Rule amendments relating to the proposed adoption of an Incorporated Approved Person compensation option

1. Matter

As part of carrying out its mandate, CIRO is committed to the protection of investors, providing efficient and consistent regulation, and building Canadians’ trust in financial regulation and in the people advising them on their investments. Building investor trust not only involves maintaining and enforcing rules designed to ensure appropriate dealer and advisor conduct and the safeguarding of client assets, it also involves maintaining rules that help ensure that the financial advisory profession remains vibrant and that financial advice remains readily available to Canadian investors into the future.

One area where the financial advisory profession does not have the same flexibility or consistency of other professions is the allowable compensation approaches individuals within the profession can use. Specifically, in the case of:

• an individual advisor registered as a mutual fund dealing representative and sponsored by either a mutual fund dealer or a dual-registered firm, their current options under the applicable Mutual Fund Dealer (MFD) Rules or Investment Dealer and Partially Consolidated (IDPC) Rules are:
  • to be compensated directly as either an employee or individual agent of their sponsoring dealer, or
  • for a portion of their compensation that is not paid to them directly to be paid to the advisor’s corporation for non-securities related activities carried out by the corporation3 on the sponsoring dealers behalf.
• all other individual advisors, their current options under the IDPC Rules are to be compensated directly as either an employee or individual agent of their sponsoring dealer

The lack of flexibility regarding the use of an advisor-owned corporation stems from:

• the need for securities regulators to always have jurisdiction over the individuals and firms that conduct securities related activities for their sponsoring dealers
• the income tax legislation requirement that only compensation generated from activities conducted within a corporation may be reported as corporation revenue.

The lack of consistency regarding the use of an advisor-owned corporation stems from the fact that mutual fund dealing representatives are much more likely to be involved in the offering of other financial products and services (such as insurance), where carrying out business within such corporations is much more common.

There is also a lack of tax certainty associated with the current directed commission option available under the MFD and IDPC rules for mutual fund dealing representatives. Specifically, there is inconsistency in the approaches used to determine the portion of the advisor’s compensation that may be directed to their corporation.

To address the lack of flexibility, consistency and tax certainty in the current advisor compensation rules, CIRO has developed proposed harmonized advisor compensation rules that are comprised of:

• retaining the current options for any client-facing Approved Persons to be an employee or an agent of their sponsoring dealer,
• repealing the directed commission arrangement option currently available to certain client-facing Approved Persons, and
• introducing the option for any client-facing Approved Persons to enter into an incorporated advisor arrangement.

It should be noted that under CIRO’s proposed harmonized advisor compensation rules, Dealer Members will not be required to make the new incorporated advisor arrangement option available to their client-facing Approved Persons. Rather, each Dealer Member will be able to decide whether they want to make this option available to their advisors, as is the case today for the employee and agent compensation options.

The remainder of this Rules Notice:

• provides background information relating to the development of these proposals – section 2,
• provides analysis in support of pursuing these proposals and of recommending a new incorporated advisor compensation option – section 3, and
• discusses the proposed harmonized advisor compensation rules, their assessed impacts on different stakeholders, proposal alternatives considered and the policy development process followed – sections 4 through 7.

2. Background

2.1 CSA request for CIRO to harmonize advisor compensation rules

As part of the CSA’s work in assessing whether the operations of IIROC and the MFDA should be brought together to create a “New SRO”, CSA Position Paper 25-404, New Self-Regulatory Organization Framework was published on August 3, 2021. This position paper included a list of specific solutions the CSA identified would “best achieve the CSA targeted outcomes” of bringing together IIROC and the MFDA into a single self regulatory organization. One of the specific solutions listed within this position paper was the harmonization of compensation options available to advisors sponsored by Investment dealers and mutual fund dealers (referred to within the paper as “Harmonizing Directed Commissions”).

Subsequent to it commencing operations on January 1, 2023, CIRO was asked by the CSA to take over primary responsibility, subject to CSA oversight, for determining the most appropriate harmonized allowable advisor compensation options to propose and to develop proposed rules to implement them.

2.2 CIRO position paper and related public comments received

As an important step in the development of the proposed harmonized advisor compensation rules, CIRO prepared and published for public comment a position paper entitled “Policy options for leveling the advisor compensation playing field” (CIRO Position Paper). This paper analyzed three possible policy options that could be pursued, set out CIRO staff’s preliminary recommendation to pursue an incorporated advisor approach and requested commenter response to specific questions relating to the compensation option we should pursue (including whether different interim and final approaches should be adopted). Thirty-nine comment letters were provided is response to this public comment request.

The vast majority of commenters indicated that they supported a compensation approach that allowed the individual Approved Person to engage in “securities and derivatives related business” (including activities requiring individual registration) within their corporation.

A small number of commenters supported an interim approach that could be implemented in the near-term and that did not require securities legislation amendments to implement. On the other hand, others expressed concern with the regulatory burden associated with adopting an interim solution and then subsequently adopting a final solution.

Twenty-eight commenters expressed support for one or more of the medium-term final solutions discussed in the paper4. The breakdown of this support is as follows:

• Five in favour of the existing MFD Rule directed commission approach
• Two in favour of the Enhanced Directed Commission approach
• Seventeen in favour of the Incorporated Approved Person approach, and
• Seven in favour of the Registered Corporation approach.

Further summary details of the comments provided on the CIRO Position Paper are included in Appendix #1.

3. Analysis and discussion

3.1 Why this initiative should be pursued

One of the key objectives in CIRO’s strategic plan5 is to pursue initiatives that enable us to deliver on our commitment to integration. Specifically, “…successful integration over the next couple of years will support the delivery of our commitments to our stakeholders, including the successful completion of the priorities set by the CSA.”

