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Trading and Advising in Securities in Canada by Non-resident Broker-Dealers and Advisers

Date

May 31, 2006

AUTHOR(s)

Sean D. Sadler




1.00 Purpose

1.01 The purpose of this paper is to provide a non-resident of Canada with an overview of the dealer and adviser registration requirements which must be considered and addressed before a non-resident can begin to trade securities with, or provide investment advice to, any person or company located in Canada. All currency amounts that are referred to in this paper are denominated in Canadian dollars.

2.00 The Canadian Securities Regulatory Framework

2.01 Like the United States, Canada has a federal system of government whereby the authority to enact legislation is divided between the federal and the provincial and territorial governments. Unlike the United States, the Canadian securities markets are solely regulated by the provincial and territorial governments. Each of the ten provinces and three territories of Canada therefore has its own legislative scheme for regulating the securities market within its own provincial or territorial jurisdiction and its own securities commission or regulatory authority (each such securities commission or regulatory authority is herein referred to as a "securities regulator") for administering and enforcing such legislation. Securities regulatory requirements in Canada therefore vary from jurisdiction to jurisdiction.

2.02 Securities legislation generally regulates the trading of, and advising in, securities1 within a province or territory by requiring those who trade, or provide advice in relation, securities to become registered or licensed as a dealer or adviser respectively, unless:

  • the securities legislation provides for an express statutory exemption from the relevant requirement2; or
  • an order or ruling can be obtained from the applicable securities regulatory authority which exempts a trade, a security or a person or company from either or both of such requirements.

2.03 For purposes of the dealer registration and prospectus requirements of Canadian securities legislation, the term "trade" is broadly defined to include any sale or disposition of a security for valuable consideration, any receipt by a registrant of an order to buy or sell a security and any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance thereof. The term "distribution" is defined with reference to the term "trade" to include a trade in the securities of an issuer that have not been previously issued.

2.04 For purposes of the adviser registration requirements of Canadian securities legislation, a person or company is generally required to become registered as an adviser or avail itself of an exemption therefrom if it engages in or holds itself out as engaging in the business of advising others as to the investing in or buying and selling of securities3.

2.05 In an effort to harmonize Canadian securities laws, each of the 13 securities regulators in Canada have, under rule making authority granted by the provincial and territorial governments, established numerous rules (referred to as "National Instruments") that operate on a substantially identical manner in each province and territory. Despite such harmonization efforts, the discussion below will highlight the differences that continue to exist in Canada as regards the regulation of trading and advising in securities by non-residents.

3.00 Trading in Securities by Non-resident Broker-Dealers

All Provinces and Territories of Canada Other than Ontario, Newfoundland and Labrador

3.01 In all provinces and territories other than Ontario and Newfoundland and Labrador, it is possible for a non-resident broker-dealer to conduct trades in reliance upon express statutory exemptions from dealer registration requirements without having to become registered as a dealer for such purpose. Two such exemptions that are convenient for these purposes are the accredited investor exemption (the "AI Exemption")4 and the minimum investment amount exemption (the "MIA Exemption")5.

Ontario

3.02 Prior to June 30, 1987, any person or company could trade securities in Ontario under certain limited circumstances without having to become registered as a dealer under the Ontario securities law by conducting its trading activity in reliance upon a number of different statutory exemptions from the dealer registration requirement. Effective June 30, 1987, however, the securities laws were amended to establish the system of "universal registration". The system of universal registration prohibits market intermediaries6, such as U.S. and other foreign broker-dealers, from relying upon all but a handful of relatively insignificant dealer registration exemptions.

3.03 As a result of the system of universal registration, a market intermediary cannot rely upon the AI Exemption or MIA Exemption that is available to non-market intermediaries7. The system of universal registration also precludes a market intermediary from conducting any trading activity through a registered dealer that is not affiliated with the market intermediary in reliance upon another dealer registration exemption that permits a person or company to conduct a trade without having to become registered as a dealer by acting solely through an agent that is a registered dealer8. This is the exemption that is used by most persons or companies for the purpose of conducting secondary market trades.

3.04 As a result of the adoption of the system of universal registration in Ontario, market intermediaries are compelled to become registered in an appropriate category of dealer registration in order to gain access to Ontario’s capital markets. Until recently, the only category of dealer registration that has been available to a person or company that is not resident in Canada is the international dealer category of dealer registration that was established at the same time as the system of universal registration became effective in 1987.

