The Federation of Canadian Independent Deposit Brokers Position Papers- June 26, 2002 Request for Comments on the Regulation of Deposit Agents Print Close

MSC NOTICE 2002-18
Request for Comments on the Regulation of Deposit Agents

We wish to thank the Manitoba Securities Commission for the opportunity to comment on its proposed Local Rule for the Regulation of Deposit Agents and we recognize and agree that some form of regulation either by the securities commission or through an SRO is necessary to both protect clients' money and preserve confidence in this method of intermediary deposit taking.

The Federation of Canadian Independent Deposit Brokers (FCIDB) is a national association that was formed in 1986 to address the common concerns of deposit brokers with respect to government legislative initiatives, financial institutions, client issues and the general state and direction of the deposit industry. From an initial membership of 14 deposit brokers the FCIDB has grown to include 76 different brokerage entities and 27 financial institutions with representation in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick and Newfoundland. For more complete information on our organization you can refer to our website at www.fcidb.com

The FCIDB on behalf of its members and the deposit industry has been involved with several past regulatory issues as well as the development of educational material for both its members and consumers. With respect to regulatory matters we have consulted with the Ontario Securities Commission regarding the Limited Market Dealer registration for deposit brokers, and the exclusion of GIC volumes from the assets under management calculation for members of the Mutual Fund Dealers Association who are also involved in deposit taking. We have put forward a policy paper to the Saskatchewan Securities Commission with respect to amendments made to its Securities Act in 1993 and also made a presentation to the House of Commons, Standing Committee on Finance in 1998 with respect to the Mackay Task Force "Report on the Future of Canada's Financial Service Sector". We have recently had discussions with Fintrac with respect to interpretation of its "Proceeds of Crime (Money Laundering) and Terrorist Financing " regulations.

From the standpoint of educational material the FCIDB has been working jointly with CDIC towards investor education and assisted in the development of their brochure entitled "Protecting Your Deposits".
We have also developed our own training manual "The Canadian Deposits Self-Study Course" which is administered on our behalf by IFIC to provide those new to the industry with a solid understanding about the products, services, legislation and regulations applicable to deposit brokers.

Our broker and institutional members are continually working together to strengthen our industry and protect both ourselves and consumers from those who would seek to commit fraud or any other illegal activity under the guise of a deposit broker. Recent discussions have focused on developing a timeline whereby all deposit business between brokers and financial institutions will be done exclusively on a "member to member" basis. Under this arrangement brokers would only place deposits with institutions which are members of the federation and likewise the institutions would only take deposits from member brokers. This is not meant to be a restrictive trade practice but rather a process by which all brokers must pass through a registration process to ensure conformity with the federation's guidelines, policies and code of ethics and thereby reduce the likelihood of any illegal activity. In conjunction with our member to member initiative we are presently undertaking a feasibility study with respect to becoming a national Self-Regulatory Organization. This process is in its infancy and has so far been limited to preliminary discussions amongst some of our members.

The FCIDB would like to continue an open dialogue with the Manitoba Securities Commission with respect to this notice and offer our assistance in the formulation of rules and policies based on our collective experience.

Our initial comments on MSC Notice 2002-18 are as follows:

Requirements

. "specific business practices be prohibited"

These practices aren't outlined and we assume this is meant to be a future use category. We do wish to note that at this time some deposit agent activity is done for client convenience and at the bequest of a client and any potential prohibited practice should be examined before it is enacted. For example many "new deposits" as opposed to rollovers are mailed to deposit agents or picked up by courier by the deposit agent as it is inconvenient (work schedules) or difficult (elderly or infirmity) for the client to attend an office. If the deposit agent signs the application is these cases on behalf of the client it would appear to be contrary to the proposal under the heading of "Receiving Investor Funds". We will elaborate on this issue with our comments under that heading

."annual reports be provided by deposit agents and financial institutions

Are these reports meant to be summaries of business conducted or are they to include financial statements?. If financial statements are to be included must they be audited ? Will the annual filing be based on a fiscal year end or will all deposit agents and institutions file annually at the same time? Given the nature of the existing deposit business there may be many deposit agents who do not have audited financial statements and sufficient lead time may be needed for them to meet this requirement.

