The Canadian Securities Administrators (CSA) recently finalized amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and its Companion Policy, as well as to certain related instruments, that were
first published for comment in December 20131. The amendment package, published on October 16, 2014 [available here], makes technical adjustments as well as more substantive changes intended to establish the regulatory approaches on long-standing issues, resolve ambiguities and clarify regulatory intentions. The CSA made some welcome changes (primarily to provide additional clarity) to the final amendments in response to well over one hundred commentators, including comments submitted by Borden Ladner Gervais LLP.
In addition to amending NI 31-103, the CSA also amended National Instrument 33-109 Registration Information (NI 33-109) and its Companion Policy, as well as National Instrument 52-107 Acceptable
Accounting Principles and Auditing Standards and its Companion Policy. Amendments to OSC Rule 33-506
(Commodity Futures Act) Registration Information and its Companion Policy mirror the amendments to the various registration related forms in NI 33-109.
Subject to governmental approvals, the amendments will be effective on January 11, 2015, although certain provisions have a six-month transition period.
Exempt market dealers will be limited in the activities that they may conduct. These restrictions will be effective July 11, 2015.
CCOs of all categories of registered dealer (except investment dealers) must have at least 12 months’ of relevant experience.
International portfolio managers will be able to rely on a new nationally-consistent
A short-term debt exemption will be available to certain financial institutions, effective July 11, 2015.
Investment fund managers will need to report NAV adjustments using a new detailed form.
Firm representatives who serve on the boards of reporting issuers or have outside business activities, including “positions of influence”, will have enhanced disclosure obligations and any conflicts of interest raised by these activities must be managed.
Registrants must give notice in certain circumstances of acquisitions of securities of another registrant – including firms registered in “foreign jurisdictions”. This latter addition is new.
All registrants will use updated registration-related forms to provide information to the regulators.
As with the existing iteration of NI 31-103, it is particularly important to review the amendments to the Companion
Policy, which provide greater clarity on regulatory expectations, and
in some cases, enhance the base requirements of rules.
[Text Box: INVESTMENT MANAGEMENT BULLETIN] [Text Box: OCTOBER 2014]
1 See Just in Time for the Holidays – Another Round of Significant Amendments Proposed for National Instrument 31-103
Investment Management Bulletin December 2013 Borden Ladner Gervais LLP.
[Text Box: INVESTMENT MANAGEMENT BULLETIN | OCTOBER 2014] KEY AMENDMENTS AT A GLANCE
Exempt Market Dealers
New prohibition on trading in securities that are listed, quoted or traded on a All registrants; firms and marketplace where the trade in the security does not require reliance on a registered representatives prospectus exemption. This is explained to be a restriction to prevent EMDs from
conducting “brokerage activities”, which are more appropriately carried out Cont’d
by investment dealers.
These restrictions will be effective July 11, 2015.
Additional guidance on the conflicts of interest that the regulators consider are raised when representatives act as directors on boards of reporting issuers and have other “outside business activities”. This is expanded guidance from that provided in CSA Staff Notice 31-326 Outside Business Activities and Multilateral Policy 34-202 Registrants Acting as Corporate Directors (these instruments will be repealed).
Working capital calculations can now take into account investments in mutual funds that are “investment companies” in the United States on the same basis as Canadian
New exemption for incidental trading activities by a registered adviser where trades executed through a registered dealer or a dealer that is exempt from registration.
Guidance added to the proficiency requirements that apply to advising representatives and associate advising representatives – guidance very clearly sets the parameters for the specific experience the CSA will consider relevant for the particular representative category. Additional guidance is provided around client relationship managers and their need for registration (depending on their activities) and their registration status.
New exemption from certain client disclosure and reporting obligations for a registered adviser that acts as sub-adviser for another registered adviser.
Repeal of existing “non-resident sub-adviser” exemption in Ontario and Québec.
mutual funds (5 percent of NAV per security held) – exemptive relief will no longer be needed.
Clarifications on how working capital must be calculated when related-party debt is outstanding – and confirmations about the need to file subordination agreements with the regulators.
Removal of statutory exemptions for registrants for activities that can be conducted under their registration.
Tweaks and clarifications made to many of the registration forms that must be filed with the regulators, including the requirement to disclose criminal offenses even where an individual has been granted an absolute or conditional discharge.
New exemption from registration if engaged as a sub-adviser to a registered adviser or a registered dealer; various conditions set for the exemption, including requirement that the registered adviser or dealer be responsible for any losses arising from the advice received from the international sub-adviser.
This new exemption will only be available for non-Canadian firms.
“Permitted” individuals (those individuals who must report information to the
regulators) now explicitly include trustees, executors, and other legal representatives that have direct or indirect control of more than 10 percent of voting securities
of a firm.
