IDA By-Laws 10.1 and 10.4 - Board of Directors, National Advisory Committee and Meetings

INVESTMENT DEALERS ASSOCIATION OF CANADA

BY-LAWS 10.1 AND 10.4 - BOARD OF DIRECTORS, NATIONAL ADVISORY COMMITTEE AND MEETINGS

I OVERVIEW

In June 2005, the IDA submitted a proposal to the Canadian Securities Administrators (CSA) to amend By-law 10.1 by eliminating the requirement that the Board of Directors be comprised of two-thirds Industry Directors. In December 2005, the IDA Membership approved a plan to continue as a Self-Regulatory Organization (SRO) and to create a separate and independent Trade Association to represent the Canadian securities industry. As such, additional changes to the structure of the Board of Directors of the SRO will be made. The first of these changes is to withdraw the current proposal before the CSA with respect to By-law 10. 1 and 10.4 and re-submit the following proposed amendments for consideration.

A Current Rules

IDA By-law 10.1 sets out the composition of the IDA Board of Directors. The by-law specifies that at least two-thirds of the Board be comprised of Industry Directors and gives the Board the authority to determine the number of members of the Board, which is confirmed each year at the Annual Meeting. The by-law also states that a maximum of eight Public Directors can be appointed to the Board.

IDA By-law 10.4 requires that nine members of the Board of Directors must be present in person at a meeting of the Board in order to form a quorum and that any action taken by a majority of those members shall constitute an action of the Board.

B The Issues

Depending on the size of the Board, the effective maximum number of Public Directors may be less than eight, because two-thirds of the Board must be comprised of Industry Directors. The Association is of the opinion that an equal number of Public and Industry Directors should be represented on the Board. As such, the two-thirds requirement needs to be removed so that the number of Public Directors on the Board at any given time will be equal to the number of Industry Directors.

Because of the changes that are being made to the structure of the Board, an amendment is required to amend what constitutes a quorum of the Board of Directors.

C Objective

The objective of the amendments is to enhance the corporate governance structure by creating a structure that is manageable in size for effective governance and decision making and which reflects a higher standard of independence than currently exists. Creating a more independent and transparent Board of Directors who is held responsible is necessary in today's corporate landscape.

D Effect of Proposed Rules

The proposed amendment strengthens the IDA's mission to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets. By removing the requirement which specifies a minimum percentage of Industry Directors, and requiring an equal number of Industry and Public Directors, a more independent and transparent Board of Directors will emerge.

II DETAILED ANALYSIS

A Present Rules, Relevant History and Proposed Policy

Present Rules

By-law 10.1 requires that the Board of Directors include in its composition the Chair, the immediate Past Chair, the Vice-Chair, the President, the Chair of the National Advisory Committee, up to eight Public Directors, and up to thirteen other persons. In addition, a minimum of two-thirds of the members of the Board of Directors must be Members or partners, directors or officers of Members. The size of the Board is determined by the Board of Directors and confirmed each year at the Annual Meeting.

The by-law states that the Board can be comprised of up to a maximum of eight Public Directors but also requires that a minimum of two-thirds of the Board of Directors be Members or partners, directors of officers of a Member, which depending on the size of the Board of Directors may not allow for a significant number of Public Directors.

By-law 10.4 addresses the issue of what constitutes a quorum for the purposes of a meeting of the Board of Directors. The current rule states that nine members of the Board of Directors present in person at a meeting of the Board shall form a quorum and that any action taken by a majority of those members shall constitute an action of the Board.

Proposed Policy

The proposed By-law amendment is structured to create a Board of Directors that has equal number of Industry Directors and Public Directors, which is needed in order to best serve the investing public and reflect a higher standard of independence. Good corporate governance demands increased independence and transparency and for Public Directors to truly be effective they must constitute a sufficient proportion of the Board. As such, the two-thirds requirement needs to be removed from the by-law so that the number of Public Directors and the number of Industry Directors on the Board can be equal

In November 2000, the IDA retained a consultant, Terence D. Dingle of Dingle and Associates Inc. to examine corporate governance issues. One recommendation made was that the size of the IDA Board should be reduced as it was felt to be unmanageable for effective governance or decision-making. As such, the proposed amendment mandates that the size of the Board be between nine members and twenty-one members, whereas the current By-law allows a maximum of twenty-six members with no minimum requirement.

