BCO Registration Requirements PDF

Registration Requirements 3 CONTENT AREAS Sales Representatives Registration Process Qualification and Registration of Sales Representatives Specific Restrictions on Sales Representatives Investment I...

Registration Requirements 3 CONTENT AREAS Sales Representatives Registration Process Qualification and Registration of Sales Representatives Specific Restrictions on Sales Representatives Investment Industry Registration Categories Transfer of Registration Post-Registration Reporting and Compliance Responsibilities Continuing Education for Sales Representatives Monitoring Sales Representatives LEARNING OBJECTIVES 1 | Identify the initial qualification and registration requirements for sales representatives and ensure they are met. 2 | Identify the continuing registration requirements and ensure they are met. 3 | Monitor the continuing education of sales representatives. 4 | Make sure that internal branch control systems are in place for supervising and managing the registered sales staff. © CANADIAN SECURITIES INSTITUTE 3 2 BRANCH COMPLIANCE OFFICER’S COURSE KEY TERMS Key terms are defined in the glossary and appear in bold text when they first occur in the chapter. National Registration Database passport system notice of change © CANADIAN SECURITIES INSTITUTE  CHAPTER 3 REGISTRATION REQUIREMENTS 3 3 INTRODUCTION In this chapter, we examine the rules and responsibilities related to the qualification, training, registration, supervision, and termination of sales representatives at a mutual fund dealer. As branch compliance officer (BCO), you will have specific responsibilities intended to ensure compliance with the rules. Securities legislation sets out the conditions under which mutual fund dealer subsidiaries of banks, trust companies, credit unions, and insurance companies may sell proprietary and third-party mutual funds. One of the key principles is that only qualified and registered sales representatives may be involved in mutual funds sales activities (including the provision of advice about mutual funds that is incidental to the selling process). DID YOU KNOW? The term securities legislation refers to all provincial and territorial securities laws, regulations, and rules (including national Instruments, multi-lateral Instruments, and local policies), as well as the bylaws, rules, and policies of the MFDA. SALES REPRESENTATIVES REGISTRATION PROCESS After qualifying through the successful completion of a recognized mutual funds course, employees must become registered (or licensed in some provinces). To register, they must complete and submit the registration forms along with the appropriate registration fee (which varies by province). In general, you should follow the procedures recommended by your mutual fund dealer. You should forward all registration applications and notices of change to the regional compliance officer (RCO) or MFDA’s registration department, who will process and forward them to the securities regulator. Each dealer can have its own structures, processes, and procedures, as long as they comply with the applicable rules and regulations. At most financial institutions, the head office or human resources department carries out the recruitment and hiring process. Accordingly, it is unlikely that you, as BCO, will be directly responsible for this task. QUALIFICATION AND REGISTRATION OF SALES REPRESENTATIVES Only those employees registered as sales representatives may sell or even provide advice about mutual funds. Non-registered employees are prohibited from participating in selling activities or activities that are deemed to be in furtherance of a selling activity, such as providing advice or recommendations on mutual funds or the selling of mutual funds. Your branch duties will normally include assisting in the administration of the employee qualification and registration process. Employees who have met the qualification requirements may begin advising on and selling mutual funds only after they have received their registration and only while their registration is in good standing. SALES REPRESENTATIVES REGISTRATION REQUIREMENTS Before applying for registration as a dealing representative of a mutual fund dealer, individuals must meet the requirements set out in National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) and its companion policy, as follows: They must have successfully completed the examination (or examinations) of the following approved program of mutual fund courses: The Investment Funds in Canada Course administered by CSI Global Education Inc., © CANADIAN SECURITIES INSTITUTE 3 4 BRANCH COMPLIANCE OFFICER’S COURSE The Canadian Securities Course administered by CSI Global Education Inc., and The Canadian Investment Funds Course administered by IFSE Institute. Or, they must have earned a CFA Charter and completed 12 months of relevant investment management experience in the 36-month period before applying for registration. Or, they must have received the Canadian Investment Manager designation and have 48 months of relevant investment management experience, 12 months of which was in the 36-month period before applying for registration. REGISTRATION TIME LIMITS There is a limited period after having completed an approved examination or program in which to apply for a licence for the first time. Candidates must have passed the examination or successfully completed the program within 36 months before the date they applied for registration. If they passed the examination or completed the program more than 36 months before the date they applied for registration, they may still apply as long as they have been approved in the same registration category for any 12 months during the 36-month period before the application date. SALES REPRESENTATIVES REGISTRATION After the successful completion of one of the required programs, the candidate must become registered (or licensed, depending on the province) before beginning to sell mutual funds. In all provinces, sales representatives must apply for registration using the National Registration Database (NRD). The NRD is a web-based registration system designed by the Canadian Securities