Dealer and adviser registration categories and requirements throughout Canada are numerous, varied and complex. After several years of consultation, the Canadian Securities Administrators (CSA) have published National Instrument 31-103 Registration Requirements (NI 31-103) containing amendments to securities legislation and local rules that are intended to harmonize, streamline and simplify dealer and adviser registration categories and requirements. In all jurisdictions other than Ontario, NI 31-103 becomes effective on September 28, 2009 (the Implementation Date). In Ontario, it becomes effective on a date to be announced by the Ontario government.
The main changes brought about by NI 31-103 are:
- The adoption of a 'business trigger' for dealer registration in lieu of the 'trade' trigger that currently exists in all provinces and territories, other than Québec.
- Registration categories and related requirements are to be harmonized across Canada. The number of existing categories of registration has been reduced significantly, but four new categories of registration have been introduced:
- exempt market dealer, which replaces the category of limited market dealer in Ontario and in Newfoundland and Labrador;
- restricted dealer, a category for dealers engaged in a limited area of dealing activities with restrictions and proficiency requirements tailored to the dealing activities;
- restricted portfolio manager, a category for advisers restricted to advising with respect to specified securities with restrictions and proficiency requirements tailored to the advising activity; and
- investment fund manager, which requires all managers of public and private investment funds to be registered regardless of whether they are in the business of dealing or advising.
- The introduction of a registration exemption framework for international dealers and international advisers.
- Exam-based (rather than course-based) proficiency requirements have been prescribed for representatives of each category of dealer, with certain exceptions.
- Minimal capital requirements under NI 31-303 will impose higher requirements than current standards.
- Registered firms will be required to identify each potential and actual conflict of interest and provide prior written disclosure of a conflict of interest to a client while dealing with such conflicts in a fair, equitable and transparent manner.
- Significant harmonization and narrowing of the exemptions from the dealer and adviser registration requirements across Canada.
Canadian residency requirements for all registrants in all provinces and territories are to be eliminated.
In Québec, the Autorité des marchés financiers (AMF) has undertaken a major overhaul of the regulatory framework for mutual fund dealers and scholarship plan dealers.
Individuals and entities affected by the rules fit into three categories: (a) parties already registered in categories that will survive under NI 31-103, but that will have certain new rules to follow; (b) existing unregistered businesses that are seeking registration for the first time; and (c) registered businesses that are relinquishing registration and becoming subject to self-policing new exemptions.
The CSA has published the Transition Timelines Table (attached as Schedule A), which gives already-registered individuals and entities between three months and 24 months after the Implementation Date to bring themselves into compliance with the new requirements they must meet. Transitional rules also have been published for entities that have been in active registered or unregistered businesses that seek to be registered under NI 31-103 for the first time in one of the new categories of registration. There are a few transitional rules for individuals and entities that are in registration categories (e.g., the international dealer registration) that will be dropped under the new regime. International dealers are given one month to comply with appointment of agent for service and submission to jurisdiction requirements that must be addressed in order to rely on the international dealer exemption described below. International advisers have 12 months to transition to either become registered as a portfolio manager or restricted adviser or to begin relying on the international adviser exemption also described below.
Proposed "Business" Registration Trigger
In all provinces and territories, other than Québec, a person or company is required to become registered as a dealer if and when it trades a security unless it can conduct the trade in reliance upon an exemption. In Québec, a person or company is not required to become registered as a dealer unless and until it becomes engaged in the business of trading in securities. This requirement is comparable to the adviser registration requirement — common to all provinces and territories — that imposes registration as an adviser on a person or company if it engages in, or holds itself out as engaging in, the business of advising others as to the investing in or the buying or selling of securities.
NI 31-103 adopts a "business" trigger for dealer registration in lieu of the "trade" trigger that currently exists in all provinces and territories other than Québec. The adoption of a "business" trigger will establish uniform dealer, adviser, underwriter and investment fund manager registration requirements throughout Canada. It will also remove from the ambit of securities legislation those persons or companies who are not engaged in the business of trading1 or, advising, acting as an underwriter or acting as an investment fund manager — and thereby facilitate the elimination of a number of dealer registration exemptions that exist to accommodate their exempt trading activity.
According to the Companion Policy to NI 31-103 (31-103CP), there will be two components to any assessment of the application of the "business" trigger. The first component will involve an assessment of whether the particular activity involves dealing in securities or advising in securities. If so, the second component will involve an assessment of the extent to which the activity is being conducted as a business. For non-residents, there will almost certainly be a third component that will involve an assessment of the extent to which the business being conducted by the non-resident is being conducted in Canada.
