Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

Incorporate Omnibus/Blanket Relief Orders and FAQs

The First Year Amendments would incorporate the omnibus/blanket relief orders issued by members of the CSA on February 26, 2010. Generally, the omnibus/blanket relief orders addressed issues relating to transition issues, including the continuation of grandfathering provisions in jurisdictions added to a registrant’s registration, exemptions for chief compliance officers and advising representatives of portfolio managers from the proficiency requirements when adding specified categories of registration, and an exemption for mutual fund dealers from the requirement to establish whether a client is an insider of a reporting issuer or other publicly traded issuer. For additional information on the omnibus/blanket relief orders, see our post dated March 8, 2010.

The First Year Amendments would also incorporate into Companion Policy 31-103CP (31-103CP) some of the guidance in the CSA staff notices published as Frequently Asked Questions (FAQs) on December 18, 2009 and February 5, 2010. The First Year Amendments would include guidance from the FAQs on, among other matters, the availability of the dealer registration exemption under section 8.5 of 31-103 for cross-border “jitneys” (discussed in more detail below) and the availability of the international dealer exemption and international adviser exemption to foreign firms otherwise registered in one or more Canadian jurisdictions. For additional information on the FAQs, see our posts dated January 5, 2010 and February 11, 2010.

Amendments relating to International Financial Reporting Standards

Taking into account the upcoming changeover to international financial reporting standards (IFRS), the First Year Amendments would replace the term “market value” with the term “fair value” as it appears in the following:

• section 8.22 [Small security holder selling and purchase arrangements] of NI 31-103;
   
• section 14.14 [Account statements] of NI 31-103;
   
• Form 31-103F1 Calculation of Excess Working Capital;
   
• section 1.2 of 31-103CP, in the guidance relating to the determination of assets under paragraph (o) of the definition of permitted client;
   
• question b) in Schedule N to Form 33-109F4 Registration of Individuals and Review of Permitted Individuals; and
   
• question b) in Schedule E of Form 33-109F7 Reinstatement of Registered Individuals and Review of Permitted Individuals.

As a result of the proposed change, where a person or company is required to determine the fair value of a security under the above-referenced sections, the fair value would be determined in accordance with IFRS. The requirement to determine fair value of a security in accordance with IFRS would apply equally to resident and non-resident registrants, which may be onerous for non-resident registrants not otherwise subject to IFRS.

The proposed amendment is further to the proposed amendments to 31-103, 31-103CP and 33-109 published by the CSA for comment on October 23, 2009, which, in turn, operate in conjunction with the proposed amendments to National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency, published by the CSA for comment on September 25, 2009 (the IFRS Proposals). The proposed amendments of October 2009 generally address the changeover to IFRS as it applies to a registered firm’s financial reporting obligations under Part 12 of 31-103. The IFRS Proposals would allow foreign registrants, subject to certain conditions, to prepare their financial statements in accordance with U.S. GAAP or such other accounting principles that meet the foreign disclosure requirements of the foreign regulatory authority to which the registrant is subject. For additional information on these proposed amendments see our posts dated September 25, 2009 and October 23, 2009.

Additional Requirements and Restrictions on Registered Representatives

The First Year Amendments would formally and explicitly entrench in 31-103 the requirement for a registered representative to understand the structure, features and risks of each security recommended by the registered representative. Currently, this requirement is addressed in 31-103CP and CSA Staff Notice 33-315 Suitability Obligation and Know Your Product.

The First Year Amendments would also entrench in 31-103, the practice of staff in various Canadian jurisdictions to restrict advising, associate advising and dealing representatives from being registered with more than one firm. This restriction would apply even if the firms are affiliated, however, the proposed guidance in 31-103CP states that when considering an exemption for relief from this restriction, affiliation of the firms will be one of the factors the CSA will consider. Other considerations for an application for relief from this restriction would include evidence that:

• there are valid business reasons for the individual to be registered with both firms;
   
• the individual will have sufficient time to adequately serve both firms;
   
• the sponsoring firms have policies and procedures addressing conflicts of interest that may arise as a result of the dual registration; and
   
• the sponsoring firms will be able to deal with these conflicts.

Extending Dealer Registration Exemption

Under the First Year Amendments, the dealer registration exemption under section 8.6 of 31-103 available to registered advisers and advisers relying on the international adviser exemption, for trades in securities of an investment fund managed by the adviser and traded to a managed account of a client of the adviser would no longer be restricted to non-prospectus qualified investment funds managed by the adviser.  This dealer registration exemption would also be made available to prospectus-qualified funds managed by the adviser.

Cross-border “jitneys”

The First Year Amendments would include guidance in 31-103CP that generally incorporates the guidance from the FAQ published December 18, 2009 regarding the availability of the dealer registration exemption under section 8.5 of 31-103 for cross-border “jitneys”. As provided in the proposed guidance, the dealer registration exemption in section 8.5 for trades made solely through a registered dealer would be available to a foreign dealer trading on behalf of its client, provided that all trading activity that occurs within the local Canadian jurisdiction is done through or to a dealer in that jurisdiction. The exemption would not be available if the foreign dealer or its client interacts directly with the client in the local Canadian jurisdiction.

International Dealer and International Adviser Registration Exemptions

Under 31-103, to continue to rely on the international dealer exemption or international adviser exemption, foreign firms must notify the applicable regulators (other than in Ontario) 12 months after it first submits a Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service, and each year thereafter that it continues to rely on the exemption. To simplify the administrative process, under the First Year Amendments the date on which the regulator must be notified annually of the continued reliance on the exemption would be December 1. Under the First Year Amendments, compliance with the filing and fee payment requirements under Ontario Securities Commission Rule 13-502 Fees would continue to satisfy the annual notice requirement in Ontario.

Currently, under the international adviser exemption, a non-Canadian adviser can advise permitted clients provided the non-Canadian adviser does not advise in Canada on securities of Canadian issuers, unless providing that advice is “incidental” to its providing advice on a foreign security. The First Year Amendments would include guidance under 31-103CP on the meaning of “incidental” advice on securities of Canadian issuers.  This proposed guidance provides that the language is not intended to provide a “carve out” that allows some portion of the portfolio to be made up of Canadian securities chosen by the international adviser without restriction. According to the proposed guidance, any advice with respect to the Canadian securities must be directly related to the activity of advising on foreign securities. That said, the proposed guidance also provides that “an international adviser may recommend a foreign investment fund that primarily holds foreign securities, but which also holds some Canadian securities, and still meet the conditions of the exemption.”

Compliance System

The First Year Amendments would include enhanced guidance in 31-103CP on the risks that should be mitigated by a firm’s internal controls, as well as enhanced guidance on effective monitoring and supervision of compliance by the firm and its registered representatives.

Complaints

The First Year Amendments would include guidance and recommendations in 31-103CP regarding complaint handling, including the documenting of complaints, what should be included in a firm’s complaint handling policies and procedures, responding to verbal and written complaints and the timeline within which a complaint should be addressed. Under the proposed guidance, where a firm requests that a complainant put in writing a verbal complaint not clearly expressed, it would be expected that the firm offer the complainant reasonable assistance to put the complaint in writing, unless the claim is clearly frivolous.

The First Year Amendments would change the obligation of registered firms to ensure independent dispute resolution and mediation services are made available with respect to complaints relating only to:

• trading or advising activity;
   
• breach of client confidentiality;
   
• theft, fraud, misappropriation or forgery;
   
• misrepresentation;
   
• undisclosed or prohibited conflicts of interest; or
   
• personal financial dealings with a client.

The proposed guidance would also encourage that firms seek to resolve complaints relating to the above-listed matters within 90 days.

Account Activity Reporting

The First Year Amendments would allow a registered dealer to send trade confirmations to a registered adviser acting for the client, provided the client consents in writing. The First Year Amendments would also impose account activity reporting obligations on investment fund managers, requiring that an investment fund manager send a trade confirmation to a security holder when the investment fund manager executes a redemption order received directly from the security holder, as well as require that an investment fund manager deliver account statements to a security holder, at least once every 12 months if there is no dealer on record for the security holder.

Members of SROs

The First Year Amendments would remove certain non-harmonized provisions respecting the mutual fund dealer category, and would provide additional exemptions to members of self-regulatory organizations (SROs) where the SRO rules adequately cover the same regulatory risks.

Ongoing and future CSA work on registrant regulation

The First Year amendments do not address a number of substantive issues that are still under review by the CSA, including:

• the application of the investment fund manager registration requirement with respect to an entity that directs the operation of an investment fund from a head office or other physical location that is outside the Canadian jurisdiction;
   
• an exemption for sub-advisers (currently, in Ontario the exemption remains in section 7.3 of Ontario Securities Commission Rule 35-502 Non-Resident Advisers, and Quebec has issued a decision to accommodate the regulatory gap for sub-advisor arrangements entered into prior to March 28, 2010 – for additional information, see our post dated January 5, 2010);
   
• an exemption for capital accumulation plans; and
   
•  the requirements and guidance on cost disclosure and performance reporting to clients (which is part of the CSA’s development of the client relationship model).

According to the notice, these matters will be addressed separately, and the CSA may publish staff notices or propose further amendments to 31-103 with respect to these specific matters in the future.

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The CSA is accepting comments on the First Year Amendments until September 30, 2010.

The order reflects the exemption in section 3.35 of National Instrument 45-106 Prospectus Requirements and Exemptions (NI 45-106), which expired on March 26, 2010, and will be in force until September 28, 2011. The exemption will also be reviewed during the temporary period to determine whether it should be included as part of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103).

The Notice states that in Ontario, it is expected that there will be few persons or companies affected by the unavailability of section 3.35 of NI 45-106, given that (i) in Ontario this exemption is already unavailable to most persons or companies that are "market intermediaries", and (ii) there are also alternate exemptions from the dealer registration requirement that may be available for trading in short-term debt, such as the exemption in section 8.5 [trades through or to a registered dealer] of NI 31-103 and, in the case of financial institutions, the exemptions in section 35.1 of the Securities Act (Ontario) and section 4.1 of OSC Rule 45-501 Ontario Prospectus and Registration Exemptions.

If there is a circumstance where a person or company, other than a financial institution listed above, is adversely affected by the expiry of the exemption from the dealer registration requirement contained in section 3.35 of NI 45-106, the Notice indicates that staff would be prepared to consider recommending that an appropriate exemption be granted, on a case-by-case basis.

Exemption from chief compliance officer proficiency requirements for portfolio manager adding a category

Under Part 3 of 31-103, an individual who satisfies the proficiency requirements for a chief compliance officer (CCO) of a portfolio manager (PM), also satisfies the proficiency requirements for a CCO of a mutual fund dealer (MFD), exempt market dealer (EMD) and investment fund manager (IFM). Each regulator issued an order providing a CCO of a PM whose proficiency is grandfathered under subsection 16.9(2) of 31-103 with an exemption from the proficiency requirements applicable to a CCO of an MFD, EMD or IFM where the firm was registered as a PM on the Effective Date and the individual was designated as the firm’s CCO on the Effective Date and remains so registered.

Exemption from dealing representative proficiency requirements for portfolio manager adding mutual fund dealer or exempt market dealer category

Under Part 3 of 31-103, an individual who satisfies the proficiency requirements for an advising representative of a PM also satisfies the proficiency requirements for a dealing representative of an MFD and EMD. Each regulator issued an order providing an advising representative of a PM whose proficiency is grandfathered under subsection 16.10(1) of 31-103 with an exemption from the proficiency requirements applicable to a dealing representative of an MFD and EMD.

Exemption from time limits on examination requirements for certain dealing representatives

Pursuant to section 16.10 of 31-103, a dealing representative of a scholarship plan dealer (SPD) registered since the Effective Date and, in Ontario and Newfoundland and Labrador, a dealing representative of an EMD registered since the Effective Date, has until September 28, 2010 to meet applicable proficiency requirements under Part 3 of 31-103. Section 3.3 of 31-103 deems an individual to not have passed an examination or successfully completed a program unless such examination or program was passed or completed within a prescribed period of time prior to the individual applying for registration.  Each regulator issued an order exempting dealing representatives of an SPD registered since the Effective Date and, in Ontario and Newfoundland and Labrador, dealing representatives of an EMD registered since the Effective Date, from the time limits under section 3.3 of 31-103. 

Exemption from client notification requirements under section 14.5 of 31-103 for certain registrants with physical place of business in local jurisdiction

Section 14.5 of 31-103 requires a registrant with no head office in a local jurisdiction to provide its clients with prescribed written disclosure relating to the potential difficulty for the client to obtain civil remedies against the registrant in the local jurisdiction.  Each regulator issued an order that exempts a registrant with a head office in Canada and a physical place of business in the local jurisdiction from the client disclosure requirements under section 14.5.

