National Instrument 31-103 Registration Requirements and Exemptions (the New Rule) and Companion Policy 31-103 CP - Registration Requirements and Exemptions (the Companion Policy) were published by the Canadian Securities Administrators (CSA) on July 17, 2009. The New Rule and Companion Policy will, subject to ministerial approval, take effect on September 28, 2009 (the Effective Date) and, together with consequential amendments to securities legislation and other instruments, will consolidate, modernize and largely harmonize registration requirements across Canada (collectively the new regime). While Ontario has not adopted certain provisions of the New Rule, amendments will be made to the Securities Act (Ontario) which will result in Ontario having substantially the same regime as the other Canadian jurisdictions. The new regime will affect not only existing registrants but other entities operating in the capital markets who are not currently registered.
Highlights of the new regime include:
- requirement to register as a dealer based on "business trigger" rather than "trade trigger"
- exempt market dealers and investment fund managers will now be required to register
- replacement of international dealer and adviser registration categories with exemptions
- registration required for chief executive officers and chief compliance officers of registrant firms
- enhanced rules on relationship disclosure, referral arrangements, conflicts of interest and investor complaints.
This bulletin provides a brief overview of the new regime.
REQUIREMENT TO REGISTER AS A DEALER OR ADVISER TRIGGERED BY "BUSINESS" TEST
The new regime will require persons or companies who are engaged or hold themselves out as being engaged "in the business of" dealing or advising in securities to register as dealers or advisers. Currently, in most Canadian jurisdictions, the requirement to register as a dealer is based upon whether a person or company is "trading" in securities. The current trigger has captured certain trading activities incidental to a firm's primary business. As a result, it is anticipated that moving from a trading to a business trigger will reduce the need for exemptive relief from the registration requirement.
The Companion Policy outlines certain factors that the regulators consider relevant in assessing whether one is in the business of dealing or advising in securities and registration is required. These factors include whether the individual or firm is engaged in activities similar to a registrant, whether the individual or firm is intermediating trades or acting as a broker, whether the activity is carried out with repetition, regularity or continuity, whether the person carrying on the activity is or is expecting to be compensated for the activity, whether the person solicits others in connection with the activity and whether there are profits arising from the activity or the activity is intended to produce a profit.
The Companion Policy further provides guidance on whether particular persons will be considered to be "in the business" of dealing or advising. A person who trades securities for their own account will not generally be required to register. The Companion Policy provides that while most issuers will not normally be in the business of dealing in securities, an issuer which frequently trades in securities, employs individuals to perform tasks similar to a registrant, solicits investors actively or acts as an intermediary may be in the business of dealing in securities and be required to register.
REVISED CATEGORIES OF REGISTRATION FOR DEALERS AND ADVISERS
The New Rule amends and reduces the categories of registration for both dealers and advisers. The new categories of registration have two main purposes, to specify the type of activity a registrant may conduct and to prescribe the requirements of registration for each category. Dealers will be registered in one or more of the following categories: investment dealer, mutual fund dealer, scholarship plan dealer, exempt market dealer, and/or restricted dealer. Firms that are currently registered as dealers will, subject to certain exceptions, have their registration converted into one of these categories.
The exempt market dealer and the restricted dealer are two new categories of registration. The exempt market dealer is similar to the limited market dealer registration currently in place in Ontario and in Newfoundland and Labrador. The effect of the new regime on exempt market participants is described under "Exempt Market Participants".
The restricted dealer is a category of registration for dealers who carry out limited activities which do not fall within another registration category. Such dealers will be subject to restrictions in their registration based on their activities.
Advisers will be registered as either portfolio managers or restricted portfolio managers. Portfolio managers may advise with respect to any security while a restricted portfolio manager will only be allowed to advise with respect to specific securities or industries. The introduction of this category reflects the fact that increasingly portfolio managers are engaged in providing specialized advice. The conditions attached to a restricted registration will, as in the case of restricted dealers, depend on the nature of the manager's activities.
Discontinued Categories of Registration
Several categories of registration will not be continued under the new regime. These include limited market dealers, international dealers, international advisers, securities issuers, investment counsel and other categories that are not widely used. Whether persons currently registered in such categories will continue to need to be registered and in what category will depend upon whether they are in the business of trading or advising and the nature of their activities.
EXEMPT MARKET PARTICIPANTS
Subject to the blanket order exemption in certain jurisdictions which is described below, dealers who carry on the business of trading in securities in the exempt market will now be required to register as exempt market dealers and to meet certain proficiency requirements. Exempt market dealers will be restricted to dealing in prospectus-exempt securities or with persons to whom prospectus-exempt securities can be distributed, such as accredited investors, and acting as underwriters with respect to a distribution of prospectus-exempt securities. Exempt market dealers will be subject to capital, insurance, proficiency and other compliance requirements. Limited market dealers registered in Ontario and/or in Newfoundland and Labrador will automatically become exempt market dealers in those provinces. Representatives of these exempt market dealers will have 12 months from the Effective Date to satisfy the proficiency requirements prescribed for such representatives. Firms active in the exempt market prior to the Effective Date will need to apply for registration as exempt market dealers within 12 months of the Effective Date.
