On December 5, 2013, the Canadian Securities Administrators (CSA) published for comment proposals to amend the regulatory framework for firms and individuals who trade in securities, provide investment advice or manage investment funds. The regulatory framework for registrants is contained in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and other related instruments (collectively, the National Registration Rules).
Key elements of the proposed changes to NI 31-103
- Give effect to omnibus/blanket relief orders relating to examination and program requirements for individuals registered as a dealing representative of a scholarship plan dealer and as a dealing representative of a limited market dealer when NI 31-103 first came into force;
- Impose additional experience requirements for chief compliance officers (CCO) of mutual fund dealers, scholarship plan dealers and exempt market dealers in order to harmonize the proficiency requirements with those applicable to CCOs of portfolio managers and investment fund managers;
- Amend the activities exempt market dealers are permitted to conduct. For example, an exempt market dealer may participate in a private placement of securities of a reporting or non-reporting issuer, but may not participate in an underwriting of a prospectus-offered security; exempt market dealers are also prohibited from trading freely tradeable exchange-traded securities off marketplace;
- Provide a general prohibition that a registrant cannot rely on exemptions to conduct activities that its registration permits. For example, certain jurisdictions currently do not allow firms registered in the exempt market dealer category to concurrently rely on the international dealer exemption because this activity may present concerns with respect to client confusion, oversight issues, maintenance of books and records, or know-your-client obligations;
- Provide an exemption for sub-advisers and exempt registered sub-advisers from certain registrant obligations. Currently, relief from the adviser registration requirement for certain non-resident sub-advisers is available in Ontario under Ontario Securities Commission Rule 35-502, in Quebec under decision N° 2009-PDG-0191 and in other jurisdictions on a discretionary basis.
The CSA propose to harmonize their approach to this relief by including a new exemption in proposed section 8.26.1 [International sub-adviser] of NI 31-103. In addition, the CSA propose a new section 13.17 [Exemptions from certain requirements for registered sub-adviser] to NI 31-103 that exempts a registered adviser who is acting as a sub-adviser to a registered adviser or registered dealer from certain client obligations that may not be required in a sub-advisory arrangement, or if required, are customized to the relevant business needs and agreed to contractually;
Incorporate into the Companion Policy some of the guidance currently contained in CSA Staff Notices and Multilateral Policies, including:
- CSA Staff Notice 31-332 Relevant Investment Management Experience for Advising Representatives and Associate Advising Representatives of Portfolio Managers;
- CSA Staff Notice 31-326 Outside Business Activities;
- Multilateral Policy 34-202 Registrants Acting as Corporate Directors;
- Provide a more streamlined mechanism for the filing of notices under sections 11.9 and 11.10 of NI 31-103. The proposed amendments would allow for the acquisition notices to be filed with the principal regulator of the registered firm. The CSA propose to add guidance in NI 31-103CP to guide acquirers or acquired firms in preparing the acquisition notices, with suggestions on the information that should be included in these notices;
- Make various drafting changes to NI 31-103 and clarifications to the guidance in NI 31-103CP in order to give better effect to the CSA’s original intent and to codify staff administrative practice that is in keeping with the original intent of NI 31-103, such as the proposed addition of guidance in NI 31-103CP on the adviser registration exemption that is available to members of IIROC (or dealing representatives acting on their behalf) that act as advisers to a client’s managed account. The guidance clarifies that this exemption is available for all managed accounts, including where the client is a pooled fund or investment fund;
- Give effect to blanket rulings and staff positions concerning the international dealer and international adviser exemptions. The CSA propose to remove the definition of “Canadian permitted client” in these exemptions and revert to using the term “permitted client,” as defined in section 1.1 of NI 31-103 since the definition of “Canadian permitted client” may be more restrictive than the CSA intended;
- Provide an exemption from the dealer registration requirement for trades in short-term debt. All CSA members except Ontario have issued parallel orders that provided the dealer registration requirement does not apply to trades in short-term debt by specified financial institutions. The CSA propose a new exemption in NI 31-103 that contains the same conditions as these blanket orders, including that the short-term debt instruments have a designated rating. However, the CSA have added a new condition, limiting the use of the exemption to trades with permitted clients;
- Provide guidance concerning the requirement to register for start-up entities. The additional guidance is intended to make it clear that a start-up issuer will be considered to have an active non-securities business and therefore will not be required to register if it has a bona fide business plan and is raising capital to advance that plan; and
- Extend certain exemptions to circumstances that are consistent with the original policy intent of NI 31-103, such as the proposed change to section 8.5 [Trades through or to a registered dealer] of NI 31-103 in relation to the exemption for trades made through a registered dealer. The CSA propose to clarify which acts in furtherance of the trades contemplated under this exemption are permitted. The CSA have added a condition to confirm that this exemption is not available if the person relying on the exemption solicits or contacts any person that is a purchaser in relation to the trade.
Another example of clarification is the addition of new section 8.5.1 [Trades through a registered dealer by registered adviser] of NI 31-103, which provides an exemption from the dealer registration requirement for registered advisers. This clarifies that incidental trading activities by advisers do not require registration as a dealer, provided the trades are executed through a registered dealer.
The CSA will be accepting comments on the proposed changes to the National Registration Rules until March 5, 2014. A copy of the proposed changes can be accessed here.