Canada: Canadian Securities Administrators Propose Revised Registration Regime For Dealers, Advisers And Fund Managers

Last Updated: March 27 2008
Article by Garth J. Foster and Pierre-Yves Châtillon

Introduction

The Canadian Securities Administrators (CSA) issued a revised draft of National Instrument 31-103 Registration Requirements (NI 31-103) on February 29, 2008 which responds to many of the comments industry participants had on the previous draft of the rule that the CSA issued on February 20, 2007.

The objective of NI 31-103 is to streamline and modernize Canada’s registration regime for dealers and advisers, and to ideally adopt a harmonized set of rules across Canada. Unfortunately local interests make this difficult as evidenced by that fact that, unlike the other Canadian jurisdictions, both British Columbia and Manitoba will not require persons to be registered as exempt market dealers in those Provinces, subject to certain conditions.

Except for Manitoba, the CSA still intends to change the current registration regime for dealers from a "trade" trigger to a "business" trigger, like advisers, and to generally require anyone who is "in the business of trading in securities" to become registered as a dealer in the applicable category of registration. The companion policy to the new draft of NI 31-103 offers an overview of when the "business" trigger will be tripped and when a person may be exempt from the registration requirement.

For example, when a lawyer or an accountant gives investment advice which is incidental to their principal occupation they may not need to be registered. However, if the advice is a primary reason for the relationship with the client, registration will be required. Whether or not a person is in the business of trading or advising in securities and needs to be registered, will depend on the circumstances of each situation.

Under the new draft of NI 31-103, investment fund managers will still need to become registered, although only in the jurisdiction(s) in which they manage their funds. Other aspects of the original draft of NI 31-103 such as the use of a relationship document and a dealer exemption for advisers investing their managed accounts in their pooled funds have also been retained, but with refinements and modifications.

A brief summary of some of the key changes to the new draft of NI 31-103, including other highlights, transition periods and consequential amendments are described below.

Any comments interested parties may have on the new draft of NI 31-103 must be submitted to the CSA by no later than May 29, 2008.

Key Changes

The new draft of NI 31-103 includes the following key changes:

  1. Permitted Clients - The CSA has introduced the concept of a subset of accredited investors consisting primarily of institutional, corporate and very high net worth individuals that do not need the same level of protection as other registration clients. For example, assessing the suitability of an investment for a permitted client does not apply to an exempt market dealer (EMD), and may be waived by permitted clients in all other situations.
  2. EMDs - Although the CSA, except for British Columbia and Manitoba, have kept the registration category of an EMD, they have acknowledged that an EMD is not subject to the capital, insurance or audited financial statement requirements of NI 31-103, and will only have to file certified quarterly unaudited financial statements with the CSA, if the EMD does not handle, hold or have access to client cash or assets, including cheques and other similar instruments. Although this concession seems encouraging, EMDS will have to be careful to ensure that they do not handle, hold or have access to client cash or assets and end up being subject to these requirements of NI 31-103.

    EMDs have also been exempted from the know-your-client, suitability, account opening and complaint handling requirements when dealing with permitted clients, and exempted from the need to complete the Partners, Directors and Senior Officers exam or the Conduct and Practices Handbook exam.
  3. International Dealers and International Advisers - The CSA now proposes that an international dealer and an international adviser can act for a permitted client, on either a solicited or an unsolicited basis, without having to be registered in Canada. This expands the list of clients an international dealer and an international dealer can act for, from what was first proposed, and is closer to the types of clients these registrants can currently deal with on a registered basis. The CSA also removed the requirement that an international dealer or an international adviser cannot have any establishment or officers, employees or agents in Canada before it could rely on this exemption.
  4. Conflicts of Interest – Although the CSA has maintained the three basic mechanisms for dealing with conflicts of interest (i.e., avoidance, control and disclosure), the CSA has added an exemption for an investment fund manager acting for a fund that is subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107). In addition, a registrant now only needs to advise clients of conflicts that a client, acting reasonably, would expect to be advised about. The CSA also simplified the requirements of the issuer disclosure statement and prohibited a registrant from acting as an adviser with respect to its own securities or securities of certain related or connected issuers.
  5. Complaint Handling - The CSA has exempted EMDs and investment managers from having to comply with NI 31-103’s complaint handling requirements. Unless another regime is prescribed in a local jurisdiction (e.g., Québec), all other registrants must participate in an independent dispute service and file semi-annual reports with the CSA of any complaints that have been made, resolved or remain outstanding. The CSA expects all complaints to be acknowledged by the registrant within 10 business days and ideally to be resolved within three months. They must also be brought to the attention of the registrant’s chief compliance officer.
  6. Information Sharing - To avoid privacy concerns, the CSA has removed the information sharing provisions of the former draft of NI 31-103 and instead imposed a requirement on a registrant in National Instrument 33-109 Registration Requirements (NI 33-109) to give a former employee, and to file with the CSA, a notice of termination (a Form 33-109F1) describing why the relationship ended. If the person resigned or was dismissed for a reason other than retirement or completing a temporary employment contract, the registrant must file additional prescribed information with the CSA within 30 days. The CSA has also imposed on a registrant wanting to hire such an individual an obligation to obtain from such individual a copy of the notice of termination prepared by such individual’s former employer.
  7. Permanent Registration - The CSA has removed the need for any annual or other renewal requirement for registrants, and indicated that a registrant’s or a person’s registration will remain effective until it is suspended or terminated by a triggering event (e.g., a person ceasing to be employed by a registrant, a regulator accepting a request from the registrant to surrender its registration, or a regulator suspending or revoking a registrant’s registration).