Alberta, British Columbia, Manitoba and the three territories have indicated that they will be issuing blanket orders that will provide an exemption from the requirement to register as an exempt market dealer, provided the person or firm relying on the exemption is not registered in any other jurisdiction, is trading securities under certain prospectus exemptions (namely the accredited investor, the offering memorandum, the family, friends and business associates, and the minimum $150,000 purchase exemptions) and meet certain other conditions, including not providing other financial services to the client or any suitability advice with respect to the trade and providing prescribed risk factor disclosure to investors.
INVESTMENT FUND MANAGERS REQUIRED TO REGISTER
A fundamental change in the new regime is the requirement that managers of investment funds other than private investment clubs be registered. An investment fund manager is defined as a person or company that directs the business operations or affairs of an investment fund. Advisers to funds who are also investment fund managers will need to be registered as both an adviser and investment fund manager. Managers who deal in the units of investment funds may, in the absence of a dealer registration exemption, be required to register as a dealer. Individuals working for a registered investment fund do not need to register but an investment fund manager must register its ultimate designated person and a chief compliance officer as described below.
Investment fund managers are subject to the proficiency, capital and insurance requirements of the new regime. They will also be required to provide and deliver financial information to regulators on an annual and quarterly basis. The New Rule also provides a framework to deal with conflicts of interest between a manager and the funds managed and imposes requirements to ensure managers have resources to either carry out their management functions directly or properly supervise any outsourced functions.
Investment fund managers that are operating on the Effective Date will be given time to register. An existing and active investment fund manager with a Canadian head office must register within 12 months of the Effective Date in the jurisdiction where its head office is located and within 24 months in any other jurisdiction where it operates. Investment fund managers without a head office in Canada are subject to a two-year transition period before registration will be required. The CSA has indicated that in the next year they will publish a proposal to explain the circumstances in which an investment fund manager without a Canadian head office will need to register and an investment fund manager with a Canadian head office will need to register in Canadian jurisdictions other than the one in which its head office is located.
INTERNATIONAL DEALERS AND ADVISERS
The new regime eliminates the international dealer category that currently exists in Ontario and the international adviser category that currently exists in Ontario and in Newfoundland and Labrador. The new regime introduces an exemption for international dealers and advisers.
Dealers and advisers who do not wish to operate within the parameters of the exemptions must register in the appropriate category of registration for the activities they seek to carry on.
International dealers who are registered in their home jurisdiction will generally be exempt from registration provided they only trade in certain specified securities (generally securities of non-Canadian issuers and certain debt instruments) with "permitted clients", a limited subset of "accredited investors" and make prescribed disclosure to such clients. Permitted clients generally include financial institutions, pension funds, government or governmental agencies, investment funds and high net worth individuals, companies and persons.
International advisers who are registered or exempt from registration in their home jurisdiction will be exempt from registration provided they only advise "permitted clients" (but excluding Canadian registered dealers and advisers), do not advise in respect of Canadian securities (unless the advice is incidental to their foreign advice) and meet certain other conditions of the exemption, including prescribed disclosure to clients.
An international dealer's registration will cease as of the Effective Date. In order to rely on the exemption, international dealers must file with the securities regulators Form 31-103 F2 Submission to Jurisdiction and Appointment of Agent for Services within one month of the Effective Date. International advisers will have 12 months to make this same filing. On the Effective Date, international advisers will be automatically converted to the registration category of portfolio managers and will continue to operate under the terms of their current registration. At the end of 12 months following the Effective Date, the registrations of international advisers will be revoked. Dealers and advisers who rely on the exemption will be required to make annual filings with the securities regulators.
As part of the introduction of the new regime, National Instrument 45-106 Prospectus and Registration Exemptions(NI 45-106) will also be amended on the Effective Date. To reflect the introduction of the business trigger for registration and the new exempt market dealer registration category, NI 45-106 will become principally a prospectus exemption rule. Certain dealer registration exemptions will be moved to a separate section of NI 45-106 and will be repealed after a 6-month period. The registration exemptions that are to be retained will be moved into the New Rule. The retained exemptions include:
- exemptions that are based on another regulatory regime applying to the trade (for example, insurance companies, mortgages, Schedule III banks);
- exemptions that are based an investor relationship (for example, reinvestment plans);
- exemptions based on low risk or public policy (for example, specified debt); and
- trades through or to a registered dealer (but not through an intermediary).