One of these CSA priorities is the development and implementation of harmonized advisor compensation rules. To deliver on this priority, CIRO intends to pursue rule amendments that:

• harmonize the compensation approach options available to all client-facing Approved Persons at both investment dealers and mutual fund dealers
• improve the consistency of compensation approach options available to individuals that provide both investment advice and other forms of financial advice to clients (such as advice on insurance products)
• ensure that the investor protection-related regulatory obligations owed to clients:
  • remain as obligations of the Dealer Member and the relevant individual Approved Persons
  • are extended to the individual Approved Person’s corporation (and in some cases the corporation’s employees and shareholders), where the proposed Incorporated Approved Person compensation approach is used6.
• recognize that the provision of investment advisory services is a profession and, like other professions, many individuals within this profession wish to be compensated in a manner that is more consistent with how they perform advisory activities for the Dealer Member (i.e. as a self-employed worker business separate from the business of their sponsoring Dealer Member), and
• promote greater investor access to regulated advice, by permitting a compensation approach that makes it more financially viable for more individual Approved Persons to enter into or stay in the investment advice profession.7

3.2 Recommended new incorporated advisor compensation option

To determine the recommended new advisor compensation option to propose (in addition to the existing employee and agent options), the following was considered:

• the pros and cons of the options outlined within the CIRO Position Paper,
• the comments received on the CIRO Position Paper options,
• the need to develop a proposed option that:
  • facilitates the efficient carrying out of advisor activities for their sponsoring Dealer Member
  • maintains existing investor protections
  • does not introduce arbitrage opportunities in terms of the activities/compensation that are subject to the option
  • is in substance a self-employed worker arrangement, and
  • can accommodate the approach or approaches used by the CSA to amend securities legislation to facilitate use of the option.

Taking these matters into consideration, we have decided to:

• propose an incorporated advisor compensation option
• phase out the existing directed commission option over a period commencing on the date the incorporated advisor compensation option becomes available

We believe the phasing out of the existing directed commission option is necessary as there are increasing tax compliance risks associated with the use of this option and variations from one firm to the next as to the portion of advisor compensation that is being directed to the advisor’s corporation.

4. Proposals

4.1 Elements of proposed new incorporated advisor compensation option

Important elements of the proposed new incorporated advisor compensation option are as follows:

• the corporation carrying out activities on behalf of the sponsoring Dealer Member must be:
  • registered in the appropriate registration category in those provinces and territories in Canada in which it operates that require the corporation to be registered
  • exempt from registration in those other provinces and territories in Canada in which it operates, and
  • approved by CIRO as an “Incorporated Approved Person”
• the individual agent associated with the corporation must be a client-facing individual Approved Person of the sponsoring Dealer Member8
• the activities that may be carried out within the corporation, in addition to those activities performed on the sponsoring Dealer Member’s behalf, are limited to those activities that:
  • are determined by CIRO to be:
    • ancillary to the activities performed within the corporation on the sponsoring Dealer Member’s behalf, or
    • regulated Canadian financial services sector activities, provided the agent:
      • is a qualified individual financial services advisor in those provinces and territories in Canada in which these activities are to be performed, and
      • is not prohibited from engaging in these activities in any of the provinces or territories in Canada in which these activities are to be performed,
  • are not contrary to securities laws, and
  • do not bring the securities industry into disrepute, and
  • have been approved in advance by the sponsoring Dealer Member.
• the voting shareholder of the corporation is limited to the individual agent sponsored by the Dealer Member
• the non-voting shareholders of the corporation must be limited to:
  • the individual agent sponsored by the Dealer Member who provides services through the corporation, and
  • family members of the individual agent who qualify as a “related person” under the Income Tax Act (Canada).
• the voting and non-voting shareholders of the corporation and corporation employees must not include individual Approved Persons who are sponsored by another Dealer Member or persons subject to a relevant sanction during the period of the sanction
• a written agreement must be executed between the Dealer Member, the corporation and the individual agent acting on their behalf detailing each party’s obligations, including the requirements:
  • to comply with all applicable laws, securities laws and CIRO requirements,
  • that the agent conduct all securities and derivatives related business it conducts for the Dealer Member through the agent’s corporation,
  • for the Dealer Member to be responsible for supervision of the agent’s and the agent’s corporation activities that are conducted for the Dealer Member,
  • to disclose to impacted clients the nature of the Incorporated Approved Person relationship, and
  • for the corporation to obtain Dealer Member approval before engaging in activities other than those conducted on behalf of the Dealer Member.

Of note, the proposal has been structured to be workable in the event there are differences in the legislative approaches used by different CSA jurisdictions to enable the carrying out of “securities and derivatives related business” within the agent’s corporation.

Also, we have tried to place sufficient restrictions on who can be a corporation shareholder, without unduly limiting the ability of individual Approved Persons to utilize standard business ownership approaches that enable the smooth transition of corporation ownership from one family generation or advisor voting owner to the next.

4.2 Proposed amendments to existing IDPC and MFD Rules and proposed CIRO Rules

Amendments to the existing IDPC and MFD Rules (and the proposed CIRO Rules9) are necessary in order to:

• codify the proposed harmonized advisor compensation rules,
• maintain investor protections,
• clarify the application of rules where the intended application is to be unchanged, and
• make other immaterial clarification revisions.

The rule amendments needed to adopt the proposed harmonized advisor compensation rules are discussed in greater detail in the remainder of this section and the rule amendments themselves are included in Appendices #2 through #7. A table of concordance summarizing the proposed harmonized advisor compensation rule amendments is included in Appendix #8.

4.2.1 Amendments to codify proposed harmonized advisor compensation rules

To codify the proposed harmonized advisor compensation rules, rule amendments are required to:

• introduce new rule requirements that permit the use of an Incorporated Approved Person relationship
• repeal the existing IDPC Rule prohibition on allowing non-individuals other than registered dealers and advisers to conduct “securities and derivatives related business”, and
• repeal the existing directed commission approach for mutual fund dealing representatives sponsored by:
  • mutual fund dealers, as set out in the CIRO Mutual Fund Dealer (MFD) Rules
  • firms registered as an investment dealer and a mutual fund dealer, as set out in the CIRO Investment Dealer and Partially Consolidated (IDPC) Rules.

