CIRO publishes proposals to level the advisor compensation playing field

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Since the integration of Canada’s two capital markets self-regulatory organizations (SROs) — the Mutual Fund Dealers Association (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) — in January 2023, market observers, investors and SRO members have been waiting for the Canadian Investment Regulatory Organization (CIRO) to release its proposal as to how SRO rules would be consolidated. Earlier this year, CIRO published a consultation paper regarding policy options for leveling the advisor compensation playing field. The consultation paper proposes potential amendments to the Investment Dealer and Partially Consolidated Rules (IDPC Rules) to harmonize acceptable Approved Person compensation approaches.

Currently, Approved Persons under the Mutual Fund Dealer Rules (MFD Rules) are permitted to structure their compensation through personal corporations, except in Alberta. Conversely, Approved Persons governed by the IDPC Rules (including investment dealer representatives) are not permitted to structure compensation using this approach.

To develop a more consistent approach to Approved Person compensation, the consultation paper proposes three possible approaches to Approved Person compensation under the IDPC Rules, each of which is canvassed in this post:

  1. an “enhanced directed commission approach”
  2. an “Incorporated Approved Person approach”
  3. a “registered corporation approach”

Notably, CIRO’s preferred approach is the Incorporated Approved Person approach, which would permit Approved Persons under the IDPC Rules to use personal corporations (approved by CIRO) to structure their compensation.

Three proposed approaches to structuring compensation for Approved Persons

Option 1: Potential amendments to enhance the existing directed commission approach

The MFD Rules permit mutual fund dealers to utilize a “directed commission arrangement” whereby an Approved Person may request that their sponsoring dealer member pay commissions or fees they have earned in respect of business conducted by the Approved Person on behalf of the dealer member to an unregistered corporation.[1] The IDPC Rules currently prohibit these arrangements and require remuneration to be paid by an investment dealer directly to an Approved Person.[2]

In considering whether to adopt a directed commission approach similar to the current approach under the MFD Rules, CIRO proposes an “enhanced directed commission approach”. Under this approach, Approved Persons could request that a portion of commissions or fees they have earned, relating to non-registerable activities the corporation has carried out, could be directed to a personal corporation owned by the Approved Person (alone or with other Approved Persons and their family members). This approach would allow for vetting of corporation owners and activities, thereby addressing potential risks to investors. Under this proposed approach, CIRO would aim to address concerns that there may be insufficient transparency of the beneficial owners’ activities within the corporations who currently receive directed commission payments. Specifically, CIRO has identified that it would need enhanced jurisdiction to determine whether an Approved Person who uses this approach is ensuring that the corporation is limiting its activities to non-registerable activities.

To address CIRO’s concerns with the existing directed commission approach, CIRO has proposed that its rules could be amended to include provisions that would

  • place limitations on corporation ownership, which would likely limit ownership to Approved Persons and their immediate family and/or a family trust
  • place limitations on securities and other activities that may be conducted within the corporation (i.e., limit other corporate activities to financial services activities and, where appropriate, other activities approved by the dealer member)
  • require that the sponsoring dealer member verify compliance with these requirements

CIRO’s objective for these proposed rule amendments to the directed commission approach is to enhance investor protection by introducing limits to the ownership of and activities conducted within the corporation, as well as requiring dealer member oversight of these activities.

Option 2: Incorporated Approved Person approach

CIRO staff have indicated that their preferred policy option is the Incorporated Approved Person approach. This approach would permit Approved Persons under the IDPC Rules to use personal corporations (approved by CIRO) to structure their compensation. Adopting this approach for use by all Approved Persons who only engage in non-registerable activities within the corporation could be achieved through amendments to CIRO Rules alone. This approach would also provide Approved Persons with the possibility of being able to engage in registerable activities within the corporation to the extent that securities legislation in certain provinces and territories is amended to allow for it.

The Incorporated Approved Person approach would be implemented through CIRO rule amendments to introduce a new category for non-individual Approved Persons (Incorporated Approved Person category).

The consultation paper specifies the requirements that applicants would need to satisfy and requirements for the execution of the Incorporated Approved Person Agreement, including the following:

  • The corporation must be a professional corporation in those jurisdictions in which becoming a professional corporation is available as an option.
  • All activities conducted within the corporation on behalf of the sponsoring Dealer Member must be conducted in the name or trade name of the sponsoring Dealer Member.
  • Activities conducted for others within the corporation would be limited to
    • other licensed activities in the financial services industry
    • other activities that have received advance sponsoring Dealer Member approval
  • An Incorporated Approved Person Agreement in a form acceptable to CIRO must be entered between the sponsoring Dealer Member, the Incorporated Approved Person (i.e., the corporation) and the Approved Persons acting on their behalf.

Additionally, the Incorporated Approved Person Agreement would require that the Dealer Member supervise the Incorporated Approved Person and its Approved Person employees and agents. The Dealer Member would also be liable to clients and other third parties for acts and omissions of the Incorporated Approved Person.

Option 3: Registered corporation approach

Finally, the third option, the registered corporation approach, contemplates that the corporation owned by the Approved Person in which activities are carried out on the sponsoring dealer member’s behalf would be required to register in the relevant CSA jurisdictions. The approach would require CIRO rule amendments as well as securities legislation amendments to introduce a new registration category and associated requirements for the registered corporation. CIRO suggests that these legislative provisions could include eligibility requirements similar to those described above for applicants under the Incorporated Approved Persons approach.

Benefits cited for the registered corporation approach include a higher level of regulatory oversight and enhancements to investor protection. However, a drawback of this approach is the additional requirements that would be imposed not only on Approved Persons, their sponsoring dealers and the Approved Persons’ corporations, but also on CIRO and CSA registration staff.


The consultation paper moves the needle significantly towards a vision for greater consolidation of rules and regulatory approach. CIRO has identified a common concern with each of the three proposed approaches: namely, that amendments to securities legislation in each province and territory in Canada would need to be enacted to allow Approved Persons to engage in and to be compensated for registerable activities within the corporation. Furthermore, given the provincial and territorial jurisdiction over securities regulation in Canada, there may be differences in the nature and timing of the securities legislation amendments in each province and territory that would permit an Approved Person’s corporation to engage in and to be compensated for registerable activities.

Dealer members and Approved Persons will also need to consider how implementing these arrangements may affect their current business models, taking into account operational, employment, supervisory and client relationship considerations.

There are also significant tax considerations that regulatory authorities and industry participants will need to consider in tandem with the CIRO proposals to ensure that the desired tax outcomes are achievable.

We will continue to monitor and report on developments.

[1] MFD Rules permit these arrangements except in Alberta. See: MFD Rule 2.4.1(a) requires remuneration to be paid by a mutual fund dealer (or its affiliates or related mutual fund dealers) directly to an Approved Person. However, MFDA Rule 2.4.1(b) allows compensation to be paid to an unregistered corporation except in Alberta and subject to certain conditions, including the condition that such arrangements are not prohibited or otherwise limited by the relevant securities legislation or securities regulatory authorities. 

[2] See the CIRO consultation paper, p. 4 (footnote 12), which provides: “IDPC Rule subsection 2551(7) requires remuneration to be paid by an investment dealer (or its affiliates or related investment dealers) directly to an Approved Person. However, IDPC Rule subsection 2551(8) allows compensation earned by Registered Representatives dealing in mutual funds only outside of Alberta to be paid to an unregistered corporation subject to certain conditions. One of the conditions is that the sponsoring Dealer Member must be registered as both an investment dealer and a mutual fund dealer.”