behalf of their members, but as a regulator, each SRO sets requirements that govern the conduct of its members. The SRO is responsible for disciplining those who have breached the requirements. In writing the Draft Report, we were concerned with whether an SRO would set standards of conduct to protect the investing public as high as an arm's-length organization might, when such standards may represent compliance challenges to its members. In addition, we questioned whether the organization would be forceful in pursuing violations of such standards and in meting out appropriate sanctions against its members. We recommended that trade association and SRO functions should be carried out by two separate bodies, each with distinct governance structures.

The Committee received a number of submissions on this matter. Commenters were divided as to whether the IDA's functions should be separated. One commenter felt that: 'There is a potential for meaningful conflict, as well as an appearance of conflict between the dual roles of trade association and self-regulatory body found in SROs such as the IDA and MFDA.231 Others did not support the recommendation. The IDA provided extensive comments on this point and met with the Committee after the Draft Report had been released. The IDA stated that it believes that 'there is no meaningful conflict, beyond the conflict inherent in self-regulation, that should concern the regulators or investors.232 Yet it recognized that there may be an appearance of conflict and stated that, as a result, a degree of 'organizational distinctiveness' should be made clear with identifiable nomenclature and fire walls where appropriate.233 The Nova Scotia Securities Commission also disagreed with our recommendation:

... the IDA has significantly improved its regulatory role in the last few years. In the circumstances and in view of the significant advances recently made by the IDA, the NSSC would urge the Committee to consider whether this is the appropriate time, on a cost-benefit analysis, for the securities industry to undergo such a radical change. 234

We have reconsidered our recommendation. We are not convinced that the benefits of forcing a split within the IDA would outweigh the costs associated with such a change. In our view, the original recommendation would occasion major structural change to the IDA and we had little evidence of either the necessity or benefits of such a change.

However, we remain concerned about an issue which was raised in comment letters on both the Issues List and the Draft Report. Investors must feel that when they have a complaint against an IDA member they receive fair and unbiased treatment from the IDA in addressing their complaint.

Since we published the Draft Report, the Financial Services OmbudsNetwork has been established to deal with, among other things, complaints by customers of investment dealers.235 The agency operates at arm's length of all industry participants, including the IDA. Consumers who seek financial compensation because of dealings with IDA members will now avail themselves of this independent process. We feel this should address many of the concerns we heard from aggrieved investors. We would also note that investors can use the arbitration process previously established by the IDA. While the IDA was responsible for establishing the arbitration process, it is run by ADR Chambers, which is an organization that is at arm's length of the IDA.

While we are pleased with these arm's-length avenues of redress for clients of IDA member firms, we note that neither the Financial Services OmbudsNetwork nor the arbitration process deals with disciplinary matters; they continue to be handled by the IDA. The IDA advises us that there is a strict firewall between its members and its disciplinary branch which has never, to its knowledge, been breached.236 Disciplinary hearings are held before a three-member panel. Two of the panel members are representatives of IDA members; the third member, who acts as the Chair of the panel, is a lawyer and is independent of the IDA and its members. The IDA advised us that while numerically it is possible for the IDA panel members to outvote the Chair, it rarely happens in practice.

While we are withdrawing our recommendation to separate the trade association and the regulatory functions of the IDA, we would encourage the IDA to be constantly mindful of the conflict inherent in self-regulation. The way that the IDA organizes and conducts itself must be designed to give confidence to outsiders that while the industry is policing itself, the way in which it does so is beyond reproach. The IDA's processes in investigating complaints of investors should be, and appear to be, independent of interference from members. We encourage the IDA to strive for timely and thoughtful responses to investors. We also urge the IDA to continue to consider whether improvements can be made to certain of its structures to enhance investor confidence.237 We suggest the IDA look again at the structure of its disciplinary panels; as two-thirds of the members of a disciplinary panel are IDA member representatives, there may be concerns about the perceived independence of the panel. In addition, we note that by 2004, when changes to the IDA's Board of Directors are implemented to add more non-member directors, there will still be a majority of non-independent directors. We encourage the IDA to reconsider this allocation.

