Acceptable Securities Locations

(Updated December 8, 2020)

Background

The purpose of this Notice is to provide guidance to Members regarding certain requirements under MFDA Rule 3.3 (Segregation of Client Property). This Notice applies to the firm’s own assets and to all client assets held in nominee name including those held by a Member in its capacity as agent for the trustee. In addition, the Notice is applicable to all Members that hold assets in an account at a Member of the Investment Industry Regulatory Organization of Canada (“IIROC”). This Notice does not apply to assets held at a fund company or financial institution in client name.

MFDA Rules require Members holding proprietary or client securities or other investment products beyond their physical possession to ensure the assets are held at an “acceptable securities location”. If the requirements are not met, a Member must have sufficient regulatory capital to cover a deduction to its capital equal to the market value of all assets held at a non-acceptable location. The General Notes and Definitions in the MFDA Form 1 define acceptable securities locations. Two conditions must be met to satisfy this definition: (i) the location itself must be an entity listed in the General Notes and Definitions; and (ii) there must be a written custodial agreement in place with that entity which outlines the terms and provisions upon which such securities or other investment products are deposited.

Client securities and other investment products may be held by the Member in certificated form in client name if held for safekeeping, or certificated or non-certificated form in nominee name. Investment products include (without limitation) securities of every type, mutual funds, investment funds, annuities and other types of insurance contracts, deposits and deposit liabilities of every type, in whatever form (i.e. certificated, non-certificated).

Acceptable Securities Locations

In order to satisfy MFDA requirements relating to acceptable securities locations the following must be adhered to:

• The location where the securities or other investment products are held must be one of the entities listed as an acceptable securities location in the General Notes and Definitions in the Form 1 and
  1. All mutual fund companies and financial institutions where proprietary or client securities or other investment products are held for the Member must enter into the prescribed Custodial Agreement (see Schedule “A”, attached) with the MFDA; or
  2. The Member must enter into a written custodial agreement with an acceptable entity where proprietary and/or client securities or other investment products are held. The custodial agreement must contain the provisions outlined in MFDA Rule 3.3.3(b).

Members are expected to review the locations at which they hold assets and proactively seek to ensure the applicable entities sign the prescribed Custodial Agreement with the MFDA, or alternatively execute a custodial agreement with the entity itself containing the provisions of Rule 3.3.3(b). If a Member chooses to rely on the Custodial Agreement executed between the fund company or financial institution and the MFDA, the Member must ensure that the following documentation has been submitted, in either hardcopy or electronic format, to the MFDA for each entity with whom it has a custodial arrangement:

1. The prescribed “bare trustee” Custodial Agreement (not negotiable in terms of amending the agreement). The standard prescribed agreement is found attached to this Notice as Schedule “A”. If submitted in paper format, two signed copies must be provided to the MFDA. If submitted in electronic format, one submission, duly executed with electronic signatures, must be provided to the MFDA; and
2. A corporate resolution for signing authority.

Upon receipt and review of the above items, additional documentation (i.e. Articles of Incorporation; most recent audited financial statements; documentation supporting registration as an Investment Fund Manager) may be requested from the custodian prior to execution of the agreement by the MFDA. Any additional documentation requested by the MFDA may also be submitted in either hardcopy or electronic format. As part of the MFDA’s due diligence process relating to reviewing the adequacy of the custodian as an acceptable securities location, the MFDA will consider whether the mutual fund company or financial institution has already executed a bare trustee custodial agreement with another securities self-regulatory organization.

A listing of all executed Custodial Agreements is published on a regular basis by the MFDA and can be viewed at Custodial Agreements (Mutual Fund Dealers). If the mutual fund company or financial institution and their respective investment products held for the Member are named on this listing, the Member can conclude that the assets are held at an “acceptable securities location”.

If a Member holds securities or other investment products at an external location that does not qualify as an acceptable securities location, the Member will be required to provide a margin provision on Statement B line 12, in accordance with the Notes and Instructions to Statement B of the Form 1. The margin deducted against the Member’s regulatory capital will be equal to 100% of the market value of securities or other investment products held at the external location.