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Table of Contents | Rule 1 | Rule 2 | Rule 4 | Rule 5
| Related Policy |
MFDA Policy No. 4 – Internal Control Policy Statements (issued December 13, 2005) |
| 3.1.1 |
Minimum Levels. |
|
(a) |
Each Member shall have and maintain at all times risk adjusted capital greater than zero, and minimum capital in the amounts referred to below for the Level in which the Member is designated, as calculated in accordance with Form 1 and with such requirements as the Corporation may from time to time prescribe:
| Level 1 |
$25,000 for a Member which is an introducing dealer and which satisfies the requirements of Rule 1.1.6(a) and (b), is not a Level 2, 3 or 4 Member and is not otherwise registered in any other category of registration under securities legislation. |
| Level 2 |
$50,000 for a Member which does not hold client cash, securities or other property. |
| Level 3 |
$75,000 for a Member which does not hold client securities or other property, except client cash in a trust account. |
| Level 4 |
$200,000, for any other Member, including a Member which acts as a carrying dealer in accordance with Rule 1.1.6. |
For the purposes of the By-laws, Rules, Policies and Forms, a Member which is required to maintain minimum capital at an amount referred to above is referred to as a Level 1, 2, 3 or 4 Dealer or Member, as the case may be. |
|
(b) |
Notwithstanding the provisions of paragraph (a), a Member that is registered as an investment fund manager under securities legislation and is a Level 2 or 3 Dealer must maintain minimum capital of at least $100,000. |
| Related Notice |
MR-0001 – Transition Periods (Replaced by MR-0026) (issued March 16, 2001)
MR-0003 – Introducing/Carrying Dealer Arrangements (issued March 16, 2001)
MR-0005 – Financial Questionnaire and Report – Related Transition Periods (issued March 16, 2001) |
| Related Bulletins |
#0007-C – Transition Period for Minimum Capital (issued February 18, 2003)
#0055-C – Expiration of Transition Periods for Minimum Capital, Financial Reporting Requirements of Members and Early Warning Requirements (issued February 9, 2004)
#0057-C – Common Errors in Financial Filings and Frequently asked Questions (issued February 9, 2004)
#0458-P – Amendments to MFDA By-law No. 1, Rules and Form 1 - Financial Questionnaire and Report (issued December 3, 2010)
#0462-P – Amendments to MFDA Rule 3.1.1 (Capital – Minimum Levels) and Form 1 – Financial Questionnaire and Report (issued January 21, 2011) |
| 3.1.2 |
Notice. If at any time the risk adjusted capital of a Member is, to the knowledge of the Member, less than zero, the Member shall immediately notify the Corporation. |
| 3.2 |
CAPITAL AND MARGIN |
| 3.2.1 |
Client Lending and Margin. No Member or Approved Person shall lend or extend credit to a client or permit the purchase of securities by a client on margin, except as provided for in Rule 3.2.3. |
| History |
Bulletin #0050-M – Amendments to MFDA Rules and Policy No. 3 (Handling Client Complaints) (issued February 3, 2004) |
| Related Notice |
MR-0047 – Personal Financial Dealings With Clients (issued October 3, 2005) |
| 3.2.2 |
Member Capital. |
|
(a) |
Each Member shall maintain capital in respect of its firm business in accordance with the requirements set out in Form 1. |
|
(b) |
Each Member shall at all times maintain positive total financial statement capital as calculated in accordance with the requirements set out in Form 1. |
| History |
Bulletin #0240-P – Amendments to MFDA Rule 3.2.2 (Member Capital) and 3.2.5 (Notice Regarding Accelerated Payment of Long Term Debt) (issued December 8, 2006) |
| Notices |
MR-0013 – Undertaking Regarding Retractable Preferred Shares (issued July 12, 2002) |
| Bulletins |
#0033-M – Amendments to Subordinated Loans (issued September 24, 2003)
|
| 3.2.3 |
Advancing Mutual Fund Redemption Proceeds. No Member shall advance funds or extend credit to or on behalf of a client, directly or indirectly, in connection with the receipt of funds on the redemption of mutual fund securities unless: |
|
(a) |
the Member has received prior confirmation of the redemption order from the issuer of the securities; |
|
(b) |
the redemption proceeds to be received (excluding any fees or commissions) are equal to or greater than the amount of funds or credit to be provided; |
|
(c) |
the client has authorized payment to and retention by the Member of redemption proceeds; |
|
(d) |
the Member maintains a copy of the confirmation of the redemption order and the client's authorization; and |
|
(e) |
the Member is designated as being in Level 2, 3 or 4 for the purposes of Rule 3.1.1. |
| 3.2.4 |
Related Member Guarantees |
|
(a) |
Each Member shall be responsible for and shall guarantee the obligations to clients incurred by each of its related Members (as defined in By-law 1), and each related Member shall be responsible for and shall guarantee the obligations of the Member to its clients on the following basis: |
