On July 17, 2009, the Canadian Securities Administrators published National Instrument 31-103: Registration Requirements and Exemptions (NI 31-103 or the Instrument), which is expected to come into force on September 28, 2009. The Instrument seeks to create a unified registration regime across the country, and to regroup all of the registration requirements and exemptions that formerly existed in various other instruments. NI 31-103 also innovates in many ways, notably by adding new registration categories and removing others, and by adopting the "business trigger" criteria for determining whether registration is or is not required.
Who must register?
Firms must register "if they are in the business of trading in, or advising on, securities, or if they act as an underwriter or manage an investment fund". Individuals must register "if they trade, underwrite or advise on behalf of a registered dealer or adviser, or act as the ultimate designated person or chief compliance officer of a registered firm".
The key criterion to determine if registration is or is not required is the "business trigger". This new concept relies on factors such as whether the individual or firm is engaging in activities similar to a registrant, intermediating trades between sellers and purchasers, conducting the activities repeatedly, receiving compensation or soliciting clients to determine if they are carrying out trading or advising activities as a business. The business trigger applies for dealers and advisers, but not investment fund managers. If a firm engages in investment fund manager activities, it must register.
NI 31-103 modernizes the registration categories and exemptions, and streamlines them in one single document. The new regime retains some existing categories and introduces new ones, while on the whole reduces the number of registration categories.
The categories of individuals who must register are dealing representative, advising representative, associate advising representative, ultimate designated person (UDP) and chief compliance officer (CCO). The last two categories are new concepts introduced by NI 31-103.
The UDP is a senior officer in charge of ensuring compliance with securities legislation by the firm and the CCO, who reports to the UDP, is responsible for monitoring and assessing compliance by the firm. The Instrument requires registered firms to designate a UDP and a CCO.
The categories of firms that must register are investment dealers, mutual fund dealers, scholarship plan dealers, exempt market dealers, restricted dealers, portfolio managers, restricted portfolio managers and investment fund managers.
The Instrument also contains a detailed list of exemptions from the registration requirement. Many of the existing exemptions have been retained, but some new ones have been added, including two new dealer exemptions. The "portfolio managers" exemption allows a portfolio manager to trade units of its in-house non-prospectus qualified funds with its managed accounts without registering as a dealer. The "international dealers" exemption allows non-resident dealers to operate in Canada with certain limitations.
Exemptions to the adviser registration requirement have also been added. Dealers who provide non-discretionary or generic advice do not need to register, nor do international advisers, with limitations.
Finally, two exemptions are now available for both dealers and advisers. The first is an "exemption relating to permitted clients", which allows registrants trading with or advising "permitted clients" (a new concept targeting institutional and corporate investors) to be exempt from certain conduct obligations such as the requirement to make suitability determinations. The second is the "mobility exemption", which allows registrants in a Canadian province or territory to continue dealing with or advising a limited number of clients who move to another province or territory without having to register in that other province or territory.
The purpose of the new regime is to strike a balance between providing an efficient system for registrants and protecting investors. Many features of the Instrument were thus crafted with the goal of enhancing investor protection. NI 31-103 provides for proficiency standards for registrants, mechanisms to handle investor complaints and conflicts of interest, and enhanced rules for consumer disclosure.
The fitness for registration of an individual or firm is evaluated at the time of its initial application for registration. It is evaluated according to three principles: proficiency, integrity and solvency. The proficiency standards are assessed through the requirement of examinations, education and training. These are detailed in the Instrument and vary according to the registration category. Firms must also maintain a certain amount of capital and insurance coverage (part 12) to ensure they can meet their financial obligations when they become due.
The Instrument also requires registrants to adopt "Know your Client" principles. They must be fully aware of their clients’ situations, and ensure that recommendations or purchases and sales of securities are suitable for the client. In addition, firms must seek to avoid conflicts of interest that may reasonably be expected to arise, and respond adequately if they occur. NI 31-103 also provides for a procedure to handle complaints reasonably and respond to them in a timely manner.