OUTSIDE BUSINESS ACTIVITIES Presented by Robert Brush April 25, 2016

Overview Why Focus on Outside Business Activities (“OBAs”) What are OBAs When OBAs Can Be Approved Asking the Right Questions Before Approving OBAs Protective Policies and Procedures Catching Undisclosed OBAs Maintaining Records Documenting Supervision

Why are we talking about OBAs? Litigation risk Regulatory risk Overview Why are we talking about OBAs? Litigation risk Regulatory risk Late and incomplete filings on disclosures regarding OBAs has been made a compliance priority Source: IIROC Notice 16-0034 – IIROC Compliance Priorities

What are OBAs - MFDA OUTSIDE ACTIVITY MFDA Rule 1.3.1 Definition For the purpose of the By-laws, Rules and Policies, “outside activity” means any activity conducted by an Approved Person outside of the Member: (a) for which direct or indirect payment, compensation, consideration or other benefit is received or expected; (b) involving any officer or director position and any other equivalent positions; or (c) involving any position of influence

What are OBAs - MFDA OUTSIDE ACTIVITY Approved Person may or may not expect to receive or receive payment, compensation, or consideration In addition, an outside activity can include a single transaction or event and does not necessarily have to occur with repetition, regularity or continuity Source: MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016

What are OBAs - IIROC “Other/Outside business activities” includes: any business or employment activity with an entity other than the individual’s sponsoring firm – this would include any business or employment activity with an affiliated firm; acting as an officer, director or in an equivalent position for a company, other than the individual’s sponsoring firm, regardless of whether the individual is in a position or power of influence and despite whether payment, compensation, consideration or other benefit is received or expected; being an officer, director or a significant owner of a holding company or personal corporation; and having a paid or unpaid position of influence within a charitable, social or religious organization. Any position of influence, regardless of whether the position is business related and despite whether payment, compensation, consideration or other benefit is received or expected, is required to be reported. Source: IIROC Notice #16-0034 – IIROC Compliance Priorities

When OBAs Can Be Approved - MFDA MFDA Rule 1.3.2 Requirements for Outside Activity An Approved Person may have, and continue in, an outside activity provided that: (a) Not prohibited - The Corporation and the securities regulatory authority in the jurisdiction in which the Approved Person carries on, or proposes to carry on, the outside activity do not prohibit the Approved Person from engaging in such outside activity; (b) Notification - The Approved Person discloses the outside activity to the Member; (c) Approval - The Approved Person obtains written Member approval of the outside activity prior to engaging in such outside activity; (d) Conduct unbecoming - The outside activity of the Approved Person must not be such as to bring the Corporation, its Members or the mutual fund industry into disrepute; and (e) Disclosure - To the extent that the outside activity could be confused with Member business, clear written disclosure is provided to clients that any activities related to the outside activity are not the business of the Member and are not the responsibility of the Member 7

When OBAs Can Be Approved - IIROC IIROC Dealer Member Rule 18.14 (1) A Registered Representative or Investment Representative may have, and continue in, any business activity outside of the Dealer Member, including another gainful occupation if: (a) The securities commission in the jurisdiction in which the Registered Representative or Investment Representative acts or proposes to act as a Registered Representative or Investment Representative, or the securities legislation or policies administered by such securities commission, does not prohibit him or her from devoting less than his or her full time to the securities business of the Dealer Member employing him or her; (b) The Dealer Member establishes and maintains procedures acceptable to the Corporation to ensure continuous service to clients and to address potential conflicts of interest; (c) The Registered Representative or Investment Representative informs the Dealer Member of the outside business activity and obtains the Dealer Member’s approval to engage such outside business activity prior to engaging in such outside business activity 8

When OBAs Can Be Approved - IIROC IIROC Dealer Member Rule 18.14 Continued (d) The Dealer Member notifies the Corporation of the outside business activity within the time period and manner required by the applicable National Instrument or Regulation; and (e) The outside business activity is not: (i) One which would bring the securities industry into disrepute; or (ii) With another dealer that is a member of a recognized self regulatory organization unless: (1) Such dealer is a related company of the Dealer Member employing the Registered Representative or Investment Representative and the Dealer Member and related company provide cross-guarantees pursuant to Rule 6.6, and (2) Such outside business activity is not contrary to the provisions of the applicable securities legislation or any policy made pursuant thereto 9

Asking the Right Questions Before Approving OBAs Generally: Identify the risk of client confusion and/or conflicts of interest in advance Ensure that approval is only granted in cases where effective controls and qualified supervisory personnel are first in place Source: IIROC Notice #13-0163 Disclosure and Approval of Outside Business Activities– June 13, 2013

Asking the Right Questions Before Approving OBAs Consider the following: Compensation to be paid under the arrangement Nature of the relationship between Approved Person and outside entity Consider any terms and conditions for Approved Person’s registration Other potential conflicts whether the outside business activity provides the individual with access to privileged, confidential or insider information relevant to their registerable activities; whether activity is contrary to securities legislation, MFDA or IIROC requirements If a conflict cannot be managed, the activity must not be approved MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016; CSA STAFF NOTICE 31-326 “OUTSIDE BUSINESS ACTIVITIES” July 15, 2011

Asking the Right Questions Before Approving OBAs Ensure that Approved Persons are not involved in approval of own outside activities Obtain basic information: business name location where the activity will take place nature of the activity title/position of Approved Person number of hours devoted description of any potential for confusion or conflicts of interest Approval is fact and circumstance specific MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016

