The Canadian Securities Administrators have finalized the “first-year” amendments [available here] to National Instrument 31-103 Registration Requirements and Exemptions (now retitled Registration Requirements, Exemptions and Ongoing Registrant Obligations). The amendments touch almost every area of NI 31-103 and include both technical and substantive changes that will affect, to varying degrees, all registrants – firms and individuals – when they come into effect on July 11, 2011 (subject, in some jurisdictions, to ministerial approval being granted). In addition to amendments to NI 31-103, substantive changes were also made to the guidance set out in the Companion Policy which explains how the CSA interprets the requirements in the Rule.
The first-year amendments to NI 31-103 were published for comment in June 2010. For a discussion of the amendments as originally proposed, please see BLG’s August 2010 Investment Management Bulletin The Canadian Registration Regime: Canadian Regulators Propose “First Year” Amendments to National Instrument 31-103 and Other Developments [available here]. The CSA have made some changes to the amendments as originally proposed, however, the changes were not considered by the regulators to be material changes and so a second comment period was not necessary. Some proposed amendments were not carried through in the final first-year amendments to the Rule but are likely to resurface in future proposals.
Changes affecting all registered firms
Many of the amendments will impact all categories of registered firms, such as:
- new restrictions have been placed on individuals who wish to be associated with more than one firm – the obligation is now placed on a registered firm to ensure that a registered dealing or advising individual that acts for it does not act in that capacity for any other registered firm, and does not act as an officer, partner or director of another registered firm that is not affiliated. Existing registrants are grandfathered
- new flexibility for UDPs – the types of individuals eligible to be the UDP of a registered firm have been broadened in certain limited circumstances to accommodate entities that carry on more than one line of business
- requirements to collect KYC on a corporation have been lightened, such that a firm needs to establish the identity of an individual shareholder of the corporation who is a 25% (and more) shareholder (formerly this requirement caught 10% shareholders)
- referral arrangement requirements have been refined so that the onus for monitoring and supervising referral arrangements entered into by a registered firm and its registered individuals is primarily on the registered firm
- flexibility has been provided to dealers in sending trade confirmations – a registered dealer is, with client consent, expressly permitted to deliver a trade confirmation to a registered adviser acting for the client.
The first-year amendments provide much additional guidance and clarification of existing guidance in the Companion Policy that affects all categories of registered firms such as:
- due diligence by firms when sponsoring individuals – a firm must undertake proper due diligence before sponsoring an individual for registration to ensure the individual is appropriately proficient to act on the firm’s behalf, and must monitor and supervise its registered individuals on an ongoing basis to ensure that they remain proficient
- development of internal controls – an expanded list of risk areas that a firm should consider addressing through internal controls has been provided
- complaint handling – guidance is provided on what a firm’s complaint handling policies and procedures should include, methods of responding to verbal and written complaints, and a timeframe for dealing with complaints
- record keeping – firms are not expected to save every voicemail or e-mail, or to record all telephone conversations with clients, but are expected to maintain records of all communications relating to orders received from clients
- insurance requirements – confirmation has been included that the insurance requirements are not cumulative for firms registered in more than one registration category
- outsourcing of account statements – with appropriate supervision, registered firms may use third parties to produce (including valuing securities) and deliver account statements.
Changes affecting specific types of registrants
In addition to the amendments that apply generally to all registered firms, there are many amendments that impact specific categories of registrants. Some changes are of a positive or less restrictive nature, while others impose additional obligations or restrictions on particular registrants.
- A number of positive changes were made to the proficiency requirements in the Rule including:
- a change in the time limit on examination requirements such that an individual only has to have been registered “any time” during the prior 36-month period for the exam to be considered current
- clarification that the proficiency principle includes understanding the key features of the securities
- the addition of alternative proficiency requirements for chief compliance officers and for dealing representatives of mutual fund dealers and exempt market dealers.
