Referral Arrangements: Presentation for the Association of Canadian Compliance Professionals

1. Referral Arrangements:Presentation for the Association of Canadian Compliance Professionals Karen McGuinnessSenior Vice-PresidentMember Regulation, Compliance

2. Referral Arrangements NI 31-103 s13.7 Definitions: • Referral arrangement – any arrangement in which a registrant agrees to pay or receive a referral fee • Referral fee – any form of compensation, direct or indirect, paid for the referral of a client to or from a registrant • Client – includes a prospective client

3. Referral Arrangements Regulatory Requirements: • Written agreement between the parties • MFDA Member must record all fees • Receiving party is qualified/licensed • Prescribed disclosure is provided to clients: • Name of each party • Material terms of the agreement • Conflicts of interest • The fee or method of calculating the fee • Category of registration and description of registerable activity including a statement that all registerable activity is conducted by the Member • Any information that may be relevant to the client

4. MFDA Notices MFDA Staff Notices: • MSN-0043 – Referral Arrangements in Respect of Specific Securities • MSN-0071 – Referral Arrangements with Other Securities Registrants

5. Referral Arrangements per Member

6. Compliance and Supervision – Approval • Policies and procedures to require APs to obtain Member approval for referral arrangements and any changes • Consider including requirement to notify and obtain approval in agent agreement • Issues to consider when approving a referral to another party: • Background of other party • Respective roles and activities • Conflicts of interest • Compensation • Suitability • Advertising and sales communications • Disclosure

7. Compliance and Supervision – Approval Risk management considerations: • Risk of client confusion • Risk of complaints/litigation • Ability to supervise • Cost/benefit

8. Compliance and Supervision – Supervision • Annual Questionnaire • Approval and monitoring of websites • Branch reviews: • Client file reviews • AP interviews • Trend analysis – decrease in AUA • Trade reviews – Redemptions • Trade and business names • Portfolio Summaries • Complaints

9. MFDA Examination Findings • Member has not taken steps to identify referrals by APs • Member has no policies and procedures requiring approval of referral arrangements • AP has entered into referral arrangements directly • Disclosure not adequate to provide client with sufficient information on the fee or role of each party • No agreement in place • Agreement not clear on respective roles/compensation • Concerns with activities performed by each party • MSN-0043- referrals for specific securities • MSN-0071- referrals with other securities registrants • Concerns with compensation

10. OSC Examination Findings OSC Staff Notices 33-736 and 33-742: • PMs delegating KYC and suitability obligations to referral agents (including mutual fund dealing representatives and financial planners) • Advised their response to these issues will be more aggressive – suspension of registration • A client referred to a PM becomes a client of the PM for the purposes of the services provided under the referral arrangement and the PM must meet all its obligations towards its clients including KYC and suitability • Registerable activities include: • Ascertaining KYC • Recommending investment opportunities • Performing ongoing portfolio reviews

11. Questions ?