Recommendation:

We recommend that the IDA consider whether improvements can be made to certain of its structures, such as the composition of its disciplinary panels and the membership of its board of directors, to lessen perceptions of conflict of interest in self-regulation.


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10.9 Commission Oversight

The Committee considered whether changes to the Act are required to address the SRO regulatory oversight function and provide the Commission with the tools necessary to perform its oversight function effectively. The oversight powers in the Act are comprehensive and include the power of the Commission to review and approve by-laws, to hear appeals of decisions of an SRO and to request that an SRO retain an auditor to conduct compliance reviews. In addition, SROs themselves perform annual reviews of their performance over the year.

The efficacy of the oversight function depends to a significant degree on the commitment of the Commission to actively monitor and oversee the activities of SROs. Nothing has come to the Committee's attention to indicate that the oversight function of the Commission is not working properly. In its Statement of Priorities for the 2001-02 fiscal year, the Commission stated that it seeks to increase its presence and effectiveness through various compliance monitoring and enforcement activities, including developing and implementing a comprehensive risk-based approach to compliance which will result in more effective Commission oversight of SROs; increasing resources allocated to SRO oversight activities; conducting examinations of SROs; continuing to oversee the regulatory functions of the IDA and work with the IDA to improve any perceived deficiencies; and providing the MFDA with reasonable implementation support.

The Committee therefore believes that the Act provides sufficient legislative tools to enable the Commission to perform its SRO oversight function. In addition, the Commission has increased its emphasis on the oversight function, making regulatory oversight one of its priorities. Thus, the Committee sees no need for additional oversight powers at this time.