3.05 An international dealer under the Ontario Securities Act is entitled to act as a market intermediary in Ontario for the sole purpose of the following:

  • carrying on in Ontario those activities, other than sales of securities, that are reasonably necessary to facilitate a distribution of securities that are offered primarily abroad;
  • trading with a designated institution9 in debt securities in the course of a distribution, where the debt securities are offered primarily abroad and otherwise than by means of a prospectus prepared and filed in accordance with the Ontario Securities Act;
  • trading with a designated institution in debt securities, except in the course of the distribution by which they were issued;
  • trading with a designated institution in foreign securities except in the course of a distribution by means of a prospectus prepared and filed in accordance with the Ontario Securities Act; and
  • trading with a broker or dealer in any securities,

and, in each case, only if the person or company is acting as principal or as agent for the issuer of the securities, another designated institution or a non-resident.

3.06 As alluded to above, registration as an international dealer has, until recently, been the only dealer registration option that has been available to non-resident market intermediaries since the system of universal registration was first adopted in June, 1987. Non-resident market intermediaries have been unable to become registered in any other category of dealer registration as the result of a requirement under Ontario securities law that provides that a registered dealer that is not an individual must be a company incorporated, or a person formed or created, under the laws of Canada or a province or territory of Canada10. This requirement does not apply to international dealers.

3.07 During the past two years, the Ontario Securities Commission (the "OSC") has granted several orders to non-resident broker-dealers exempting them from the residency requirements of Ontario securities law to permit them to become registered in the limited market dealer category of dealer registration in lieu of having to become registered as an international dealer.

3.08 Like the international dealer category of dealer registration, the limited market dealer category is another form of restricted licence. A limited market dealer is authorized to act as a market intermediary for the sole purpose of trading securities in reliance upon exemptions from the Ontario Securities Act’s dealer registration requirements that would not otherwise be available to the limited market dealer as the result of the system of universal registration. Accordingly, as a limited market dealer, a market intermediary is effectively exempt from the system of universal registration and it may therefore trade any securities in reliance upon any exemption from the Ontario Securities Act’s dealer registration requirements including the AI Exemption and MIA Exemption. As a result, a limited market dealer registration affords greater trading flexibility than an international dealer registration because, unlike an international dealer, a limited market dealer is not, for example, limited to trading certain types of debt and foreign securities with accredited investors that are not individuals. A limited market dealer may trade any securities with any accredited investor, including individual accredited investors.

3.09 A comparison of the list of registration requirements applicable to a limited market dealer with the list of registration requirements for an international dealer reveals only one significant distinction. Unlike the registration requirements that apply to applicants for registration as an international dealer, the registration requirements that apply to applicants for registration as a limited market dealer generally require every director, officer and salesperson of an applicant to complete and file an individual Form 33-109F4 application for registration in Canada’s National Registration Database (the "NRD"). In discussions with OSC staff regarding the application of this individual registration requirement to U.S. broker-dealers who wish to apply for registration as a limited market dealer, we have been advised that it is not necessary for every director, officer and salesperson of a U.S. broker-dealer applicant to complete and file a Form 33-109F4 in NRD. Rather, it is possible for an applicant for registration as a limited market dealer to obtain an exemption to allow it to register only those directors, officers and salespersons who will actually be trading securities in Ontario.

3.10 Apart from this individual registration requirement, the registration requirements for a limited market dealer are similar to the registration requirements for an international dealer. Accordingly, like an international dealer, a limited market dealer is not required to comply with any capital, proficiency, bonding, self regulatory organization membership or investor protection fund contribution requirements and it can obtain an exemption from financial statement filing requirements as part of its application for registration.

3.11 Once registered as a limited market dealer, the registrant would be required to update its Form 3 application for registration and any Form 33-109F4s filed in support of its application whenever there is a change in any of the information provided by those documents.

3.12 Each of a limited market dealer and an international dealer would also be required to renew its registration annually and to pay an annual capital markets participation fee that is based on the revenue that is attributable to it’s use of Ontario’s capital market during each calendar year.

Newfoundland and Labrador

3.13 Newfoundland and Labrador has adopted a system of universal registration like Ontario. Accordingly, in Newfoundland and Labrador, a non-resident broker-dealer may become registered as an international dealer and it should be possible for a non-resident broker-dealer to become registered as a limited market dealer for the purpose of gaining access to accredited investors in that jurisdiction because Newfoundland and Labrador tends to adopt the regulatory initiatives of the OSC.

4.00 Advising in Securities by Non-resident Advisers

Ontario

4.01 As described above, in order to act as an adviser in Ontario, a person or company must become registered as an adviser, or as a partner or officer of a registered adviser, or it must avail itself of an exemption from the Ontario Securities Act’s adviser registration requirements.

