In many ways given the breadth of the regulatory changes, it's been a relatively smooth first six months of working with National Instrument 31-103 Registration Requirements and Exemptions. All registrants registered on September 28, 2009 were "mapped" over to the new registration categories and new firm and individual applicants since that date have been successfully registered in the new categories of registration. The "passport" system for processing registration applications by the principal regulator of a registrant – Multilateral Instrument 11-102 Passport System and National Policy 11-204 Process for Registration in Multiple Jurisdictions – has proven to be a boon to industry participants, including their counsel, in the absence of a national Canadian regulator.
Notwithstanding the smooth introduction, it has been necessary for industry participants to expend much time and effort to implement the new and modified requirements that became effective September 28, 2009, to understand all of the nuances of the new regime and to get ready for the compliance deadlines that loom large in 2010. The regulators have also worked overtime to provide answers to frequently asked questions, to provide additional transition relief and to mitigate against unintended consequences of new requirements.
It remains important for industry participants to understand the new and modified requirements and the timing of the remaining transition periods, and to complete necessary filings as they become due. In this Investment Management Bulletin we highlight some of the key dates and requirements that will be important to keep in mind as we move into 2010. We also outline the regulatory developments that have taken place during the past six months and point out "what's next".
Key 2010 Compliance Deadlines:
Some transition periods established by National Instrument 31-103 have ended – for example, all firms must have designated an "ultimate designated person" (UDP) and a "chief compliance officer" (CCO) on or before December 28, 2009 – and others are rapidly coming to an end for firms and individuals registered on, or carrying on certain activities as of September 28, 2009 (the implementation date of National Instrument 31-103). As well, some new requirements that did not have transition periods may just now be coming into play – for example, the requirement that registrants prepare financial statements on a non-consolidated basis impacted registrants with a December 31 year end.
- March 28, 2010 deadlines include:
- Firms (except mutual fund dealers and scholarship plan dealers in Québec) must comply with the enhanced insurance requirements in National Instrument 31-103.
- Firms and registered individuals must comply with referral arrangement requirements in National Instrument 31-103.
- September 28, 2010 deadlines include:
- Dealing representatives of scholarship plan dealers and exempt market dealers must meet the enhanced proficiency established by National Instrument 31-103.
- A firm acting as an investment fund manager (managing publicly or privately offered investment funds) on September 28, 2009 must apply for registration in the province or territory where it has its head office.
- A firm in the business of trading in securities in the "exempt market" on September 28, 2009 must apply for registration in all provinces and territories (outside of Ontario and Newfoundland and Labrador – an existing firm will already be registered in these provinces as an EMD) where it carries on that business.
- Firms (other than investment fund managers) must provide clients with specified "relationship disclosure information".
- Firms must comply with the new capital requirements of National Instrument 31-103 and begin using the new capital reporting form mandated by National Instrument 31-103 after this date.
- Firms must file (by September 30, 2010) a completed Form 33-109F6 with principal regulators.
Firms that are registered as international advisers in Ontario or as portfolio managers (foreign) in the other jurisdictions have significant decisions to make about their business in Canada, given that this registration will lapse, and the registration categories disappear, on September 28, 2010. After this date these firms may no longer operate in Canada as advisers unless they are registered in the applicable provinces and/or territories as portfolio managers or they rely on the "international adviser" exemption provided for in National Instrument 31-103. Significant lead time will be necessary in order to prevent gaps in registration status. For example, OSC staff has asked international advisers seeking portfolio manager registration to apply by June 30, 2010 in order to allow sufficient time for the application review process. Reliance on the international adviser exemption or the "sub-adviser" exemption (available in Ontario and Québec) requires satisfaction of the specified conditions, including regulatory filings. Those who wish to rely on a "sub-adviser" exemption in other provinces/territories will require a specific order from the applicable regulators.
Additional Transition Periods
Various CSA members, including the Ontario Securities Commission (OSC), have issued broad-based additional transitional relief from specified requirements under National Instrument 31-103 for certain registrants including:
- Limited market dealers and international advisers (now "mapped-over" exempt market dealers and portfolio managers) in Ontario and Newfoundland and Labrador with respect to financial statement and delivery obligations, and client statement obligations [revised February 2010 order available here].
- International dealers in Ontario for trades in specified Canadian government debt instruments with "permitted clients" and with respect to certain client disclosure [order available here].
- Relief for all registrants from requirements in one or more additional jurisdictions if they have transitional relief in another jurisdiction [OSC order available here].
- The CCO of a portfolio manager that is adding another registration category concerning proficiency requirements [OSC order available here].
- Representatives of a portfolio manager that is adding registration as a mutual fund dealer or exempt market dealer with respect to proficiency requirements [OSC order available here].
