Supporting Industry Transformation – Project to modernize IIROC rules governing back-office arrangements and subordinated debt financing

21-0119
Type: Administrative Notice> Request for Applications
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Contact:

Suzanne Lasrado
Director, Member Regulation & Strategy (Acting)
Telephone:
Email:

This Notice summarizes IIROC’s project to review whether our processes, rules, and agreements pertaining to back-office arrangements and subordinated debt financing at Dealer Members needs to be updated. We are inviting participation from interested Dealer Members in two industry working groups.

This project is being undertaken as part of IIROC’s commitment to support industry transformation to more effectively and efficiently serve Canadians.

Overview

One of our key priorities, as outlined in our fiscal year 2022 priorities, is to modernize IIROC rules and approach to regulation and identify and address rules that result in unnecessary burden and cost.

Innovation and capital raising in the investment industry has evolved and impacted business models and commercial practices at Dealer Members. IIROC’s project will investigate whether the rules governing back-office arrangements and subordinated debt financing need to be updated and accordingly, propose solutions which could involve one or a combination of the following:

  • amending existing rules or introducing new rules
  • issuing guidance
  • updating the uniform standard agreements1

The objectives of any proposed recommendations will be to ensure that:

  1. investors are protected,
  2. the rules are proportionate to the risk of the activity, and
  3. unnecessary regulatory burden is eliminated.

Back-office arrangements

Dealer Members enter into several arrangements to share and provide back-office services to each other and other entities. Some of the more common arrangements involving Dealer Members are:

  • Introducing Broker/Carrying Broker arrangements (Types 1, 2, 3, and 4)2  – these arrangements are entered into between Dealer Members only and are documented in a Uniform Introducer/Carrier Broker agreement3
  • Clearing arrangements involving delivery against payment/receipt against payment settlements4
  • Service arrangements with Portfolio Managers5
  • Back-office consolidation with Canadian affiliates6
  • Back-office services provided to foreign affiliates7
  • Other outsourcing arrangements8

Subordinated debt

Subordinated debt is a common and widely-used form of capital financing used by Dealer Members. By entering into a Uniform Subordinated Loan Agreement 9  with the Dealer Member and IIROC, the Creditor subordinates its claim to the Dealer Member’s assets in favour of claims of eligible customers10  of the Dealer Member, and agrees that repayment of amounts owed to them will be subject to IIROC’s prior approval11 . As a result of this subordination, Dealer Members include these subordinated loan amounts in their calculation of “regulatory financial statement capital” and risk adjusted capital (RAC).

Implementation plan

  1. Commencing August 2021, IIROC will create two industry working groups of the Financial and Operations Advisory Section (FOAS) committee as follows:
    1. Back-office arrangements will be discussed at a dedicated working group of the FOAS Operations sub-committee
    2. Subordinated debt arrangements will be discussed at a dedicated working group of the FOAS Capital Formula sub-committee
  2. The working groups will assist IIROC in
    1. clarifying and ranking issues, and
    2. providing feedback on resolutions.
  3. By March 31, 2022, IIROC will determine and summarize the key issues identified and the proposed methods of resolution.

Next steps

If you work for an IIROC Dealer Member and are interested in being part of either working group, please notify your Financial & Operations Compliance relationship manager by July 21, 2021. We will try to accommodate as many firms as we can; however, to ensure effective discussions, we may limit participation.

Regular updates on the working group discussions will be provided at the FOAS committee meetings and the Conduct, Compliance, and Legal Advisory Section (CCLS) meetings.

  • 1Any material changes being proposed to the standard form agreements will follow IIROC’s rule-making process
  • 2Dealer Member Rule (DMR) 35 [IIROC Rule 2403-2460]
  • 3Agreement templates are available in the Supporting Schedules page. The agreements cannot be altered except where expressly permitted.
  • 4IIROC Notice 14-0010 Clearing arrangements [IIROC Rule 2402(1) and 2461(1)]
  • 5IIROC Notice 18-0242 Service Arrangements between Dealer Members and Portfolio Managers
  • 6MR Notice 291 Consolidation of Back-Office Operations of a Member firm and its Affiliate [IIROC Rule 2460(1)]
  • 7DMR 35.6 [IIROC Rule 2435-2436]
  • 8IIROC Notice 14-0012 Outsourcing Arrangements
  • 9The Agreement cannot be altered in any form.
  • 10Defined as those customers eligible for CIPF protection
  • 11 DMR 5.2A(2) [IIROC Rule 2014(1)]