Canada: National Registration Reform Proposal: Impact On International Dealers Registered In Ontario

On February 20, 2007, the Canadian Securities Administrators (the CSA) published for comment Proposed National Instrument 31-103 – Registration Requirements (the Proposed Registration Rule). The comment period will expire on June 20, 2007.

The Proposed Registration Rule is one phase of the CSA Registration Reform Project which is intended to harmonize and streamline registration requirements across Canada. It represents a major restructuring of the Canadian dealer, adviser and investment fund manager registration rules, and has implications for Canadian and non-Canadian dealers, advisers and investment fund managers doing business on a registered or exempt basis in any province or territory of Canada, including non-Canadian dealers registered in Ontario in the category of "international dealer."

The primary effects of the Proposed Registration Rule on non-Canadian dealers are:

• elimination of the "international dealer" registration category in Ontario;
• repeal of the dealer registration exemptions contained in National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106), including the exemption for trades with an "accredited investor";
• introduction of a national "international dealer exemption" that significantly narrows the list of clients with whom a non-Canadian dealer may trade on an exempt basis; and
• introduction of an "exempt market dealer" registration category that will permit Canadian and non-Canadian dealers to trade (i) in securities being distributed under a prospectus exemption or (ii) to persons or companies to whom a security may be distributed under a prospectus exemption (for example, trading with an "accredited investor").

In Ontario, registration as an "international dealer" permits a non-Canadian dealer to trade with "designated institutions" in non-Canadian equity securities and certain Canadian debt securities. The practical effect of the international dealer registration regime in Ontario is to permit a non-Canadian dealer to trade in permitted securities with any person or entity, other than an individual, that qualifies as an "accredited investor."

Except in Ontario (and the Yukon Territory and Newfoundland and Labrador), provincial and territorial securities laws generally permit a non-Canadian dealer to trade in both Canadian and non-Canadian securities with an "accredited investor" on a dealer registration-exempt basis.

Under the Proposed Registration Rule, a non-Canadian dealer that has no establishment in Canada may rely on the international dealer exemption to trade with a narrow list of "permitted international dealer clients" when trading in "foreign securities" and certain Canadian debt securities. Subject to the filing of submission to jurisdiction forms and delivering client notifications, the practical effect of the proposed international dealer registration exemption is to significantly narrow the list of clients with whom a non-Canadian dealer is permitted to trade on an exempt basis and to require registration as an "exempt market dealer" as a condition to trading with the full range of "accredited investors."

Non-Canadian dealers that are presently registered as international dealers in Ontario will no longer be permitted to trade with the following clients in Ontario under the proposed international dealer exemption:

• a person or entity that has net assets of C$5,000,000 (note: this category was used by international dealers to trade with corporate entities and hedge funds);
• an investment fund that is not advised by a person registered as a portfolio manager in Canada;
• a registered charity; or
• a person in respect of which all of the owners of interests, direct, indirect or beneficial, are persons that are accredited investors.

In the Canadian provinces and territories that presently permit non-Canadian dealers to trade in securities with "accredited investors" on an unregistered basis, the Proposed Registration Rule will require such dealers to rely on the international dealer exemption. As a consequence, an unregistered non-Canadian dealer will only be permitted to trade with a narrow list of permitted clients or, alternatively, will be required to register as an "exempt market dealer" to gain access to the full list of "accredited investors" with whom they are presently permitted to trade (summarized below). Significantly, in the provinces and territories where a non-Canadian dealer may presently trade in securities with an "accredited investor" on a dealer registration-exempt basis, the proposed international dealer exemption would not permit the dealer to trade with any of the following "accredited investors":

• the persons and entities identified above; and
• individuals who meet the accredited investor asset or income tests.

Under the proposed international dealer exemption, non-Canadian dealers will be restricted to trading only in "foreign securities," the definition of which does not include an inter-listed security (i.e., a security that is listed or traded on a marketplace in Canada), and in certain Canadian debt securities. Presently, a non-Canadian dealer may trade in both Canadian and non-Canadian securities on a dealer registration-exempt basis with an "accredited investor" resident in most provinces and territories, other than Ontario. The "foreign securities" restriction is a requirement presently applicable to registered international dealers in Ontario.