- Dealing representatives of a scholarship plan dealer and, in Ontario and Newfoundland and Labrador only, an exempt market dealer, with respect to time limits on examination requirements [OSC order available here].
- Foreign-based portfolio managers in British Columbia now have
transitional relief until September 28, 2010 from certain
requirements (e.g. the designation of a UDP and CCO and the
delivery of financial information) provided certain conditions are
met [BCSC order available
BLG'S 2010 COMPLIANCE CHECKLISTS
We have worked with many of our clients to develop detailed 2010 Compliance Checklists which outline the specific requirements and next steps necessary to meet the deadlines that will apply to them. Our 2010 Compliance Checklists provide our clients with a comprehensive plan to ensure that they meet the enhanced regulatory requirements by the applicable deadlines. BLG's 2010 Compliance Checklists are available to our registrant-clients for a fixed fee. Please contact your usual BLG lawyer to ask for a 2010 Compliance Checklist tailored for your firm and business.
Regulatory Responses during the First Six Months
In addition to the transition relief described above, the CSA have published additional information in response to comments and questions, along with various notices and omnibus/blanket orders to supplement certain of the new requirements. As well, IIROC has published guidance for its members.
Frequently Asked Questions
The CSA issued an initial set of FAQs covering a wide range of issues in December 2009 - CSA Staff Notice 31-313 NI 31-103 Registration Requirements and Exemptions and Related Instruments Frequently Asked Questions as of December 18, 2009 December 2009 and supplemental FAQs regarding financial reporting obligations in February 2010 - CSA Staff Notice 31-314 NI 31-103 Registration Requirements and Exemptions and Related Instruments Frequently Asked Questions as of February 5, 2010 February 2010 [consolidated FAQs available here].
IIROC also provided guidance for its members in the form of FAQs that cover such issues as NRD filing requirements, reinstatements, processes for passport applications, individual category selection and termination notices. See IIROC Rules Notice 10-0062 Registration Reform FAQs March 2010 [available here].
CSA staff published the following notices on issues related to National Instrument 31-103.
- CSA Staff Notice 31-312 The Exempt Market Dealer Category under National Instrument 31-103 Registration Requirements and Exemptions August 7, 2009 [available here]. This notice summarizes the key requirements and transition process for the new EMD category.
- CSA Staff Notice 33-315 Suitability Obligation and Know Your Product September 2009 [available here]. This notice reminds registrants of their duty under securities law to satisfy their suitability obligations to clients including the requirement to fully understand the products they recommend to clients. It also provides guidance to registrants on how to meet the "know-your-product" obligations.
In March 2010, IIROC released a Guidance Note on Reporting of Changes to Business Models [available here]. IIROC expects to be notified of any significant changes to a member's business model. The Notice provides examples of "significant changes", including a member's introduction of a new line of business that would be a marked departure from a member's existing business activities and/or requires the member or its staff to obtain new or additional registration. IIROC cautions its members that if they are in doubt as to the significance or materiality of a planned change, members should err on the side of caution and either report the change or discuss the change with IIROC staff.
To deal with specific unintended consequences of National Instrument 31-103, each of the CSA members have granted relief from:
- The client notification requirements under section 14.5 of National Instrument 31-103 that apply to a registered firm if the firm's head office is in one province or territory of Canada and the firm has a physical place of business in another province or territory [OSC order available here]
- The requirement on mutual fund dealers to establish whether a client is an insider under paragraph 13.2(2)(b) of National Instrument 31-103 [OSC order available here].
The Northwestern Exemption
On March 27, 2010, the "Northwestern Exemption" granted by the securities commissions of British Columbia, Alberta, Saskatchewan, Manitoba and the three territories became effective. The Northwestern Exemption was suggested in the July 2009 publication of National Instrument 31-103 and each participating province/territory's version is substantively the same. The Northwestern Exemption exempts firms in an applicable jurisdiction from the exempt market dealer registration requirement when trading in securities distributed in that jurisdiction under the following exemptions set out in National Instrument 45-106:
- Accredited investor
- Family, friends and business associates
- Offering memorandum
- Minimum investment amount.
A firm must meet significant conditions to rely on the Northwestern Exemption, including:
- The firm must not be registered in any jurisdiction, including jurisdictions outside of Canada.
- The firm must not provide advice to a client and can only provide factual information about the security and the subscription agreement.
- The purchaser must sign a risk acknowledgement form that is in the form specified in the applicable exemption.
- The firm must not "hold or have access" to the purchaser's assets.
- The firm must file a prescribed form with the applicable regulator and keep records of its compliance with the applicable exemption.
