Insurance Requirements for Dealers, Advisors and Investment Fund Managers

1. National Instrument 31-103:
Insurance Requirements for Dealers, Advisors
and Investment Fund Managers
Introduction Insurance Requirements
National Instrument 31-103 is scheduled to come into force It is important to note that, notwithstanding the Instrument,
September 28, 2009, subject to Ministerial approval. This current Mutual Fund Dealers Association (MFDA) and
Instrument is the result of four years of work on the part of Investment Industry Regulatory Organization of Canada
numerous Canadian regulators to “harmonize, streamline (IIROC) insurance regulations continue to apply to MFDA
and modernize” the country’s securities registration and IIROC registrants. Other registered firms are subject to
regime. The primary function of the Instrument is to create the Instrument’s new requirements. As stated earlier, those
a single set of registration rules to replace a myriad of new insurance requirements are set out in sections 12.3
requirements that had been developed under various (for dealers), 12.4 (for advisors) and 12.5 (for investment
Canadian regulatory and self-regulatory regimes. In order fund managers) of the Instrument. There are a number of
to clarify the types of persons, organizations and activities common elements for all registration categories:
that require registration, the Instrument introduces a
1. The Financial Institution Bond (FIB) that is purchased
new registration trigger based on “the business purpose”
must include insuring agreements for:
of the activity carried out by an individual or firm. As a
result, there are now three revised registration categories: - fidelity
Advisors, Dealers (including Exempt Market Dealers EMD) - on premises
and Investment Fund Managers (IFM). - in transit
- forgery or alteration
As part of the revamped registration regime, registrants - securities
are now subject to harmonized insurance requirements
based on their individual classification and circumstance. It is important to note that although the wording of FIBs is
These new requirements are substantially set out in sections thought to be standard, there are many instances where
12.3-12.5 of the Instrument. For many EMDs and IFMs the important provisions have been amended or added to
obligation to purchase insurance represents an additional; clarify and enhance coverage. A thorough discussion with
significant, and perhaps unwanted, operating expense. your insurance broker about these amendments is highly
Despite that fact, it would be beneficial for the majority recommended.
of EMDs and IFMs to understand the type of coverage 1. Limits under each insuring agreement vary, depending
that has been mandated, to ensure compliance with the on the classification of the registrant. Formulas to
Instrument and appropriate levels of protection. calculate the minimum limit for dealers are set out in
section 12.3 of the Instrument, whereas formulas for
advisers are contained in section 12.4. Investment
fund managers must comply with the provisions of
section 12.5 when determining limits for the mandated
insurance coverage.
2. For those entities that are, or need be, registered in
more than one category, the insurance limits will be the
highest of the limits outlined in the sections applicable
to those entities.
3. The FIB must provide for a double aggregate limit or full
reinstatement of coverage. In other words, the amount
of coverage available during the policy period is twice
the individual occurrence limit. For example, if there is
a $1 million per occurrence limit, the policy will pay a
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2. National Instrument 31-103: Insurance Requirements for Dealers, Advisors and Investment Fund Managers
maximum of $1 million per any one occurrence, and a Written By:
maximum of $2 million during the policy period. There
Brian Rosenbaum LL.B.
can be any combination of claims less than $1 million
Vice-President
each, as long as they are less than $2 million in the
Director, Legal and Research Practice
aggregate.
Aon Financial Services Group
4. The Instrument does not stipulate how much the FIB’s
deductible need be. However, it is important to note
that despite the fact a higher deductible may result
in a lower premium, it will impact on the amount
recoverable, should there be a claim, and could For more information
negatively influence the registrant’s available working
capital.
please contact:
5. The general deadline for compliance with the insurance National
provisions of the Instrument is six months from the date Brad Lorimer
on which the Instrument comes into force for firms that Senior Vice President,
were registered prior to that date. For investment fund National Director
managers or registered dealers or advisors acting as 416.868.2479
investment fund managers on the day the Instrument brad.lorimer@aon.ca
comes into force, the period to comply is one full
David A. Griffiths
year. In order to obtain the most advantageous
Senior Vice President
terms and conditions at favourable pricing levels, it is
National Consulting Director
recommended that new registrants act on placing the
416.868.5554
mandated insurance as soon as possible.
david.griffiths@aon.ca
6. There are organizations that may have more than one Ontario
entity that is required to purchase insurance under the Mark LeSauvage
Instrument. In that situation, the Instrument permits those Vice President
organizations to include multiple registered entities 416.868.5795
under one primary policy, as long as certain conditions mark.lesauvage@aon.ca
are met pursuant to section 12.6.
Québec
7. Scholarship plan or mutual fund dealers registered in Bernard Dupré
Quebec are exempt from the provisions of section 12.4 Vice President
8. The Instrument requires registrants to provide notification 514.840.7783
in writing as soon as practicable to the regulator, should bernard.dupre@aon.ca
coverage be changed or cancelled or should there
Prairies
be a claim made under the policy. This is different from
Kathleen Cook
MFDA and IIROC requirements, where provisions must
Prairie Region FSG Leader 403.267.7878
be included in the policy to obligate the insurer to notify
kathleen.cook@aon.ca
the regulator, should the policy be cancelled.
With the coming into force of the Instrument, many B.C.
investment fund managers and some exempt market Paul Lively
dealers will be required to purchase FIBs for the first time. Senior Vice President
The terms and conditions of FIBs are no longer standard 604.443.3353
and can be negotiated, as can pricing and retention paul.lively@aon.ca
levels. It is also vital that FIBs purchased by registrants
strictly comply with the insurance requirements under
the Instrument. It is therefore highly recommended that
new registrants seek out the counsel of an experienced
insurance professional to guide them through the
procurement and placement process.