Exemption from requirement to establish whether client an insider under section 13.2 of 31-103 for mutual fund dealers

Subsection 13.2(2)(b) of 31-103 requires that a registrant take reasonable steps to establish whether a client is an insider of a reporting issuer or any other issuer whose securities are publicly traded. Each regulator issued an order exempting mutual fund dealers from this requirement.

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Previously issued omnibus/blanket orders

Transitional relief for previously registered international dealers in respect of Canadian debt securities

On September 25, 2009, the Ontario Securities Commission (OSC) issued an order, effective in Ontario and Newfoundland and Labrador, providing certain transitional relief under 31-103 to dealers formerly registered as international dealers in Ontario and/or Newfoundland.  The order permits dealers formerly registered as international dealers to continue to trade in Canadian debt securities outside of a distribution of the securities with designated institutions (as that term was defined prior to the Effective Date under section 204 of Ontario Regulation 1015) for a transition period of one year, expiring on September 28, 2010.  The order also provides for a transition period of six months, expiring March 31, 2010 for dealers relying on the order to provide clients with prescribed written disclosure relating to clients’ potential difficulty in obtaining civil remedies against the registrant in the local jurisdiction.  To rely on the order, a dealer must: (i) have been formerly registered as an international dealer; (ii) have filed with the regulators a Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service, together with an indication of its intention to rely on the order; and (iii) fulfill the conditions set out in subsection 8.18(3) (a) – (d) of 31-103.

Transitional relief for exempt market dealers in respect of financial reporting and client statements

On September 28, 2009, the OSC issued an order, effective in Ontario and Newfoundland and Labrador, providing certain transitional relief to former limited market dealers “mapped-over” to the EMD category. (There was an amendment to this order on February 19, 2010 to correct a drafting oversight). The order provides a transition period of one year, expiring on September 28, 2010, to former limited market dealers “mapped-over” to the EMD category from the financial reporting requirements under subsection 12.12(1) of 31-103. This transitional relief can only be relied upon if the EMD is not registered in any other category of registration in Ontario and Newfoundland and Labrador, other than a former international adviser “mapped-over” to the PM category. The order also provides a transition period of two years, expiring on September 28, 2011, to former limited market dealers “mapped-over” to the EMD category from the client statement requirements under section 14.14 of 31-103. This transitional relief can only be relied upon if the EMD is not registered in any other category of registration in Ontario and Newfoundland and Labrador, other than a “mapped-over” MFD, investment fund manager, or former international adviser “mapped-over” to the PM category. 

The orders, however, apply only where certain conditions are met. Specifically, the person or company seeking to rely on the exemption in B.C.: (i) must not be registered in any jurisdiction, including a foreign jurisdiction; (ii) must not have provided advice to the purchaser with respect to suitability; (iii) must obtain from the purchaser a signed risk acknowledgement in the form prescribed by the blanket order; (iv) must not hold or have access to the purchaser's assets; and (v) must electronically file with the BCSC a current or updated information report in the prescribed form within ten days of relying on the exemption. 

The Manitoba order, meanwhile, also includes a requirement, like the recent Alberta order published earlier this month, that the person relying on the exemption not have provided financial services to the purchaser at any time other than in connection with a prospectus-exempt distribution under the relevant sections. However, the Manitoba and B.C. orders do not include language found in the Alberta order imposing the express condition that the person relying on the exemption must not be registered or required to be registered. The BCSC And MSC also released accompanying guidance respecting their respective orders  (see B.C.'s companion policy and Manitoba's guidance notice).

B.C. and Manitoba, which are the second and third of the "North West" jurisdictions to issue such orders after Alberta, are expected to be further joined by Saskatchewan, the Northwest Territories, Nunavut and the Yukon Territory, whose regulators have also announced their intention to issue similar orders.

For more information on the impact of the new registration regime on dealers trading in the exempt market, see our July 2009 publication: "Impact on Limited Market Dealers and Unregistered Dealers Trading in the Exempt Market".

The February FAQ focuses on addressing the challenge faced during the first year of implementation of NI 31-103 by those registrants that were previously required by the securities legislation of certain provinces to deliver audited consolidated financial statements, to comply with the requirements under section 12.11 of NI 31-103 to (i) deliver annual financial statements and interim financial information on a non-consolidated basis and (ii) to provide comparative figures.  

The February FAQ provides that for financial years and interim periods ended on or between September 30, 2009 and August 31, 2010, staff will accept annual financial statements and interim financial information prepared under one of the following two options:

1. non-consolidated financial statements and interim financial information with no comparative figures; or
    
2. non-consolidated financial statements and interim financial information with non-consolidated comparative figures.

Unless otherwise exempt under National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107), the annual financial statements must be prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), except on a non-consolidated basis and, if the first option is chosen, excluding comparative information. Since the annual financial statements will be prepared on a basis of accounting other than Canadian GAAP, the February FAQ provides that the financial statements must include a note describing this basis of accounting and the auditor’s report that must accompany the financial statements is to be prepared in accordance with CICA Handbook Section 5600 Auditor’s Report on Financial Statements Prepared Using a Basis of Accounting other than Generally Accepted Auditing Principles.

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As a reminder - pursuant to currently proposed amendments to NI 52-107, all domestic registrants will be required to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) and report compliance with IFRS for financial years beginning on or after January 1, 2011.

Under the decision, any person not ordinarily resident in Quebec that acts as an adviser (the adviser) to a registered portfolio manager or to a registered dealer that acts as a portfolio manager under the exemption provided for under section 8.24 of 31-103 (the registrant), is exempt from the requirement to register, provided the adviser and the registrant meet the following conditions by no later than March 28, 2010:

1. the obligations and duties of the adviser are set out in a written agreement with the registrant;
2. the registrant contractually agrees with its clients on whose behalf the investment advice or portfolio management services are to be provided to be responsible for any loss that arises out of the failure of the person or company so acting as an adviser to comply with the following obligations:
   1. to exercise its powers and functions honestly, in good faith and in the best interests of the registrant and each client of the registrant for whose benefit the advice is or portfolio management services are provided;
   2. to act with the degree of care, diligence and skill that a reasonably prudent person would exercise in similar circumstances;
3. the registrant cannot be relieved by its clients from its responsibilities for loss under paragraph 2;
4. the person so acting as an adviser, if resident of a jurisdiction, is registered as an adviser in that jurisdiction.

In Ontario the sub-adviser exemption under section 7.3 of OSC Rule 35-502 Non-Resident Advisers remains available and the CSA have stated that discretionary relief on a similar basis will be granted in other jurisdictions. 

The FAQ reiterates that the grandfathering of a CCO’s proficiency requirements is only available in those Canadian jurisdictions where prior to the Effective Date the firm was required to identify its compliance officer on the National Registration Database (NRD), as these were the only jurisdictions where compliance officers were required to satisfy proficiency requirements. The jurisdictions that had this requirement were British Columbia, New Brunswick and Ontario. While an individual acting as personne responsable (ou chef) de la conformité in Quebec could have been acting in a similar capacity to a compliance officer, he or she did not have to be identified on NRD. In this regard, the FAQ makes clear that an individual acting as personne responsable (ou chef) de la conformité in Quebec could have his or her proficiency grandfathered only if he or she was identified on NRD on the Effective Date as the firm’s CCO in British Columbia, New Brunswick or Ontario. Otherwise he or she is required to satisfy the proficiency requirements under 31-103 by no later than September 28, 2010.

Exempt market dealer underwriting activities

The FAQ clarifies that, while an EMD can trade a prospectus-qualified security and provide a purchaser with a copy of the prospectus where an exemption from the prospectus requirement would be available, an EMD cannot underwrite a prospectus-qualified distribution even if the EMD only distributes securities to clients that may purchase securities offered under a prospectus exemption. EMDs are restricted to underwriting distributions made under an exemption from the prospectus requirement.

Sale of principal protected notes by mutual fund dealers in Quebec

The FAQ clarifies that pursuant to the exemption under paragraph 9º of section 3 of the Securities Act (Quebec) (QSA) an MFD in Quebec does not have to register as an EMD to sell market-linked GICs. Further, pursuant to paragraph 14º of section 3 of the QSA, an MFD in Quebec does not have to register as an EMD for the sale of market-linked notes issued or guaranteed by a bank or an authorized foreign bank, unless the market-linked notes confer a right of payment ranking lower than a deposit contemplated in paragraph 9º of section 3 of the QSA and are entrusted to the issuer or guarantor of the market-linked notes.

Investment fund manager registration requirement

The FAQ reiterates that registration as investment fund manager is required where the collective investment vehicle being managed is an “investment fund”. While the FAQ refers to the guidance provided in Companion Policy NI 81-106CP Investment Fund Continuous Disclosure, what constitutes an “investment fund” is not clarified further in the FAQ. The FAQ confirms, however, the CSA staff’s view that an investment fund is not restricted to funds that invest in securities, and provides as examples funds that invest in uranium or gold bullion as funds that may fall within the definition of an investment fund.

The FAQ clarifies that a firm that qualifies for the one-year exemption under section 16.4 of 31-103 from the requirement to register as an IFM and registers as an IFM prior to end of such one-year period must comply with the requirements of 31-103 as soon as it becomes registered as an IFM.

Foreign dealer trading through or to a registered dealer

The FAQ confirms that the dealer registration exemption in section 8.5 of 31-103, for trades made solely through or to a registered dealer, is available to foreign dealers trading on behalf of their clients provided that all trading activity that occurs within the local jurisdiction be done through or with the locally registered dealer. The intermediation by the foreign dealer does not in itself mean that the trade in the local jurisdiction was not made “solely” through a registered dealer. However, if the foreign dealer or its client is engaged in other trading activity in the local jurisdiction in connection with the transaction, then it is not a trade “solely” through a registered dealer and the exemption in section 8.5 is not available. The FAQ provides as an example, a foreign dealer or its client contacting the purchaser in the jurisdiction and directly soliciting the purchase of securities. “Trading” is broadly defined under securities legislation and includes acts directly or indirectly in furtherance of a trade.

Registered firm relying on international dealer and adviser exemptions

The FAQ clarifies that a registered firm can rely on the international dealer exemption under section 8.18 of 31-103 or the international adviser exemption under section 8.26 of 31-103 in the local jurisdiction whether it is registered there or elsewhere in Canada. The required notification to clients is met by notifying the client that it is not registered in the jurisdiction in respect of the activities for which the exemption is being relied upon.

Insurance requirements for firm registered as portfolio manager and investment fund manager

The FAQ confirms that insurance requirements are not cumulative. A firm registered in the categories of PM and IFM must maintain insurance that satisfies the highest insurance requirement of its categories of registration.

The FAQ clarifies that the “assets under management” referred to in the PM insurance calculation under section 12.4 of 31-103 refers only to those client assets which the PM holds or to which it has access. The “assets under management” referred to in the IFM insurance calculation under section 12.5 of 31-103 refers only to the assets under management of its own funds for which the registrant is acting as IFM.   

Requirement to deliver Form 31-103F1 Calculation of Excess Working Capital

The FAQ clarifies that despite the one-year transition under section 16.11 of 31-103 for previously registered firms to comply with the new capital requirements, there is no corresponding transition for the requirement to deliver a Form 31-103F1 Calculation of Excess Working Capital. The FAQ states that where the firm relies on section 16.11, it must also deliver the capital calculations required under the former requirements (which continue to apply during the one-year transition period), if any. 

Despite their being no transitional relief to deliver Form 31-103F1, the FAQ provides that in Ontario, the regulator does not expect a firm that calculates its working capital based on consolidated financial statements in reliance on the transitional relief in section 16.11 to deliver a Form 31-103F1. 

Failing to meet requirement under 31-103 before end of transition period

The FAQ suggests that where a firm fails to meet a requirement under 31-103 before the end of the applicable transition period it should immediately contact the regulator. According to the FAQ, a registrant in this situation might be required to cease registerable activity until the firm complies with the requirement, or a temporary exemption might be granted, depending on the circumstances.

Requirement to file Form 33-109F6 by September 30, 2010

All firms registered prior to the Effective Date that continue to be registered, are required under section 6.1 of NI 33-109 to file a Form 33-109F6 with its principal regulator by no later than September 30, 2010. The FAQ indicates that supporting documents and audited financial statements do not have to be provided with the form. When completing the form, the firm should not check off any of the boxes for section 1.3 as the reason for submitting the form and should make a note in its cover letter or e-mail that it is submitting the form further to section 6.1 of NI 33-109.

Requirement that foreign firm be registered in foreign jurisdiction where based

The CSA staff note that foreign firms applying for registration are normally expected to be registered in the relevant category in their home jurisdiction. This is stated to be part of the fit and proper assessment to be registered in a Canadian jurisdiction and is also relevant to the CSA’s compliance oversight capabilities.

