Local Instrument 32-501
Deposit Agents to come into force on January 1, 2006
The Securities
Commission (Local Instrument) Amendment Regulations, 2005 (No. 2)
will
come into force on January 1, 2006. The regulations adopt Local
Instrument 32-501 Deposit Agents (“LI 32-501”). LI 32-501
regulators intermediaries who trade in guaranteed investment
certificates. It replaces the Deposit Agents rules that have been
in place since March 1993. LI 32-501 applies only in Saskatchewan.
Background to LI 32-501
Summary and
Discussion of LI 32-501
Summary of Comments
Received
Summary of Principal Changes
Authority for LI 32-501
Background to LI 32-501
The
Deposit Agent Rules
The Local
Instrument is intended to replace the Business Practice Rules set
out in the decision of the Commission dated March 18, 1993 (“the
Deposit Agent Rules” or “Rules”) that govern trades in GICs by
intermediaries referred to as deposit agents. The Commission
adopted the Deposit Agent Rules in response to the thefts of over $1
million by individuals purporting to collect money from investors
for the purchase of GICs and to transmit the money to financial
institutions. The Rules were developed with the intention of
minimizing the opportunity for fraud or theft by those acting as
deposit agents.
The Deposit
Agent Rules have been in place for over 10 years, and they have been
reasonably successful in reducing instances of fraud or theft by
deposit agents. However, the Commission is of the view that it is
time to replace the Deposit Agent Rules with the Local Instrument.
The Rules need to be updated and written in more clear language.
They should also be put on a more sound legal footing. The Rules
are guidelines, and if they are not complied with, it is difficult
to take direct enforcement action. In cases where an individual
deposit agent has misappropriated investors’ money, the Rules
provide no clear means of recourse for investors.
The provisions
in the Local Instrument are an attempt to remedy these
shortcomings. The Local Instrument requires a deposit agent to
register as a dealer and to be responsible for the actions of its
officials and salespersons. The Local Instrument also requires a
deposit agent to obtain insurance for losses resulting from the
dishonest or fraudulent acts of its officials, salespersons and
employees. Insurance coverage will provide the deposit agent with
the means of compensating investors who suffer loss from the
wrongful actions of its officials and salespersons. Because deposit
agents, their officials and salespersons are registered, the
enforcement provisions of the Act will apply.
Summary and Discussion
of LI 32-501
The purpose of the Local Instrument is to regulate intermediaries
who trade in guaranteed investment certificates.
The following is
a summary of the provisions of the Local Instrument:
·
Section 2 removes the GIC exemption for deposit agents, their
officials and their salespersons.
·
Section 3 prohibits anyone from acting:
o
as
a deposit agent unless they are registered as a dealer in the
category of deposit agent;
o
as
an official of a deposit agent unless they are registered as such;
and
o
as
a salesperson of a deposit agent unless they are registered as
such.
Section 3 also
prohibits individuals from acting as deposit agents.
·
Section 4 grants certain exemptions from the registration
requirement in section 3.
·
Section 5 prohibits an official of a deposit agent from acting as a
deposit agent on his own account or on behalf of any other deposit
agent.
·
Section 6 prohibits a salesperson of a deposit agent from acting as
a deposit agent on their own account or on behalf of any other
deposit agent.
·
Section 7 prohibits a deposit agent from engaging unregistered
salespersons or officials.
·
Section 8 prohibits agreements between deposit agents, officials and
salespersons that limit the liability of the deposit agent for the
actions of an official or salesperson.
·
Section 9 prescribes the form of application for registration as a
deposit agent, official or salesperson.
·
Section 10 exempts a deposit agent from the requirements in Part IV
Registration of The Securities Regulations except for
section 15 [prohibits interest in other registrants].
·
Section 11 requires a deposit agent to maintain insurance in the
form of a financial institution bond that covers specified losses.
·
Section 12 requires deposit agents to give notice when there is a
change of control of the deposit agent.
