Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, April 2008
- Types of permitted clients to be expanded and
solicitation to be allowed
- No more "look-through" registration requirement
for advisers to international funds
- OSC will continue to assess annual fees to exempt
international dealers and international advisers
- Current international dealers to be converted initially
to exempt market dealers
The Canadian Securities Administrators (CSA) have republished their proposed reforms to the registration regime in a new draft of National Instrument 31-103 "Registration Requirements" (the new NI 31-103), originally published in February 2007. (For a summary of the original proposal, please see our February 2007 Blakes Bulletin on Securities Law International Dealers and Advisers Face Proposed New Registration Exemptions and Requirements.
Under the original reform proposals, the current registration requirements for non-Canadian broker/dealer and adviser firms who transact with Canadian clients would be harmonized across Canada and in many cases would be replaced by a registration exemption with certain conditions. This latest version of the reform proposal modifies how those changes would apply to international dealers and international advisers.
MORE PERMITTED CLIENTS
The list of permitted Canadian clients has been equalized for international dealers and international advisers. This list has also been expanded.
Under NI 31-103 as originally proposed, permitted clients for international dealers and international advisers would be limited to Canadian financial institutions (being banks, loan corporations, trust companies, insurance companies, treasury branches, credit unions or caisse populaires), a Schedule III bank branch, Business Development Bank of Canada, subsidiaries of the foregoing, Canadian registered dealers or advisers (other than scholarship plan dealers or restricted dealers), Canadian pension funds, federal or provincial governments and crown corporations or agencies, Canadian municipalities, public boards and commissions, and trust companies acting on behalf of fully-managed accounts.
Under new NI 31-103, international advisers would also be permitted to have certain clients that previously were available only to international dealers; now both types could have as clients investment funds that are advised by a portfolio manager registered in Canada, or a person acting on behalf of a fully-managed account if that person is registered or authorized to carry on business as an adviser in Canada or a foreign jurisdiction.
New NI 31-103 has also added some new permitted clients for both international dealers and advisers: registered charities that receive advice from a qualified adviser, corporations with at least C$100-million shareholders equity, and individuals (or their personal holding companies or trusts) with net financial assets of more than C$5-million.
This list of permitted clients under new NI 31-103 continues to be more limited than the list of person or companies that qualify as "accredited investors" under the current prospectus and dealer registration exemption regime.
INTERNATIONAL REGISTRANTS CAN HAVE A CANADIAN OFFICE
Currently, international dealers and international advisers are prohibited from having an office, employees or agents in Canada. Under new NI 31-103, this will no longer be prohibited. Accordingly, an international dealer or international adviser could theoretically set up an office in Canada as a branch. However, for reasons such as Canadian income tax, it is unlikely that international registrants would set up direct branch offices in Canada. They are more likely to continue to deal cross-border from their home jurisdictions.
MINOR CHANGES FOR INTERNATIONAL DEALERS POWERS
The powers of international dealers under their proposed exemption are substantially unchanged under new NI 31- 103. One difference relates to trading with investment dealers. International dealers already have the power to trade in any securities (i.e., not necessarily foreign) with investment dealers, so long as the investment dealer is acting as principal. Under new NI 31-103, investment dealers may trade in any foreign securities with an investment dealer, whether or not the investment dealer is acting as principal. Therefore, the new power will primarily allow international dealers to trade foreign securities with Canadian investment dealers acting as agent.
One of the conditions for the exemption for international dealers and advisers is that they provide a prescribed notice to their permitted clients that they are not registered in Canada. Under new NI 31-103, this notice will not be required when international dealers are trading with Canadian registered dealers.
FOREIGN SECURITIES MEANS FOREIGN
In most cases, international dealers and international advisers are limited to trading or advising primarily with respect to "foreign securities". The definition of "foreign security" has been narrowed under new NI 31-103 to refer only to securities of non-Canadian issuers and non-Canadian governments. The former inclusion of a Canadian security that was not listed or traded on a marketplace in Canada has been dropped.
INTERNATIONAL ADVISERS GAIN POWERS
The category of "international portfolio manager" under the original draft of NI 31-103 has been renamed as "international adviser", still as a registration exemption.
