Proposed initial regulations on registration requirements and exemptions

01 August 2015

On August 25, 2015, the participating provinces and territory in the Cooperative Capital Markets Regulatory System achieved an important milestone towards implementation of the system by publishing a revised consultation draft of the uniform provincial and territorial capital markets act (now known as the Capital Markets Act), along with the drafts of the initial regulations proposed for adoption by the participating provinces and territory under the draft uniform act. These materials have been published for a 120-day public comment period.

This article is part of Gowlings' Guide to the Proposed Initial Regulations and related materials. In this segment of our guide, we discuss the proposed initial regulations on registration requirements, exemptions and related matters. View other sections of the guide here.

The Uniform Act

Part 4 of the draft uniform act (Registration) sets out the registration requirements of firms and individuals who act as dealers, advisers, investment fund managers or large derivatives participants. Only the overarching requirements are included in the draft uniform act, with the detailed requirements set out in the regulations, which is consistent with the approach of most provincial and territorial securities acts.

National and Multilateral Instruments

In order to maintain continuity and minimize disruption for market participants, the proposed initial regulations are derived principally from the existing “3-series” national and multilateral instruments(1) in their current forms as of March 2, 2015. Generally, the changes that have been proposed are those necessary:

  • to fit the “3-series” as regulations under the draft uniform act;
  • to eliminate differences in requirements across the participating provinces and territories; and
  • to reflect the integration of the regulatory authorities in the participating provinces and territories into the system.

The proposed revisions are not intended to affect the application of the existing “3-series” in the non-participating jurisdictions.

If you are interested in understanding the types of technical drafting changes being made generally to the “3-series” and seeing some examples, see note (2) below.

New Developments

(a) Registration in the Participating Provinces and Territories

An area that will see a regulatory change in both British Columbia and Ontario relates to registration in the participating provinces and territories. It is proposed that a person that becomes registered in one participating province or territory is automatically registered in all participating provinces and territories.

(b) Dealer Registration Exemption for Mortgages

An area that will see a regulatory change for dealers in Ontario (to bring it in line with British Columbia) relates to trades in syndicated mortgages. It is proposed that in a participating province or territory, the dealer registration exemption for trades in a mortgage on real property in subsection 8.12(2) in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations will not apply in respect of a trade in a syndicated mortgage. This was previously a carve-out only for British Columbia and Saskatchewan (as well as some of the non-participating jurisdictions). This means that those in the business of trading in syndicated mortgages in a participating province or territory must be registered or rely on another registration exemption. As the proposals for prospectus exemptions in the participating provinces and territories will be made public at a later date, it remains to be seen whether the registration exemption that is currently available under British Columbia securities laws for certain trades in, and distributions of, syndicated mortgages will be carried forward.

(c) Mortgages in the Calculation of Market Risk

An area that will see a regulatory change for registered firms in British Columbia (to bring it in line with Ontario) relates to the approach to the valuation of mortgages. A firm registered in a participating province or territory, regardless of whether it is also registered in another jurisdiction of Canada, will be required to calculate line 9 (market risk) in Form 31-103F1 Calculation of Excess Working Capital of National Instrument 31-103 using the margin rates set forth in paragraph 2(f)(ii) of Schedule 1 to Form 31-103F1 for a firm registered in Ontario. The Ontario approach to the valuation of mortgages, which is considered a more conservative approach to the calculation of market risk, has also been extended to the valuation of mortgages in paragraph 2(f) of Schedule C to Form 33-109F6 Firm Registration of National Instrument 33-109 Registration Information.

(d) Submission of Business Plans

An area that will see a regulatory change for firms seeking registration whose principal regulator is Ontario relates to the submission of business plans. A firm seeking registration in a participating province or territory will be required to attach with its completed Form 33-109F6, the firm’s business plan, policies and procedures manual and client agreements, including any investment policy statements and investment management agreements. This was previously a requirement only if the firm’s principal regulator was not Ontario.

(e) Derivatives-related Changes to National Instrument 31-103

Where necessary, changes have been proposed to National Instrument 31-103 to reflect, and be consistent with, the proposed approach to the regulation of derivatives trading in the participating provinces and territories. For example, it is proposed that in the participating provinces and territories all derivatives (broadly classified into two categories: exchange contracts and over-the-counter (OTC) derivatives) will be subject to National Instrument 31-103. As a result, National Instrument 31-103 has been revised so that in the participating provinces and territories, the term “securities” in National Instrument 31-103 is interpreted to include all derivatives (unless the context otherwise requires). Today, National Instrument 31-103 would not apply to registrants in respect of OTC derivatives unless the OTC derivative contract fell within the definition of a “security” in the participating province or territory. For more information, see our segment on Derivatives.