Administrators to harmonize, improve, and centralize the registration process. It must be used for all applications, renewals, and amendments to registrations with all provincial and territorial securities regulators. All dealers must use the NRD to transmit information pertaining to the registration of their registered salespersons, officers, and directors (referred to as “registrants”). New registrations and renewals must be sent electronically. Registration fees are submitted through the NRD system for each province and territory in which the registrant conducts business. Fees will vary. With the NRD, a single submission can be made electronically to all jurisdictions in Canada. With the implementation of NI 31-103, which came into effect on September 28, 2009, the so-called passport system was introduced. This system allows a dealer or salesperson to become registered in any province or territory by obtaining a decision from the securities regulator in their home province or territory and having that decision apply in all other jurisdictions. In addition, sales representatives must execute a document, commonly referred to as a Schedule G, in which they acknowledge that they are bound by the bylaws, rules, and regulations of MFDA and that they grant jurisdiction to the MFDA. The sales representative’s Schedule G does not have to be filed with the securities regulators or MFDA, but the mutual fund dealer must keep it on file. The RCO or securities regulator will notify the BCO when an employee has been registered. Employees are not to provide advice or sell mutual funds until notification of registration is received. The securities regulators have adopted the National Registration System in conjunction with the passport system, which makes it easier to become registered in more than one jurisdiction. When a candidate seeks registration in multiple jurisdictions, the principal regulator will consider whether the request should be granted, and the other regulators will accept the decision of the principal regulator. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3 REGISTRATION REQUIREMENTS 3 5 SPECIFIC RESTRICTIONS ON SALES REPRESENTATIVES After registration, the sales representative is subject to specific restrictions. In addition to the compliance and sales practice limitations (which are discussed later in this course), it is also forbidden for sales representatives of all provinces and territories in Canada except in British Columbia and Alberta, to advertise that they are registered with a securities commission or that a securities regulator has approved their qualifications. These restrictions are intended to ensure that the securities regulators are not seen as endorsing or otherwise supporting the activities or actions of a salesperson. Registration means only that the securities regulator has determined that the sales representative has met his or her registration requirements. Furthermore, registration certificates must not be displayed by the sales representative or the branches, although course completion certificates may be displayed. Sales representatives should be clearly identified within the branch when acting on behalf of the mutual fund dealer subsidiary. The use of nameplates and separate business cards is recommended. In addition, sales representatives may not engage in tied selling; in other words, they may not require that a client make a particular purchase or investment as a condition of purchasing another product or security or continuing to receive another service. As BCO, you are also responsible for ensuring that your sales representatives do not receive unauthorized sales incentives. Salary and other compensation details are determined at your head office. You are not allowed to introduce sales incentive plans (such as cash awards or prizes) at the branch level. Furthermore, you must make sure that your sales representatives do not enter into side arrangements with other employees in which they share incentives or rewards or enter into arrangements where compensation or other material benefits are paid for referrals. Sales representatives cannot directly receive sales commissions or other forms of compensation from mutual fund companies. All sales and trailer commissions and other forms of compensation must flow through the mutual fund dealer. A mutual fund company can provide promotional items (such as mugs or golf balls) or invite sales representatives to business promotion activities (such as sports events) as long as the items are not so valuable or the activities so frequent that they would cause a reasonable person to question whether the benefits have improperly influenced the advice the sales representatives are providing to their clients. There are also limitations on the portion of mutual fund dealer advertising that can be paid for by mutual fund companies. National Instrument 81-105– Mutual Fund Sales Practices Rule (NI 81-105) establishes standards of conduct that aim to minimize the conflicts of interest between the legitimate commercial goals of dealers and sales representatives in the industry and the fundamental obligations they owe to investors. Payments and other benefits that can be made by a mutual fund to a dealer and its sales representatives are described in NI 81-105. Generally, a mutual fund company (but not the mutual fund itself) can pay dealers sales commissions and trailing commissions as well as the costs of marketing and educational events within prescribed limits. A mutual fund company may also organize and present conferences or seminars for the sales representatives of mutual fund dealers as long as certain conditions are met. The promotional items and business promotion activities that a mutual fund company can provide to sales representatives are subject to certain restrictions, along with other sales practices such as commission rebates and financial assistance. As BCO, you should make sure your sales representatives understand that any such benefit provided by a mutual fund company must be approved by the head office. As well, remember that under no circumstances may a non-registered person, even one who has passed a mutual