One change under new NI 31-103 as compared to the original proposal is that, previously, an international adviser would have been required to be registered as an adviser under the laws of its home jurisdiction. Now it can be either registered or operating under a registration exemption in its home jurisdiction.
Another significant change under new NI 31-103 is that international advisers would be allowed to solicit new permitted clients in Canada. Solicitation was prohibited under the original proposal.
If an international adviser buys or sells a security of a pooled fund administered by the adviser for fully-managed accounts that are created and managed by the adviser, the international adviser would be exempt from the Canadian dealer registration requirement, so long as the adviser provides notice to the regulator that it is relying on the exemption within five business days of its first use.
This dealer registration exemption will not be available, however, if the fully-managed account or pooled fund is created or used primarily for the purpose of qualifying for the exemption. In their Companion Policy to new NI 31-103, the regulators explain that this anti-avoidance provision is because the exemption is not intended to apply to an adviser that operates an investment fund as a core or principal business activity. Examples given where the exemption would not be available included an adviser who has only a small number of funds into which most of its client accounts are invested, or who focuses on designing and managing its funds, rather than on tailoring the fully-managed portfolios to the investment needs of its clients.
INTERNATIONAL ADVISERS TO FOREIGN FUNDS EXEMPTED
New NI 31-103 reflects a significant change in doctrine affecting foreign advisers to foreign investment funds. The Ontario Securities Commission (OSC) proposes to abandon its "flow-through analysis" under which an adviser to a foreign investment fund is deemed to be indirectly advising the Ontario purchasers of securities of that fund. Currently, foreign advisers caught by that flow-through principle need to rely upon a registration exemption, such as the exemption based upon the securities having been offered primarily abroad and being offered in Canada only to accredited investors through registered dealers. Under new NI 31-103, no such exemption would be needed. The only foreign advisers who would need to consider registration or an exemption in Canada would be those who are directly advising clients in Canada.
New NI 31-103 also exempts international fund managers (i.e., the persons that direct the business, operations and affairs of an investment fund, as opposed to acting as a portfolio manager for the fund) from having to register in Canada as an investment fund manager, if the investment fund manager is located outside Canada.
EXEMPT INTERNATIONAL FIRMS STILL PAY ANNUAL FEES TO ONTARIO
Even if international dealers and international advisers would be exempt from registration under new NI 31-103, the OSC intends to continue to assess them for annual participation fees under OSC Rule 13-502. The OSC annual fee is based on the percentage of the firms revenues attributable to capital markets activities in Ontario.
CURRENT INTERNATIONAL DEALERS TO BE AUTOMATICALLY REGISTERED AS EXEMPT MARKET DEALERS
Under new NI 31-103, all international dealers that are registered on the date NI 31-103 comes into force will be automatically registered as exempt market dealers. Since exempt market dealers will have new capital, proficiency and other requirements applicable to them, which have not previously applied to international dealers, current international dealers will need to decide in advance if they wish to rely solely on the new international dealer exemption and surrender their exempt market dealer registration, or take steps to bring their new exempt market dealer status into compliance with the new requirements. If an international dealer chooses to continue as an exempt market dealer, there would be transition provisions of between six to 12 months before the various proficiency, capital, insurance and other business conduct rules applicable to exempt market dealers would fully apply to former international dealers.
There is no similar automatic registration conversion for current international advisers. If the new international adviser exemption is too restrictive for their business, they will need to apply to become registered as a portfolio manager on the same basis as Canadian firms.
The proposed draft of new NI 31-103 includes many other very significant changes to registration requirements for dealers, advisers and investment fund managers in Canada. These changes are summarized in the following Blakes Bulletins on Securities Regulation that are being published concurrently with this bulletin and available on Blakes Web site, in our PublicationsCorporate Finance and Securities Regulation section: Securities Commissions Republish Proposed Dealer Registration Reform and Securities Commissions Propose New Registration Requirement for Investment Fund Managers.
OPEN FOR COMMENTS
The proposed draft of new NI 31-103 is open for comment until May 29, 2008. Although no implementation date has been proposed yet, it is understood that the CSA is targeting the instrument to come into force at the end of 2008.
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.