4.02 In addition to the business trigger described in paragraph 2.04 above, the OSC considers a person or company to be acting as an adviser in Ontario if it, directly or through a third party, acts as an adviser for a person or company in Ontario notwithstanding that the advice may be given from a place outside Ontario or that the advice may be unsolicited. The OSC also considers a person or company to be acting as an adviser in Ontario if it, directly or through a third party, acts as an adviser for a mutual fund or a non-redeemable 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. In these circumstances, the OSC considers that the Ontario investors in the fund are acquiring the advisory services of the portfolio adviser of the fund and that the securities of the fund are distributed in Ontario for the purpose of providing these advisory services in Ontario.

4.03 A resident adviser who has a place of business in Ontario must generally become fully registered in Ontario as an adviser by meeting the registration requirements for an investment counsel and portfolio manager. The ability of a non-resident adviser (i.e. an adviser that does not have a place of business in Ontario with partners or officers resident in Ontario who are acting on its behalf in Ontario) to act as an adviser in Ontario is subject to OSC Rule 35-502 – Non-Resident Advisers ("Rule 35-502").

Rule 35-502

4.04 Rule 35-502 is a reformulation of OSC Policy 4.8. OSC Policy 4.8 was first introduced in May 1992 to prescribe registration requirements for non-resident advisers. At that time, OSC Policy 4.8 was intended to represent an exception to the OSC’s administrative practice of requiring applicants for registration as an adviser in Ontario to establish an office in the province and to have employees resident in the jurisdiction. OSC Policy 4.8 was largely a product of market pressures attributable to the rapid growth of the mutual fund industry in Canada, particularly mutual funds designed to provide investors with indirect access to foreign markets. As the successor to OSC Policy 4.8, Rule 35-502 codifies past administrative practices while expanding the scope of the OSC’s jurisdiction over non-resident advisers in the manner described above, and providing them with access to the Ontario market on a restricted basis.

4.05 A non-resident adviser may act as an adviser in Ontario in one of three ways11. It may seek to rely upon one of the exemptions from the adviser registration requirements that are set out in Rule 35-502, it may become registered as an international adviser for the purpose of providing advice to a restricted list of permitted clients or it may seek to become fully registered as an adviser. Each of these options is considered below.

Exemptions from the Ontario Adviser Registration Requirements

4.06 There are very few exemptions from the Ontario adviser registration requirements. The only three exemptions that are generally available to non-residents as a practical matter are set out in Rule 35-502.

4.07 The first of these three exemptions is found in Section 7.1 of Rule 35-502. It provides that an international adviser is not required to register as an adviser if it, and its affiliates not ordinarily resident in Ontario, have acted as an adviser for not more than five persons or companies in Canada during the immediately preceding twelve month period, excluding persons or companies who are advised, or could have been advised if resident in Ontario, in reliance upon one of the adviser registration exemptions set out in Part 7 of Rule 35-502, including the sub-adviser and non-resident fund exemptions described below. Additionally, an non-resident adviser may only rely upon this exemption if:

  • it acts as an adviser in Ontario solely for persons or companies, other than funds, that are permitted clients, as that term is defined in Rule 35-502;
  • it does not solicit clients in Ontario;
  • its acting as an adviser in Ontario in respect of Canadian securities is incidental to its acting as an adviser in Ontario in respect of foreign securities;
  • prior to advising any person or company in Ontario it notifies that person or company that it is not registered as an adviser in Ontario; and
  • all funds, securities and other assets of its clients who are in Ontario are held by prescribed custodians.

This first exemption is comparable to the investment adviser registration exemption available pursuant to section 203(b)(3) of the Investment Advisers Act, 1940.

4.08 The second adviser registration exemption permits a non-resident adviser to effectively jitney its advice through a registered adviser or broker for the benefit of the client of the registered adviser or broker. According to section 7.3 of Rule 35-502, this so-called "sub-adviser" exemption is only available if the obligation and duties of the non-resident adviser are set out in a written agreement with the Ontario registrant and the Ontario registrant contractually agrees with its clients on whose behalf investment advice is, 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 exercise the powers and discharge the duties of its office 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 the portfolio management services are to be, provided, or
  • to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.

4.09 The third adviser registration exemption is available pursuant to section 7.10 of Rule 35-502. Section 7.10 permits a non-resident adviser to act as a portfolio adviser to a mutual fund or non-redeemable investment fund if the securities of the fund are primarily offered outside of Canada, are only distributed in Ontario through one or more registrants and are so distributed in reliance upon an exemption from the Ontario Securities Act’s prospectus requirements such as the AI Exemption or MIA Exemption.

