Notice 2006-004 - Proposed Repeal of CNQ Rule 10
Notices
Notice 2006-004 - Proposed Repeal of CNQ Rule 10
PROPOSED REPEAL OF CNQ RULE 10
NOTICE AND REQUEST FOR COMMENTS
The Board of Directors of Canadian Trading and Quotation System Ltd. (�CNQ�) has passed a resolution repealing CNQ Rule 10 (the �sales practice rules�) upon Ontario Securities Commission approval following public notice and comment. The text of the rules proposed to be repealed is attached as Appendix �A.�
The Board has determined that the proposed amendments are in the public interest and have authorized them to be published for public notice and comments. Comments should be made no later than 30 days from the date of publication of this notice and should be addressed to:
Canadian Trading and Quotation System Inc.
BCE Place, 161 Bay Street
Suite 3850, P.O. Box 207
Toronto ON
M5J 2S1
Attention: Mark Faulkner, Director, Listings and Regulation
Fax: 416.572.4160
E-mail: [email protected]
A copy should be provided to the Ontario Securities Commission at the following address:
Capital Markets Branch
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West
Toronto ON
M5H 3S8
Attention: Cindy Petlock, Manager, Market Regulation
Fax: 416.595.8940
E-mail: [email protected]
Background
Like other exchanges, CNQ has a body of rules that provide for market integrity and efficiency. Like the other Canadian exchanges, CNQ works with the Investment Dealers Association of Canada (�IDA�) and Market Regulation Services Inc. (�RS�) to ensure a well-regulated market.
When CNQ commenced operations, the sales practice rules were adopted to address concerns about abusive trading practices that occurred in the past on over-the-counter markets, including the Canadian Dealing Network (�CDN�). In particular, certain dealers registered in Ontario as securities dealers (who were not members of an exchange or of the Investment Dealers Association of Canada) would engage in high-pressure sales tactics with vulnerable investors. These dealers charged excessive mark-ups on sales to customers and then refused to accept orders from those customers to sell out their positions. These were usually done in the context of �pump and dump� or boiler room stock manipulations.
These abusive trading practices were exacerbated by the fact that the securities dealers were not members of a self-regulatory organization and that there was no comprehensive body of market integrity rules governing trading on CDN. This is not the case with CNQ. All CNQ Dealers must be members in good standing of the IDA and all trading on CNQ is governed by the Universal Market Integrity Rules (�UMIR�) administered by RS. Given the provisions of IDA rules and UMIR, CNQ believes that the sales practice rules are redundant and may create confusion that they set a different standard.
Abusive Sales Practices
CNQ Rules 10-101 through 10-103 prohibit certain abusive sales practices such as high pressure sales tactics and taking advantage of a person�t inabiltiy to protect his or her own interest. These practices are all prohibited, albeit not explicitly, by IDA sales practice and business conduct rules, and, in particular, IDA By-law 29.1 which prohibits dealers and their employees from engaging in any conduct which is unbeoming or detrimental to the public interest. CNQ understands that the IDA will be issuing a regulatory notice clarifying that IDA members are prohibited from engaging in the practices prohibted by the CNQ Rules with respect to any security.
Disclosure
Rules 10-104 and 10-106 require CNQ Dealers to make certain disclosures to clients prior to recommending a trade in a CNQ security, such as whether the dealer will fill the order as principal and in a riskless principal trade. Dealers must also inform the client if the security has no market maker.
CNQ believes that these rules are unnecessary. Recommendations are governed by IDA suitability rules which would require, among other things, an analysis of the liquidity of the security. Whether a particular security has a market maker is indicated on the issuer�s page in the Disclosure Hall on CNQ�s website (www.cnq.ca). Customer-principal trading (whether the dealer is acting as market maker or not) is governed by comprehensive UMIR provisions to ensure that the customer is treated fairly (see UMIR Rule 8.1 and Policy 8.1).
CNQ Rule 10-105 was previously repealed.
Consultation
No formal consultations were undertaken with respect to the proposed rule. CNQ staff have consulted informally with IDA and RS staff.
Alternatives Considered
No alternatives were considered.
Rules of Other Jurisdictions
As noted, the subject matter of the rules proposed to be repealed are covered by IDA rules and UMIR.