(f) Ontario Registration Exemptions for Financial Institutions

An area that will see a regulatory change in Ontario relates to the registration exemptions for financial institutions. Today, in Ontario, subsection 35.1(1) of the Ontario Securities Act provides a general registration exemption for certain financial institutions for activities not prohibited under their governing legislation (e.g., the Bank Act). In addition, paragraph 31(a) of the Ontario Commodity Futures Act provides an exemption from the adviser registration requirement for various financial institutions whose performance of advisory services is incidental to their principal business. Neither exemption has been carried forward under the draft uniform act as proposed.

While no specific exemption for financial institutions has been included, financial institutions may nonetheless be able to avail themselves of a number of registration exemptions contained in the proposed initial regulations, based on the various activities, relationships and investment products a financial institution may partake in.

(g) CMRA Regulation 31-501 Registration Requirements, Exemptions and Related Matters

The participating provinces and territories have proposed one new regulation relating to registration requirements, exemptions and related matters that would apply only to these jurisdictions. Proposed CMRA Regulation 31-501 Registration Requirements, Exemptions and Related Matters, together with its related forms and companion policy, is derived from existing local rules of the participating provinces and territories, as well as provisions in their current securities acts that have not been included in the draft uniform act but which are proposed to be retained. The intent of this proposed regulation is to replace these local rules and provisions, as well as to provide guidance and impose requirements that address other requirements contemplated by the draft uniform act that cannot be easily added to the existing national or multilateral instruments.

There are two main parts to this proposed regulation: (i) Registration Requirements; and (ii) Exemptions from the Requirement to Register. Below, we summarize some of the key aspects of these parts.

(i) Registration Requirements

Auditor of Registrant

An area that will see a regulatory change for registrants in British Columbia (arising from a provision in the Ontario Securities Act) relates to the appointment of an auditor. It is proposed that every registrant under the draft uniform act that is not a member of a recognized self-regulatory organization must appoint an auditor. In addition, the auditor will be required to examine the registrant’s annual financial statements and other regulatory filings in accordance with generally accepted auditing standards and to prepare a report on the financial affairs of the registrant in accordance with professional reporting standards.

The proposed requirements apply to an auditor of a “registrant”, which is defined under the draft uniform act to include not only persons who are registered but also those who are required to be registered under the draft uniform act. As a result, failure to comply with the proposed requirements could potentially result in regulatory action being taken directly against not only an auditor of a registered firm in a participating province or territory, but also against an auditor of a firm that is not registered but should be.

If you are interested in understanding the rationale for this regulatory change, see note (3) below.

Registered Dealer Acting as Principal

An area that will see a regulatory change for registered dealers in Ontario (arising from a provision in the British Columbia Securities Act) relates to the disclosure requirement of a registered dealer intending to act as principal in respect of a purchase or trade in a security. It is proposed that if a registered dealer intends, as principal, to effect a trade in a security with a person who is not a registered dealer, and issues a communication to that person to effect that trade, the registered dealer must not contract for the sale or purchase of the security unless, before contracting and accepting payment, the registered dealer has stated in the communication that the registered dealer proposes to act as principal in the trade.

The failure of a registered dealer to comply with the proposed requirement will give rise to a right of rescission under the draft uniform act to the person with whom the dealer effects the purchase or trade in a security.

If you are interested in understanding the rationale for this regulatory change, see note (4) below.

Investor Compensation Fund

Another area that will see a regulatory change for registered dealers in Ontario (arising from a local rule in British Columbia) relates to the requirement of members of designated investor compensation funds to make certain disclosures. It is proposed that registered dealers that are not subject to the requirement under the proposed regulation to participate in a designated investor compensation fund in order to act as dealers (being registered dealers other than investment dealers and mutual fund dealers) must provide to future clients, before accepting each client, and to existing clients written notice that (a) the dealer does not participate in or contribute to an investor compensation fund and (b) as a result, clients will not have the benefit of coverage under any investor compensation fund.

Over-the-Counter Trading and Reporting

An area that will see a regulatory change for investment dealers in Ontario (arising from a local rule in British Columbia) relates to trades in securities of over-the-counter issuers. It is proposed that investment dealers that trade in U.S. over-the-counter markets will, with some exceptions, be required to comply with record keeping, data recording and other requirements. These requirements are currently imposed as conditions of registration for investment dealers that have a British Columbia office and trade in the U.S. over-the-counter markets and will eventually apply to investment dealers that have an office in any participating province or territory (including in Ontario) and trade in U.S. over-the-counter markets. For more information, see our segment on Over-the-Counter Trading and Reporting.

(ii) Exemptions from the Requirement to Register

Provincial Financing Authorities/Investment Management Corporations

The proposed regulation carries forward an exemption from registration for activities carried out by the Ontario Financing Authority, British Columbia Investment Management Corporation and New Brunswick Investment Management Corporation in the fulfilment of their duties and responsibilities under the legislation authorizing their activities.

Non-Resident Investment Fund Managers

An area that will see a regulatory change for investment fund managers in British Columbia (to bring it in line with Ontario) relates to the investment fund manager registration requirement in the draft uniform act. The expanded definition of “investment fund manager” in the draft uniform act will require an investment fund manager operating outside the participating provinces and territories, if the fund it manages has a security holder resident in any participating province or territory, to be registered in the participating provinces and territories. This is in contrast with the narrower interpretation of the investment fund manager registration requirement in British Columbia (which requires an investment fund manager to register in the jurisdiction only if it engages in the activities of a fund manager in the jurisdiction).

