Armonización de los sistemas de vida

aim of protecting the interests of clients and their assets and ensuring proper

management of risk, through which management of the intermediary accepts primary responsibility for these matters.

Description Internal controls, risk management and compliance

NI 31-103 requires registrants to establish, maintain and apply policies and procedures that establish a system of controls and supervision that:

 provides reasonable assurance that the firm and the individuals acting on its behalf comply with securities legislation and

 Manages the risks associated with its business in accordance with prudent business practices.

provide guidance in 31-103CP on general best practices in respect of effective compliance systems. In particular, there is guidance outlining that an effective compliance system includes internal controls, day-to-day supervision and systemic monitoring (each of these concepts is expanded upon in the guidance).

There is also guidance by IIROC for their members that provides clarifications on the difference between supervision and compliance and on the expectations of the SRO in connection with the roles of the dealer member, its board of directors, management, the UDP, the CCO, the CFO as well as other individuals that are not approved persons (including the compliance officer ).

UDPs and CCOs

The guidance in the 31-103CP emphasizes that compliance is a firm-wide responsibility, and NI 31-103 makes it clear that senior management of all categories of registrants is responsible for maintaining appropriate standards of conduct and adhering to proper procedures. In addition, as stated in Principles 24 and 29, every registered firm is required to designate a UDP and a CCO, who are subject to registration.

The UDP is the person ultimately responsible for ensuring that the firm manages its systems of compliance effectively. The CCO monitors and oversees the firm’s

compliance system, as described in Principle 29. Among its regulatory obligations, the CCO must report serious non-compliance issues to the UDP. In addition, the CCO is required to submit an annual report on compliance to the board of directors of the registrant.

External evaluation

Registrants other than IIROC and MFDA members

The current framework for registrants does not require an external evaluation of the internal controls and risk management. As for any audit, as per GAAPs, the auditors must consider the internal controls relevant to the registrant’s preparation and fair presentation of the financial statements. For example, auditors may test internal controls and risk management systems as they relate to the segregation of client and firm assets and the daily processes of trading financial products. There are currently no regulatory requirements for auditors to report material breaches in the controls of the operations of a registered firm to the securities regulators. However, if an auditor discovers a material breach during the normal course of an audit and the material breach is not in the best interest of the public (for example, fraudulent activity), the auditor must report it to the securities regulators immediately. Under Canadian GAAP, an auditor must report all findings, including material breaches in controls, to senior management of the registered firm during the normal course of an audit.

MFDA and IIROC Member Firms

Under MFDA Rule No. 3.6.4 and IIROC Dealer Member Rule 300.1, independent auditors must conduct a review of the member’s systems (under IIROC rules, this review is annual) including the accounting system, the internal accounting controls and the procedures for safeguarding client assets. The audit opinion that accompanies the financial statements of an MFDA or IIROC member firm must include an opinion on the integrity of the three items noted above. If the auditor finds a material breakdown in internal controls and the accounting system during the audit, it must bring these issues to the attention of the management of the member firm and the MFDA or IIROC. Under MFDA Rule No. 3.6.6 and IIROC Dealer Member Rule 300.6, auditors must report to the MFDA or IIROC any material breach of rules, by-laws and policies they observe during the regular conduct of the audit related to calculating a member’s financial position, its handling and custody of securities and its maintenance of adequate records.

Organizational requirements—Fair dealing Practices

All registered firms and their representatives are required to deal fairly, honestly and in good faith with their clients.

Organizational requirements—Segregation of key duties and functions

As indicated above NI-31-103 follows a principle based approach. Thus, there are no specific rules on segregation of key duties and functions; beyond the need for firms to have a UDP and a CCO. The CP to NI 31-103 does set up the expectation that in

principle these two functions should be carried out by different persons, and that larger firms should have larger resources. Staff indicated that in respect of larger firms, the regulatory expectation is that firms will segregate the key duties and functions within the firm, particularly those which, when performed by the same individual, may result in undetected errors or may be susceptible to abuses which expose the firm and its clients to inappropriate risks. In practice, stakeholders indicated that the bulk of registrants are small firms where such segregation is not possible.

Segregation of assets

31-103 Registered Firms

All registered firms with a head office in Canada (other than IIROC and MFDA member firms) are required to hold client assets in trust and separate and apart from the firm’s own property. Any cash held for a client must be held by a prescribed financial institution or with a member of IIROC or the MFDA.

assets in client name, on behalf of a client by a prescribed custodian, or by a registered dealer that is a member of an SRO and that is also a member of a compensation fund or contingency fund, essentially insuring the client’s assets. These non-resident firms are also required to provide disclosure to clients related to the risks of dealing with a foreign firm.

In addition, securities regulators have provided guidance to industry stating that registrants who are not members of an SRO should hold client assets in client name only. Reviews undertaken by the regulators indicate that this practice is broadly being met.

Staff of the agencies indicated that in practice registered advisers and dealers (other than IIROC and MFDA members) normally hold assets with a custodian who is a separate legal entity from the adviser or dealer. Further, there is currently a proposal to extend custodial requirements to these categories of registrants.

Registered firms are required to maintain books and records that record their business activities, financial affairs, and client transactions. These records must permit the identification and segregation of client cash, securities and other property. The record- keeping obligation also includes keeping track of securities held in safekeeping for clients.

MFDA and IIROC member firms

Under MFDA Rule No. 3.3.1 and IIROC Dealer Member Rule 2000.2, all assets that MFDA and IIROC members hold for clients must be segregated from all other assets and kept in separate trust accounts clearly labelled as trust accounts.

