The CSA indicate that the proposed amendments to National Instrument 31-103 and related instruments [available here] are a response to feedback obtained from industry participants working to implement National Instrument 31-103 and the CSA’s own experience with the new registration regime. Generally, the proposed amendments are intended to make the registration rules clearer, either through new requirements or the rewording of existing rules or through additional guidance provided in the Companion Policy. To better reflect the breadth and scope of the various requirements, the CSA also propose to change the name of National Instrument 31-103 to: Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Many of the proposed amendments simply reflect the exemptions that have been granted following the implementation of National Instrument 31-103. For example, National Instrument 31-103 will provide for grandfathering proficiency for certain chief compliance officers and certain dealing or advising representatives and relief for mutual fund dealers from the requirement to establish whether a client is an insider of a reporting issuer or an issuer whose securities are publicly traded. BLG’s April 2010 Investment Management Bulletin National Instrument 31-103: The First Six Months–What’s Next? [available here] describes the earlier exemptions, as well as some of the responses to frequently asked questions released by the CSA following the implementation of National Instrument 31-103.
However, some of the proposed amendments reflect new requirements or new guidance that will, if adopted, significantly impact registrants. No transition is proposed for any of these new proposed requirements and guidance. Some of the more significant proposed new requirements and guidance are outlined below.
Individual registered representatives will
- be required to have education and training sufficient to enable them to understand the structure, features and risks of each security they recommend; and
- be prohibited from being registered as a representative for more than one registered firm, although exemption applications will be considered in limited cases and existing registered individuals that are registered with more than one firm will be grandfathered.
Portfolio managers will benefit from the proposal to extend the dealer registration exemption available for these registrants when they trade in their own investment funds to managed accounts to include their own prospectus-qualified funds, as well as their own privately offered funds.
Investment dealers acting as portfolio managers under IIROC rules will become subject to the same restrictions on certain managed account transactions as registered portfolio managers.
Mutual fund dealers operating in Québec will only be able to rely on the exemptions from National Instrument 31-103 requirements available to MFDA members if equivalent requirements are applicable to the mutual fund dealers under the regulations in Québec. This is a change from the current exemption where a mutual fund dealer in Québec only has to comply with applicable requirements in Québec (and not concern itself with determining if the requirement in Québec is equivalent to the National Instrument 31-103 requirement). The Autorité des marchés financiers (AMF) has publicly stated that it intends to adopt rules largely harmonized to those of the MFDA by September 2011. Assuming that the proposed amendments to National Instrument 31-103 will be in force sometime in early 2011, mutual fund dealers operating in Québec will need to comply with some of National Instrument 31-103’s ongoing registrant obligations for a few months, to then be subject to the new MFDA-harmonized rules. We understand that the AMF would consider providing some form of relief should this proposed amendment create undue hardship for mutual fund dealers in Québec.
Portfolio managers and dealers will benefit from the proposal to limit the requirement to provide clients with an independent dispute resolution or mediation service to specified types of complaints. Firms registered as of September 28, 2009 still can rely on the transition exemption from having to comply with this requirement until September 28, 2011.
Investment fund managers will be required to provide specified trade confirmations and account statements to investors who deal directly with them, including those investors who place redemption orders directly with them. The CSA acknowledge that these proposals may present challenges for investment fund managers and ask specifically for these firms to review the new rules carefully and comment.
International firms operating under the international dealer or international adviser exemption in National Instrument 31-103 will find more refined and restrictive conditions on those exemptions. For example, the CSA have clarified that these exemptions are intended only for non-Canadian advisers and dealers to provide limited services to Canadian resident permitted clients. The current requirement for international firms who intend to continue relying on these exemptions to notify each applicable CSA member on an annual basis will, under the proposals, be required to provide that notice by December 1 of each year. The CSA have also clarified to what extent international advisers can provide “incidental advice” about Canadian securities. This restriction is not intended to permit a de minimus amount of advice, but rather any advice about Canadian securities must be directly related to the firm’s activity of advising on foreign securities.
SRO members will have more exemptions from provisions of National Instrument 31-103 available to them, primarily in areas where the SROs continue to develop their own rules – for example, complaint handling. The CSA will also exempt SRO members from the requirements in National Instrument 31-103 to provide client statements, once the SROs implement conforming rule amendments. SRO members that are also registered in another category will particularly benefit from the additional clarity provided for in the proposed amendments, with exemptions proposed for these firms that will allow them to be subject to only one set of rules – MFDA or IIROC rules – for many requirements.
All registrants that have referral arrangements in place will benefit from the changes proposed by the CSA for the referral rules. For example, a referral agreement need only be signed by the registered firm and the other party but not by any individual representative who may be participating in the referral arrangement.
Companion Policy: The CSA propose amendments to the Companion Policy to National Instrument 31-103, which expand significantly the guidance given to registrants on the following topics.
- Additional guidance is given on the CSA’s core principle that requires registrants to institute a “firmwide culture of compliance”, including enhanced discussion of compliance systems and the distinction between “monitoring” and “supervision”.
- Guidance is provided about the availability of the “trades through a registered dealer” exemption, including that it is not intended to allow a firm to escape registration where it is “in the business of trading”(e.g. doing acts in furtherance of a trade) but then executes the trade through a registered dealer.
- Guidance on complaint handling requirements has been significantly expanded, including the CSA’s expectations as to when a firm must respond in writing to complaints and the various time-lines that firms will be expected to meet in connection with complaints. The CSA explain that a firm will be expected to take a balanced approach to fact gathering in the context of complaints. A firm’s complaint handling policy should provide for specific procedures for reporting the complaints to superiors. Note that the complaint handling requirements of National Instrument 31-103 became effective on September 28, 2009, for all registrants other than investment fund managers.