Investment dealer reps may not envy much about their fund dealer counterparts, but one thing the former group does covet is the ability to use personal corporations. Although there’s a movement afoot in Alberta that would address this disparity, the push for a national regulator represents a major complication.
In mid-November, Alberta’s provincial government announced a series of proposed changes to the province’s securities legislation, including a proposal that would allow investment advisors to use personal corporations.
The primary appeal of incorporation is that it allows professionals to flow their revenue through a corporation, and thus have those dollars taxed in the hands of the company at the lower corporate tax rate rather than at the personal rate. Incorporation is an option that’s available to doctors, lawyers and, oddly, fund dealer reps – but not to investment dealer reps.
One of the fundamental obstacles to financial advisor incorporation is the lack of provision for this arrangement in securities legislation. As a result, several provinces have made efforts to change this disparity in the past couple of years. In 2012, Saskatchewan passed legislative amendments to allow a form of advisor incorporation, but those amendments were never proclaimed into law. The government of Quebec introduced its own set of amendments to permit advisor incorporation in 2013, but that effort died at the order paper stage. Alberta appears ready to take a crack at the subject now.
The Alberta Treasury Board and Finance Ministry says its proposed legislation will create a statutory framework that would allow individual reps of registered dealers and other advisors the option of providing their services to clients through a professional corporation while still operating under the supervision of a registered firm: “This framework will allow individual representatives to choose what business structure works best for them.”
Yet, the uncertainty surrounding the creation of a possible co-operative national securities regulator among some of the provinces is hanging over the prospect of advisor incorporation. Before British Columbia and Ontario threw their collective lot in with the federal government to try to create a new co-operative national regulator in the autumn of 2013, those provinces were talking about introducing amendments to their respective securities legislation to allow advisor incorporation.
Earlier this year, the Provincial/Territorial Council of Ministers of Securities Regulation, which includes all of the provinces apart from Ontario, indicated that it has developed a model to allow advisor incorporation and that the various provincial and territorial governments are committed to introducing legislative amendments to do so.
Michelle Alexander, vice president and corporate secretary with the Investment Industry Association of Canada (IIAC), says the expectation is that the various provinces plan to introduce legislation that would allow advisors to incorporate in their spring or autumn legislative sessions in 2015.
However, the prospect of a co-operative national regulator threatens to throw these plans into disarray. For example, a statement from B.C.’s Ministry of Finance says that before B.C. joined the effort to create a co-operative regulator, it was “actively participating” in discussions related to advisor incorporation. Now that B.C. is part of the initiative to create a co-operative national regulator, the development of legislation to allow incorporation would have to come as part of that effort.
Yet, the provinces that are part of the co-operative national regulator project have published harmonized draft legislation that makes no mention of advisor incorporation. So, for now, advisor incorporation apparently isn’t part of the plan under the co-operative model.
This strategy includes the three provinces – Saskatchewan, New Brunswick and Prince Edward Island – that have joined the co-operative national regulator initiative in the past several years. Whether the degree of provincial participation amounts to the “critical mass” that Ottawa has been seeking to make its co-operative national regulatory model a reality remains to be seen.
In fact, there is no certainty that the co-operative plan will succeed. The participating provinces and the federal government still have to finalize, and pass, the enabling legislation. (The comment period on the draft legislation ends Dec. 8.) And the various governments have to agree on rules for the new authority. If the effort fails, progress on projects that are taking place outside the co-operative project, such as advisor incorporation, appear likely to stall.
In the meantime, regulators are adopting a “wait and see” approach to the various legislative efforts. Carolyn Shaw-Rimmington, manager of public affairs with the Ontario Securities Commission (OSC), says the OSC “would follow the direction of the provincial government on this issue” but adds that the OSC is “not pursuing any action at this time.”
Meanwhile, says Paul Riccardi, the Investment Industry Regulatory Organization of Canada‘s (IIROC) senior vice president, member regulation: “While we are monitoring the developments in Alberta, IIROC’s position has not changed.”
That long-standing position is that incorporated reps are not permitted under IIROC rules. Individual reps can have personal corporations that carry on business that doesn’t require registration under securities rules, Riccardi says, but reps can’t have a personal corporation that engages in securities-related business, which would require registration.
Securities regulators have been reluctant to allow advisors to incorporate for fear that the use of this structure could disrupt the prevailing chain of liability and accountability between an advisor and his or her dealer. Fund dealer reps have gotten away with incorporating by way of historical accident and by using a different model that avoids the need for legislative changes.
Fund dealers weren’t prevented from incorporating when they were under the direct oversight of the securities commissions. So, when the Mutual Fund Dealers Association of Canada (MFDA) was created as their self-regulatory organization, the dealers vehemently resisted any effort to dismantle that business model.
Ultimately, the MFDA resolved the apparent conflict by adopting a rule that allows fund dealers to direct commissions to a rep’s corporation rather than to the rep directly – effectively allowing reps to flow their revenue through a corporation and gain a tax advantage. But, as with IIROC advisors, fund dealer reps aren’t able to use corporations that directly do business that requires registration.
The securities industry hasn’t sought to emulate the MFDA’s approach, Alexander notes, as there is some question of whether it would stand up to the scrutiny of the Canada Revenue Agency (CRA). She is not aware of any case in which the CRA has questioned a fund dealer rep’s incorporation structure, but adds that this may become a bigger issue if extended to the investment dealer world.
Instead, the IIAC has sought changes to both securities legislation and industry rules to allow personal corporations to act as registrants – a model that clearly would be onside with the CRA. Alexander recalls that the industry’s efforts to sell regulators on the idea resulted in the approval by IIROC in 2006 of a bylaw that the Canadian Securities Administrators rejected in 2007 amid investor protection concerns. Now, the industry hopes that if securities legislation is changed to permit advisor incorporation, the regulators could be convinced to follow suit.
However, this issue really is one that calls for a uniform national approach. If just one province goes ahead with advisor incorporation legislation, matters could get very messy for firms that have reps in multiple provinces – and for reps who serve clients in different provinces. Moreover, the fact that reform would require a rule change by IIROC, a national organization, makes differing provincial laws less than ideal.
Ironically, fund dealer reps in Alberta are the one constituency that could benefit from the province adopting a framework to permit advisor incorporation, even if other provinces don’t follow suit. According to Karen McGuinness, the MFDA’s senior vice president, member regulation, compliance, Alberta is the one province that doesn’t permit the MFDA’s model of advisor incorporation.
If Alberta goes ahead with its approach, McGuinness notes, the existing MFDA model still would not be allowed in Alberta: “We would have to amend our rules to harmonize with the Alberta legislation, as our rules currently do not contemplate a personal corporation as an approved person.”
The MFDA would be open to following Alberta’s lead, McGuinness says, noting that when the MFDA was in the process of getting recognized, it adopted practices in place in its industry at the time.
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