1. Background

Traditionally, life insurance business conducted by a dually licensed individual employed by a Dealer has been recorded separately from the securities business of the Dealer. However, the number of individuals licensed to sell both securities products and life insurance products has increased significantly. Also, segregated funds and guaranteed income annuities have become increasingly popular. This has led to situations where clients of the Dealers wish to have these insurance products reported in their accounts along with reports of activities with the Dealer in securities products. Clients have difficulty understanding the Dealers' inability to report these products together especially given their similarity to securities products and the fact that both are purchased through the same individual.

1. Previously published notices

Financial Compliance Notice FC98-29 published on December 22, 1998, sets out the circumstances in which Dealers would be permitted to report segregated fund contracts on client statements. This notice specifically avoided addressing legal and regulatory implications that might arise from marketing or administering the distribution of segregated fund contracts, which are contracts of life insurance, through a Dealer.

In 2003, we published Member Regulation notice MR0207 based on a review done jointly by a subcommittee of the Canadian Life and Health Insurance Association (CLHIA) and staff of the Investment Dealers Association of Canada (IDA) (IIROC’s predecessor) as well as expert staff of Dealers. This review was undertaken to ensure that segregated funds contracts processing by Dealers remained compliant with IIROC Rules and the legal and regulatory provisions of the insurance industry. Although changes arose to the manner in which the manufacturers processed segregated funds contracts, the conclusions reached were that these changes would be transparent to Dealers from the processing perspective, whether the trades were for registered or non-registered accounts. This meant that manufacturers would continue to accept trades entered through FundSERV on a nominee basis, and report the accounts and positions on all FundSERV files (AO, AT, AF & AM) as account designation 2, being broker nominee. As well, Dealers could continue to display segregated funds contract positions on their client statements on a nominee basis (i.e. registered in broker name).

1. Purpose of this Guidance

This Guidance combines the two notices mentioned in Section 1.1.

1. Reporting of positions on client statements

We have concluded that while legally these products are life insurance products, they exhibit strong similarities to securities products and may be treated for processing and reporting purposes in a similar manner. Accordingly, we will permit reporting of positions in these products on client statements of our Dealers under the following circumstances:

1. a confirmation for the purchase of the product is issued in the name of the Dealer,
2. the statement showing the transaction and the position is in the name of the Dealer,
3. the payment for the purchase is sent to the Dealer,
4. the individual selling the insurance product is a registered representative of the Dealer and is dually licensed to sell insurance in the province where the client resides,
5. the Dealer pays any commission from the sale of the product,
6. the income from the sale of the product is recorded "gross" in the books of the Dealer and CIPF fees are based on this gross income,
7. the product is recorded in nominee name with the life insurance company and the nominee name is a nominee name of the Dealer, and
8. positions in the product are subject to the same controls and reconciliations as mutual funds.

Given that these products are to be treated in a manner very similar to mutual funds, the rules relating to off-book transactions apply. It should be noted that this manner of processing and reporting these insurance products may have certain legal and regulatory implications. For example, there may be contractual and regulatory obligations for the life insurance agency affiliate of the Dealer stemming from reporting the sales of these products in this way. In addition, the holding of these products in nominee name may have implications of which the clients must be made aware. In particular, "creditor proofing" and probate status features of segregated funds may be effected. Dealers should consult legal counsel with respect to these matters.

1. Principles underlying the processing of segregated fund contracts

The principles underlying the processing of segregated fund contract transactions by a Dealer are as follows:

