Canada: Proposed Experience Requirement For Chief Compliance Officers Of Exempt Market Dealers – PCMA Canada’s Comment Letter

Last Updated: March 18 2014
Article by Brian P. Koscak

The Canadian Securities Administrators (the CSA) have proposed certain amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and other rules (the Proposed Amendments) that includes, adding a new experience component to the proficiency requirement to be a chief compliance officer (CCO) of an exempt market dealer (EMD). Specifically, the CSA proposal would require a CCO applicant to have "gained 12 months of relevant securities industry experience in the 36-month period before applying for registration" (the Proposed Experience Requirement). 

I was privileged to Chair the Comment Committee of the  Private Capital Markets Association of Canada (formerly, the Exempt Market Dealers Association of Canada) (PCMA Canada) that submitted a comment letter to the CSA that discussed, among other things, the Proposed Experience Requirement. 

"PCMA Canada is a not-for-profit association founded in 2002 to be the national voice of exempt market dealers, issuers and industry professionals in the private capital markets across Canada."

Below is an extract from PCMA Canada's comment letter about the Proposed Experience Requirement. A copy of PCMA Canada's complete comment letter is available on the Ontario Securities Commission's website here.

Proposed Experience Requirement is too subjective

"The Proposed Experience Requirement, although generally helpful in encouraging high standards in the industry, is not related or tailored to the functions and responsibilities of an EMD CCO. We are concerned that what is relevant and, equally important, sufficient 'securities industry experience', is not well articulated by the CSA, other than as set out in the Companion Policy to NI 31-103.

Imposing the Proposed Experience Requirement is a possible barrier to entry

We are concerned that imposing the Proposed Experience Requirement would act as a barrier to entry for new EMDs if there is an insufficient number of available CCO candidates who satisfy the Proposed Experience Requirement. We are also not aware of any cost benefit analysis involving the introduction of the Proposed Experience Requirement and understand this is required by Section 143.2 of the Securities Act (Ontario). Such information would be helpful to all capital market participants.

Moreover, the implementation of NI 31-103 and its new business trigger test, has resulted in the need for more issuers to become registered (when an exemption is not available or they do not seek to engage a registered dealer) and these firms may not have personnel with such "relevant securities industry experience".

Better alternative is to introduce a mandatory EMD CCO Course

The CSA states in the Proposed Amendments that

"CCOs must have a good understanding of the regulatory requirements applicable to the firm and individuals acting on its behalf. CCOs must also have the knowledge and ability to design and implement an effective compliance system."  (the CCO Requirements). We agree.

PCMA Canada believes a better way to satisfy the CCO Requirements is to mandate that all CCO candidates for EMDs take a mandatory CCO course and successfully pass an examination. We believe a mandatory EMD CCO Course specifically designed for CCOs of EMDs would ensure a more consistent level of knowledge and experience across the industry and increase the likelihood of satisfying the CCO Requirements.

Although a permanent EMD CCO Course does not presently exist, PCMA Canada has already identified a need for a CCO course and opportunities for ongoing education for CCO's. For example, last year, we presented a full-day EMD CCO Course in Toronto, Calgary and Vancouver and we have plans to expand the program in 2014. PCMA Canada is also near completion of the redesigned Exempt Market Products Course with our partners, the IFSE Institute, which will form a new baseline proficiency standard for the exempt market. PCMA Canada would be pleased to work with the CSA to develop an EMD CCO Course to satisfy industry needs and CSA expectations.

Consider allowing one CCO to act for more than one EMD

While considering matters involving EMD CCOs, PCMA Canada recommends that the CSA permit a qualified individual to be the CCO of more than one unrelated EMD, which is currently not permitted.

We are advised by our members that: (a) it is difficult for EMDs to find  individuals interested, yet alone qualified, to be an EMD CCO; and (b) many small EMDs are unable to afford to pay for a full-time CCO unless their business model and activity are of a certain minimum size. We submit one advantage of having a part-time EMD CCO is that their compensation and the costs of developing, implementing and updating an effective compliance system could be shared among EMDs. Any conflicts could be adequately addressed by the CSA as part of the registration process.

There is precedent for having a senior officer working part-time at more than one registrant since IIROC currently allows individuals to act as a CFO for more than one IIROC dealer firm. Arguably, there is merit in extending this to CCOs provided that there is an adequate plan of supervision which addresses, and properly manages, any conflicts of interest. There are also numerous examples of individuals having multiple CCO roles in related registrants which also provides some precedent for our recommendation.

Need for conflicts guidance for lawyers as CCOs

We understand that some lawyers are, or seek to be, the CCO of an EMD or other registrants in Canada while also maintaining a legal practice. We are aware of the potential conflicts of interest and solicitor-client privilege issues that such circumstances may present, especially when clients of the lawyer are also clients of the EMD, but would appreciate CSA guidance on how such matters are to be managed. CSA guidance on such matters would ensure it is undertaken fairly and consistently among all CSA jurisdictions and among all categories of registration where a lawyer is, or seeks to be, registered as a CCO while also operating a legal practice. We believe this is important especially when registration rule and regulations continue to evolve in number and complexity and often are of a legal nature, while registrants desire to engage and retain qualified and competent candidates, that may include lawyers.

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.

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