Factors that will be taken into account for the purpose of determining whether any trading or advisory activity is being conducted as a business will include:
- intermediating a trade between a buyer and seller of securities;
- 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.
Applying these factors, 31-103CP offers the following examples of how the "business" trigger might be applied.
A securities issuer is an entity that issues or trades its own securities. Generally speaking, a securities issuer with an active non-securities business will not be considered to be in the business of dealing in securities.
Venture Capital and Private Equity
Venture capital and private equity investing is distinguishable from other types of investing as a result of the role played by venture capital and private equity management companies (VC Companies). VC Companies typically raise capital by way of a private placement that is conducted in reliance upon an exemption from the prospectus requirements. The VC Company uses its capital to invest in securities of companies that are not publicly traded, then becomes actively involved in the management of these companies by becoming:
- represented on the board of directors,
- involved in the appointment of managers, and/or
- involved in the making of material management decisions.
A VC Company looks to realize on its investment either through a public offering of the company's securities or a sale of the business. Investors in a VC Company rely upon the VC Company's expertise in selecting and managing the companies it invests in. The VC Company receives a management fee or "carried interest" in the profits generated from its investments, but it does not receive compensation for raising capital or trading in securities.
Based upon these activities, a VC Company will not be required to register as a portfolio manager provided the advice given in connection with the purchase and sale of companies is incidental to the VC Company's active management of such companies. Similarly, a VC Company will not be required to register as a dealer provided both its capital raising and its investment activities are occasional and uncompensated activities. Furthermore, provided a VC Company is actively involved in the management of the companies it invests in, it would generally not be considered an investment fund and would not therefore be required to register as an investment fund manager. This analysis may not be applicable to VC Companies that engage in activities other than those described above.
Generally speaking, one-time trading or advising activities will not require a person or company to become registered as a dealer or adviser. Such activities would include trading or advising conducted by an individual or firm acting as a trustee, executor, administrator, personal or other legal representative, as well as any trading or advising that is carried out in connection with the sale of a business.
Any trading or advising that is incidental to a person or company's primary business purpose should not be considered trading or advising that is conducted for a business purpose. Accordingly, merger and acquisition specialists that advise the parties to a transaction should not normally be required to register as dealers or advisers, even though the transaction may result in trades and the receipt of compensation for their advice.
Investment Fund Managers
Unlike the dealer and adviser registration requirements, registration as an investment fund manager is not dependent upon a business trigger, because a person or company acting as an investment fund manager will always be considered to be engaged in business as such.
Categories of Registration and Permitted Activities
Under NI 31-103, the registration categories and related requirements have been harmonized across all jurisdictions and the number of categories of registration has been reduced significantly, though a few new categories of registration have been introduced. The registration categories of dealer and adviser will be maintained and will continue to have sub-categories (i.e., investment dealer, mutual fund dealer etc.). Of note is the addition of the new category of registration for investment fund managers.
A registered firm that continues to be registered following the Implementation Date must submit a completed Form 33-109F6 to the regulator on or before September 30, 2010.2 Form 33-109F6 is new and will replace Form 3.
New Categories of Registration
Exempt Market Dealer — is a new category of registration for dealers restricted to dealing in prospectus exempt securities and with persons to whom prospectus exempt distributions can be made. An exempt market dealer may therefore trade a security that is distributed in reliance upon a prospectus exemption whether a prospectus was filed in respect of the distribution or not, and it may also trade a security that, if the trade were a distribution, would be exempt from the prospectus requirement. In Ontario, and in Newfoundland and Labrador, the exempt market dealer category will replace the limited market dealer category, and limited market dealers will become registered as exempt market dealers on the day NI 31-103 becomes effective. Exempt market dealers in Ontario and Newfoundland and Labrador will then have six months to comply with new insurance requirements and one year to comply with new capital requirements that will be applicable to exempt market dealers. In all other jurisdictions, a person or company that acts as dealer in the exempt market on the day that NI 31-103 becomes effective will have one year to apply for registration as an exempt market dealer. Firms that had an active business before the Implementation Date will have 12 months to apply and comply with NI 31-103. Firms not active before the Implementation Date will not get the benefit of any transitional rules.3
Restricted Dealer — is a new category of registration for dealers engaged in dealing activities that are limited to a particular sector or type of securities (i.e., real estate securities). The restrictions and requirements applicable to a restricted dealer will be tailored to, and dependent upon, the particular dealing activities.
