On Friday, April 15, 2011, the Canadian Securities Administrators (the CSA) published amendments to National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) and its companion policy (the 31-103 CP); National Instrument 33-109 – Registration Information (NI 33-109) and its companion policy; and the forms that accompany the two instruments (collectively, the Amendments). The Amendments implement certain of the proposed amendments published for comment on June 25, 2010 with some modification based on comments received. Subject to receiving ministerial approvals, the Amendments will come into force on July 11, 2011 (the effective date).
While some of the Amendments may be characterized as clarification of existing requirements or technical amendments, other Amendments introduce substantive new requirements and restrictions on registrants and firms that rely upon exemptions from registration. This Osler Update summarizes certain key substantive changes that affect registrants generally, as well as certain key substantive changes that pertain to specific categories of registrants and exempt firms, as of the effective date.
Changes in Key Transition Deadlines
- Transition period extended for investment fund manager registration. The temporary exemption from the investment fund manager registration requirement for (i) non-Canadian investment fund managers and (ii) Canadian investment fund managers registered in their principal jurisdiction (i.e. a province of Canada) has been extended for one year to September 28, 2012. This extension will give the CSA more time to review and consider the comments received on the CSA's proposed registration requirements for non-Canadian investment fund managers that were released on October 15, 2010 by the CSA and summarized in an earlier Osler Update, " Canadian Securities Administrators Propose Amendments to Registration Rules for Canadian and Non-Canadian Investment Fund Managers."
- Transition period for dispute resolution services extended. The transition period for the coming into force of the dispute resolution service requirements for all registrants, except those registered in Québec (and already subject to similar requirements), has been extended from September 28, 2011 to September 28, 2012.
Amendments Affecting Registrants Generally
- Know your client requirements. For purposes of establishing the identity of a corporate client, NI 31-103 previously required registered firms to establish the identity of any individual that is a beneficial owner of, or exercises direct or indirect control or direction over, more than 10% of the voting rights of the corporation. With the introduction of the Amendments, this threshold has been raised from 10% to 25% of the voting rights.
- Restrictions on lending to clients. The 31-103 CP will now include guidance on the application of the restriction on lending to clients in the context of trading products that inherently contain leverage. The view of the CSA is that products may contain a leverage component and not violate the restriction on lending to clients, provided the products sold to clients are structured in a way that would not result in the registrant becoming a lender to the clients. Also, the 31-103 CP will state that direct lending to clients (i.e. margin) is only permitted by Investment Industry Regulatory Association of Canada (IIROC) members.
- Use of registrations and exemptions concurrently. Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service will require an international firm seeking to rely upon the international dealer exemption and/or international adviser exemption to disclose to securities regulators the firm's National Registration Database (NRD) number, if it was previously assigned an NRD number as a registered firm or an unregistered exempt international firm. This requirement gives further support to the guidance provided in the response to frequently asked questions published by the CSA on December 18, 2009, where the CSA confirmed that the two exemptions are also available to a firm that is registered in a jurisdiction of Canada.
- NI 33-109 form requirements and deadlines for filing notice of material changes to previously filed information. The deadline for filing notices of material changes in previously filed information (for example, changes in financial condition or regulatory or legal actions) has been changed from seven days to 10 days. There have also been certain technical changes to forms used in NI 33-109, mostly to reflect changes made in other sections of NI 31-103 and NI 33-109 summarized in this update.
Amendments Affecting Registered Individuals
- Individuals registered with multiple firms. There is now an express prohibition in NI 31-103 on registered dealing, advising or associate advising representatives acting as a representative of more than one registered firm concurrently. However, representatives that registered with multiple firms prior to the effective date will be grandfathered from the prohibition. The 31-103 CP will provide new guidance on the factors that will be considered for granting exemptions from this prohibition.
- More flexible proficiency requirements for chief compliance officers and dealing representatives. Chief compliance officers may take the Chief Compliance Officers exam as an alternative to the Partners', Directors' and Officers' (PDO) exam. Also, the CFA charter will now be an accepted alternative to the Canadian Securities Course in several individual registration categories.
