The Canadian Securities Administrators recently published final amendments to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations which will have a significant impact on the registration requirements for dealers, advisers and investment fund managers (the Amendments) and include (i) restrictions on the activities that exempt market dealers may conduct, including a prohibition on brokerage activities; (ii) limits on the availability of certain registration exemptions for registrants; (iii) the addition of an adviser registration exemption for trades through a registered dealer; (iv) a harmonized adviser registration exemption for international sub-advisers; and (v) exemptions from certain registration requirements for registered sub-advisers.
Restrictions on Exempt Market Dealers (EMDs)
The Amendments will significantly restrict the activities that may be undertaken by EMDs. Notably, an EMD will be prohibited from conducting brokerage activities and will only be permitted to act as a dealer when trading a security that would be exempt from the prospectus requirement if such trade were to be a distribution provided that the security is not listed, quoted or traded on a marketplace unless the trade is made in reliance on a further prospectus exemption. Interestingly, the definition of “marketplace” is not limited to marketplaces in Canada, and as such, an EMD will be prohibited from trading securities that are listed on a foreign exchange. An EMD will still be permitted to act as a dealer by trading a security distributed under a prospectus exemption, whether or not a prospectus is filed, and to act as an underwriter in respect of a distribution made under a prospectus exemption. However, an EMD will no longer be able to receive an order from a client to sell a security that was acquired by the client in these circumstances, nor may it conduct activities or solicitations in furtherance of receiving such orders. Amendments to Companion Policy NI 31-103 also clarify that distributions of securities offered under a prospectus and the participation in the resale of securities on a marketplace, including the establishment of an omnibus account with an investment dealer and trading securities through that account, are prohibited activities that should be conducted by an investment dealer.
Limits on Registration Exemptions
Another significant Amendment is that a firm currently registered as a dealer (EMD, restricted dealer or investment dealer), adviser (portfolio manager, restricted portfolio manager) or investment fund manager, will no longer be able to rely on the exemptions from registration in another Canadian jurisdiction if the firm’s existing registration in the local jurisdiction permits the firm to act in the capacity for which the exemption is provided. As such, dealers registered in one province, for example, will no longer be permitted to rely upon a dealer registration exemption (i.e., the international dealer exemption) in any other Canadian jurisdiction.
This restriction only applies to the prescribed exemptions set out in NI 31-103. Thus, exemptions such as the specified debt exemption (section 8.21 of NI 31-103) and the short term debt exemption (section 8.22.1 of NI 31-103) which have similar counterparts set out in the Securities Act in Ontario and/or OSC Rule 45-501 Ontario Prospectus and Registration Exemptions will continue to be available to firms in Ontario regardless of their registration in other Canadian jurisdictions.
Trades Through a Registered Dealer
A new dealer registration exemption will be introduced pursuant to the Amendments that permits a registered adviser, or an advising representative or associate advising representative on behalf of a registered adviser, to conduct trading activities that are incidental to its providing advice to a client, if the trade is made through a dealer registered in a category that permits the trade or a dealer operating under an exemption from the dealer registration requirement.
Additionally, the current dealer registration exemption permitting firms to trade securities through a registered dealer or to a registered dealer purchasing as principal has been clarified to indicate that it will no longer be available to those who solicit or contact directly any purchaser of securities in relation to a trade. This exemption now prohibits the firm seeking to rely on it from having any contact with the prospective investor, regardless of the nature of the contact. The CSA have noted that this exemption is only intended to permit acts in furtherance of a trade that do not involve soliciting or direct contact in relation to that trade. Meetings with clients that do not involve acts in furtherance of that trade and presentations about brands or strategies with no mention of specific securities may not be solicitation or direct contact in relation to that trade. The execution of a trade through or to an appropriately registered dealer by a dealer located in another jurisdiction would, however, qualify under this exemption.
International Sub-Adviser Exemption
The adviser registration exemption currently available in Ontario and Quebec has been incorporated in NI 31-103 and will be harmonized across the other jurisdictions. As was required under this exemption in Ontario and Quebec, a sub-adviser will not be required to register as an adviser provided that the obligations and duties of the sub-adviser are set out in a written agreement with the registered adviser or dealer and the registered adviser or dealer has entered into a written agreement with its clients on whose behalf investment advice is or portfolio management services are to be provided and agreeing to be responsible for losses that arise out of certain failures on the sub-adviser’s part. The sub-adviser must also be located in a foreign jurisdiction (the foreign jurisdiction requirement, be registered in a category of registration (or exempt from registration) and engaged in the business of an adviser in such foreign jurisdiction. The foreign jurisdiction requirement is a departure from the exemptions currently in effect in Ontario and Quebec, and it effectively precludes reliance on the exemption by unregistered Canadian-resident sub-advisers located in another Canadian jurisdiction. Unregistered sub-advisers located in Canada may need to consider the need to register as an adviser or seek special exemptive relief. In the companion policy to NI 31-103, the CSA have expressed their expectation that registrants taking on liability for a sub-adviser’s activities will conduct and maintain records of appropriate due diligence and ensure the investments are appropriate for the registrant’s clients.
In accordance with the Amendments, a registered sub-adviser will be exempt from certain requirements in respect of its activities, including requirements relating to the identification of conflicts of interests, referral arrangements and account statements provided that its obligations and duties are set out in a written agreement and the registered adviser or dealer has entered into a written agreement with its clients agreeing to be responsible for losses that arise out of certain failures on the sub-adviser’s part. These exempt requirements are not considered necessary as the sub-adviser’s client is another registrant. The CSA expects the registrant and sub-adviser to conduct and maintain records of their transactions and due diligence as described above.
Other Amendments include:
- CCO Experience Requirements for EMDs: in addition to passing the Exempt Market Products Exam or the Canadian Securities Course Exam and passing the PDO Exam or the Chief Compliance Officer’s Qualifying Exam, an EMD will also be required to have gained 12 months of relevant securities industry experience in the 36-month period before applying for registration;
- Short-Term Debt Exemption: the codification of a short-term debt exemption that is currently available in the majority of Canadian jurisdictions which permits specified financial institutions to trade short-term debt instruments with permitted clients. This exemption will be available in all jurisdictions except for Ontario where there are alternative exemptions that may be available for trading in short-term debt instruments, including exemptions in section 35.1 of the Securities Act (Ontario) and section 4.1 of OSC Rule 45-401 Ontario Prospectus and Registration Exemptions;
- Delivery of Subordination Agreement: registered firms that enter into a subordination agreement must deliver the executed agreement to the securities regulatory authority within a prescribed period of time; and
- Reporting Requirements for Acquisition of Foreign Registrants: a registrant will be required to provide written notice to the regulator if it proposes to acquire 10% or more of the voting securities or securities convertible into voting securities of a registrant in any foreign jurisdiction or all or a substantial part of the assets of a firm registered in any foreign jurisdiction.
The Amendments which are being made to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, NI 33-109 Registration Information, NI 52-107 Acceptable Accounting Principles and Auditing Standards, their related companion policies and OSC Rules 33-506 (Commodity Futures Act) Registration Information and 35-502 Non-Resident Advisers, are generally expected to come into effect on January 11, 2015 with the prohibition on EMDs engaging in brokerage activities being subject to a transition period ending July 11, 2015.