Canada: Canadian Securities Regulatory Requirements Applicable To Non-Resident Broker-Dealers, Advisers And Investment Fund Managers

1.00 PURPOSE

1.01 The purpose of this paper is to provide a non-resident of Canada with an overview of the dealer registration, adviser registration, investment fund manager registration and prospectus requirements that should be considered and addressed by the non-resident before it begins to trade securities with, or provide investment advice to, any person or company located in Canada, or to act as an investment fund manager in Canada. All currency amounts that are referred to in this paper are denominated in Canadian dollars.

2.00 THE CANADIAN SECURITIES REGULATORY FRAMEWORK

2.01 Like the United States, Canada has a federal system of government whereby the authority to enact legislation is divided between the federal and the provincial and territorial governments. Unlike the United States, the Canadian securities markets are currently regulated solely by the provincial and territorial governments¹. As a result, each of Canada's 10 provinces and three territories has its own legislative scheme for regulating the securities market within its own provincial or territorial jurisdiction and its own securities commission or regulatory authority (a "Securities Regulator") for administering and enforcing such legislation. Securities regulatory requirements in Canada can therefor vary from jurisdiction to jurisdiction.

2.02 Canadian securities legislation generally regulates the trading of, and advising in respect of, securities within a province or territory by requiring those who engage in, or hold themselves out as being engaged in, the business of trading in, or advising in respect of, securities to become registered or licensed as a dealer or adviser, respectively, and by requiring those who distribute securities to file a prospectus with, and obtain a receipt therefor from, the applicable Securities Regulator(s) unless:

Canadian securities legislation also requires any person or company who acts as an investment fund manager in a province or territory of Canada to become registered as such with the relevant Securities Regulator subject to certain transitional relief that has been granted pursuant to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Obligations ("NI 31-103"). As described in greater detail below, non-resident investment fund managers are generally exempt from the investment fund manager registration requirement until September 28, 2012.

2.03 For purposes of the dealer registration and prospectus requirements of Canadian securities legislation, the term "trade" is broadly defined to include any sale or disposition of a security for valuable consideration, any receipt by a registrant of an order to buy or sell a security and any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance thereof. The term "distribution" is defined, with reference to the term "trade", to include a trade in the securities of an issuer that have not been previously issued.

2.04 For purposes of the adviser registration requirement, what constitutes carrying on the business of an adviser has been the subject of two significant decisions of the Ontario Securities Commission ("OSC"). In the Matter of Jack Maguire & J.K. Maguire & Associates², the OSC endorsed the following statement of the British Columbia Securities Commission made In The Matter of Robert Anthony Donas³:

A person who does nothing more than provide factual information about an issuer and its business activities is not advising in securities. A person who recommends an investment to an issuer or a purchase or sale of an issuer's securities, or who distributes or offers an opinion on the investment merits of an issuer or an issuer's securities, is advising in securities. If a person advising in securities is distributing or offering the advice in a manner that reflects a business purpose, the person is required to be registered under the Act.

The OSC provided further guidance In The Matter of Brian K. Costello⁴ when it observed that "the trigger for registration as an adviser is not doing one or more acts that constitute the giving of advice but engaging in the business of advising". In Costello, the OSC went on to state that:

Providing mere financial information in relation to specific securities does not constitute the giving of advice, but providing an opinion on the wisdom or value or desirability of investing in specific securities does: Re Canadian Shareholders Association (1992), 15 OSCB 617. In Lowe v. Securities and Exchange Commission, 472 U.S. 181 (1985), a 'one-on-one' relationship involving the giving of advice on specific securities to specific individuals was found to be required to qualify as the giving of advice under U.S. law. Such a direct one-on-one relationship with an investor is not required to qualify as the giving of advice under Ontario law.

2.05 In an effort to harmonize Canadian securities laws, each of the 13 Securities Regulators in Canada have, under rule making authority granted by the provincial and territorial governments, established numerous rules, referred to as national instruments, that operate in a substantially identical manner in each province and territory. NI 31-103 is a product of this harmonization effort.

3.00 TRADING IN SECURITIES BY NON-RESIDENT BROKER-DEALERS

3.01 In lieu of becoming registered as a dealer, a non-resident that proposes to engage in the business of trading securities in Canada may elect to rely upon one of a very limited range of dealer registration exemptions. The most relevant exemptions from a non-resident's perspective are the international dealer and registered dealer exemptions that are described below.

International Dealer Exemption

3.02 A non-resident person or company that is eligible to rely on the international dealer exemption may engage in the following trading related activities without having to become registered as a dealer in reliance upon section 8.18(2) of NI 31-103 (the "International Dealer Exemption").

