Publication
title
The CSA Propose a Harmonized Registration Regime
DATE
March 19, 2007
EXPERTISE
The CSA recently published for public comment proposed National Instrument 31-103 Registration Requirements (the Rule) and Companion Policy 31-103 CP (the Companion Policy). Once in force, the Rule will consolidate, modernize and harmonize registration requirements across Canada. The publication of the Rule and Companion Policy represents one phase of the CSA's Registration Reform Project. The purpose of the project is to reduce the regulatory burden and create an efficient and flexible regulatory regime.
Due to the extensive changes in the registration regime, the CSA have provided an extended public comment period until June 20, 2007. In addition, legislative amendments will be required to implement certain parts of the Rule. In this bulletin, we outline some of the highlights of the new regime.
REQUIREMENT TO REGISTER AS DEALER OR ADVISER TRIGGERED BY "BUSINESS" TEST
The new regime will require any person or company who is "in the business of" dealing or advising in securities to register as a dealer or adviser. Currently, in all provinces other than Quebec, the requirement to register as a dealer is based upon whether a person or company is "trading" in securities. The CSA believe that moving from a trading to a business trigger will reduce the need for exemptive relief and bring Canada into line with other marketplaces, including the United States and the United Kingdom.
In the Notice accompanying the Rule, the CSA outline certain factors that could be considered in assessing whether or not one is in the business of dealing or advising in securities. These factors include whether the activity is carried out regularly or continuously, whether the person carrying on the activity is or is expecting to be compensated for the activity, whether the person solicits others in connection with the activity, whether the person acts as an intermediary or holds itself out as being in the business of the activity and whether there are profits arising from the activity or the activity is intended to produce a profit.
The Companion Policy provides guidance on whether particular persons will be considered to be in the business of dealing or advising. A person who trades securities for their own account will not generally be required to register. The Companion Policy further states that while most issuers will not normally be in the business of dealing in securities, an issuer which creates a secondary market for its securities or is a market maker in its securities may be dealing in securities and be required to register.
REVISED CATEGORIES OF REGISTRATION FOR DEALERS AND ADVISERS
The Rule proposes to amend and reduce the categories of registration for dealers and advisers. Dealers will be registered in one or more of the following categories: investment dealer, mutual fund dealer, scholarship plan dealer, exempt market dealer, and/or restricted dealer.
The exempt market dealer is a new category of registration similar to the limited market dealer registration currently in place in Ontario and Newfoundland and Labrador. However, unlike limited market dealers an exempt market dealer will be subject to registration requirements, including proficiency requirements. Exempt market dealers will be restricted to dealing in prospectus-exempt securities or with persons to whom prospectus-exempt securities can be distributed (i.e., accredited investors). The restricted dealer is also a new category of registration and will apply to a person or company which carries on the business of dealing in securities but whose conditions of registration limit it to dealing in a specified security or class of security.
Advisers will be registered as either portfolio managers or restricted portfolio managers. A restricted portfolio manager will only be allowed to advise with respect to specific securities or industries. The introduction of this category reflects the fact that increasingly portfolio managers may be engaged in providing specialized advice. The conditions attached to the registration will, as in the case of restricted dealers, depend on the nature of the manager's activities.
Several categories of registration will not be continued under the Rule. These include limited market dealers, international dealers, international advisers, securities issuers, investment counsel and other categories that are not widely used. Whether persons currently registered in such categories will continue to need to be registered and in what category will depend upon whether they are in the business of dealing or advising and the nature of their activities.
INVESTMENT FUND MANAGERS REQUIRED TO REGISTER
A fundamental change proposed by the CSA is the requirement that managers of investment funds (domestic, foreign, reporting and non-reporting issuers) other than private investment clubs be registered. The purpose of introducing registration for investment fund managers is to allow direct regulation of such managers, provide a framework to deal with conflicts of interest between a manager and the funds managed and impose requirements to ensure managers have resources to either directly carry out their management functions or properly supervise any outsourced functions. A fund manager will register in the jurisdiction where the fund is located.
The Rule exempts international investment fund managers and sub-advisers from registering provided they meet certain requirements that currently exist under OSC Rule 35-502 Non-Resident Advisers.
As a result of being a registrant, the Rule will require the investment fund managers to meet certain requirements. These include having a chief compliance officer who meets certain proficiency requirements, maintaining minimum excess working capital and maintaining a prescribed amount of insurance by way of a financial institution bond. They will also be required to provide and deliver financial information to regulators.
INTERNATIONAL DEALERS AND ADVISERS
The Rule does not propose a framework for registration as an international dealer or international adviser such as the one that currently exists in Ontario. International dealers and international portfolio managers (as defined in the Rule) will be exempt from registration provided they carry out only those activities prescribed by the exemptions. The Rule narrows the types of clients international dealers and advisers are permitted to deal with or advise compared with those permitted under the current Ontario regime.
ELIMINATION OF REGISTRATION EXEMPTIONS
In conjunction with the introduction of the business trigger for registration and the exempt market dealer registration category, the regime intends to repeal certain dealer registration exemptions currently provided for in National Instrument 45-106 Prospectus and Registration Exemptions. The exemptions for capital raising transactions and the sale of certain "safe" securities will not be available to dealers who are required to be registered under the Rule. If a person or company is not required to be registered as a dealer, they will continue to be exempt from the registration requirement.
REGISTRATION OF ULTIMATE DESIGNATED PERSON AND CHIEF COMPLIANCE OFFICER
The Rule requires each firm to designate an individual to be registered as its Ultimate Designated Person (UDP) and its Chief Compliance Officer (COO). The UDP will be the chief executive officer or the senior officer in charge of the firm's activities which require registration. The role of the UDP is to ensure the registrant has an effective compliance regime, but such individual need not be involved in the day-to-day compliance activities of the registrant. The COO will be the individual responsible for the continued monitoring of the registrant's adherence to its compliance regime. The COO will be subject to proficiency requirements while the UDP will not. The Companion Policy acknowledges that in smaller registrants the UDP and COO may be the same individual.
REQUIREMENTS OF REGISTRATION
The Rule consolidates in one instrument what requirements must be met in order to obtain and maintain registration. In order to ensure the suitability of firms and individuals for registration, the Rule prescribes proficiency, integrity and solvency requirements known as the "fit and proper" requirements. The proficiency and capital requirements will not apply to members of a self-regulatory organization (SRO), as they will continue to be subject to the proficiency and capital requirements of their SRO. In addition, the Rule prescribes further conditions necessary to maintain ongoing registration, including extensive conduct rules regarding accounts, client suitability, record-keeping, compliance systems, complaint handling policies and procedures, and conflict of interest provisions.
CONFLICTS OF INTEREST
The Rule consolidates and modernizes the conflict of interest provisions currently contained in various legislation, rules and policies. The Rule requires registrants to identify potential and actual conflicts and provides prescriptions for dealing with such conflicts, which, depending upon the circumstances of the conflict, may be handled by disclosing the conflict to clients, controlling the conflict or completely avoiding the conflict. The Rule specifically addresses the issue of referral arrangements and requires registrants to make disclosure of such arrangements to clients and to enter into written referral agreements to which the registrant firm must be a party.
TRANSITION
Those impacted by changes will be required to make a transition to the new requirements. The transition time will ultimately be determined and the CSA invite comments on this issue.
ADDITIONAL INFORMATION
The above is a general overview of the new registration regime. To access a copy of the Notice, Rule and Companion Policy click here. We would be pleased to provide further information or specific and detailed advice on this significant development.
Tracey Kernahan
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.
© Ogilvy Renault LLP 2007 - All Rights Reserved
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