Firms applying for registration with their principal regulators must file business plans, compliance manuals and draft client-facing documents, except the OSC has
Investment Fund Managers
New very detailed form for reporting adjustments to net asset value.
said that although such documents are expected to be prepared at the time of initial
application and they may ask for these documents, they do not need to be filed as a
CAP plan administrators or sponsors
Clarification to existing exemption from investment fund manager registration for
plan sponsors and plan service providers. Chief Compliance Officers of registered
matter of course.
Requirement that CCOs have at least 12 months’ of relevant securities industry experience in the 36 months prior to applying for registration.
All registrants; firms and
Introduction of “principal regulator” process for filing required notices with the investment dealers)
regulators when securities or assets of a registered firm are acquired by another firm International dealers and or when a registered firm acquires another firm. New requirement to give notice to the international advisers regulators of any time a registrant proposes to acquire an interest in a firm that may
be registered in a “foreign jurisdiction”. Clarification on when these notices must be filed (that is, only on an “initial” acquisition of securities or on an acquisition of assets), but also removal of the provision that presently exempts firms undergoing an internal reorganization from providing these notices (that is, when there is no actual change
Clarification on when information about “business locations” must be provided to the
Firms cannot be registered in a jurisdiction of Canada, while also relying on any registration exemption in the same jurisdiction (this is a welcome change from the previous proposals).
Additional guidance on how an exempt international firm should determine who its principal regulator is in Canada.
Change of the drafting of the exemptions to revert back to the concept that international exempt firms can trade with or advise “permitted clients”,
as opposed to “Canadian permitted clients”.
regulators for representatives working out of a home office. Representatives must Start-up issuers
consent to give regulators access to home offices for compliance review purposes.
Guidance to clarify when start-up entities can engage in capital raising activities, without being required to register as a dealer.
Clarification that representatives must disclose to the regulators all officer or director Financial institutions
positions (not purely “business-related” positions) and all “positions of influence”,
whether or not compensation is paid.
Codification of dealer registration exemption for trades in short-term debt having a designated rating by financial institutions to permitted clients.
This exemption will be effective July 11, 2015.
[Text Box: INVESTMENT MANAGEMENT BULLETIN | OCTOBER 2014] IMPACT OF THE AMENDMENTS
We expect that the following five amendments will have the greatest impact on the applicable market participants, which is not to say that we believe the myriad of other amendments do not deserve a close review for their applicability to a registrant’s business. Pages 2 and 3 of this Bulletin briefly set out the expected impact of the amendments on the various market participants. As we noted earlier, it is especially important that firms focus on the additional guidance provided for in the Companion Policy to ensure appropriate understanding of the impact of the amendments.
EXEMPT MARKET DEALERS
The restriction on the type of trading businesses that can be carried on by exempt market dealers (EMDs) has been drafted more narrowly than the December 2013 proposals in ways that provide more clarity and definition to the scope of the restriction. The regulators have also worked to explain the rationale for these restrictions. The revised restrictions come into effect on July 11, 2015 (a six-month transition period from the effective date of the amendments).
An EMD will not be permitted to trade in a security if
it is listed, quoted or traded on a marketplace and the trade is not made in reliance on a prospectus exemption. The restrictions include establishing an omnibus account with an investment dealer and trading securities for clients through that account. Activities such as acting as an underwriter in a prospectus distribution of securities, or directly or indirectly participating in a resale of securities traded on an exchange or marketplace (whether on exchange or
off exchange) (unless the latter is in reliance on a prospectus exemption) should not be conducted by EMDs. The CSA have clearly stated that this trading activity may only be conducted by investment dealers.
These restrictions on an EMD’s activities clearly draw a line in the sand to distinguish between the “exempt
markets” and the “retail markets”. That is, EMDs should be limited to trading in non-prospectus qualified securities and trades in prospectus qualified and
listed securities should only be carried out by investment dealers.
INTERNATIONAL SUB-ADVISER EXEMPTION AND REPEAL OF QUÉBEC/ ONTARIO SUB-ADVISER EXEMPTION
A nationally uniform “sub-adviser” exemption has been in the works for many years. OSC Rule 35-502 Non- Resident Advisers has long provided for a sub-adviser exemption to allow a non-resident firm to act as a sub- adviser to a registered adviser in a jurisdiction. Québec also has a blanket order with similar effect.
An international sub-adviser exemption will be in place across Canada on the effective date of the amendments (and the Ontario and Québec provisions repealed). The exemption is nationally uniform and no regulatory filings will be required before firms can rely on this exemption. The only firms that will be able to rely on the exemption are non-Canadian firms that carry on the business of an adviser (and are appropriately registered) in their
The CSA have made two welcome changes from the December 2013 proposals, both in response to comments:
Firms can be registered in one jurisdiction and rely on the sub-adviser exemption in another jurisdiction (the proposals would have prevented this).
