The long-anticipated changes to the registration regime under Canada’s securities regulation have now been finalized with the release of National Instrument 31-103 Registration Requirements and Exemptions on July 17, 2009. The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone doing securities-related business in Canada on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule [available here] outlines the scope of National Instrument 31-103, as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments.
National Instrument 31-103 will affect virtually every financial services firm doing business in Canada and will have a unique impact on firms that are not located in Canada.
Firms not located in Canada, but who carry on business with residents of Canada may register in one or more of the eight categories of registration mandated by National Instrument 31-103 provided they comply with the general conditions of registration for the particular category or categories of registration. The eight registration categories contained in National Instrument 31-103 are investment dealer, mutual fund dealer, scholarship plan dealer, exempt market dealer, restricted dealer, portfolio manager, restricted portfolio manager and investment fund manager. The CSA have eliminated registration categories that are presently relied on by non-Canadian firms, such as international dealer and international adviser. However, new registration exemptions have been built into National Instrument 31-103 which are intended for non-Canadian firms that can comply with the applicable conditions.
Dealing Activities: Firms that are in the business of trading securities with residents of a Canadian province or territory will need to be registered as a dealer in the applicable jurisdictions, or, if they qualify, rely on specified registration exemptions.
Firms that are in the business of trading securities that are or could be issued under prospectus exemptions, such as non-prospectused securities of Canadian and non-Canadian investment funds, to residents of a Canadian province or territory must be registered under National Instrument 31-103 as exempt market dealers (EMDs), unless their activities are confined to one of the western Canadian provinces or the territories where a registration exemption will be available. Firms and individuals trading in exempt market securities in any of Alberta, British Columbia, Manitoba, the Northwest Territories, Nunavut and the Yukon Territory, and possibly Saskatchewan, may be exempted from the EMD registration requirement, but only in very limited circumstances, including where they are not registered in any other category anywhere else in Canada (and, potentially in any other country).
The EMD registration category will replace the “limited market dealer” (LMD) category currently applicable in Ontario and Newfoundland and Labrador and will apply across Canada. Each officer and employee of an EMD that carries on the trading activities for the firm, and the firm’s chief compliance officer and ultimate designated person, must also be registered. Unlike LMDs, an EMD will be subject to minimum capital and insurance as well as proficiency requirements for its dealing representatives and its chief compliance officer. Exempt market dealers will also be subject to know-your-client and suitability requirements, except in respect of trades to permitted clients who waive those requirements. “Permitted clients” include certain institutional investors such as banks and trust companies, government agencies, pension funds, registrants, advisers acting on behalf of managed accounts, investment funds managed or advised by a registrant, individuals with more than $5 million in financial assets and companies with net assets of at least $25 million.
Existing registered LMDs will be automatically converted to the new EMD category in Ontario and/or Newfoundland and Labrador, as applicable. They will have to comply with many of the new provisions aimed at prudent business practice, as soon as National Instrument 31-103 comes into force, although there will be a transition period over which capital, insurance and proficiency requirements must be met.
The international dealer category of registration presently available in Ontario and Newfoundland and Labrador is not being continued in National Instrument 31-103. Firms that are today registered in this registration category will have their registration revoked as of September 28, 2009. These firms will have two options after September 28, 2009
- They can apply to become registered in another dealer registration category, but must cease any registrableactivity in Canada until such registration is granted or
- They can carry out registrable activity in Canada pursuant to the “international dealer” registration exemption, which will be available as of September 28, 2009. This registration exemption will permit a firm that is registered in its home jurisdiction as a dealer to carry out certain specified activity in Canada, primarily with investors that are “permitted clients” (as discussed above). The specified activities include
- An activity that is reasonably necessary to facilitate a distribution of securities offered primarily outside of Canada, other than a sale of a security
- A trade in a debt security offered primarily outside of Canada with a permitted client during the security’s distribution, and where no prospectus has been filed with a Canadian securities regulatory authority
- A trade in a foreign (i.e. non-Canadian) debt security with a permitted client, other than during the security’s distribution
- A trade in a foreign security with a permitted client unless the trade is made during the security’s distribution under a prospectus that has been filed with a Canadian securities regulatory authority or
- A trade in a foreign security with an investment dealer, or
- A trade in a security with an investment dealer that is acting as principal.
The international dealer registration exemption may only be relied upon by a firm whose head office is not in Canada; where it is engaged in the business of a dealer and is registered as a dealer under the securities legislation of its home jurisdiction; it is acting as principal or as agent for the issuer of the securities, for either a permitted client or non-resident of Canada; and if it has provided the proper notifications to the appropriate Canadian securities regulator(s) and provided specified notices to its clients. Firms must also make annual filings, including fee payments in some provinces, including Ontario, to continue to rely on the international dealer registration exemption.