|
|
(i) |
where a Member holds an ownership interest in a related Member, the Member shall provide a guarantee in an amount equal to 100% of the Member's total financial statement capital (as determined in accordance with Form 1); |
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(ii) |
where a Member holds an ownership interest in a related Member, the related Member shall provide a guarantee of the Member in an amount equal to the percentage of the related Member’s total financial statement capital (as determined in accordance with Form 1) that corresponds to the percentage of ownership interest the Member holds in the related Member; and |
|
|
(iii) |
where two related Members are related because of a common ownership interest held by the same person(s), each related Member shall provide a guarantee of the other in an amount equal to the percentage of its total financial statement capital (as determined in accordance with Form 1) that corresponds to the percentage ownership interest held by the person(s) who holds the common ownership interest. |
|
(b) |
A guarantee shall not be required at all or in the amount prescribed in accordance with Rule 3.2.4(a) where the Corporation in its discretion determines that a guarantee is not appropriate. |
|
(c) |
A guarantee shall be required in such greater or lesser amount as prescribed in Rule 3.2.4(a) where the Corporation in its discretion determines that such greater or lesser guarantee amount is appropriate. |
|
(d) |
A guarantee required pursuant to this Rule 3.2.4 shall be in the form prescribed from time to time by the Corporation. |
| Related Notices |
MR-0001 – Transition Periods (Replaced by MR-0026) (issued March 16, 2001)
MR-0026 – Transition Periods (issued February 27, 2004)
MR-0050 – Related Member Guarantees (issued December 22, 2005) |
| 3.2.5 |
Notice Regarding Accelerated Payment of Long Term Debt. Each Member shall immediately notify the Corporation of any request or demand by a creditor for accelerated payments or any other payments in addition to those specified under the agreed regular repayment schedule with respect to contingent and long term liabilities owed by the Member. |
| History |
Bulletin #0240-P – Amendments to MFDA Rule 3.2.2 (Member Capital) and 3.2.5 (Notice Regarding Accelerated Payment of Long Term Debt) (issued December 8, 2006) |
| 3.3 |
SEGREGATION OF CLIENT PROPERTY |
| Related Policy |
MFDA Policy No. 4 – Internal Control Policy Statements (issued December 13, 2005) |
| Related Notices |
MR-0051 – Capital Provisions for Unresolved Differences in Nominee Name Assets (issued December 22, 2005)
MR-0058 – Acceptable Securities Locations (issued December 14, 2006)
|
| Related Bulletins |
#0250-M – Member Regulation Notice MR-0058 (Acceptable Securities Locations) (issued March 14, 2007)
#0263-C – Member Regulation Notice MR-0051 (Capital Provisions for Unresolved Differences in Nominee Name Assets) (issued June 4, 2007) |
| 3.3.1 |
General. Each Member that holds cash, securities or other property of its clients shall hold such cash, securities or property separate and apart from its own property and in trust for its clients in accordance with this Rule 3.3. |
| 3.3.2 |
Cash |
|
(a) |
Trust Account. All cash held by a Member on behalf of clients shall be held separate and apart from the property of the Member in a designated trust account with a financial institution (which is an acceptable institution for the purposes of Form 1). |
|
(b) |
Determination. Each Member shall determine on a daily basis the amount of cash it holds for clients and that is required to be held in segregation pursuant to this Rule 3.3. |
|
(c) |
Deficiency. In the event of a deficiency in the amount of cash required to be held in trust for a client, the Member shall immediately provide from its own funds an amount necessary to correct the deficiency and any unsatisfied obligation to do so shall be immediately charged to the capital of the Member. |
|
(d) |
Notice to Institution. The Member must advise the financial institution in writing that: |
|
|
(i) |
the account is established for the purpose of holding client funds in trust and the account shall be designated as a "trust account"; |
|
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(ii) |
money may not be withdrawn, including by way of electronic transfer, by any person other than authorized employees of the Member; and |
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(iii) |
the money held in trust may not be used to cover shortfalls in any other accounts of the Member. |
|
(e) |
Commingling. The Member shall not commingle money for mutual fund transactions with money held in trust for the purchase or sale of other securities or financial products (such as deposit instruments or segregated funds). The Member must maintain separate accounts, which may be designated as trust accounts, for the purchase and sale of such other securities or financial products. |