The specific new and revised provisions that will be necessary to permit the use of an Incorporated Approved Person relationship are as follows:

• Persons not subject to the MFD Rules – Revise MFD Rule application provision to specify that where a Dealer Member is registered as both an investment dealer and a mutual fund dealer, the Dealer Member, its employees and Approved Persons and the employees and shareholders of any Incorporated Approved Persons it sponsors are exempt from the MFD Rules provided they comply with the IDPC Rules. [MFD Rule 1A, Application / Interpretation (iii)].
• Definition of “Approved Person” - Add a new “Incorporated Approved Person” non-individual approval category within the existing “Approved Person” defined term. This revision is required to ensure that rule requirements that apply to “Approved Persons” also generally apply to “Incorporated Approved Persons” going forward. [IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2)].
• Definition of “Incorporated Approved Person” - Add a new “Incorporated Approved Person” defined term to permit the use of an incorporated approved person relationship where the individual agent and their corporation comply with requirements referenced within the term. [IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2)].
• Definitions of “qualified individual financial services advisor” and “regulated Canadian financial services sector” - Add new “qualified individual financial services advisor” and “regulated Canadian financial services sector” defined terms to enable a client-facing Approved Person to offer other Canadian financial services from within their corporation to their clients under certain conditions. [IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2)].
• Eligibility for exemptions – Revise rule requirements to specify that exemptions may also be granted to “Approved Persons” and other “Regulated Persons”, to clarify that the CIRO Board of Directors (Board) may grant exemptions to any Regulated Person provided certain conditions are met. The equivalent MFD Rule already refers to Approved Persons [IDPC Rule subsection 1302(1); MFD Rule 1A, Exemptions; and CIRO Rule subsection 1302(1)].
• General requirements prohibiting a non-individual from conducting securities and derivatives related business on a Dealer Member’s behalf - Repeal current rule requirements that prohibit a non-individual from conducting securities and derivatives related business on a Dealer Member’s behalf [Current IDPC Rule subsections 2302(2) and 2302(3); and current CIRO Rule subsections 2302(2) and 2302(3)].
• General requirements for permissible agent arrangements – Add new rule provisions that set out general requirements to be met when entering into a principal and agent arrangement or an incorporated agent arrangement [IDPC Rule subsection 2302(2); MFD Rules 1.1.5(a) and 1.1.5(b); and CIRO Rule subsection 2302(2)].
• Specific requirements involving the dealer and the CIRO – Harmonize drafting language used within the IDPC and MFD Rules that set out the specific requirements to be met by the dealer (including executing an agreement with CIRO) when entering into a principal and agent arrangement or an incorporated agent arrangement [IDPC Rule section 2303; MFD Rule 1.1.5(c); and CIRO Rule 2303].
• Specific dealer and agent requirements under a principal and agent arrangement – Harmonize drafting language used within the IDPC and MFD Rules that set out the specific requirements to be met by the dealer and the agent when entering into a principal and agent relationship [IDPC Rule section 2304; MFD Rule 1.1.5(d); and CIRO Rule section 2304].

• Specific dealer, agent and agent’s corporation requirements under an incorporated agent arrangement - Add new rule provisions to specify the requirements to be met by the dealer, the agent and the agent’s corporation when entering into an incorporated agent relationship. These include requirements:

  • the corporation must meet,
  • the individual agent must meet,
  • the corporation owners must meet,
  • that prohibit certain individuals from being shareholders or employees of the corporation, and
  • for a written agreement to be executed between the Dealer Member, Incorporated Approved Person and the agent acting on their behalf.

  The written agreement requirements are based on the existing agreement requirements for a principal and agent relationship as set out in IDPC Rule section 2304. [IDPC Rule section 2305; MFD Rule 1.1.5(e); and CIRO Rule section 2305]

• Requirements restricting individual Approved Person compensation arrangements – Revise rule requirements to narrow scope of requirements restricting Approved Person compensation arrangement from “Approved Persons” to “individual Approved Persons” [IDPC Rule subsection 2551(7); MFD Rule 2.4.1(a); and CIRO Rule subsection 2551(7)].
• Requirements permitting the directing of commissions under specified conditions - Repeal current rule requirements that permit entering into a directed commission arrangement under specified conditions [IDPC Rule subsections 2551(8) and 2551(9); MFD Rules 2.4.1(b) and 2.4.1(c); and CIRO Rule subsections 2303(3) and 2303(4)].
• Requirements permitting the payment of remuneration to an agent’s corporation under specified conditions - Add new rule provisions that permit the payment of remuneration relating to business the agent conducts for its sponsoring dealer to the agent’s corporation under specified conditions [IDPC Rule subsections 2551(8) and 2551(9); MFD Rules 2.4.1(b) and 2.4.1(c); and IDPC Rule subsections 2551(9) and 2551(10)].
• Conditions under which individual Approved Person may engage in other activities within their corporation - Add new rule provisions that specify the other activities that an individual Approved Person may engage in within their corporation and the conditions that must be met in order to engage in these activities. [IDPC Rule clause 2305(1)(ii) and subsection 2555(1); MFD Rules 1.1.5(e)(i)(B) and 1.3.3; and CIRO Rule clause 2305(1)(ii) and subsection 2555(1)].
• Approval of non-individuals - Add new rule provisions that specify the approval conditions and processes for Incorporated Approved Persons which include an expedited approval process where the corporation applying to be an Incorporated Approved Person is wholly owned by an individual Approved Person. [IDPC Rule section 2561; MFD Rule 1.5.1; and CIRO Rule section 2561]
• Cessation of approval status – Revise existing / add new rule provision that specifies that an individual ceases to be an Approved Person upon termination of any incorporated agent arrangement it has with their sponsoring dealer [IDPC Rule subsection 2807(2); MFD Rule 1.2.7; and CIRO Rule subsection 2807(2)]
• Personal financial dealings – Revise rule requirements to:
  • expand the scope of persons subject to the personal financial dealing prohibitions to include Incorporated Approved Persons and their employees and shareholders [IDPC Rule section 3115; MFD Rules 2.1.5, 2.3.1(a), 2.4.1(a) and 3.2.1; and CIRO Rule section 3110], and
  • exclude payments received from an Incorporated Approved Person from the prohibition from receiving compensation from a source other than the Dealer Member [IDPC Rule clause 3115(2)(i); MFD Rule 2.4.1(b); and CIRO Rule clause 3110(2)(i)].
• Prohibited practices – Revise rule requirements to exclude payments received from an Incorporated Approved Person from the prohibition from receiving compensation from a source other than the Dealer Member [IDPC Rule subsections 7112(2) and 7112(3); and CIRO Rule subsections 7112(2) and 7112(3)].