By-law 10.4 sets out what constitutes a "quorum" for the purposes of a Board meeting. The by-law currently states that a quorum of the Board is nine members but since the size of the Board has been amended and an equal proportion required, a change is required to mandate that a majority of the Board of Directors be present in person in order to constitute a quorum and further, that at least two of those present be Public Directors.

B Issues and Alternatives Considered

In June 2005 when the initial amendments to By-law 10.1 and 10.4 were submitted to the CSA for approval, comments were received from the CSA questioning why a specific number of Public and Industry Directors were not proposed. As such no other alternatives were considered in re-submitting our proposal for consideration.

C Systems Impact of Rule

There are no systems issues associated with the amendment.

D Best Interests of the Capital Markets

The Board has determined that the public interest rule is not detrimental to the best interests of the capital markets.

E Public Interest Objective

According to subparagraph 14(c) of the IDA's Order of Recognition as a self-regulatory organization, the IDA shall, where requested, provide in respect of a proposed rule change "a concise statement of its nature, purposes (having regard to paragraph 13 above) and effects, including possible effects on market structure and competition". Statements have been made elsewhere as to the nature and effects of the proposals with respect to the proposed amendments.

The purpose of the proposal is to ensure that the governance and organization structure is of paramount importance as it provides the platform from which the Association delivers upon its mandate. As a national not-for-profit Self-Regulatory Organization, the aim of the IDA's corporate governance structure must be to satisfactorily address the inherent conflicts between the public, Members and management. As a result the related general purpose of the amendment is:

• generally promote public confidence and public understanding of the goals and activities of the IDA

The proposal does not permit unfair discrimination among customers, issuers, brokers, dealers, Members or others. It does not impose any burden on competition that is not necessary or appropriate in furtherance of the above purposes.

III COMMENTARY

A Filing in Other Jurisdictions

These proposed amendments will be filed for approval in Alberta, British Columbia, Quebec and Ontario and will be filed for information in Manitoba, Nova Scotia and Saskatchewan.

B Effectiveness

The proposed amendments are simple and effective.

C Process

The proposed amendments were developed by the Executive Committee of the IDA and have been approved by the IDA Board of Directors.

IV SOURCES

References:

• By-law 10.1

• By-law 10.4

• Governance Review, D. Terence Dingle, Dingle & Associates, January 2001

V OSC REQUIREMENT TO PUBLISH FOR COMMENT

The IDA is required to publish for comment the accompanying amendments to By-laws 10.1 and 10.4.

The Association has determined that the entry into force of the proposed amendments would be in the public interest. Comments are sought on the proposed amendments. Comments should be made in writing. One copy of each comment letter should be delivered within 30 days of the publication of this notice, addressed to the attention of Richard J. Corner, Vice President, Regulatory Policy, Investment Dealers Association of Canada, Suite 1600, 121 King Street West, Toronto, Ontario, M5H 3T9 and one copy addressed to the attention of the Manager of Market Regulation, Ontario Securities Commission, 20 Queen Street West, 19^th Floor, Box 55, Toronto, Ontario, M5H 3S8.

Questions may be referred to:

Richard J. Corner

Vice President, Regulatory Policy

Investment Dealers Association of Canada

416.943.6908

[email protected]

INVESTMENT DEALERS ASSOCIATION OF CANADA

BY-LAWS 10.1 AND 10.4 - BOARD OF DIRECTORS, NATIONAL ADVISORY COMMITTEE AND MEETINGS

BOARD RESOLUTION

THE BOARD OF DIRECTORS of the Investment Dealers Association of Canada hereby makes the following amendments to the By-laws, Regulations, Forms and Policies of the Association:

1. By-law 10.1 is amended by deleting the first paragraph and replacing it as follows:

"There shall be a Board of Directors of the Association composed from time to time of such odd numbers of persons between a minimum of nine and a maximum of twenty-one as the Members may determine by resolution at the Annual Meeting. The Board shall consist of an equal number of Industry Directors (one of whom shall be the Chair of the National Advisory Committee) and Public Directors together with the President. Industry Directors (other than the Chair of the National Advisory Committee) shall be nominated by the Nominating Committee referred to in By-law 13.4 and approved by the Board of Directors or nominated by any Member at the Annual Meeting (which nomination shall be made by the Member if he or she is an individual or by the senior partner, director or officer of the Member present at the Annual Meeting) and confirmed at the Annual Meeting. All of such nominated and confirmed Industry Directors shall hold office for such term not exceeding two years as may be prescribed in the resolution appointing them. Notice of the names of those persons who have been nominated by the said Nominating Committee and approved by the Board of Directors as Industry Directors shall be given to each Member at least thirty days prior to the Meeting."