Restricted Portfolio Manager — is a new category of registration available to portfolio managers restricted to advising with respect to specified securities, types of securities or specific industries. As with the restricted dealer category, the restrictions and requirements for a restricted portfolio manager will be tailored to the advising activity of the portfolio manager. It is expected that the proficiency requirements for this category will be less than the requirements for a portfolio manager. A restricted portfolio manager will be permitted to provide discretionary management, subject to the terms and conditions of its registration.
Investment Fund Manager — this category introduces a new requirement for all managers of investment funds to be registered as investment fund managers, regardless of whether they are in the business of trading or advising. This includes managers of public mutual funds, public closed-end funds and private or prospectus-exempt pooled funds and hedge funds. Through this new category of registration, the CSA is attempting to address and regulate certain risks particular to fund managers (i.e., calculation of NAV, financial reporting and conflicts of interest between the manager and investors) through the regulation of the fund managers, in addition to the current regime of regulating the investment funds. A portfolio manager that manages an investment fund will also be required to be registered as an investment fund manager and meet the conditions of both categories. The CSA has indicated that it will be publishing a proposal for comment during the next year that will address the circumstances under which an investment fund manager that does not have a Canadian head office will need to register, and in what additional provinces and territories an investment fund manager with a head office in Canada will need to register. Firms that had an active business before the Implementation Date will have a 12-month period to register if they apply in their Canadian head office jurisdiction and 24 months if the head office is outside Canada.
NI 31-103 also introduces a few new categories of registration for individuals, including a requirement that all registrant firms have a registered ultimate designated person (UDP) as the person who is in charge of the business (likely the president or CEO) and a chief compliance officer (CCO) who is responsible for monitoring daily compliance with policies and procedures. NI 31-103 introduces a new category of associate advising representative which is a category that currently exists in some Canadian jurisdictions, such as Ontario. This category is intended as an apprentice category for individuals looking to obtain the full registration but who do not yet meet the proficiency requirements. Registered firms will have three months to apply for registration for their Ultimate Designated Person or Chief Compliance Officer.
The following categories of registration are proposed to be eliminated: security issuer, securities adviser, investment counsel, international dealer, international adviser and limited market dealer. Persons who currently qualify as international dealers (in Ontario and Newfoundland and Labrador) or international advisers (in Ontario only) will be exempt from registration subject to certain conditions, but the types of permitted clients has been narrowed. See "Registration Exemptions" below.
A registered adviser who deals in securities of in-house pooled funds with fully managed accounts managed by the adviser will be exempt from the dealer registration requirement.
A registered dealer who provides non-discretionary advice in support of its dealing activities will be exempt from the adviser registration requirement. There is no longer a requirement that the advising be "incidental to" a dealer's primary business. The current exemption for members of the Investment Industry Regulatory Organization of Canada (IIROC) who give discretionary advice to fully managed accounts will be maintained.
Registration Requirements for Individuals
Exam-based (rather than course-based) proficiency requirements have been prescribed for representatives of each category of dealer other than an investment dealer or a mutual fund dealer representative that is a member of IIROC or the MFDA, and for portfolio managers. Proficiency requirements largely taken from OSC Rule 31-502 Proficiency Requirements for Registrants are also prescribed for chief compliance officers for each of the categories of registrants. Unlike limited market dealer representatives, a person acting as a dealing representative of the new exempt market dealer category must meet one of three proficiency requirements, similar to representatives of an investment dealer member of IIROC. Representatives and Chief Compliance Officers will have 12 months from the Implementation Date to satisfy their respective proficiency requirements.
The required experience of an advising representative, if a representative holds a CFA charter, has been significantly reduced from five years to 12 months of investment management experience in the 36-month period prior to applying for registration. If a person has the Canadian Investment Management designation, on the other hand, he or she must have 48 months of investment management experience, at least 12 months of which was in the 36-month period prior to applying for registration. A person may be granted registration as an associate advising representative of a portfolio manager if he or she has completed any part of a requirement for an advising representative, for example, having earned a CFA charter.
Capital and Insurance Requirements
Minimum capital requirements for registered firms under the new Instrument (IIROC and MFDA impose different requirements for their members) will be $25,000 for advisers, $50,000 for dealers and $100,000 for investment fund managers. A registered firm that, at any time, fails to maintain these minimum capital requirements, must notify the regulator as soon as possible. A financial institution bond calculated based on the number of employees or a percentage of client assets or assets under management subject to $200,000 minimum is prescribed. Solvency requirements are not cumulative — a firm registered in more than one category will have to comply with the highest requirement. Firms will have 12 months from the Implementation Date to comply with these capital rules.
NI 31-103 contains rules in Parts 13 and 14 pertaining to the relationship between a registered dealer or adviser and its clients. These client relationship rules restate and refine the business conduct requirements that are summarized below and that are currently found in provincial and territorial securities legislation.
