The Canadian registration regime continues to evolve at a rapid pace, with new rule amendments proposed and more under development, the introduction of new rules by the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC), and important compliance deadlines swiftly approaching.
The Canadian Securities Administrators (the CSA) released for comment at the end of June 2010, the anticipated proposed "first year" amendments to National Instrument 31- 103 Registration Requirements and Exemptions. At the same time, they also indicated their intention to continue working on several outstanding regulatory reform projects relating to registrant regulation. This regulatory activity comes at a time when registrants and other securities industry participants must ensure they will be in compliance with significant new requirements that come into effect at the end of September 2010 as transition periods end.
To help you keep reforms in sight, this Investment Management Bulletin highlights some of the important regulatory developments and upcoming deadlines that will affect securities industry participants carrying on business in Canada.
Comments on the proposed "first year" amendments to National Instrument 31-103 are due by September 30, 2010. We will be providing comments on the proposals and would be pleased to assist you in preparing a comment letter by the deadline.
BLG's Keeping Reforms in Sight
The Investment Management Advisories in our eight-part series entitled Keeping Reforms in
Sight: Understanding the New Canadian Registration Requirements explain the impact of National Instrument 31-103 on the various types of financial services firms that must be registered (or rely on registration exemptions) to conduct securities-related activities in Canada. Included are What's New commentaries for each of the key registration categories and an outline of the implications of National Instrument 31-103 for non-Canadian advisers and dealers doing business in Canada.
Our publications are available [here] and on our website www.blgcanada.com/en/home/Pages/default.aspx www.blgcanada.com. You can also access our National Instrument 31-103 At a Glance publication [here]. If you would like to receive our publications in bound booklet format, please email email@example.com to request a copy.
Proposed "first-year" amendments to National Instrument 31-103
The CSA indicate that the proposed amendments to National Instrument 31-103 and related instruments [available here] are a response to feedback obtained from industry participants working to implement National Instrument 31-103 and the CSA's own experience with the new registration regime. Generally, the proposed amendments are intended to make the registration rules clearer, either through new requirements or the rewording of existing rules or through additional guidance provided in the Companion Policy. To better reflect the breadth and scope of the various requirements, the CSA also propose to change the name of National Instrument 31-103 to: Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Many of the proposed amendments simply reflect the exemptions that have been granted following the implementation of National Instrument 31-103.
For example, National Instrument 31-103 will provide for grandfathering proficiency for certain chief compliance officers and certain dealing or advising representatives and relief for mutual fund dealers from the requirement to establish whether a client is an insider of a reporting issuer or an issuer whose securities are publicly traded. BLG's April 2010 Investment Management Bulletin National Instrument 31-103: The First Six Months–What's Next? [available here] describes the earlier exemptions, as well as some of the responses to frequently asked questions released by the CSA following the implementation of National Instrument 31-103.
However, some of the proposed amendments reflect new requirements or new guidance that will, if adopted, significantly impact registrants. No transition is proposed for any of these new proposed requirements and guidance. Some of the more significant proposed new requirements and guidance are outlined below.
Individual registered representatives will
- be required to have education and training sufficient to enable them to understand the structure, features and risks of each security they recommend; and
- be prohibited from being registered as a representative for more than one registered firm, although exemption applications will be considered in limited cases and existing registered individuals that are registered with more than one firm will be grandfathered.
Portfolio managers will benefit from the proposal to extend the dealer registration exemption available for these registrants when they trade in their own investment funds to managed accounts to include their own prospectus-qualified funds, as well as their own privately offered funds.
Investment dealers acting as portfolio managers under IIROC rules will become subject to the same restrictions on certain managed account transactions as registered portfolio managers.
Mutual fund dealers operating in Québec will only be able to rely on the exemptions from National Instrument 31-103 requirements available to MFDA members if equivalent requirements are applicable to the mutual fund dealers under the regulations in Québec. This is a change from the current exemption where a mutual fund dealer in Québec only has to comply with applicable requirements in Québec (and not concern itself with determining if the requirement in Québec is equivalent to the National Instrument 31-103 requirement). The Autorité des marchés financiers (AMF) has publicly stated that it intends to adopt rules largely harmonized to those of the MFDA by September 2011. Assuming that the proposed amendments to National Instrument 31-103 will be in force sometime in early 2011, mutual fund dealers operating in Québec will need to comply with some of National Instrument 31-103's ongoing registrant obligations for a few months, to then be subject to the new MFDA-harmonized rules. We understand that the AMF would consider providing some form of relief should this proposed amendment create undue hardship for mutual fund dealers in Québec.
Portfolio managers and dealers will benefit from the proposal to limit the requirement to provide clients with an independent dispute resolution or mediation service to specified types of complaints. Firms registered as of September 28, 2009 still can rely on the transition exemption from having to comply with this requirement until September 28, 2011.
Investment fund managers will be required to provide specified trade confirmations and account statements to investors who deal directly with them, including those investors who place redemption orders directly with them. The CSA acknowledge that these proposals may present challenges for investment fund managers and ask specifically for these firms to review the new rules carefully and comment.
International firms operating under the international dealer or international adviser exemption in National Instrument 31-103 will find more refined and restrictive conditions on those exemptions. For example, the CSA have clarified that these exemptions are intended only for non-Canadian advisers and dealers to provide limited services to Canadian resident permitted clients. The current requirement for international firms who intend to continue relying on these exemptions to notify each applicable CSA member on an annual basis will, under the proposals, be required to provide that notice by December 1 of each year. The CSA have also clarified to what extent international advisers can provide "incidental advice" about Canadian securities. This restriction is not intended to permit a de minimus amount of advice, but rather any advice about Canadian securities must be directly related to the firm's activity of advising on foreign securities.
