Pledge of Dealer Member’s client securities

Type: Rules Notice> Guidance Note
Rule connection:
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Financial and Operations Compliance

Executive Summary

Effective Date: December 31, 2021I

IROC is publishing guidance regarding arrangements where a client pledges its securities.

This Guidance Note addresses:

  • the impact on client statements,
  • personal client bank loans and guarantees, and
  • Investor Immigration Programs.
  1. General

Dealer Members (Dealer) generally finance client securities purchased on margin by arranging for a call loan directly with a bank and using that portion of client unpaid securities as collateral or pledge for the call loan.  As required by section 3808 of the IIROC Rules, the client statement must show the security transaction, the money balance and security holdings of the client held in segregation and/or non-segregation. The stock record must show the location of all securities held on behalf of clients, including those hypothecated to the bank.

  1. Personal client bank loans and guarantees

Where a client directs a Dealer to deliver any of its security holdings to a bank as a pledge against a personal bank loan, line of credit, bank guarantee etc., and the Dealer does not retain “custody” over such securities, these client assets are no longer considered under the “control” of the Dealer and must not be shown as a security position on the Dealer’s client statement and stock record.

Alternatively, where a Dealer, its client and a bank jointly enter into a tri-party agreement as the result of a loan arrangement directly between the client and a bank, and the terms of the tri-party agreement require that client securities or monies held at a Dealer cannot be withdrawn or transferred out unless prior written consent is obtained from the bank, it is acceptable to record these as security positions held on behalf of the client and not the bank on the books and records of the Dealer.  This arrangement is generally used to simplify tax event reporting by the Dealer on the security positions held by the client as the beneficial owner.

  1. Investor Immigration Program

IIROC has found that some Dealers participate in government sponsored “Investor Immigration Programs”.  These programs invariably require a purchase by immigrant investors in “eligible” investments under the program.  The following examples must be considered in determining the financing arrangement and the applicable record keeping requirements.

  1. To the extent that a Dealer acts as a “principal” in financing the purchase of the eligible securities on behalf of the immigrant investor, the client indebtedness to the Dealer for the purchase on margin and security position must be shown on the Dealer’s client statement and stock record.
  2. To the extent that a Dealer does not directly finance the purchase of the eligible investment on margin but acts as “agent” in the purchase of the eligible securities and delivers the securities to the financial institution (or to a depository where the Financial Institution alone is authorized to give instructions to the depository relating to these securities) against payment for a loan arranged directly with the immigrant investor, the Dealer’s client statement must only show the purchase, settlement and delivery of the transaction.  The custody of the securities pledged is directly with the bank on behalf of the client and thereby outside the “control” of the Dealer.  There is no security position to be recorded on the Dealer’s client statement or stock record in respect to this transaction.

IIROC requires that Dealers carefully review any arrangements whereby securities of its clients have been pledged or guaranteed to a lending financial institution as to whether such securities are properly recorded on the Dealer’s client statements.

  1. Applicable Rules

IIROC Rules this Guidance Note relates to:

  •  section 3808.
  1. Previous Guidance Note

This Guidance Note replaces Member Regulation Notice MR077 – Pledge of Member’s Customer Securities.

  1. Related Documents

This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.

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