The proposed regulation provides limited exemptions from the investment fund registration requirement for non-resident investment fund managers that are based on Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers. For more information, see our segment on Non-Resident Investment Fund Managers.

Interface Mechanism

Provisions relating to how interface will work are not included in the proposed initial regulations, but are expected to be made public at a later date. There are a number of provisions in the “3-series” (particularly in National Instruments 31-103 and 33-109) that will have to be considered when determining the interface to be established between the participating provinces and territories and other jurisdictions.

Questions

If you would like to discuss these regulations and how they will apply to your business, or if you wish to be added to our email distribution list for related publications, please contact Tal Cyngiser* or any of the following lawyers:

*Tal Cyngiser, an Associate in our Toronto office, was seconded to the Canadian Securities Transition Office (CSTO) for over a year, working extensively with the participating provinces and their securities commissions on the drafts of the initial regulations.

View our full guide.


(1) The “3-series” includes five national instruments and their related forms and companion policies:

NI 31-102 National Registration Database

NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations

NI 33-105 Underwriting Conflicts

NI 33-109 Registration Information

NI 35-101 Conditional Exemption From Registration For U.S. Broker-Dealers And Agents

(2) The types of technical drafting changes being made generally to the “3-series” are summarized below.

  • Existing carve-outs have been deleted if they are not necessary to fit them under the draft uniform act.

    For example, subsection 8.4(1) of National Instrument 31-103, which provides an exemption from the dealer registration requirement to persons in British Columbia and New Brunswick who are not in the business of trading in securities, is no longer necessary under the business trigger for dealer registration in the draft uniform act.

    As a further example, the carve-outs for Ontario from the dealer registration exemptions in sections 8.12 and 8.13 of National Instrument 31-103, which result from similar exemptions being provided under the Ontario Securities Act, have been deleted since the exemptions in the Ontario Securities Act have not been carried forward under the draft uniform act.

    Similarly, the British Columbia and Ontario carve-outs in sections 11.9 and 11.10 of National Instrument 31-103 relating to a regulator’s review of the acquisition of registrant’s securities or assets are not necessary under the draft uniform act, which, unlike the securities acts in those provinces, has the rule-making power to allow the regulator to object to an acquisition in the circumstances of those provisions.

    In addition, the carve-out for Ontario in section 13.2 of National Instrument 31-103 regarding the definition of “insider” for the purposes of that section stems from the difference in definitions of “insider” in the Ontario Securities Act and securities acts in other jurisdictions. In the Ontario Securities Act, the definition of “insider” is limited to “reporting issuers”, while in other jurisdictions, it extends to “issuers”. This limitation does not exist in the definition of “insider” in the draft uniform act, and so this carve-out is no longer necessary.
  • Existing carve-outs have been extended to all participating provinces and territories if the draft uniform act includes an identical or overlapping requirement.

    For example, the carve-out for Ontario in subsection 8.15(2) of National Instrument 31-103 from the dealer registration exemption in subsection 8.15(1) for certain evidences of deposit, which exists because the definition of “security” in the Ontario Securities Act excludes the securities described in subsection 8.15(1), has been extended to all participating provinces and territories because a similar exclusion exists in paragraph (e) of the definition of “security” in the draft uniform act.

(3) Today, registered firms are already subject to auditor appointment and examination requirements through the operation of National Instrument 31-103, which requires each registered firm to submit a copy of its audited annual financial statements for the financial year. Despite this overlap, the auditor appointment and examination requirements in the proposed regulation are not redundant. The requirements in National Instrument 31-103 apply only to the relevant registered firm, but do not extend to “registrants” generally (and therefore to persons that are not registered but should be) or directly to a firm’s auditor. Consequently, the requirements in the proposed regulation are only partially achieved through National Instrument 31-103. There is also no general provision in National Instrument 31-103 which requires the auditor of a registrant to make an examination of “all other regulatory filings of the registrant, in accordance with generally accepted auditing standard”.

(4) Ontario had a provision in its securities act that imposed requirements similar to those to be imposed under the proposed regulation relating to disclosure by a registered dealer of its intention to act as principal, but it was repealed when National Instrument 31-103 came into force. National Instrument 31-103 attempts to harmonize the conflicts of interest provisions that registrants must consider, and requires registrants to disclose any material conflicts of interests between the firm and a client in a timely manner, as well as to disclose in trade confirmations whether the dealer acted as principal or agent on the trade. The participating provinces and territories believe however that the proposed regulation necessarily complements rather than overlaps the National Instrument 31-103 requirements. For example, the proposed regulation requires that the disclosure about the conflict be in the written communication intended to effect the trade. As a result, the proposed regulation provides information to the purchaser about a conflict at a time when it could influence the decision whether to make the trade.


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