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Registration & Compliance

Registration and Compliance

The New Insurance Rules for EMDs are Here

Published: 03/16/2010

By Peter A. Dunne, Brian P. Koscak

On March 28, 2010, every exempt market dealer (EMD) in Canada must have in place the minimum amount and type of insurance coverage as prescribed by National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103).

Prior to the creation of the EMD category under NI 31-103, there were no insurance requirements applicable to limited market dealers in Ontario and Newfoundland and Labrador. So this is new for all EMDs across Canada, whether mapped over from the former limited market dealer registration or new registrants altogether.

Every EMD should contact its insurance broker sufficiently in advance of the March 28 deadline to ensure that it has adequate coverage in place.

THIS ISSUE DESCRIBES THE INSURANCE REQUIREMENTS (BELOW). OUR NEXT ISSUE WILL DESCRIBE THE GROUP FINANCIAL INSTITUTION BOND INSURANCE PROGRAM ESTABLISHMENT BY THE EXEMPT MARKET DEALERS ASSOCIATION OF CANADA FOR ITS MEMBERS AND GIVE COST EXAMPLES IN VARIOUS SCENARIOS.

Overview of Prescribed Insurance for EMDs

EMDs must maintain bonding or insurance that contain the coverage clauses set out in Appendix A of NI 31-103, as summarized in the table below.

Type of Coverage Clause	Details
Fidelity	This clause insures against any loss through dishonest or fraudulent act of employees.
On Premises	This clause insures against any loss of money and securities or other property through robbery, burglary, theft, hold-up, or other fraudulent means, mysterious disappearance, damage or destruction while within any of the insured's offices, the offices of any banking institution or clearing house or within any recognized place of safe-deposit.
In Transit	This clause insures against any loss of money and securities or other property through robbery, burglary, theft, hold-up, misplacement, mysterious disappearance, damage or destruction, while in transit in the custody of any employee or any person acting as messenger except while in the mail or with a carrier for hire other than an armoured motor vehicle company.
Forgery or Alterations	This clause insures against any loss through forgery or alteration of any cheques, drafts, promissory notes or other written orders or directions to pay sums in money, excluding securities.
Securities	This clause insures against any loss through having purchased or acquired, sold or delivered, or extended any credit or acted upon securities or other written instruments which prove to have been forged, counterfeited, raised or altered, or lost or stolen, or through having guaranteed in writing or witnessed any signatures upon any transfers, assignments or other documents or written instruments.

The foregoing insurance clauses must provide for a "double aggregate limit" or a "full reinstatement of coverage," concepts we describe below.

A double aggregate limit means a policy that has a specified limit for each claim. The total amount that may be claimed during the coverage period is twice the limit. For example, if an EMD maintains a financial institution bond of $50,000 for each clause with a double aggregate limit, the EMD’s coverage is $50,000 for any one claim and $100,000 for all claims during the coverage period.

A full reinstatement of coverage means a policy that has a specified limit for each claim but no limit on the number of claims or losses during the coverage period. For example, if an EMD maintains a financial institution bond of $50,000 for each clause with a full reinstatement of coverage, the EMD’s maximum coverage is $50,000 for any one claim, but there is no limit on the total amount that can be claimed under the bond during the coverage period.

Amount of Insurance Coverage Required by EMDs under NI 31-103

An EMD must maintain bonding or insurance in respect of each clause set out in Appendix A of NI 31-103 (described above) in the highest of the following amounts for each clause:

$50,000 per employee, agent and dealing representative or $200,000, whichever is less;
1% of the total client assets that the EMD "holds or has access to" (defined below), as calculated using the EMD’s most recent financial records or $25,000,000, whichever is less;
1% of the EMD's total assets, as calculated using the EMD’s most recent financial records or $25,000,000, whichever is less;
the amount determined to be appropriate by a resolution of the EMD’s board of directors or individuals acting in a similar capacity.

A recent Canadian Securities Administrators (CSA) Staff Notice has clarified that the calculation above is based on the lesser of 1% of assets or $25 million (and not 1% of $25 million).¹

What does "hold or have access to" mean in connection with calculating an EMD’s total client assets?

An EMD will be considered to hold or have access to client assets if it does any of the following:

hold client securities or cash for any period;
accept funds from clients, for example, a cheque made payable to the EMD;
accept client money from a custodian, for example, client money that is deposited in the EMD’s bank or trust accounts before the EMD issues a cheque to the client;
have the ability to gain access to client assets;
have, in any capacity, legal ownership of, or access to, client funds or securities;
have the authority, such as under a power of attorney, to withdraw funds or securities from client accounts;
have authority to debit client accounts to pay bills other than investment management fees;
act as a trustee for clients, or
act as fund manager or general partner for investment funds.

What is the timing of the calculation of insurance requirements – when must a firm adjust its insurance?

The insurance provisions under NI 31-101 state that an EMD must "maintain" bonding or insurance in the amounts specified. The CSA does not expect that the calculation would differ materially from day-to-day. However, if there is a material change in an EMD's circumstances, it should consider the potential impact on its ability to meet its insurance requirements.²

Naming Other Insureds under the EMD's Insurance Policy

An EMD may not maintain bonding or insurance under NI 31-101 that benefits, or names as an insured, another person or company unless the bond provides, without regard to the claims, experience or any other factor referable to that other person or company, the following:

the EMD has the right to claim directly against the insurer in respect of losses, and any payment or satisfaction of those losses must be made directly to the EMD;
the individual or aggregate limits under the policy may only be affected by claims made by or on behalf of: (a) the EMD; or (b) a subsidiary of the EMD whose financial results are consolidated with those of the EMD.

Global Bonding or Insurance

An EMD may be covered under a global insurance policy. Under this type of policy, the EMD is insured under a parent company's policy that covers the parent and its subsidiaries or affiliates. EMD's should ensure that claims of other entities covered under a global insurance policy do not affect the limits or coverage applicable to the firm.

Requirement to Notify the Regulator of a Change, Claim or Cancellation

An EMD must, as soon as practicable, notify the regulator in writing of any change in, claim made under or cancellation of an insurance policy under NI 31-103.

OUR NEXT ISSUE WILL DESCRIBE THE GROUP FINANCIAL INSTITUTION BOND INSURANCE PROGRAM ESTABLISHMENT BY THE EXEMPT MARKET DEALERS ASSOCIATION OF CANADA FOR ITS MEMBERS AND GIVE COST EXAMPLES IN VARIOUS SCENARIOS.

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Brian Koscak is a Partner at Cassels Brock & Blackwell LLP and a director of the Exempt Market Dealers Association of Canada.

¹See CSA Staff Notice 31-103 – NI 31-103 Registration Requirements and Exemptions and Related Instruments – Frequently Asked Questions as of December 18, 2009.

²Again, see CSA Staff Notice 31-103 – NI 31-103 Registration Requirements and Exemptions and Related Instruments – Frequently Asked Questions as of December 18, 2009.