The IIROC rules industry players need to know about

As the national self-regulatory organization that oversees all investment dealers and trading activities on debt and equity marketplaces in the country, the Investment Industry Regulatory Organization of Canada (IIROC) sets and enforces rules regarding the proficiency, business and financial conduct of dealer firms and their registered employees, as well as integrity rules regarding trading activities on Canadian equity marketplaces.

Below are some of the IIROC rules that investment industry players need to know about:

Rule 2600 (Internal Control Policy Statements)
The CICA Handbook defines internal control as consisting of the policies and procedures established and maintained by the management to assist in achieving its objective of ensuring, as far as practical, the orderly and efficient conduct of the entity's business. The responsibility for ensuring adequate internal control is part of the management's overall responsibility for the day-to-day activities of the entity.

Rule 2600 has eight internal control policy statements: general matters, capital adequacy, insurance, segregation of clients’ securities, safekeeping of clients’ securities, safeguarding of securities and cash, pricing of securities, and derivative risk management. Under each statement, except for general matters, these sections can be found: control objective, minimum required firm policies and procedures, and indications that internal control is not adequate.

Cash Account Rule
The rule was designed to prevent dealer members from having poor credit practices, accepting orders to purchase securities from clients who may have no intention or ability to make a settlement in full, accepting undisclosed short sale orders, and carrying under-margined accounts under the guise of a cash account.

Under this rule, payment by a client in respect of any cash account transaction may be made by:

• cash or other immediately available funds
• the application of the proceeds of the sale of the same or other securities held long in any cash account of the client with the dealer member – provided that the equity (excluding all unsettled transactions) in such account exceeds the amount of the transaction
• the transfer of funds from a margin account of the client with the dealer member – provided that adequate margin is maintained in such account immediately before and after the transfer

Violations of the rule can be summarized in two types:

1. Failure to adopt practices that ensure cash account compliance standards are achieved
2. Trading done to avoid or artificially delay settlement

Rule 100 (Margin Requirements)
The rule states margin requirements for bonds, debentures, treasury bills and notes, bank paper, acceptable foreign bank paper, unhedged foreign exchange, the National Housing Act, stocks, units, mortgage-backed securities, precious metal certificates and bullion, interest rate swaps, total performance swaps, mutual funds.

Aside from these, the rule also includes the following sections:

• Bond margin and surcharge
• Offsets
• Underwriting
• Rights offerings
• Control blocks
• Commodity futures contracts and futures contract options
• Customer positions in options, futures and other equity-related derivatives
• Dealer members’ positions in options, futures and other equity-related derivatives
• Over-the-counter options
• Inventory
• Securities subject to redemption call or offer
• Guarantees
• Instalment receipts
• When issued trading of new and additional issues
• Concentration of securities
• Maximum margin required for convertible securities

Rule 1300 (Supervision of Accounts)
The rule has two main sections: (1) identity and creditworthiness, and (2) discretionary and managed accounts.

Under the section about identity and creditworthiness, there are clauses about business conduct, suitability determination required when accepting order, when recommendation is provided and for account positions held when certain events occur, suitability of investments in client accounts, exemptions from the suitability assessment requirements, and corporation approval.

Meanwhile, the section about discretionary and managed accounts defines these accounts in this way:

• Discretionary account – an account of a customer other than a managed account in respect of which a dealer member or any person acting on behalf of the dealer member exercises any discretionary authority in trading by or for such account

• Managed account – any account solicited by a dealer member in which the investment decisions are made on a continuing basis by the dealer member or any third party hired by the dealer member

Rules of Practice and Procedure
The rules of practice and procedure consist of five parts – general matters, enforcement proceedings, appeals, approval and exemption review hearings, and early warning proceedings – with a total of 28 rules under them. These rules, however, apply only to proceedings commenced before September 1, 2016 as, on that day, IIROC implemented new rules that consolidated existing rules relating to its enforcement, procedural, examination and approval activities.

New proceedings commenced on or after Sept. 1, 2016, are governed by the consolidated rules, which are relating to standards of conduct, enforcement investigation, enforcement proceedings, hearing committees, rules of practice and procedure, compliance examination approvals and regulatory supervision, regulatory review proceedings, and procedures for opportunity to be heard.

All the rules discussed here are meant to set high-quality regulatory and investment industry standards, protect investors and strengthen market integrity while maintaining efficient and competitive capital markets. For these reasons, following IIROC’s rules is a must for investment industry players.