Article Detail



Article

CSA Proposes to Harmonize Dealer and Advisor Registration under National Instrument 31-103

Date

June 1, 2007

AUTHOR(s)

Katherine M. Gurney
Michael C. Nicholas
Sean D. Sadler
Ronald R. Schwass
Shea T. Small
Sonia J. Struthers


Overview

Dealer and advisor registration categories and requirements throughout Canada are numerous, varied and complex. After several years of consultation, the Canadian Securities Administrators ("CSA") recently published proposed National Instrument 31-103 Registration Requirements (‘NI 31-103’), containing amendments to securities legislation and local rules aiming to streamline and simplify registration categories and requirements.

The main changes brought about by NI 31-103 are:

  • The adoption of a ‘business trigger’ for dealer registration in lieu of the ‘trade’ trigger that currently exists in all provinces and territories, other than Québec.
  • Registration categories and related requirements are to be harmonized across Canada and while the number of categories of registration has been reduced significantly, four new categories of registration have been introduced:
    • exempt market dealer, replacing the category of limited market dealer in Ontario and Newfoundland and Labrador,
    • restricted dealer, a category for dealers engaged in a limited area of dealing activities with restrictions and proficiency requirements tailored to the dealing activities,
    • restricted portfolio manager, a category for advisers restricted to advising with respect to specified securities with restrictions and proficiency requirements tailored to the advising activity, and
    • investment fund manager, requiring all managers of public and private investment funds to be registered regardless of whether they are in the business of dealing or advising.
Exam-based, rather than course-based, proficiency requirements have been prescribed for representatives of each category of dealer, with certain exceptions.
  • Minimal capital requirements under NI 31-303 may impose higher requirements than current standards.
  • Registered firms must identify each potential and actual conflict of interest and provide prior written disclosure of a conflict of interest to a client while dealing with such conflicts in a fair, equitable and transparent manner.
  • Significant harmonization and narrowing of the exemptions from the dealer and advisor registration requirements across Canada.
  • Canadian residency requirements for all registrants in all provinces and territories are proposed to be eliminated.
  • In Québec, the AMF is proposing a major overhaul of the regulatory framework for restricted practice dealers.

The CSA has given until June 20, 2007, for comments on NI 31-103. The AMF has set May 25, 2007, as its deadline for comments on the proposed Québec changes to the restricted practice dealer regulatory framework. The CSA has announced that a revised draft of NI 31-103 will be published in fall 2007, with a final version to be issued and to come into force in 2008.

Proposed "Business" Registration Trigger

In all provinces and territories, other than Québec, a person or company is required to become registered as a dealer if and when it trades a security unless it can conduct the trade in reliance upon an exemption. In Québec, a person or company is not required to become registered as a dealer unless and until it becomes engaged in the business of trading in securities. This requirement is comparable to the adviser registration requirement that is common to all provinces and territories that imposes registration as an advisor on a person or company if it engages, or holds itself out as engaging, in the business of advising others as to the investing in or the buying or selling of securities.

NI 31-103 contemplates the adoption of a "business" trigger for dealer registration in lieu of the "trade" trigger that currently exists in all provinces and territories other than Québec. The adoption of a "business" trigger would establish uniform dealer, adviser and investment fund manager registration requirements throughout Canada. It would also remove from the ambit of securities legislation those persons or companies who are not engaged in the business of dealing, advising or acting as investment fund managers and thereby facilitate the elimination of a number of dealer registration exemptions that exist to accommodate their exempt trading activity.

According to the Companion Policy to 31-103 ("31-103CP"), there would be only two components to any assessment of the application of the "business" trigger. The first component would involve an assessment of whether the particular activity involved dealing in securities, advising in securities or acting as an investment fund manager. If so, the second component would involve an assessment of the extent to which the activity was being conducted as a business. For non-residents, there would almost certainly be a third component that would involve an assessment of the extent to which the business conducted by the non-resident was being conducted in Canada.

Factors that would be taken into account for the purpose of determining whether dealer, adviser or investment fund manager activity was being conducted as a business would include:

  • undertaking the activity, directly or indirectly, with repetition, regularity or continuity;
  • being, or expecting to be, remunerated or otherwise compensated for undertaking the activity;
  • soliciting, directly or indirectly, others in connection with the activity; and
  • holding oneself out, directly or indirectly, of being in the business of the activity.

Applying these factors, 31-103CP offers these examples of the way in which the "business" trigger might be applied.

Security Issuers

Few issuers with active non-securities businesses would also be considered to be in the business of dealing in securities.

