IIROC Registration The Fit and Proper Test for Approved Persons

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1 Administrative General Please distribute internally to: Legal and Compliance Registration Contact: Rossana Di Lieto Vice-President, Registrations and Complaints (416) June 26, 2009 IIROC Registration The Fit and Proper Test for Approved Persons The purpose of this notice is to set out: IIROC Registration Staff s approach when conducting suitability reviews for individuals seeking IIROC approval and/or registration under securities legislation in those jurisdictions where IIROC has been delegated statutory authority for individual registration by a securities commission. IIROC Registration Staff s approach in evaluating termination, regulatory, criminal, civil or financial disclosures filed on NRD with IIROC. Guidance on some best hiring practices that IIROC regulated firms may want to consider adopting. I. IIROC Registration Reviews (a) The Fit and Proper Test for Approved Persons Dealer Member Rule generally provides that an application for individual approval be approved unless the applicant is not qualified by reason of integrity, solvency, training or

2 experience or the approval is not in the public interest. 1 IIROC s approval regime is similar to the registration regime set out in securities legislation. 2 In any approval or registration application the question that IIROC Registration Staff must evaluate is whether an individual appears to be fit and proper for approval/registration and/or whether the individual s approval/registration is not in the public interest or objectionable as the case may be. There are three fundamental criteria for determining whether an individual is fit and proper for approval/registration: Integrity, which includes honesty and good faith, particularly in dealings with clients, and compliance with IIROC rules and securities laws; Financial solvency, which is considered relevant because it is an indicator of the risk that an individual will engage in self-interested activities at the expense of clients; and Competence, which includes prescribed proficiency and knowledge of the requirements of IIROC rules and securities law. Integrity In evaluating a person s integrity, IIROC Registration Staff will have regard to matters including, but not limited to: Whether the person has been convicted of any offence. Particular consideration will be given to offences of dishonesty, fraud, financial crime or an offence whether or not in Canada or other offences under legislation relating to securities, financial services, insolvency, insurance, and consumer protection, money laundering, market manipulation or insider trading. Whether the person has been the subject of any adverse finding or any settlement in civil proceedings, particularly in connection with investment or other financial business, misconduct, or fraud. 1 Dealer Member Rule 20.18(2) gives the District Council the authority (which it may delegate to a Subcommittee of the District Council) to (a) approve an application for approval or transfer subject to such conditions as may be considered just and appropriate; or (b) refuse an application for approval or transfer if in its opinion: (i) the applicant does not meet any requirements prescribed by IIROC rules or rulings; (ii) the rules and rulings of IIROC will not be complied with by the applicant; (iii) the applicant is not qualified for approval by reason of integrity, solvency, training or experience; or (iv) such approval is otherwise not in the public interest. 2 Securities legislation generally provides that unless it appears that an applicant is not suitable for registration or that the proposed registration is objectionable, registration shall be granted. 2

3 Whether the person has been the subject of any existing or previous investigation or disciplinary proceedings, by IIROC, other securities regulatory authorities, other selfregulatory organizations or government bodies or agencies. Whether the person is, or has been, the subject of any proceedings of a disciplinary or criminal nature, or has been notified of any potential proceedings or of any investigation which might lead to those proceedings; Whether the person has contravened any of the requirements and standards of the securities regulatory system or the equivalent standards or requirements of other regulatory authorities, professional bodies, or government bodies or agencies. Whether the person has been the subject of any complaints relating to regulated activities. Whether the person has been involved with a company, partnership or other organization that has been refused registration or approval, or has had that registration or approval terminated. Whether the person has been a director, partner, or concerned in the management, of a business that has gone into insolvency, liquidation or administration, while the person has been connected with that organization. Whether the person has been dismissed, or asked to resign and resigned, from employment. Whether the person has been the subject of an internal disciplinary action by a registered firm. Whether the person has ever been prohibited from acting as a director or officer of any issuer or registrant or has been ordered to resign one or more positions that the person holds as a director or officer of an issuer or registrant. Whether, in the past, the person has been candid and truthful in all his/her dealings with any regulatory body and whether the person demonstrates a readiness and willingness to comply with the requirements and standards of the regulatory system and with other legal, regulatory, and professional requirements and standards. IIROC Registration Staff treats each individual s application on a case-by-case basis, taking into account the seriousness of, and circumstances surrounding any matter that may impact the individual s suitability; the explanation provided by the individual; the passage of time since 3