4.2.2 Amendments to maintain investor protections

One of the most important goals of this rule amendment proposal is that investor protections within the CIRO rules are maintained where an individual Approved Person decides to enter into an Incorporated Approved Person relationship with the Dealer Member. To accomplish this, the following amendments are proposed:

• General rule interpretation provisions – To ensure that rules apply to Incorporated Approved Persons and/or their employees and shareholders if appropriate:
  • retain existing general rule interpretation clause that specifies that requirements that apply to a “Dealer Member” or a “Member” also apply to “its employees and Approved Persons, if the context is appropriate”. The combined effect of this retained provision and the proposed amendment to the defined term “Approved Person” is that rule requirements that apply to a “Dealer Member” or a “Member” also apply to Incorporated Approved Persons if the context is appropriate [IDPC Rule clause 1102(3)(i); MFD Rule 1A, Application / Interpretation (i); and CIRO Rule clause 1103(1)(i)]
  • add new rule provision to specify that requirements that apply to an “Approved Person” or an “Incorporated Approved Person” also apply to “employees and shareholders of an Incorporated Approved Person if the context is appropriate”. The effect of this new requirement is to ensure that rule requirements apply, where appropriate, to key individuals associated with Incorporated Approved Persons sponsored by the Dealer Member. [IDPC Rule clause 1102(3)(ii);MFD Rule 1A, Application / Interpretation (ii); and CIRO Rule clause 1103(1)(ii)].
• Definition of “Approved Person” – Add a new “Incorporated Approved Person” non-individual approval category within the existing “Approved Person” defined term. The impact of this revision is that:
  • all rules that currently apply to Approved Persons will automatically apply to Incorporated Approved Persons as a result of proposed modifications to the “Approved Person” defined term10
  • when read together with new IDPC Rule clause 1102(3)(ii) or MFD Rule 1A, Application / Interpretation (ii) or CIRO Rule clause 1103(1)(ii), rules that apply to “Approved Persons” also apply the employees and shareholders of an Incorporated Approved Person, if the context is appropriate.
    [IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2)]
• Definition of “Incorporated Approved Person” – Add a new “Incorporated Approved Person” defined term to only permit the use of an incorporated approved person relationship where the individual agent and their corporation comply with the relevant rule requirements. The impact of the introduction of this new defined term, when read together with the revised general rule interpretation provisions is that rules that apply to “Incorporated Approved Persons” also apply the employees and shareholders of an Incorporated Approved Person if the context is appropriate. [IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2)]
• Personal financial dealings – Revise rule requirements to expand the scope of the prohibited personal financial dealings to include certain practices that may be engaged in by individuals that are employees and shareholders of an “Incorporated Approved Person”. This has been done to ensure that the personal financial dealing prohibitions cannot be avoided by using corporation employees or shareholders (not otherwise qualifying as an “agent” or “individual Approved Person” of the Dealer Member) to engage in these prohibited dealings. [IDPC Rule section 3115; MFD Rules 2.1.5, 2.3.1(a), 2.4.1(a) and 3.2.1; and CIRO Rule section 3110] 

• Opening new client accounts – Revise rule requirements to expand the scope of application of these “non-client” account provisions to:

  • obtain other Dealer Member approval to open an account, and
  • designate such accounts as “non-client accounts”

  to include “Incorporated Approved Person” accounts.
  [IDPC Rule subsection 3214(6) and CIRO Rule subsection 3214(6)]

• Retail client complaints – Revise rule requirements to expand scope of complaints considered to be a retail client complaint to include retail client complaints against both “employees” and “Approved Persons” (which would include “Incorporated Approved Persons”). [IDPC Rule section 3721; MFD Rule 300, Part I, Item #2; and CIRO Rule section 3750]
• Record retention requirements for retail client complaints – Revise rule requirements to expand scope of application of this provision to include records relating to client complaints against both “employees” and “Approved Persons” (which include “Incorporated Approved Persons”). [IDPC Rule sections 3728 and 3786; MFD Rule 300, Part V and CIRO Rule section 3771]
• General supervision requirements – Revise rule requirements to expand scope of application of these general supervision requirements from “individual” to “person” in order to ensure the activities of any Incorporated Approved Persons are subject to supervision. [IDPC Rule 3900, Part A; MFD Rules 2.5.1 through 2.5.5; and CIRO Rule 3900, Part A]
• Supervision of Retail Client Accounts – Revise rule requirements to expand the scope of trades subject to trade reviews to include trades in accounts of both “employees” and “Approved Persons”. [IDPC Rule 3900, Part C; MFD Rule 200, Parts IV and V; and CIRO Rule 3900, Part C]
• Supervision of Institutional Client Accounts – Revise rule requirements to expand the scope of trades subject to trade reviews to include trades in accounts of both “employees” and “Approved Persons”. [IDPC Rule 3900, Part D; and CIRO Rule 3900, Part D]
• Prohibited practices – Revise rule requirements to expand the scope of the prohibited debt market practices to include certain practices that may be engaged in by individuals that are employees and shareholders of an “Incorporated Approved Person”. This has been done to ensure prohibited practices cannot be engaged in by using agent-owned corporation employees or shareholders (not otherwise qualifying as an “Approved Person” of the Dealer Member) to engage in them. [IDPC Rule subsections 7112(2) and 7112(3); and CIRO Rule subsections 7112(2) and 7112(3)]

