CSA to overhaul adviser, dealer and investment fund manager registration
Kathleen Ward, Alix d'Anglejan-Chatillon, Ramandeep Grewal, Jennifer Northcote, Darin Renton and Simon Romano
The Canadian Securities Administrators (CSA) have now released for comment the much anticipated proposed NI 31-103 - Registration Requirements (the Proposed Registration Rule), along with the accompanying companion policy (the Companion Policy) and forms. The Proposed Registration Rule represents a major overhaul of the current registration regime by moving from a "trade trigger" to a "business trigger" to require registration for those not only advising (as is currently the case) but also dealing in securities and by imposing a new registration requirement for investment fund managers.
New registration regime
The Proposed Registration Rule represents one piece of what is proposed to be a national, harmonized and simplified registration regime. The full regime is proposed to be brought into force through consequential amendments to securities legislation and related instruments, which will work in conjunction with the National Registration System and implementation of core client relationship principles through SRO by-laws (which are yet to be proposed).
In Ontario, for example, it is proposed that the Securities Act (Ontario) will be amended to require registration by anyone who is in the business of acting as a dealer or representative of a dealer, or who is an adviser or representative of an adviser or an investment fund manager. While the legislation will determine who needs to be registered, the Proposed Registration Rule will set out the categories of registration, for both firms and individuals, and the related requirements for these categories, including "fit and proper" requirements, conduct rules for dealers and advisers and obligations regarding conflicts of interest. Exemptions from the requirement to register as a dealer, including the exemption for trades with accredited investors, will be eliminated. While the text of the Proposed Registration Rule and related Companion Policy has been published for comment (summarized below), the detailed legislative amendments required to implement this regime have not yet been provided.
Meaning of "in the business"
The CSA propose certain factors to be considered in determining whether an activity is conducted as a business. These include, inter alia: undertaking an activity with repetition or regularity; being or expecting to be remunerated or compensated for undertaking the activity; soliciting others in connection with the activity; and holding oneself out as being in the business of conducting the activity.
Moving to this type of "business trigger" for dealers means dealer registration exemptions relating to specific types of trades or trades to specific types of investors will be eliminated (for example, the dealer registration exemptions contained in National Instrument 45-106 - Registration and Prospectus Exemptions, including the accredited investor exemption). These will be replaced by registration requirements for those "in the business of" dealing. While most security issuers themselves would not be "in the business" of dealing in securities (and therefore will not require registration or a registration exemption), the Companion Policy clarifies that an issuer that creates a secondary market in its securities or is a market maker for its own securities would likely be considered to be "in the business of" dealing in securities. Similarly, the Companion Policy states that, in most instances, the CSA would not consider a person whose main or sole activity is dealing for their own account to be in the business of dealing in securities.
Categories of registration
The Proposed Registration Rule contains five basic categories of dealer registration:
1. Investment dealer
2. Mutual fund dealer
3. Scholarship plan dealer
4. Exempt market dealer
5. Restricted dealer
The exempt market dealer category is similar to the current "limited market dealer" category in Ontario and Newfoundland and Labrador, although the fit and proper requirements are more onerous than those applicable to limited market dealers. Persons registered as exempt market dealers would be permitted to deal only in securities being distributed under a prospectus exemption or to persons or companies to whom a security may be distributed under a prospectus exemption (for example, trading in prospectus qualified securities with accredited investors). British Columbia is considering not adopting the exempt market dealer category based on concerns that imposing registration requirements on those dealing in the exempt market will negatively impact venture capital business. Other categories of dealer in the various provinces would be eliminated.
The Proposed Registration Rule also contemplates two categories of adviser registration, namely, portfolio manager and restricted portfolio manager, as well as certain registration exemptions, including exemptions for international dealers and advisers. For an overview of the impact on international dealers and advisers, Stikeman Elliott has published a related Canadian Securities Law Update (February 2007).
Registration for investment fund managers
One of the more significant changes included in the new regime is the proposal to impose a registration requirement for managers of investment funds (which includes domestic, foreign, reporting and non-reporting issuers, but does not include private investment clubs). Investment fund managers will not only be required to register, but will also be subject to registration related obligations imposed under the Proposed Registration Rule, including solvency, proficiency and others (discussed below). The CSA's rationale for imposing fund manager registration is to allow regulators to directly regulate fund managers, impose requirements on fund managers relating to resources and supervision of out-sourced activities, and impose a framework for managing conflicts. Managing an investment fund is considered to include administering the fund but not acting as portfolio manager for the fund.
Individual registration categories
The Proposed Registration Rule also sets out two new categories of individual registration by requiring all registered firms to designate an individual as the ultimate designated person (UDP) and the chief compliance officers (CCO). The UDP is proposed to be the person in charge of the registrant firm or the division in the firm that carries on the activity requiring registration, and the CCO is proposed to be the person responsible for the day-to-day monitoring of compliance policies and procedures. Of importance to smaller registrants, the CSA also clarify that these functions can be carried out by the same individual.
Considerations for private equity and venture capital
While the Proposed Registration Rule does not expressly address private equity or venture capital funds, some guidance is offered in the Companion Policy in respect of registration requirements for general partners. Here the CSA state that whether the general partner will be in the business of providing advisory services and so required to register as an adviser will depend upon the business purpose of the limited partnership and the services the limited partners expect the general partner to provide.
The CSA state in the Companion Policy that if the general partner of a limited partnership selects investments where it will be involved in the management and development of those investments, the CSA would not consider the general partner's activities to be portfolio management activities requiring registration. This is in contrast to the situation where the purpose of the limited partnership is simply to invest in exempt securities relying on the expertise of the general partner. In the CSA's view, as the general partner does not bring "special expertise" to the underlying investments, it would be required to be registered as a portfolio manager. The CSA also state that they would not consider a firm that provides merger and acquisition advisory services without participating in the distribution of securities to be in the business of dealing in securities.
Referral arrangements
Specific requirements and disclosure obligations for referral arrangements pursuant to which a registrant pays or receives any compensation for the referral of a client are included in the Proposed Registration Rule.
Further requirements and rules
The Proposed Registration Rule also contains rules relating to proficiency, solvency and financial records for registrants (fit and proper requirements), detailed and technical conduct requirements (governing matters such as account opening and know-your-client, relationship disclosure and record-keeping), disclosure and compliance requirements relating to conflicts of interest and provisions governing suspension and revocation of registration. Details on these and other matters governed by the Proposed Registration Rule will be provided in our forthcoming updates.
Comment period
The Proposed Registration Rule is open for comments until June 20, 2007. Implementation is expected to stretch well into 2008 as the CSA have yet to provide any specifics on implementation dates or transition matters.