(a) an activity, other than a sale of a security, that is reasonably necessary to facilitate a distribution of securities that are offered primarily in a foreign jurisdiction;

(b) a trade in a debt security with a Canadian permitted client during the security's distribution if the debt security is offered primarily in a foreign jurisdiction and a prospectus has not been filed with a Canadian securities regulatory authority for the distribution;

(c) a trade in a debt security that is a foreign security⁵ with a Canadian permitted client, other than during the security's distribution;

(d) a trade in a foreign security with a Canadian permitted client unless the trade is made during the security's distribution under a prospectus that has been filed with a Canadian securities regulatory authority;

(e) a trade in a foreign security with an investment dealer; and

(f) a trade in any security with an investment dealer that is acting as principal.

3.03 For purposes of the International Dealer Exemption, a Canadian permitted client is a person or company that is referred to in paragraphs (a) to (e), (g) or (i) to (r) on the list of permitted clients that is attached as Schedule A⁶ provided that:

(a) in the case of an individual, the individual is a resident of Canada;

(b) in the case of a trust, the terms of the trust expressly provide that those terms are governed by the laws of a jurisdiction of Canada; and

(c) in any other case, the permitted client is incorporated, organized or continued under the laws of Canada or a jurisdiction of Canada.

3.04 A non-resident is only eligible to rely upon the dealer registration exemption that is available pursuant to the International Dealer Exemption if all of the following terms and conditions apply:

(a) the head office or principal place of business of the non-resident is in a foreign jurisdiction;

(b) the non-resident is registered under the securities legislation of the foreign jurisdiction in which its head office or principal place of business is located in a category of registration that permits it to carry on the activities in that jurisdiction that registration as a dealer would permit it to carry on in Canada;

(c) the non-resident engages in the business of a dealer in the foreign jurisdiction in which its head office or principal place of business is located;

(d) the non-resident is acting as principal or as agent for the issuer of the securities, for a Canadian permitted client who is a Canadian resident of Canada or for another non-resident; and

(e) the non-resident has submitted to the relevant Canadian Securities Regulator(s) a completed Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service ("Form 31-103F2").

3.05 In addition to the above-described terms and conditions, the International Dealer Exemption is not available to a non-resident in respect of a trade with a Canadian permitted client unless one of the following applies:

(a) the Canadian permitted client is registered as a dealer or adviser under the securities legislation of a province or territory of Canada; or

(b) the non-resident has provided the Canadian permitted client with notice (a "Client Notice") of the following:

(i) the non-resident is not registered in the relevant province or territory to make the trade;

(ii) the foreign jurisdiction in which the head office or principal place of business of the non-resident is located;

(iii) all, or substantially all, of the assets of the non-resident may be situated outside of Canada;

(iv) there may be difficulty enforcing legal rights against the non-resident because of the above;

(v) the name and address of the agent for service of process of the nonresident in the relevant province or territory.

Registered Dealer Exemption

3.06 A second dealer registration exemption that is available to a non-resident is the registered dealer exemption that is available pursuant to section 8.5 of NI 31-103. Section 8.5 provides that the dealer registration requirement does not apply to a person or company in respect of a trade made by the person or company if the trade is made:

(a) solely through an agent that is a registered dealer; or

(b) to a registered dealer that is purchasing as principal,

provided, in either case, that the registered dealer is registered in a category of dealer registration that permits the trade.

4.00 ADVISING IN SECURITIES BY NON-RESIDENT ADVISERS

4.01 In lieu of becoming registered as an adviser, a non-resident that proposes to engage in the business of an adviser in Canada may elect to rely on one of two adviser registration exemptions. The first exemption is the sub-adviser exemption. As described below, the subadviser exemption is available as a statutory exemption in Ontario and Quebec and it is generally available as a discretionary exemption in all other provinces and territories. The second exemption is the international adviser exemption, also described below, that is available as a statutory exemption in all provinces and territories pursuant to section 8.26 of NI 31-103 (the "International Adviser Exemption").

4.02 Before describing each of the above-described adviser registration requirements, it should be noted that Ontario's look-through approach to adviser registration was abandoned effective September 28, 2009. As a result, an adviser to an investment fund that distributes its securities into Ontario is no longer required to address adviser registration requirements, and Ontario adviser registration requirements are, like all other provincial and territorial jurisdictions, generally applicable only to advisers who provide investment advice on a separately managed account basis to person or companies, including investment funds, that are resident or otherwise located in Canada.