The pending adoption of 31-103 in Quebec can be expected to accelerate the implementation of rules under the Quebec Derivatives Act (QDA), which came into force in Quebec on February 1, 2009 and governs trading and advisory activities relating to all forms of derivatives. On July 31, 2009, as part of this implementation process, the Autorité des marchés financiers (AMF), Quebec’s financial services regulator, published a proposed Regulation to amend the Derivatives Regulation (the Proposed Quebec Regulation). The Proposed Quebec Regulation incorporates by reference various registration-related instruments and material provisions of 31-103 and would (if adopted) introduce an important registration exemption for non-Quebec dealers and advisers in exchange-traded derivatives offered primarily outside Quebec, provided they limit their activities to “accredited counterparties” (as defined in the QDA).

Unfortunately, the regulation of futures and security options across all Canadian jurisdictions has not undergone a process of streamlining and harmonization similar to Canadian securities legislation, and remains very fragmented. Consequently, the rules regarding the futures and security options activities of non-Canadian FCMs and CTAs in Canada vary significantly by province and territory.

National Instrument 31-103

31-103 is intended to harmonize, streamline and modernize registration requirements and exemptions for dealers, advisers and investment fund managers across all Canadian provinces and territories (jurisdictions) with respect to securities. It regulates the registration of firms and individuals and consolidates requirements for registration, including proficiency, solvency and insurance requirements, as well as ongoing compliance requirements for registrants. These include requirements with respect to financial reporting, know-your-client, suitability, client disclosure, safekeeping of assets, recordkeeping, account activity reporting, complaint handling and other compliance procedures. The CSA note that, to create flexible regulation, 31-103 combines principles, supported by guidance in a Companion Policy, with prescriptive elements where considered appropriate.

31-103 represents a major overhaul of the current securities registration regime and has significant implications for non-Canadian FCMs, dealers, CTAs, advisers and investment fund managers currently doing business on a registered or exempt basis in any jurisdiction of Canada.

However, 31-103 does not harmonize, streamline or modernize registration requirements and exemptions across Canada with respect to futures and security options. The CSA stated during the comment process that the regulation of futures was beyond the scope of 31-103. However, because futures and security options are regulated in some jurisdictions as securities, 31-103 will be relevant in those jurisdictions but not others.

A key development under 31-103 is the creation of an “international dealer exemption” and an “international adviser exemption” for trading with or advising “permitted clients” (including, specified institutional clients, entities with net assets of more than C$25,000,000 and individuals with net financial assets before taxes of more than C$5,000,000). The international dealer exemption is available for dealers registered in their home jurisdiction and is limited to dealing in non-Canadian securities and certain Canadian debt securities. The international adviser exemption is available to advisers that are registered or exempt in their home jurisdiction and is limited to advising on non-Canadian securities and to a very limited extent in Canadian securities where the advice on Canadian securities is incidental to the provision of advice on non-Canadian securities (for example, advising on a global portfolio with a small Canadian allocation). Reliance on these exemptions requires the prior filing of agent-for-service-of-process forms in each jurisdiction where the exemption is proposed to be relied on, along with the delivery of mandated client disclosure notices and compliance with annual filing requirements.

Three different regimes for the regulation of futures

After the implementation of 31-103, there will continue to be three regimes governing the regulation of futures and security options in Canada and the applicable regime will depend on the Canadian jurisdiction in which an FCM or CTA is doing business. The rules vary significantly depending on the applicable regime.  In the first regime, futures and security options fall within the definition of a “security” and thus are regulated in the same manner as securities. In the second regime, futures are governed by separate futures or derivatives legislation while security options are regulated under securities legislation. In the third regime, futures and options are governed by securities legislation but subject to separate treatment under the definition of “exchange contracts” in the securities legislation. Each of these regimes and where they are applicable is discussed below. 

Securities-only regime

In Nova Scotia, Prince Edward Island, Newfoundland, Yukon Territory, Northwest Territories and Nunavut, futures and security options fall within the definition of “security” under applicable securities legislation. Consequently, under 31-103 FCMs that are registered and CTAs that are registered or exempt in their home jurisdiction may rely on the “international dealer exemption” and “international adviser exemption” provided that the conditions of those exemptions are met (see above).     

This represents a significant change, since prior to 31-103 FCMs that were not registered in these jurisdictions could deal on an exempt basis with “accredited investors” in Canadian or non-Canadian futures, security options and securities. Under the 31-103 international dealer exemption, FCMs are limited to dealing with “permitted clients” in non-Canadian futures, security options and securities. Because of the transition rules, FCMs should review their current client base and determine the appropriate time to make the required filings in order to rely on the international dealer exemption.

For CTAs, the new 31-103 international adviser exemption is an improvement, as previously there was no exemption for CTAs for advising on non-Canadian futures, security options and securities in these provinces and territories. The required international adviser exemption filings would need to be made prior to relying on this new exemption.

Separate futures or derivatives statutes

In Ontario, Manitoba and Quebec, trading in and advising with respect to investing in futures are regulated under the Commodity Futures Acts in Ontario and Manitoba and the QDA in Quebec. These statutes include FCM and CTA registration requirements and exemptions from such requirements, which are not affected by the new securities registration regime established under 31-103. 

In Ontario, FCMs may continue to rely upon statutory exemptions under the Commodity Futures Act (Ontario) (Ontario CFA) such as the “hedger” exemption and the “unsolicited” trade exemption to trade with, or on behalf of, Ontario resident clients. Under the Ontario CFA, there are no exemptions from the adviser registration requirement and thus CTAs would be required to be registered. However, the Ontario Securities Commission (OSC) has recently granted discretionary relief to several firms that are registered to trade securities as “international dealers” in Ontario, allowing them to also trade futures with “designated institutions.” We would expect that the OSC will continue to be willing to grant similar exemptions to firms based on the requirements of the 31-103 international dealer exemption; however, this remains to be determined. Firms that have previously received this type of exemption may continue to rely upon such relief. In Ontario, security options fall within the definition of "security" and therefore, after the Implementation Date, non-Canadian firms may rely on the “international dealer exemption” and the “international adviser exemption” to trade or advise “permitted clients” in Ontario with respect to security options. Transition issues under 31-103 will need to be considered prior to making the filings to rely on these exemptions.

In Manitoba, there are no available statutory exemptions for trading or advising with respect to futures. A firm that wishes to trade in or advise on futures with clients residing in Manitoba would have to seek discretionary relief. Security options will continue to be covered by the definition of “security” under Manitoba securities legislation and thus, after the Implementation Date, non-Canadian firms may rely on the international dealer exemption and the international adviser exemption to trade and advise “permitted clients” in Manitoba with respect to security options. Again, transition issues under 31-103 will need to be considered.

In Quebec, the recently enacted QDA regulates futures and security options, as well as other types of derivatives. Under the Proposed Quebec Regulation, the AMF is proposing registration relief for persons “authorized to act as a dealer or adviser or authorized to exercise similar functions in a jurisdiction outside Quebec where its head office or principal place of business is located” in relation to activities involving exchange-traded derivatives (futures and security options) offered primarily outside Quebec with “accredited counterparties” only. However, the exemption contemplates registration relief only, and does not provide any exemption from the derivatives qualification and approval requirements governing the creation and marketing of derivatives in Quebec. It does not specifically exempt non-Quebec market participants from other ongoing compliance requirements applicable to “dealers” and “advisers” under the QDA, as does the OTC derivatives exemption. Consequently, the precise scope of this exemption is not yet entirely clear. For additional information, please refer to Stikeman Elliott’s newsletter, released earlier this month, regarding Proposed Quebec Derivatives Regulation.

Securities statutes with definition of “exchange contracts”

In Alberta, British Columbia, New Brunswick (after the Implementation Date) and Saskatchewan, trading and advising in “exchange contracts” (standardized exchange-traded futures and security options) are regulated under the Securities Acts in those provinces. However, in these provinces, the registration requirements and exemptions applicable to exchange contracts are different from those applicable to securities. Exchange contracts are expressly excluded in these four jurisdictions from the international dealer exemption and the international adviser registration exemption under 31-103, with the result that dealers or advisers relying on those exemptions for their securities-related activities in any of these jurisdictions could not rely on the exemptions for trading or advising activity in respect of exchange contracts. In Alberta, British Columbia and New Brunswick but not Saskatchewan, 31-103 provides two limited dealer-registration exemptions for trading in exchange contracts. The first exemption is for a trade made solely through an agent who is a registered dealer, if the dealer is registered in a category that permits the trade. The second is an exemption for an unsolicited order placed with an individual who is not a resident of, and does not carry on business in, the local jurisdiction. However, the scope and practical application of the latter exemption is very limited due to the definition of “individual” (i.e. natural person) and existing commentary from the regulators, which suggests that this exemption may only be relied upon for one trade.

Some non-Canadian firms have applied for and received discretionary relief in both British Columbia and Alberta in order to trade exchange contracts with certain investors. In British Columbia, the discretionary relief permits non-Canadian firms to trade in non-Canadian exchange contracts with “accredited investors.” In Alberta, the discretionary relief permits non-Canadian firms to trade in non-Canadian exchange contracts with “qualified parties.” This relief will continue to apply in British Columbia and Alberta after the Implementation Date.

Montreal Exchange and ICE Futures Canada

The Montreal Exchange (MX) permits non-Canadian firms to apply for foreign approved-participant (FAP) status, which provides these firms with direct access to the MX, including the Montreal Climate Exchange (MCEX). In addition, many non-Canadian firms have access to ICE Futures Canada (ICE Canada). Firms that are FAPs or have access to ICE Canada should review their current status and trading activities to determine the impact of these new rules on such activities.

Canadian activities chart

For a summary of the basic permitted activities and exemptions in the Canadian provinces and territories for non-Canadian firms trading in or advising on futures and security options, please refer to our Canadian Securities/Futures Activities Chart.

Northwestern exemption orders

As previously described in the CSA's notice of NI 31-103, the securities regulators in the Northwestern jurisdictions intend to issue local orders (the Northwestern exemption orders) exempting from the dealer registration requirement persons or companies who trade in securities distributed under one or more of the following prospectus exemptions in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106):

• section 2.3 (accredited investor)
• section 2.5 (family, friends and business associates)
• section 2.9 (offering memorandum)
• section 2.10 (minimum $150,000 purchase of a security in one transaction)

To rely on the Northwestern exemption orders, the person or company must:

• not be registered in any category of registration in any jurisdiction
• not provide suitability advice about the trade to the purchaser
• except in British Columbia, not otherwise provide financial services to the purchaser
• not hold or have access to the purchaser's assets
• provide risk disclosure in the prescribed form to the purchaser, and
• file an information report with the securities regulatory authority.

The Staff Notice indicates that the Northwestern jurisdictions plan to issue the Northwestern exemption orders when the registration exemptions in NI 45-106 expire.  As stated in the CSA notice of repeal and replacement of NI 45-106, the registration exemptions are scheduled to expire on March 27, 2010, being 6 months from the Implementation Date.

Transition for LMDs in Ontario and Newfoundland and Labrador

As indicated in NI 31-103, firms currently registered as LMDs in Ontario and Newfoundland and Labrador will be transitioned to EMDs on the Implementation Date.  The Staff Notice makes clear that LMDs will only be transitioned to EMDs in Ontario and Newfoundland and Labrador and will not automatically be registered as an EMD in any other jurisdiction.  Further, there is no transition period for those firms that begin acting as a dealer in the exempt market in Ontario and Newfoundland and Labrador after the Implementation Date.  These firms will have to register prior to carrying on business in Ontario and Newfoundland and Labrador.

Transition in all other jurisdictions

As indicated in NI 31-103, dealers active in the exempt market in jurisdictions other than Ontario and Newfoundland and Labrador prior to the Implementation Date have a one year transition period.  Accordingly, if these dealers cannot otherwise rely on the Northwestern exemption orders or any of the other limited exemptions from dealer registration, they must apply for registration as an EMD by no later than September 28, 2010.

Firms that begin acting as a dealer in the exempt market in jurisdictions other than Ontario and Newfoundland and Labrador after the Implementation Date can rely on the dealer registration exemptions in NI 45-106 for the 6 month transition period.  However, as of March 27, 2010 these dealers will have to be registered as an EMD if they cannot otherwise rely on the Northwestern exemption orders or any of the other limited exemptions from dealer registration.

The Staff Notice emphasizes that to the extent a firm is required to register as an EMD before carrying on business, the firm must be able to demonstrate, at the time of its application, that it meets all of the requirements in NI 31-103 applicable to EMDs.

Key Requirements of the QDA

The QDA imposes a requirement to register as a derivatives dealer or adviser for any person that engages in those activities in Quebec. The QDA also sets out a recognition requirement for “regulated entities” (including exchanges, alternative trading systems not registered as derivatives dealers or other published markets, clearing houses, information processors and self-regulatory organizations) that carry on derivatives activities in Quebec. The QDA further requires that any person other than a “recognized regulated entity” that seeks to “create or market” a derivative must be qualified by the AMF (the derivatives qualification requirement) and that the derivative must be approved by the AMF (the derivatives approval requirement). The QDA also contains rules for the purposes of determining whether so-called “hybrid products” are to be regulated as derivatives under the QDA or as securities under Quebec securities legislation.