|
(f) |
Interest Bearing. The trust account bears interest at rates equivalent to comparable accounts of the financial institution. |
|
(g) |
Use of Funds. The Member shall not use any money received for the investment of mutual funds or other securities to finance its own operations. |
|
(h) |
Distributions. The Member must have a system in place to properly distribute on a cash basis interest earned in the mutual fund trust account to either the mutual fund companies for reinvestment or to clients directly. |
| Related Bulletins |
#0056-C – Common Deficiencies Noted During On-site Examinations of Members (issued February 9, 2004)
#0183-C – Second Round of Compliance Examinations (issued January 27, 2006)
#0206-P – Exemptive Relief from MFDA Rule 3.2.2(e) (Commingling Prohibition) (issued July 10, 2006)
#0208-P – Exemptive Relief from MFDA Rule 3.3.2(e) (Commingling Prohibition) (issued July 14, 2006)
#0438-P – Proposed Amendments to MFDA Rule 3.3.2 (Segregation of Client Property – Cash) (issued June 28, 2010)
#0458-P – Amendments to MFDA By-law No. 1, Rules and Form 1 - Financial Questionnaire and Report (issued December 3, 2010) |
| 3.3.3 |
Securities |
|
(a) |
Internal Locations. For the purposes of Rule 3.3.1, a Member may hold securities or other investment products within the physical possession or control of the Member segregated and held in trust for clients of the Member, provided that all internal storage locations are designated in the Member's ledger of accounts and the Member has adequate internal accounting controls and systems for safeguarding of securities held for clients. |
|
(b) |
External Locations. For the purposes of Rule 3.3.1, securities or other investment products held beyond the physical possession of the Member must be segregated and held in trust for clients of a Member, or segregated and held by or for a Member, as the case may be, in acceptable securities locations, provided that the written terms upon which such securities or other investment products are deposited and held beyond the physical possession of the Member include provisions to the effect that: |
|
|
(i) |
no use or disposition of the securities or products shall be made without the prior written consent of the Member; |
|
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(ii) |
certificates representing the securities or products can be delivered to the Member promptly on demand or, where certificates are not available and the securities are represented by book entry at the location, the securities or products can be transferred either from the location or to another person at the location promptly on demand; and |
|
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(iii) |
the securities or products are held in segregation for the Member or its clients free and clear of any charge, lien, claim or encumbrance of any kind in favour of the depository or institution holding such securities or products. |
|
(c) |
Bulk Segregation. A Member, which holds securities or property of clients in segregation in accordance with Rule 3.3.1 may hold securities or property in bulk segregation provided that the Member identifies in its records the amount and kind of each security or property held for each client. The Member shall determine, for all accounts of each client the market value and number of all securities to be held for the client. |
|
(d) |
General Restrictions. In complying with its obligation to segregate client securities in accordance with Rule 3.3.1, each Member shall ensure that: |
|
|
(i) |
a segregation deficiency is not knowingly created or increased; and |
|
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(ii) |
all securities of clients received by the Member are segregated. |
|
(e) |
Correction of Segregation Deficiencies. In the event that a segregation deficiency exists, the Member shall expeditiously take the most appropriate action required to settle the segregation deficiency. If for any reason the deficiency has not been settled within 30 days of being discovered, the Member shall immediately purchase the securities or property for the account of the client. |
| Related Notice |
MR-0063 – Extension to Effective Date of Acceptable Securities Locations Requirement (issued June 18, 2007) |
| Related Bulletins |
#0183-C – Second Round of Compliance Examinations (issued January 27, 2006)
#0250-M – Member Regulation Notice MR-0058 (Acceptable Securities Locations) (issued March 14, 2007) |
| History |
Bulletin #0093-P – Amendment to MFDA Rule 3.4.4 (Early Warning – Duration) (issued August 20, 2004) |
| Related Notices |
MR-0001 – Transition Periods (Replaced by MR-0026) (issued March 16, 2001)
MR-0005 – Financial Questionnaire and Report – Related Transition Periods (issued March 16, 2001)
MR-0018 – Extension of Certain Transition Periods (issued April 17, 2003) |