- Types of individuals who may be designated as an ultimate designated person. The CSA has narrowed the types of individuals who may be designated as a registrant's ultimate designated person. While an officer in charge of a division of a firm may be designated as the firm's UDP, 31-103 will require that such an officer may only be designated to the extent that the firm has significant other business activities.
Investment Fund Managers
- Clarification of registration requirements for certain investment fund managers. The 31-103 CP has been revised to provide that in the situation where an investment fund is managed by a board of directors or one or more trustees, the investment fund itself may be considered the investment fund manager and therefore required to register, and to include the CSA's expectation that an investment fund manager that has delegated the fund management function to a registered affiliate will need to apply for an exemption from the registration requirement.
- Trade confirmation requirements for redemption orders received directly from security holders. Registered investment fund managers will now be required to send a trade confirmation to a security holder when the investment fund manager executes a redemption order received directly from the security holder.
- Changes to lending restrictions. Investment fund managers will no longer be prohibited from lending money to an investment fund it manages, provided that the loan is on a short term basis for the purpose of funding redemptions of the fund's securities or meeting expenses incurred by the investment fund in the normal course of its business.
Investment Dealers and Mutual Fund Dealers
- Registrants that are members of SROs and registered in multiple categories. There are new clarifications of the NI 31-103 business conduct requirements that will apply to a firm that is a member of either IIROC or the Mutual Fund Dealers Association of Canada and is also registered in other categories. For example, a firm registered as an investment dealer (and therefore a member of IIROC) that is also registered as an investment fund manager does not have to satisfy the capital requirements prescribed in NI 31-103 for investment fund managers, so long as it satisfies IIROC capital requirements.
- Clients of firms relying upon the international dealer exemption must be Canadian. To clarify the CSA's intent that the international dealer exemption cannot be relied upon to trade with foreign clients, the defined term "permitted client" will now be modified in the exemption to apply only to "Canadian permitted clients."
- Client Notice Requirements. There are non-substantive changes to the form of notice that, going forward, must be provided to clients by a firm that is relying upon the international dealer exemption.
- Notice of continued reliance on the international dealer exemption. Previously, a firm relying upon the international dealer exemption was required to notify the local securities regulator of its continued reliance on the exemption on each anniversary of first perfecting the exemption. NI 31-103 will now require that the notice of continued reliance on the exemption be given on December 1 of each year.
- Changes to the international adviser exemption that mirror changes to the international dealer exemption. The international adviser exemption has been modified to mirror the changes to the international dealer exemption described above.
- Guidance on meaning of "incidental advice" on Canadian securities. A foreign firm is not permitted to use the international adviser exemption to provide advice on securities of Canadian issuers, unless providing that advice is incidental to its providing advice on a foreign security. The 31-103 CP is being revised to clarify that "incidental advice" is not a quantitative concept that permits some portion of a permitted client's portfolio to be invested in Canadian securities, but rather permits advising on Canadian securities that is directly related to advising on foreign securities. For example, it would be permitted to advise on Canadian securities if such securities are an appropriately weighted component of a global advisory mandate, relative to Canada's economic position on a global basis.
- Further delay in introduction of a sub-adviser exemption. Despite previous commitments of the CSA to revisit the proposed exemption for international advisers who act as sub-advisers to registered portfolio managers, no such exemption appears in the Amendments. The existing sub-adviser exemption will remain in force in Ontario through OSC Rule 35-502 – Non-Resident Advisers and in Québec through a blanket order exemption.
John Black focuses on corporate finance and securities regulatory matters, investment funds, asset management and mergers and acquisitions. Linda Currie's practice focuses on financial institution and securities regulatory and compliance matters relating to investment funds and asset management. Mark DesLauriers practises in the area of corporate and securities law, with particular emphasis on cross-border corporate finance, public company law, and the regulation of securities dealers and advisers. Blair Wiley's practice focuses on mergers and acquisitions, corporate finance and general corporate matters.
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.