funds course, sell mutual funds or offer advice about them. All branch staff, both registered and non-registered, must strictly adhere to these restrictions. © CANADIAN SECURITIES INSTITUTE 3 6 BRANCH COMPLIANCE OFFICER’S COURSE INVESTMENT INDUSTRY REGISTRATION CATEGORIES Every investment dealer that sells securities in Canada must be registered with the regulator in every province in which they sell the securities. All officers and sales representatives employed by investment dealers must also be registered with the regulator of the appropriate province. The different categories of securities dealers and advisors are described below. CATEGORIES OF REGISTRATION FOR SECURITIES DEALERS Investment dealer A firm that offers various investment products such as shares and bonds, mutual funds, exchange-traded funds, limited partnerships, and exempt products. Mutual fund dealer A firm that only sells mutual funds – the category of firm registration that generally applies to you as the BCO and the mutual fund representatives under your supervision. Scholarship plan dealer A firm that pools contributions in a registered education savings fund to invest in a scholarship plan unit. Exempt market dealer A dealer that offers exempt products (i.e., products that can be sold to accredited investors without a prospectus). Accredited investors are individual or institutional investors who meet certain minimum requirements relating to income, net worth, or investment knowledge. Restricted dealer A specialized category that does not necessarily fit into any other category of registration. Portfolio manager A firm that provides advice, manages an investment portfolio, and buys and sells investments for clients on a discretionary basis. There is also a restricted portfolio manager category of registration which refers to the provision of specialized advice in a certain industry such as oil & gas or reals estate. Investment fund manager A firm that manages an investment fund. CATEGORIES OF REGISTRATION FOR INDIVIDUALS The different categories of registration for individuals are as follows: Dealing representative A person who buys or sells investment products on behalf of clients at their instruction. This is the category of registration that will generally apply to sales representatives – or mutual fund sales representatives – under your supervision as BCO. Advising representative A person who provides advice on investment products, manages investment portfolios according to client instructions, and makes decisions and trades on a client’s behalf. Advising representatives are sponsored by portfolio manager firms. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3 REGISTRATION REQUIREMENTS 3 7 Ultimate designated The chief executive officer of a registered firm who is responsible for the firm’s person overall compliance with securities law. Chief compliance officer A person who manages a registered firm’s day-to-day compliance with securities law. OUTSIDE ACTIVITIES Sales representatives under your supervision should also obtain prior your written permission or that of the RCO or head office of the mutual fund dealer before taking part in any of the following activities: Engaging in any business other than that of the mutual fund dealer Accepting employment or compensation from any person or organization other than the mutual fund dealer Serving as an officer, director, or partner of any business organization Sales representatives should not engage in any employment or business activity that might appear to put them in a conflict of interest with their duties at the mutual fund dealer. In addition, the mutual fund dealer may have certain policies and procedures regarding personal investment trading. Generally, conflict-of-interest matters will be addressed in the mutual fund dealer’s code of conduct. TRANSFER OF REGISTRATION If a sales representative of another registered mutual fund or securities dealer in your province is hired by your branch, their registration must be transferred to your dealer. To effect this transfer, you must use the appropriate forms to advise your RCO of the date their employment started at your branch, the branch location, and the name of their former employer. The transfer of registration is filed through the NRD, and the applicable registration fee is required. Under National Policy 11-204 – Process for Registration in Multiple Jurisdictions (NP 11-204), the passport system allows individuals and firms to register in more than one Canadian jurisdiction by dealing only with a principal regulator (rather than dealing separately with the securities regulatory body of each jurisdiction in which they want to register). The registration of a new employee who is not registered in your province or territory cannot be transferred. An application for registration with your dealer must be filed through the NRD, and the applicable registration fee must be paid. If an employee’s registration was suspended by a securities regulator or their previous employer, he or she may be required to submit a new registration application and complete the applicable proficiency courses again. The grace period between suspension and reinstatement varies from province to province. The completion of a proficiency course will only be recognized if the representative becomes registered within a certain period or if their registration lapses for less than a specific period. Typically, employees whose registration is suspended for three years or more must complete the required courses again. (Refer to the section Dealing Representatives’ Registration Requirements before applying for registration.) It is also expected that the sales representative will not engage in any activity that requires registration until their transfer of registration has been confirmed by the securities regulatory authorities. The RCO will inform you when the employee can begin selling mutual funds. © CANADIAN SECURITIES INSTITUTE 3 8 BRANCH COMPLIANCE OFFICER’S COURSE POST-REGISTRATION REPORTING AND COMPLIANCE RESPONSIBILITIES Once they are registered, dealing representatives’ registration status must be maintained if they wish to continue to sell