| Related Bulletins |
#0055-C – Expiration of Transition Periods for Minimum Capital, Financial Reporting Requirements of Members and Early Warning Requirements (issued February 9, 2004)
#0082-M – Notice of Material Changes to Membership Information (issued June 1, 2004) |
| 3.4.1 |
Definitions. The terms and definitions used in this Rule 3.4 shall have the same meanings as used in Form 1, unless otherwise defined in the By-laws or Rules or the context requires. |
| 3.4.2 |
(a) |
Designation. A Member shall be designated in early warning according to its capital, profitability and liquidity position from time to time and frequency of designation or at the discretion of Corporation as provided in this Rule 3.4 if at any time: |
|
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(i) |
Capital
Its risk adjusted capital is less than zero; or |
|
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(ii) |
Liquidity
Its early warning excess is less than zero; or |
|
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(iii) |
Profitability
Its risk adjusted capital at the time of calculation is less than the net loss (before bonuses, income taxes and extraordinary items) for the most recent quarter. |
|
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(iv) |
Frequency
It has been designated in early warning more than two times in the preceding twelve months. |
|
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(v) |
Discretionary
The condition of the Member, in the sole discretion of the Corporation, is not satisfactory for any reason including, without limitation, financial or operating difficulties, problems arising from record keeping conversion or significant changes in clearing methods, the fact that the Member is a new Member or the Member has been late in any filing or reporting required pursuant to the By-laws and Rules. |
|
(b) |
Requirements. If a Member is designated in early warning then, notwithstanding the provisions of any By-law or Rule, the following provisions shall apply: |
|
|
(i) |
the chief executive officer and chief financial officer of the Member shall immediately deliver to the Corporation a letter containing the following:
| (A) |
advice of the fact that any of the circumstances in Rule 3.4.2 are applicable, |
| (B) |
an outline of the problems associated with the circumstances referred to in (A), |
| (C) |
an outline of the proposal of the Member to rectify the problems identified, and |
| (D) |
an acknowledgement that the Member is in early warning category and that the restrictions contained in Rule 3.4.2(b)(iv) apply, |
a copy of which letter shall be provided to the Member's auditor;
|
|
|
(ii) |
the Corporation shall immediately designate the Member as being in early warning and shall deliver to the chief executive officer and chief financial officer a letter containing the following:
| (A) |
advice that the Member is designated as being in early warning, |
| (B) |
a request that the Member file its next monthly financial report required pursuant to Rule 3.5.1(a) no later than 15 business days or, in the discretion of the Corporation if considered to be practicable, such earlier time following the end of the relevant month, |
| (C) |
a request that the Member respond to the letter as required under Rule 3.4.2(b)(iii) and confirmation that such response, together with the notice received pursuant to Rule 3.4.2(b)(i), will be forwarded to MFDA Investor Protection Corporation and may be forwarded to any securities commission having jurisdiction over the Member, |
| (D) |
advice that the restrictions referred to in Rule 3.4.2(b)(iv) shall apply to the Member, |
| (E) |
such other information as the Corporation shall consider relevant; |
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|
(iii) |
the chief executive officer and the chief financial officer of the Member shall respond by letter signed by them both within five business days of receipt of the letter referred to in Rule 3.4.2(b)(ii), with a copy to be sent to the auditor of the Member, containing the information and acknowledgement required pursuant to Rule 3.4.2(b)(i)(B), (C) and (D), to the extent not previously provided, or an update of such information if any material circumstances or facts have changed; |
|
|
(iv) |
if and so long as the Member remains designated as being in early warning, it shall not without the prior written consent of the Corporation:
| (A) |
reduce its capital in any manner including by redemption, re-purchase or cancellation of any of its shares, |
| (B) |
reduce or repay any indebtedness which has been subordinated with the approval of the Corporation, |
| (C) |
directly or indirectly make any payments by way of loan, advance, bonus, dividend, repayment of capital or other distribution of assets to any director, officer, partner, shareholder, related company, affiliate or associate, |
| (D) |