Ontario Registration as an International Adviser

4.10 The first registration option available to a non-resident adviser is to become registered as an international adviser and to thereby limit its client base to the list of permitted clients12 set out in section 1.1 of Rule 35-502. The registration requirements for an international adviser are much less onerous than those applicable to a non-resident adviser seeking to become fully registered as an adviser under the Act. An international adviser is not, for example, required to establish an office or to have anyone resident within the jurisdiction. It is also required to register only those persons who will actually be providing advice within the province rather than having to register all officers of the applicant. In addition, it is not required to meet minimum capital requirements or to file financial statements with the OSC. It must, however, submit to the jurisdiction and appoint an agent for service of process and it must establish to the OSC’s satisfaction that it carries on the business of an adviser in a country other than Canada where its registration to carry on such business is in good standing.

4.11 An international adviser may only act as an adviser in Ontario pursuant to Rule 35-502 if it engages in the business of an adviser in a country other than Canada in respect of securities of the type in respect of which it acts as an adviser in Ontario and not more than 25% of the aggregate consolidated gross revenues from the advisory activities of the non-resident adviser and its affiliates are attributable to their acting as advisers for clients in Canada.

Full Registration as an Adviser in Ontario

4.12 The second adviser registration option that is available to a non-resident adviser is to become fully registered as an adviser under the Ontario Securities Act. The OSC is prepared to consider registration as an adviser of an applicant which has neither a place of business in Canada nor Canadian resident advising officers or partners on the basis of full compliance with the requirements that are ordinarily applicable to advisers including proficiency requirements, capital requirements, financial reporting requirements, business practice requirements, the requirement to maintain in Ontario books and records necessary to record properly transactions relating to Ontario clients, as well as other matters required by the Ontario Securities Act. In addition to this list of registration requirements, additional requirements would be imposed upon non-resident applicants. Such additional registration requirements will be imposed as terms and conditions of registration and will include the appointment of an agent for service; agreeing to inform the OSC of any investigation or disciplinary action take by any governing regulatory authority; requiring clients’ funds and securities to be held by the client, a custodian in Canada or a custodian that satisfies the requirements of Rule 35-502; submitting to the non-exclusive jurisdiction of the judicial, quasi-judicial and administrative tribunals of Ontario; and disclosing the adviser’s non-resident status to clients and to purchasers in any related offering documents.

Quebec

4.13 Like Ontario, no person may carry on business as an adviser in Quebec unless it is registered with the Autorité des marches financiers du Quebec ("AMF") or an exemption from the adviser registration requirement is available under the Quebec Securities Act.

4.14 The AMF considers a person or a company to be carrying on business as an adviser in Quebec if it , directly or through a third party, acts as an adviser for a Quebec resident even if the advice is given from a place outside of Quebec. Unlike the OSC, however, the AMF takes the position that, in the case of the private offering of mutual funds, unless the portfolio adviser of a mutual fund which is constituted and managed outside of Quebec carries on the business of an adviser from a place of business in Quebec, it is not subject to the adviser registration requirement if no advisory services are provided directly to investors.

4.15 A non-resident adviser has three options under the Quebec Securities Act when providing discretionary portfolio management services to Quebec residents:

  • A statutory exemption from the adviser registration requirement is available under the Quebec Securities Act if the non-resident adviser carries on business only with institutional accredited investors13.
  • A non-resident adviser could become registered with the AMF as a non-Canadian adviser permitting it to carry on business with the institutions listed in section 30 of AMF Policy Q-914.
  • Finally, if a non-resident adviser chooses to set up a place of business in Canada and register as an adviser with a Canadian securities regulatory authority, it could register with the AMF as an adviser and would be permitted to carry on business with the public in Quebec, provided it submitted to the jurisdiction of the AMF and Quebec courts. The AMF’s registration requirements for advisers are substantially similar to the OSC’s requirements.

Canadian Jurisdictions Other Than Ontario and Quebec

4.16 Unlike Ontario and Quebec, the other Canadian jurisdictions do not have exemptions from the adviser registration requirement that are of practical significance to non-resident advisers. Accordingly, a non-resident adviser must either become registered or apply for discretionary relief from the adviser registration requirement. For those non-resident advisers that are seeking institutional mandates only, it is possible, depending on the jurisdiction, to become registered with a licence restricting the clients of the non-resident adviser to persons or companies that are similar to accredited investors or permitted clients. In circumstances where a restricted licence is sought, the securities regulator is often willing to waive compliance with many of the local proficiency requirements provided the non-resident adviser is registered in its home jurisdiction.