mutual funds. Unless your head office handles registration requirements, you will be responsible as BCO for ensuring that they are fulfilled on an ongoing basis. Your duties in this regard will include filing notices of changes in information with the securities regulators, transferring registration, and terminating employee contracts. Continuing education (CE) requirements apply in each province and territory. MFDA expects all dealers to have a CE program in place to ensure that their registered salespersons regularly update their skills and knowledge. Continuing education requirements are outlined in further detail later in this chapter. Under NI 31-103, annual renewal of registration is not required, but fees must be paid every year to maintain registration. Registered individuals may carry on the activities for which they are registered until their registration is suspended, terminated, or surrendered. NOTICE OF CHANGE As BCO, you are responsible for ensuring that the information maintained by the securities regulator for each sales representative remains current. You must inform your RCO immediately of any material changes that affect a sales representative. You must prepare a notice of change and submit it to the RCO, who will then forward it to the provincial securities regulator. Material changes include any of the events described below: Terminations and The RCO should be informed of a termination or resignation immediately. Sales resignations representatives who leave the branch and transfer to another province are also considered terminations. In this case, a new registration application must be made to the securities regulator in the new province, unless the sales representative is already registered in that province. Provide the date of the termination or resignation and state the reasons. Branch transfers within Provide the date of transfer and give the name and location of the old and new the same mutual fund branches. dealer Change of address In Quebec, representatives must submit a change-of-address form when they change their home address. Change of name Provide the date of the change, proof of the change, and reasons for the change. A copy of a marriage certificate, if relevant, should be attached. Change in circumstances State the date and describe the event, such as personal bankruptcy. Criminal charge State the date and describe the charge. A notice of change is often prepared by the BCO and is typically submitted to the RCO or registration department. The RCO must then submit the notice through the NRD within five days of the change. Upon receiving notice of a change that relates to suitability for registration, such as a bankruptcy or criminal offence charge, some provincial and territorial regulators will require that paper documentation be submitted. Termination includes the transfer of a sales representative from one branch of a mutual fund dealer to another branch of the same dealer in another province or territory. In this case, a new registration application must be made to the securities regulator in the new province or territory (unless the sales representative is already registered © CANADIAN SECURITIES INSTITUTE  CHAPTER 3 REGISTRATION REQUIREMENTS 3 9 there). The BCO must immediately notify the RCO or registration department of any terminations or resignations. Upon termination, registration is suspended until the sales representative finds employment with another dealer. Failure to file a notice of change to the securities regulatory authorities within five business days may result in a fine of $100 per day or other sanctions and penalties (or both). As such, it is imperative that sales representatives be reminded to promptly notify you of any change. CONTINUING EDUCATION FOR SALES REPRESENTATIVES Education should not stop at the qualification and registration level. Although decisions to finance formal continuing education normally lie with your head office, your recommendations will be important. If your financial institution has an ongoing, optional educational program, you should encourage your sales representatives to participate. Strong and committed sales representatives should be apprised of the educational opportunities in investment finance, including CSI’s CE programs. Education is an ongoing process that can be both formal and informal. It is your responsibility to ensure that employees are kept up to date on all new products and procedures that are communicated to you by your head office. This informal education can take the form of weekly sales meetings in which you discuss changes and new developments. The purpose is to ensure that your sales representatives have enough knowledge to properly assess their clients’ needs and make appropriate recommendations. On a more formal basis, the MFDA requires that new sales representatives complete a training program within the first 90 days of registration. At a minimum, this program must cover the following topics: General knowledge, including an overview of the industry and the salesperson’s role Product knowledge Advising the client Administration, including internal systems and technology, processes and controls, and recordkeeping Sales processes Ethics and standards of conduct It is likely that CE requirements will become mandatory in the near future. In Quebec, the CE requirements for dealing representatives comprise 30 professional development units (PDUs) every two years. Ten of those PDUs deal with general subjects such as finance or economics; 10 deal with compliance with standards, ethics, or professional practice; and 10 relate to each sector for which the representative holds a certificate issued by the Autorité des marchés financiers (AMF). These requirements are administered by the Chambre de la sécurité financière. MFDA Policy No. 9 provides guidance to member firms on how to develop and document a training program for new registrants. MFDA Policy No. 1 establishes supervision requirements for all newly registered salespersons for a six-month period, commencing on the date of initial registration. During the first 90-day period, all new accounts must be approved by the BCO before any trading activity