increase its non-allowable assets (as specified by the Corporation) unless a prior binding commitment to do so exists or enter into any new commitments which would have the effect of materially increasing the non-allowable assets of the Member, |
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(v) |
if and so long as the Member remains designated as being in early warning, it shall continue to file its monthly financial reports within the time specified pursuant to Rule 3.4.2(b)(ii)(B), |
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(vi) |
after the Member is designated as being in an early warning category, the Corporation may conduct an on-site review of the Member's procedures for monitoring capital on a daily basis and prepare a report as to the results of the review, or |
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(vii) |
the Corporation may request and the Member shall provide in such time as the Corporation considers practicable, such reports or information, on a daily or a less frequent basis, as may be necessary or desirable in the opinion of the Corporation to assess and monitor the financial condition or operations of the Member. |
|
(c) |
Prohibited Transactions. No Member shall enter into any transaction or take any action, as described in Rule 3.4.2(b)(iv), which, when completed, would have or would reasonably be expected to have the effect on the Member as described in Rule 3.4.2(a), without first notifying the Corporation in writing of its intention to do so and receiving the written approval of the Corporation prior to implementing such transaction or action. |
|
| History |
Bulletin #0050-M – Amendments to MFDA Rules and Policy No. 3 (Handling Client Complaints) (issued February 3, 2004) |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.4.3 |
Restrictions. The Corporation may in its discretion, without affording the Member a hearing, prohibit a Member which is designated as being in early warning from opening any new branch offices, hiring any new Approved Persons, opening any new client accounts or changing in any material respect the investment positions of the Member. Any such prohibitions which have been imposed shall continue to apply until the Member is no longer designated as being in early warning, as demonstrated by the latest filed monthly financial report of the Member. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.4.4 |
Duration. A Member shall remain designated as being in early warning and subject to the provisions in this Rule 3.4 as are applicable, until the latest filed monthly financial reports of the Member, or such other evidence or assurances as may be appropriate in the circumstances demonstrate, in the opinion of the Corporation that the Member no longer is required to be designated as being in early warning and the Member has otherwise complied with this Rule 3.4. |
| History |
Bulletin #0093-P – Amendment to MFDA Rule 3.4.4 (Early Warning – Duration) (issued August 20, 2004) |
| 3.5 |
FILING REQUIREMENTS |
| 3.5.1 |
Monthly and Annual. Each Member shall: |
|
(a) |
file monthly with the Corporation within 20 business days of the month’s end a copy of a financial report of the Member as at the end of each fiscal month or at such other date as may be agreed with the Corporation. Such monthly financial reports shall contain or be accompanied by such information as may be prescribed by the Corporation from time to time; and |
|
(b) |
file annually with the Corporation two copies of the audited financial statements of the Member as at the end of the Member's fiscal year or as at such other fixed date as may be agreed with the Corporation. Such statements shall be in such form, shall contain such information and shall be supplemented by such additional schedules as the Corporation may from time to time prescribe, and shall be filed through the Member's auditor within 90 days of the date as of which such statements are required to be prepared; |
| History |
Bulletin #0097-P – Amendment to MFDA Rule 3.5.1 (Filing Requirements) (issued September 13, 2004) |
| Related Notices |
MR-0001 – Transition Periods (Replaced by MR-0026) (issued March 16, 2001)
MR-0005 – Financial Questionnaire and Report – Related Transition Periods (issued March 16, 2001)
MR-0018 – Extension of Certain Transition Periods (issued April 17, 2003)
MR-0052 – MFDA Financial Questionnaire and Report Basis of Presentation Note Disclosure (issued December 22, 2005)
MR-0063 – Extension to Effective Date of Acceptable Securities Locations Requirement (issued June 18, 2007) |
| Related Bulletins |
#0054-C – Electronic Filing System ("EFS") (issued February 9, 2004)
#0055-C – Expiration of Transition Periods for Minimum Capital, Financial Reporting Requirements of Members and Early Warning Requirements (issued February 9, 2004)
#0057-C – Common Errors in Financial Filings and Frequently Asked Questions (issued February 9, 2004)