• Segregated fund contracts are life insurance contracts between the insurer and the client. Such contracts are sold by licensed life insurance agents, who may be related to a life insurance agency.  Any Dealer involvement in transmitting instructions or premiums to the insurer is solely as agent of the client pursuant to the terms of an account opening agreement or supplementary authorization. The Dealer, by acting as agent for the client, does not hold the segregated fund contract “in trust,” bare or otherwise, for the client.
• Where segregated fund contracts are held in a self-directed registered plan, the life insurance contract is a qualified investment that is purchased by the trustee. The insurance company should issue the contract to the trustee as such and not as a registered insurance contract.
• Dealers who are processing segregated fund contract transactions do so pursuant to an agreement to provide accounting and custody services to the insurance agency whose representative sold the segregated fund contract to the client.
• Segregated fund contracts are contracts of life insurance and as such are not “securities.”  We understand that insurers contract with insurance agencies that are affiliated with Dealers to distribute the insurers’ segregated fund contracts and that these affiliated insurance agencies engage the services of the Dealer to process such transactions using the Dealer’s systems and FundSERV. In these circumstances, the Dealer is processing segregated fund contract transactions as a provider of accounting and custody services for an affiliated insurance agency.

1. Reporting of information and confirmations in segregated fund contracts

Clients of Dealers and their affiliated insurance agencies desire to consolidate their insurance and security transactions into a single set of statements. Accordingly, we will permit reporting of information and confirmations regarding transactions in segregated fund contracts on client statements prepared by the Dealer under the following circumstances:

1. The Dealer’s client documentation, whether in an account opening agreement or in a supplementary authorization:
   1. specifically authorizes the Dealer to act as exclusive agent for the client in transmitting instructions to the insurer with respect to segregated fund contracts, and
   2. provides that the client acknowledges that the Dealer is not engaged in the sale of life insurance products and acknowledges the relationship between the Dealer and the life insurance agency responsible for the life insurance representative engaged in the sale.
2. The Dealer enters into a servicing agreement with the insurance agency for which it processes segregated fund transactions. This servicing agreement must specify that the Dealer is engaged to open client accounts and process such transactions on behalf of the insurance agency and prepare confirmations and statements, where applicable, with respect to such insurance transactions on behalf of the insurance agency.
3. Premiums should be paid by the client to the Dealer with instructions to transmit the premium to the insurer as agent for the client.
4. The individual selling the segregated fund contract is a licensed life insurance agent in the province in which the sale takes place.
5. Commissions payable on the sale of segregated fund contracts shall be processed through the Dealer provided that its obligations to do so are set out in an agreement between itself and the insurance agency as described in circumstance #2 above.
6. Segregated fund transactions must be clearly and reliably identified so as to distinguish insurance transactions from securities transactions.
7. Where the segregated fund contract is issued to a self-directed registered plan, it must be recorded by the insurer in the name of the trustee of the plan and the client must be recorded as the beneficial owner of the plan. Where the Dealer is providing instructions with respect to the segregated fund contract on behalf of the trustee, the contractual arrangement between the Dealer and the trustee must authorize the Dealer to do so.
   
   Where the segregated fund contract is issued on a non-registered basis, the contract must be shown as owned by the client on the insurance company’s records and the Dealer recorded as exclusive agent of the client for purposes of policy transactions with the insurance company. Where the Dealer is acting as exclusive agent for the client, the Dealer must ensure that this relationship is appropriately established in the account opening agreement or otherwise.
8. The Dealer, in processing segregated fund transactions for the insurance agency and in transmitting client instructions with respect to the segregated fund contracts, abides by appropriate controls and procedures, including those required by insurers or applicable insurance laws, regulations or guidelines. The Dealer will apply the same controls and procedures as apply to the processing of mutual fund or security transactions except where to do so conflicts with applicable insurance regulations or where the controls and procedures are inapplicable to the product.

Although care has been taken to accommodate the fact that segregated fund contracts are contracts of life insurance, each insurer and insurance agency affiliate of a Dealer processing segregated fund transactions through a Dealer must be satisfied of its own compliance with applicable insurance laws, regulations and guidelines. In addition, this Guidance makes no statement with respect to the implications of this process on certain aspects of life insurance contracts, including probate status and creditor protection features and Dealers should consult legal counsel with respect to these matters.

1. Applicable rules

IIROC Rules this Guidance Note relates to:

• Rule 3800.

1. Previous Guidance Notes

This Guidance Note replaces:

• FC98-29 – Process of Segregated Funds, and
• MR0207 - Processing of Segregated Fund Contracts.

1. Related documents

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