On Friday, July 17th, 2009, the Canadian Securities Administrators (CSA) published the final version of National Instrument 31-103 – Registration Requirements and Exemptions (NRR) and Companion Policy 31-103CP (Policy) along with certain consequential amendments to other securities laws. Subject to ministerial approval requirements, the NRR will come into force on September 28, 2009 (effective date). In Ontario, certain registration requirements set forth in the NRR will be implemented via changes to the Securities Act (Ontario); however, the registration requirements in Ontario will remain substantially similar to the NRR requirements. The NRR is the final result of a five-year project to harmonize, streamline and modernize the registration regime in Canada’s ten provinces and three territories. The NRR is intended to reduce the regulatory burden for the securities industry by streamlining procedures and providing for permanent registration, while providing for more comprehensive investor protection by setting out higher proficiency standards for some registrants and emphasizing complaint handling, dispute resolution and compliance oversight at registered firms.
The final version of the NRR is different in certain material respects from the last version published for comment in February 2008:
- The NRR and the Policy have been reorganized into four functional topics – individual registration, firm registration, business operations and client relationships;
- Many requirements have been altered and the Policy has been expanded, including additional guidance on the business trigger requirement for registration; and
- New dealer registration exemptions have been added, most of which re-state exemptions that currently exist in National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106). Six months after the effective date, dealer registration requirements will be removed from NI 45-106 and all dealer registration exemptions will reside under the NRR, other than those that are expected to be provided for by blanket order in the western provinces and the territories.
The following commentary provides: an overview of the new registration regime under the NRR; some of the significant developments in the final version of the NRR; and some of the key NRR transition timelines.
Overview of the NRR
Registration Categories (Firms)
Firms must register if they are in the business of trading in, or advising on, securities, or if they act as an underwriter or manage an investment fund. In general, firms carrying on more than one type of activity requiring registration must register in each applicable category. Firms must comply with the requirements of all categories in which they are registered. Major categories of registration include:
- Investment dealer: Firms registered as investment dealers under the NRR may trade in any security with any type of client and act as an underwriter in respect of any security.
- Mutual fund dealer: Under the NRR, except in Québec, firms registered as mutual fund dealers may trade only in securities of mutual funds and securities of investment funds that are labour sponsored investment corporations or labour sponsored venture capital corporations. In Québec, firms registered in the mutual fund dealer category are subject to a different regulatory framework.
- Exempt market dealer (EMD): In Ontario and in Newfoundland and Labrador, this category replaces the category of limited market dealer (LMD) and a firm registered as an LMD before the effective date will automatically have its LMD registration converted to an EMD registration. In all other jurisdictions, this is a new category of registration. An EMD may trade in any security in circumstances where the trade would be exempt from the prospectus requirements if it were a distribution, including trades with accredited investors and trades with a $150,000 minimum purchase amount.
- Restricted dealer: This new category of registration was introduced to accommodate firms that carry out limited dealing activities and do not fall under any other dealer categories. Restricted dealers may carry out limited dealing activities as set forth in the terms and conditions attached to the firm’s registration.
- Portfolio manager: The new portfolio manager category of registration replaces existing investment counsel and portfolio manager categories. Portfolio managers may advise any type of client with regard to any type of security.
- Restricted portfolio manager: This new category was introduced to accommodate specialist advisers who have specialized expertise but may not have the proficiency required for full portfolio manager registration. Restricted portfolio managers will be allowed to carry out limited advising activities as set forth in the terms and conditions attached to the firm’s registration.
- Investment fund manager: The registration of investment fund managers (defined as a firm that directs the business, operations or affairs of an investment fund) is a new registration requirement under the NRR.
Registration Categories (Individuals)
Individuals must register if they trade, underwrite or advise on behalf of a registered dealer or adviser. In addition, each firm must designate an ultimate designated person (UDP) and a chief compliance officer (CCO).
Dealing and Advising Representatives: Dealing and advising representatives registered under the current registration regime will have their registrations transitioned into the dealer and advising representatives categories under the NRR. In general, if an individual is currently registered as a dealing or advising representative, that individual will not be required to satisfy the specified proficiency requirements of the NRR so long as the individual remains registered in the same individual registration category. However, registered dealing representatives of an LMD will have 12 months to satisfy the proficiency requirements applicable to registered dealing representatives of an EMD. An individual who was entitled to rely on an exemption from registration requirements before the effective date will be exempt from any substantially similar proficiency requirements in the NRR.
Ultimate Designated Person: The UDP is responsible for promoting compliance at the firm and overseeing the effectiveness of the compliance system. The UDP must be either (i) the chief executive officer of the firm, sole proprietor or equivalent; (ii) an officer in charge of a division of the registered firm, if the activity that requires the firm to register occurs only within that division; or (iii) an individual acting in a capacity similar to that of a CEO or an officer in charge of a division of the registered firm. The UDP is not required to meet any proficiency requirements, including the passing of exams or minimum experience thresholds.