#0100-M – 2004/2005 Financial Filing Deadlines (issued October 14, 2004)
#0104-C – Mandatory Use of the Electronnic Filing System ("EFS") (issued October 29, 2004)
#0112-M – Relief from Monthly Financial Filings with the Alberta Securities Commission (issued November 17, 2004)
#0171-M – 2005/2006 Financial Filing Deadlines (issued October 26, 2005)
#0229-M – 2006/2007 Financial Filing Deadlines (issued October 26, 2006)
#0279-M – 2007/2008 Financial Filing Deadlines (issued October 1, 2007)
#0300-C – Audited Financial Questionnaire and Report – Filing Process (issued February 4, 2008) Replaced by Bulletin #0471-C - Audited Form 1 Filing Process (issued March 23, 2011)
#0348-C – New Process for Year-End Audit Engagements (issued December 17, 2008)
#0339-M – 2009 Financial Filing Deadlines (issued November 4, 2008)
#0414-M – 2010 Financial Filing Deadlines (issued December 9, 2009) |
| 3.5.2 |
Combined Financial Statements. In calculating the risk adjusted capital of a Member, the financial position of the Member may, with the prior approval of the Corporation, be combined (in a manner as set out below) with that of any related Member provided that: |
|
(a) |
the Member has guaranteed the obligations of such related Member and the related Member has guaranteed the obligations of the Member (such guarantee to be in a form acceptable to the Corporation and unlimited in amount). |
|
(b) |
inter-company accounts between the Member and the related Member shall be eliminated; |
|
(c) |
any minority interests in the related Member shall be eliminated from the capital calculation; and |
|
(d) |
calculations with respect to the Member and the related Member shall be as of the same date. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.5.3 |
Members' Auditors |
|
(a) |
Examination. Every Member's auditor shall examine the accounts of the Member as at the date referred to in Rule 3.5.1 and shall make a report thereon in such form as the Corporation may from time to time prescribe. Each Member's auditor shall also make such additional examinations and reports as the Corporation may from time to time request or direct. |
|
(b) |
Standards. The Member's auditor shall conduct his or her examination of the accounts of the Member in accordance with Canadian generally accepted auditing standards and the scope of his or her procedures shall be sufficiently extensive to permit him or her to express an opinion on the Member's financial statements in the form prescribed. Without limiting the generality of the foregoing, the scope of the examination shall, where applicable, include at least the procedures set out in Rule 3.6. |
|
(c) |
Access to Books and Records. Every Member's auditor for the purpose of any such examination shall be entitled to free access to all books of account, securities, cash, documents, bank accounts, vouchers, correspondence and records of every description of the Member being examined or its affiliates or its related Members, and no Member, affiliate or related company, as the case may be, shall withhold, destroy or conceal any information, document or thing reasonably required by the Member's auditor for the purpose of such examination. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.5.4 |
Assessments |
|
(a) |
Excessive Attention. If at any time the Corporation is of the opinion that the financial condition or conduct of the business of any Member has required excessive attention from the Corporation and that it would be in the interests of the Corporation that the Corporation be reimbursed by such Member, the Corporation shall have the power to impose an assessment against such Member. |
|
(b) |
Late Filing. Each Member shall be liable for and pay to the Corporation levies or assessments in the amounts prescribed from time to time by the Corporation for the failure of the Member, its auditors or any person acting on its behalf, to file any report, form, financial statement or other information required under this Rule 3 within the times prescribed by this Rule 3, the Corporation or the terms of such report, form, financial statement or other information, as the case may be. |
| Related Notices |
MR-0021 – Late Filing Fees (issued October 23, 2003) |
| Related Bulletins |
#0057-C – Common Errors in Financial Filings and Frequently Asked Questions (issued February 9, 2004)
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008)
#0348-C - New Process for Year-End Audit Engagements (issued December 17, 2008) |
| 3.6 |
AUDIT REQUIREMENTS |
| 3.6.1 |
Standards. The audit under Rule 3.5 shall be conducted in accordance with Canadian generally accepted auditing standards and shall include a review of the accounting system, the internal accounting control and procedures for safeguarding assets. It shall include all audit procedures necessary under the circumstances to support the opinions which must be expressed in the Member's auditor's reports of Parts I and II of Form 1. Because of the nature of the industry, the substantive audit procedures relating to the financial position must be carried out as of the audit date and not as of an earlier date, notwithstanding that the audit is otherwise conducted in accordance with Canadian generally accepted auditing standards. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.6.2 |
