Referral Arrangements: Presentation for the Association of Canadian Compliance Professionals Karen McGuinness Senior Vice-President Member Regulation, Compliance

1 Referral Arrangements NI 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

2 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

MFDA Notices MFDA Staff Notices: MSN-0043 – Referral Arrangements in Respect of Specific Securities MSN-0071 – Referral Arrangements with Other Securities Registrants 3

Referral Arrangements per Member 4

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 5

Compliance and Supervision – Approval Risk management considerations: Risk of client confusion Risk of complaints/litigation Ability to supervise Cost/benefit 6

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 7

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 referrals for specific securities  MSN referrals with other securities registrants Concerns with compensation 8

OSC Examination Findings OSC Staff Notices and : 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 9

Questions ? 10