CIRO Considers its Options for Payment of Advisor Compensation to Unregistered Corporations

March 1, 2024

Currently, mutual fund dealers (outside Alberta) can pay compensation to a registered representative’s unregistered corporation subject to certain conditions. This approach is referred to as “directed commissions.” While we do not provide tax advice, it would seem from the many years that the topic of allowing advisors to “incorporate” has been discussed, that advisors favour the directed commission approach. CIRO is seeking comments by March 25th regarding three approaches discussed in a recent Position Paper – Policy options for leveling the advisor compensation playing field (link).

Option 1: Enhanced Directed Commissions

CIRO is concerned that unregistered corporations (“URs”) may undertake “registerable activities” under the current rules. CIRO could amend its rules to address this concern, subject to the usual CSA approval process to allow directed commissions to all Approved Persons. Amendments to provincial and territorial securities laws would not be required, making this option easily adoptable. At this stage, CIRO anticipates that ownership in URs would be limited to Approved Persons, immediate family members, or a family trust, restricting the activities of URs (perhaps only to other financial services) and requiring the sponsoring dealer to both verify compliance with any conditions and limitations and approve the activities undertaken by the UR before entering into such an arrangement. One might anticipate a mandated annual verification process.

Option 2: Incorporated Approved Person

This approach would see Approved Persons establishing “Incorporated Approved Persons” (“IAPs”), which would initially be limited to engaging in non-registerable activities.  CIRO could amend its rules to adopt this approach subject to the usual CSA approval process.  If securities legislation were amended, IAPs could engage in registerable activities, but this would likely take many years to accomplish on a pan-Canadian basis.  While CIRO would have jurisdiction over IAPs, this would impose additional requirements on CIRO in terms of oversight and on its registration staff.  Sponsoring dealers would also have compliance and oversight obligations with regard to IAPs.  CIRO lists several conditions that would apply, including:

1. IAPs would be incorporated in a Canadian jurisdiction and as a professional corporation where that option is available;

2. Ownership limitation applicable URs would apply;

3. All activities conducted by the IAPs must be in the name or trade name of the sponsoring dealer;

4. IAPs could only conduct activities for third parties who are licensed in the financial services industry; and

5. A CIRO-approved agreement be entered into by the Approved Person(s), the applicable IAP, and the sponsoring dealer.

CIRO’s Staff favour this approach as it provides direct jurisdiction over the activities of IAPs and the potential for IAPs to be permitted to conduct registerable activities, if and when, securities legislation is amended to allow the same. In the interim, other than CIRO having direct jurisdiction, it is unclear how the IAP approach is favourable to the Enhanced Direct Commissions approach from a dealer or Approved Person perspective.

Option 3: Registered Corporations

This approach is similar to the IAP approach if and when securities legislation was amended on a pan-Canadian approach to permit a corporation that is not a dealer to undertake registerable activities.  While numerous benefits flow from this approach, including possibly providing clients statutory rights concerning Registered Corporations and statutory restrictions on their activities, we anticipate that the need for legislative changes would push adoption well into the future if it could be accomplished at all.

A Registered Corporation’s sponsoring dealer would be responsible for the following:

1. Verifying the corporation’s ownership structure;

2. Obtaining background information on shareholders that were not Approved Persons;

3. Reviewing the business case in support of permitting shareholders that are not Approved Persons;

4. Approving the ownership structure and the activities to be conducted by CIRO and CSA requirements; and

5. Ensuring detrimental information of shareholders who are not Approved Persons is reported to CIRO and the CSA on an ongoing and prompt basis.

Next Steps:

CIRO requests general comments and comments with regard to three specific questions by March 25.  As CIRO’s decision on which approach to take will directly impact dealers and the resulting expectations of Approved Persons, we anticipate a large number of submissions.  We are here to assist you in making solid and persuasive arguments in favour of your preferred approach. 

Contact: info@northstarcompliance.com