Limited Partnerships

Whether the general partner ("GP") of a limited partnership ("LP") must register as an adviser depends upon the nature of the services provided by the GP and the expectations of the other limited partners. The legal form of the investment vehicle is not determinative. Accordingly, if, for example, the LP is a venture capital fund and the GP’s role is to select companies that the GP will actively manage and develop, the GP would not be required to register as an adviser because the purchase and sale of securities by the GP would be incidental to its primary business activity. If, however, the purpose of the LP is simply to invest in securities, the limited partners would be relying on the GP’s investment skills and the GP would be required to register as an adviser.

Principal Dealing Activities

In most cases, persons or companies, such as individuals, day traders and pension funds, whose main or sole activity is dealing for their own account would not be considered to be in the business of dealing in securities.

Investment Fund Managers

A person or company acting as an investment fund manager will always be considered to be engaged in business as such.

Categories of Registration and Permitted Activities

Under NI 31-103, the registration categories and related requirements have been harmonized across all jurisdictions and the number of categories of registration has been reduced significantly, though a few new categories of registration have been introduced. The registration categories of dealer and adviser will be maintained and will continue to have sub-categories (i.e. mutual fund dealer, investment dealer, etc.). Of note, is the addition of the new category of registration of investment fund manager (there are no sub-categories for investment fund managers).

New Categories of Registration

"Exempt Market Dealer" is a new category of registration for dealers restricted to dealing in prospectus exempt securities and with persons to whom prospectus exempt distributions can be made. It will replace the Limited Market Dealer ("LMD") category in Ontario and Newfoundland and Labrador. Most LMDs will be expected to become registered as Exempt Market Dealers through a (to-be-determined) transition process. Exempt Market Dealers, unlike LMDs will be required to meet fit and proper and conduct requirements.

"Restricted Dealer" is a new category of registration for dealers engaged in dealing activities that are limited to a particular sector or type of securities (i.e. real estate securities). The restrictions and requirements applicable to a Restricted Dealer will depend on the particular dealing activities.

"Restricted Portfolio Manager" is a new category of registration available to portfolio managers restricted to advising with respect to specified securities, types of securities or specific industries. As with the Restricted Dealer category, the restrictions and requirements for a Restricted Portfolio Manager will be tailored to the advising activity of the portfolio manager. It is expected that the proficiency requirements for this category will be less than the requirements for a Portfolio Manager. A Restricted Portfolio Manager will be permitted to provide discretionary management, subject to the terms and conditions of its registration.

The "Investment Fund Manager" category introduces a new requirement for all managers of investment funds to be registered as Investment Fund Managers, regardless of whether they are in the business of trading or advising. This includes managers of public mutual funds, public closed-end funds and private or prospectus-exempt pooled funds and hedge funds. Through this new category of registration, the CSA is attempting to address and regulate certain risks particular to fund managers (i.e. calculation of NAV, financial reporting and conflicts of interest between the manager and investors) through the regulation of the fund managers, rather than the current regime of regulating the investment funds. A Portfolio Manager that manages an investment fund will also be required to be registered as an Investment Fund Manager and meet the conditions of both categories. The category of Investment Fund Manager is expected to be set out in the securities legislation of each jurisdiction through consequential amendments when the NI 31-103 is brought into force.

NI 31-103 also introduces a few new categories of registration for individuals, including a requirement that all registrant firms have a registered Ultimate Designated Person as the person who is in charge of the business (likely the president or CEO) and a Chief Compliance Officer who is responsible for monitoring daily compliance with policies and procedures. NI 31-103 introduces a new category of Associate Advising Representative which is a category that currently exists in some Canadian jurisdictions. This category is intended as an apprentice category for individuals looking to obtain the full registration but who do not yet meet the proficiency requirements.

The following categories of registration are proposed to be eliminated: security issuer, securities adviser, investment counsel, international dealer, international adviser and LMD. Persons who currently qualify as International Dealers (in Ontario and Newfoundland and Labrador) or International Advisers (in Ontario only) will be exempt from registration subject to certain conditions, but the types of permitted clients has been narrowed. See "Registration Exemptions below.

Permitted Activities

A registered adviser who deals in securities of in-house pooled funds with fully managed accounts managed by the adviser will be exempt from the dealer registration requirement.

A registered dealer who provides non-discretionary advice in support of its dealing activities will be exempt from the adviser registration requirement. There is no longer a requirement that the advising be "incidental to" a dealer’s primary business. The current exemption for IDA members who give discretionary advice to fully managed accounts will be maintained.

SRO Membership

NI 31-103 provides that no person, company or individual may be registered as an investment dealer unless he, she or it is also a member or approved person under the by-laws of the IDA, and that no person or company may be registered as a mutual fund dealer unless he, she or it is also a member of the MFDA or, in Québec, a self-regulatory organization (an "SRO") recognized for regulating mutual funds (together with the MFDA, an "MFD SRO"). Where a registrant is a member of one of these SROs, the registrant will be exempt from certain sections of the NI 31-103, including capital requirements and related reports, appointment of auditors and leverage and relationship disclosure, as these SROs have rules and policies that will instead govern these areas. NI 31-103 reflects the current regime in most Canadian jurisdictions.