Application & Licensing

Once a rule or regulation comes into force how will all existing deposit agents , especially those located outside of the province of Manitoba be notified in order that they can meet the 30-day application deadline? Will there be a time frame from the date of application by which all conditions must be met in order to continue to act as a deposit agent? Will the deposit agent be required to maintain an office in the province of Manitoba to carry on business with Manitoba residents? This situation may occur when a client moves to Manitoba but wishes to maintain an existing relationship with an out of province deposit agent to handle rollovers of maturing investments as well as new deposits. Will an out of province deposit agent require registration when placing deposits for clients from their own province with an institution that maintains its head office in Manitoba?

With respect to registration it may be less cumbersome to register only the deposit agent and its subagents with the commission and require that the partners, officers, directors and signatories of the deposit agent, as the case may be, ensure that all individuals accepting deposits from depositors are fit to do so. A subagent would be defined as any person other than an employee of the deposit agent who is contracted with the deposit agent to accept deposits but is not contracted separately with the financial institutions. The compliance function could be delegated to an authorized compliance officer for larger deposit agents. The individual registration of employees could be a huge burden on the commission and we feel that as long as the public can be assured that the deposit agent or the subagent is registered their potential concerns should be alleviated.

Is the term "surety bond" meant to be "Financial Institution Bond" ? How are the required amounts to be determined? We would suggest that a minimum standard amount be set for both errors and omissions insurance as well a Financial Bond and that the amount be increased based on various risk factors associated with the deposit agent such as: use of a trust account or the existence of several subagents.

We also feel that those seeking registration should meet minimum educational requirements and that new registrants should complete and pass "The Canadian Deposits Self Study Course" which we mentioned above. As we noted earlier our industry is moving towards member to member business and thus any potential applicant for registration as a deposit agent would have to meet the FCIDB guidelines before any institution would accept deposits from them. There are allowances within the FCIDB - Membership Information & Application guidelines to allow for provisional membership until all membership requirements are met. We will forward copies of these noted documents to you separately.

The notice does not indicate if there will be any exemptions from registration for deposit agents that are already members of the MFDA (IDA members appear to be exempt) We would recommend an exemption from registration for deposit agents that have met the registration requirements of the MFDA. For those, that have their MFDA registration out of province, we would recommend that they satisfy the Manitoba Securities Commission as to the existence of their registration and provide a list of the names and addresses of their officers, branch mangers, compliance officers and subagents.

OBLIGATIONS OF DEPOSIT AGENTS

Service Contract & Deposit Application

The service contract and deposit application carry a duplication of information and we suggest that all the necessary particulars can be included on the deposit application without the need for a separate document. The notice indicates that the standard application form must "contain an assertion that any funds received will be held in trust by the agent for the investor". This should only be the case where the deposit agent is actually using a trust account. In situations where a client cheque is deposited directly with the financial institution the agent does not receive the funds in trust and this wording should not apply.

The notice does not make any allowances for situations where a client is not able to sign the deposit application for new deposits. We noted earlier that physical attendance at the deposit agent office is often a hardship for many clients. Further discussion and suggestions regarding these situations are included below under the heading of "Receiving Investor Funds". There is no method for the financial institution to acknowledge the deposit on the application form at the time the deposit is made since it is not physically present. The financial institution acknowledgement currently comes by way of its certificate or confirmation several days or weeks later.

Many deposit agents have developed or are in the process of developing GIC applications that can be completed and forwarded to the agent and/or redirected to the financial institution over the internet. The notice does not include allowances for recent advances in electronic transmission of data and we suggest that these issues be addressed for inclusion in any final rule.

Receiving Investor Funds

The position of the FCIDB is that cash deposits should not be accepted from clients even when a trust account is in use. Many existing financial institution agent agreements already forbid agents from accepting cash.

The requirement for an investor to make a cheque, draft or money order payable to the financial institution receiving the deposit will prove to be inconvenient for many clients as well as put them at a disadvantage. The reason being that interest rates at any particular financial institution can fluctuate daily and as most clients want to receive the best rate available for their chosen term they often forward a cheque payable to themselves to the deposit agent. Accompanying the cheque is an instruction to the deposit agent to invest the funds with the financial institution that has the best rate for their chosen term on the date the deposit is to be made. This cheque is then treated the same way as a maturity cheque from a financial institution that is to be rolled over into a new deposit. A rubber stamp is placed on the reverse of the cheque indicating that it is to be deposited for credit to the payee at the chosen financial institution.