The OTC Derivatives Exemption - By way of background, section 7 of the QDA sets out an important blanket exemption for OTC derivatives “involving accredited counterparties only or in any other cases specified by regulation” from the application of certain specified provisions, including the derivatives dealer and adviser registration requirements, the derivatives qualification and approval requirements, and certain limited procedural and enforcement-related provisions, except in the case of market manipulation and fraud (the OTC Derivatives Exemption). The list of “accredited counterparties” includes most of the leading Quebec institutional investors, as well as accredited persons meeting certain subjective (knowledge and experience) and objective (minimum financial assets) tests and qualified “hedgers”.

Exchange-Traded Derivatives - As noted in our previous updates, the QDA does not currently contain any exemption for exchange-traded derivatives activities that is equivalent to the OTC Derivatives Exemption. With the coming into force of the QDA on February 1, 2009, this marked a significant departure from the existing “accredited investor” exemptions under Quebec securities legislation on the basis of which many Canadian, U.S. and other foreign dealers had historically engaged in exchange-traded derivatives activities outside of Quebec for Quebec-resident institutional investors.

The AMF Blanket Decision – In the interim, the AMF had responded to the above concerns in part by issuing a blanket decision on January 22, 2009 (the AMF Blanket Decision) that sets out a temporary exemption from the derivatives dealer and adviser registration requirements and the derivatives qualification rules under the QDA for specified derivatives activities carried out solely with accredited investors as defined under the soon to be revised National Instrument 45-106 Prospectus and Registration Exemptions (45-106) (see Registration Reform  – Quebec’s Derivatives Act) The AMF has not indicated for how long the AMF Blanket Decision will remain in effect.). 

The Proposed Exchange-Traded Derivatives Exemption for Non-Quebec Derivatives Dealers and Advisers

Overview of the Proposed Exemption - Under the Proposed Regulation, the AMF is proposing more general and permanent registration relief for activities in relation to exchange-traded derivatives offered primarily outside Quebec with “accredited counterparties” only.

Specifically, the Proposed Regulation provides that “a person authorized to act as a dealer or adviser or authorized to exercise similar functions under legislation applicable in a jurisdiction outside Québec where its head office or principal place of business is located is exempt from the registration requirement to the extent it carries on business solely for an accredited counterparty and its activity involves a standardized derivative that is offered primarily outside Québec” (the Proposed Exchange-Traded Derivatives Exemption). A “standardized derivative” is defined under the QDA as “a derivative that is traded on a published market, whose intrinsic characteristics are determined by that market and whose trade is cleared and settled by a clearing house.”^[1]

The proposed exemption is essentially the exchange-traded derivatives equivalent of the OTC Derivatives Exemption but is significantly more limited in its scope. In particular, the exemption contemplates registration relief only. It does not provide any exemption from the derivatives qualification and approval requirements governing the creation and marketing of derivatives in Quebec, and it does not specifically exempt non-Quebec market participants from other ongoing compliance requirements applicable to “dealers” and “advisers” under the QDA as does the OTC Derivatives Exemption.

No Clear Exemption from Ongoing Requirements Applicable to Dealers and Advisers -The OTC Derivatives Exemption provides a clear exemption from the application of the provisions of the QDA governing the business operations and client relationships of dealers and advisers under the QDA. In the absence of an equivalent carve-out, non-Quebec market participants relying on the Proposed Exchange-Traded Derivatives Exemption, on the other hand, will remain technically subject to these provisions. The relevant provisions, include, for example, the requirement to deliver to a client the risk information document prescribed by regulation and the requirement to provide to the client, prior to recommending or executing any trade, “(1) information the client ordinarily needs for the purposes of their business relationship; (2) information required to make an informed decision and give clear trade instructions; and (3) information on the margin requirements to which the trade is subject and on the consequences of the client failing to meet those requirements when called to do so.” The QDA further requires that any document required to be communicated to a client under the QDA be provided in both English and French or in French only.

Qualification of “Accredited Counterparties” -Non-Quebec FCMs and CTMs seeking to rely on the proposed exemption will have to qualify their clients and prospects as ”accredited counterparties” in much the same way as the OTC industry has done during the six-month phase-in period for compliance with the QDA. The proposal does not, however, provide an equivalent transition period to permit the qualification of existing clients for purposes of this exemption.

The AMF previously published a Policy Statement Respecting Accredited Counterparties. The policy statement was drafted in connection with the OTC Derivatives Exemption but may be helpful for purposes of relying on the Proposed Exchange-Traded Derivatives Exemption. Market participants seeking to rely on the proposed exemption should obtain representations from Quebec-resident clients and prospects as to their specific status as an “accredited counterparty” and consider appropriate amendments to their contractual documentation.

As certain categories of “accredited counterparties” involve factual determinations which, in certain cases, cannot be independently verified, detailed representations will be required in such cases. In addition, in certain cases, reliance on the exemption may require enhanced due diligence to back up a market participant’s reasonable reliance on a client or prospect’s status as an “accredited counterparty”.

The Incorporation of the 31-103 and Other Registration-Related Provisions

The QDA is formulated as principles-based legislation and its key provisions cross-reference regulations which (for the most part) have yet to be published. The current Derivatives Regulation covers a limited range of matters, including the minimum asset requirement for self-certified “accredited counterparties”, the rules for self-certification of operating rules of “recognized regulated entities”, and the prescribed risk disclosure document to be delivered by derivatives dealers.

The Proposed Regulation addresses a number of outstanding procedural and substantive matters by incorporating by reference the provisions of National Instrument 31-102 National Registration Database and National Instrument 33-109 Registration Information (as amended in conjunction with the adoption of 31-103), as well as most provisions of 31-103 governing the registration of individual representatives, and the business operations and client relationships of registered portfolio managers and dealers.

These provisions will generally apply only to persons and entities registered as derivatives dealers and advisers under the QDA and include initial and ongoing proficiency requirements for advising representatives, associate advising representatives and chief compliance officers of registered derivatives advisers, requirements governing internal control systems (including the implementation of compliance systems and the designation of an “ultimate designated person” and a “chief compliance officer”), restricted business practices, requirements governing the acquisition of a registrant’s securities or assets, working capital requirements, insurance and financial reporting requirements, provisions governing registrant relationships with clients (including with respect to the management and disclosure of conflicts of interest, referral arrangements, complaint handling and dispute resolution procedures), relationship disclosure, safekeeping of account assets, and the prohibition on registrants lending money, extending credit or providing margin to clients.

As noted above, in the absence of a clear exemption from these requirements under the Proposed Exchange-Traded Derivatives Exemption, a number of these requirements may technically apply to non-Quebec market participants seeking to rely on the exemption in connection with their activities with “accredited counterparties”.

The Proposed Regulation also cross references a very limited number of registration exemptions under 31-103, including the so-called “client mobility exemption” (which would allow a registered firm and representative to continue to deal with a small number of clients who move to another Canadian jurisdiction without the need to register in that other jurisdiction) and the adviser registration exemption for “general advice” not purporting to be tailored to the needs of the particular recipient of the advice.

The Proposed Regulation also sets out the new registration categories for representatives of derivatives dealers and advisers registered under the QDA, the proficiency requirements for registered representatives of derivatives advisers, the registration requirements and responsibilities of the “ultimate designated person” and the “chief compliance officer” designated by QDA registrants and provisions governing the suspension and revocation of registration under the QDA.

Market participants who wish to comment on any aspect of the Proposed Regulation should submit their comments to the AMF no later than August 31, 2009.

In addition to changes relating to registration reform, the CSA have also taken the opportunity to reflect other changes in the Revised NI 45-106, mainly to clarify certain provisions, reflect policy decisions that were made in the course of granting exemptive relief and to harmonize certain previously issued local exemptions.  

Finally, the Revised NI 45-106 also results in certain consequential amendments, including amendments relating to National Instrument 45-102 Resale of Securities, OSC Rule 45-501 Ontario Prospectus and Registration Exemptions, National Instrument 33-105 Underwriting Conflicts, National Instrument 51-102 Continuous Disclosure Obligations and related forms and companion policies.

These amendments are scheduled to come into force, subject to Ministerial approval, on the later of September 28, 2009 and the day on which sections 5 and 11, subsection 12(1) and section 13 of Schedule 26 of the Budget Measures Act, 2009 (Ontario) are proclaimed into force.

The proposed new categories are:

1. Investment Representative;
2. Registered Representative;
3. Trader;
4. Supervisor;
5. Executive;
6. Director (Non-Industry);
7. Director (Industry);
8. Ultimate Designated Person;
9. Chief Financial Officer;
10. Chief Compliance Officer; and
11. Investor.

The notice also includes a chart outlining the new categories into which current Approved Persons will be automatically converted based on their existing categorization. The conversion is expected to occur during a planned freeze period of the National Registration Database between September 25 and October 12, 2009.

Conversion

During the “freeze period”, discussed below, the CSA propose to convert the existing categories of registration for firms and individuals to the equivalent categories under NI 31-103, where applicable, as set out in Appendix A to the Staff Notice. Generally, where there is no equivalent category of registration, the firm will no longer be registered. Of note, and as discussed further below, International Dealers currently registered in Ontario and Newfoundland and Labrador are no longer proposed to be transitioned to the Exempt Market Dealer category as proposed in the most recently published draft of NI 31-103, released in February 2008 (the 2008 Proposal).

The Investment Industry Regulatory Organization of Canada (IIROC) also plans to publish its own notice regarding the conversion of registration categories.

Transition Timelines

The CSA Staff are recommending varied transition periods to allow firms and individuals to “adjust to, and comply with” the new requirements.

For firms registered in a jurisdiction before the effective date, the CSA Staff's recommendations are as follows:

Generally

• 3 months for firms to designate and apply for registration for the Ultimate Designated Person (UDP) and Chief Compliance Officer (CCO);
   
• 12 months for firms to satisfy capital requirements and notify the regulator of a subordination agreement;
   
• 6 months for firms to satisfy bonding or insurance requirements;
   
• 6 months for firms to comply with referral arrangement requirements;
   
• 12 months for firms to deliver relationship disclosure information to clients; and
   
• 24 months for firms to ensure that an independent dispute resolution or mediation service is available to resolve client complaints (except in Quebec where no transition period is required).

Capital and insurance in accordance with current requirements must be maintained during the transition.

If a firm fails to meet the prescribed timelines, it will be prohibited from carrying on business in the relevant jurisdictions until all the requirements of NI 31-103 are met.

Any discretionary relief relating to registration obtained by a firm before the effective date can continue to be relied on, as it relates to substantially similar provisions of NI 31-103.

Mutual Fund Dealer

• 24 months for firms to comply with the requirement to deliver client statements.

International Dealer

• Under the CSA Staff’s recommendation, a firm’s International Dealer registration in Ontario and Newfoundland and Labrador would be automatically revoked on the effective date and as of such date, the firm could continue to do business in these provinces pursuant to the “international dealer exemption” under NI 31-103. The firm would have one month to submit Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service (Form 31-103F2).

Under the 2008 Proposal, the “international dealer exemption” would allow, subject to certain conditions being met, a non-Canadian dealer to trade with “permitted clients” when trading in “foreign securities” and certain debt instruments. The list of “permitted clients” under the 2008 Proposal is similar to the list of “designated institutions” with which Ontario-registered International Dealers are currently permitted to deal, except that:

• the "designated institution" definition does not include any individual clients, while the "permitted client" definition is expected to include an individual who beneficially owns, directly or indirectly, financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds C$5 million, and to include a person or company that is entirely owned, legally and beneficially, by such an individual or individuals; and
   
• a "permitted client" is expected to include a corporation that has shareholders' equity of at least C$100 million on a consolidated basis. (Note: This is a significant limitation as the threshold is C$5 million under the definition of "designated institutions"). 

International Adviser

• 12 months for firms currently registered as an International Adviser in Ontario or as a Portfolio Manager & Investment Counsel (Foreign) in Alberta, to submit Form 31-103F2.

During the 12-month transition period, registrants in the category of International Adviser in Ontario, and Portfolio Manager & Investment Counsel (Foreign) in Alberta would be automatically converted to the category of “Portfolio Manager” and permitted to operate under their current conditions of registration. At the end of the transition period, the firm’s registration as Portfolio Manager would be revoked. During the transition period the firm would need to register as a Portfolio Manager under NI 31-103 or determine that it would be able to operate under the “international adviser exemption” under NI 31-103, which, as set out in the 2008 Proposal, generally permits, subject to certain conditions being met, a non-Canadian adviser to advise “permitted clients” on “foreign securities”.