4 the matter occurred and evidence of the individual s appreciation for the seriousness of the matter. Financial soundness In evaluating a person s financial soundness, IIROC Registration Staff will have regard to factors including, but not limited to: whether the person has been the subject of any judgment debt or award, in Canada or elsewhere, that remains outstanding or was not satisfied within a reasonable period; whether, in Canada or elsewhere, the person has made any arrangements with his creditors, filed for bankruptcy, had a bankruptcy petition served on him/her, or been adjudged bankrupt; whether the person has failed to meet a material financial obligation as it came due or has, or has had, any outstanding garnishment, unsatisfied judgments or directions to pay. Competence In evaluating a person s competence and capability, IIROC Registration Staff will have regard to matters including, but not limited to: Whether the person satisfies the relevant minimum IIROC proficiency requirements in relation to the activity the person performs or is intended to perform. Whether the person has demonstrated by experience and training that the person is able, or will be able if approved, to perform the activity. (b) Is the proposed approval or registration contrary to the public interest or objectionable? IIROC Dealer Member Rules and securities legislation generally draw a distinction between the determination of whether: an applicant is suitable for approval or registration; or the approval is not in the public interest (or the registration is objectionable in the case of securities legislation generally). 4

5 In considering whether an approval is not in the public interest or a registration is otherwise objectionable IIROC staff will have regard to the public interest mandate of securities regulators: to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets. In most cases, the determination of whether an approval or registration is not in the public interest or objectionable will coincide with the determination of whether it is also suitable based on the criteria set out above. However, IIROC Staff will also consider whether an approval or registration should be granted on broader public interest grounds, regardless of the determination of suitability. For example, where an individual seeking approval is currently employed with another registered firm IIROC Staff will consider whether the dual employment may have an impact on the individual s ability to discharge his/her regulatory responsibilities with the IIROC regulated firm. (c) IIROC regulatory response where fit and proper issues arise In cases where IIROC Staff have concerns about an individual s suitability we may recommend the imposition of terms and conditions on the individual s approval or registration or recommend refusal of an approval or registration. An individual will be given an opportunity to be heard before a decision is made to impose terms and conditions or refuse an approval or registration. IIROC no longer accepts voluntary supervision as an appropriate regulatory response where suitability issues arise. We have moved away from voluntary supervision in response to concerns expressed by some securities commissions and because the imposition of formal terms and conditions is more transparent to investors. Formal terms and conditions that are imposed on an approved/registered individual are generally disclosed on the web sites of various securities commissions across Canada. Such disclosure is intended to provide investors with access to more complete information about their investment advisers. We recognize the importance to firms of timely reviews and approvals by IIROC of individual applicants. IIROC Staff may require additional review time, however, in cases where we have concerns about an individual s fitness for approval/registration. Such reviews are ultimately in the best interest of investors and the industry itself. In order to facilitate our reviews it is important that firms provide timely and complete responses to questions raised by Staff. 5

