Introduction
Arrangements
Louis P. Piergeti
VP, IIROC
March 29, 2011
NI 31-103 Requirements
NI 31-103 internal control
requirement
ICB compliance
1. Functions outsourced by a securities registrant
must be set out in a written legally binding
contract
Yes
Prescribed type 1-4 written introduction
agreements required to be executed and subject to
IIROC approval.
2. Registrants remain responsible and accountable
for all functions outsourced to a service
provider
Yes
Introducer contractually retains the services of
the carrying broker.
No provision in the prescribed agreement
permitting introducer to subrogate compliance with
its regulatory responsibilities to customers.
Agreement provides for indemnities for errors or
omissions by either party.
Dispute resolution mechanism referenced in the
prescribed agreement to resolve commercial
disputes.
NI 31-103 Requirements
NI 31-103 internal control
requirement
ICB compliance
3. Arrangement must define all activities
outsourced and responsibilities of the parties
Yes
Responsibilities differentiated by specific type
1-4 introduction agreements and ancillary services
by supplementary schedules.
4. Registrant must conduct ongoing reviews of the
quality of outsourced services
Yes
Annual section 5970 audit report provided by
carrying broker provides introducing broker with
an assessment of adequacy of internal controls
over services outsourced.
5. Arrangement must establish precise service and
performance levels and how they will be
monitored
Yes.
Defined in the terms and conditions of the
prescribed type 1-4 agreements. All carrying
brokers agree to comply with IIROC rule
requirements on record keeping, settlement,
margining, segregation of securities, insurance
etc.
NI31-103 requirements (cont’d)
NI 31-103 internal control requirement
ICB compliance
6. Registrants must have the same access to the work
product of the third-party service provider as they
would if the Dealer Member itself performed the
activities.
Yes
Provision in the prescribed agreements require access
to work product information to both the registrant and
IIROC including by way of access to electronic
databases.
Supplementary schedule to the prescribed introduction
agreement references the work product information.
As both the Introducer and Carrying broker must be
Dealer Members of IIROC - IIROC retains full
jurisdiction over both entities and to access records
as required.
7. Auditor of the registrant must have the same access
to the work product of the third-party service
provider.
Yes
IIROC Rule 300 set out specific audit requirements that
include introduction arrangements.
8. Service provider must develop and test a business
continuity plan
Yes
As a rule requirement - all IIROC Dealer Members must
have in place and test BCP.
NI31-103 requirements (cont’d)
NI 31-103 internal control
requirement
ICB compliance
9. Agreement must cover termination and exit
process to allow for transfer of the service to
another service provider.
Yes.
Agreement includes provision for terminations
subject to IIROC approval.
10. Arrangement must consider other legal
requirements such as privacy laws
Yes
Supplementary schedules to prescribed
introduction agreement address PIPEDA
requirements.
11. Service provider must have safeguards in
place to keep information confidential
Yes
Undertaking provided by the Carrying Broker in
the agreement to refrain from using any
information for the purpose of solicitation of
business from clients of the Introducing Broker.
Considerations in the event of a EW, CD or
insolvency event of an introducer
•
Type 1 and 2 carrying broker lien on an introducer’s comfort deposit is
limited to customer credit risk exposure resulting from margin
requirements, including unsecured debits. In the event of an
insolvency of an introducer, the credit loss to the carrying broker may
exceed the introducer’s comfort deposit.
•
Type 3 and 4 introduction arrangements should include a clause in the
supplementary schedules to the prescribed agreement requiring the
introducer to promptly notify the carrying broker of material changes
in the financial status of the firm such as early warning and capital
deficiency occurrences.
•
IIROC will notify all type 1 and 2 carrying brokers of early warning
and capital deficiency occurrences and provide details of sanctions and
business restrictions imposed on the introducer.
•
IIROC will promptly notify all carrying brokers of membership
suspensions and appointment of trustee for insolvency.
•
The termination of all introduction agreements is subject to IIROC
approval. All carrying brokers must co-operate with suspension or court
orders that require continued service to introduced customer accounts.
This may include instructions to close inventory and customer open
contract positions, assign investment advisor to process customer
orders to liquidate positions or cover short positions, carrying out
customer instructions to transfer out.
•
Customer protection priority for IIROC and CIPF is to work towards a
successful bulk transfer of all customer accounts to another dealer as
expeditiously as possible in the event of an insolvency or permanent
Common deficiencies - Introducers
•
Failure to reclassify comfort deposit as non-allowable asset for
amounts representing margin lien by carrying broker to cover customer
margin requirements.
•
Failure to reclassify comfort deposit as non-allowable asset for
amounts unsecured customer debit balances.
•
Failure to provide inventory margin on securities processed through
average price inventory accounts assigned by carrying broker for “all
or none” customer trade orders.
•
Inadequate credit risk management policies and procedures and/or
failure to apply policies of the carrying broker to its customers.
•
Failure to perform independent price verification on inventory
holdings.
•
Lack of procedures in place to monitor performance of certain
outsourced functions such as monitoring of segregation of customer
fully paid and excess margin securities.
•
Failure to margin, report and/or reconcile trades jitnied with other
brokers.
•
Failure to report customer complaints on Comset.
Common deficiencies - Carriers
•
Differing standards of due diligence work and risk assessment of
prospective introducing clients.
•
Inadequate policies and procedures to monitor and/or restrict
introducer (type 1-3) customer and inventory funding requirements.
•
Inadequate credit risk policies and procedures applied to type 1 and
introducing customers.
•
Failure to promptly notify introducer - in writing - of lien on comfort
deposit taken to offset introducer customer margin requirements
(including unsecured balances).
•
Failure to provide appropriate customer margin for guaranteed fill
customer trade orders processed though inventory accounts assigned to
introducer for average price accumulation and client trade ticketing.
•
Failure to provide annual section 5970 report to introducer and its
auditors.
•
Failure by auditors of carrying broker to include type 1 and 2 customer
accounts in year-end confirmation process.