Individuals

For individuals registered before the effective date, individuals currently registered, and in each case who will continue to be registered, as a dealing representative of a mutual fund dealer, advising representative of a portfolio manager, associate advising representative of a portfolio manager, or advising representative subject to terms and conditions of registration equivalent to the scope of authority of an associate advising representative under NI 31-103, would not be required to satisfy formal proficiency requirements.

An individual currently registered as a dealing representative of either a Scholarship Plan Dealer or a Limited Market Dealer (which is transitioning to an Exempt Market Dealer) would have 12 months to satisfy formal proficiency requirements. Similarly, the chief compliance officer designated by a Limited Market Dealer transitioning to an Exempt Market Dealer would have 12 months to meet formal proficiency requirements.

Individuals and Firms not Required to be Registered before the Effective Date, but Requiring Registration after the Effective Date

Generally, a firm or individual that is not registered before the effective date must meet all requirements of NI 31-103 at the time of the firm’s or individual’s application for registration is filed, as the case may be. However, there are two main exemptions to this general rule for individuals or firms who intend to register as Exempt Market Dealers or Investment Fund Managers, as set out below:

Exempt Market Dealers

• Other than in Ontario and Newfoundland, firms active in the exempt market in a jurisdiction prior to the effective date would have 12 months to apply for registration in that jurisdiction and comply with the requirements. New firms will have no transitional relief.
   
• In Ontario and Newfoundland and Labrador those currently registered Limited Market Dealers will automatically be converted to Exempt Market Dealers on the effective date, and would be subject to the transition periods set out above.

Investment Fund Managers

• Investment fund manager firms with their head office in Canada and active prior to the effective date will have 12 months to apply for registration in the jurisdiction in which their head office is located and 24 months to apply for registration in other applicable Canadian jurisdictions.
   
• Firms with their head office outside Canada that are either active or inactive prior to the effective date have 24 months to apply for registration.

The CSA plan to publish a proposal during the upcoming year explaining when an investment fund manager that (i) has a head office outside of Canada would be required to register or (ii) that has a head office in Canada that is registered in that jurisdiction in Canada would be required to register in another jurisdiction in Canada.

NRD Freeze Period

The CSA Staff propose to shut down NRD for a period of two weeks between September 25, 2009 and October 12, 2009, to convert the existing categories of registration to the new categories of registration under NI 31-103 and to activate the new forms under NI 33-109. Firms would still have read-only access during that period. 

Applications submitted but not approved prior to the effective date would be withdrawn from NRD, which would require such applicant to re-apply for registration using the new forms under NI 33-109 in compliance the new requirements under NI 31-103. To avoid such duplication, the CSA Staff suggest that applications be submitted well in advance and no later than (i) June 26, 2009 in respect of firm applications, (ii) July 15, 2009 in respect of individual applications for registration with adviser, and (iii) August 14, 2009 in respect of individual applications for registration with an existing firm in any category other than adviser. 

Any applications that are in progress but not submitted prior to the freeze period would be deleted by the system.

Firms would be required to continue to file material information (all reinstatements, terminations for cause and changes in civil, criminal and financial information). The filings would have to be in paper format, using the new forms and would have to be re-filed using NRD no later than November 10, 2009. All other notices that otherwise would have had to be filed during the freeze period, would have to be filed using NRD no later than November 24, 2009.

The Staff Notice contains a number of additional detailed recommendations, including with respect to the conversion of individual categories of registration to a narrower “permitted individual” status, on the surrender of individual registrations that are no longer required and on certain filing procedures to avoid NRD user fees being charged unnecessarily to NRD accounts during the transition process.

The amendments to the OSA proposed under Schedule 26 to Bill 162 amend statutory provisions in the following areas:

• registration requirements for dealers, advisers and others,
   
• exemptions from the registration requirements,
   
• exemptions from the prospectus requirement, and
   
• resale of securities previously distributed under an exemption from the prospectus requirement.

Proposed amendments to the Prospectus and Registration Rules were originally published for comment on February 29, 2008 in connection with proposals to reform and harmonize registration requirements across the country under Proposed NI 31-103 Registration Requirements (Registration Reform). As a consequence of Registration Reform, NI 45-106 was proposed to be repealed and replaced (largely to reflect to new approach to registration being required on a business-based trigger as opposed to a trade-based trigger) and OSC Rule 45-501 and NI 45-102 were proposed to be amended to, among other things, reflect corresponding changes.

Under Bill 162, the Government of Ontario has taken the approach of retaining or including certain prospectus and registration exemptions in the OSA, thereby requiring corresponding amendments to the Prospectus and Registration Rules as previously proposed.

The prospectus and registration exemptions that the Government of Ontario intends to retain or include in the OSA relate to:

• securities subject to other provincial or federal regulatory regimes such as mortgages, securities evidencing indebtedness secured by or under a security agreement provided under personal property security legislation, and financial intermediaries and Schedule III banks,
   
• securities that Ontario Ministry of Finance staff have advised are subject to securities regulatory considerations as well as broader public policy considerations such as specified debt, including government debt, and
   
• securities that the staff of the Ministry of Finance have advised relate to key government policy priorities such as school board debt, tax incentive securities and venture capital raising.

Specifically, the proposed amendments to the OSA under Bill 162 would supersede the following exemptions contained in NI 45-106, as previously proposed to be amended: specified debt (proposed sections 2.34 and 3.34), mortgages (proposed sections 2.36 and 3.36), securities evidencing indebtedness secured by or under a security agreement provided under personal property security legislation (proposed sections 2.37 and 3.37), and evidences of deposit issued by a Schedule III bank or an association governed by the Cooperative Credit Associations Act (Canada) (proposed sections 2.41 and 3.41). References to resale provisions in section 72 of the OSA found in Appendix C to proposed NI 45-102 would be modified to reflect proposed amendments to section 72 and a new section 73.7 found in sections 11 and 13 of Schedule 26 to Bill 162. Certain provisions of OSC Rule 45-501 would be modified or deleted in favour of the application of corresponding provisions in the OSA.

If the proposed amendments to the OSA under Bill 162 are passed, implementation is expected to take place in two stages; the first, reflecting transitional provisions corresponding to the implementation of Registration Reform; and the second, at a later time intended to replace the prospectus exemptions enacted in stage one. If the second stage of amendments to the OSA are enacted, the OSC intends to publish new versions of NI 45-106 and OSC Rule 45-501 for comment. These stage two amendments are found at subsection 12(2) of Schedule 26 to Bill 162 and related regulation-making powers are found at subsection 20(17) of that Schedule.

These proposals have been published for a 30-day comment period expiring on June 22, 2009.

Proposed changes to the dealer registration and exemption regime

Under the existing rules, non-Canadian dealers typically participate in the Canadian market by being registered as an "international dealer" in Ontario and relying on the "accredited investor" exemption in the other provinces and territories.
The primary effects of the Instrument on non-Canadian dealers are:

• elimination of the "international dealer registration" category in Ontario; 
• introduction of a national "international dealer exemption" based on the Ontario "international dealer" registration category with some changes (see below) to the list of exempt "permitted clients";
• repeal of the dealer registration exemptions contained in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106), including the exemption for trades with an "accredited investor;
• elimination of the "limited market dealer" registration category in Ontario; and
• introduction of a new "exempt market dealer" registration category across Canada.

Current dealer registration and exemption regime

In Ontario, registration as an "international dealer" permits a non-Canadian dealer to trade with "designated institutions" in non-Canadian equity and debt securities and certain Canadian debt securities (primarily in the secondary market). The practical effect of the international dealer registration regime in Ontario is to permit a non-Canadian dealer to trade in permitted securities with institutional clients (not individuals).

Except in Ontario, provincial and territorial securities laws generally permit a non-Canadian dealer to trade in both Canadian and non-Canadian securities with an "accredited investor" on a dealer registration-exempt basis. This exemption has been very widely used by non-Canadian dealers and its proposed elimination is a significant regulatory change.

Proposed international dealer exemption will narrow list of permitted clients outside Ontario

The Ontario "international dealer registration" will be replaced by the similar Canada-wide "international dealer exemption".  Outside Ontario, this represents a very significant narrowing of permitted activities and clients in all of the other (i.e. non-Ontario) provinces and territories.

Under the Instrument, a non-Canadian dealer that is registered under the securities laws of its home jurisdiction may rely on the international dealer exemption to trade with a "permitted client" when trading in "foreign securities". Subject to the filing of submission to jurisdiction forms in each province and territory and delivering client notifications, the practical effect of the proposed international dealer registration exemption is to narrow the list of clients with whom a non-Canadian dealer is permitted to trade on an exempt basis outside Ontario and to require registration as an "exempt market dealer" as a condition to trading with the full range of "accredited investors" in all types of securities.

Under the revised draft of the Instrument, the definition of "permitted client" has been expanded from the previous draft so that it is now very similar to the current list of "designated institutions" for Ontario-registered international dealers. The principal differences between the "designated institutions" list and the proposed "permitted client" exemption are:

• the "designated institution" definition does not include any individual clients, while the "permitted client" definition includes an individual who beneficially owns, directly or indirectly, financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds C$5 million, and includes a person or company that is entirely owned, legally and beneficially, by such an individual or individuals; and
• a corporation that has shareholders' equity of a least C$100 million on a consolidated basis. (Note: This is a significant limitation as the threshold is C$5 million under the definition of "designated institutions"). 

Under the proposed international dealer exemption, non-Canadian dealers will be restricted to trading only in "foreign securities." Presently, a non-Canadian dealer may trade in both Canadian and non-Canadian securities on a dealer registration-exempt basis with an "accredited investor" resident in most provinces and territories, other than Ontario. The "foreign securities" restriction is presently applicable to registered international dealers in Ontario.

Exempt Market Dealer Registration

If a non-Canadian dealer wishes to trade with "accredited investors" in Canada, the dealer will need to register as an "exempt market dealer." An exempt market dealer registration will require a non-Canadian dealer to satisfy a number of Canadian requirements such as individual proficiency, registration of directors and officers, capital, insurance and designation of a compliance officer and senior business person. This registration is significantly more onerous than the current "international dealer" registration in Ontario.

Comment Period

The comment period on the Instrument is open until May 29, 2008.

The key features of the revised proposals with respect to Canadian investment fund managers, mutual fund dealers, foreign investment funds offered into Canada on a private placement basis and private equity funds include the following:

Registration of investment fund managers

• Persons or companies which are "investment fund managers" (i.e., which are permitted to direct the business, operations and affairs of an investment fund) will be required to register and comply with prescribed "fit and proper" requirements, conduct rules and conflicts of interest standards.
• The key elements of this new category of registration include: (a) a registration requirement for a person or company acting as an investment fund manager; (b) two new categories of individual registration requiring all registered investment fund managers to designate an individual as the ultimate designated person (UDP) and the chief compliance officer (CCO); (c) proficiency requirements for the CCO (but not the UDP); (d) insurance requirements; (e) a $100,000 minimum excess working capital requirement (for non-SRO members); and (f) conduct rules.
• Under the "new business trigger" for registration (which will apply in most, but not all, provinces), additional dealer or adviser registrations will be required if the investment fund manager is also engaged in the business of trading or advising in securities as a business.  The CSA have expanded the guidance for the business trigger test and indicated that firms registered in multiple categories will have to comply with the most stringent "fit and proper" requirements and conduct rules.
• The CSA have clarified that investment fund managers will be required to register only in the jurisdiction where the investment fund manager is located.
• The Ontario Securities Commission (OSC) has clarified that investment fund managers which are registered or exempt from registration in Ontario will be required to pay capital market participation fees under OSC Rule 13-502 Fees.

Foreign investment funds

• The new registration rule will introduce significant changes to the private placement rules on the basis of which foreign fund offerings have been effected in Canada.  The main change is the repeal, for the most part, of the dealer registration exemptions contained in National Instrument 45-106 Prospectus and Registration Exemptions, including the exemption for trades with "accredited investors" and the introduction of a universal dealer registration requirement based on the new business trigger for registration.
• The first draft of 31-103 had given rise to considerable uncertainty with respect to the application of the dealer, adviser and investment fund manager registration requirements in cross-border fund offerings. In response to significant comments on this issue, the CSA have made a number of changes which, if adopted, should simplify the process of privately placing foreign fund securities to a new category of super-accredited investors called "permitted clients".  These permitted clients are a subset of the "accredited investor" category and include institutional and similar entities, as well as qualified high net worth individuals (net financial assets over C$5M), entities legally and beneficially owned by qualified individuals and qualified corporations (shareholders' equity over C$100M).
• First, the revised proposals introduce key exemptions from the dealer and adviser registration requirements for qualified "international dealers" and "international advisers" engaging in certain limited trading and advisory activities with "permitted clients".
• As a result of these exemptions, the securities of foreign investment funds could be sold into Canada either to a "permitted client" through a dealer registered in a foreign jurisdiction which relies on the international dealer registration exemption or through a locally registered dealer to any other category of accredited investor.  Certain other limited types of fund offerings which would not trigger the application of the dealer registration requirement under the new business trigger test could potentially be made directly to any Canadian-resident accredited investor.
• Second, the CSA have effectively discarded the application of the "look through" principle historically applied by the OSC as a result of which the foreign portfolio manager of a non-resident investment fund which issues securities to Ontario-resident investors is deemed to be providing advice in Ontario and is therefore subject to the adviser registration requirement unless an exemption is available. However, unless the international dealer exemption is available, the offering of securities of non-resident funds in any province will generally have to be made through a locally registered dealer.
• Third, the CSA have clarified that if an investment fund manager is located outside of Canada, there is no requirement for it to be registered as an investment fund manager in Canada, unless it is directing the management of an investment fund from inside Canada.

