A Practical Guide for Exempt Market Dealers

1. A Practical Guide for Exempt Market Dealers September 14, 2010

2. Your Panelists Brian Prill – Partner, McLean & Kerr LLP; President EMDA Ian Pember – Senior Vice President, Administration and Compliance, Hillsdale Investment Management Inc.; co-chair AIMA Canada Legal & Finance Committee David Gilkes – Vice President, Sutton Boyce Gilkes Regulatory Consulting Group; Director EMDA Marsha Gerhart – Counsel, Borden LadnerGervais LLP; Director EMDA

3. Today’s discussion • Discussion of practical issues facing EMDs • Overview • Filings – Sept. 28, 2010 Deadline • UDP, CCO and Permitted Individuals • Conduct and compliance requirements • Capital and insurance • Internal controls and compliance • Client relationships

4. What business can an EMD be in? • Prospectus exemptions • EMD’S may act as a dealer by trading in a security that is distributed under an exemption from the prospectus requirements • NI-45-106 has 41 prospectus exemptions • 18 are transactions an EMD could potentially act upon • Not restricted to accredited investors

5. Who doesn’t need to be registered as an EMD? “Northwestern” exemption Financial service providers cannot rely on exemption PM who trades in proprietary non-prospectus qualified investment funds to managed account International dealers 5

6. What you need to file Sept 28/2010 deadline Firm registration form 33-109F6 Existing EMD’s in Ontario & Newfoundland file in other applicable jurisdictions Firms in other jurisdictions acting as EMD’s file to complete registration Individual registration form 33-109F4 Dealing reps, UDP and CCO - registration Permitted individuals - information only Proficiency requirements for Dealing Reps and CCO 6

7. Ultimate designated person (UDP) Must be CEO of the company or the registerable business unit or sole proprietor Responsibilities Supervise activities of the firm directed to ensuring compliance by firm & individuals Promote culture of compliance Access to Board required at all times No prescribed proficiency requirements 7

8. Chief Compliance Officer (CCO) Must be officer or partner of the company or sole proprietor (CCO & UDP can be same person) Responsibilities Establish & maintain policies and procedures to ensure compliance of firm and individuals Report to UDP Access to and Annual Report to Board for purpose of assessing compliance by firm & individuals Proficiency – EMP or CSE plus the PDO 8

9. Who are Permitted Individuals? Individuals who are not registered and who: Are director, CEO, COO, CFO, (or perform those functions) or Have beneficial ownership, or control over, > 10% of voting securities of a firm Submit through NRD Form 33-109F4 within 7 days of appointment No proficiency requirements 9

10. What is your level of capital? Capital requirement Minimum required working capital is $50,000 Cannot be less than zero for 2 consecutive days – if less than zero notify regulator asap Working capital calculated on unconsolidated basis – Form 31-103F1 Basically current assets less current liabilities, with adjustments Warning! – If you are borderline this could require close monitoring 10

11. How’s your insurance? Maintain bond insurance with specified clauses & double aggregate limit Bond insurance – highest of Lesser of $50,000/employee or $200,000 Lesser of 1% of total client assets under management or $25mm Lesser of 1% of dealer assets or $25mm Amount as determined by directors 11

12. Financial reporting Capital requirement reporting Must file Form 31-103F1 annually with regulators within 90 days of year end Not need for EMDs to file interim financials or interim Form 31-103F1 12

13. And more Financial Reporting Annual financial statements Must be prepared in accordance with GAAP (IFRS effective Jan 1/2011) Standard audit opinion amended for non-consolidation if applicable Warning! – To control costs assess if there is any requirement for audited consolidated financial statements 13

14. Internal controls & compliance are important Internal controls & systems Do you have an adequate system of controls & supervision to meet regulatory requirements? Is your compliance system effective? Do your records achieve the desired regulatory outcome? 14

15. How do you create an effective compliance regime? Some considerations Determine resources available or required Establish a “Culture of Compliance” (“Tone at the top”) Understand the applicable rules and regulations Determine a framework for risk identification and assessment Determine the internal controls to be used to manage risks – includes accountabilities and responsibilities (who, when, how) Establish mechanisms for supervision and oversight (action and result) Management action in addressing matters Reporting and escalation 15

16. Develop an effective Risk Assessment Framework You cannot manage risks if they are not identified Identify the risks - Create a regulatory summary, tailored to your firm Consider law firm checklists as a start point Review regulatory commentaries or advisories Keep up on developments Categorize risks – e.g. reputational, operational, regulatory Assess potential impact – high, medium, low Determine response – accept, share, mitigate & who is responsible? 16

17. Client Relationships - Things you must tell your clients (in writing) Relationship disclosure information deliver to a client, before any advice given or security purchased or sold, all information that a reasonable investor would consider important about relationship (prescribed information) Then notify client on timely basis of any significant changes. 17

18. Do you know your client? KYC obligations Gatekeeper KYC Determine who is the client and who has responsibility for KYC & suitability Maintain a/c opening & client documentation and make reasonable efforts to keep current Suitability KYC Investment needs & objectives Investment knowledge & experience Risk tolerance Investment horizon Income level & net worth 18

19. Do you know your product? Essential for suitability Know features and risks Due diligence in selection of issuer KYP is proposed as an amendment to the overarching proficiency requirement in NI 31-103

20. Obligations differ for some clients “Permitted Client” Governments, banks & trust companies Other Cdn registrants and funds managed or advised by them Pension funds or wholly owned subs regulated by OSFI or province Individual with financial assets > $5mm Person or company with net assets > $25mm Permitted clients can waive certain requirements (in writing) Requirements N/A if client is registered firm, Cdn FI or Sched III bank 20

21. Conflicts of Interest – how will you respond? Conflicts of interest Identify all current & potential material conflicts to client in timely manner Avoid Respond Disclose Related issuer Restrictions on managed account transactions 21

22. Do you enter into referral arrangements? Referral arrangements “Referral fee” is any form of compensation paid for the referral of a client to or from a registrant “Referral arrangement” is any arrangement agreeing to pay or receive a fee Must be a written agreement between registrant & person or company making or receiving referral Registrant making referral must take reasonable steps to ensure that receiving company qualified, & registered if necessary, to provide services Referral arrangements Must disclose to client before account opening or any services 22

23. What happens when your client makes a complaint? Document & effectively & fairly respond to client complaints and have written policies and procedures in place By Sept 28/11 ensure an independent dispute resolution or mediation service is made available, at firm’s expense, to clients When a complaint is received the client must be informed asap how to contact the service. 23

24. Other things you must provide Trade confirmations & client statements EMD that has acted on behalf of client for purchase or sale of security must promptly deliver a written confirmation of the transaction with specified information EMD must deliver statement to client at least once every 3 months, or for month in which transaction occurs (monthly if requested by client) 24

25. A few things to remember Prohibition on lending, extending credit or margin to a client Any client assets held must be segregated and in trust for client 25

26. Looming deadlines Sept 28/2010 File Form 33-109F6 to register as EMD in all applicable jurisdictions Dealing representatives must meet proficiency requirements Meet capital requirements Relationship disclosure information to be delivered to all clients 26

27. Not so looming deadline Sept 28/2011 Independent dispute resolution or mediation service must be in place 27

28. Regulations to keep in mind NI 31-103 Registration Requirements NI 33-109 Registration Information Requirements NI 45-106 Prospectus and Registration Exemptions NI 81-102 Mutual Funds and NI 81-107 Independent Review Committee for Investment Funds NI 23-101 Trading Rules NI 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research Services 28