Conclusion
The sales practice rules should be repealed as they are duplicative of IDA rules and UMIR and may create the mistaken impression that a different standard is intended.
NOTICE AND REQUEST FOR COMMENTS
The Board of Directors of Canadian Trading and Quotation System Ltd. (�CNQ�) has passed a resolution repealing CNQ Rule 10 (the �sales practice rules�) upon Ontario Securities Commission approval following public notice and comment. The text of the rules proposed to be repealed is attached as Appendix �A.�
The Board has determined that the proposed amendments are in the public interest and have authorized them to be published for public notice and comments. Comments should be made no later than 30 days from the date of publication of this notice and should be addressed to:
Canadian Trading and Quotation System Inc.
BCE Place, 161 Bay Street
Suite 3850, P.O. Box 207
Toronto ON
M5J 2S1
Attention: Mark Faulkner, Director, Listings and Regulation
Fax: 416.572.4160
E-mail: [email protected]
A copy should be provided to the Ontario Securities Commission at the following address:
Capital Markets Branch
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West
Toronto ON
M5H 3S8
Attention: Cindy Petlock, Manager, Market Regulation
Fax: 416.595.8940
E-mail: [email protected]
Background
Like other exchanges, CNQ has a body of rules that provide for market integrity and efficiency. Like the other Canadian exchanges, CNQ works with the Investment Dealers Association of Canada (�IDA�) and Market Regulation Services Inc. (�RS�) to ensure a well-regulated market.
When CNQ commenced operations, the sales practice rules were adopted to address concerns about abusive trading practices that occurred in the past on over-the-counter markets, including the Canadian Dealing Network (�CDN�). In particular, certain dealers registered in Ontario as securities dealers (who were not members of an exchange or of the Investment Dealers Association of Canada) would engage in high-pressure sales tactics with vulnerable investors. These dealers charged excessive mark-ups on sales to customers and then refused to accept orders from those customers to sell out their positions. These were usually done in the context of �pump and dump� or boiler room stock manipulations.
These abusive trading practices were exacerbated by the fact that the securities dealers were not members of a self-regulatory organization and that there was no comprehensive body of market integrity rules governing trading on CDN. This is not the case with CNQ. All CNQ Dealers must be members in good standing of the IDA and all trading on CNQ is governed by the Universal Market Integrity Rules (�UMIR�) administered by RS. Given the provisions of IDA rules and UMIR, CNQ believes that the sales practice rules are redundant and may create confusion that they set a different standard.
Abusive Sales Practices
CNQ Rules 10-101 through 10-103 prohibit certain abusive sales practices such as high pressure sales tactics and taking advantage of a person�t inabiltiy to protect his or her own interest. These practices are all prohibited, albeit not explicitly, by IDA sales practice and business conduct rules, and, in particular, IDA By-law 29.1 which prohibits dealers and their employees from engaging in any conduct which is unbeoming or detrimental to the public interest. CNQ understands that the IDA will be issuing a regulatory notice clarifying that IDA members are prohibited from engaging in the practices prohibted by the CNQ Rules with respect to any security.
Disclosure
Rules 10-104 and 10-106 require CNQ Dealers to make certain disclosures to clients prior to recommending a trade in a CNQ security, such as whether the dealer will fill the order as principal and in a riskless principal trade. Dealers must also inform the client if the security has no market maker.
CNQ believes that these rules are unnecessary. Recommendations are governed by IDA suitability rules which would require, among other things, an analysis of the liquidity of the security. Whether a particular security has a market maker is indicated on the issuer�s page in the Disclosure Hall on CNQ�s website (www.cnq.ca). Customer-principal trading (whether the dealer is acting as market maker or not) is governed by comprehensive UMIR provisions to ensure that the customer is treated fairly (see UMIR Rule 8.1 and Policy 8.1).
CNQ Rule 10-105 was previously repealed.
Consultation
No formal consultations were undertaken with respect to the proposed rule. CNQ staff have consulted informally with IDA and RS staff.
Alternatives Considered
No alternatives were considered.
Rules of Other Jurisdictions
As noted, the subject matter of the rules proposed to be repealed are covered by IDA rules and UMIR.
Conclusion
The sales practice rules should be repealed as they are duplicative of IDA rules and UMIR and may create the mistaken impression that a different standard is intended.