Private equity funds - venture capital

• The application of the proposed registration rules with respect to private equity funds and a range of other funds which do not fall within the definition of "investment fund" for purposes of the securities rules is uncertain.  In response to substantial comments seeking greater clarity as to the specific application of the business trigger test, the CSA have issued additional guidance with respect to activities they characterize as "venture capital" investing.
• In particular, the CSA have noted that the "expectations and reliance of investors" must be considered when applying the business trigger factors to venture capital.
• The Companion Policy gives specific guidance in respect of registration requirements for general partners of limited partnerships, specifically in the portfolio manager context.  For example, if the purpose of the limited partnership is to invest in a trading portfolio of securities and the limited partners are relying on the general partner's expertise in selecting and transacting securities, the CSA would require that the general partner register as an adviser.
• Conversely, the Companion Policy indicates that the adviser registration requirement will not necessarily be triggered in cases where, for example, a limited partnership is operating as a venture capital fund and the general partner's role is to select small private companies that the general partner will actively manage and develop.  The stated basis for the CSA's position in this context is that the purchase and sale of the securities of these companies is incidental to the general partner's activities on behalf of the limited partners.
• The CSA have also clarified that M&A specialists advising parties to a transaction would not be required to register as advisers since the business purpose of these specialists is to effect corporate transactions and not to trade in securities.  The CSA have not specifically addressed the trading aspect of these activities but presumably the same analysis applies.

Dealer registration exemption for pooled funds sold to fully-managed accounts

• The revised proposals include a dealer registration exemption for registered advisers or advisers relying on the "international adviser" exemption covering the purchase and sale of securities of pooled funds administered by the adviser for fully-managed accounts established and managed by the adviser.
• The exemption is only available if the adviser gives written notice to the relevant regulator within 5 business days of the first use of the exemption and if the fully-managed account or the pooled fund is not created or used primarily to qualify for the exemption.

SRO relief

• The revised proposals include broader relief from a number of "fit and proper" and conduct-related requirements for registrants that are members of an SRO, including the Investment Dealers Association of Canada (IDA) and the Mutual Fund Dealers Association of Canada (MFDA) or Quebec-registered mutual fund dealers which comply with the rules applicable to mutual fund dealers in Québec.

Mutual fund dealers

• Following public consultations in 2007, the Autorité des marchés financiers of Québec (AMF) has indicated that Québec mutual fund dealers, scholarship plan dealers and investment contract dealers and their representatives which are currently subject to the Quebec Act respecting the distribution of financial products and services will become subject to securities laws, including 31-103.  They will continue to be supervised by the AMF and their representatives will continue to be required to be members of the Chambre de la securité financière.  They will not be required to become members of the MFDA.
• The CSA have also clarified the ability of mutual fund dealers in certain jurisdictions (excluding Québec) to trade in securities of investment funds that are labour sponsored investment fund corporations or labour sponsored venture capital corporations and, in British Columbia, securities of scholarship plans or educational trusts.

Transition

The amendments to the original proposals now also include specific transition provisions.  Existing registrants will, in most cases, be deemed to be registered in the equivalent new category (and given six months to comply with new requirements, such as relationship disclosure and complaint handling). New registrants, such as investment fund managers, will have six months to apply for registration and to comply with most of the requirements of the new rules.

Proposed changes to the dealer registration and exemption regime

The more significant features of the revised proposals as they pertain to non-Canadian dealers are:

• the elimination of the "international dealer" registration category in Ontario and the repeal, in most provinces, of the dealer registration exemptions contained in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106), including the dealer registration exemption for trades with an "accredited investor";
• the proposed introduction of a national "international dealer exemption" that would permit non-Canadian dealers to trade in "foreign securities" on a registration-exempt basis with a "permitted client", a new category of client comprised of a subset of "accredited investors" that includes individuals with net financial assets over C$5M and corporations with shareholders' equity over C$100M, subject to certain conditions; and
• the requirement to register as an "exempt market dealer" to trade in Canadian and "foreign securities" with "accredited investors" (British Columbia and Manitoba have retained a limited registration exemption for certain dealers that trade only with "accredited investors").

Proposed changes to adviser registration and exemption regime

The more significant features of the revised proposals for non-resident advisers are:

• the elimination of the "international adviser" registration category in Ontario and repeal of OSC Rule 35-502 Non-Resident Advisers;
• the introduction of a national "international adviser" exemption that permits a non-Canadian adviser registered or operating under an exemption from registration under the securities legislation of its home jurisdiction to advise "permitted clients" in Canada on "foreign securities", subject to certain conditions;
• the requirement to register as an adviser where the "international adviser" exemption and certain other limited adviser registration exemptions cannot be relied upon;
• confirmation that investment fund managers are required to register only in the jurisdiction where the person or company that directs the management of the investment fund is located, which applies equally to Canadian and foreign investment fund managers;
• the addition of exemptions from the dealer registration requirement for registered advisers and international advisers when distributing units of their own pooled funds, where they actively manage client accounts under discretionary authority; and  
• the removal of prohibitions on international advisers soliciting new business.

Transition

The amendments to the original proposals now also include specific transition provisions. Existing registrants will, in most cases, be deemed to be registered in the equivalent new category (and given six months to comply with new requirements, such as relationship disclosure and complaint handling). New registrants, such as exempt market dealers and investment fund managers, will have six months to apply for registration and to comply with most of the requirements of the new rules.

The revised proposals are subject to a comment period expiring on May 29, 2008. These proposals are expansive and will have a significant impact on registration issues generally, as well as on a broad range of capital markets activities, including private placements, trading and advising activities and private and public fund offerings.
 

Some of the more significant amendments presented in the revised proposals include the following:

Expanded category of permitted clients

The revised proposals now include a broader category of super-accredited investors called "permitted clients".  These permitted clients are a subset of the "accredited investor" category and include institutional and similar entities as well as qualified high net worth individuals (net financial assets over C$5M), entities legally and beneficially owned by qualified individuals and qualified corporations (shareholders equity over C$100M).  The amendments would also relax "know your client" obligations and certain "fit and proper" requirements for certain registrants when dealing with permitted clients.  Activities permitted to be carried on by international dealers on a registration exempt basis have also been expanded to include trading with this broader category of permitted client. Qualified international advisers would also be exempt from registration requirements when advising permitted clients with respect to non-Canadian securities.

Expanded exemptions and elimination of "look-through" analysis for fund managers

While the proposed categories of registration presented in the original proposals have not been amended, the CSA have clarified that investment fund managers would have to register only in the jurisdiction where the person or company that directs the management of the fund is located.  This applies equally to domestic and foreign investment fund managers.  As set out in the proposed Companion Policy, if an investment fund manager is located outside of Canada, the CSA have stated there would be no requirement to register in Canada unless the management of the fund is directed from within Canada.  Exemptions from dealer registration have also been added for registered advisers (and those falling under the international adviser exemption) when distributing units of their own pooled funds.  Prohibitions from investment advisers soliciting new business have also been removed, and additional registration exemptions have been added for certain types of government guaranteed debt and self-directed RESPs.

Registration trigger

As set out in the original proposals, the registration trigger for dealer registration is proposed to be changed generally to a business trigger.  The proposed amendments include a trigger based on being in the "business of trading" in securities, as opposed to "dealing".  The Companion Policy has also been amended to reflect that acting in an intermediary or market-maker capacity will constitute trading for a business purpose.

Other amendments

Significant amendments have also been made to the "fit and proper" and to the conduct requirements.  These include amendments to certain solvency requirements as well as changes to proposed rules governing conflicts of interest and information sharing, and the relaxation of requirements to deliver relationship disclosure documents to clients.  Exempt market dealers are, for example, proposed to be exempt from requirements relating to maintenance of capital and insurance and delivery of financial statements if they do not hold, handle or have access to cash. As well, registrants which are members of a self-regulatory organization have been given broader relief from a range of the "fit and proper" requirements under the revised proposals.

Transition

The amendments to the original proposals now also include specific transition provisions.  Existing registrants will, in most cases, be deemed to be registered in the equivalent new category (and given six months to comply with new requirements, such as relationship disclosure and complaint handling). New registrants, such as exempt market dealers and investment fund managers, will have six months to apply for registration and to comply with most of the requirements of the new rules. 

Registration for investment fund managers

The requirement to register an as investment fund manager is contemplated by the recently released proposed National Instrument 31-103 - Registration Requirements (the Proposed Registration Rule) and accompanying companion policy (Companion Policy), which will be implemented by a change to the Securities Act in each jurisdiction. All persons or companies who are "investment fund managers" will be required to register and to comply with prescribed fit and proper requirements, conduct rules and conflicts of interest standards.

The CSA intend that firms carrying on more than one type of activity will be required to register and comply with the requirements of multiple categories, as applicable. Although the Proposed Registration Rule is unclear on the definition of investment fund manager (further guidance is anticipated), the Companion Policy indicates that the management of an investment fund includes "administering" the fund, which may include information gathering, performance reporting and handling client assets, but does not include acting as portfolio manager for the fund.

While neither private equity nor venture capital funds are expressly addressed in the Proposed Registration Rule, the Companion Policy gives some guidance in respect of registration requirements for general partners, specifically in the portfolio manager context. For example, if the general partner is making investment decisions for the limited partners who rely primarily on the general partner's expertise in selecting investments in securities, that could trigger a requirement to register as a portfolio manager. Conversely, the Companion Policy indicates that a registration requirement will not necessarily be triggered in cases where, for example, a limited partnership is operating as a venture capital fund and the general partner's role is to select companies in which it will participate in active management and development (with the rationale that the purchase and eventual sale of these securities is incidental to the operational business activity of the limited partnership).

In their notice to the Proposed Registration Rule, the CSA indicate that investment fund managers must be registered in the Canadian jurisdiction in which the fund is "located". Given the international investment fund manager exemption (discussed below), it is unclear whether a presence in Canada is required in order to trigger registration requirements, and no guidance is given in relation to determining the location or the process of registration generally. Registration as an investment fund manager does not have to be renewed annually, and will remain in effect until suspended or terminated by certain "triggering events", including non-payment of annual fees and failure to comply with on-going fit and proper and conduct requirements.

Additional new individual categories of registration - UDPs and CCOs

The Proposed Registration Rule introduces two new individual categories of registration for all registrants including investment fund managers, namely the UDP and the CCO.

The UDP's role is to ensure that the registrant complies with applicable securities regulations and that written compliance policies and procedures are developed and implemented. The designated UDP must be the CEO of the registered firm, a senior officer responsible for the division within the firm which is carrying on investment fund activity, or someone with a similar function, but does not necessarily need to be someone who is involved in the day-to-day compliance management of the group. No proficiency requirements are specified for the UDP function.

The CCO is responsible for the management and supervision of the day-to-day monitoring of compliance with the registrant's compliance system. Accordingly, the CCO (who must be an officer or partner of the registered firm, or, if applicable, the sole proprietor), will be subject to the same proficiency requirements as required for the CCO of a portfolio manager (discussed below).

While the CSA would prefer that the UDP and CCO roles be performed by different individuals, they do recognize that this may not always be practical, particularly for smaller investment fund managers and sole proprietors. Depending on the size and structure of the investment fund manager, the CSA would permit the UDP and CCO function to be performed by the same individual (who may also be required to be registered in the dealing or advising categories), provided they meet the requirements for all designations and are registered separately for each.

Fit and proper, conduct and conflicts of interest requirements

Registered investment fund managers must comply with many of the fit and proper requirements, conduct rules and conflicts of interest provisions set out in the Proposed Registration Rule.

Exemptions for Members of Self-Regulatory Organizations (SRO)

Certain requirements in the Proposed Registration Rule (for example, the proficiency and solvency requirements) will not apply to investment fund managers who are members of the IDA or an MFD SRO.

Fit and proper requirements

The cornerstones of the registration fit and proper requirements are proficiency, solvency and integrity. Non-compliance may result in the imposition of terms and conditions, or revocation or suspension of registration.