4.2.3 Minor other amendments

There are a number of additional less material amendments that have been proposed to:

• clarify which rule requirements:
  • do not apply to Incorporated Approved Persons11
  • apply to Approved Persons (including Incorporated Approved Persons), in addition to employees12
• make minor defined term, requirement title, requirement introduction and requirement provision language clarifications

4.3 Required corollary amendments to securities legislation

In order to engage in securities related activities, securities legislation requires that individuals and non-individuals be either:

• exempt from the requirement to be registered, or
• in the case of individuals, registered in the appropriate individual registration category or categories
• in the case of non-individuals, registered in the appropriate non-individual registration category or categories.

The registration categories for non-individuals are set out in:

• subsections 26(2) and 26(6) of the Securities Act (Ontario), in the case of Ontario
• subsections 7.1(1) and 7.2(1) of National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations, in the case of all other CSA jurisdictions

The current non-individual registration categories do not contemplate an advisor-owned corporation carrying out securities related activities and the regulatory obligations that would be incurred under these current categories are not practical for a corporation to assume. Rather, to make it viable for a corporation to carry out securities related activities, amendments to securities legislation are necessary to either:

• exempt advisor-owned corporations that carry out securities related activities from having to be registered, or
• establish a new less burdensome category of non-individual registration for advisor-owned corporations

The CSA is in the process of determining which securities legislation amendment approach to pursue to enable the implementation of CIRO’s proposed harmonized advisor compensation rules. In particular, amendments to securities legislation are required in order to ensure that the Dealer Member, client-facing Approved Person, and Incorporated Approved Person remain liable to clients for the client-facing Approved Person 's and Incorporated Approved Person 's conduct. Possible approaches that might be pursued to enable an advisor-owned corporation to carry out registrable activities include:

1. introducing a registration requirement for advisor-owned corporations, or
2. exempting advisor-owned corporations from the requirement to be registered.

Both approaches would likely require amendments to National Instrument NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and, in some or all the CSA jurisdictions, securities legislation. Amendments to NI 31-103 and securities legislation could be addressed concurrently and may require significant time to implement, including required processes such as CSA rule making and public comment considerations. In some jurisdictions, ministerial approvals are required for the implementation of amendments through the rule-making process. Legislative approvals will also be required for amendments, as may be required, to securities legislation.

As the approach that will be pursued to amend securities legislation is not yet known, CIRO’s proposals have been developed to accommodate either an exemption from registration or the introduction of a new registration category.

5. Impacts

5.1 Impacts of proposed amendments

We have assessed the near-term and longer-term impacts of the proposed harmonized advisor compensation rule amendments. The longer-term assessment was considered important to perform for this project as it is intended and believed that implementation of these rule amendments will:

• improve the consistency of compensation approach options available to individuals that provide both investment advice and other forms of financial advice to clients (such as advice on insurance products), and
• promote greater investor access to regulated advice, by permitting a compensation approach that makes it more financially viable for more individual Approved Persons to enter into or stay in the investment advice profession.

Specific non-neutral impacts we’ve identified are as follows:

• for investment dealers making the incorporated advisor option available, we’ve assessed:

  • the near-term impact as minor negative as they will:

    • have to execute a new tri-party agreement involving themselves, their advisors and their advisor’s corporation
    • have to revise the approaches they use to allocating compensation and related expenses to advisors

    for advisors using this option.

  • the longer-term impact as positive as they will;
    • benefit from transferring the risk of profit/loss from the investment dealer to the advisors using this option
    • benefit competitively from being able to offer this option to advisors sponsored by other Dealer Members that choose to not offer this option
• for advisors sponsored by investment dealers and using the incorporated advisor option, we’ve assessed the near-term and longer-term impacts as minor negative and positive, respectively, for primarily the same reasons as for investment dealers using option13
• for mutual dealers and their sponsored advisors using the incorporated advisor option, we’ve assessed the near-term and longer-term impacts as negative and positive, respectively, as:
  • in the near-term, in addition to the matters highlighted above for investment dealers, these firms and their sponsored individuals will have to transition from using the current directed commission option to the new incorporated advisor option
  • in the longer-term, in addition to the matters highlighted above, they will benefit from the greater clarity associated with being able to conduct all of the activities they conduct for their sponsoring dealer within their corporation and from the greater tax certainty associated with the arrangement
• for Dealer Members not offering the incorporated advisor option, we’ve assessed the longer-term impact as negative, as we believe that not offering this option will become a competitive disadvantage in the longer-term when trying to attract and retain advisors
• for advisors not using the incorporated advisor option, we’ve assessed the longer-term impact as neutral to minor negative, as we believe there is some risk that client business may be lost to advisors that use the incorporated advisor option and are able to pass along savings to clients under this option
• for clients, we’ve assessed the longer-term impact of this proposal as being neutral, as existing investor protections will continue to apply irrespective of which approach is used to compensate the client-facing individual Approved Person
• for CIRO, we’ve assessed the near-term impact of this proposal to be negative in terms of required use of CIRO staff resources as resources will be required at the outset to approve corporations qualifying under the incorporated advisor option as “Incorporated Approved Persons”

The following table summarizes the near-term and longer-term assessed impact of the proposed harmonized advisor rule amendments:

5.2 Regional impacts

We have not identified any specific regional impacts associated with the proposed harmonized advisor compensation rule amendments. However, there is a possibility that there may be differences in the approach that individual CSA jurisdictions take to permitting the use of the incorporated advisor option being introduced as part of these proposals.