SRO members will have more exemptions from provisions of National Instrument 31-103 available to them, primarily in areas where the SROs continue to develop their own rules – for example, complaint handling. The CSA will also exempt SRO members from the requirements in National Instrument 31-103 to provide client statements, once the SROs implement conforming rule amendments. SRO members that are also registered in another category will particularly benefit from the additional clarity provided for in the proposed amendments, with exemptions proposed for these firms that will allow them to be subject to only one set of rules – MFDA or IIROC rules – for many requirements.
All registrants that have referral arrangements in place will benefit from the changes proposed by the CSA for the referral rules. For example, a referral agreement need only be signed by the registered firm and the other party but not by any individual representative who may be participating in the referral arrangement.
Companion Policy: The CSA propose amendments to the Companion Policy to National Instrument 31-103, which expand significantly the guidance given to registrants on the following topics.
- Additional guidance is given on the CSA's core principle that requires registrants to institute a "firmwide culture of compliance", including enhanced discussion of compliance systems and the distinction between "monitoring" and "supervision".
- Guidance is provided about the availability of the "trades through a registered dealer" exemption, including that it is not intended to allow a firm to escape registration where it is "in the business of trading"(e.g. doing acts in furtherance of a trade) but then executes the trade through a registered dealer.
- Guidance on complaint handling requirements has been significantly expanded, including the CSA's expectations as to when a firm must respond in writing to complaints and the various time-lines that firms will be expected to meet in connection with complaints. The CSA explain that a firm will be expected to take a balanced approach to fact gathering in the context of complaints. A firm's complaint handling policy should provide for specific procedures for reporting the complaints to superiors. Note that the complaint handling requirements of National Instrument 31-103 became effective on September 28, 2009, for all registrants other than investment fund managers.
SRO Rule amendments - client relationship requirements MFDA:
The "client relationship" amendments to the MFDA rules were approved by the applicable CSA members in mid-July 2010. These rule amendments relate to client accounts, minimum standards for account supervision, client communications and client reporting. The MFDA has indicated that the amendments will be presented to MFDA members at the December 2010 annual meeting for final approval and if approved will be made effective shortly thereafter subject to transition periods for certain requirements.
If approved by the MFDA membership, the amendments will, among other things,
- require MFDA members to provide investors with certain fundamental information at the time an account is opened – similar to the "relationship disclosure information" requirements under National Instrument 31-103;
- clarify the duty of MFDA members and approved persons to assess the suitability of investments in each client account when various triggering events occur;
- clarify the responsibilities of MFDA members and their representatives in discharging obligations to ensure suitable recommendations;
- require MFDA members to provide certain information to clients on an annual basis with respect to the performance of the client's account; and
- clarify an MFDA member's supervisory requirements regarding client communications that disclose a rate of return.
IIROC has also proposed "client relationship" amendments to its rules similar to those proposed by the MFDA. IIROC's proposed amendments which were approved by the IIROC Board of Directors in June 2010 are expected to be republished in the near future for a 90-day comment period.
Ongoing CSA initiatives
The CSA explain in the recent publication that industry participants can expect to see other proposals for amendments to National Instrument 31-103 and related instruments as they continue their work on various outstanding projects. We expect that the CSA would welcome comments from industry participants on these issues .
- Registration for investment fund managers in provinces and territories other than the jurisdiction of their head office – this could affect non-Canadian investment fund managers that are today not required to be registered in this capacity in Canada.
- Exemption for sub-advisers – currently, Ontario and Québec are the only provinces that provide registration exemptions for sub-advisers; in the other Canadian jurisdictions such relief must be applied for.
- Exemption for capital accumulation plans – the CSA proposed an exemption regime for capital accumulation plans in 2005 but that proposal was never finalized.
- Cost disclosure and performance reporting to clients – the CSA continue to work with the SROs to develop harmonized requirements for enhanced cost disclosure and performance reporting requirements.
- Client statements, including whether they should include securities held or controlled by a firm or whether they need to also include client name securities. In addition to seeking general comments on this issue, the CSA have asked for feedback on specific questions about the issue.
- Requirements for registrants to report on client complaints to the CSA.
Mortgage investment corporations and mortgage syndicators:
The CSA are also considering how the registration regime should fit with the business of mortgage investment corporations and mortgage syndicators. These entities are expected to benefit from an additional transition period – to the end of 2010 – before the adviser and investment fund manager registration requirements will apply to them. Importantly, however, the CSA have indicated clearly that firms in the business of mortgage investment corporations and mortgage syndicators are in "the business of trading" in the exempt market and must comply with the requirement to apply for registration as an exempt market dealer by the September 28 deadline, unless there is an exemption available. The BCSC has said publicly that it will be issuing temporary relief until December 31, 2010 from dealer registration for real estate entities that are not registered in another category or jurisdiction.
REMINDER: IMPORTANT SEPTEMBER DEADLINES
We have worked with many of our clients to develop detailed 2010 Compliance Checklists which outline the specific requirements and next steps necessary to meet the deadlines that will apply to them.
The significant registration requirements in National Instrument 31-103 that come into effect on September 28, 2010 following the end of the transition periods are
As well, there is a September 30, 2010 deadline under National Instrument 33-109 Registration Information for all registered firms that were registered on September 28, 2009, and are still registered, to file a completed Form 33-109F6 with their principal regulator. The same requirement and deadline applies to firms registered in Ontario under the Commodity Futures Act.
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.