Sub-Adviser Exemption in Québec
As was widely expected, the Autorité des marchés financiers in Québec issued a blanket order which was effective as of December 28, 2009 to continue a modified, narrower form of Québec's pre-September 28, 2009 exemption that allowed certain portfolio management activities with institutional investors. The AMF's blanket order is [available here]. The modified form of sub-adviser exemption is similar to Ontario's sub-adviser exemption provided for in OSC Rule 35-502 and is subject to compliance with similar conditions. This sub-adviser exemption is a welcome addition to the regulatory landscape in Canada particularly for non-Canadian advisers who wish to provide advice to Québec and Ontario registered advisers as sub-advisers. Sub-adviser relief in the other jurisdictions must be applied for. We understand that the remaining members of the CSA continue to review whether or not to modify National Instrument 31-103 to provide for a Canada-wide exemption of this nature.
Multiple UDPs and CCOs for a firm
We were pleased to have worked with certain IIROC members in connection with their application for an order permitting each firm to designate and register two individuals as UDPs and two individuals as CCOs. This allows for one UDP and one CCO for a firm's distinct lines of securities business – an institutional or wholesale banking division and a retail division, each with separate and distinct senior management structures. This result is consistent with the regulatory objectives of the UDP and CCO requirement which are to ensure that the most senior person in charge of the registrable activities of a firm (i.e. the CEO or CEO equivalent) and able to "set the tone at the top" is the UDP for that registrable activity and to allow flexibility in the compliance structure to fit the activities of the firm. The OSC's decision, as principal regulator, is [available here].
Trades in Short-term Debt by Financial Institutions
All CSA members except the OSC (relief was not needed in Ontario since there is similar statutory relief under the Securities Act) recently granted blanket relief [CSA Notice 31-316 available here] to certain financial institutions in respect of trades in negotiable promissory notes or commercial paper maturing not more than one year from the date of issue subject to conditions including a sunset clause of September 28, 2011. The CSA explain that they will review the relief to determine if it should be included as a statutory exemption in National Instrument 31-103.
New National Rules
New national rules that are expected to become effective in the coming months also have new requirements that Canadian registrants must adhere to:
- National Instrument 55-104 Insider Reporting Requirements and Exemptions has been revised by the CSA with an effective date that is expected to be April 30, 2010. Please see BLG's Securities & Capital Markets Bulletin Changes to Insider Reporting: 5 Day Filing, Deemed Beneficial Ownership and Reporting for Derivatives January 2010 [available here].
- National Instrument 23-102 Use of Client Brokerage Commissions is expected to come into force on June 30, 2010 and contains new requirements regarding use of soft dollars and client disclosure. National Instrument 23-102 applies to registered dealers and advisers. Please see BLG's Investment Management Advisory Rules Regulating the Use of Client Brokerage Commissions to be Effective June 30, 2010 November 2009 [available here].
CSA staff have discussed at recent public conferences and forums, their intention to publish for comment, what they refer to as "first year amendments" to National Instrument 31-103. This publication will consist of proposed amendments to National Instrument 31-103 and will be effective once the rule-making procedures are completed (likely some time in 2011). We expect that these amendments, although important, will be largely of a technical and non-substantive nature. The CSA will seek to refine National Instrument 31-103 to fix up the drafting glitches that were the subject of the omnibus/blanket orders discussed above and to clarify the scope of National Instrument 31-103 in ways that are consistent with the two sets of FAQs. CSA staff are working towards publishing these amendments for comment before summer 2010.
In the meantime, we expect that the CSA will soon be publishing final versions of the amendments to various rules, including National Instrument 31-103, that will require registrants to prepare financial statements in accordance with international financial reporting standards (IFRS). These amendments were published for comment in September and October 2009.
The CSA have also indicated that they are on track to publish at some point in the next year proposals that relate to where investment fund managers must be registered. Presently, investment fund managers with a head office in a single province or territory must apply for registration as an investment fund manager only in that province or territory by September 28, 2010. Firms that do not have a head office in any province or territory, generally non-Canadian firms, do not need to apply for registration until September 28, 2011 under the transition provisions of National Instrument 31-103.
In February 2010, IIROC released an important proposal that expands on regulatory concepts in National Instrument 31-103. The comment period for IIROC's draft notice entitled Requirements and Best Practices for distribution of non-arm's length investment products ends on May 6, 2010 [available here]. This notice is related to, and expands on, the CSA's discussions about management of conflicts of interest and the requirement for firms to "know their product" provided for in National Instrument 31- 103 and its companion policy. We expect that the MFDA and the CSA will be monitoring closely IIROC's progress with this proposed notice to determine whether concepts contained in this notice should be more broadly applicable to registrant firms.
Later this year, both IIROC and the MFDA can be expected to release either for further comment or in final form, their respective rules providing for additional "client relationship model" requirements for members of these SROs. It remains to be seen whether the SROs and the CSA can agree on harmonized requirements for registrants in this area.
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.