Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, April 2008
- Requirement to be registered as a dealer will be based on
being in the business of trading in securities
- Universal registration still contemplated for all
provinces, with some reductions in obligations of exempt
- Six-month transition period proposed to allow compliance
with most new rules
The Canadian Securities Administrators (CSA) have republished their proposed reforms to the dealer registration regime in a new draft of National Instrument 31-103 Registration Requirements (new NI 31-103), originally published in February 2007 (the 2007 Proposal). (For a summary of the original proposal, see our February 2007 Blakes Bulletin on Securities Law Proposed Registration Reform Rule Released by Canadian Securities Regulators for Comment).
As part of the registration reforms, the CSA have also published for comment a revised version of National Instrument 45-106 Prospectus and Registration Exemptions, which makes changes to the regime providing exemptions from the dealer registration requirement, in order to provide consistency with the regime under new NI 31-103.
The following is an overview of the main changes proposed by the CSA.
Currently, the requirement to be registered is triggered by a person engaging in a "trade" of securities. One key aspect of the registration reform project has been the proposal to replace the "trade" trigger with a so-called "business trigger", pursuant to which a person would be subject to requirement to register as a dealer only if that person was in the "business" of trading in securities. The theory behind this approach has been that this will simplify the statutory dealer registration exemptions by eliminating the need for discretionary relief from the CSA based on occasional trades and, accordingly, reduce the need for dealers to apply for such relief.
This "business trigger" approach has been continued, with some modifications and attempted clarification having been made since the 2007 Proposal. It remains perhaps the single most problematic aspect of the reform. The "business trigger" in effect replicates the approach already in existence in Ontario, which requires registration by a "market intermediary" that is, a person engaging or holding themselves out as engaging in Ontario in the business of trading in securities. This definition has been notoriously difficult to interpret, and such difficulties may now be expanded across Canada. One problem with reviewing and commenting at this time on the proposed business trigger at the national level is that the trigger will be implemented through the amendment of local securities legislation in each CSA jurisdiction and no drafts of such legislation have been published to date.
Nonetheless, the CSA have made some changes to their understanding of the "business trigger" and attempted to provide some clarification. The "business trigger" is now proposed to be in regard to "trading in securities", rather than in regard to "dealing in securities", which was a new concept contained in the 2007 Proposal. The CSA have, helpfully, dropped the "dealing in securities" concept, which could have enlarged the scope of the proposed registration requirements. The CSA indicate that the change was made to "clarify the breadth of the trigger and ensure consistency with securities legislation" and that this "not reflect any change in policy".
In the 2007 Proposal, the CSA included in the proposed Companion Policy some indicia of what factors would be relevant in considering whether someone was in the "business" of trading in securities, including the undertaking of the activity with repetition and expecting compensation or profit. The CSA have added the concepts of "acting in an intermediary capacity between a seller and a buyer of securities" or "making a market in securities" as additional potential indicators of being "engaged in the business of trading in securities".
The CSA have also provided specific discussion on the application of the "business trigger" to specific types of organizations and they state that activity "incidental to the primary business of a firm" may suggest that there is no business purpose in the activity in itself.
HARMONIZATION AND SIMPLIFICATION OF THE RULES ACROSS CANADA
The CSA have always presented harmonization and simplification of rules among the jurisdictions of Canada as a key goal of the registration reform project. In this regard, they have achieved a considerable level of success; generally the new regime will provide uniform requirements and categories of registration across the country. For instance, the proposed instrument will introduce consistent rules concerning proficiency, registration, conduct, capital and compliance requirements. The result should be considerably greater clarity and transparency for many of the rules, which currently differ from province to province.
Some examples of changes to existing rules are:
- Consistent referral arrangement rules will apply for all
registrants; new NI 31-103 will require a registrant desiring
to participate in an arrangement in which it will pay or
receive a referral fee to, among other things, provide
detailed written disclosure to its clients about the
arrangement, including the method of calculating the referral
fee and to the extent possible, the amount of the fee;
currently, not all provinces have referral arrangement
- A new general requirement for registrants to provide
information to clients concerning conflicts of interest that
a reasonable client would consider important respecting the
clients relationship with the registrant.
- The imposition of a new rule permitting individuals to
perform an activity requiring registration only if they have
the education and experience reasonably necessary to perform
the activity; it is unclear how this principle will mesh with
the detailed proficiency and experience requirements of new
EXEMPT DEALERS AND LIMITED MARKET DEALERS
The structure of new NI 31-103 and the new version of NI 45-106 would implement, except in Manitoba, the "business trigger" across Canada, therefore prima facie requiring persons in the business of trading in securities to register, even those that only act in trades that are exempt from the prospectus requirements. This amounts to the expansion of the "universal registration" regime that has until now been in place only in the provinces of Ontario and Newfoundland and Labrador. However, under new NI 31-103, a person resident in Manitoba or British Columbia will be able to continue to trade in the exempt market without being registered if he or she deals only with persons resident in Manitoba or British Columbia, as the case may be, and is not otherwise registered in any province.
The effect of the new regime is that persons that intend to trade only in the exempt market will be required to register as "exempt market dealers". This will correspond roughly to the category of "limited market dealers" currently existing in Ontario. However, exempt market dealers will be subject to many of the proficiency, capital and operational requirements of dealers, unlike the existing situation in which limited market dealers are generally not subject to such requirements. The CSA have made some changes from the 2007 Proposal to the requirements to which exempt market dealers will be subject. Exempt market dealers that do not handle, hold or have access to client cash or assets, will not be subject to the new capital requirements, insurance requirements or the requirement to deliver annual audited financial statements to the regulators. In addition, when dealing with "permitted clients", exempt market dealers will be exempt from the know-your-client rule, the suitability obligation, certain account opening information requirements and complaint handling requirements.
The CSA do not state the proposed effective date of new NI 31-103, but we expect that the instrument will come into force around the end of 2008. New NI 31-103 instrument itself provides some transitional relief as follows:
- Firms already registered as investment dealers, mutual
fund dealers and investment counsel or portfolio managers
will be deemed to be registered under the similar new
category on the effective date of new NI 31-103.
- In Ontario, a firm registered as a limited market dealer
or an international dealer will be deemed to be registered as
an exempt market dealer on the effective date.
- A firm required to be registered as an exempt market
dealer must apply to be registered within six months after
the effective date of new NI 31-103.
For most other rules imposing new requirements, a six-month transition period is provided, but market participants should review carefully the specific requirements applicable to them to ensure that they have taken the necessary steps to comply with the new requirements on a timely basis.
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: New Changes Proposed for International Dealers and Advisers 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. As noted above, 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.