Summarized below are some of the key changes under the Amendments that will impact all registrants generally. There are additional amendments that will also affect specific categories of market participants. Learn more by by clicking on any of the following:
- Mutual Fund Dealers
- Investment Dealers (IIROC Members)
- Firms Relying on the International Dealer Exemption
- Firms Relying on the International Adviser Exemption
The Amendments require all registered individuals to understand the structure, features and risks of recommended securities.
Advising, associate advising and dealing representatives are not permitted to be registered with more than one registered firm even if the firms are affiliated unless the registered individual is acting as an officer, partner or director of an affiliated firm or unless dual registration is granted before July 11, 2011. The CSA have stated that applications for exemptive relief will be reviewed on a case-by-case basis.
Sponsoring Firm Obligations
Registered firms are now responsible for the conduct of their sponsored registered individuals. A firm is required to undertake due diligence prior to sponsoring an individual and has an ongoing obligation to monitor and supervise its registered individuals in an effective manner.
All permitted individuals of any registrant are required to file Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (Form 33-109F4).
Extra-Provincial Registration Exemption
Certain mobility exemptions permit registered individuals to continue dealing with and advising clients who move to another jurisdiction without requiring the individual or firm to be registered in the other jurisdiction (to a maximum of 5 clients per jurisdiction). An individual may rely on a registration exemption even where his/her sponsoring firm is not relying on a registration exemption. However, a firm relying on the exemption cannot exceed the 10 client limit (per jurisdiction) without triggering the registration requirement.
Surrendering or Terminating Registration
The firm must complete Form 33-109 Notice of Termination of Registered Individuals and Permitted Individuals (Form 33-109) no later than 10 days (previously 7 days) after the effective date of the employee termination (regardless of reason for termination) which will now terminate the registration of the employee in each jurisdiction of registration. Additional information with respect to the individual’s termination is required to be filed no later than 30 days following the termination (except where the individual is deceased) and must be made available to the terminated employee upon request.
When an individual wishes to terminate his/her registration in one or more of the non-principal jurisdictions in which he/she is registered Form 33-109F2 Change or Surrender of Individual Categories (Form 33-109F2) is required to be completed and filed by the sponsoring firm.
Disclosure notices are now required to be delivered only to a registrant’s principal regulator (except disclosures required pursuant to section 11.9 (Registrant acquiring a registered firm’s securities or assets) and section 11.10 (Registered firm whose securities are acquired). Where notices were required to be filed in within 7 days the Amendments have extended the filing period to 10 days.
Risk Management and Supervision
The Companion Policy emphasizes and has provided additional guidance with respect to a firm’s responsibility to manage the risks associated with the firm’s business in accordance with prudent business practices. Internal controls should mitigate risk and protect client assets from risk. Controls should be designed to assist with monitoring compliance with securities legislation.
The Companion Policy suggests that effective day-to-day monitoring and supervision should include the implementation of measures to identify, detect and refer non-compliance or internal control weaknesses to management or other authorized supervisory personnel.
Know Your Client
Registrants are required to make inquiries if they have cause for concern about a client’s reputation. The registered firm is required to make all reasonable inquiries necessary to resolve the concern, which according to the Companion Policy, means inquiring to identify the beneficial owners of clients that are corporations, partnerships or trusts.
When selling highly concentrated pooled funds, the CSA is also encouraging firms, notwithstanding that they may be relying on the exemption in section 13.2(7) (requirement to establish whether the client is an insider of any publically traded issuer (when trading in labour sponsored investment funds, labour sponsored venture capital funds, scholarship plans, educational plans or education trusts)) to enquire whether a client is an insider of the issuer of any securities held by the fund.
A registered firm is required to maintain records of all communications relating to orders received from their clients. However, the Companion Policy clarifies that it is not necessary to maintain taped conversations. Registered firms are expected to maintain notes of oral communications as well as e-mail, regular mail, fax and other written communications as part of the client records required to be maintained.
Account Activity Reporting
Registered dealers are required to provide trade confirmations and detailed client account statements. The Companion Policy highlights that this function may be outsourced but cautions that the registered firm remains ultimately responsible for compliance.
Avoidance of Conflicts
The Companion Policy adds guidance with respect to disclosure of conflicts of interest. Disclosure is to be provided shortly before the transaction takes place. Blanket disclosure of potential conflicts in account opening documentation will likely be insufficient to meet the hurdle of timely disclosure.
The Companion Policy cautions that special attention should be given to potential conflicts of interest, conflicting fiduciary duties and the possibility of the receipt of confidential inside information where a registered individual serves on a board of directors.
Firms involved in referral fee arrangements are required to keep records of all referral fees paid or received.
Complaints and Dispute Resolution
The Companion Policy provides guidance on how registered firms should handle complaints, including how and which complaints should be documented. The CSA expects a firm to offer a complainant reasonable assistance to put his/her complaint in writing, unless the claim is clearly frivolous.
Although it was expected that additional requirements and guidance with respect to dispute resolution requirements would be added to the Amendments, the changes in this area have been delayed to September 28, 2012 (except for registrants in Quebec). Therefore, registrants remain subject to the existing requirement to provide dispute resolution services for any trading or advising activity.
Amendments relating to International Financial Reporting Standards
Although the initial draft of the amendments that were released for comment in 2010 had considered replacing the term “market value” with the term “fair value” as it appeared in various sections of NI 31-103, the CSA have decided that they will not proceed with the proposed change. However, the CSA have added a definition of “fair value” in Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1) for valuing securities. Additional guidance on audited financial statements can be found in the Companion Policy to NI 52-107 Accounting Principals and Auditing Standards. It should be noted that the valuation of mutual fund securities in the Form 31-103F1 is based on the net asset value (NAV) as determined in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure and is unaffected.
Working Capital (Long Term Related Party Debt)
Guidance has been added in the Companion Policy to clarify the requirements relating to subordination agreements. Unless a subordination agreement is in place, long-term related party debt must be deducted from a registered firm’s working capital on Form 31-103F1. Pursuant to the Amendments, notification is required to be delivered to the regulator 10 days prior (formerly 5 days) to terminating the subordination agreement or repaying all or part of a loan.