In addition to the Amendments affecting registrants, generally, summarized below are some of the key changes under the Amendments that will impact firms relying on the international dealer exemption in section 8.18 of NI 31-103.
Addition of Canadian Residency, Organization or Incorporation Requirement for Permitted Clients
Under the Amendments, the international dealer exemption under section 8.18 of NI 31-103 will be available only if the permitted client is a “Canadian permitted client”. “Canadian permitted client” is defined to mean a permitted client referred to in any of the paragraphs of the definition of “permitted client”, as that term is defined in section 1.1 of NI 31-103, set out in section 8.18(1) if:
- in the case of an individual, the individual is a resident of Canada;
- in the case of a trust, the terms of the trust expressly provide that those terms are governed by the laws of a jurisdiction of Canada;
- in any other case, the permitted client is incorporated, organized or continued under the laws of Canada or a jurisdiction of Canada.
As a result, a non-Canadian firm relying on this exemption is precluded from engaging in a trade with a permitted client unless that permitted client is a "Canadian permitted client". The addition of the "Canadian permitted client" definition to NI 31-103 was not included in the proposal of the Amendments published for comment on June 25, 2010. Members of Stikeman Elliott’s securities practice group have written to the CSA to suggest that they defer implementation of this change pending a full notice and comment process. Based on recent discussions, we understand that a deferral is not feasible however, we also understand transitional relief is being contemplated and we anticipate a resolution in the short term. A copy of our letter to the CSA is available upon request.
Revised Disclosure Notice to Clients
The Amendments change the prescribed contents of the notice to clients required under subsection 8.18(4) of NI 31-103. In order to rely on the international dealer exemption, a foreign firm must notify a Canadian permitted client of all of the following:
- the firm is not registered in the local jurisdiction to make the trade;
- the foreign jurisdiction in which the head office or principal place of business of the firm is located;
- all or substantially all of the assets of the firm may be situated outside of Canada;
- there may be difficulty enforcing legal rights against the firm because of the above; and
- the name and address of the agent for service of process of the firm in the local jurisdiction.
The CSA confirmed in the notice to the Amendments that the changes to the notice required under subsection 8.18(4) of NI 31-103 are not retroactive and, therefore, there is no requirement to send the new notice to existing clients.
Notification to the Regulator of Reliance on the International Dealer Exemption
The Amendments harmonize the timing of the renewal notification to the various Canadian securities regulators. A non-Canadian firm relying on the international dealer exemption in a province or territory during the 12 month period preceding December 1 of a year must notify the regulator in such province or territory by December 1 of such fact. In Ontario compliance with the requirements regarding filings and payments under the fee rule suffices. Currently, a non-Canadian firm relying on the international dealer exemption in a province or territory other than Ontario is required to notify the regulator 12 months after it first submits a Form 31-103F2 in that jurisdiction, and each year thereafter, if it continues to rely on the exemption.
New Adviser Registration Exemption when Relying on the International Dealer Exemption
The Amendments add a new provision at subsection 8.18(7) of NI 31-103 to provide an adviser registration exemption to the non-Canadian firm relying on the international dealer exemption if it provides advice to a client and the advice is in connection with an activity or trade covered under the international dealer exemption and not in respect of a managed account of the client.