The CSA recently published CSA Staff Notice 31-347 Guidance for Portfolio Managers for Service Arrangements with IIROC Dealer Members (the Notice). The Notice provides guidance to registered portfolio managers (PMs) that enter into service arrangements with dealer members (DMs) of IIROC. The Notice establishes new expectations and may restrict a PM’s ability to continue to rely on a DM to satisfy certain of its client reporting requirements.

Under these so called Portfolio Manager - Dealer Member Service Arrangements (PMDSAs), a DM typically holds an investor's cash and securities (Investments) in an account over which a PM has discretionary trading authority, and executes and settles the investor's trades in the account based on instructions from the PM. The investor is thus a client of both the PM and the DM and each has a regulatory obligation to deliver statements of Investment positions and trades (Statements) to the shared client, as well as to maintain their own records of each client’s Investment positions and trades.

The regulator has identified six key points as guidance to help PMs and DMs with their approach to PMDSAs, some of which may come as a surprise to PMs (and, to the extent applicable, exempt market dealers):

  1. PMs must maintain their own records of its clients' Investment positions and trades, and may not rely on a DM's records as a substitute for its own records.
  2. PMs and DMs should have a written agreement on the arrangement, which includes the key terms, and the roles and responsibilities of the PM and DM.
  3. PMs are expected to provide written disclosure to their clients on the arrangement which summarizes its purpose and material terms, including the key services provided, and key obligations owed by the PM and DM to the client. (For existing clients, this must be provided no later than November 17, 2017.)
  4. PMs that hold any Investments for a client must prepare and deliver its own Statements to the client.
  5. If all of the Investments that a PM is authorized to trade for a client are held by a DM, the CSA are of the view that the PM may satisfy its Statement delivery obligations in NI 31-103 if the DM deliver Statements to the shared client (covering the same Investment positions and trades) that is compliant with the requirements in IIROC Dealer Member Rules, provided that the PM takes the appropriate steps outlined in this Notice to verify that the DM's Statement is complete, accurate and delivered on a timely basis.
  6. The discussion above applies to PMs for their PM Statement obligations when they have entered into a PMDSA. The CSA states that it does not deal with a PM's obligations to issue to its clients an annual report on charges and other compensation and an annual investment performance report, which came into effect on July 15, 2016. These reports should be issued by PMs under the PM firm's name.

This new Guidance reflects a significant departure from the safe-harbour published in OSC Staff Notice 33-745. We are surprised by the timing of its release as we expect that this guidance will require significant changes to (or plans in respect of) account reporting for many registered firms, including, in particular, the expectation that PMs must issue the report on charges and other compensation and the annual investment performance report under the PM firm’s name.