Account Opening, Suitability and Know-Your-Client (KYC) Requirements
The KYC/suitability requirements are the key due diligence and gatekeeping elements that are intended to assist in protecting the client, the registrant and the integrity of the capital markets. A registrant is always required to comply with KYC requirements and with suitability requirements that are prescribed, unless the registrant is executing a purchase or sale of a security pursuant to instructions received from, among others, another registrant, a Canadian financial institution or a Schedule III bank or where a permitted client waives the suitability requirement in writing (other than in respect of a permitted client's4 managed account with an adviser). These account opening and KYC requirements do not apply to investment fund managers.
A registrant is required to address conflicts faced in the course of its operations. First, a registrant must address general conflicts of interest; second, it must address particular conflicts associated with referral arrangements; and third, an adviser is subject to self-dealing restrictions in respect of managed accounts.
A registered firm must identify each potential and actual conflict of interest between it and a client, and provide prior written disclosure of a conflict of interest to a client while dealing with such conflicts in a fair, equitable and transparent manner and exercising responsible business judgment. 31-103 CP provides examples of such conflicts. Disclosure must be made by a registered firm in respect of securities of a related issuer or of a connected issuer by way of delivery of a disclosure statement in prescribed form.
Referral arrangements are arrangements in which a registrant agrees to pay or receive a fee as a result of a client referral. A registrant will be prohibited from participating in a referral arrangement unless it meets certain requirements, including the prior written disclosure of such arrangements to the client. Firms will have six months from the Implementation Date to comply with these requirements. The minimum content of any such notice is prescribed. The registrant is also required to take reasonable steps to satisfy itself that the referred person or company has appropriate qualifications to provide the services and, if applicable, is registered to provide those services.
Prohibitions Respecting Managed Accounts
In addition to these general conflicts matters, an adviser is subject to certain prohibitions respecting its handling of managed accounts to the extent the transactions involve "responsible persons."
Loans and Margin
A registrant (other than an IIROC member) must not lend money to a client. A registrant must also provide any client that intends to borrow money to finance the purchase of securities with a prescribed form of leverage disclosure.
A registered firm will be required to document, and to deal fairly and effectively, with every complaint it receives in respect of any of its products or services. It will also be required to participate in a related dispute resolution service and to advise complainants of the availability of the service. Except for clients in Québec, firms will have 24 months from the Implementation Date to comply with these requirements.
Before a registrant can purchase or sell a security for a client, or provide advice to a client, the registrant will be required to provide the client with disclosure of information that a reasonable client would consider important as regards the client's relationship with the registrant. Firms will have 12 months from the Implementation Date to comply with these relationship disclosure rules. This disclosure is not required to take the form of a separate document tailored for this purpose but may be provided through separate documents which, in combination, give the client the required information, including:
- a description of the client's account;
- a discussion that identifies which products or services offered by the registered firm will meet the client's investment objectives, and how they will do so;
- a discussion of investment risk factors;
- a description of the conflicts of interest;
- disclosure of all service fees, charges and other costs associated with the investment;
- a description of the content and frequency of reporting for each account or portfolio of the client;
- information about how the client can contact the firm;
- notice that a dispute resolution service is available to mediate any dispute that might arise between the client and the firm regarding a product or service of the firm; and
- the information a registered firm is required to collect about the client as part of its KYC obligations.
An adviser is required to provide its clients with a statement of policies respecting fair allocation of investment opportunities.
Relationship with Financial Institution
Certain disclosure must also be provided to the non-permitted clients of registrants that are conducting securities related activities in an office or branch of a Canadian financial institution or a Schedule III bank. This to ensure the clients understand they are dealing with the registrant, not the financial institution.
Generally, a registrant that holds the securities or other property of a client must hold the securities or property separate and apart from its own property and in trust for the client. If the registered firm is holding cash on behalf of the client, the cash must be held in a designated trust account with, among others, a Canadian financial institution or a Schedule III bank. This conduct category also prescribes requirements for client securities that are the subject of a written safe-keeping agreement.
In addition to general record-keeping requirements, NI 31-103 will require registrants to keep their records in a safe and durable form and in a manner that facilitates their prompt delivery to the regulator for a period of seven years following the creation of the records.
Account Activity Reporting
Account activity reporting requirements include, without limitation, trade confirmation, statement of account and statement of portfolio delivery requirements. The trade confirmation requirements will permit trade confirmations to be sent to either the relevant client or, with the client's consent, any registered adviser acting on behalf of the client. Statements of account and statements of portfolio must be sent to clients by registered dealers and advisers, not less than once every three months. A client may instruct an adviser to deliver a statement less frequently.