Scope |
|
(a) |
Tests. The scope of the audit shall include the following procedures, but nothing herein shall be construed as limiting the audit or permitting the omission of any additional audit procedure which any Member's auditor would deem necessary under the circumstances. For purposes of this Rule tests fall into two basic categories as described in CICA Handbook: |
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(i) |
specific item tests, whereby the auditor examines individual items which he or she considers should be examined because of their size, nature or method of recording; and |
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(ii) |
representative item tests, whereby the auditor’s objective is to examine an unbiased selection of items. |
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The determination of an appropriate sample on a representative basis may be made using either statistical or non-statistical methods in accordance with Canadian generally accepted auditing standards.
In determining the extent of the tests appropriate in sub-sections (i), (ii) and (iii) of (b) below, the Member's auditor should consider the adequacy of the system of internal control and the level of materiality appropriate in the circumstances so that in the auditor’s professional judgement the risk of not detecting a material misstatement, whether individually or in aggregate is reduced to an appropriately low level (e.g. in relation to the estimated risk adjusted capital and early warning excess). |
|
(b) |
Audit Procedures. The Member's auditor shall as of the audit date: |
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(i) |
compare ledger accounts with the trial balances obtained from the general and subsidiary ledgers and substantiate the subsidiary ledger totals with their respective control accounts (see Rule 3.6.4 below relating to Electronic Data Processing); |
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(ii) |
account for, by physical examination and comparison with the books and records, all securities in the physical possession of the Member; |
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(iii) |
review the reconciliation of all mutual fund companies and financial institutions where a Member operates a nominee name account and review the balancing of all positions. Where a position or account is not in balance according to the records, ascertain that an adequate provision has been made in accordance with the Notes and Instructions for out of balance positions embodied in Statement B of Form 1 for any potential loss; |
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(iv) |
review bank reconciliations and by appropriate audit procedures substantiate on a test basis the reconciliations with the ledger control accounts as of the audit date; |
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(v) |
where a Member operates a nominee name account or has its own securities or investment products, ensure that all custodial agreements are in place for those lodged with acceptable locations and that such agreements satisfy the minimum requirements of the Corporation; |
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(vi) |
obtain written confirmation with respect to the following:
| (A) |
bank balances and other deposits; |
| (B) |
cash, nominee name positions and deposits with clearing houses and like organizations and cash and nominee name positions with mutual fund companies and financial institutions; |
| (C) |
cash and investments loaned or borrowed (including subordinated loans) together with details of collateral received or pledged, if any; |
| (D) |
accounts with brokers or dealers; |
| (E) |
accounts of directors, partners or officers of the Member held by the Member where the Member operates a nominee name account; |
| (F) |
accounts of clients where a Member operates a nominee name account; |
| (G) |
statements from the Member's lawyers as to the status of lawsuits and other legal matters pending which, if possible, should include an estimate of the extent of the liabilities so disclosed; and |
| (H) |
all other accounts which in the opinion of the Member's Auditor should be confirmed. |
