On July 17, 2009, the Canadian Securities Administrators (the "CSA") approved National Instrument 31-103 – Registration Requirements and Exemptions ("NI- 31-103") and Companion Policy 31-103CP (together with NI 31-103, the "Instrument"). The Instrument will come into force on September 28, 2009 (the "Implementation Date").
This memorandum is intended to provide the reader with a brief overview of the Instrument and is not intended to be a fulsome discussion of the new registration regime. For questions of a specific nature, please contact a member of the FMC Securities Group as indicated on the Contact Us link.
The Instrument introduces a new registration regime that is intended to harmonize, streamline and modernize registration requirements across Canada for firms and individuals who sell securities, offer investment advice or manage investment funds.
Requirement to Register
The requirement to register is found in the securities legislation of each province and territory. Under the Instrument, dealer and adviser registration is required when an individual or firm conducts trading or advising activity as a business. This principle is referred to as the "business trigger" for registration and is a departure from the current regime which contemplates a "trade trigger" for dealing in securities and a "business trigger" for the adviser registration requirement. The new registration requirements will also extend to those who manage investment funds.
To determine whether registration is required, a firm or individual must consider whether their activities amount to trading or advising and then determine whether they are carrying out those activities as a business. Some factors to be considered when making the determination of whether the registration requirements have been triggered include:
- whether the activities engaged in are similar to those of a registrant;
- whether the activity is conducted on a regular basis; and
- whether there is an expectation to be remunerated for performing the activity.
However, a person or company acting as an investment fund manager will always be considered to be conducting that activity as a business.
While overall the Instrument reduces the number of registration categories, it also introduces some new ones. The following is a summary of the categories of registration for firms under the Instrument:
- Investment Dealer - permitted to act as a dealer or underwriter in any security.
- Mutual Fund Dealer – restricted to dealing solely in a security of a mutual fund or, except in Quebec, an investment fund that is a labour-sponsored investment fund corporation or labour-sponsored venture capital corporation.
- Scholarship Plan Dealer – restricted to dealing solely in a security of a scholarship plan, educational plan or educational trust.
- Exempt Market Dealer – restricted to dealing in prospectus-exempt securities and with persons to whom prospectus-exempt distributions can be made.
- Restricted Dealer – limited to dealing activities that do not fall within the other firm categories.
- Portfolio Manager – permitted to advise with respect to any security.
- Restricted Portfolio Manager – restricted to advising others with respect to specified securities or class of securities.
- Investment Fund Manager – a new category which will apply to managers of all investment funds.
- Registered firms must conduct registerable activity through registered individuals. The following is a summary of the categories of registration for individuals under the Instrument:
- Dealing Representative – permitted to act as a dealer or an underwriter in respect of a security that the individual’s sponsoring firm is permitted to trade or underwrite.
- Advising Representative – permitted to act as an adviser in respect of a security that the individual’s sponsoring firm is permitted to advise on.
- Associate Advising Representative – permitted to act as an adviser in respect of a security that the individual’s sponsoring firm is permitted to advise on if the advice has been approved by an Advising Representative. Intended to be an apprentice category for individuals working toward full adviser registration.
- Ultimate Designated Person ("UDP") – responsible for promoting compliance at the firm and overseeing the effectiveness of the firm’s compliance system. The UDP must be the chief executive officer of the firm, sole proprietor or equivalent.
- Chief Compliance Officer ("CCO") – an operating officer responsible for monitoring and overseeing the firm’s compliance system, including establishing policies and procedures, and reporting on the firm’s compliance with securities legislation. The CCP reports to the UDP of the firm.
Compliance Requirements for Registrants
Under NI 31-103, minimum requirements have been introduced to ensure that potential registrants are fit for registration by assessing their proficiency, integrity and solvency.
- Proficiency - The proficiency requirements are meant to ensure that registered individuals have a sufficient level of knowledge before providing dealing or advising services to clients, or compliance functions for their firms. The general proficiency principle requires an individual to have the education, training and experience that a reasonable person would consider necessary to competently perform an activity that requires registration.
- Integrity – The regulator will assess the integrity of firms and individuals through the information that registrants are required to provide and update on registration forms and compliance reviews. In addition, applicants are required to undergo certain background checks, including criminal record and bankruptcy checks.
- Solvency – all registered firms will be required to demonstrate their ability to manage their business as a going concern and will be required to maintain a minimum amount of capital to ensure they can meet their financial obligations when they become due. Additionally, registered firms will be required to maintain a minimum amount of insurance coverage to protect the firm against property loss.
In general, dealers and advisers will be required to collect "know your client" ("KYC") information and make a suitability determination for all clients. The Instrument also contains disclosure requirements for certain relationships and conflicts.
Exemptions from Registration Requirements
With the addition of the "business trigger" requirement for dealers, a number of the existing dealer registration exemptions will be removed upon the instrument becoming effective. The existing adviser registration exemptions have been substantially retained. In addition, certain new dealer and adviser registration exemptions have been added to the instrument. It is also expected that some jurisdictions (including Alberta) will provide additional exemptions beyond those contained in the Instrument (for example, it is expected that an exemption from the registration requirement for Exempt Market Dealers will be made available in certain circumstances).
The Instrument provides for various transition periods for individuals and firms to comply with the new requirements set forth in NI 31-103. Transition periods vary from between 3 months and 24 months depending on the specific requirement in question and whether or not the applicant was registered prior to the Implementation Date.