• Proficiency: There are no proficiency requirements for a UDP, but a CCO of an investment fund manager must comply with the same proficiency requirements as provided for the CCO of a portfolio manager. Accordingly, the CCO of an investment fund manager must:
  
  
  • have previously been registered as an advising representative of a portfolio manager,
     
  • have:
    
    • obtained professional designation as a lawyer or chartered accountant in Canada and be in good standing;
    • passed the Canadian Securities Exam and the Partners, Directors and Senior Officers Exam; and
    • either been employed for three years as a registered dealer or adviser or provided professional services to the securities industry for three consecutive years and been employed by a registered dealer or registered adviser for 12 consecutive months; or
       
  • have:
    
    • passed the Canadian Securities Exam and the Partners, Directors and Senior Officers Exam; and
    • either been employed for five consecutive years by a registered dealer or adviser (including three years under the supervision of the CCO), or been employed for five consecutive years by a regulated financial intermediary and employed by a registered dealer or registered adviser for 12 consecutive months.
      
       
  • Capital requirements: All non-SRO registered investment fund managers will be required to have a minimum excess working capital of not less than $100,000 (considerably more than the minimum capital requirement for non-SRO advisers and dealers). Excess working capital must be calculated as at the end of each month by completing Form 31-103F1 - Calculation of excess working capital within 20 days following the end of the month, and the regulator must be notified if the excess working capital is ever calculated to be less than zero.
  • Insurance: Investment fund managers will be required to maintain a financial institution bond in the greater of the following amounts: (a) the amount which is the lesser of 1% of the assets under management or $25,000,000; (b) $200,000, and (c) any other amount determined necessary by the directors of the investment fund manager. As a minimum, insurance must be maintained by way of a financial institution bond with a double aggregate limit or a provision for full reinstatement of coverage, and must include the clauses specified in Appendix A of the Proposed Registration Rule (fidelity, on premises, in transit, forgery, alterations, and securities clauses). The regulator must be notified in writing of any change in, claim made under, or cancellation of the financial institution bond.
  • Financial records: Non-SRO registered investment fund managers will be required to appoint an auditor and to deliver annual financial statements with the audit report within 90 days of year end and quarterly financial statement within 30 days following the completion of the first, second and third fiscal quarters. All financial statements are to be prepared in accordance with GAAP but on an unconsolidated basis, and a special form of audit report for regulatory purposes (known as a section 5600 report) is required. The annual and quarterly financial statements must each be accompanied by a completed Form 31-103F1.
  • NAV adjustments: The quarterly and annual financial statements must be accompanied by a description of any net asset value adjustment made during the relevant period, including a description of the cause of the adjustment, its dollar amount, and the effect of the adjustment on NAV per unit or share and any corrections made to purchase and sale transactions affecting either the investment fund or security holders of the investment fund.

Conduct rules

The Proposed Registration Rule and Companion Policy contain detailed and technical conduct requirements for all registrants, not all of which apply to investment fund managers. The conduct rules which do apply to investment fund managers include:

• Client assets: Investment fund managers will be required to hold securities or other client property in trust separately from their own property.
• Record keeping: Investment fund managers will be required to maintain records to accurately record their business activities, financial affairs and client transactions, as well as to demonstrate regulatory compliance. Records must be safeguarded and be kept in durable form. Activity records (which include, inter alia, trade confirmation statements, records of dividends and interest paid and communications between the investment fund manager and the client) must be kept for seven years from the date of the activity.
• Compliance: Investment fund managers will be required to establish, maintain and enforce appropriate systems to achieve compliance with securities legislation and to manage the risks associated with conducting its business in conformity with prudent business practices. The compliance measures must be documented in the form of written policies and procedures, and the CCO must report directly to the board of directors on securities compliance at least annually.
• Complaint handling: Investment fund managers must establish and implement complaint handling procedures, including procedures for recording and investigating complaints and policies for the resolution of disputes concerning the firm's products or services. In addition, non-SRO registered investment fund managers will be required to participate in a dispute resolution service which mirrors similar requirements of the SROs.
• New reporting requirements: Investment fund managers must submit an annual report within 2 months of year end to the securities regulators detailing their complaints handling policy, and the number and nature of complaints received.

Conflicts of interest

The Proposed Registration Rule consolidates and streamlines conflict of interest provisions, requiring investment fund managers to implement procedures and internal structures for managing and disclosing conflicts of interest in a fair, equitable and transparent manner. Conflicts of interest must be identified and managed fairly and in the best interests of clients, and conflict of interest disclosure is prescribed in certain cases, including with respect to trades and offerings involving securities of related entities (research reports involving such securities are severely circumscribed).

Exemptions from registration

The Proposed Registration Rule contains limited exemptions from the registration requirement for, among others, "international investment fund managers", who will be exempt if the securities of the fund are:

• primarily offered outside of Canada;
• only distributed in Canada through a registered dealer; and
• distributed in Canada in reliance upon an exemption from the prospectus requirement.

An "international investment fund manager" is an investment fund manager that has no establishment in Canada or officers, employees or agents resident in Canada, and engages in the business of a portfolio manager in the jurisdiction in which its head office or principal place of business is located.

There is a similar exemption from the requirement to register as an adviser for an "international portfolio manager" advising an investment fund. It is unclear whether the inclusion of that international portfolio manager registration exemption when advising an investment fund is a sign that the CSA are moving towards the approach currently taken by Ontario with the "look through" analysis reflected in OSC Rule 35-502 - Non-Resident Advisers (under which portfolio managers of an investment fund sold to investors in Ontario are treated as advisers who must be registered as such in Ontario unless an exemption is available).

Fees

The Proposed Registration Rule does not impose filing or participation fees. The only reference to fees is in the context of the suspension or revocation of registration (non-payment of fees is one of the triggering events for a revocation or termination of registration). Currently, Ontario is the only CSA jurisdiction which requires market participants (including currently unregistered investment fund managers) to pay an annual capital markets participation fee. It remains to be seen whether and to what extent other CSA jurisdictions will follow Ontario's lead, and how the interplay between fees and registration is regulated.

Implementation and transition

The Proposed Registration Rule and Companion Policy were published by the CSA on February 23, 2007, and remain open for comment until June 20, 2007. The CSA have indicated that they intend to move quickly in finalizing and implementing the Proposed Registration Rule, and this is anticipated sometime in 2008. Implementation of the Proposed Registration Rule will require amendments to provincial securities laws and regulations, proposed drafts for which have not yet been published in any jurisdiction with the exception of Alberta. A transition timetable is also yet to be published.

How do I learn more?

 If you wish to receive other updates in the series or further information, please contact your Stikeman Elliott representative or the authors, Jennifer Northcote, Darin Renton, Simon Romano, Kathleen Ward and Ramandeep Grewal.

Registration as an exempt market dealer

Under the Proposed Registration Rule, exempt market dealers will be restricted to:

1. dealing in securities being distributed under an exemption from prospectus requirements (the most common is a distribution to accredited investors acting as principal); or

2. dealing with persons to whom a security may be distributed under an exemption from prospectus requirements (such as accredited investors acting as principal). All persons or companies who are EMDs will be required to register and to comply with certain prescribed fit and proper requirements, conduct rules and conflict of interest standards.

Exemption from registration

The Proposed Registration Rule contemplates a new "mobility exemption" which would in some circumstances allow a firm and a representative to continue to deal with a small number of relocating clients who move to another province without the EMD having to get registered in that other province. The transfer of a representative from one firm to another will also be regulated.

Registration requirement for UDPs and CCOs

The Proposed Registration Rule introduces two further categories of registration for all registrants, including EMDs, namely the Ultimate Designated Person (UDP) and the Chief Compliance Officer (CCO). The UDP's role is to ensure that the registrant complies with applicable securities regulations and that written compliance policies and procedures are developed and implemented. While the actual form of compliance system to be implemented is not prescribed in the Proposed Registration Rule, the Companion Policy gives guidance on what the CSA view as an effective compliance framework. The designated UDP should be the CEO of the EMD, but does not necessarily need to be someone who is involved in day-to-day compliance matters. No proficiency requirements are specified for the UDP function.

The CCO is responsible for the management and supervision of the day-to-day monitoring of compliance with the EMD's compliance system. Accordingly, the CCO (who must be an officer or partner of the EMD) will be subject to certain proficiency requirements as described below. The CCO must report directly to the board of directors as necessary and at least annually.

While the CSA would prefer that the UDP and CCO roles be performed by different individuals, they do recognize that this may not always be practical. Depending on the size and structure of the EMD, the CSA would permit the UDP and CCO function to be performed by the same individual (who may also be registered in other registration categories), provided they meet the requirements for all designations and are registered separately for each.

Fit and proper, conduct and conflict of interest requirements

EMDs and their personnel will need to demonstrate integrity and competence, and the firm will need to satisfy the regulator as to its solvency. Conflicts of interest and compliance procedures are also contemplated in the Proposed Registration Rule.

Fit and proper requirements

EMD's will be required to meet the following fit and proper requirements. Non-compliance may result in the imposition of terms and conditions by the securities regulators, or revocation or suspension of registration:

• Proficiency: EMD personnel will need to satisfy proficiency requirements, which will generally be exam-based, rather than course-based. Representatives can qualify, among other ways, by passing the CS (Canadian Securities) Exam and either the CPH (Conduct and Practices Handbook) Exam or the PDO (Partners, Directors and Senior Officers) Exam. While an UDP does not need to satisfy proficiency requirements, a CCO of an EMD can qualify, among other ways, by passing the CS Exam and the PDO Exam.
   
• Capital requirements: EMDs will have to satisfy capital requirements. This means that their excess working capital (calculated as prescribed, via Form 31-103F1 - Calculation of excess working capital, and certified by management) must not be less than zero, and their minimum capital must be $50,000.
  

  Excess working capital must be calculated within 20 days after each month end. Negative excess working capital at any time must be reported to the regulator as soon as practicable. Under Form 31-103F1, "excess working capital" is calculated according to the following formula:

  • Adjusted current assets (those readily convertible into cash), less
  • Adjusted current liabilities (current liabilities plus 100% of unsubordinated long-term related party debt), less
  • The required minimum capital which, in the case of EMD's is $50,000, less
  • An amount on account of market risk (based on owned securities, applying IDA margin rules), less
  • The insurance deductible for the financial institution bond, less
  • The amount of any guarantees by the firm, less
  • "Unreconciled differences" (both firm and client, and securities shortfalls must include the applicable margin amount).
  
   
• Insurance: EMDs will need to have specified insurance, namely a financial institution bond (with fidelity, on premises, in transit, forgery or alterations and securities coverage, and either a double aggregate limit or a full reinstatement of coverage provision) in the greater of: (1) $50,000 per employee, agent and representative or $200,000, whichever is less; (2) 1% of total clients assets held or accessible by the dealer or $25,000,000, whichever is less; (3) 1% of the dealer's total assets or $25,000,000, whichever is less; and (4) the amount determined by its board of directors. Changes, claims or cancellation of such insurance policy will need to be reported in writing to the regulator as soon as practicable.
   
• Financial records:EMDs will need to have an auditor (for annual purposes and to be on standby to deliver an audit or review report as and when requested by the regulator), and will be required to deliver annual financial statements (with the audit report and a completed Form 31-103F1 within 90 days of year end. Unaudited quarterly financial statements and a completed Form 31-103F1 are required to be filed within 30 days following the completion of the 1st, 2nd and 3rd quarters.
  All financial statements are to be prepared in accordance with GAAP but on an unconsolidated basis, and a special form of audit report for regulatory purposes (known as a s. 5600 report) will be required. Fiscal year end changes, together with the reasons for the change, must also be reported to the regulator in writing as soon as practicable following the change.

Conduct rules

The Proposed Registration Rule and Companion Policy contain detailed and technical conduct requirements for all registrants, including EMD's. The CSA consider compliance to be a firm-wide responsibility to be carried out in accordance with a documented compliance system which must address, among others, the following elements:

Account opening and client documentation: Account opening and client documentation (including for know-your-client and suitability purposes) must be maintained and kept current. Unsuitable trades (in the firm's opinion, acting reasonably) at a client's direction can be executed only if the client is first informed of their unsuitability (in the EMD's opinion). Know your client and suitability exemptions are available for certain specified institutional clients.

Leverage disclosure: Where a client is using borrowed money to finance any part of the purchase of a security, a written acknowledgement of the risks of leverage must be obtained from the client, with certain exceptions (including for accredited investors or where the proposed purchase is on margin and the client's margin account is maintained in accordance with SRO margin rules).