6. Alternatives to rule proposals considered

6.1 Compensation approach alternatives considered

As outlined in the CIRO Position Paper, CIRO identified and assessed a number of compensation alternatives before recommending that an incorporated advisor compensation option be introduced as part of the proposed harmonized advisor compensation rule amendments. The alternatives identified by CIRO were:

• an Enhanced Directed Commission approach,
• an Incorporated Approved Person approach, and
• a Registered Corporation approach.

Also, a few of the commenters who responded to the CIRO Position Paper identified the existing Directed Commission approach permitted under MFD Rules as a compensation alternative they wanted CIRO to consider.

The alternatives favoured by commenters were:

• the Incorporated Approved Person approach, with seventeen commenters expressing support for this approach
• the Registered Corporation approach, with seven commenters expressing support for this approach

In substance, the only difference between these two approaches is the means by which CIRO obtains jurisdiction over the advisor-owned corporation, Specifically, under the:

• the Incorporated Approved Person approach, CIRO would require the corporation to be approved by CIRO as a non-individual “Incorporated Approved Person” and to be subject to the jurisdiction of CIRO in the same manner as occurs today for individual Approved Persons
• the Registered Corporation approach, the CSA (and ultimately CIRO) would require the corporation to be registered in a new category of registration established specifically for advisor-owned corporations

6.2 Compensation approach adoption alternatives considered

CIRO also considered whether it should implement an interim advisor compensation option (that would not require securities legislation changes to implement) and then replace this option with a permanent advisor compensation option (that would require securities legislation changes to implement).

Regarding whether to adopt an interim compensation option, while this alternative had support amongst a number of commenters, other commenters pointed out that introducing an interim option and then replacing it later on with a permanent option would be burdensome on firms and advisors who would have to change the compensation option they used on two occasions. Also, we are aware that there are tax compliance risks associated with the existing Directed Commission approach and these risks would not have been materially mitigated by using the either the existing Directed Commission or Enhanced Directed Commission approaches. As the existing Directed Commission and Enhanced Directed Commission approaches were the only approaches identified that could be adopted on an interim basis, we decided against proposing either of them an interim solution because of the burden and tax compliance risks adopting an interim solution would introduce.

7. Policy development process followed

7.1 Regulatory purpose

We took the public interest into consideration when developing the proposed harmonized advisor compensation rule amendments and we believe the proposals achieve their intended objectives of improving the consistency of compensation approach options available to individuals that provide investment advice and other forms of financial advice to clients and promoting greater investor access to regulated advice.

7.2 Regulatory process

The Board has determined the proposed rule amendments to be in the public interest and on June 17, 2026, approved them for public comment.

We consulted with the following stakeholders on this matter:

• individuals and organizations who provided comments on CIRO’s Position Paper, including:
  • individual mutual fund dealing representatives
  • mutual fund dealers
  • investment dealers
  • firm groups mutual fund dealer and investment dealer affiliates
  • dual-registered firms
  • a portfolio management firm
  • an investor advocate and an investor advocacy organization
  • industry advocacy organizations
• the Incorporated Advisor Ad Hoc Committee, an advisory committee assembled for this project to provide feedback on the incorporated advisor compensation option structure; the membership of this ad hoc committee was comprised of individuals with the necessary expertise representing a fair cross-section of CIRO Dealer Member types, sizes and regional focus.
• the following advisory committees have also been consulted as part of the development of these proposed rule amendments:
  • Conduct, Compliance and Legal Advisory Section
  • Financial and Operations Advisory Section
  • Investor Advisory Panel
  • National Council
  • Regional Councils

After considering the comments received in response to this Request for Comments together with any comments of the CSA, CIRO staff may recommend revisions to the proposed rule amendments. If the revisions and comments received are not material in nature, the Board has authorized the President to approve the revisions on CIRO’s behalf and the revised proposed rule amendments will be subject to approval by the CSA. If the revisions or comments are material, CIRO staff will submit the proposed rule amendments, including any revisions, to the Board for approval for republication or implementation, as applicable.

7.3 CIRO advisory committee and other stakeholder feedback

The stakeholder feedback we’ve received to date on the proposed rule amendments has come from Canada Revenue Agency (CRA) staff and CIRO advisory committee members.

The CRA staff feedback we received was generally neutral in that they provided us with links to cases and website materials that they felt would be of help to us in the development of our proposed rule amendments.

The CIRO advisory committee feedback we’ve received was focused on requesting:

• the ability to offer both investment services and other financial services from within the same advisor-owned corporation
• greater corporation ownership flexibility, and
• a streamlined CSA/CIRO advisor corporation registration/approval process

In support of this feedback, advisory committee members indicated that it is common for teams of financial services advisors to provide a range of financial services to clients and so continuing to have this ability was important from a continuity and cost of client service standpoint. Further, where a team approach is used, they also stressed that it was important to allow all of the corporation advisor team members (and related person members of their family) to be able to participate in the ownership of the corporation in order to not introduce an equity participation double standard amongst the corporation’s advisors and to, when the time comes, enable the smooth transition of ownership from one set of financial services advisor corporation owners to another.

