INTRODUCTION
The Canadian Securities Administrators (CSA) have proposed rule changes that will narrow the trading powers of dealers registered in the category of exempt market dealer (EMD), by prohibiting EMDs from trading any security that is listed, quoted or traded on a marketplace, whether in Canada or a foreign jurisdiction, either directly or indirectly, and whether the transaction is on-exchange or off-exchange. In addition, no dealer registration exemptions (such as international dealer) can be relied upon by anyone registered as a dealer in any jurisdiction of Canada.
NEW RESTRICTIONS TO EMD POWERS
As part of a package of proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), EMD trading powers would be amended and made more restrictive. This restriction on powers of EMDs was telegraphed earlier by CSA Staff Notice 31-333 Follow-up to Broker-Dealer Registration in the Exempt Market Dealer Category, and its predecessors.
EMDs will be permitted to participate in the distribution of securities, but only if made under an exemption from the prospectus requirement. The securities sold in that distribution could be securities of a reporting issuer and could, in that case, be listed or unlisted on a marketplace. EMDs will not be permitted to participate in any distribution of securities offered under a Canadian prospectus.
EMDs would also be permitted to participate in a resale of securities that are subject to resale restrictions, e.g., secondary trading in the prospectus exempt market with accredited investors.
EMDs can also participate in a resale of securities that are freely tradable, but only if the securities are not traded on a marketplace. "Marketplace" means an exchange, a quotation and trade reporting system or another form of facility that brings together orders for securities and multiple buyers and sellers and uses established non-discretionary methods under which the orders interact with each other. Notably, "marketplace" is not limited to Canadian marketplaces, so these proposed amendments would also prohibit EMDs from trading securities that are freely tradable and listed on a U.S. or other foreign exchange. This restriction is not limited to equity securities.
The restriction would mean that EMDs could not establish an omnibus account with a Canadian investment dealer and trade listed securities for the EMD's clients through that account.
The CSA expressed the view that these activities prohibited to EMDs should be conducted in Canada by registered investment dealers.
REGISTERED DEALERS CAN'T RELY ON INTERNATIONAL DEALER EXEMPTION (NOR ANY OTHER)
For firms that are currently registered, whether as EMDs, restricted dealers or investment dealers, a further complication may arise through proposed new section 8.0.1 of NI 31-103, which provides that none of the dealer registration exemption requirements in part 8 of NI 31-103 are available to a person registered in any jurisdiction of Canada in a category of registration that permits the person to act as a dealer or trade in a security for which the exemption is provided. For example, certain provinces had said that they would not allow firms registered as an EMD to concurrently rely on the international dealer exemption in that province.
The geographic scope of proposed section 8.0.1 is unclear. It may suggest that even if a dealer is registered in only one province of Canada, it could not rely upon the international dealer exemption (or any other dealer exemption) in any other province of Canada. The interaction with other exemptions is also not yet clear; for example, the jitney trade exemption in section 8.5 of NI 31-103, which provides a dealer registration exemption for a person who trades through a dealer registered in Canada, trading either as agent or purchasing as principal. Section 8.0.1 could suggest that any trader in a U.S. firm that is registered in Canada as an EMD must register in Canada all its U.S. traders who send client orders to Canadian investment dealers.
The CSA has specifically invited comments as to how this proposed section 8.0.1 may impact the current business models of registrants and whether these amendments will result in registered representatives needing relief from proficiency requirements in certain circumstances. For example, under the international dealer exemption, individual trading representatives of firms do not need to be registered in order to conduct that trading, while for EMDs, individual dealing representatives must be individually registered and normally satisfy Canadian proficiency requirements. The CSA have specifically invited comments as to whether registrants will face difficulty in complying with the proposed amendment and why.
HOW TO GET READY
Current EMDs should review their existing Canadian business to determine how they would be affected when the proposed amendments come into effect. The proposed effective date for these changes is not identified in the request for comments. If either the new trading restrictions or the new limitation on registrants relying upon other registration exemptions give rise to concerns, the comment period is open until March 5, 2014.
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.