can occur in the account. All subsequent trading activity must be reviewed and signed off by the BCO no later than one business day following the trade date, and all leveraged trades where leverage was recommended by the salesperson must be reviewed by the BCO before trade execution. During the subsequent 90-day period, all new accounts must be approved by the BCO before or within one business day of any trading activity in the account. Each month, the BCO must review the greater of five individual files or 10% of all client files handled by the salesperson in the preceding month. The BCO must also conduct a daily review © CANADIAN SECURITIES INSTITUTE 3 10 BRANCH COMPLIANCE OFFICER’S COURSE of the greater of five separate trades or 10% of all trades conducted by the salesperson. All leveraged trades that were recommended by the salesperson must be reviewed by the BCO before they are executed. In addition to the requirements outlined in MFDA Policies, the mutual fund dealer may also have policies and procedures with respect to new accounts and trading and the ongoing supervision of client accounts. MONITORING SALES REPRESENTATIVES To ensure compliance with all issues related to managing the registered sales staff, you must ensure that no provision of advice or trading takes place before an employee is registered. Under no circumstances may a non- registered person, even if qualified, sell mutual funds or offer advice about them. You must make sure that all branch staff comply with these restrictions by scheduling regular meetings to discuss and review the functions of non-registered and registered staff. We suggest periodically circulating a memorandum that outlines allowable and prohibited functions for non-registered employees. A program for the regular monitoring and review of sales orders should be implemented. A system of random checks on sales orders should be established during which sales communications are reconstructed to verify that no non-registered employees were involved in the process. All sales representatives must maintain their registration status, and it may be your responsibility to ensure that these ongoing requirements are fulfilled. Obligations include renewal of registration, notice of material changes, and transfer of registration. One way to address this requirement is to maintain an employee logbook (either physical or electronic), in which the qualification and registration status of each employee is listed and kept up to date. You could maintain a monthly record with a tick-box beside the names of the sales representatives to indicate that you have reviewed their status with them. Note that any material changes, transfers, or changes in registration status must be communicated to the applicable securities regulator or regulators within five business days through the NRD. An important part of BCO supervision is the screening of incoming mail. This requirement is essential to the early detection of client problems and complaints. Equally important is the review of all outgoing correspondence, including email communications. Correspondence should be reviewed for accuracy and to ensure that registered staff are not holding themselves out in a capacity that could mislead clients regarding their qualifications or designations and their overall adherence to the mutual fund dealer’s professional communication standards. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3 REGISTRATION REQUIREMENTS 3 11 SUMMARY Now that you have completed this chapter, you should be able to meet the following learning objectives: 1. Identify the initial qualification and registration requirements for sales representatives and ensure they are met. Individuals must successfully complete the examination (or examinations) of one of the approved mutual fund courses to qualify to apply for registration as a dealing representative of a mutual fund dealer. After the successful completion of a qualified course, the candidate must apply for registration using the NRD. 2. Identify the continuing registration requirements and ensure they are met. The province of Quebec has specific CE requirements. « Quebec dealing representatives must meet CE requirements comprising 30 PDUs every two years (10 PDUs dealing with general subjects, 10 compliance PDUs, and 10 PDUs in each sector for which they hold a certificate issued by the AMF). The MFDA requires that new sales representatives complete a training program within the first 90 days of registration. Furthermore: « During the first 90 days of registration, all new accounts must be approved by the BCO before any trading activity takes place in the account. « During the subsequent 90-day period, all new accounts must be approved by the BCO prior to or within one business day of any trading activity in the account. After the 180-day period, MFDA expects that all dealers have a CE requirement or program in place. 3. Monitor the continuing education of sales representatives. It is the BCO’s responsibility to ensure that sales representatives are up to date on all changes and developments to ensure that they have sufficient knowledge to properly assess client needs and make appropriate recommendations to clients. 4. Identify the different types of individual and firm categories of registration and the investment products they can offer. Firm categories of registration include investment dealer, portfolio manager, exempt market dealer, mutual fund dealer, restricted portfolio manager, scholarship plan dealer, and investment fund manager. Individual categories of registration include dealing representative, advising representative, ultimate designated person, and chief compliance officer. 5. Make sure that internal branch control systems are in place for supervising and managing the registered sales staff. A program for the regular monitoring and review of sales orders should be in place and a system of random checks on sales orders should be established. It is the BCO’s responsibility to ensure that registration requirements are fulfilled. These include renewal of registration, notice of material changes, and transfer of registration. © CANADIAN SECURITIES INSTITUTE