·
Section 13 requires deposit agents to maintain effective compliance
systems.
·
Section 14 requires deposit agents to report annually to the
Commission.
·
Section 15 requires a deposit agent’s officials and salespersons to
hold themselves out only under the name of the deposit agent when
they carry on deposit agent business.
·
Section 16 requires a deposit agent that operates a trust account to
annually file a report of an auditor on the operations of the trust
account.
·
Section 17 requires deposit agents to maintain books and records to
record their business transactions.
·
Section 18 imposes conditions on deposit agents who do not have a
place of business in Saskatchewan.
·
Section 19 requires deposit agents to complete an application form
when its officials or salespersons receive money from an investor
for investment in a GIC. The application form must contain
specified information, and be executed and distributed in a
specified way. The application form must be approved by the
financial institution with whom the money is invested.
·
Section 20 sets out the circumstances in which an official or
salesperson may sign an application form on behalf of an investor.
·
Section 21 sets out the manner in which officials and salespersons
may accept money from investors for investment in GICs.
·
Section 22 requires salespersons and officials to pay over all money
received for investment in a GIC to the deposit agent immediately
upon receipt for the money.
·
Section 23 prohibits a deposit agent, official or salesperson from
pooling money received from investors with money received from other
investors.
·
Section 24 provides that deposit agents, officials and salespersons
shall hold money they receive from investors in trust.
·
Section 25 specifies rules for how a deposit agent must operate its
trust account.
·
Section 26 specifies how a deposit agent must send money received
from investors to a financial institution.
·
Section 27 prohibits financial institutions from accepting money for
the purchase of GICs from deposit agents, officials or salespersons
unless they are registered.
·
Section 28 requires a financial institution to have a contract with
a deposit agent before its accepts money for investment in GICs from
the deposit agent. The section specifies provisions that the
agreement must contain.
·
Section 29 specifies the manner in which a financial institution
must make payment to investors for money due under GICs.
·
Section 30 requires financial institutions to send confirmation
notices to investors within 15 days of receiving an investor’s money
for investment in a GIC.
·
Section 31 requires financial institution to report certain events
to the Commission, including the names of new deposit agents, and
the names of terminating deposit agents.
·
Section 32 requires financial institutions to send annual reports to
the Commission.
·
Section 33 permits the Commission or Director to grant exemptions
from the Local Instrument.
Summary of Written
Comments Received
We received submissions from 31 commenters regarding LI 32-501. We
have considered all the comments received and thank all the
commenters. The names of the commenters are contained in
Schedule A
to this Notice.
A summary of the
comments we received, and our responses to those comments, is also
contained in Schedule A. Upon consideration of the comments, we
determined to incorporate a number of changes into LI 32-501. A
summary of the principal changes is set out below. The changes
are not significant enough to warrant a second publication for
comment pursuant to section 6 of The Securities Commission
(Regulation Procedures) Regulations.
Summary of Principal Changes
Clause 1(e) –
Interpretation
We amended the
definition of “financial institution” to include “an association to
which the Cooperative Credit Association Act (Canada)
applies”. We also included “an authorized foreign bank named in
Schedule III of the Bank Act (Canada)”.
We defined the
term “GIC exemption” to mean an exemption in Saskatchewan securities
laws from the registration requirement in section 27 of the Act to
trade in GICs, including (i) the exemption in clause 2.34(2) of
National Instrument 45-106 Prospectus and Registration Exemptions
and (ii) an exemption granted pursuant to a decision of the
Commission or Director.
Section 2 –
Exemption Removed - Replaced the reference to the registration
exemptions in clauses 39(2)(a)(iii), 39(2)(b) and (j) of the Act to
the new term “GIC exemption”.
Clause 4 –
Exemptions from registration
We replaced
“section 3” with “this Instrument” to clarify that none of the
requirements in the instrument apply to deposit agents who are
exempt from registration pursuant to section 4.