Chief Compliance Officer: The CCO is an operating officer responsible for monitoring and overseeing the registered firm’s compliance system, including establishing policies and procedures, and reporting on the firm’s securities law compliance. The CCO reports to the UDP of the firm. The CCO must meet certain education and experience requirements, depending on the category of registration of the CCO’s firm.
Exemptions from Registration
The NRR eliminates certain categories of registration in Canada, including the international dealer category (in Ontario and Newfoundland and Labrador), the international adviser registration category (in Ontario) and the portfolio manager and investment counsel (Foreign) category (in Alberta). However, the following new registration exemptions permit international dealers and advisers to perform many of the same activities as were previously performed under the eliminated registration categories in all jurisdictions, without the need to register:
- International dealer exemption: In general, an international dealer may trade specified categories of securities with individuals or firms that qualify as “permitted clients” (a sub-set of persons and companies from the accredited investor definition in NI 45-106) without the need to register provided that certain conditions are met, including registration in the international dealer’s home jurisdiction, prescribed disclosure to clients and an annual filing with the regulator.
- International adviser exemption: International advisers may advise “permitted clients” without the need to register if the adviser does not advise in Canada on securities of Canadian issuers, unless providing that advice is incidental to its provision of advice on a foreign security, and providing certain other conditions are met, including registration or operation under an exemption in the international dealer’s home jurisdiction, prescribed disclosure to clients and an annual filing with the regulator.
Other registration exemptions have also been introduced into the NRR, including registration exemptions previously found in NI 45-106 and a mobility exemption that permits registrants in a Canadian province or territory to continue dealing with a limited number of clients who move to a different province or territory without registering in that other province or territory.
Fitness for Registration
The CSA assess a firm’s or individual’s fitness for registration at the time of the initial application for registration; registered firms and individuals must continue to satisfy the fitness criteria to retain their registration status. Fitness for registration is determined by three criteria – proficiency, solvency and integrity – as described as follows:
- Proficiency: The NRR requires that registered individuals have the education, training and experience to competently perform the activities for which they are registered;
- Solvency: The NRR requires firms to meet minimum capital requirements and minimum insurance requirements, and to periodically report such capital and insurance thresholds to regulators. For most registrants that are not members of a self-regulatory organization such as the Investment Industry Regulatory Organization of Canada (IIROC), the NRR will increase minimum capital requirements; and
- Integrity: The NRR requires registered firms and individuals to update registration forms and submit compliance reviews from time-to-time. Regulators will use these documents to assess integrity.
Under the NRR, dealers and advisers must deal fairly, honestly and in good faith with their clients, and investment fund managers must exercise the powers and discharge the duties of their office honestly, in good faith and in the best interests of the investment fund. For example, registered firms generally must: satisfy “know your client” and suitability rules; disclose certain relationships with other registrants, costs, compensation and performance; avoid or disclose conflicts of interest; comply with disclosure and other requirements for referral arrangements; report regularly to clients on account activity; and establish complaint handling procedures.
Firms will have a minimum of six months after the effective date to comply with the various client relationship requirements (see “Transition Timelines” below for more information).
Passport System for Registration
On the effective date, the current registration requirements and procedures for applying for registration in more than one province or territory will be replaced with the passport system for registration. The passport system will enable individuals and firms to register in more than one province or territory by dealing only with the individual’s or firm’s principal regulator and meeting the requirements of one set of harmonized laws. Although Ontario is not adopting the passport system, it can be a principal regulator under the system and will interface with the passport system for firms with a principal regulator in a jurisdiction other than Ontario.
Significant Developments in the Final Version of the NRR
The CSA made certain key changes to the final version of NRR or provided comments on certain key issues in the release documents as follows:
- The NRR exempts investment dealers who are members of IIROC from a number of NRR provisions that overlap with the IIROC rules. The IIROC rules are being amended in connection with the NRR. IIROC members should review the IIROC rule changes that were released on July 17, 2009.
Limited Market Dealers and Exempt Market Dealers
- There is no grandfathering under the NRR from proficiency requirements for dealing representatives of an LMD. For an LMD that chooses to transition to the EMD registration category, individuals registered as dealing representatives of the LMD prior to the effective date will be required to meet the applicable education and experience proficiency requirements for dealing representatives of EMDs; however, such representatives will have one year from the effective date to do so.
- A person or company that acts as a dealer in the exempt market (other than in Ontario or Newfoundland and Labrador) may carry on its existing dealing activities for a period of one year after the effective date before that person or company will need to register as an EMD.