A registered firm will be required to permit its UDP and its CCO to gain direct access to the firm's board of directors whenever either of them considers it necessary or advisable to do so in the light of his or her responsibilities. The CCO will be required to report directly to the board of directors at least once a year respecting the registrant's compliance with securities legislation.
Non-resident registrants will be required to continue providing their clients with disclosure of the potentially adverse consequences of their non-resident status. They will also be required to continue holding client assets in accordance with prescribed custodial requirements and to maintain any registration or SRO memberships that are required for the business that is being conducted by them in their home jurisdiction.
Dealer Registration Exemptions
NI 31-103 offers far fewer dealer registration exemptions than current regimes because NI 31-103 is premised upon a business trigger instead of the trade trigger that exists today in all provinces and territories other than Québec. Moreover, the introduction of an exempt market dealer registration category will, in most jurisdictions, dramatically narrow the exempt market for unregistered market intermediaries. In the western jurisdictions (British Columbia, Alberta, Manitoba and the three territories), market intermediaries will be able to deal in the exempt market without registration in reliance upon certain prospectus exemptions subject to certain conditions (see "Exempt Market Intermediaries).
The dealer registration exemptions contained in NI 45-106 are repealed and replaced with the following exemptions:
Trades through a registered dealer — an exemption to a person if the trade is made through an agent that is a registered dealer or made to a registered dealer that is purchasing as principal.
Adviser – non-prospectus qualified investment fund — an exemption to a registered adviser or an international adviser (see "International Adviser Exemption" below) for a trade in a security in a non-prospectus qualified investment fund if (i) the adviser acts as the investment fund's adviser and investment fund manager; and (ii) the trade is to a managed account of a client of the adviser.
Investment fund reinvestment — a limited exemption to an investment fund and its manager where (i) distributions or dividends are used by securityholders to acquire securities of the same class or series of the investment fund; or (ii) a securityholder makes an optional cash payment and acquires securities of an investment fund that trade in a marketplace that are of the same class or series of securities referred to in (i), but securities subscribed with these cash payments in any financial year cannot exceed two per cent of the issued and outstanding securities of the class.
Additional investment in investment funds — an exemption to an investment fund and its manager in connection with a distribution of securities to securityholders that have previously acquired securities of the investment fund for an acquisition cost of not less than $150,000 or hold securities having a net asset value of not less than $150,000.
Private investment club — an exemption for a trade in a security of an investment fund that (i) has no more than 50 holders and requires contributions from them for funding; (ii) does not distribute its securities to or borrow money from the public; and (iii) pays no fees for investment management or administration advice other than brokerage fees.
Private investment fund — loan and trust pools — an exemption for a trade in an investment fund co-mingling money of different estates and trusts that is administered solely by the trust company.
Mortgages — an exemption to a person dealing in mortgages (other than, in certain jurisdictions, syndicated mortgages) who is licensed or exempt from licensing under mortgage brokerage laws.
Personal property security legislation — an exemption to a person dealing in a security (other than to an individual) evidencing indebtedness secured under personal property security legislation.
Variable insurance contract — an exemption to an insurance company dealing in (i) a contract of group insurance; (ii) a whole life insurance contract providing for a payment at maturity of an amount not less than 75 per cent of the premium paid; (iii) an arrangement for the investment of policy dividends and policy proceeds; and (iv) a variable life annuity.
Schedule III banks and cooperative associations — evidence of deposit — an exemption to a person dealing in a deposit issued by a Schedule III bank or federal co-op.
Plan administrators — an exemption for dealing in securities of an issuer by a trustee, custodian or administrator acting on behalf of employees, executives, directors and consultants of the issuer pursuant to a plan of the issuer.
Re-investment plan — an exemption for dealing in securities of an issuer by the issuer or by a trustee, custodian or administrator acting for or on behalf of the issuer if the traders are made pursuant to a plan and dividends or distributions are applied to the purchase of the issuer's securities or a securityholder makes an optional cash payment to purchase the issuer's securities but securities subscribed with these cash payments cannot exceed, in any financial year, two per cent of the issued and outstanding securities of the relevant class or series.
Self-directed RESPs — an exemption for a trade in a self-directed RESP (registered educational savings plan) to a subscriber (A) if the trade is made by (i) a mutual fund dealer representative; (ii) a Canadian financial institution; and (iii) in Ontario, a financial intermediary; and (B) the self-directed RESP restricts its investments in securities to securities that the person who trades the RESP is permitted to trade.