Ability to offer other financial services from within advisor-owned corporation

Regarding the request to be able to offer other financial services (in addition to investment services), we developed proposals that would have given advisors the flexibility to operate under an individual or team corporation approach by:

• allowing the offering of investment services by one or more client-facing Approved Person(s) from within the same advisor-owned corporation, and
• allowing the offering of investment services and certain other financial services from within the same advisor-owned corporation by:
  • one or more client-facing Approved Person(s) who are also registered / licensed to provide these other financial services, and/or
  • one or more client-facing Approved Person(s) and one or more other financial services advisors who are registered / licensed to provide these other financial services

These offering of financial services-related proposal elements have been extensively discussed with CSA staff. In order for all stakeholders to have a chance to comment on the proposals and suggest proposal improvements, CIRO will not propose certain of these proposal elements at this time. Instead CIRO will propose under the proposed incorporated compensation option that:

• investment services must be provided to clients from within the advisor-owned corporation by a single client-facing Approved Person
• other financial services may be provided to clients from within the advisor-owned corporation where, amongst other conditions:
  • the single client-facing Approved Person that is providing financial services:
    • has the necessary registration/licensing to provide these other financial services
    • is not prohibited from providing these other financial services from within a corporation that is also providing investment services in any of the provinces or territories in Canada in which these services are to be performed
  • the relevant sponsoring Dealer Member has approved the provision of these other financial services

Also, in order to determine if the final CIRO rule amendments should offer the ability for individuals and groups of financial services advisors to offer a broad range of financial services through a single corporation, we have asked within this bulletin a series of 8 questions (refer to Questions A1. through A8. in section 9) relating to the offering of investment and other financial services. Your responses to these questions will be an important input in determining the final CIRO rule amendments relating to the suite of financial services that may be offered to clients, and who may offer them, from within a single advisor-owned corporation under the incorporated agent compensation approach

Advisor-owned corporation business model and related ownership options

To make feasible the individual and team business model approaches and the offering of multiple financial services under the incorporated agent compensation option, we developed proposals that would have allowed:

• voting and non-voting ownership of the corporation by those financial services advisors that provide financial services to clients from within the corporation
• advisor family member ownership of voting and non-voting shares of the corporation, provided that voting ownership of the corporation is controlled by the advisors providing financial services from within the corporation

These corporation ownership-related proposal elements have been extensively discussed with CSA staff. In order for all stakeholders to have a chance to comment on the proposals and suggest proposal improvements, CIRO will not propose certain of these proposal elements at this time. Instead CIRO will propose under the proposed incorporated compensation option that:

• the voting shareholders of the corporation be limited to a single client-facing Approved Person sponsored by the Dealer Member who provides investment services to clients from within the corporation
• the non-voting shareholders of the corporation be limited to the same client-facing Approved Person and their family members

Also, in order to determine if the final CIRO rule amendments should offer greater corporation ownership flexibility, we have asked within this bulletin a series of 6 questions (refer to Questions B1. through B6. in section 9) relating to corporation ownership under the incorporated agent compensation option. Your responses to these questions will be an important input in determining the final CIRO rule amendments relating to corporation ownership under the incorporated agent compensation option.

Advisor-owned corporation approval streamlining

Regarding approval streamlining, we have proposed a streamlined approval process where the corporation is wholly owned by an advisor that has already been approved by CIRO within a client-facing Approved Person category. These proposed amendments will need to be modified where revisions are made to the corporation ownership requirements in finalizing the CIRO incorporated agent-related rule amendments.

8. Implementation of proposed amendments

An implementation date will be determined closer to the date these rule amendments are approved for implementation. The implementation date chosen will take into consideration any implementation issues raised in response to this public comment request. To encourage this feedback, we have included 2 questions within this bulletin (refer to Questions C1. and C2. in section 9) regarding the implementation of these proposals.

9. Questions

While comments are requested on all aspects of the proposed harmonized advisor compensation rule amendments, comments are also specifically requested on the following questions:

10. Supporting documents

Appendix 1 - Summary of comments on CIRO Position Paper

Appendix 2 - Blackline copy of proposed rules amendments – IDPC Rules

Appendix 3 - Blackline copy of proposed rules amendments – MFD Rules

Appendix 4 - Blackline copy of proposed rules amendments – proposed CIRO Rules

Appendix 5 - Clean copy of proposed rules amendments – IDPC Rules

Appendix 6 - Clean copy of proposed rules amendments – MFD Rules

Appendix 7 - Clean copy of proposed rules amendments – proposed CIRO Rules

Appendix 8 - Table of concordance summarizing proposed revisions to IDPC, MFD and proposed CIRO rules