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  1. The Act, subsection 25.1(1).
  2. "Trade" or "trading" includes,
    1. any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, instalment or otherwise, but does not include a purchase of a security or, except as provided in clause (d), a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith,
    2. any participation as a trader in any transaction in a security through the facilities of any stock exchange or quotation and trade reporting system,
    3. any receipt by a registrant of an order to buy or sell a security,
    4. any transfer, pledge or encumbrancing of securities of an issuer from the holdings of any person or company or combination of persons or companies described in clause (c) of the definition of "distribution" for the purpose of giving collateral for a debt made in good faith, and
    5. any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing. (The Act, subsection 1(1)).
  3. See, for example, the exemption provided at subparagraph 35(1)(12)(iii) of the Act, which is required in order to permit the exercise of conversion rights attached to convertible securities; the exemption provided at paragraph 35(1)(17) of the Act, which allows a holder to tender securities to a take-over bid; or the exemption provided at paragraph 35(1)(19) of the Act, which permits a company to issue stock options to its employees.
  4. See comment letter on Issues List of Osler, Hoskin & Harcourt LLP.
  5. Section 204 of the Regulation.
  6. Recent amendments to Australian legislation, however, have moved to a model of one registration requirement regardless of whether the activity is dealing or advising.
  7. See comment letters of Investment Funds Institute of Canada, Ontario Teachers' Pension Plan, Davies Ward Phillips & Vineberg LLP and Torys LLP.
  8. See comment letter of Torys LLP.
  9. The Act, clause 34(c).
  10. In its comment letter the Canadian Association of Independent Financial Advisors suggests that the advisory activities its members participate in are not viewed by its members as incidental or ancillary, and regretted the use of these terms in the Draft Report. We use the term "incidental advice" as it is the term used in the Act.
  11. See www.fairdealingmodel.com.
  12. CSA news release, "CSA Provides Relief from Suitability Obligations" (April 10, 2000), 23 OSCB 2683.
  13. (2001), 24 OSCB 2923 and 4513.
  14. See the comment letter of the Nova Scotia Securities Commission.
  15. (2001), 24 OSCB 1107.
  16. Ibid.
  17. In the Matter of CanIssue Inc. (2001), 24 OSCB 4533.
  18. On February 26, 2002, the Commission issued temporary cease-trade orders against Create-a-fund Incorporated, alleging it offers websites which purport to offer investment services such as portfolio customizing and investment monitoring for which registration is required.
  19. MI 31-102 National Registration Database (2002), 25 OSCB 7509.
  20. See comment letter of the Small Investor Protection Association.
  21. The Committee received a comment from the Canadian Association of Independent Financial Advisors requesting that we consider dispensing with language in our Final Report which contemplates that dealers and salespersons are in an employer-employee relationship. We are aware that the Canadian Association of Independent Financial Advisors is urging regulators to reconsider the current regulatory structure which contemplates salespersons to be in an employment relationship with dealers. However, where describing the existing regulatory provisions under the Act, this language is appropriately used.
  22. A "market intermediary" is defined in section 204 of the Regulation as: a person or company that engages or holds himself, herself or itself out as engaging in Ontario in the business of trading in securities as principal or agent, other than trading in securities purchased by the person or company for his, her or its own account for investment only and not with a view to resale or distribution, and, without limiting the generality of the foregoing, includes a person or company that engages or holds himself, herself or itself out as engaging in the business of,
    1. entering into agreements or arrangements with underwriters or issuers, in connection with distributions of securities, to purchase or sell such securities,
    2. participating in distributions of securities as a selling group member,
    3. making a market in securities, or
    4. trading in securities with accounts fully managed by the person or company as agent or trustee, whether or not the person or company engages in trading in securities purchased for investment only.
  23. See comment letters on the Issues List of the Canadian Bankers Association, the Investment Counsel Association of Canada, Financial Services Commission of Ontario, Simon Romano, Nancy Ross, and the IDA.
  24. The Act, subsection 21(1). Subsection 1(1) of the Act defines "recognized stock exchange" as "a person or company recognized by the Commission under section 21."
  25. The Act, subsection 21.2(1). Subsection 1(1) of the Act defines "clearing agency" as "a person or company that acts as an intermediary in paying funds or delivering securities, or both, in connection with trades in securities and that provides centralized facilities for the clearing of trades in securities."
  26. The Act, subsection 21.2.1(1). Subsection 1(1) of the Act defines a QTRS as "a person or company that operates facilities that permit the dissemination of price quotations for the purchase and sale of securities and reports of completed transactions in securities for the exclusive use of registered dealers but does not include a stock exchange or a registered dealer."
