As we discussed in our post of June 25, the Canadian Securities Administrators (CSA) recently published for comment proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions (31-103), National Instrument 33-109 Registration Information (33-109), and Ontario Securities Commission Rule 33-506 (Commodity Futures Act) Registration Information and related policies and forms (the First Year Amendments). The First Year Amendments range from technical adjustments to more substantive matters and, according to the CSA, will serve to "enhance investor protection and improve the day-to-day operation" of the registration regime for both industry and regulators. Summarized below are some of the more substantive proposals under the First Year Amendments.
Incorporate Omnibus/Blanket Relief Orders and FAQs
The First Year Amendments would incorporate the omnibus/blanket relief orders issued by members of the CSA on February 26, 2010. Generally, the omnibus/blanket relief orders addressed issues relating to transition issues, including the continuation of grandfathering provisions in jurisdictions added to a registrant's registration, exemptions for chief compliance officers and advising representatives of portfolio managers from the proficiency requirements when adding specified categories of registration, and an exemption for mutual fund dealers from the requirement to establish whether a client is an insider of a reporting issuer or other publicly traded issuer. For additional information on the omnibus/blanket relief orders, see our post dated March 8, 2010.
The First Year Amendments would also incorporate into Companion Policy 31-103CP (31-103CP) some of the guidance in the CSA staff notices published as Frequently Asked Questions (FAQs) on December 18, 2009 and February 5, 2010. The First Year Amendments would include guidance from the FAQs on, among other matters, the availability of the dealer registration exemption under section 8.5 of 31-103 for cross-border "jitneys" (discussed in more detail below) and the availability of the international dealer exemption and international adviser exemption to foreign firms otherwise registered in one or more Canadian jurisdictions. For additional information on the FAQs, see our posts dated January 5, 2010 and February 11, 2010.
Amendments relating to International Financial Reporting Standards
Taking into account the upcoming changeover to international financial reporting standards (IFRS), the First Year Amendments would replace the term "market value" with the term "fair value" as it appears in the following:
- section 8.22 [Small security holder selling and purchase arrangements] of NI 31-103;
- section 14.14 [Account statements] of NI 31-103;
- Form 31-103F1 Calculation of Excess Working Capital;
- section 1.2 of 31-103CP, in the guidance relating to the determination of assets under paragraph (o) of the definition of permitted client;
- question b) in Schedule N to Form 33-109F4 Registration of Individuals and Review of Permitted Individuals; and
- question b) in Schedule E of Form 33-109F7 Reinstatement of Registered Individuals and Review of Permitted Individuals.
As a result of the proposed change, where a person or company is required to determine the fair value of a security under the above-referenced sections, the fair value would be determined in accordance with IFRS. The requirement to determine fair value of a security in accordance with IFRS would apply equally to resident and non-resident registrants, which may be onerous for non-resident registrants not otherwise subject to IFRS.
The proposed amendment is further to the proposed amendments to 31-103, 31-103CP and 33-109 published by the CSA for comment on October 23, 2009, which, in turn, operate in conjunction with the proposed amendments to National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency, published by the CSA for comment on September 25, 2009 (the IFRS Proposals). The proposed amendments of October 2009 generally address the changeover to IFRS as it applies to a registered firm's financial reporting obligations under Part 12 of 31-103. The IFRS Proposals would allow foreign registrants, subject to certain conditions, to prepare their financial statements in accordance with U.S. GAAP or such other accounting principles that meet the foreign disclosure requirements of the foreign regulatory authority to which the registrant is subject. For additional information on these proposed amendments see our posts dated September 25, 2009 and October 23, 2009.
Additional Requirements and Restrictions on Registered Representatives
The First Year Amendments would formally and explicitly entrench in 31-103 the requirement for a registered representative to understand the structure, features and risks of each security recommended by the registered representative. Currently, this requirement is addressed in 31-103CP and CSA Staff Notice 33-315 Suitability Obligation and Know Your Product.
The First Year Amendments would also entrench in 31-103, the practice of staff in various Canadian jurisdictions to restrict advising, associate advising and dealing representatives from being registered with more than one firm. This restriction would apply even if the firms are affiliated, however, the proposed guidance in 31-103CP states that when considering an exemption for relief from this restriction, affiliation of the firms will be one of the factors the CSA will consider. Other considerations for an application for relief from this restriction would include evidence that:
- there are valid business reasons for the individual to be registered with both firms;
- the individual will have sufficient time to adequately serve both firms;
- the sponsoring firms have policies and procedures addressing conflicts of interest that may arise as a result of the dual registration; and
- the sponsoring firms will be able to deal with these conflicts.
Extending Dealer Registration Exemption
Under the First Year Amendments, the dealer registration exemption under section 8.6 of 31-103 available to registered advisers and advisers relying on the international adviser exemption, for trades in securities of an investment fund managed by the adviser and traded to a managed account of a client of the adviser would no longer be restricted to non-prospectus qualified investment funds managed by the adviser. This dealer registration exemption would also be made available to prospectus-qualified funds managed by the adviser.