• 3Under current securities legislation, only non-securities related activities can be carried out within an advisor-owned corporation that is not a registered firm without obtaining exemptive relief.
• 4Three commenters supported two approaches so 31 preferences were indicated by 28 commenters.
• 5CIRO Strategic Plan Fiscal Years 2025-2027.
• 6Refer to section 4.2 of this proposal paper for further discussion of the amendments we’ve proposed to ensure the current investor protections within the CIRO rules continue to apply (and in some cases are expanded to include other parties) where securities and derivatives related business is being provided through an advisor-owned corporation.
• 7Further, as CIRO views investor access to regulated advice to be an investor protection issue, if greater investor access to regulated advice is achieved, we believe investor protection would be enhanced by pursuing these amendments.
• 8Specifically, the agent would need to be an individual sponsored by:
  • a mutual fund dealer that is registered as a mutual fund dealing representative
  or
  • an investment dealer or a dual-registered firm that is approved by CIRO in one or more of the following individual Approved Person categories: (1) Associate Portfolio Manager, (2) Investment Representative, (3) Portfolio Manager, and (4) Registered Representative.
• 9As a separate project to develop one set of dealer rules applicable to both investment dealers and mutual fund dealers (CIRO Rules) is nearing completion, we have also developed amendments to the proposed CIRO Rules. As the proposed CIRO Rules have not yet been finalized or implemented, the CIRO Rules amendments included within Appendices 4 and 7 are subject to change.
• 10Investor protection and other requirements that will apply to “Incorporated Approved Persons” include:
  • the definition of the term “records” (IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2))
  • the definition of the term “Rules” (IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2))
  • the definition of the term “sub-branch” (MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2))
  • the scope of persons that may be exempted from a rule requirement (IDPC Rule section 1302; MFD Rule 1A, Exemptions; and CIRO Rule section 1302)
  • the general standard of conduct (IDPC Rule subsections 1402(1) and 1402(2); MFD Rule 2.1.1 and CIRO Rule subsections 1402(1) and 1402(2))
  • the requirement to comply with Corporation requirements (IDPC Rule clause 1403(2)(i); MFD Rule 1.1.2 and CIRO Rule clause 1403(2)(i))
  • the requirement to avoid any act or omission that would cause a Dealer Member to violate any Corporation requirement (IDPC Rule clause 1403(2)(i); and CIRO Rule clause 1403(2)(i))
  • the obligation to ensure that Corporation requirements will be complied with (IDPC Rule subsection 1404(2); MFD Rule 1.2.1 and CIRO Rule subsection 1404(2))
  • the requirements relating to the use of trade names (IDPC Rule sections 2281 through 2283; MFD Rule 1.1.7; and CIRO Rule sections 2281 through 2283)
  • to carry on all securities related business for the account of the Member and through the facilities of the member with certain exceptions (MFD Rule 1.1.1(a))
  • the requirements relating to service arrangements (MFD Rule 1.1.3)
  • the conflict of interest management requirements (IDPC Rule sections 3110 through 3113; MFD Rules 2.1.4(1) and 2.1.4(2); and CIRO Rule sections 3105 through 3108)
  • the discretionary trading prohibition (IDPC Rule subsection 3221(1); MFD Rule 2.3.1(b) and CIRO Rule subsection 3221(1))
  • the conditions under which a temporary hold can be placed on a client account (IDPC Rule section 3222; MFD Rule 2.2.8 and CIRO Rule section 3222)
  • the requirement to give priority to client transactions (IDPC Rule section 3503; and CIRO Rule section 3503)
  • the requirements to avoid misleading communications (IDPC Rule section 3640; MFD Rule 1.2.5; and CIRO Rule section 3640)
  • the requirements to report client complaints and other matters to the Dealer Member (IDPC Rule sections 3702 through 3704; MFD Rule 1.4; and CIRO Rule sections 3710 through 3713)
  • the requirement to commence an internal investigation (IDPC Rule subsection 3706(1); and CIRO Rule subsection 3720(1))
  • the client complaint-related settlement agreement requirements (IDPC Rule section 3710; and CIRO Rule section 3730)
  • the institutional client complaint handling requirements (IDPC Rule section 3715; and CIRO Rule 3740)
  • the account activity review requirements (IDPC Rule subsection 3927(3); MFD Rule 200, Parts IV and V; and CIRO Rule section 3927)
  • the daily and monthly trade supervision requirements (IDPC Rule clause 3945(2)(x); MFD Rule 200, Parts IV and V and CIRO Rule clause 3945(2)(x))
• 11Requirements that do not apply to Incorporated Approved Persons include:
  • the definition of the term “agent” (IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2))
  • the definition of the term “employee” (IDPC Rule subsection 1201(2); MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2))
  • the definition of the term “sub-branch” (MFD Rule 1A, Definitions; and CIRO Rule subsection 1201(2))
  • the requirements for shared office premises (IDPC Rule subsection 2216(17); and CIRO Rule subsection 2218(2))
  • the individual approval requirements (IDPC Rule sections 2551 through 2553; MFD Rules 1.2.2 and 1.2.3; and CIRO Rule sections 2551 through 2553)
  • the outside activity requirements (IDPC Rule section 2554; MFD Rule 1.3; and CIRO Rule section 2554)
  • the individual proficiency requirements (IDPC Rule sections 2601 through 2605; and CIRO Rule sections 2601 through 2605)
  • the requirement to provide training in key areas to individual Approved Persons (IDPC Rule clause 2604(1)(iii); MFD Rule 1.2.4; and CIRO Rule clause 2604(1)(iii))
  • the exemptions from completing, rewriting or repeating individual courses (IDPC Rule sections 2627 and 2628; and CIRO Rule sections 2627 and 2628)
  • the continuing education requirements (IDPC Rule 2700; MFD Rules 1.2.6 and 900; and CIRO Rule 2700)
  • the national registration database requirements (IDPC Rule 2800; and CIRO Rule 2800)
  • the product due diligence requirements (IDPC Rule section 3301; MFD Rule 2.2.5(3); and CIRO Rule section 3301)
  • the know your product requirements (IDPC Rule section 3302; MFD Rules 2.2.5(2) and 2.2.5(2.1); and CIRO Rule section 3302)
  • the research report requirements (IDPC Rule 3600, Part B; and CIRO Rule 3600, Part B)
  • the appointment of authorized individuals to negotiate settlement agreements (IDPC Rule subsection 3710(3); and CIRO Rule subsection 3730(3))
  • the account statement content requirements (MFD Rule 5.3.2)
  • the trade confirmation content requirements (MFD Rule 5.4.3)
  • the requirements for calculating the minimum amount of insurance coverage required (MFD Rule 4.4.1)
  • the requirements relating to applications to be exempted from individual proficiency requirements (IDPC Rule subsection 9206(1); and CIRO Rule subsection 9206(1)).
• 12Requirements that need to apply to Approved Persons in addition to employees include:
  • the dealer responsibility for the acts and omissions of its employees and Approved Persons (IDPC Rule clause 1403(1)(i); MFD Rule 2.1.2; and CIRO Rule clause 1403(1)(i))
  • the scope of complaints subject to the retail client complaint handling requirements (IDPC Rule subsection 3721(1); and CIRO Rule subsection 3750(1))
  • debt market surveillance and reporting requirements (IDPC Rule subsection 7113(1); and CIRO Rule subsection 7113(1)).
• 13In making this assessment we did not determine that the transfer of profit/loss risk from the dealer to the advisor would have a material negative impact to the advisor, provided the revised approaches to allocating compensation and related expenses to advisors under this option give advisors a reasonable likelihood of being profitable.
• 14Where these proposals end up making it more financially viable for advisors to enter into or stay in the investment advice profession, and this results in greater investor access to regulated advice, we believe the impact on clients will be “Positive”.
• 15

  Please Note: The implementation period/date chosen for the CIRO proposals must be a date no earlier than the date related changes to securities legislation are implemented to permit the carrying out of securities and derivatives related business within the advisor-owned corporation.