Canada: Limited Market Dealers And Proposed National Instrument 31-103 - Registration Requirements

Last Updated: November 19 2007

Article by Martin Aquilina and Shawn Dubuc

Earlier this summer, the Canadian Securities Administrators published for comment Proposed National Instrument 31-103 - Registration Requirements (the "Proposed Rule") and Proposed Companion Policy 31-103 - Registration Requirements (the "Proposed Companion Policy"). The purpose of the Proposed Rule is to harmonize, streamline and modernize the registration rules for securities dealers and advisers across Canada.

This article discusses the following aspects of the Proposed Rule which are of particular interest to limited market dealers ("LMDs"): (i) first, a change from a "trade trigger" to a "business trigger" for dealer registration; (ii) second, the replacement of the limited market dealer category in Ontario and Newfoundland/Labrador with the "exempt market dealer" category, together with modifications to the existing registration requirements for LMDs; (iii) third, the introduction of the exempt market dealer category in the other Canadian jurisdictions; and (iv) fourth, the creation of a restricted dealer category. Each of these developments is discussed below.

Business Trigger for Dealer Registration

The first feature of the Proposed Rule discussed in this article is the change in triggering events for dealer registration from a "trade trigger" to a "business trigger". In all Canadian jurisdictions except Québec, which has had a "business trigger" for dealing in securities since 1982, the current registration trigger is a "trade trigger" for dealing in securities but a "business trigger" for advising in securities. Under a "trade trigger" system, registration (or an exemption from registration) is required for all sales of securities or acts in furtherance thereof. Under a "business trigger" regime, registration is required only where a person or company is "in the business" of dealing in securities.

One of the primary objectives for creating a business trigger for dealer registration is that it will bring Canada in line with the registration requirements of other common law jurisdictions such as the United States and the United Kingdom. It will also eliminate the need for statutory registration exemptions for occasional trades. For example, dealer registration for companies issuing securities from treasury in order to raise capital would no longer generally be required given that the vast majority of issuers (investment funds are a notable exception) will not normally be considered as being "in the business" of dealing in their own securities.

The Proposed Companion Policy lists certain factors to consider in assessing whether an activity is conducted as a business. Some of these factors are:

  • undertaking the activity, directly or indirectly, with repetition, regularity or continuity;
  • being, or expecting to be, remunerated or otherwise compensated for undertaking the activity;
  • soliciting, directly or indirectly, others in connection with the activity; and
  • holding oneself out, directly or indirectly, as being in the business of the activity.

The move from a "trade trigger" to a "business trigger" will not be of great relevance to LMDs in Ontario and Newfoundland/Labrador since these persons are virtually all in the business of trading in securities and thus caught by the new trigger point in any event. However, those outside these two jurisdictions will want to consider whether their level and/or type of activity is such that they are in the business of trading, in which case registration under the Proposed Rule will be required unless an exemption is available.

Replacement of Limited Market Dealer Category

Currently, both Ontario and Newfoundland/Labrador require registration for anyone who is a "market intermediary". A market intermediary is an individual or entity which engages, or holds itself out as engaging, in the business of trading in securities, as principal or agent, other than for its own account. While market intermediaries in these two jurisdictions are not entitled to rely upon the dealer registration exemptions (such as those set out in National Instrument 45-106 - Prospectus and Registration Exemptions ("NI 45-106")) available to other market participants, including most issuers, they can currently register as LMDs for the purpose of effecting trades in the exempt market. Examples of such trades include sales to accredited investors and minimum subscriptions of $150,000 in a given security. While LMDs indubitably have their place in the capital markets they serve, the universal registration system under which they exist has come under scrutiny for not imposing any minimum capital or financial reporting requirements. As such, the category of LMD will be "retooled" under the Proposed Rule and will continue to exist, although in a modified manner, under the guise of the "exempt market dealer" category.

Creation of Exempt Market Dealer Category

The third feature of the Proposed Rule is the creation of the exempt market dealer ("EMD") category. An EMD is "permitted to deal solely (i) in a security that is being distributed under an exemption from the prospectus requirement, or (ii) with persons or companies to whom a security may be distributed under an exemption from the prospectus requirement". EMDs will thus, for example, be allowed to deal in prospectus-qualified securities (as well as in securities not so qualified) with accredited investors.

The proposed EMD category is similar to the current LMD category in Ontario and Newfoundland/Labrador which it will replace. However, it imposes new "fit and proper conduct" requirements which address proficiency, integrity and solvency concerns. EMDs will be required to satisfy exam-based qualifications, meet minimum financial capital and insurance requirements and deliver financial information to regulators on a periodic basis.

The British Columbia Securities Commission is considering not adopting the EMD category. Its concern is that the new registration requirements will have an adverse effect on the province's venture capital raising business. Certain stakeholders in Ontario have expressed similar concerns regarding raising capital in exempt markets. Many believe that the current regime for dealer registration exemptions in NI 45-106 is effective and there is concern that the additional capital raising costs associated with the Proposed Rule could have a detrimental effect on a number of stakeholders. For example, the consulting industry that currently assists small companies in raising capital from accredited investors would face additional compliance costs which will likely be passed on to the issuer.

Creation of Restricted Dealer Category

The restricted dealer category is intended to accommodate limited dealing activities that do not fall within any other category. Pursuant to the Proposed Rule, a restricted dealer is "a dealer that is limited by conditions on its registration to dealing in a specified security or class of securities". The category is intended to be flexible in nature and the fit and proper conduct registration requirements imposed on a particular registrant will vary depending on the activity being carried out. According to the Ontario Securities Commission, "[t]his category might be used, for example, by an issuer that must register because it is in the business of dealing in securities. The issuer's registration in this case would be restricted by conditions to dealing in securities for the purpose of distributing securities of its own issue, exclusively for its own account."

Impact on Market Intermediaries Across Canada

While market intermediaries in Ontario and Newfoundland/Labrador are not entitled to rely upon the dealer registration exemptions found in NI 45-106 and elsewhere, these are currently available to other market participants in Canada. The Proposed Rule will have a significant impact on these other participants by imposing upon them a registration requirement where none existed before.

The Proposed Rule currently does not contemplate the grandfathering of existing LMDs. As a result, the vast majority of those currently registered in Ontario and Newfoundland/Labrador as LMDs will need to familiarize themselves with the new EMD requirements and ensure they are in a position to comply with them. If not, they will need to consider applying to the regulators to obtain registration on a case-by-case basis as restricted dealers.

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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