Other Highlights

The new draft of NI 31-103 also contains the following provisions:

  1. Relationship Disclosure Document - The CSA replaced the need for a relationship disclosure document with a principle based provision that sets out a basic list of items a registrant, except an EMD, should provide to a client regarding the client’s relationship with the registrant. The CSA expects that registrants will usually be able to use existing documents to satisfy these requirements.
  2. Pooled Fund Exemption - The CSA maintained the exemption from the dealer requirement for an adviser investing the assets of one or more of its fully managed accounts in a pooled fund that the adviser administers, provided that neither the account or the pooled fund was created or is used primarily to take advantage of this exemption, and provided the adviser notifies the CSA within five business days of the first use of this exemption.
  3. Associate Advising Representative - The CSA has confirmed that a person can initially be registered as an associate advising representative, provided the person’s advice is approved by an advising representative designated by the adviser before the advice is given to the client, and provided the adviser notifies the CSA of such designation within five business days of the designation.
  4. SRO Membership - The CSA has expanded somewhat the requirements in NI 31-103 that will not apply to a member of the Investment Dealers Association of Canada (IDA) and, except in Québec, the Mutual Fund Dealers Association of Canada (MFDA), on the basis that these registrants and their personnel are already subject to the equivalent requirements of the IDA and the MFDA.
  5. Québec - The Autorité des marchés financiers (AMF) has decided that mutual fund dealers in Québec do not need to become members of the MFDA, and will remain under the direct supervision of the AMF.
  6. Ultimate Designated Person (UDP) and Chief Compliance Officer (CCO) - The CSA clarified that a registrant’s UDP is responsible for supervising the registrant’s compliance activities and promoting compliance, and that the registrant’s CCO is responsible for establishing the registrant’s compliance policies and procedures, monitoring and assessing compliance, and reporting to the registrant’s UDP and board of directors.
  7. Referrals - The CSA reiterated that referral agreements need to be evidenced by a written agreement between the applicable parties, with appropriate disclosure to clients.
  8. Exemptions – The CSA proposes, except for British Columbia, Manitoba and New Brunswick, to transition the registration exemptions currently contained in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) to NI 31-103.
  9. Mobility - The CSA maintained the exemptions that a registrant and an individual can, after satisfying certain conditions, have up to 10 or five clients, respectively, that move to another jurisdiction before the registrant or the individual has to become registered in that jurisdiction.

Transition

The new draft of NI 31-103 requires registrants to appoint and register their UDPs and CCOs within one month of the rule becoming laws, although compliance officers will have 12 months to satisfy the proficiency requirements of NI 31-103.

Investment fund managers will have six months to register and will have 12 months to comply with the rule’s insurance and capital requirements. Exempt market dealers, including limited market dealers in Ontario and Newfoundland and Labrador, will have six months to register once the rule becomes law.

Registrants will also have six months to comply with the relationship disclosure, complaint handling (except in Québec) and referral requirements after NI 31-103 becomes effective. Registrants will also not have to comply with the capital and insurance requirements of NI 31-103 for 12 and six months, respectively, provided they comply with current requirements.

Individuals will have six months to 12 months to comply with the proficiency requirements of NI 31-103. On a positive note, except for a dealing representative of a scholarship plan dealer, if an individual is registered in a particular category referred to in NI 31-103 when it comes into force, the individual will be grandfathered from having to comply with the proficiency requirements of NI 31-103 for that category. A dealing representative of a scholarship plan dealer must comply with the proficiency requirements of NI 31-103 within 12 months of the rule becoming effective.

Consequential Changes

The CSA intends to amend and repeal various other national instruments, local legislation and local rules when NI 31-103 comes into force including National Instrument 31-102 National Registration Database, NI 33-109, NI 45-106, National Instrument 81-102 Mutual Funds, NI 81-107, Ontario Securities Commission Rule 31-501 Registrant Relationships, Ontario Securities Commission Rule 31-502 Proficiency Requirements for Registrants and Ontario Securities Commission Rule 35-502 Non-Resident Advisers (OSC Rule 35-502).

In particular, the repeal of OSC Rule 35-502 will mean that the investment advice that is given to an investment fund in Ontario will no longer be deemed to flow through to its securityholders. This will bring Ontario into line with the other Canadian jurisdictions and avoid the need for exemptive relief for non-resident investment fund portfolio managers that are offering non-resident investment funds to Ontario investors.

* * * * * * * * * * * * * * * * * * * *

Please join us and the Investment Council Association of Canada for a presentation about the new draft of NI 31-103:

  • Tuesday, April 15, 2008 at 2:00 pm at the St. Andrew's Club & Conference Centre in Toronto with the Ontario Securities Commission.
  • Friday, April 18, 2008 at 2:00 pm at Fasken's office in Montréal, and Québec City by video conference, with the Autorité des Marchés Financieres.
  • Thursday, April 24, 2008 at 2:00 pm at Fasken's office in Vancouver with the British Columbia Securities Commission.

For more information and to register, please email events@fasken.com

Our Investment Funds Group

Fasken Martineau’s Investment Funds Group, comprised of lawyers in our Toronto, Montreal and Vancouver offices with expertise in corporate/securities, tax, derivatives and trusts, is recognized as one of the leading investments funds legal practices in Canada. We act for public and private open-end mutual funds, closed-end funds, exchange traded funds, REITS and other investment funds, as well as labour-sponsored venture capital funds, special purpose investment vehicles and Canadian and international investment fund managers, investment dealers and advisers. We have excellent working relationships with the Canadian securities administrators and other government and private organizations involved in the investment management industry. We have also been at the centre of Canada’s fund governance initiatives. If the Investment Funds Group at Fasken Martineau can be of assistance to you, please contact us.

www.fasken.com

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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