MFDA members typically do not hold mutual fund securities in bulk segregation or in omnibus accounts.

IIROC IDs typically hold customer assets in the name of the dealer (nominee name) while the dealers’ books and records identify the customer and account to which the securities belong. The customer assets are segregated from the assets of the dealer and pursuant to IIROC rules are permitted to be held in bulk segregation. In bulk means that the customer assets are commingled in one separate account (bulk), but as per IIROC rules all securities positions must be identified for each customer. Under IIROC Dealer Member Rule 2000.4, IIROC dealer members must perform regular value calculations for each class of securities they hold in bulk form for clients. These rules apply also for derivatives positions.

IIROC Form 1 Schedule D allows use by the firm of any un-invested client monies (free credits) up to a calculated limit based on capital thresholds of the firm. Any un-

in a designated bank account or invested in qualified securities (such as government guaranteed debt instruments) and held in segregation. As explained in Principle 30, based on recent market events, IIROC has reviewed current rules and recommended firms to comply with more stringent capital threshold calculations until a rule is codified.

Organizational requirements—conflicts of interest

Under NI 31-103, all categories of registered firms are required to take reasonable steps to identify existing and expected material conflicts of interest between the registered firm, including individuals acting on the firm’s behalf, and a client. Once identified, registered firms are required to respond to them. Where an investor would expect to be informed of the conflict, the firm must disclose the nature and extent of the conflict, in a timely manner, to the client whose interest conflicts with that of the firm, or one of its individuals acting on its behalf.

31-103 CP identifies three primary methods to respond to conflicts: avoidance, control and disclosure. The guidance also outlines that, in order to control conflicts of interest, firms need to tailor the design of their organizational structures, lines of reporting and physical locations with a view of effectively controlling conflicts. There is also guidance for firms as to when and how to disclose a conflict.

KYC and suitability obligations

As part of their KYC obligations, registered firms are required to take reasonable steps to:

 establish the identity of a client (including enquiring into the reputation of the client if there is cause for concern),

 establish whether the client is an insider of an issuer whose securities are publicly traded,

 ensure that they have sufficient information to make a determination of the suitability of a trade or investment for a client, including information regarding the client’s needs and objectives, financial circumstances and risk tolerance, and

 establish the creditworthiness of the client if the registered firm is financing the client’s acquisition of a security (applies only to investment dealers as other types of registered firms are prohibited from making loans to clients). Registrants are required to keep this information current, based on the frequency of trading or advising being conducted by the registrant.

Registered firms are also required, among other anti-money laundering and anti- terrorist financing requirements, to identify clients prior to opening an account. This includes determining beneficial ownership, when applicable, under the federal Proceeds

of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its regulations.

They must also keep records to show that they have complied with these client identification requirements and must have policies and procedures in place to ensure that these requirements are met consistently.

Registered firms are also required to ensure that a purchase or sale of a security is suitable for a client before making a recommendation to, or accepting an instruction from a client to, buy or sell a security.

In June 2012, the OSC began a targeted review (sweep) of 87 registered EMDs and advisers to assess their compliance with their KYC, KYP and suitability obligations under NI 31-103. This sweep introduced a new approach of contacting a sample of a dealer’s or adviser’s clients as part of a normal course compliance inspection. A sample of clients for each registrant being reviewed were telephoned and asked a number of questions about the firm or the representative, including the completeness and accuracy of their KYC information obtained by the firm and the investment recommendations and advice provided to them. Going forward, some jurisdictions are incorporating this approach of contacting clients directly into all compliance inspections. In May 2013, OSC staff issued a report summarizing the results of the sweep. A further report providing guidance and best practices will be issued in late 2013.

IIROC has also issued guidance in connection with best practices for distribution of non arms length investment products (Notice 13-0039)

Know your product obligations

Know your customer obligations have been complemented with know your product obligations. In this regard IIROC issued guidance in connection with best practices for product due diligence (Note 09-0087). Essentially this guidance requires members to take a proactive approach to review and monitor new product before they are offered for sale to their clients. In 2010 IIROC conducted a targeted review of compliance with this obligation by members who distribute structured products. The Note 10-0234 summarizes main findings from such review. In addition IIROC sent letters to the firms requesting corrective actions from them.

The securities regulators similarly issued guidance to registrants to meet their know your product obligations under CSA Staff Notice 33-315 Suitability Obligation and Know

Relationship disclosure information

NI 31-103 requires that clients be provided with all information about the client’s relationship with the registrant that a reasonable investor would consider important. This information includes:

 a description of the nature or type of the client’s account;

 identification of the products or services the registered firm offers to a client;

 a description of the types of risks that a client should consider when making an investment decision;

 a description of the risks to a client of using borrowed money to finance a purchase of a security;

 a description of the conflicts of interest that the registered firm is required to disclose to a client under securities legislation;

 disclosure of all costs to a client for the operation of an account;

 a description of the costs a client will pay in making, holding and selling investments (securities regulators confirm in guidance that these costs include commissions and fees and the description of these costs must include the potential impact on the investment),

 a description of the compensation paid to the registered firm in relation to the different types of products that a client may purchase through the registered firm;

 a description of the content and frequency of reporting for each account or portfolio of a client;

 if the firm is subject to the dispute resolution and mediation services provisions of NI 31-103, disclosure that independent dispute resolution or mediation services are available at the registered firm's expense;

 a statement regarding the registered firm’s obligation to assess the suitability of an investment for a client prior to executing the transaction or at any other time; and

 the information a registered firm must collect in respect of KYC obligations in NI 31-103.