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

Last Updated: April 20 2012
Article by Michael C. Nicholas, Sean Sadler and Sonia J. Struthers

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:

(a) the securities legislation provides for an express statutory exemption from the relevant requirement; or

(b) an order or ruling can be obtained from the applicable Securities Regulator which exempts a trade, a security or a person or company from the relevant requirement.

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.

To read this article in full together with its remaining footnotes please click here.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Michael C. Nicholas
 
In association with
Related Video
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.