The long-anticipated changes to the registration regime under Canada’s securities regulation have now been finalized with the release of National Instrument 31-103 Registration Requirements and Exemptions on July 17, 2009. The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule [available here] outlines the scope of National Instrument 31-103, as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments.
Firms registered as mutual fund dealers that are members of the Mutual Fund Dealers Association of Canada (MFDA) and their respective representatives will not be as affected as other registrants by National Instrument 31-103, given the scope of regulation by the MFDA. MFDA members have been exempted from some of the rules set out in National Instrument 31-103, in recognition that the MFDA regulates the area and MFDA members must comply with MFDA by-laws, rules and policies (MFDA rules).
Mutual fund dealers registered in Québec are not required to be members of the MFDA and will remain under the direct supervision of the Autorité des marchés financiers, while their representatives will continue to be required to be members of the Chambre de la sécurité financière. Québec mutual fund dealers and representatives have been exempted from the same rules set out in National Instrument 31-103 as mutual fund dealers that are members of the MFDA.
Amendments to MFDA Rules
The MFDA is expected to publish amendments to the MFDA rules, designed to bring the MFDA rules into conformity with National Instrument 31-103 once National Instrument 31-103 comes into force. MFDA members also will be required to comply with new MFDA rules proposed to implement the Client Relationship Model (CRM), which is a related parallel initiative of the Canadian securities regulators, including the self-regulatory organizations. The MFDA notice regarding CRM was published on April 24, 2009 and the revised MFDA rules related to CRM were re-published for a 90-day comment period, which ended in July 2009. The MFDA proposals regarding CRM include
- Requirements on a dealer to provide a clear definition of the relationship between the client and the dealer and the rules and responsibilities that each party will assume when an account is opened. Clients must be provided with adequate information regarding the client/dealer relationship at the time the relationship is established in order to allow them to understand the basic obligations of their dealer and what to expect regarding service levels
- Enhanced dealer responsibilities to ensure that a client’s investments remain consistent with the client’s needs and objectives
- Mandatory periodic reporting of account performance to clients
- Enhanced procedures for discharging dealers’ supervisory obligations in connection with client accounts.
On account opening, all MFDA members and their respective representatives will be required to provide their clients with certain specified information (relationship disclosure) regarding the relationship they are entering into with a client. The MFDA does not propose to mandate a prescribed format for the relationship disclosure which may be provided in one document or several.
The MFDA proposes to issue Member Regulation Notices to provide additional guidance as to the level of detail to be set out in the relationship disclosure, the procedures for supervisory review and approval of relationship disclosure, the procedures for maintaining evidence of disclosure and the process of account performance reporting (ie., standard industry practices in calculating rates of return).
The MFDA has pointed out differences between its CRM proposals and those of the Investment Industry Regulatory Organization of Canada (IIROC), which are intended for registered investment dealers. Some of the differences include differences in the content of relationship disclosure and the requirements for account performance reporting, with the MFDA not proposing to require preparation of customer account cost reports and the same degree of customer account performance information as IIROC.
The proposed MFDA rules are expected to be published in final form in the fall of 2009, subject to oversight by the CSA.
Impact of National Instrument 31-103
A mutual fund dealer that acts as an investment fund manager, in addition to its principal business as a mutual fund dealer, must also register as an investment fund manager by the prescribed deadline and comply with the requirements of National Instrument 31-103 applicable to that category of registrant. A mutual fund dealer that is in the business of trading in securities (other than mutual funds, “specified debt” or investment vehicles that are not securities) that are or could be distributed pursuant to a prospectus exemption must also register as an exempt market dealer by the prescribed deadline and comply with the requirements of National Instrument 31-103 applicable to that category of registrant. Finally, if any mutual fund dealer wishes to trade in securities of scholarship plans, it must apply to become registered as a scholarship plan dealer (except in British Columbia, where mutual fund dealers may also trade in scholarship plans).
MFDA members must comply with National Instrument 31-103 and understand its application and implications to their business. The following table focuses on various provisions of National Instrument 31-103 and explains how they apply to mutual fund dealers that are members of the MFDA and their representatives.
To view table click here.