2. By-law 10. 1 is amended by removing the following sentence in the third paragraph:

"A minimum of two-thirds of the members of the Board of Directors shall at all times be Members or partners, directors or officers of Members."

3. By-law 10.4 is amended by replacing the words "nine members" with the words "a majority."

4. By-law 10.4 is amended by including the phrase "provided at least two Public Directors are present." immediately after the word "thereof".

PASSED AND ENACTED BY THE Board of Directors this 12th day of April 2006, to be effective on a date to be determined by Association staff.

INVESTMENT DEALERS ASSOCIATION OF CANADA

BY-LAWS 10.1 AND 10.4 - BOARD OF DIRECTORS, NATIONAL ADVISORY COMMITTEE AND MEETINGS

BLACKLINE COPY OF AMENDED SECTIONS

By-law 10.1 -- Amendment #1

10.1. There shall be a Board of Directors of the Association composed from time to time of such odd numbers of persons between a minimum of nine and a maximum of twenty-one as the Members may determine by resolution at the Annual Meeting. The Board shall consist of an equal number of Industry Directors (one of whom shall be the Chair of the National Advisory Committee) and Public Directors together with the President.of the Chair, the immediate Past Chair, the Vice-Chair, the President, the Chair of the National Advisory Committee, up to eight public directors, and up to thirteen other persons Industry Directors (other than the Chair of the National Advisory Committee) shall be nominated by the Nominating Committee referred to in By-law 13.4 and approved by the Board of Directors or nominated by any Member at the Annual Meeting (which nomination shall be made by the Member if he or she is an individual or by the senior partner, director or officer of the Member present at the Annual Meeting) and confirmed at the Annual Meeting., aAll of such nominated and confirmed Industry Directors shall persons to hold office for such term not exceeding two years as may be prescribed in the resolution appointing them. The number of members of the Board of Directors to be confirmed at each Annual Meeting shall be fixed by the Board of Directors and nNotice thereof and of the names of those persons who have been nominated by the said Nominating Committee and approved by the Board of Directors as Industry Directors shall be given to each Member at least thirty days prior to the Meeting.

The public directors shall be elected annually by the Board of Directors at its first meeting following the Annual Meeting to hold office for such term not exceeding two years as may be prescribed in the resolution electing them. Except as expressly provided otherwise, a public director shall be considered a member of the Board of Directors for the purposes of the By-laws. No person shall be eligible to be elected or remain as a public director if he or she is or becomes during his or her term of office a partner, director, officer or employee of a Member or associate or affiliate or related company of a Member. Nominations for public directors shall be made by the Nominating Committee referred to in By-law 13.4 and may be made by any member of the Board of Directors.

In the event that any person shall hold the office of Chair for two successive years, the immediate Past Chair shall continue to be a member of the Board of Directors during such Chair's second year of office. A retiring member of the Board of Directors shall be eligible for re-appointment. If a vacancy shall occur in the Board of Directors, the remaining members of the Board may appoint a person to fill the vacancy for the remainder of the term or until the next Annual Meeting whichever is the earlier, provided that a quorum is present at the meeting at which such appointment is made. A minimum of two thirds of the members of the Board of Directors shall at all times be Members or partners, directors or officers of Members. No Member shall have more than two partners, directors or officers as members of the Board of Directors at any one time, nor may both such members be from the same District, unless one of such members is either the Past Chair of the Association or the Chair of the National Advisory Committee. Where the Board selection process would result in more than two persons from a Member serving on the Board, the Chief Executive Officer of that Member shall decide which two persons will serve on the Board.

By-law 10.4 -- Amendment #2

10.4 Nine Members A majority of the Board of Directors present in person shall form a quorum at any meeting thereof provided at least two Public Directors are present and any action taken by a majority of those members of the Board present at any meeting of the Board at which a quorum is present shall constitute the action of the Board.