Compliance with the confirmation requirements shall be deemed to have been made if positive requests for confirmation have been sent by, and returned directly to, the Member's auditor and second requests are similarly sent to those not replying to the initial request. Appropriate alternative verification procedures must be used where replies to second requests have not been received. For accounts mentioned in (D) and (F) above, the Member’s auditor shall (1) select specific accounts for positive confirmation based on their size (all accounts with equity exceeding a certain monetary amount, with such amount being related to the level of materiality) and other characteristics such as accounts in dispute, and (2) select a representative sample from all other accounts of sufficient extent to provide reasonable assurance that a material error, if it exists, will be detected. For accounts in (D) and (F) above that are not confirmed positively, the Member’s auditor shall send statements with a request that any differences be reported directly to the auditor. Clients' accounts without any balance whatsoever and those closed since the last audit date shall also be confirmed on a test basis using either positive or negative confirmation procedures, the extent to be governed by the adequacy of the system of internal control; |
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(vii) |
subject the Statements in Part I and Schedules in Part II of Form 1 to audit tests and/or other auditing procedures to determine that the margin and capital requirements, which are used in the determination of the excess (deficiency) of risk adjusted capital are calculated in accordance with the Rules and Form 1 in all material respects in relation to the financial statements taken as a whole; |
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(viii) |
obtain a letter of representation from the senior officers of the Member with respect to the fairness of the financial statements including among other things the existence of contingent assets, liabilities and commitments. |
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(ix) |
complete and report on the results of applying the prescribed procedures contained in the Report on Compliance for Segregation of Cash and Securities in Form 1. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.6.3 |
Additional Reporting. In addition, the Member's auditor shall: |
|
(a) |
complete and report on the results of applying the prescribed procedures contained in the Report on Compliance for Insurance in Form 1; and |
|
(b) |
report on any subsequent events, to date of filing, which have had a material adverse effect on the excess (deficiency) of risk adjusted capital. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.6.4 |
Systems Review. The Member's auditors' review of the accounting system, the internal accounting control and procedures for safeguarding securities prescribed in the above Audit Requirements should encompass any in-house or service bureau EDP operations. As a result of such review and evaluation the Member's auditor may be able to reduce the extent of detailed checking of clients and other account statements to trial balances and security position records. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.6.5 |
Retention. Copies of Form 1 and all audit working papers shall be retained by the Member's auditor for seven years. The two most recent years shall be kept in a readily accessible location. All working papers shall be made available for review by the Corporation and the MFDA Investor Protection Corporation and the Member shall direct its auditor to provide such access on request. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.6.6 |
Report to Corporation. If the Member's auditor observes during the regular conduct of his or her audit any material breach of the By-laws or Rules pertaining to the calculation of the Member's financial position, handling and custody of securities and maintenance of adequate records he or she shall make a report to the Corporation |
| 3.6.7 |
Reliance. The reports and audit opinions required in respect of a Member under this Rule 3.6 shall be addressed to the Corporation and the MFDA Investor Protection Corporation in conjunction with the Member who shall be entitled to rely on them for all purposes. |
Related Bulletin |
#0346-P – Housekeeping Amendments to MFDA Rules, Policies and Form 1 – Financial Questionnaire and Report and Other Amendments (issued December 11, 2008) |
| 3.6.8 |
Qualification. The reports and audit opinions referred to in this Rule 3.6 shall be signed by an engagement partner on behalf of the Member's auditor who shall (i) be authorized to do so in accordance with applicable legislation in the jurisdiction in which the principal office of the Member is located, (ii) be acceptable to the Corporation in accordance with By-law 11.2.1, and (iii) have acknowledged in writing to the Corporation and the Member that it is familiar with the then current By-laws, Rules, Policies and Forms as they relate to the matters required to be reported on therein. |
| Related Bulletin: |
#0348-C - New Process for Year-End Audit Engagements (issued December 17, 2008) |
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