In provinces and territories outside of Ontario and Newfoundland & Labrador, securities laws have not required market participants to be registered as a dealer in circumstances where they engage exclusively in the business of trading in securities in the “exempt market”. Trading in the “exempt market” commonly refers to trading securities in reliance upon exemptions from the prospectus and dealer registration requirements under applicable securities laws, such as trades to “accredited investors” (i.e. certain institutions and high net worth individuals) and trades with a minimum investment amount of $150,000.
Many of the exemptions from the dealer registration requirement available to such market participants, however, will be removed with the coming into force of National Instrument 31-103 Registration Requirements and Exemptions (“NI 31-103”), its related companion policy and other related rules and amendments. The Canadian Securities Administrators (“CSA”) have stated that NI 31-103 is expected to come into force on or about September 28, 2009, subject to ministerial approvals in some jurisdictions (the “Effective Date”).
As a result, by the Effective Date, unregistered “exempt market” participants will need to determine whether they are required to register as a dealer or whether there is an applicable exemption from dealer registration in their jurisdiction. The following is a description of a new category of dealer registration that will be created on the Effective Date and some of the issues unregistered “exempt market” participants need to consider in advance of the Effective Date.
Exempt Market Dealer Category
NI 31-103 will introduce a new category of registered dealer – the exempt market dealer (“EMD”) – to all provinces and territories of Canada. On the Effective Date, firms that are currently registered as limited market dealers (“LMDs”) in Ontario and Newfoundland & Labrador will be automatically registered in the category of EMD in those provinces.
Unregistered individuals and firms already acting as a dealer in the “exempt market” in jurisdictions other than Ontario and Newfoundland & Labrador on the Effective Date, will be required to apply to register as an EMD within twelve months of the Effective Date in order to continue such registrable activities, unless an exemption is available. Unregistered individuals and firms that seek to commence acting as a dealer in the “exempt market” in all provinces and territories following the Effective Date will need to be registered prior to conducting registrable activities, unless an exemption is available.
Exemption from Exempt Market Dealer Registration in certain Jurisdictions
The CSA has announced that the securities regulatory authority in each of Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut Territory and the Yukon Territory will each issue an order exempting a person from the dealer registration requirement when the person trades in securities in reliance on one of the following prospectus exemptions in National Instrument 45-106 – Prospectus and Registration Exemptions (i) accredited investor, (ii) family, friends, and business associates, (iii) offering memorandum, and (iv) minimum investment amount. To rely on this order, a person must meet each of the following conditions:
- not be otherwise registered,
- not provide suitability advice leading to the trade,
- not otherwise provide financial services to the purchaser,
- not hold or have access to the purchaser’s assets,
- provide a risk disclosure in prescribed form to the purchaser, and
- file an information report with the securities regulatory authority.
Registration Requirements for EMDs
Unregistered “exempt market” participants (that are unable to rely on an exemption from registration) should start to consider the requirements imposed on EMDs. The following is a brief summary of some of the material registration and ongoing compliance requirements applicable to EMDs. In certain circumstances, the requirements are phased-in over prescribed transition periods.
An EMD will be subject to a number of business operation requirements. For instance, an EMD must establish a compliance system and designate a Chief Compliance Officer and Ultimate Designated Person to, among other things, establish, monitor, supervise and promote compliance within the firm. EMDs must maintain certain types of records for prescribed time periods and ensure accessibility of such records for audit, business and regulatory purposes. In addition, EMDs will be subject to restrictions on (or in certain cases, limitations on) tied selling arrangements, client lending and referral arrangements.
Each dealing representative (i.e. an individual that trades in a security) and the Chief Compliance Officer of an EMD will be required to have achieved prescribed educational proficiencies unless specifically exempted therefrom by the applicable securities regulatory authority.
An EMD must maintain a minimum capital of $50,000 (or $100,000, if also registered as an investment fund manager) and bonding or insurance in at least the minimum prescribed amount applicable to the firm. In addition, an EMD must deliver audited annual financial statements and an annual comparative calculation of excess working capital (that is not less than zero) in the prescribed form.
Dealing with Clients
Subject to certain exceptions, an EMD must take reasonable steps to “know the client” (including, where applicable, the client’s identity, reputation, investment needs and objectives, financial circumstances, risk tolerance and creditworthiness) and to ensure that the purchase or sale of a security is suitable for the client, prior to the execution of the trade. An EMD must also take reasonable steps to identify existing and potential material conflicts of interest between the firm, its individuals and the client. In the event of a client compliant about any trading or advising activity of the EMD, an EMD will be required to provide an independent dispute resolution or mediation service, at its expense, to the client to resolve the complaint. An EMD that holds client assets or client securities under a written safekeeping agreement is subject to additional requirements with respect to the manner in which those assets or securities are held.
Client Reporting and Disclosure
An EMD must provide a client with a relationship disclosure information statement prior to the first purchase or sale of a security for the client, a trade confirmation following each purchase or sale of a security for the client and periodic client statements. An EMD must provide clients outside of the province or territory in which the EMD’s head office is located a prescribed form of notice with respect to being non-resident.