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), along with certain consequential amendments to other securities laws (collectively, the new rules). Subject to ministerial approval requirements, NI 31-103 will come into force on September 28, 2009 (the effective date).

Did You Know?

  • An exempt market dealer (EMD) has proficiency, capital and insurance requirements. Limited market dealers (LMD) had none.

These and other important changes in the regulation of the exempt market under NI 31-103 are discussed below in this issue.

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Increased Requirements for EMDs

EMDs are subject to many of the proficiency, capital and insurance requirements applicable to other categories of dealers — unlike LMDs, which are generally not subject to such requirements.

Proficiency

EMD personnel must satisfy proficiency requirements.

  • Dealing representatives must qualify by passing any of:
    • the Canadian Securities Course Exam,
    • the Investment Funds Institute of Canada (IFIC) Exempt Market Products Exam, or
    • satisfying the proficiency requirements applicable to an advising representative of a portfolio manager.1
  • The chief compliance officer (CCO) of an EMD must qualify by passing:
    • the “PDO Exam”2, and
    • either of the Canadian Securities Course Exam or the Exempt Market Products Exam, or satisfying the proficiency requirements of a CCO of a portfolio manager.
  • There are no proficiency requirements of an ultimate designated person (UDP).

Exemptions from the proficiency requirements may be obtained in cases where the regulator is satisfied that an individual’s qualifications are equivalent to, or more appropriate in the circumstances than, the prescribed criteria.

Capital Requirements

EMDs are subject to capital requirements. An EMD’s excess working capital (calculated as prescribed and certified by management) must not be less than zero for two consecutive days, and the EMD must maintain minimum capital of $50,000 at all times. Negative excess working capital at any time must be reported to the regulator as soon as possible.

Insurance Requirements

EMDs must maintain bonding or insurance coverage containing the following clauses — fidelity, on premises, in transit, forgery or alternations and securities. The coverage must include either a double aggregate limit or a full reinstatement of coverage provision, and coverage must be in the greater of the following amounts for each clause:

    • 1% of total clients assets held or accessible by the dealer or $25,000,000, whichever is less;
    • 1% of the dealer’s total assets or $25,000,000, whichever is less;
    • $50,000 per employee, agent and representative or $200,000, whichever is less; and
    • the amount determined to be appropriate by a resolution of its board of directors (or individuals acting in a similar capacity).

Changes to, claims under or cancellation of such insurance coverage must be reported in writing to the regulator as soon as possible.

Other Registration Reforms

NI 31-103 and the new rules include other significant changes to registration requirements for dealers, advisers and investment fund managers in Canada.