Asking the Right Questions Before Approving OBAs Thorough Investigation Standards of Conduct – MFDA Rule 2.1.1 - Consider the background, history and experience of the others involved with the outside activity. Nature of the Activity – Be thorough in the review process regarding the investment of client funds or financial services provided outside of the Member. This includes consideration of educational, experience and other competency thresholds. Risk Management Issues – Consider client confusion between Approved Person’s inside and outside activities. Consider threat of litigation against Member. Ability to Supervise – Consider the Member’s ability to supervise the outside activity. MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016

Asking the Right Questions Before Approving OBAs Positions of Influence Examples include: religious leaders, health care providers and military officers Assess the nature of the position and the degree of influence the Approved Person holds through the position Consider whether the client can separate the influence, and if not, the activity should not be approved Consider whether terms and conditions on the client relationship or outside activity can solve the potential conflict Vulnerability is key Source: MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016 ; SIIROC Notice #13-0163 Disclosure and Approval of Outside Business Activities– June 13, 2013

Protective Policies and Procedures MFDA Rule 2.1.4(d) requires Members to implement Policies and Procedures to supervise and monitor outside business activities Form 33-109F4 requires all registrants to disclose their current employment, other business activities, officer positions held and directorships The Canadian Securities Administrators has issued guidance in this regard in Companion Policy 31-103 CP Registration Requirements, Exemptions and Ongoing Registrant Obligations

Protective Policies and Procedures Policies and Procedures Must Address The requirement for Approved Persons to disclose all outside activities, obtain pre-approval of outside activities and the process by which Approved Persons may seek such pre-approval; The Member’s criteria for the approval of outside activities; The requirement to communicate to the Branch Manager or supervisor the details of the Member’s approval of, and any refusal to approve, the Approved Person’s outside activities; The requirement for the Approved Person to notify the Member in the event of any material changes to significant aspects or termination of an outside activity; and The requirement for records to include complete supporting evidence regarding the Member’s handling of all outside activity approval requests, including any special conditions, policies, procedures and controls that have been imposed and how compliance will be monitored MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016

Protective Policies and Procedures Consider the Following: Outside Business Activities should not materially impair a Dealer Member’s ability to discharge its “duty of care” to its clients Members should take reasonable measures to ensure that there is no change in the outside activity that was approved Source: IIROC Notice #13-0163 Disclosure and Approval of Outside Business Activities– June 13, 2013; MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016

Drawing the Line Between What Is and What Is Not Dealer Business Ensure that the distinction between Member business and outside activity is clearly disclosed to clients Members should clearly inform clients that outside activity is not the responsibility of the Member Outside Business Activities should not involve the use of client information – training and controls should prevent this The distinction between Dealer Member Business and Outside Business Activity should be clear to clients Do not permit the use of the Dealer Member’s premises, records, logos, trade names, stationary, support staff or contact facilities for OBAs Members must monitor for complaints arising from outside activity MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016; IIROC Notice #13-0163 Disclosure and Approval of Outside Business Activities– June 13, 2013;

Catching Undisclosed OBAs Advertising, website and other social media reviews - MFDA Rule 2.7.3 (Review Requirements) Approval of trade names - MFDA Rule 1.1.7 (Business Names, Styles, Etc.) Branch reviews - MFDA Policy No. 5 Branch Review Requirements Trend analysis and trade reviews - MFDA Policy 2 Minimum Standards for Account Supervision Due diligence in recruitment Complaint handling Annual Approved Person questionnaires MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016

Catching Undisclosed OBAs Consider ability to supervise outside activities Members must ensure they have access to any files necessary to complete investigation of undisclosed and unauthorized outside activity Consider potential client privacy issues as outside activity may contain 3rd party confidential information Review MFDA Staff Notice – Regulatory Notice on Federal and Provincial Privacy Legislation – December 2003 MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016

Maintaining Records Documenting Supervision Maintain evidence of the review and due diligence undertaken by the Member, as well as the approval process Be specific on the activity approved and that the Approved Person must notify the Member of a material change and seek approval if there is a material change A material change could include the expansion of the approved activity or new services or products MFDA Staff Notice “Outside Activity” May 20, 2005, Updated March 17, 2016

Maintaining Records Documenting Supervision Records should include complete supporting evidence regarding handling of all outside business activity approval requests, including any special conditions, policies, procedures and controls that have ben imposed and how compliance will be monitored Source: IIROC Notice #13-0163 Disclosure and Approval of Outside Business Activities– June 13, 2013

Maintaining Records Documenting Supervision NRD Item 10 of Form 33-109F4 All Approved Persons are required to disclose their outside business activities on NRD Item 10 of Form 33-109F4 is intended to capture all current employment information, as well as outside business activities Individuals must treat each employment relationship or outside business activity as a separate item and therefore make separate entries addressing all elements Changes to employment relationships and outside business activities must be reported within ten (10) days of the change pursuant to section 4.1 of NI 33 -109 – remind Approved Persons frequently Source: IIROC Notice #13-0163 Disclosure and Approval of Outside Business Activities– June 13, 2013; IIROC Notice 16-0034 IIROC Compliance Priorities

Maintaining Records Documenting Supervision Form 33-109F4 requires the following: Start date Firm information Description of duties Number of hours per week Conflict of interest Source: IIROC Notice #13-0163 Disclosure and Approval of Outside Business Activities– June 13, 2013

Other Helpful Sources IIROC Dealer Member Rule 42 - General conflicts of interest identification and disclosure requirements; see also NI 31-103 and the associated companion policy NI 33-109 Requires Approved Persons to disclosure business activities outside of sponsoring firm CSA Staff Notice 31-326 “Outside Business Activities” Source: IIROC Notice #13-0163 Disclosure and Approval of Outside Business Activities– June 13, 2013 25

Concluding Remarks Questions?