On July 7, 2016, the Canadian Securities Administrators (CSA) released for comment proposed amendments to NI 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and NI 33-109 – Registration Information Requirements (NI 33-109), aimed at enhancing custody requirements for certain registrants, clarifying activities that may be conducted by EMDs and incorporating relief from certain CRM2 requirements.
The proposed amendments to NI 31-103 will not significantly impact registered dealers which are members of the Mutual Fund Dealers Association of Canada (MFDA) or the Investment Industry Regulatory Organization of Canada (IIROC) since they are exempted from many of the obligations in NI 31-103 in light of substantially similar requirements under MFDA and IIROC member rules.
The proposed custody amendments will:
- Require registered firms to ensure that a "qualified custodian" is used to hold securities and cash of a client or an investment fund in certain circumstances
- With some exceptions, prohibit self-custody by registered firms and prohibit the use of a custodian that is not functionally independent of the registered firm
- Require registered firms to confirm how the securities and cash of a client or an investment fund are being held by a qualified custodian
- Require registered firms to disclose to clients where and how client assets are held or accessed
Proposed exceptions to these custodial requirements include:
- Permitted clients if such clients (i) are not individuals or investment funds, and (ii) waive (in writing) the custodial requirements
- Investment funds subject to National Instrument 81-102 - Investment Funds or National Instrument 41-101 General Prospectus Requirements
- Certain types of assets, such as client name securities, certain mortgages and customer collateral subject to specified custodial requirements under derivatives regulation
The CSA propose a six-month transition period for impacted firms to meet these new custody requirements.
The proposed EMD amendments re-affirm that EMDs may not participate in distributions of securities under prospectuses in any capacity, including as underwriters and selling group members, and provide further clarification around permissible EMD activities, including trades of securities distributed under a prospectus exemption and certain resale trades. Significant additional guidance has been added to the Companion Policy for NI 31-103 (31-103CP) regarding this restriction. EMDs should review their internal procedures to ensure they have sufficiently robust processes in place to stay onside these strict requirements.
The proposed amendments also expand the exemption from the dealer registration requirement in section 8.6 of NI 31-103 so that registered advisers may trade in the securities of investment funds (including, as is the case today, those distributed under a prospectus) if the adviser or an affiliate of the adviser manages the investment fund and certain conditions are met.
CRM2 Relief Amendments
The proposed amendments relating to CRM2 aim to make permanent certain temporary blanket-like relief granted by the CSA in May 2015 in relation to CRM2 amendments made in 2013 (2013 Amendments). The proposed amendments also address various matters that have arisen in the course of implementing the 2013 Amendments, including adding guidance to 31-103CP regarding the delivery of information to clients required by the 2013 Amendments. Impacted registrants should review their current CRM2 templates and internal procedures to determine whether they align to these proposed amendments.
The CSA are proposing certain minor amendments of a housekeeping nature to NI 31-103 and 31-103CP that include clarifying drafting changes or addressing matters in specific jurisdictions (e.g., Alberta and Québec).
Finally, the CSA also propose changes to National Instrument 33-109 that:
- Would eliminate the requirement, in Form 33-109F6, for firms to provide information on exemptions from registration or licencing to trade or advise in securities or derivatives that the firm is currently relying on if the firm has already notified the regulator in accordance with the applicable exemption.
- Clarify that registered or permitted individuals would be required to complete an updated Form 33- 109F4 (as part of a reactivation procedure), rather than the more streamlined Form 33-109F7 (and related reinstatement procedure), if the individual is moving to another registered firm and there have been certain changes to the individual’s registration or licencing to trade in or advise on securities or derivatives (other than an approved recorded through NRD), or in the case of registrations or licences when dealing with the public in a non-securities or derivatives context, disciplinary actions or refusals to register or license the individual.
The comment period for the CSA’s proposed amendments to NI 31-103 and NI 33-109 closes on October 5, 2016.