Fit and Proper Requirements

Proficiency Requirements

Exam-based, rather than course-based, proficiency requirements have been prescribed for representatives of each category of dealer other than an investment dealer or a mutual fund dealer representative that is a member of the IDA or an MFD SRO and for portfolio managers. Proficiency requirements largely taken from OSC Rule 31-502 – Proficiency Requirements for Registrants are also prescribed for chief compliance officers for each of the categories of registrants. Unlike LMD representatives, a person acting as a dealing representative of the new exempt market dealer category must meet one of three proficiency requirements, similar to representatives of an investment dealer member of the IDA.

The required experience of an advising representative, if a representative holds a CFA charter, has been significantly reduced from five years to 12 months of investment management experience in the 36-month period prior to applying for registration. If a person has the Canadian Investment Management designation, on the other hand, he or she must have 48 months of investment management experience, at least 12 months of which was in the 36-month period prior to applying for registration. A person may be granted registration as an associate advising representative of a portfolio manager if he or she has completed any part of a requirement for an advising representative, for example, having earned a CFA charter.

Solvency requirements

Minimum capital requirements for registered firms under NI 31-103 (the IDA or MFD SRO may impose higher requirements) will be $25,000 for advisors, $50,000 for dealers and $100,000 for investment fund managers. Monthly minimum capital reports will be required. A financial institution bond calculated based on the number of employees or a percentage of client assets or assets under management subject to $200,000 minimum is prescribed. Solvency requirements are not cumulative – a firm registered in more than one category will have to comply with the highest requirement.

Conduct Rules

Rules governing the conduct of all registered firms (the "Conduct Rules") are set out in Part 5 of both NI 31-103 and 31-103CP. The Conduct Rules restate and refine business conduct requirements that are currently found in provincial and territorial securities legislation. The Conduct Rules comprise the eight conduct categories summarized below. Generally, members of the IDA or an MFD SRO are exempt from the Conduct Rules to the extent that their conduct is governed by the by-laws, rules and policies of the IDA or an MFD SRO.

Account Opening and Know-Your-Client

A registered firm is required to comply with know-your-client and suitability requirements that are prescribed by the Conduct Rules unless the registrant is executing a purchase or sale of a security pursuant to instructions received from, among others, another registrant, a Canadian financial institution or a Schedule III bank. A registered firm must also provide any client that intends to borrow money to finance the purchase of securities with a prescribed form of leverage disclosure and it must obtain the client’s written acknowledgement of receipt. Certain disclosure must also be provided to the non-accredited investor clients of registered firms that are conducting securities related activities in an office or branch of a Canadian financial institution or a Schedule III bank to ensure that the clients appreciate that they are dealing with the registrant firm rather than the financial institution. These account opening and know-your-client requirements do not apply to investment fund managers.

Relationship Disclosure

Before a registrant can purchase or sell a security for a client, or provide advice to a client, the registrant will be required to provide the client with a relationship disclosure document that must contain, among other things, a description of the client’s account, a description of the conflicts of interest that the registrant is required to disclose under securities legislation, disclosure of all service fees and charges that will be levied in respect of the operation of the client’s account and a description of the content and frequency of the registrant’s client reporting obligations. A relationship disclosure document will not have to be prepared and delivered by an investment fund manager or by a registrant when it is dealing with an accredited investor.

Client Assets

Generally, a registered firm that holds the securities or other property of a client must hold the securities or property separate and apart from its own property and in trust for the client. If the registered firm is holding cash on behalf of the client, the cash must be held in a designated trust account with, among others, a Canadian financial institution or a Schedule III bank. This conduct category also prescribes requirements for client securities that are the subject of a written safe-keeping agreement as well as the use of free credit balances to reduce debit balances.

Record-Keeping

In addition to general record-keeping requirements, the Conduct Rules will require registered firms to keep their records in a safe and durable form and in a manner that facilitates their prompt delivery to the regulator for a period of two years following the creation of the records. Thereafter, records must be kept in a manner that permits such delivery within a reasonable period of time. All activity records of a registered firm will have to be retained for a period of seven years from the date of the relevant act, and all relationship records will have to be retained for a period of seven years from the date the relevant person or company ceases to be a client of the registered firm.

Account Activity Reporting

Account activity reporting requirements include, without limitation, trade confirmation, statement of account and statement of portfolio delivery requirements. The trade confirmation requirements will permit trade confirmations to be sent to either the relevant client or, with the client’s consent, any registered adviser acting on behalf of the client. They will also allow a registered dealer that has acted for a client in respect of a trade in a mutual fund security to refrain from sending a written confirmation of the trade to the client if the trade confirmation is delivered to the client by the investment fund manager of the mutual fund. Statements of account and statements of portfolio must be sent to clients by registered dealers and advisers, not less than once every three months. If a registered adviser has been receiving trade confirmations on behalf of its client, the client must receive a statement of portfolio not less than once every month.

