Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, July 2009
The Canadian Securities Administrators (CSA) have published the final form of National Instrument 31-103 – Registration Requirements and Exemptions (the National Instrument), which will come into force on September 28, 2009. As reported in previous Blakes Bulletins on the topic, this National Instrument is part of a substantial reform of securities regulation relating to the registration of dealers and advisers in Canada. It is designed to modernize and harmonize the rules across Canada's provinces and territories.
Among the many changes contained in the National Instrument is the elimination in Ontario of the categories of "international dealer" and "international adviser" and their replacement across Canada with new exemptions from the registration requirements. The new exemptions will allow non-Canadian companies to trade or provide advisory services in respect of foreign securities to certain Canadian "permitted clients" on a similar basis as for existing registered international dealers or international advisers in Ontario.
Permitted client is a new concept. It is largely a subset of "accredited investor", covering institutional and corporate investors, and very high net worth individuals. Under the National Instrument, permitted clients are limited to: Canadian financial institutions (banks, loan corporations, trust companies, insurance companies, treasury branches, credit unions or caisse populaires); a Schedule III bank; 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 and their subsidiaries; entities organized in a foreign jurisdiction that are analogous to any of the foregoing entities; Canadian federal or provincial governments and Crown corporations or agencies; foreign governments and agencies; Canadian municipalities, public boards and commissions; trust companies acting on behalf of fully-managed accounts; 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; investment funds that are either advised by a portfolio manager registered in Canada or managed by a person registered as an investment fund manager in Canada; registered charities that receive advice from a qualified adviser; individuals (or their personal holding companies or trusts) with net financial assets of more than C$5-million; a person or company, other than an individual or investment fund, that has net assets of at least C$25-million; and a person or company that distributes securities of its own issue in Canada only to such permitted clients.
Under the National Instrument, "foreign security" means securities of non-Canadian issuers and non-Canadian governments. A security of a Canadian issuer traded on a foreign exchange is not a foreign security as defined.
International Dealer Registration Exemption
Under the National Instrument, the international dealer exemption is available for a dealer whose head office or principal place of business is in a foreign jurisdiction and that engages in the business of a dealer in securities in that foreign jurisdiction pursuant to a registration under the securities legislation in that jurisdiction that permits the dealer to engage there in the same trading activities as those in the province or territory where the dealer is proposing to trade.
Note that international dealers must be registered as dealers in their home jurisdiction. Carrying on business there under a registration exemption will not satisfy the Canadian exemption's condition.
A dealer that fits the criteria for the international dealer exemption does not need to register in Canada and is permitted to trade on a limited basis with permitted clients.
International dealers relying upon the exemption are not subject to the insurance, capital, proficiency, accounting, recording and know-your-client obligations of NI 31-103.
An international dealer is permitted to trade in foreign securities and Canadian debt securities so long as the dealer is acting as principal or agent for the issuer, a permitted client or for a person who is not a Canadian resident. Permitted activities are substantially similar to the activities now permitted in Ontario for international dealers, and consist of:
- activities, other than a sale of a security, that are reasonably necessary to facilitate a distribution of securities (Canadian or foreign, equity or debt) that are offered primarily in a foreign jurisdiction;
- trading in debt securities (Canadian or foreign) with a permitted client in the course of a distribution, where the debt securities are offered primarily in a foreign jurisdiction and a prospectus has not been filed in Canada;
- trading in foreign debt securities with a permitted client, other than during the security's distribution;
- trading in foreign securities with a permitted client, except in the course of a prospectus distribution in Canada;
- trading in foreign securities with a Canadian investment dealer; and
- trading in any securities (Canadian or foreign) with a Canadian investment dealer that is acting as principal.
The international dealer exemption also provides an underwriter registration exemption.
For each jurisdiction in Canada where it wishes to carry on business, the international dealer must appoint an agent for service and file a prescribed form of submission to jurisdiction and appointment of agent for service with the local securities regulator. Permitted clients, aside from Canadian dealers and advisers, must be notified that the international dealer is not registered in Canada, where the dealer is registered and the contact information of the dealer's agent for service of process in the relevant Canadian jurisdiction(s). The client must also be warned of the difficulties which could arise in enforcing legal rights against an international dealer because substantially all of their assets are outside of Canada.
International Adviser Registration Exemption
Similar to the new regime for international dealers, the regime under the National Instrument for non-Canadian advisers providing advisory services to Canadian clients has been harmonized across Canada and in many cases converted from a registration requirement to a registration exemption, with certain conditions.
Under the National Instrument, the international adviser exemption is available for an adviser whose head office or principal place of business is in a foreign jurisdiction and that engages in the business of advising on the buying and selling of securities in that foreign jurisdiction, pursuant to either a registration or an exemption from registration under the securities legislation of that foreign jurisdiction.