Many clients cannot attend the deposit agents office even for new investments and most agents have had to adapt their business practices to accommodate the needs of these individuals that are housebound or unable to leave their place of employment. The ability of deposit agents to meet these challenges and provide these individuals with access to a wide array of financial institutions is one of the reasons for the growth of the intermediary business. Clients prefer the convenience and flexibility that deposit agents provide.

We would suggest that the deposit agent be allowed to sign the application on the client's behalf for new investments as well as maturing deposits as long as a confirmation of the deposit details is mailed to the client within a reasonable time after the deposit completion. If there is a discrepancy between the deposit details and the client's wishes financial institutions have been willing to correct the details without penalty as long as they are notified in a timely fashion.

Authorized Officials (Subagents)

Our recommendation would be that subagents would have to be registered in a fashion similar to deposit agents in order that they receive the same scrutiny as the officials of the deposit agent. The individual registration information should include details similar to the application used for mutual fund registrants and be a sworn document. Attachments could include a police report, bank reference and freedom of information consent. Deposit agents do not have the ability to obtain information on subagents in the same manner as the securities commission and as the subagents will also be at separate business locations they will not be subject to the same close examination as employees of the deposit agent. In the interests of client protection we would support this type of verification as it is our belief that a stringent registration process is a good preventative measure against fraudulent activity . Our recommendation is that only the employees of the deposit agent or subagent would be exempt from registration.

Subagents should be permitted to deposit client cheques to the clearing accounts set up for each financial institution or to the deposit agent's trust account. Most deposit agents do not use trust accounts and in order to provide value for the subagent client on the date the funds are received and protect the interest rate the subagent will need the ability to deposit the client's funds to the institution's clearing account.

Trust Accounts

Our approach to trust accounts is that they should be the exception rather than the rule. There is too much potential for abuse with the use of trust accounts and only those deposit agents who have received authorization from the securities commission and the financial institutions with which they deal should be permitted to use them. For clients who wish to split deposits from a single maturity cheque many deposit agents would prefer to return the maturity cheque to the client and receive separate cheques for each intended new deposit. The FCIDB has always promoted the deposit of client funds directly to a clearing account set up by each deposit taking institution with one of the major banks. Deposit agents and subagents can only deposit client cheques to these accounts and have no facility to withdraw funds.

OBLIGATIONS OF FINANCIAL INSTITUTIONS

Written Agency Agreement

As noted above under the heading of "Authorized Officials", financial institutions should be permitted to accept deposits directly from subagents who use a clearing account facility set up for the financial institution at one of the major banks.

Confirmation Notice

We don't see the need for a separate confirmation notice and investment certificate to be sent by the financial institution to the investor since they would contain the exact same information. Many institutions have been forwarding the client copy of the investment confirmation directly to the agent for verification with the agent then mailing the confirmation to the client with their statement. We can understand the need for independent verification directly from the financial institution to the client however we feel that this matter should be discussed with the financial institutions as it will certainly increase their costs of doing business. Many institutions would also have difficulty meeting the two-week deadline for forwarding a confirmation notice.

WHERE RULE WILL NOT APPLY

The rule is not intended to apply to lawyers who are acting in a solicitor-client relationship where no commission is received for being a fiduciary. Our experience would suggest that there are many lawyers and accountants (are these included in the same fiduciary capacity as lawyers?) who have agent agreements with the financial institutions and are paid commissions for their deposit business. We would support a requirement for registration for legal and accounting firms that are receiving commission income for deposits placed on their client's behalf.

Thank you for allowing us to comment on this process and we look forward to a continuing dialogue with you in this regard. We will forward to you under separate cover related documents pertinent to the FCIDB which may be of interest to you.

Sincerely,

David J. Newman
President
Federation of Canadian Independent Deposit Brokers
3 Stollar Blvd
Barrie, Ontario. L4M 6N8