6 II. Additional filings for disclosures affecting an individual s suitability Any approval or registration application (Form F4) or any notice filed by an existing approved or registered person that contains disclosure related to items 12 (Resignations and Terminations); 13 (Regulatory Disclosures); 14 (Criminal Disclosures); 15 (Civil Disclosure); or 16 (Financial Disclosure) will generally trigger an extensive review by IIROC Registration Staff as these items usually have an impact on an individual s suitability for approval or registration (or continued suitability for approval or registration). In these cases IIROC Staff will typically request that the individual provide a letter (signed by the sponsoring firm s current Chief Compliance Officer) that explains the circumstances leading up to these specific disclosure events. In cases where IIROC Staff have serious concerns about an individual s suitability, Staff will also request letters from the firm and the individual explaining why they believe the individual is suitable for approval/registration and why the firm supports the individual s application or continued approval/registration. Firms should expect that any approval or registration application that contains material disclosures that may impact on an individual s suitability will require additional review time by IIROC Staff. IIROC Staff may also ask the individual to provide the following additional supporting documentation to assist in our review of these disclosure items: Item 13 Form F4 Regulatory Disclosure This section pertains to disclosures under the following subsections of item 13 of the NRD form: 13.1.c - Refusal of registration by a securities regulatory authority 13.1.d - Exemption denied by a securities regulatory authority 13.1.e - Notice of Hearing by a securities regulatory authority 13.2.b - Refusal of approval by a self-regulatory organization 13.2.c - Notice of Hearing by a self-regulatory organization 13.3.c - Suspension or disciplinary action by a non securities regulator Supporting Documents that may be requested by IIROC Staff: Documentation issued by respective SRA/SRO/Non-Securities Regulator Item 14 Form F4 Criminal Disclosure Copy of the criminal charges Copy of the Release/bail conditions 6

7 Item 15 Form F4 Civil Disclosure Statement of Claim Statement of Defense (if filed) If statement of defense has not been filed, a letter of explanation from the registrant is required. Item 16 Form F4 Financial Disclosures Supporting documents for undischarged bankruptcy: Statement of Affairs and any other relevant supporting documentation Supporting documents for discharged bankruptcy: Copy of relevant supporting document(s) evidencing Discharge of Bankruptcy Supporting documents for unsatisfied consumer proposal/debt consolidation/garnishment/requirement to pay/debt obligations: Copy of relevant supporting document(s) evidencing nature of disclosure and detailing debt amount & repayment plan, if applicable Supporting documents for satisfied consumer proposal/debt consolidation/garnishment/requirement to pay Discharge documentation or document(s) evidencing debt has been satisfied To facilitate a timely consideration of an individual s approval or registration application we encourage firms to anticipate the need for the supporting documents and submissions discussed in this notice and to provide them to the IIROC lead jurisdiction as soon as practicable after the initial filing of the pertinent submission to regulators on NRD. IIROC Staff may ask for additional information or documents at any time during the review process. III. Sponsoring firm hiring due diligence A critical part of the hiring process in the securities industry is the background investigation of prospective personnel. For instance, background investigations can help member firms determine whether a prospective employee may present a regulatory risk for the firm and its clients. In addition to reviewing and discussing with an applicant his/her F4 and contacting the applicant's previous employers, IIROC Registration Staff recommend that firms consider the following as "best hiring practices": 7

8 (1) discuss with the applicant the nature of the applicant's prior clients and the types of securities sold while associated with prior sponsoring firms; (2) obtain from the applicant explanations regarding any customer complaints and regulatory actions to determine the merit, to the extent practicable, of each before hiring; (3) ask applicants about the existence of and nature of any pending proceedings, customer complaints, regulatory investigations, or civil litigation; and (4) involve compliance and legal staff, as appropriate, in the hiring process, and designate an individual (above the branch office manager level) or a committee to review for example the circumstances of previous terminations for cause, the applicant s customer complaint history, previous disciplinary actions, or outstanding regulatory or civil proceedings before hiring an individual with such a registration history. (5) review the applicant s registration file, including Notices of Termination filed by previous employers, using the Registration due diligence process described in IDA Member Regulation Notice We strongly encourage firms to more proactively consider the issues set out in this notice before hiring or promoting an individual and submitting an application for approval/registration. Questions Member firms may refer their questions to the following IIROC Registration Staff: Josette Nagel, Manager Registration (Vancouver) Tel: (604) jnagel@iiroc.ca Janice Briggs, Manager Registration (Calgary) Tel: (403) jbriggs@iiroc.ca Wendyanne D Silva, Director Registration (Toronto) Tel: (416) wdsilva@iiroc.ca 3 This guidance is based on a similar notice issued by the Financial Industry Regulatory Authority (FINRA) in November 2007 and NASD Notice to Members (April 1997). 8

9 Lucy Pacheco, Manager Registration (Toronto) Tel: (416) Laurie-Ann Gingras, Manager Registration (Montreal) Tel: (514)