Investment fund managers
- a new provision has been added to the Rule requiring, in situations where there is no dealer of record, a registered investment fund manager to send account statements to investors at least once every 12 months
- a new provision has also been added to the Rule requiring a registered investment fund manager to send a trade confirmation to a security holder when it completes a redemption pursuant to an order received directly from the security holder
- guidance has been added to the Companion Policy about when a “fund” itself may be considered to be “self-managed”, such that its boards of directors or trustee(s) would be subject to registration as investment fund managers. A fund that does not have a separate management company must consider the extent to which its board of directors or its trustee(s), directs the business, operations or affairs of the investment fund and whether registration is required
- guidance has been added indicating that investment fund complexes or fund groups with more than one investment fund manager may need to seek exemptive relief if they would like only one entity to be registered
- the CSA have not completed their analysis of the comments received on the proposed amendments to NI 31-103 concerning investment fund manager registration in provinces other than where an an IFM’s head office is located1, and therefore the transition provision for non-resident investment fund managers in NI 31-103 has been extended. Accordingly, no additional registrations in provinces, other than head office provinces, as investment fund manager will be necessary before September 28, 2012. Similarly investment fund managers not based in Canada need not apply for registration until September 28, 2012.
The dealer registration exemption for portfolio managers who trade in their own investment funds to managed accounts has been extended to permit portfolio managers to trade in their own prospectusqualified funds, in addition to their own privately offered funds.
For non-Canadian entities carrying on dealing or advising activities in one or more Canadian jurisdictions in reliance on the international dealer exemption and/or the international adviser exemption, there are minor changes to the conditions of both exemptions:
- the permitted client must be a “Canadian” permitted client
- notice of reliance on the exemption must now be provided to the applicable regulator by December 1 each year.
The CSA has also provided some clarity to the meaning of “incidental advice” on Canadian securities through guidance in the Companion Policy. The CSA explain that “incidental advice” on Canadian securities means the advice is incidental to advice provided on foreign securities and not a “carve-out” that allows an international adviser to independently advise on Canadian securities (i.e. the advice is not directly related to the advice on foreign securities) for a small portion of a permitted client’s portfolio. We expect that this clarification may concern some that are relying on the exemption.
As well, the CSA has clarified that the 10% revenue restriction in the conditions to the international adviser exemption must be assessed as at the end of the international adviser’s year-end and does not need to be done on an ongoing basis throughout the year.
The provisions of NI 31-103 that exempt SRO members from various provisions of the Rule have been reorganized to clarify the requirements that apply when an SRO member is also registered in another category, and include a few additional exemptions
- complaint handling – both IIROC and MFDA members
- prohibition on lending – MFDA members.
A number of changes were also made to the capital and financial statement requirements in NI 31-103 exempting SRO members which are also registered in other categories from these requirements provided they comply with the applicable SRO’s financial requirements and satisfy certain other conditions.
After the release of the final first-year amendments, the CSA published additional proposed amendments [available here] to the provisions of NI 31-103 that exempt SRO members from various provisions of the Rule. The proposed amendments identify the specific SRO requirements that must be complied with in order to be exempt from the corresponding NI 31-103 requirements.
A few changes were made to the National Registration Database (NRD) rules, and to the NRD forms to be used by registrants and applicants for registration. While many of these changes are identified by the CSA as being for clarification purposes, some changes require additional information to be provided.
The time frame for submitting required changes to previously filed registration information has been extended from 7 to 10 calendar days.
Issues under consideration by the CSA
The CSA continue to work on some of the originally-proposed amendments. For example,
- the proposal to expand section 13.5 of NI 31-103 (the self-dealing restrictions on certain managed account transactions) to include portfolio managers operating under IIROC rules was not finalized. The CSA are continuing to review the regime applicable to IIROC members carrying on discretionary management and may publish proposed amendments for comments in the future.
- the proposal to include a list of specific matters that require independent dispute resolution was not finalized given the nature of the comments the CSA received. The transition period for the requirement for registered firms (except in Québec) to offer independent dispute resolution services to clients has been extended to September 28, 2012.