  27. The Act, subsections 21(1), 21.2(1), 21.2.1(1), 21.1(1)(3).
  28. The Act, subsection 21.1(1)(4).
  29. The Act, subsection 1.1.
  30. RS Inc. was recognized by the Commission on January 29, 2002 ((2002), 25 OSCB 891). RS Inc. operates as a regulation services provider under the Alternative Trading System rules and administers and enforces trading rules for the marketplaces that retain its services.
  31. See OSC Rule 31-507 SRO Membership - Securities Dealers and Brokers, (2001), 23 OSCB 5657.
  32. See OSC Rule 31-506 SRO Membership - Mutual Fund Dealers, (2001), 24 OSCB 2333.
  33. See National Instrument 23-101 Trading Rules. An exchange or quotation and trade reporting system has the option of monitoring the conduct of its members or users and enforcing the requirements set either directly or indirectly through a regulation services provider.
  34. See comment letters of Association for Investment Management and Research, Canadian Association of Insurance and Financial Advisors and the Nova Scotia Securities Commission.
  35. See comment letter of the Canadian Association of Insurance and Financial Advisors.
  36. See comment letter of the Nova Scotia Securities Commission.
  37. The Act, section 21.2.
  38. See the 1934 Act, subclauses 17A(b)(1), 17A(a)(1).
  39. IOSCO, Report of the Technical Committee, Objectives and Principles of Securities Regulation (1998) (http://www.iosco.org/docs-public/1998objectivesdocument03.html).
  40. See the 1934 Act, subclause 17(A)(a)(2)(A).
  41. The Act, section 1.1.
  42. Federal Deposit Insurance Corporation Improvement Act of 1991, 105 Stat.2236, 12 U.S.C. § 188, section 408.
  43. At present the Canadian Trading and Quotation System Inc. (CNQ) is the only recognized QTRS in Canada. CNQ was recognized by the Commission on February 28, 2003 and will operate an electronic marketplace for Ontario investment dealers to trade non-exchange listed securities of Ontario reporting issuers (www.osc.gov.on.ca/en/ HotTopics).
  44. OSCB (13 September 2002) 6161 and OSCB (22 November 2002) 7761. On November 7, 2002, the Minister of Finance approved the MOU and it became effective on that date.
  45. We note that not all CSA jurisdictions define QTRSs or give their Commission express authority over QTRSs.
  46. See comment letters of the TSX and the TSX Venture Exchange.
  47. See comment letter of the TSX.
  48. CDN issuers fell into two categories. First, the issuers in respect of which trading was merely reported on the CDN system in compliance with Ontario's mandatory over-the-counter trade reporting requirements contained in section 154 of the Regulations. Second, the issuers in respect of which, in addition to trade reporting, active and continuous bid and ask price quotations were posted on the CDN system.
  49. See section 5.1 of the OTC Agreement among CUB, TSX Venture Exchange and the Commission at (2000), 23 OSCB 8448.
  50. See Notice of Commission Approval - Canadian Venture Exchange Exemption from Recognition As A Stock Exchange Under Section 21 of the Act at (2000), 23 OSCB 8437.
  51. Ibid.
  52. See comment letter of the Ontario Association of Unlisted Reporting Issuers.
  53. Supra, note 209.
  54. 1934 Act, section 19.
  55. See joint submission of the IDA, MFDA and RS Inc.
  56. See comment letter of Gowling Lafleur Henderson LLP and the TSX Venture Exchange. In particular, Gowlings believed that SROs should be given the authority to conduct investigations and obtain evidence from non-members, provided that this authority is made subject to the Commission's review. TSX Venture Exchange suggested that it would be useful to consider the Alberta Act, which gives SROs increased powers to conduct hearings and obtain court orders for the appointment of receivers.
  57. Paragraph 4 of section 2.1 of the Act directs the Commission to use, subject to an appropriate system of supervision, the enforcement capability and regulatory expertise of recognized SROs.
  58. The Committee received two comment letters that recommend that SROs should be subject to all the same legal and procedural regimes as the Commission, such as the Canadian Charter of Rights and Freedoms, the Statutory Powers Procedure Act, and the Evidence Act (Ontario) (see comment letters of Robert Kyle and Ken Kivenko).
  59. 1934 Act, section 6.
  60. Comment letter of the IDA.
  61. Comment letters of TSX Venture Exchange on the Issues List. Note, however, the discussion in section 10.6 where the Committee recommends consideration of whether SROs should be subject to similar statutory evidentiary standards and procedures as the Commission if SROs are given enhanced statutory investigative and enforcement powers.
  62. Comment letter of the IDA on the Issues List.
  63. This information was retrieved from the IDA's website on July 28, 2000, at www.ida.ca. The IDA made a similar point in its comment letter to the Committee on the Issues List.
  64. Comment letter of the IDA on the Issues List.
  65. See comment letter of Ontario Teachers' Pension Plan.
  66. See comment letter of the IDA.
  67. Ibid.
  68. See comment letter of the Nova Scotia Securities Commission.
  69. Ibid.
  70. See comment letter of the IDA.
  71. In Chapter 21, we note recent commitments by the IDA to enhance transparency in relation to its arbitration program.

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