Exchange contracts — an exemption for trades by a person in exchange contracts in British Columbia, Alberta, Saskatchewan and New Brunswick (i) made solely through an agent that is a registered dealer or to a registered dealer purchasing as principal; or (ii) subject to specific conditions, resulting from an unsolicited order placed with an individual who is not a resident of and does not carry on business in the local jurisdiction.
Specified debt — an exemption for a trade in specified government debt such as debt securities of the federal, provincial, territorial or municipal governments and of regulated financial institutions (if not subordinate in payment to deposits).
Small securityholder arrangements — an exemption for a trade by an issuer or an agent under the odd lot selling and purchase arrangements policy of the Toronto Stock Exchange or TSX Venture Exchange or a similar policy of a designated exchange.
Non-resident dealers — See "International Dealer Exemption" below.
Adviser Registration Exemptions
NI 31-103 contains the following exemptions from the adviser registration requirement:
Ancillary advice by dealers — an exemption to a registered dealer and its representatives for advice in connection with a trade other than a trade for a managed account.
IIROC members with discretionary authority — an exemption to a registered dealer that is an IIROC member and its representative acting as an adviser in compliance with IIROC rules to a managed account.
Advising generally — an exemption to a person that carries on an advisory business either directly or through publications if the advice is not tailored to needs of specific clients and applicable disclosure requirements are addressed.
Non-resident advisers — See "International Adviser Exemption " below.
NI 31-103 sets out limited exemptions that permit a dealer or adviser to continue to service up to ten (and each of its representatives, up to five) individual clients and certain family members of those clients that re-locate to a jurisdiction in which the dealer or adviser is not registered.
Investment fund manager registration exemptions
Private investment club — an exemption for acting as an investment fund manager of an investment fund that (i) has no more than 50 holders and requires contributions from them for funding, (ii) does not distribute its securities to the public, and (iii) pays no fees for investment management or administration advice other than brokerage fees.
Capital accumulation plan — an exemption for a person required to register only because the investment fund is an investment option in a capital accumulation plan such as a defined contribution registered pension plan, a group RRSP or RESP or a deferred profit-sharing plan.
Private investment fund-loan and trust pools — an exemption to a trust company that administers an investment fund co-mingling money of different estates and trusts.
International Dealer Exemption
Under NI 31-103, the category of international dealer registration available in Ontario as well as Newfoundland and Labrador is eliminated and replaced with an international dealer exemption from registration. Under the exemption available in all jurisdictions of Canada, a non-resident dealer will only be permitted to trade with permitted clients, including:
- regulated financial institutions;
- registered dealers and advisers;
- federal, provincial, territorial and municipal governments and crown corporations;
- regulated pension funds;
- accounts fully managed by a registered adviser;
- an investment fund managed by a registered investment fund manager or advised by a registered adviser;
- an individual with at least $5 million in net financial assets; and
- a person (other than an individual or investment fund) with net assets of at least $25 million.
An exhaustive list of permitted clients is attached as Schedule B. Trades with permitted clients will generally be limited to trades involving:
- a debt security during the security's distribution if it is offered primarily in a foreign jurisdiction and if no prospectus is filed in Canada;
- a debt security that is a foreign security other than during the security's distribution;
- a foreign security unless the trade is made during the security's distribution under a prospectus filed in Canada;
- if the permitted client is an investment dealer, a foreign security or any security if the investment dealer is acting as principal;
A "foreign security" means a security of an issuer formed under the laws of a foreign jurisdiction or issued by a foreign government.
The international dealer exemption from registration will only be available to persons or companies that are registered to carry on the business of dealing in securities in their home (foreign) jurisdiction and engage in the business of a dealer in their home (foreign) jurisdiction. In order to rely on the exemption, the non-resident dealer will have to formally submit to the jurisdiction and appoint an agent for service. Before dealing with any permitted client, the non-resident dealer will also have to notify the client of its non-resident status and of the name and address of its agent for service in the relevant jurisdiction. The non-resident dealer must also provide the securities regulatory authority with an annual notification of its reliance on this exemption.
International Adviser Exemption
Currently, a non-resident adviser that provides advice to (i) a resident of Ontario or (ii) a non-resident investment fund that distributes securities to residents of Ontario must be either registered as an international adviser with the Ontario Securities Commission (OSC) or exempt from registration under OSC Rule 35-502 Non-Resident Adviser.
Under NI 31-103, the category of international adviser registration and many of the exemptions from registration under OSC Rule 35-502 are eliminated and replaced with an international adviser exemption.
