Rule Consolidation Project Update

On January 1, 2023, the Canadian Investment Regulatory Organization (CIRO) (formerly the New Self-Regulatory Organization of Canada) commenced operations. One of the initial CIRO priorities is to consolidate:

• the rules applicable to investment dealers1 , the CIRO Investment Dealer and Partially Consolidated (IDPC) Rules and
• the rules applicable to mutual fund dealers2 , the CIRO Mutual Fund Dealer (MFD) Rules

into one set of consolidated rules applicable to both investment dealers and mutual fund dealers.

Project objectives and principles

The intended objectives to be realized through this project are as follows:

• Greater rule harmonization to:
  • ensure like dealer activities will be regulated in a like manner
  • minimize regulatory arbitrage between investment dealers and mutual fund dealers
• Where practical and appropriate, adopt less prescriptive, more principles-based rule requirements to facilitate rules that are scalable and proportionate to the different types and sizes of dealers and their respective business models
• Improve access to and clarity of the rules applicable to all CIRO Dealer Members, which will be known as the CIRO Dealer and Consolidated (DC) Rules3

Principles to be followed during the development and implemention of the consolidated rules are as follows:

• Develop consolidated rules in a consultative and efficient manner by:
  • consulting regularly with stakeholders on proposed consolidated rule changes
  • focusing stakeholder consultations on matters that could represent a substantive change to investment dealers and/or mutual fund dealers and/or their Approved Persons and employees
• Implement rules in a non-disruptive manner by:
  • selecting an implementation approach that does not introduce too many rule changes at the same time
  • providing stakeholder training sufficiently in advance of the effective date of the rules to help facilitate timely rule compliance

Decisions made to date

Taking the above project objectives into consideration, the following decisions have been made relating to the structure and content of the future DC Rules:

• the rules will be organized and numbered in the same manner as the existing IDPC Rules (see Appendix 1 for rule organization and numbering structure to be used)
• a standard approach will be used to draft each consolidated rule requirement – this approach will be to:
  • wherever possible, draft a single rule requirement applicable to both investment dealers and mutual fund dealers, and
  • where necessary and appropriate, permit alternative compliance approaches within the rule requirement to accommodate firm business model differences
• the rules will be drafted in plain language, and
• a phased approach will be used to develop and implement the consolidated rules.

Consolidated Rule Project Phases

As just mentioned, the Consolidated Rule Project is being pursued in phases. A phased approach is being used (as opposed to a “big bang” approach) to minimize the amount of stakeholder disruption that will be caused during the development and implementation of the new consolidated rules. To accommodate the introduction of these new rules on a phased basis:

• a fourth rule set, the new DC Rules, will begin to be implemented before we begin to repeal the existing IDPC Rules and MFD Rules in phases, and
• equivalent rule provisions within existing IDPC Rules and MFD Rules, will need to be systematically repealed.

We anticipate that there will be 5 rule development and implementation phases as follows:

• Phase 1 - Establish new rule set structure which involves the adoption of:
  • rule interpretation provisions
  • definitions of common application throughout the rules
  • rule exemption provisions, and
  • general standards of conduct
• Phase 2 - Adopt rules that are unique to the IDPC or MFD Rules and have been assessed as not having a material impact on stakeholders4 - an example of rules that would be adopted in this phase would be the detailed margin requirements set out within the IDPC Rules, where there is very little overlap with the much more limited margin requirements set out within the MFD Rules
• Phase 3 - Adopt rules that are common to the IDPC and MFD Rules and have been assessed as not having a material impact on stakeholders – an example of rules that would be adopted in this phase would be the investigation and enforcement procedures set out in the IDPC and MFD Rules that already have a high degree of harmonization
• Phase 4 - Adopt rules that are unique to the IDPC or MFD Rules and have been assessed as having a material impact on stakeholders – an example of rules that would be adopted in this phase would be the approval and proficiency requirements within the IDPC Rules, which may materially impact mutual fund dealers and their Approved Persons
• Phase 5 - Adopt rules that are common to the IDPC and MFD Rules and have been assessed as having a material impact on stakeholders - an example of rules that would be adopted in this phase would be the financial solvency requirements, where whether to maintain one capital formula or two must be assessed and determined

A topical chart detailing a high-level list of rule types to be included within each DC Rule phase is included as Appendix 2.

Project Progress to Date

Rule drafting work has commenced on all 5 phases of the project. The proposed Phase 1 rule amendments are currently scheduled to be presented to the CIRO Board early this fall and, if approved, will be published for public comment shortly thereafter. Proposed rule amendments for each subsequent phase will be presented to the CIRO Board regularly thereafter over the next couple of years until all 5 phases have been published for public comment.

Appendix 1

CIRO Dealer and Consolidated (DC) Rule organization and numbering structure

Appendix 2

Topical chart of rule types to be included within each DC Rule phase

The first consolidated rule development phase will focus on the establishment of rules relating to:

• the interpretation and application of the new rule set, which will include rule interpretation provisions, definitions to be applied throughout the rules and the provisions under which rule exemptions can be granted
• general standards of conduct applicable to all activities of the dealer and their employees and Approved Persons

Note: The equivalent IDPC Rule and MFD Rule requirements will not be repealed until all phases of the DC Rules are implemented.

Rules to be adopted in this phase include rules relating to:

• margin requirements
• debt markets and Inter-Dealer Bond Brokers (IDBBs)
• trading (including trading on markets that are not subject to UMIR)

Note: The equivalent IDPC Rule or MFD Rule requirements will be repealed when this phase and subsequent phases of the DC Rules are implemented.

Rules to be adopted in this phase include rules relating to:

• membership and member business activity approval matters
• examination, investigation and enforcement procedures
• clearing and settlement of trades and trade delivery standards

Rules to be adopted in this phase include rules relating to:

• approval and proficiency for individuals, where the adoption of a more expansive Approved Person regime may materially impact mutual fund dealers and their Approved Persons
• continuing education, where both previous SROs had a different regime and regime changes are expected to directly impact a considerable number of registered individuals
• managing significant areas of risk, where the mandatory adoption of principles-based supervision framework may impact smaller dealers who have a small number of executives and may have segregation of duties challenges

Rules to be adopted in this phase include rules relating to:

• financial solvency, where whether to maintain one capital formula or two must be assessed and determined
• books and records and client periodic and transaction reporting, where there are differences in the reporting requirements applicable to accounts with nominee name versus client name holdings
• client asset use, where there are significant differences in a dealer’s ability to use client assets within their operations
• outsourcing and service arrangements, where there are significant differences in permissible principal/agent arrangements, introducing broker/carrying broker arrangements, service arrangements and external custody arrangements
• sales conduct, where both consistency of rule wording and rule application needs to be agreed upon

• 1CIRO Dealer Members that are registered as an investment dealer or are registered as both an investment dealer and a mutual fund dealer are required to comply with:
  • the IDPC Rules, and
  • where the firm is a participant in one or more of the markets overseen by CIRO, the CIRO Universal Market Integrity Rules (UMIR).
• 2CIRO Dealer Members that are registered as a mutual fund dealer and not registered as both an investment dealer and a mutual fund dealer are required to comply with the MFD Rules.
• 3The Consolidated Rule Project will consolidate the IDPC Rules and the MFD Rules into one set of rules applicable to CIRO Dealer Members, the DC Rules. UMIR will not be consolidated with other CIRO Rules as part of this project and will continue as a separate CIRO Rule set.
• 4Important stakeholders that were considered include investors, the public, investment dealers and their Approved Persons and employees, mutual fund dealers and their Approved Persons and employees and CIRO itself.