On January 7, the New Brunswick Securities Commission (NBSC) published NBSC Notice 91-701 to respond to certain frequently asked questions on NBSC Local Rule 91-501 Derivatives (the Rule). As discussed in our previous update dated December 14, 2009, the Rule imposes registration and risk disclosure requirements in respect of trades in “derivatives” as defined in the Rule, other than trades among qualified parties.
The notice clarifies that a qualified party that engages in a derivatives transaction is responsible for determining whether the other party is also a qualified party. To do so, it may rely on factual statements made by the other party provided that it does not have reasonable grounds to believe that the statements are false. The qualified party is also responsible for determining whether the exemptions under the Rule are applicable based on the facts supplied by the other party and should retain all documentation relating to its determination.
The notice is somewhat ambiguous in response to the question of whether the Rule applies to principal protected notes (PPNs) and refers readers to CSA Staff Notices 46-303 and 46-304. In characterizing PPNs as investment products that offer an investor potential returns “based on the performance of an underlying investment”, it appears that NBSC staff is suggesting that they would fall within the definition of “derivative” under the Rule. However, the notice does clarify that the Rule does not apply to spot foreign exchange contracts and that the registration exemptions contained in the Rule may be relied on by insurance companies, loan and trust companies, investment dealers, portfolio managers, investment fund managers (and certain persons authorized to act as such or carry out similar functions), and certain registered individuals (all as referred to in paragraphs (d), (f). (j) and (k) of the definition of “qualified party”) when acting as agent or trustee for a fully-managed account.
The notice also provides a six-month transition period for financial sector participants having to implement new derivatives-related compliance measures, giving them until March 28, 2010 to phase in compliance obligations arising from the Rule.