Similar to the replacement of the international dealer category of registration with the international dealer exemption from registration, under the international adviser exemption that is available in all jurisdictions, a non-resident adviser may provide advice to permitted clients without having to become registered as an adviser.
The international adviser exemption from registration is only available to persons or companies that are registered to carry on and engage in the business of an adviser in their home (foreign) jurisdiction or operate under an exemption from registration in that jurisdiction. In order to rely on the exemption, the non-resident adviser will have to formally submit to the jurisdiction and appoint an agent for service. Before acting as adviser to any permitted client, the non-resident adviser will also have to notify the client of its non-resident status and the name and address of its agent for service in the relevant jurisdiction. The non-resident adviser must also provide the securities regulatory authority with an annual notification of its reliance on this exemption.
The non-resident adviser cannot advise in Canada with respect to securities of Canadian issuers, unless providing advice on securities of a Canadian issuer is incidental to providing advice on securities of a foreign issuer. In addition, not more than 10 per cent of the aggregate consolidated gross revenue of the non-resident adviser and its unregistered affiliates for any financial year may be derived from portfolio management activities of the non-resident adviser and its affiliates in Canada.
Exempt Market Intermediaries
Western jurisdictions (British Columbia, Alberta, Manitoba, and the three territories) will issue orders exempting a person in the business of dealing in securities using certain prospectus exemptions from registering as an exempt market dealer.
The market intermediary must deal only with persons who are (i) accredited investors; (ii) family, friends and business associates; (iii) purchasers provided with a prescribed offering memorandum; or (iv) purchasers subscribing to a minimum of $150,000 of a security and who rely on the analogous prospectus exemption.
To use one of these exemptions, a person must meet all of the following conditions:
- not be otherwise registered in any jurisdiction;
- not provide suitability advice leading to the trade;
- except in British Columbia, not otherwise provide financial services to the purchaser;
- not hold or have access to the purchaser's assets;
- provide prescribed risk disclosure to the purchaser; and
- file an information report with the securities regulatory authority.
Registration in Multiple Jurisdictions
National Policy 11-204 Process for Registration in Multiple Jurisdictions (NP 11-204) sets out the procedures for registering in more than one jurisdiction. Together with the amendments to MI 11-102 Passport System, NP 11-204 replaces the former National Registration System (NRS) under National Instrument 31-101 National Registration System with a passport system for firms and individuals seeking registration in passport jurisdictions. Because Ontario is not adopting the passport system, NP 11-204 creates an interface similar to the NRS for firms or individuals in passport jurisdictions seeking registration in Ontario as non-principal jurisdiction.
For the purpose of NP 11-204, the principal regulator for a firm will usually be the regulator in the jurisdiction where the firm has its head office, and for an individual — the regulator of the jurisdiction where the individual has his or her working office.
Registration in Passport Jurisdictions — Passport Registration
A firm or individual applying for registration in a non-principal passport jurisdiction in a category (other than restricted dealer) for which the firm or individual is already registered or is concurrently seeking registration in its principal jurisdiction (including Ontario), must do so through "passport registration." Although Ontario is not a member of the passport system, it can be a principal regulator under the system. If the principal jurisdiction of an applicant is Ontario, it must apply to Ontario as principal regulator and all the other regulators will treat Ontario as a principal regulator under the passport system.
Under the passport registration system, a firm need only submit its registration application to its principal regulator, whereas an individual must file the application through the National Registration Database (NRD). The firm or the individual's sponsoring firm deals only with the principal regulator, which reviews the application to register in any other jurisdiction only to ensure that it is complete. Any non-principal regulator does not conduct a review of the registration application of the firm or individual. The applicant is automatically registered in the non-principal jurisdiction in the same category when registered in the principal jurisdiction if the application is complete and, where required for the specific category of registration, if the applicant is an approved member of an SRO.
The applicant under the passport registration must still pay fees in both the principal jurisdiction and in the other passport jurisdictions where it seeks registration .
Registration in Ontario — Interface Registration
Firms or individuals seeking registration in Ontario as non-principal jurisdiction in a category (other than restricted dealer) in which the firm/individual is already registered or is concurrently seeking registration in its principal jurisdiction, must apply through "interface registration." The firm must submit the registration application to both the principal regulator and the OSC; the individual must submit his or her application through the NRD. The principal regulator reviews the application and submits to the OSC an interface document containing its proposed determination. Within one business day, the OSC advises the PR whether it opts in or out of the principal regulator's determination. It should be noted that the OSC has the option of opting in and imposing additional terms and conditions to the registration.