In clause 4(a)
we deleted the words “working in a branch”. This is to allow the
exemption to apply to banks selling GICs through a branch, on-line
and through telephone banking channels.
Section 11 –
Insurance
We amended
subsection (6) to add the requirement to file a certified copy of
the financial institution bond with the initial application for
registration.
We added new
subsection (10) that requires deposit agents to promptly notify the
Director of any claim that it makes under a financial institution
bond.
We also added
new subsection (11) to give the Director the discretion to accept
insurance that has coverage that is equivalent to the financial
institution bond requirement in section 11.
Clause 13(b) –
Compliance systems – We deleted “fairly and honestly” and
substituted “honestly fairly, and in good faith” to track related
provision in section 33.1 of the Act.
Section 14 –
Annual reporting requirement – We amended to remove the
requirement to file a report annually within three months after its
financial year end, and substitute a requirement to file a report
annually in compliance with Local Instrument 33-503 Permanent
Registration System. This is so that all registrants file their
annual reports on the same time cycle.
Clause 27(b) –
Dealing with registered entities – We added the words “unless
the official or salesperson is acting on behalf of the deposit
agents”. This is to clarify that a financial institution can accept
money from an official or salesperson where he or she is acting on
behalf of a registered deposit agent.
Section 31 –
Reporting to the Commission – We extended the reporting period
from five to ten days. Also in clause 31(a) we clarified that
requirement to file a preliminary report for a deposit agents
applies to the first time that a financial institution enters into
an agreement with a registered deposit agents pursuant to section
28. This is to limit clause 31(a) to new agreements entered into
with registered deposit agents.
Section 32 –
Annual reporting – We amended section 32 so that financial
institutions are required to file their annual reports by December
31st of each year, not within three months after their
financial year.
Authority for the Instrument
The Commission has the power to make regulations adopting the Local
Instrument pursuant to the following provisions:
·
Clause 154(1(a) of The Securities Act, 1988 (the “Act”)
authorizes the Commission to make regulations prescribing categories
of persons and companies and the manner of allocating persons and
companies to categories, including permitting the Director to make
those allocations.
·
Clause 154(1)(b) of the Act authorizes the Commission to make
regulations prescribing requirements respecting applications for
registration and the renewal, amendment, expiration or surrender of
registration and respecting suspension, cancellation or
reinstatement of registration.
·
Clause 154(1)(c) of the Act authorizes the Commission make
regulations to prescribing categories or sub-categories of
registrants, classifying registrants into categories or
sub-categories and prescribing the conditions of registration or
other requirements for registrants or any category or sub-category,
including:
(i)
standards of practice and business conduct of registrants in
dealing with their customers and clients and prospective customers
and clients;
(ii)
requirements that are advisable for the prevention or
regulation of conflicts of interest; and
(iii)
requirements with respect to membership in a self-regulatory
organization.
·
Clause 154(1)(d) of the Act authorizes the Commission to make
regulations requiring unregistered directors, partners, officers,
salespersons and employees of registrants to comply with all or any
requirements prescribed pursuant to clause (c).
·
Clause 154(1)(f) of the Act authorizes the Commission to make
regulations prescribing requirements respecting the disclosure or
furnishing of information to the public or the Commission by
registrants.
·
Clause 154(1)(h) of the Act authorizes the Commission to make
regulations prescribing requirements respecting books, records and
other documents that market participants shall keep, including the
form in which and the period for which the books, records and other
documents shall be kept.
·
Clause 154(1)(oo) of the Act authorizes the Commission to make
regulations exempting any person, company, trade or security from
all or any provision of this Act or the regulations, including
prescribing any terms or limitations on an exemption and requiring
compliance with those terms or limitations.
·
Clause 154(1)(qq) of the Act authorizes the Commission to make
regulations removing any exemption granted by this Act or the
regulations, including prescribing any conditions or restrictions on
removal of the exemption.
Dated September 6,
2005
Questions may be
referred to:
Dean Murrison
Deputy Director, Legal and Registration
(306) 787-5879
