Vol. 145, No. 8 — April 13, 2011
SOR/2011-94 March 25, 2011
BANKRUPTCY AND INSOLVENCY ACT
ARCHIVED — Rules Amending the Bankruptcy and Insolvency General Rules
P.C. 2011-458 March 25, 2011
His Excellency the Governor General in Council, on the recommendation of the Minister of Industry, pursuant to subsection 209(1) of the Bankruptcy and Insolvency Act (see footnote a), hereby makes the annexed Rules Amending the Bankruptcy and Insolvency General Rules.
RULES AMENDING THE BANKRUPTCY AND INSOLVENCY GENERAL RULES
1. The Bankruptcy and Insolvency General Rules (see footnote 1) are amended by adding the following after section 1.1:
1.2 The MFDA Investor Protection Corporation is a prescribed body for the purposes of the definition “customer compensation body” in section 253 of the Act.
COMING INTO FORCE
2. These Rules come into force on the day on which they are registered.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Rules.)
Issue and objectives
Stakeholders requested that the Bankruptcy and Insolvency General Rules (the “Rules”) be amended in order to prescribe Mutual Fund Dealers Association of Canada Investor Protection Corporation (MFDA IPC) as a “customer compensation body” pursuant to the definition of that term in section 253 of the Bankruptcy and Insolvency Act (the “Act”). Under Part XII of the Act, a customer compensation body has certain rights, including the right to file an application for a bankruptcy order in respect of an insolvent securities firm, to participate in the administration of a bankruptcy estate by designating an inspector and to consult with the trustee in bankruptcy. The Canadian Investor Protection Fund (CIPF) is specifically named as a customer compensation body in section 253 of the Act and no other bodies had been prescribed. The CIPF protects investors’ cash and security should an investment dealer, a member of the Investment Industry Regulatory Organization of Canada (IIROC), go bankrupt. The MFDA IPC provides coverage to customers of members of the MFDA for losses of property in customer accounts caused by the insolvency of a member. A mutual fund dealer is a company that is registered with the provincial securities commissions to distribute mutual funds to Canadian investors.
The Office of the Superintendent of Bankruptcy (OSB) amended the Rules in order to prescribe the MFDA IPC as a “customer compensation body” pursuant to the definition of that term in section 253 of the Act. Without the amendment, the MFDA IPC could not have availed itself of certain rights offered to customer compensation bodies under Part XII of the Act.
The objective of the amendment was to enable a customer compensation body protecting customer accounts to play a role in the bankruptcy proceeding of a firm whose customers the body protects. That customer compensation body will be the largest stakeholder in the end, covering virtually the entire shortfall in securities. The amendment ensures that the customer compensation body’s concerns and interests will be considered in the administration of the bankruptcy in the same manner as the CIPF.
Description and rationale
Part XII of the Act establishes a special regime for securities firm bankruptcies. It streamlines the administration of a bankrupt securities firm’s estate since it creates a particular class of securities, called “customer name securities,” that are registered or in the process of being registered, which pursuant to section 253 of the legislation are to be returned to customers. All other securities and cash held by the bankrupt firm are to be pooled in a “customer pool fund” and distributed among all the customers of the firm on a pro rata basis.
In addition to ordinary creditors, an application for a bankruptcy order against a securities firm may be filed by a securities commission, a securities exchange, a customer compensation body or a receiver. These bodies and persons may apply for a bankruptcy order on the same grounds as are available to creditors generally and also on grounds that the firm has been suspended for failure to comply with capital adequacy requirements. Special administrative powers and duties are also given to the trustee (sections 257, 258 and 260 of the Act) and to an extent to CIPF (which is specifically named as a customer compensation body under section 253 of the Act) to deal with securities firm bankruptcies. In fact, where customers are protected by a consumer compensation body (i.e. CIPF), the trustee must consult the compensation body on the administration of the estate and an inspector can be designated by the compensation body (section 264 of the Act).
Part XII of the Act does not indicate the requirements or qualifications for a compensation body to be prescribed as a “compensation body” for the purpose of the Act. Section 253 of the legislation specifically names the CIPF as a customer compensation body but no other bodies had been prescribed. The MFDA IPC is the functional equivalent of CIPF in respect to mutual fund dealers. CIPF provides customer protection to securities dealers. The primary objective of the MFDA IPC is to provide compensation to customers of insolvent members of the MFDA in circumstances which, in most cases, would be governed by the provisions of Part XII of the Act applicable to securities firm bankruptcies. Also, the basis of the coverage is substantially the same and both have a maximum of $1 million coverage for each general and separate account as determined by their respective coverage policies. Both securities dealers and mutual fund dealers are “securities firms” for the purposes of section 253 of the Act in that they are, among other things, “persons who carry on the business of buying and selling securities from, to or for a customers.”
The amendment prescribing the MFDA IPC as a customer compensation body allows the MFDA IPC to have the same status, rights and authority as the CIPF for the purposes of Part XII of the Act. These rights are significant to a customer compensation body in that they minimize customer losses, permit the timely payment of claims by customers and reduce risk in the financial system by facilitating the efficient administration of security firm insolvencies when they may occur.
The amendment is also in the public interest as the MFDA IPC ensures that customers recover losses where assets available in the estate of the securities firm are not adequate.
In the development of this regulatory amendment, the following two options were considered.
Option one — Status quo
The Rules did not prescribe the MFDA IPC as a consumer compensation body even though it is the functional equivalent of the CIPF in respect of providing customer protection caused by the insolvency of a mutual fund dealer.
Option two — Prescribe the MFDA IPC as a “consumer compensation body” under the Bankruptcy and Insolvency General Rules (recommended)
Option two was the recommended option as it allows the MFDA IPC to have the same status, rights and authority as the CIPF under Part XII of the Act.
Benefits and costs
The benefit of the amendments is that public protection is enhanced by permitting the MDFA IPC to avail itself of the rights available to a compensation body under Part XII of the Act in the same manner that they are available to the CIPF.
With respect to costs, the adoption of the regulatory amendment has no significant monetary impact. The regulation does not add any new obligation or restriction. Therefore, there will be no direct cost to the industry or stakeholders.
Consultations between the OSB, Industry Canada’s Corporate and Insolvency Law Policy Directorate and stakeholders with respect to the proposed amendment as well as other legislative changes had been on-going since November 2007. Conference calls and meetings were held to discuss possible regulatory and legislative changes relating to Part XII of the Act. During these discussions, the stakeholders have on numerous occasions advocated the addition of a rule prescribing the MFDA IPC as a consumer compensation body under the Rules. The amendment enables MFDA IPC, a customer compensation body protecting customer accounts, to play a role in the bankruptcy proceeding of a firm whose customers it protects. The industry stakeholders, including IIROC, CIPF, MFDA and MFDA IPC have been consulted and support the amendment to the Rules.
On October 2, 2010, the proposed Rules were pre-published in the Canada Gazette, Part I (Vol. 144, No. 40), for a period of 30 days for consultation. The OSB received no comments.
Implementation, enforcement and service standards
No new mechanisms for compliance and enforcement are required because the amendment does not impose any new obligations or restrictions. The OSB’s existing compliance and enforcement mechanisms are sufficient.
Josée Pilotte, LL.L.
Senior Policy Analyst, Policy and Regulatory Affairs
Office of the Superintendent of Bankruptcy
155 Queen Street, 4th Floor
R.S., c. B-3; S.C. 1992, c. 27
C.R.C., c. 368; SOR/92-579; SOR/98-240