- Alberta, British Columbia and Manitoba will pass a blanket order exempting individuals and firms from the dealer registration requirement when they trade in securities under one of the following prospectus exemptions contained in NI 45-106 and provided they meet certain conditions, including not being registered in any registration category in Canada:
- accredited investor;
- family friends and business associates;
- offering memorandum; and
- $150,000 minimum purchase.
Mutual Fund Dealers
- The CSA have confirmed that mutual fund dealers are permitted to sell prospectus-exempt mutual funds but are not permitted to sell exchange-traded funds that do not meet the definition of a mutual fund. Mutual fund dealers must send interim statements of accounts to clients on a quarterly basis but have been provided a 24-month transition period to meet this requirement.
Investment Fund Managers
- The CSA have indicated that investment fund managers resident in Canada will be required to register within one year in the province or territory where their head office is located. In what appears to be a policy change from the last draft of the NRR, the CSA have indicated that they will publish a “proposal” in the future that may require, within a two-year period, Canadian resident investment fund managers to register in other provinces and territories, and may require foreign investment fund managers to register in Canada.
- Entities not incorporated under Canadian law may be registered in any category unless restricted by applicable SRO rules. Foreign firms operating in Canada may use the international adviser and international dealer exemptions, subject to a number of conditions including (in general) the requirement that the activity is with a firm or individual that qualifies as a “permitted client”. The definition of “permitted client” has been expanded to also include:
- investment funds managed by a registered investment fund manager or advised by a person or company authorized to act as an adviser;
- a wholly-owned subsidiary of a pension fund;
- a national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any agency of that government;
- a person or company with net assets of at least $25 million; and
- a person or company that distributes its securities only to other permitted clients.
- The CSA have narrowed the “permitted client” definition for purposes of the international adviser exemption to exclude a person or company registered as an adviser or dealer in a Canadian jurisdiction.
- In Ontario, foreign firms relying on these exemptions will be required to pay participation fees to the Ontario Securities Commission (OSC), even though they are not registered.
- In a significant departure from the prior drafts of the NRR, the CSA have removed from the NRR the exemption for international advisers who act as sub-advisers to registered portfolio managers. The CSA have indicated that the existing sub-adviser exemption will remain in force in Ontario through OSC Rule 35-502 – Non-Resident Advisers and have indicated that the other CSA members will continue to grant discretionary relief in the other jurisdictions. The CSA have described this as a "temporary" measure that will give the CSA an opportunity to review the exemption in the context of the current market turmoil and regulatory responses to cross-border activity.
Development and Notable Issues Affecting Registrants Generally
Suitability Exemptions: Registrants that advise or trade with permitted clients will be exempt from the know your client and suitability obligations if the permitted client has waived the requirements in writing and the registrant is not providing discretionary portfolio management services.
Restrictions on Lending Money, Extending Credit or Providing Margin: Only IIROC and Mutual Fund Dealers Association member firms are permitted to lend money, extend credit or provide margin to clients. The CSA were not persuaded by comments that foreign exempt market dealers that are subject to other regulatory requirements relating to lending, extending credit or providing margin should be permitted to extend such credit to clients.
Chief Compliance Officer: The proficiency requirements for the CCO of an exempt market dealer have changed such that the CCO must pass the Partners, Directors and Senior Officers Exam in addition to either the Canadian Securities Course Exam or Exempt Market Products Exam. Also, in response to comments that registered firms that carry out different registerable activities through multiple operating divisions should be permitted to designate several CCOs, the CSA have indicated that they will consider this type of arrangement in appropriate circumstances.
The following transition timelines apply to firms registered before the effective date for compliance with requirements for registration or certain exemptions:
- 1 month for firms currently registered as an international dealer planning to rely on the international dealer exemption, to: (i) provide a permitted client with certain disclosure prior to trading with the client, and (ii) submit a completed Submission to Jurisdiction and Appointment of Agent for Service form;
- 3 months to designate and apply for registration for the Ultimate Designated Person and Chief Compliance Officer;
- 6 months for firms to satisfy bonding or insurance requirements;
- 6 months for firms to comply with referral arrangement requirements;
- 12 months for firms to deliver relationship disclosure information to clients;
- 12 months for firms to satisfy capital requirements and notify the regulator of a subordination agreement;
- 12 months for firms currently registered as an international adviser planning to rely on the international adviser exemption, to: (i) provide a permitted client with certain disclosure prior to advising the client, and (ii) submit a completed Submission to Jurisdiction and Appointment of Agent for Service form; and
- 24 months for firms to ensure that an independent dispute resolution or mediation service is available to resolve client complaints.
The CSA Transition Notice sets forth additional transition timelines for specific categories of firms and individuals, including timelines for firms currently registered to seek registrations in new categories and for individuals to meet proficiency requirements.
The NRR represents a major change to Canadian securities laws, and will impact the business and regulatory compliance responsibilities of the vast majority of securities industry participants in Canada.