The First Year Amendments would include guidance in 31-103CP that generally incorporates the guidance from the FAQ published December 18, 2009 regarding the availability of the dealer registration exemption under section 8.5 of 31-103 for cross-border "jitneys". As provided in the proposed guidance, the dealer registration exemption in section 8.5 for trades made solely through a registered dealer would be available to a foreign dealer trading on behalf of its client, provided that all trading activity that occurs within the local Canadian jurisdiction is done through or to a dealer in that jurisdiction. The exemption would not be available if the foreign dealer or its client interacts directly with the client in the local Canadian jurisdiction.
International Dealer and International Adviser Registration Exemptions
Under 31-103, to continue to rely on the international dealer exemption or international adviser exemption, foreign firms must notify the applicable regulators (other than in Ontario) 12 months after it first submits a Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service, and each year thereafter that it continues to rely on the exemption. To simplify the administrative process, under the First Year Amendments the date on which the regulator must be notified annually of the continued reliance on the exemption would be December 1. Under the First Year Amendments, compliance with the filing and fee payment requirements under Ontario Securities Commission Rule 13-502 Fees would continue to satisfy the annual notice requirement in Ontario.
Currently, under the international adviser exemption, a non-Canadian adviser can advise permitted clients provided the non-Canadian adviser does not advise in Canada on securities of Canadian issuers, unless providing that advice is "incidental" to its providing advice on a foreign security. The First Year Amendments would include guidance under 31-103CP on the meaning of "incidental" advice on securities of Canadian issuers. This proposed guidance provides that the language is not intended to provide a "carve out" that allows some portion of the portfolio to be made up of Canadian securities chosen by the international adviser without restriction. According to the proposed guidance, any advice with respect to the Canadian securities must be directly related to the activity of advising on foreign securities. That said, the proposed guidance also provides that "an international adviser may recommend a foreign investment fund that primarily holds foreign securities, but which also holds some Canadian securities, and still meet the conditions of the exemption."
The First Year Amendments would include enhanced guidance in 31-103CP on the risks that should be mitigated by a firm's internal controls, as well as enhanced guidance on effective monitoring and supervision of compliance by the firm and its registered representatives.
The First Year Amendments would include guidance and recommendations in 31-103CP regarding complaint handling, including the documenting of complaints, what should be included in a firm's complaint handling policies and procedures, responding to verbal and written complaints and the timeline within which a complaint should be addressed. Under the proposed guidance, where a firm requests that a complainant put in writing a verbal complaint not clearly expressed, it would be expected that the firm offer the complainant reasonable assistance to put the complaint in writing, unless the claim is clearly frivolous.
The First Year Amendments would change the obligation of registered firms to ensure independent dispute resolution and mediation services are made available with respect to complaints relating only to:
- trading or advising activity;
- breach of client confidentiality;
- theft, fraud, misappropriation or forgery;
- undisclosed or prohibited conflicts of interest; or
- personal financial dealings with a client.
The proposed guidance would also encourage that firms seek to resolve complaints relating to the above-listed matters within 90 days.
Account Activity Reporting
The First Year Amendments would allow a registered dealer to send trade confirmations to a registered adviser acting for the client, provided the client consents in writing. The First Year Amendments would also impose account activity reporting obligations on investment fund managers, requiring that an investment fund manager send a trade confirmation to a security holder when the investment fund manager executes a redemption order received directly from the security holder, as well as require that an investment fund manager deliver account statements to a security holder, at least once every 12 months if there is no dealer on record for the security holder.
Members of SROs
The First Year Amendments would remove certain non-harmonized provisions respecting the mutual fund dealer category, and would provide additional exemptions to members of self-regulatory organizations (SROs) where the SRO rules adequately cover the same regulatory risks.
Ongoing and future CSA work on registrant regulation
The First Year amendments do not address a number of substantive issues that are still under review by the CSA, including:
- the application of the investment fund manager registration requirement with respect to an entity that directs the operation of an investment fund from a head office or other physical location that is outside the Canadian jurisdiction;
- an exemption for sub-advisers (currently, in Ontario the exemption remains in section 7.3 of Ontario Securities Commission Rule 35-502 Non-Resident Advisers, and Quebec has issued a decision to accommodate the regulatory gap for sub-advisor arrangements entered into prior to March 28, 2010 – for additional information, see our post dated January 5, 2010);
- an exemption for capital accumulation plans; and
- the requirements and guidance on cost disclosure and performance reporting to clients (which is part of the CSA's development of the client relationship model).
According to the notice, these matters will be addressed separately, and the CSA may publish staff notices or propose further amendments to 31-103 with respect to these specific matters in the future.
The CSA is accepting comments on the First Year Amendments until September 30, 2010.
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.