The proposed “chaperoning” requirements have been dropped.
The CSA have added guidance in the Companion Policy that should be reviewed by registered advisers who have engaged international firms, including those firms which are their affiliates, on the initial and ongoing due diligence that should be carried out and documented by the registered firm in connection with its sub-adviser’s reliance on this exemption.
We are not aware of many Canadian advisers who presently rely on the Ontario and Québec exemptions so as to act as a sub-adviser to a registered adviser (without being themselves registered in these provinces), but we urge any such firms to consider the fact that the Ontario and Québec exemptions will be repealed as of January 11, 2015, which will leave them without any exemption from registration, because the exemption will only be available to sub-advisers located outside of Canada. There also may be firms relying on
“sub-adviser exemption” orders from the other Canadian regulators, which will likely sunset within specified time- periods after the coming into force of this amendment. Firms that are operating under either form of exemption should review documentation to ensure that the arrangements are accurately reflected in accordance with the new conditions.
INTERNATIONAL ADVISER AND INTERNATIONAL DEALER EXEMPTION
With one exception (discussed below), no significant substantive changes are being made to the international adviser and international dealer registration exemptions, although the CSA have codified earlier blanket orders which change the existing drafting of these exemptions to allow these firms to trade with or advise “permitted clients”, as opposed to the more restrictive “Canadian permitted client”.
As we point out above in connection with the international sub-adviser exemption, the CSA have dropped the December 2013 proposals to limit
the availability of the international dealer and the international adviser exemptions to firms that have no registration in the applicable category of registration in any Canadian jurisdiction. This is a welcome change.
GUIDANCE IMPACTING (IN PARTICULAR) REPRESENTATIVES
The CSA have amended the Companion Policy to provide additional guidance in the following areas that will affect representatives, but also will impact a registrant firm’s compliance programs.
Conflicts of interest that arise from representatives’ outside business activities.
Conflicts of interest that arise when representatives act as directors on boards of public or private corporations.
Conflicts of interest that arise when representatives are in “positions of influence” with volunteer or
non-profit organizations, even when they are not compensated for that work.
The expected levels of proficiency – primarily experience levels – that advising and associate advising representatives must have before they can become registered, or in the case of associate advising representatives, can become registered in the higher level of advising representative.
REORGANIZATIONS, ACQUISITIONS OR OTHER RESTRUCTURING OF REGISTRANT FIRMS
The amendments to the provisions of NI 31-103 that require a registrant to give notice to the regulators of certain reorganizations, acquisitions or other restructurings, have the following impacts:
The notice needs to be provided only to the principal regulator, who will “coordinate” the review with the other applicable jurisdictions. This is a welcome change that should facilitate these notices (and reduce regulatory filing fees), although we note that the CSA state clearly that other jurisdictions may still “object”.
[Text Box: INVESTMENT MANAGEMENT BULLETIN | OCTOBER 2014] The requirements apply when a firm acquires “for the first time” direct or indirect ownership, beneficial or otherwise, of 10 percent or more of the voting securities or other securities of another registrant, or a parent company of such a firm, or a substantial part of the assets of a registrant. The CSA have removed a provision that clearly established that internal reorganizations, where beneficial control
is not affected, do not have to be reported to the regulators. The CSA explain that this provision is no longer necessary given the other amendments to the requirements. We caution that is unclear how narrowly the regulators will interpret the revised provisions and it may be that certain transactions that did not fall within the notice requirements under the existing drafting of these requirements, now will be required to be reported to the regulators.
The requirements apply if any of the listed circumstances take place with respect to a firm that is registered in a “foreign jurisdiction”. This is a new provision (that is not explained) and will
have implications for some registrants, including the possibility that a Canadian regulator could object,
and prevent, a registrant purchasing more than 10 percent of the voting securities or the assets of an international firm.
Guidance is provided as to the information that must be provided to the regulators, as well as when the notice provisions will apply to acquisitions of assets (including a book of business, a business line or a division of a firm).
The regulatory expectations on registrants and registered individuals are ever increasing, as well as evolving. It is vital that registrants keep up to date on regulatory changes – as well as the views of the various regulators. We recommend a close review of these amendments to NI 31-103 and related instruments,
as well as the commentary of the staff of the various commissions in their periodic summaries of compliance issues. The Annual Summary Report for Dealers,
Advisers and Investment Fund Managers published
by the Compliance and Registrant Regulation Branch of the Ontario Securities Commission (OSC Staff Notice 33-745) on September 25, 2014 is [available here].