On July 17, 2009, the Canadian Securities Administrators (the CSA) published in final form their reforms to the registration regime in National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103 or the new rule), along with certain consequential amendments to other securities laws. Subject to ministerial approval requirements, NI 31-103 will come into force on September 28, 2009 (the effective date).
New Rules for the “Exempt Market”
Securities legislation across Canada divides the distribution of securities into two broad categories: (i) distribution pursuant to a prospectus; and (ii) distribution pursuant to a prospectus exemption. The prospectus exemptions map out what is commonly known as the “exempt market”. Securities legislation also provides for a number of exemptions from the dealer registration requirement which roughly track the prospectus exemptions. Under the current rules, only Ontario and Newfoundland and Labrador impose a registration requirement upon those who trade in securities in the exempt market — the Limited Market Dealer (LMD). No registration is currently required in the other provinces and territories.
Under NI 31-103, a new dealer registration category is being introduced in all jurisdictions across Canada to regulate trading in the exempt market — the Exempt Market Dealer (EMD). In Ontario and Newfoundland and Labrador, the EMD category will replace the LMD category, making the EMD registration category uniform across the country.
Did You Know?
o Existing LMDs automatically become EMDs on September 28, 2009. You don’t have to apply.
o Not all LMDs will require registration as EMDs under NI 31-103. It’s up to you to make the determination.
These and other changes in the regulation of the exempt market under NI 31-103 are discussed below in this issue.
We can help you navigate your way.
EMDs replacing LMDs Automatically
In the prior version of the new rule published for comment in 2008, LMDs were going to be required to apply to become registered as EMDs. This is no longer the case under NI 31-103. Effective September 28, 2009, all LMDs registered on that date will automatically become registered as EMDs.
A fundamental change under NI 31-103 is the introduction of the “business trigger”. Currently, the requirement to be registered is triggered by a person engaging in a “trade” of securities. Under the new rules, the traditional “trade trigger” is being replaced by the narrower “business trigger”, so the dealer registration requirement will only apply to those whose trading in securities amounts to carrying on the business of trading in securities.
This isn’t news for the exempt market in Ontario and Newfoundland and Labrador. The new business trigger in effect replicates the approach already taken in those jurisdictions in relation to a “market intermediary” – that is, a person engaging or holding themselves out as engaging in the business of trading in securities. This definition has been difficult to interpret in the past. While the Companion Policy to NI 31-103 provides more guidance than had been available previously, there will continue to be questions about this threshold test under the new rule.
With the benefit of additional regulatory guidance on when the business trigger is pulled, it is possible to identify existing LMDs which may not be required to continue being registered as EMDs under the new rule. Much of it depends on the LMD’s business model. We can help make that assessment.
Other Registration Reforms NI 31-103 includes many other very significant changes to registration requirements for dealers, advisers and investment fund managers in Canada. The CSA intend that firms carrying on more than one type of activity will be required to register and comply with the requirements of multiple categories, as applicable.