Under the international adviser exemption in the National Instrument, an adviser is permitted to advise permitted clients in Canada in respect of foreign securities without registration in Canada. However, in the case of the international adviser exemption, "permitted clients" do not include Canadian-registered dealers or advisers (see the discussion below about sub-advising).
International advisers may not advise in Canada on securities (whether equity or debt) of Canadian issuers unless providing that advice is incidental to providing advice on a foreign security.
International advisers using the exemption do not need to abide by the "fit and proper" requirements stipulated within the National Instrument for registered advisers, such as requirements relating to insurance, capital, proficiency, accounting, recording and know-your-client obligations.
For an adviser using the international adviser exemption, not more than 10% of the aggregated consolidated gross revenue of that adviser, its affiliates and its affiliated partnerships can be derived from portfolio management activities in Canada.
For each jurisdiction in Canada where it wishes to carry on business, the international adviser must appoint an agent for service and file a prescribed form of submission to jurisdiction and appointment of agent for service with the local securities regulator. It must notify its Canadian clients that it is not registered in Canada, its home jurisdiction, the name and address of its local agent for service and that there may be difficulty enforcing legal rights against the adviser because it is resident outside Canada and all or substantially all of its assets may be situated outside of Canada.
International Adviser Offering Securities of its Own Pooled Fund
The National Instrument provides a dealer registration exemption for advisers using the international adviser exemption if (i) the adviser trades to a client account it manages, (ii) the security is of an investment fund that is not qualified by prospectus in Canada, and (iii) the adviser acts as that fund's adviser and investment fund manager. This exemption is not available if the managed account or the investment fund was created or is used primarily for the purpose of qualifying for the exemption. An adviser that relies upon this exemption must provide a written notice to the local regulator within seven days of its first use of the exemption.
On September 28, 2009, all international dealer registrations will be revoked.
Entities registered in Ontario or Newfoundland as international dealers will have until October 28, 2009, to appoint an agent for service, file the prescribed form and notify clients of the identity of their agent for service.
Non-Canadian dealers who have been trading on the exempt market in the provinces or territories other than Ontario and Newfoundland, in reliance on the accredited investor registration exemption, will no longer be able to rely on this exemption effective September 28, 2009. They must comply instead with the new international dealer exemption in those jurisdictions.
Entities registered in Ontario as international advisers or in Alberta as portfolio managers (foreign) will have 12 months from the effective date of the National Instrument to decide if they wish to rely on the exemption described above or to transition to a full portfolio manager registration. During this 12-month period, such registered entities may continue to operate under the existing conditions of their current registrations. The international adviser exemption will also be available to such registered entities, except that they will not be required to appoint an agent for service, file the prescribed form or notify clients of the identity of their agent for service until 12 months after the effective date.
At the end of the 12-month period, existing international adviser or portfolio manager (foreign) registrations will be revoked.
Exempt International Firms Still Pay Annual Fees to Ontario
Dealers and advisers that use the international dealer or international adviser exemptions to carry on business in Ontario will still be required to pay annual participation fees to the Ontario Securities Commission on the same basis as if they were a registered firm. In other provinces and territories, those relying upon the international dealer or international adviser exemption must notify the local regulators annually if they are continuing to rely upon the exemption in that jurisdiction.
International Advisers to Foreign Funds Exempted
The National Instrument confirms that the former "flow-through" interpretation, under which an adviser to a foreign investment fund was deemed to be indirectly advising Ontario purchasers of securities of that fund, has been abandoned. Under new NI 31-103, a foreign adviser to a fund established outside Canada will not are sold into Canada. 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 (which could include funds established in Canada).
The National Instrument has temporarily not included a sub-advising exemption. The CSAare currently reviewing the sub-adviser exemption to take into account regulatory responses to cross-border activity. In the meantime, the existing sub-adviser exemption in OSC Rule 35-502 and any discretionary exemptions for sub-advisers previously granted will continue. The CSAhave said that discretionary relief on a similar basis will still be granted in other jurisdictions. We would anticipate seeing further developments in the sub-adviser area within the next two years.
Activities Beyond the Exemptions
If the limitations on these registration exemptions for international dealers or international advisers are too restrictive a business model, foreign dealers and advisers may wish to register under one of the Canadian domestic registration categories for dealers or advisers. Under NI 31-103, the CSAhave eliminated all residency requirements under any of the Canadian registration categories, for example, exempt market dealer. However, it should be noted that the rules of the Investment Industry Regulatory Organization of Canada still require that its members be Canadian firms. Membership in IIROC is a condition of becoming an investment dealer.
NI 31-103 also includes many other very significant changes to registration requirements for dealers and advisers in Canada, including what sort of business will trigger a registration requirement. These changes are summarized in other Blakes Bulletins.
- International dealers and international advisers given conditional exemptions across Canada from registration for trading or advising in respect of foreign securities
- Clients in Canada limited to specified permitted clients
- No more "look-through" registration for foreign advisers to international funds
- OSC will continue to assess annual fees to exempt international dealers and international advisers
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.