In case of an opt-out decision, which must be supported by written reasons, the principal regulator works with the firm or with the individual's sponsoring firm in order to solve the OSC's opt-out issues. In case of failure, the individual or firm must deal directly with the OSC thereafter.
NP 11-204 gives the applicant the right to request an opportunity to be heard before a decision to reject the registration or to grant it with terms and conditions is rendered either by the principal regulator or by the OSC.
Restricted Dealer Registration
The passport registration and interface registration rules do not apply to firms seeking to become registered in the category of restricted dealer. A restricted dealer seeking registration in a non-principal jurisdiction, including Ontario, must apply directly to the regulator of the jurisdiction involved."
Changes to Québec Regulatory Framework
Changes to the Securities Act (Québec) (QSA) and an Act respecting the distribution of financial products and services (Québec) (Distribution Act) which are expected to come into force concurrently with NI 31-103 will move the regulation of mutual fund dealers and scholarship plan dealers to the more flexible regulatory framework of the QSA from the Distribution Act.
However, mutual fund dealers and scholarship plan dealers registered only in Québec will continue to be supervised by the Autorité des marchés financiers (AMF) and not be required to become members of the MFDA. Any Québec-registered mutual fund dealer or scholarship plan dealer will be required to maintain prescribed professional liability insurance and contribute to the Québec-based indemnity fund, the Fonds d'indemnisation des services financiers. Further more, their representatives will be required to be members of the Chambre de la sécurité financière.
The current provision of the QSA prohibiting a financial institution employee from acting as an investment dealer representative unless he or she specializes in mutual funds or scholarship plans has been changed to prohibit an investment dealer representative from acting as a representative in a financial institution's place of business in Québec and being employed by the financial institution, unless he or she specializes in mutual funds or scholarship plans.
When the Derivatives Act (Québec) (QDA) came into force on February 1, 2009, the AMF issued a general decision that provides exemptions from the requirements under the QDA to register as a derivatives dealer or a derivatives adviser and to qualify newly created derivatives if activities are carried out only with accredited investors in accordance with NI 45-106 (including the filing of reports and fees) and relate only to specified derivatives: (i) an option or a negotiable futures contract pertaining to securities or a treasury bond futures contract; (ii) an option on a commodity futures contract or financial instrument futures contract; and (iii) commodities futures contracts, financial futures contracts, currencies futures contracts and stock indices futures contracts. While the general decision continues to apply, the AMF did state when it was issued that it was a temporary measure to preserve the status quo until the effective date of NI 31-103.
On July 31, 2009, the AMF published for comment amendments to the Derivatives Regulation (QDR) adopted under the QDA. As expected, the QDR amendments integrate by reference many of the provisions of NI 31-103 including individual registration requirements, firm capital and insurance requirements and client relationship requirements such as KYC/suitability, conflicts and referral arrangement requirements. As a result, these requirements will also apply to the activities of derivatives dealers and derivatives advisors registered under the QDA. The QDR amendments also contain additional derivatives specific education and experience requirements for individuals as well as an exemption for a person authorized to act as a dealer or adviser or authorized to execute similar functions under legislation in a jurisdiction outside Québec where its head office or principal place of business is located is exempt from registration under the QDA to the extent it carries on activities only for "accredited counterparties" as defined in the QDA relating to exchange traded derivatives offered primarily outside Québec. This exemption is in addition to the exemption already contained in the QDA which exempts activities relating to over-the-counter derivatives with accredited counterparties from substantially all of the requirements of the QDA. The QDR amendments are expected to come into force on the Implementation Date without any material amendment.
NI 31-103 Registrant Impact Analysis
We have prepared an NI 31-103 Registrant Impact Analysis Template to assist registrants with an understanding of the impact that NI 31-103 will have on their current registration status once NI 31-103 becomes effective on or about September 28, 2009. A copy of this template is attached as Schedule C. We would be happy to assist you with the completion of an Impact Analysis Template on request.
1. In all provinces and territories other than Alberta, the business trigger will generally require a person or company engaged in, or holding itself out as being engaged in, the business of trading securities to register as a dealer. In Alberta, the dealer registration requirement will apply to persons or companies engaged in, or holding themselves out as being engaged in, the business of dealing in securities. The Alberta Securities Commission (ASC) will, however, implement ASC Rule 31-504 Dealer Registration Requirement — Scope of Application to provide interpretive guidance intended to harmonize its dealer registration requirement and the dealer registration requirement in all other jurisdictions.
2. Section 6.1 of National Instrument 33-109 Registration Information
3. (2009) 32 OSCB (Supp 2) at 52.
4. A list of permitted clients is attached as Schedule B.
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.