Advising Activities: Firms that are in the business of advising on securities with residents of a Canadian province or territory will need to be registered as advisers, in the categories of portfolio manager or restricted adviser, in the applicable jurisdictions or, if they qualify, rely on a specified registration exemption available to “international advisers”.
The international adviser registration category presently available in Ontario (and its equivalents in certain of the other Canadian jurisdictions) is not being continued in National Instrument 31-103. Firms that are today registered in this registration category in Ontario or its equivalent in Alberta and British Columbia will have their registration revoked as of September 28, 2010, which provides these firms with a year to determine what registration they need, if any, in Ontario, Alberta or British Columbia, as applicable. These firms will have two options in Ontario, Alberta and British Columbia after September 28, 2010 (or earlier, if they chose to surrender their registration):
- They can apply to become registered as a portfolio manager or restricted portfolio manager, but must cease any registrable activity in Ontario, Alberta and British Columbia, as applicable after September 28, 2010 until such registration is granted. Registration as a portfolio manager will give the firm the most flexibility in providing advice to residents of a jurisdiction without the restrictions on the type of advice or the type of clients associated with the current Ontario international adviser registration and its equivalent in Alberta and British Columbia, and under the new international adviser registration exemption described below, or
- They can carry out registrable activity in Ontario (and elsewhere in Canada) pursuant to the “international adviser” registration exemption provided for in National Instrument 31-103. This registration exemption will permit a firm that is registered in its home jurisdiction as an adviser to carry out specified activity in Canada, primarily with “permitted clients” (as discussed above), other than registered advisers or dealers. The conditions for this registration exemption include
- The advice must be given only in respect of foreign (ie non-Canadian) securities and not on Canadian securities, unless such advice is incidental to the advice on foreign securities
- The adviser must be registered in or operate under a registration exemption and engage in the business of an adviser in its home jurisdiction
- Not more than 10% of its consolidated gross revenues (together with that of its unregistered affiliates) can be derived from its advising activities in Canada and
- It provides the proper notifications to its Canadian clients and the applicable securities regulators before advising Canadian clients. The non-Canadian adviser must make annual filings and pay fees in Ontario to continue to rely on the international adviser exemption.
Non-Canadian firms that today are registered as advisers in provinces or territories other than Ontario, Alberta and British Columbia, generally are restricted by terms and conditions on that registration to advising certain clients only. These firms do not generally have the benefit of a transition period for the implementation of National Instrument 31-103. These firms should determine whether they can rely on the international adviser exemption in that province or territory on and after September 28, 2009. If the exemption is not available, then it will be necessary for those firms to request an extension of their current registration subject to terms and conditions, until such time as they seek registration as a portfolio manager under the new rules.
Finally, we note that the “sub-adviser exemption” that would have permitted non-Canadian advisers to be sub-advisers to Canadian registrants without registration, contained in previous drafts of National Instrument 31-103 has been removed from the final version pending further review of the exemption. The current subadviser exemption contained in OSC Rule 35-502 Non-Resident Advisers will be retained in Ontario and discretionary relief may continue to be sought in other jurisdictions.
Acting as an Investment Fund Manager: National Instrument 31-103 introduces a new category of registration in each Canadian province and territory: investment fund manager. This registration category will apply to managers of all types of investment funds managed in Canada, whether reporting issuers or not, including mutual funds, pooled funds, closed-end funds, exchange-traded funds and hedge funds. For the time being, non-Canadian based firms that manage investment funds outside of Canada and that do not have a head office in Canada will not be required to be registered as an investment fund manager in Canada.
A Canadian-based investment fund manager must apply for registration (for existing fund managers, by September 28, 2010) in its “principal jurisdiction”, which will be the province or territory where its head office is located. National Instrument 31-103 gives a Canadian-based investment fund manager a two-year exemption from having to register in any “local” jurisdiction, if it applies for registration and becomes registered in its principal jurisdiction. Similarly, an investment fund manager that distributes its funds in Canada, but does not manage the funds or have its head office in Canada, will not be required to register as an investment fund manager at least for another two-year period (until September 28, 2011). The CSA indicate that they intend to publish an amendment to National Instrument 31-103, for comment, during the next year or so that will explain under what circumstances a fund manager will need to register in more than one Canadian province or territory and under what circumstances a fund manager with its head office outside Canada would need to register.