The new regime provides new registration exemptions including:
- the international dealer/adviser exemptions described above;
- an exemption for portfolio managers who trade in units of their own non-prospectus qualified funds with their managed accounts;
- an exemption from the requirement for a dealer to register as an adviser where non-discretionary advice is given and is necessary to support the dealer's trading activities; and
- a mobility exemption which allows a registrant firm in one jurisdiction to continue to deal with up to 10 clients who have moved to another jurisdiction (each registered individual can deal with up to 5 clients in another jurisdiction).
The sub-adviser exemption from registration provided such advisers meet certain requirements that currently exist under OSC Rule 35-502 Non-Resident Advisershas been retained in Ontario on at least a temporary basis. Other jurisdictions have not adopted this exemption and exemptive relief will need to be sought.
Individuals must register if they trade, underwrite or advise on behalf of a registered dealer or adviser or if they are the Ultimate Designated Person ("UDP") or Chief Compliance Officer ("CCO") of a registered firm. Individuals who are currently registered will be transitioned to the new regime. The New Rule also adds three new individual registration categories: UDP, CCO and associate advising representative.
Each firm will be required to register a UDP and a CCO. The UDP will be the chief executive officer, the officer in charge of a division of the firm whose activities have triggered the registration requirement or an individual acting in a similar capacity to the CEO or officer in charge of the relevant division. The role of the UDP is to oversee the effectiveness of the compliance system of the registrant and promote compliance within the organization, but such individual need not be involved in the day-to-day compliance activities of the registrant. The CCO is the individual responsible for the continued monitoring and assessment of the registrant's compliance regime. The CCO must report any compliance deficiencies to the UDP. The CCO will be subject to certain prescribed proficiency requirements. Current registrants will have 3 months from the Effective Date to designate a UDP and a CCO.
The associate advising representative category is intended for apprentices in the business of advising who have not yet met all the registration requirements of a full adviser. Such representatives must be supervised and notice of the supervisor must be given to the regulators. Any advice given by such representatives must be pre-approved.
The New Rule also introduces the concept of "permitted individuals" who are the mind and management of a registrant firm (i.e., its senior officers and directors or others who have direct influence or control over the firm). Such individuals will not be required to be registered, but they must make certain filings and are subject to review as part of the regulators' general oversight of a firm's registration.
REQUIREMENTS OF REGISTRATION
The New Rule consolidates the requirements that must be met in order to obtain and maintain registration. The new regime prescribes three fitness requirements for registration: proficiency, integrity and solvency (capital and insurance). Registrants that are members of a self-regulatory organization (SRO) such as IIROC will not be subject to certain requirements if they are subject to requirements of their SRO in the same area. In addition, the New Rule provides that dealers and advisers must act fairly, honestly and in good faith with their clients and that investment managers must exercise the powers and discharge the duties of their office honestly, in good faith and in the best interests of the investment fund.
The New Rule prescribes further conditions necessary to maintain ongoing registration, including extensive rules of conduct regarding accounts, know your client and suitability obligations, record keeping, compliance systems, complaint handling policies and procedures, relationship disclosure, referral arrangements and conflict of interest provisions. For current registrants these various requirements will be required to be satisfied over a period of time ranging from 3 to 24 months. These time periods are set out in CSA Staff Notice 31-311 (the CSA Notice) previously published.
TRANSITION TO THE NEW REQUIREMENTS
Staff of the CSA and the Investment Industry Regulatory Organization of Canada (IIROC) have both published guidance regarding the transition to the new regime. The guidance is set out in the CSA Notice and IIROC Notice 09-0190.
The new regime provides for staggered timelines for compliance to provide firms and individuals with the necessary time to adapt to and comply with the new requirements. For firms registered under the existing rules on the Effective Date, there are varying transition periods to satisfy certain capital, insurance, proficiency and other requirements. Firms and individuals not currently registered under the existing rules who will be required to be registered under the new regime must meet the requirements when they register.
Further guidance on the transition can be found on our website under Guidance on Transition to New Registration Regime(July 2009).
SINGLE POINT OF CONTACT FOR REGISTRATION
MI 11-102 - Passport System (the "Passport System") will also be amended on the Effective Date to allow registration applications to be made under the Passport System. The Passport System will allow firms and individuals to register in multiple jurisdictions by dealing only with their principal regulator. While Ontario is not a party to the Passport System, it can be a registrant's principal regulator, which will allow a registrant which has Ontario as its principal regulator to deal only with the Ontario Securities Commission but also register in other jurisdictions. National Policy 11-204 - Process for Registration in Multiple Jurisdictions will be adopted by all jurisdictions on the Effective Date and will streamline the process of registration in multiple jurisdictions, including Ontario.
The above is a general overview of the new registration regime which will take effect on September 28, 2009. We would be pleased to provide further information or specific and detailed advice on this significant development. The full text of the New Rule and Companion Policy can be accessed here.