Provincial policymakers have initiated a consultation on how to deal with the issue of personal incorporation in the investment industry.

A working group of provincial/territorial government officials has been struck to consider allow broader incorporation of individual sales reps. A paper released Monday by Alberta’s finance department seeks input on whether changes to allow personal incorporation are appropriate, and it presents several options, including two legislative proposals, one developed by the Alberta Securities Commission and the other by Advocis, both of which are designed to allow personal incorporation. A third option would be to allow a broader range of sales reps to redirect their remuneration to a non-registered corporation.

The paper notes that discussions of whether to allow individual reps to incorporate have been underway since 1999 when securities regulators flagged the issue. Moreover, mutual fund dealer reps had historically been allowed to incorporate, and, in March 2010, securities regulators in several provinces (BC, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia) signed off on a rule for fund dealers allowing their reps to flow commissions through a non-registered corporation. However, Alberta hasn’t adopted this approach.

There remains an unlevel playing field between fund dealer reps and investment dealer reps, as the latter aren’t allowed to incorporate under Investment Industry Regulatory Organization of Canada rules. IIROC has proposed changing those rules, but the provincial regulators would not sign off on the change.

Regulators have been concerned about preserving liability to, and regulatory accountability of, dealers for the actions of their reps. They don’t want personal corporations to act as a shield for dealers, damaging investor protection. Reps want to be allowed to incorporate primarily for the tax advantages, but there can be administrative and operational advantages too.

According to the paper, the ASC proposal would establish a permit regime for the incorporation of sales reps modeled on the professional corporation permit system used by the legal, accounting, medical and dental professions in Alberta. Under the ASC proposal, the rep’s corporation would not have to be registered but would have to obtain an annual permit from the executive director of the commission authorizing it to provide trading or advising services to clients. The ASC’s proposal also imposes shareholder structure restrictions.

The Advocis proposal “would establish broad parameters and specific conditions for incorporation that are largely based on regulatory requirements found in the life insurance sector,” it notes. It would not impose restrictions on directors or shareholders or on their shareholdings. “Under this proposal, both registrants and non-registrants could be directors and shareholders of a corporation providing trading and advising services,” it says.

The third option is to allow IIROC to modify its rules and allow individual sales reps to redirect their commissions to non-registered corporations. “This option has the merit of not adversely affecting the flow of liability between the individual sales representative and his or her clients and between the sales representative and his or her sponsoring firm. It would also establish a level playing field between MFDA and IIROC sales representatives. However, this option does not address the potential tax risk inherent in the redirection of remuneration from trading or advisory services to a non-registered corporation,” it says.

The discussion paper notes that governments and regulators haven’t necessarily signed off on any of the options presented, rather, it is intended to stimulate policy discussion. Comments on the paper are due by February 25, 2011.

IE