There are currently 2,000 firms and 130,000 individuals registered to deal or advise in securities in Canada. In July 2009, the Canadian Securities Administrators (“CSA”) published new national rules that apply to firms and individuals who deal in securities, provide investment advice or manage investment funds. The new rules are found in National Instrument 31-103 Registration Requirements and Exemptions (“NI 31-103”), which comes into force on September 28, 2009. The new registration regime is intended to be easier to use and more flexible than the existing regime and should better accommodate a wide variety of business models, scales of operation, clients and products. A better system of registration requirements is also intended to assist in ensuring investor protection and foster a more efficient business environment.
Registration by Dealers and Advisers
Professional securities dealers and advisers are required to register with the securities commissions in each Canadian jurisdiction where they do business, each in the appropriate registration category according to the type of business they do. The various securities commissions screen registrants for integrity, proficiency and solvency as part of their mandate to protect investors and develop fair and efficient capital markets.
NI 31-103 is part of the CSA’s larger Registration Reform Project, which involves the harmonization, streamlining and modernization of the different sets of registration rules that exist in each Canadian province and territory. Under the current registration regime, securities dealers and advisers must comply with different rules in each Canadian jurisdiction where they are registered to carry on business. Under the new regime, NI 31-103 will be the sole instrument governing dealer and adviser conduct in Canada and a single set of rules will lay out the procedures they need to follow to become registered.
Changes from the current provincial regimes include the following: higher proficiency standards for some registrants, enhanced rules for consumer disclosure, referral arrangements, handling investor complaints, and disclosing and addressing conflicts of interest. Also of note is a new registration requirement for investment fund managers, exempt market dealers and senior officers responsible for compliance.
New Process for Dealer and Adviser Registration
A new process for dealer and adviser registration in multiple jurisdictions will also come into force on September 28, 2009. The new registration process will be a passport system, similar to the passport system for filing prospectuses introduced in early 2008. The registration passport system will allow individuals and firms to register in more than one Canadian jurisdiction by filing registration materials only with the “principal regulator”. Similarly as with the prospectus filing passport system, Ontario is not adopting the registration passport system. However, Ontario can be a “principal regulator” under that system. This means Ontario-based registrants will only need to deal with the Ontario Securities Commission, even when they are also active in other parts of Canada. Registration procedures are set out in the National Registration Database (“NRD”) rules, and in the passport system and Ontario’s passport interface. National Instrument 45-106 Prospectus and Registration Exemptions will also be amended this year to further harmonize and streamline requirements for using some exemptions and to complement changes to the registration regime found in NI 31-103. Canadian jurisdictions will also need to amend their respective Securities Acts to accommodate the new registration regime in their legislative framework.
Since investors often rely heavily on registrants in making securities investment decisions, a key component of the new registration regime is to enhance investor protection, mainly through fostering a culture of compliance among the securities adviser and dealer community. Some examples of how the new regime may achieve this goal include:
- Chief executive officers will have to register as the “ultimate designated person” who is responsible for the existence of an effective compliance system at their respective firms.
- A chief compliance officer must be registered by firms, and such officer will be responsible for the day-to-day operation of the compliance system at the firm.
- Administrators of investment funds will be required to register for the first time under a new category called “investment fund managers”.
- The “exempt market dealers” registration requirement found currently only in Ontario and Newfoundland and Labrador will now be a national requirement, so that dealers who sell securities under certain exemptions from the usual requirements under securities regulations will have to register for the first time.
- The regime introduces new requirements for referral arrangements, handling investor complaints and risk-based capital and insurance and expands requirements for consumer disclosure, and disclosing and addressing conflicts of interest. Higher proficiency requirements are introduced for some registration categories.
Besides enhancing investor protection, another goal of the new registration regime is to promote a more efficient business environment. Some examples of how the new regime may achieve this goal include:
- The new regime will be the first time there are common requirements across Canada for registration.
- There will be far fewer registration categories: over 30 individual categories of registration will be reduced to five and 60 firm categories will be reduced to eight. The new registration categories also accommodate specialized operations.
- Registered individuals will be able to transfer automatically between employers as long as no concerns are raised regarding their conduct.
- Registered firms will no longer have to renew their registration annually, and the firm registration rules will adopt a less prescriptive approach which recognizes that registered firms vary greatly in their size and the range of business they undertake.
- The new regime will introduce the concept of a “business trigger” – the requirement to register for dealers will be triggered by whether or not they are actually in the business of trading securities, instead of being triggered by certain very technical requirements that can capture trading activity incidental to a firm’s primary business.
Transition to New Regime
Guidance to the industry on how the new registration regime will be implemented by regulators is set out in CSA Notice 31-311 Transition into new Registration Regime under NI 31-103, which was published on June 12, 2009.
If you have any questions about the new dealer / adviser registration regime or related matters, contact any member of Clark Wilson LLP’s Corporate Finance / Securities Group.