The OSC yesterday published a staff notice to provide guidance on the circumstances in which certain exemptions from the dealer registration requirement under the Commodity Futures Act are available to market participants.
Specifically, the notice provides OSC staff's view on when foreign dealers and other market participants may rely on certain exemptions under the CFA, such as the "unsolicited trade" exemption, including indicia of activities considered to be "carrying on business" in Ontario and activities considered to be "solicitation" in a jurisdiction. In this respect, staff identify the following factors as indicia of "carrying on business in Ontario:
- the establishment of an office or place of business in Ontario;
- the establishment of a relationship with an affiliated entity or third party in Ontario to conduct marketing or other activities that are in furtherance of a trade with a customer in Ontario;
- payment of commissions, fees or similar compensation to "introducing brokers", "finders", "referral agents" or other persons in connection with the trade with a customer in Ontario; and
- trading with regularity with customers in Ontario, whether in reliance on the unsolicited trade exemption and/or in reliance on other exemptions, including exemptions contained in a discretionary exemptive relief order granted by the OSC under the CFA or the Securities Act (Ontario).
Citing that the unsolicited trade exemption was only intended to apply to occasional, isolated, unsolicited trades by foreign dealers, staff also state that they do not believe that the exemption is available to permit the operation of unsolicited order-execution-only accounts by such dealers with customers in Ontario.
With respect to what may constitute "solicitation", the notice states that undertaking the following activities would preclude a foreign dealer from relying on the exemption:
- any advertising or promotional activities that are directed to persons in Canada during the six months preceding the trade, including attendance at industry group conferences in Canada to promote the foreign dealer's products and services to Canadians;
- website disclosure that is addresses to Canadians or that provides information, including tax information, which is tailored to Canadians;
- payment of commissions, fees or similar compensation to "introducing brokers", "finders", "referral agents" or other persons, whether situate in Ontario or not, in connection with a trade with a customer in Ontario.
While the notice applies to the specified exemptions under the CFA, staff’s guidance may also be instructive in other contexts, including in determining when a person may be “carrying on business” for the purposes of the dealer registration requirement under the Securities Act.
The notice also explains the circumstances in which the "hedger" exemption is available and market participants' obligations when relying on the exemption, as well as staff's expectations on a dealer’s obligations to determine a customer is a bona fide hedger.
The Staff notice also reminds market participants that those relying on registration exemptions are “market participants” under the Securities Act and, as such, in addition to keeping required books and records, are expected to provide appropriate risk disclosure to their customers. Other matters clarified in the notice include the fee payment obligations of unregistered market participants that seek to trade with Ontario residents and staff's expectations on foreign dealers and other unregistered market participants that intend to rely on exemptions from the registration requirement and the actions that staff may take where expectations are not met.
For more information, see OSC Staff Notice 33-744.