________________________________________________________

1 In Ontario and Manitoba, exchange traded commodity futures contracts and options on commodity futures contracts ("futures" and "options on futures") are not "securities" and therefore are not governed by securities legislation in those provinces. In such provinces, trading and advising in futures and options on futures are governed by the commodity futures legislation in such provinces.

2 In addition to triggering a dealer registration requirement, a trade may also trigger the prospectus requirement where the trade is a "distribution" i.e., a trade in a previously unissued security or a resale of a previously unissued security distributed pursuant to an exemption from the prospectus requirement. The topic of distributions of securities and the related prospectus requirement is beyond the scope of this paper.

3 The Ontario Securities Commission ("OSC") has further elaborated on what it considers advising in securities to mean In the matter of Jack Maquire & J.K. Maguire & Associates (1995) 18 OSCB 4623 when the Commission endorsed the following statement of the British Columbia Securities Commission made In the Matter of Robert Anthony Donors (BC Weekly Summary, April 7, 1995; 39): "A person who does nothing more than provide factual information about an issuer and its business activities is not advising in securities. A person who recommends an investment in an issuer or a purchase or sale of an issuer’s securities, or who distributes or offers an opinion on the investment merits of an issuer or an issuer’s securities, is advising in securities. If a person advising in securities is distributing or offering the advice in a manner that reflects a business purpose, the person is required to be registered under the Act". The OSC further elaborated on the foregoing In the matter of Brian K. Costello (2003) 26 OSCB 1617 ("Costello") when it stated that: "The trigger for registration as an adviser is not doing one or more acts that constitute the giving of advice, but engaging in the business of advising". In Costello, the OSC went on to state that "Providing mere financial information as to specific securities does not constitute the giving of advice, but providing an opinion on the wisdom or value or desirability of investing in specific securities does: Re Canadian Shareholders Association (1992), 15 OSCB 617 (Canadian Shareholders). In Lowe v. Securities and Exchange Commission, 472 U.S. 181 (1985), a "one-on-one" relationship involving the giving of advice on specific securities to specific individuals was found to be required to qualify as the giving of advice under U.S. law. Such a direct, one-on-one relationship with an investor is not required to qualify as the giving of advice under Ontario law."

4 Section 2.3 of National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106") provides an exemption from the prospectus and dealer registration requirements where a security is respectively distributed or traded to an accredited investor who acquires the security as principal. Accredited investors are purchasers who are considered to be sophisticated because of their status or financial well-being. The concept is based upon U.S. Regulation D Rule 501, 17 C.F.R. Like the U.S. version, Canadian accredited investors include financial institutions; governments; pension funds; securities dealers and advisers; corporations, partnerships and trusts with net assets of $5 million; individuals who, alone or with a spouse, have net assets of at least $5 million; individuals who meet a financial net worth test of $1 million or an income test of $200,000 in each of the last 2 years (or together with their spouse of $300,000) and a reasonable expectation exceeding that amount in the current year.

5 Section 2.10 of NI 45-106 provides an exemption from the prospectus and dealer registration requirements where a purchaser purchases a security as principal and the security has an acquisition cost to the purchaser of not less than $150,000 paid in cash at the time of the trade.

6 A market intermediary is a person or company that engages, or holds himself, herself or itself out as engaging, in Ontario in the business of trading in securities as principal or agent other than trading in securities purchased by the person or company for his, her or its own account for investing only and not with a view to take to resale or distribution.

7 Generally speaking, an issuer will not be considered a "market intermediary".

8 Section 35(1) 10 of the Securities Act (Ontario)

9 Generally speaking, the term "designated institution" includes banks, trust companies, insurance companies, their subsidiaries, portfolio managers, registered dealers, government pension funds and corporations, partnerships or trusts with net assets of at least $5,000,000. Notably absent from this list are individuals.

10 Section 213 of the Regulation to the Securities Act (Ontario)

11 See Rule 35-502 and OSC Notice 35-701 Residency Requirements for Advisers and their Partner and Officers

12 The term "permitted client" is slightly different from the terms "designated institutions" and "accredited investor" but it does include most large institutional clients and individuals with a net worth of $5 million excluding the value of his or her principal residence.

13 Institutional accredited investors include federal and provincial governments and their agencies, Canadian banks, trust companies, credit unions, insurance companies, Quebec registered dealers and advisers, municipal corporations and pension funds.

14 The institutions listed in Section 30 of AMF Policy Q-9 includes institutional accredited investors as well as a mutual fund with assets of over $10 million.

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