Client assets: Client assets that are held by an EMD must be segregated and held in trust for the client (in the case of cash in a designated trust account with certain types of Canadian financial institution, and in the case of securities in accordance with certain requirements). For clients with multiple accounts, free credit balances must be applied against derivative (e.g. options) account debit balances absent written instructions to the contrary from the client. As well, special additional requirements, including regarding custody of client assets and disclosure to clients, will apply to non-resident EMDs.

Margin: EMDs may not "lend or extend credit" to clients or permit clients to purchase securities on margin (the rationale for this is not explained).

Record keeping and account activity reporting: Record-keeping is mandated, and certain client records must be kept for at least 7 years, and for at least 2 years in a readily accessible form to provide to regulators promptly. The Proposed Registration Rule does not contain a prescriptive list of records that must be kept, instead requiring all records that demonstrate compliance with securities legislation to be retained. Trade confirmations are required, with related party disclosure, if applicable, and other specified disclosure, as are account statements.

Complaint handling: EMDs will also be required to have policies and procedures on complaint handling, and must participate in a dispute resolution service to mediate disputes. New reporting requirements: An annual report must be submitted to the securities regulators within two months of year end detailing the EMD's complaints handling policy, and the number and nature of complaints received.

Conflicts of interest
Conflicts of interest must be identified and managed fairly and in the best interests of clients, and conflict of interest disclosure is prescribed in certain cases, including with respect to trades and offerings involving securities of related entities (research reports involving such securities are severely circumscribed). Referral arrangements are also regulated, including from a disclosure and diligence perspective, as are "tied selling" and unnecessary mandatory financial institution settlement arrangements. If firms outsource, they are expected to do so via written agreements with third parties reviewed with appropriate due diligence.

Suspension and revocation of registration

Registration as an EMD does not have to be renewed annually, and will remain in effect until suspended or terminated by certain "triggering events", including non-payment of annual fees and failure to comply with the fit and proper requirements and conduct rules. Revocation of an EMD's registration triggers an automatic suspension of the registration of all of its representatives. The Companion Policy states that there is no opportunity to be heard in the case of an automatic suspension, and a suspended EMD must immediately cease all activity requiring registration.

Fees

The Proposed Registration Rule does not impose filing or participation fees. The only reference to fees is in the context of the suspension or revocation of registration (non-payment of fees is one of the triggering events for a revocation or termination of registration). Currently, Ontario is the only CSA jurisdiction which requires market participants to pay an annual capital markets participation fee. It remains to be seen whether and to what extent other CSA jurisdictions will follow Ontario's lead, and how the interplay between fees and registration is regulated.

Implementation and transition

The Proposed Registration Rule and Companion Policy were published by the CSA on February 23, 2007, and remain open for comment until June 20, 2007. The CSA have indicated that they intend to move quickly in finalizing and implementing the Proposed Registration Rule, and this is anticipated sometime in 2008. Implementation of the Proposed Registration Rule will require amendments to provincial securities laws and regulations, proposed drafts for which have not yet been published in any jurisdiction with the exception of Alberta. A transition timetable is also yet to be published.

How do I learn more?

If you wish to receive other updates in the series or further information, please contact your Stikeman Elliott representative or the authors, Jennifer Northcote, Darin Renton, Simon Romano, Kathleen Ward and Ramandeep Grewal.

Proposed changes to the registration and exemption regime

The primary effects of the Proposed Registration Rule on non-Canadian investment funds are:

1. repeal of the dealer registration exemptions contained in National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"), including the exemption for trades with an "accredited investor";
2. continuation of the requirement for portfolio managers to register in Canada;
3. introduction of a requirement for "investment fund managers" to register in Canada;
4. introduction of a national exemption from the adviser registration requirement for "international portfolio managers" provided that securities of the investment fund are distributed through a registrant; and
5. introduction of a national exemption from the investment fund manager registration requirement for "international investment fund managers" provided that securities of the investment fund are distributed through a registrant.

Current dealer and adviser registration and exemption regime

Except in Ontario (and the Yukon Territory and Newfoundland and Labrador), provincial and territorial securities laws generally permit a non-Canadian investment fund to sell its own securities to "accredited investors" on a dealer registration and prospectus exempt basis subject to certain disclosure requirements and post-distribution filings. Such exempt distributions are common private placement transactions in Canada. In Ontario, the dealer registration exemption, but not the prospectus exemption, has been removed for "market intermediaries".

The Ontario Securities Commission (OSC) considers an adviser to be acting as an adviser in Ontario if it, directly or through a third party, acts as an adviser for an investment fund that distributes its securities in Ontario, notwithstanding that the advice to the fund may be given to, and received by, the fund outside of Ontario.

As a result, portfolio advisers to investment funds that distribute securities in Ontario must either be registered as advisers in Ontario or rely on an adviser registration exemption. In Ontario, a common practice is for non-resident investment funds to rely upon an adviser registration exemption if the securities of the investment fund are (i) primarily offered outside of Canada, (ii) only distributed in Ontario through a registrant, and (iii) distributed in Ontario in reliance upon an exemption from the prospectus requirements (e.g., "accredited investors").

The practical effect of the Ontario rules is that the sale of investment fund securities in Ontario is typically intermediated by an Ontario-registered dealer, subject to compliance with certain disclosure and post-distribution filing requirements.

Requirement to register as a portfolio manager and investment fund manager

The Proposed Registration Rule makes a distinction between those that are in the business of advising others as to the investing in of securities (i.e., a portfolio manager) and those that are in the business of managing and administering an investment fund (i.e., an investment fund manager). Persons or companies that are in the business of managing an investment fund will be required to register as an investment fund manager.

The Proposed Registration Rule requires that portfolio managers to investment funds and investment fund managers be registered in Canada or comply with the limited international portfolio manager and international investment fund manager exemptions. The Proposed Registration Rule effectively imposes a registration requirement on portfolio managers and investment fund managers where investment fund securities are distributed in any Canadian jurisdiction. The Proposed Registration Rule is silent on what specifically triggers the registration requirement for non-Canadian investment fund service providers.

The British Columbia Securities Commission is considering not adopting the registration requirements for persons who are in the business of dealing in the exempt market. It is unclear whether this will affect the registration requirements for portfolio managers and investment fund managers.

In cases where a company is both a portfolio manager and an investment fund manager, registration will be required in both categories under the Proposed Registration Rule. The registration requirements include application of various "Fit and Proper" requirements such as the requirement to have an Ultimate Designated Person, a Chief Compliance Officer and registered personnel that meet certain proficiency standards, capital and insurance requirements, financial statement filing obligations, and other requirements.

Proposed international portfolio manager and international investment fund manager exemptions

The Proposed Registration Rule contains exemptions from the registration requirements for "international portfolio managers" and "international investment fund managers".

International portfolio managers and international investment fund managers to an investment fund will be exempt from the registration requirements if:

1. the securities of the fund are primarily offered outside of Canada;
2. the securities of the fund are only distributed in Canada through a registrant; and
3. the securities of the fund are distributed in Canada in reliance upon an exemption from the prospectus requirement.

In order to rely on the exemption, an international portfolio manager must also satisfy certain client notification and disclosure requirements.

An "international portfolio manager" is a portfolio manager that has no establishment in Canada or officers, employees or agents resident in Canada, and engages in the business of a portfolio manager in the jurisdiction in which its head office or principal place of business is located.

An "international investment fund manager" is an investment fund manager that has no establishment in Canada or officers, employees or agents resident in Canada, and engages in the business of an investment fund manager in the jurisdiction in which its head office or principal place of business is located.

Significantly, under these definitions, "international portfolio managers" and "international investment fund managers" need not be registered in their home jurisdictions. Such entities must simply engage in the business of a portfolio manager or investment fund manager, as the case may be.

Notably, investment funds cannot be distributed through a non-resident dealer relying on the proposed "international dealer exemption" contained in the Proposed Registration Rule. Consequently, investment funds must generally be distributed through an "exempt market dealer", a proposed new category of dealer registration, or a fully registered Canadian investment dealer.

Transition

The Proposed Registration Rule does not set out any grandfathering or other transitional relief for non-Canadian investment funds that have issued securities to Canadian investors prior to the coming into force of the Proposed Registration Rule. For funds with limited redemption features, this may be an issue. It is also unclear how these requirements will apply to the service providers to non-Canadian investment funds that placed securities in Canada before the Proposed Registration Rule becomes effective.

Proposed changes to the dealer registration and exemption regime

The primary effects of the Proposed Registration Rule on non-Canadian dealers are:

• elimination of the "international dealer" registration category in Ontario;
• repeal of the dealer registration exemptions contained in National Instrument 45-106 - Prospectus and Registration Exemptions (NI 45-106), including the exemption for trades with an "accredited investor";
• introduction of a national "international dealer exemption" that significantly narrows the list of clients with whom a non-Canadian dealer may trade on an exempt basis; and
• introduction of an "exempt market dealer" registration category that will permit Canadian and non-Canadian dealers to trade (i) in securities being distributed under a prospectus exemption or (ii) to persons or companies to whom a security may be distributed under a prospectus exemption (for example, trading with an "accredited investor").

Current dealer registration and exemption regime

In Ontario, registration as an "international dealer" permits a non-Canadian dealer to trade with "designated institutions" in non-Canadian equity securities and certain Canadian debt securities. The practical effect of the international dealer registration regime in Ontario is to permit a non-Canadian dealer to trade in permitted securities with any person or entity, other than an individual, that qualifies as an "accredited investor."

Except in Ontario (and the Yukon Territory and Newfoundland and Labrador), provincial and territorial securities laws generally permit a non-Canadian dealer to trade in both Canadian and non-Canadian securities with an "accredited investor" on a dealer registration-exempt basis.

Proposed international dealer exemption will narrow list of permitted clients

Under the Proposed Registration Rule, a non-Canadian dealer that has no establishment in Canada may rely on the international dealer exemption to trade with a narrow list of "permitted international dealer clients" when trading in "foreign securities" and certain Canadian debt securities. Subject to the filing of submission to jurisdiction forms and delivering client notifications, the practical effect of the proposed international dealer registration exemption is to significantly narrow the list of clients with whom a non-Canadian dealer is permitted to trade on an exempt basis and to require registration as an "exempt market dealer" as a condition to trading with the full range of "accredited investors."

Non-Canadian dealers that are presently registered as international dealers in Ontario will no longer be permitted to trade with the following clients in Ontario under the proposed international dealer exemption:

• a person or entity that has net assets of C$5,000,000 (note: this category was used by international dealers to trade with corporate entities and hedge funds);
• an investment fund that is not advised by a person registered as a portfolio manager in Canada;
• a registered charity; or
• a person in respect of which all of the owners of interests, direct, indirect or beneficial, are persons that are accredited investors.

In the Canadian provinces and territories that presently permit non-Canadian dealers to trade in securities with "accredited investors" on an unregistered basis, the Proposed Registration Rule will require such dealers to rely on the international dealer exemption. As a consequence, an unregistered non-Canadian dealer will only be permitted to trade with a narrow list of permitted clients or, alternatively, will be required to register as an "exempt market dealer" to gain access to the full list of "accredited investors" with whom they are presently permitted to trade (summarized below). Significantly, in the provinces and territories where a non-Canadian dealer may presently trade in securities with an "accredited investor" on a dealer registration-exempt basis, the proposed international dealer exemption would not permit the dealer to trade with any of the following "accredited investors":

• the persons and entities identified above; and
• individuals who meet the accredited investor asset or income tests.

Under the proposed international dealer exemption, non-Canadian dealers will be restricted to trading only in "foreign securities," the definition of which does not include an inter-listed security (i.e., a security that is listed or traded on a marketplace in Canada), and in certain Canadian debt securities. Presently, a non-Canadian dealer may trade in both Canadian and non-Canadian securities on a dealer registration-exempt basis with an "accredited investor" resident in most provinces and territories, other than Ontario. The "foreign securities" restriction is a requirement presently applicable to registered international dealers in Ontario.

Overview of Permitted Clients

¹ All provinces and territories except Ontario, Newfoundland and Labrador and the Yukon Territory

"Exempt market dealer" registration requirement

Under the Proposed Registration Rule, a non-Canadian dealer will be required to register as an "exempt market dealer" to trade in Canadian and non-Canadian securities with the full list of "accredited investors." A non-Canadian dealer that wishes to register as an exempt market dealer will be required to:

• make informational filings for each of its directors and senior executive officers;
• register each of its individual dealing representatives that will trade in Canada, who will be subject to Canadian proficiency requirements;
• register an Ultimate Designated Person (i.e., the senior person in charge of the firm's activities requiring registration) and a Chief Compliance Officer (i.e., the person responsible for the day-to-day monitoring of the firm's adherence to its compliance policies and procedures).

Exempt market dealers will also be subject to "fit and proper" requirements, such as annual and quarterly financial statement reporting requirements, capital adequacy calculation and reporting requirements, insurance, bonding and other notice filing requirements. In addition, exempt market dealers will be subject to specific custody rules for client assets.