Sub-Adviser Exemption

4.03 As noted above, the sub-adviser exemption is only available as a statutory exemption in Ontario and Quebec. It permits a non-resident adviser to effectively jitney its advice through a registered adviser or a registered investment dealer for the benefit of the registrant's clients.

4.04 In Ontario, the sub-adviser exemption is available pursuant to section 7.3 of OSC Rule 35-502 Non-Resident Advisers ("OSC Rule 35-502"). According to section 7.3, the exemption is only available if the obligations and duties of the non-resident adviser are set out in a written agreement with the Ontario registered adviser or investment dealer, as the case may be, and the Ontario registrant contractually agrees with its clients on whose behalf investment advice is, or portfolio management services are to be, provided to be responsible for any loss that arises out of the failure of the person or company so acting as an adviser to:

(a) exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the registrant and each client of the registrant for whose benefit the advice is, or the portfolio management services are, to be provided; or

(b) to exercise the degree of care, diligence and skill that a reasonable prudent person would exercise in the circumstances.

A comparable statutory exemption is available in Quebec and can generally be obtained by way of an application for exemptive relief in other provinces and territories.

International Adviser Exemption

4.05 The international adviser exemption that is available pursuant to section 8.26 of Nl 31- 103 (the "International Adviser Exemption") is similar to the International Dealer Exemption because it permits a non-resident to act as an adviser to certain Canadian permitted clients subject to terms and conditions set out in paragraph 4.07 below that are similar to those set out in paragraph 3.04 above provided that:

(a) Canadian permitted clients do not include a person or company registered as a dealer or adviser in any province or territory of Canada; and

(b) the non-resident does not provide advice in Canada in respect of securities of Canadian issuers except to the extent that such advice is incidental to its providing advice in respect of foreign securities.⁷

4.06 For purposes of the International Adviser Exemption, a Canadian permitted client is a person or company that is referred to in paragraphs (a) to (c), (e), (g) or (i) to (r) on the list of permitted clients that is attached as Schedule A⁸ provided that:

(a) in the case of an individual, the individual is a resident of Canada;

(b) in the case of a trust, the terms of the trust expressly provide that those terms are governed by the laws of a jurisdiction of Canada; and

(c) in any other case, the permitted client is incorporated, organized or continued under the laws of Canada or a jurisdiction of Canada.

Footnotes

1 On May 26, 2010, the federal Minister of Finance released a draft of a proposed federal securities Act (the "Proposed Federal Securities Act") that was intended to establish a comprehensive and uniform framework for the regulation of securities and derivatives trading and advisory activities throughout the country. Rather than introducing the Proposed Federal Securities Act to Parliament as a bill, the federal government referred it to the Supreme Court of Canada for the Court's opinion on the constitutional authority of the federal government to enact such legislation. The Supreme Court of Canada heard the case on April 13, and 14, 2011 and it rendered its decision on December 22, 2011. The Court reached the unanimous decision that the Proposed Federal Securities Act is not constitutional because the federal government does not have the power to regulate comprehensively trading in securities pursuant to its general trade and commerce power under the Constitution Act, 1867. The Supreme Court of Canada noted that although the federal government's power to regulate trade and commerce is broadly cast, it cannot be used in a way that denies the provinces the power to regulate local matters and industries within their boundaries.

2 (1995) 18 OSCB 4623

3 BC Weekly Summary, April 7, 1995, p. 39

4 (2003) 26 OSCB 1617

5 For purposes of section 8.18 of NI 31-103, a foreign security means a security that has been issued by an issuer incorporated, formed or created under the laws of a foreign jurisdiction and a security issued by the government of a foreign jurisdiction.

6 The Securities Regulators have recently issued orders and no-action notices to allow a non-resident person or company to rely on the International Dealer Exemption as if the term "Canadian permitted client" referred to the entire list of permitted clients attached as Schedule A. See section 2 of Canadian securities administrators ("CSA") Notice 31-329 Omnibus/Blanket Orders Exempting Registrants from Certain Provisions of NI 31-103 and Related Staff Positions ("CSA Notice 31-329"). We would be happy to discuss these orders and no-action notices with you at your convenience.

7 Supra, note 5.

8 The Securities Regulators have issued orders and no-action notices to allow a non-resident person or company to rely upon the International Adviser Exemption as if the term "Canadian permitted client" referred to the entire list of permitted clients attached as Schedule A. See section 2 of CSA Notice 31-329. We would be happy to discuss these orders and no-action notices with you at your convenience.

9 For purposes of the International Adviser Exemption, aggregate consolidated gross revenue does not include the gross revenue of an affiliate of the adviser if the affiliate is registered in a jurisdiction of Canada.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.