Compliance

A registered firm will be required to permit its Ultimate Designated Person and its Chief Compliance Officer to gain direct access to the firm’s board of directors whenever either of them considers it necessary or advisable to do so in the light of his or her responsibilities. The Chief Compliance Officer will be required to report directly to the board of directors at least once a year respecting the registered firm’s compliance with securities legislation.

Complaints Handling

A registered firm will be required to document, and to deal fairly and effectively, with every complaint that it receives in respect of any of its products or services and it will be required to participate in a related dispute resolution service and to advise complainants of the availability of the service. It will also be required to prepare a report for filing with the securities regulatory authority within two months of the end of its fiscal year that will describe the policies that it has established for processing complaints as well as the number and nature of client complaints filed during the year. These requirements reflect the complaint handling regime already in place in Québec.

Non-Resident Registrants

Non-resident registrants will be required to continue providing their clients with disclosure of the potentially adverse consequences of their non-resident status. They will also be required to continue holding client assets in accordance with prescribed custodial requirements and to maintain any registration or SRO memberships that are required for the business that is being conducted by them in their home jurisdiction.

Conflicts

Part 6 of NI 31-103 addresses conflicts faced by a registered firm in the course of its operations. It is divided into two divisions: first, addressing general conflicts of interest and second, addressing particular conflicts associated with referral arrangements.

NI 31-103 requires that a registered firm must identify each potential and actual conflict of interest and provide prior written disclosure of a conflict of interest to a client while dealing with such conflicts in a fair, equitable and transparent manner exercising responsible business judgment. In spite of these overarching principles, NI 31-103 then specifies certain prohibited managed account transactions including certain forms of self-dealing. The balance of Division I of Part 6 addresses a number of discrete conflicts of interest. One section prohibits certain individuals from being registered with more than one registered firm. Several sections address disclosure to be made by a registered firm in respect of securities of a related issuer or of a connected issuer, require the delivery of an Issuer Disclosure Statement in prescribed form and discipline the dissemination of research recommendations concerning related or connected issuers. The current CFA Institute rules regarding the allocation of investment opportunities and requires written policies to be circulated to a client are set out in a section of this division. A requirement already in place in Québec that 30-days notice be provided to regulators of the acquisition of 10% or more of the securities of a registrant is imposed throughout Canada. Finally, another section codifies and reinforces other statutory prohibitions to a person or company engaging in tied selling of any products or services.

Division II of Part 6 addresses "referral arrangements" - arrangements in which a registrant agrees to pay or receive a referral fee. A registrant will be prohibited from participating in a referral arrangement unless it meets certain requirements, including the prior written disclosure of such arrangements to the client. The minimum content of any such notice is prescribed. The registrant is also required to take reasonable steps to satisfy itself that the referred person or company has appropriate qualifications to provide the services and, if applicable, is registered to provide those services.

While many of these provisions restate current requirements or simplify reference such provisions, other requirements, such as regulatory consent to the acquisition of an interest in a registrant, are new.

Registration Exemptions

NI 31-103 proposes significant harmonization of the exemptions from dealer and adviser registration requirements across Canada.

Dealer Registration Exemptions

NI 31-103 offers far fewer dealer registration exemptions than current regimes because NI 31-103 is premised upon a business trigger instead of the trade trigger that exists today in all provinces and territories other than Québec. Moreover, the introduction of an Exempt Market Dealer registration category will, in jurisdictions other than Ontario and Newfoundland and Labrador, dramatically narrow the exempt market for unregistered intermediaries. In Ontario and Newfoundland and Labrador, the adoption of the system of universal registration in the late 1980’s had effectively eliminated the exempt market for unregistered intermediaries.

Under the business trigger concept of registration, the dealer registration exemptions contained in NI 45-106 will be repealed and will be replaced with these exemptions:

Investment fund distributing through dealer - an exemption to an investment fund or the manager of the fund that distributes a security of the fund’s own issue solely through a registered dealer.

Investment fund reinvestment - a limited exemption to an investment fund and its manager where (i) distributions or dividends are used by securityholders to acquire securities of the investment fund; and (ii) a securityholder acquires securities of an investment fund whose securities trade in a marketplace provided that the maximum number of securities that may be issued pursuant to this exemption is 2% of the issued and outstanding securities of the class.

Additional investment in investment funds - an exemption to an investment fund and its manager in connection with a distribution of securities to securityholders that have previously acquired securities of the investment fund for an acquisition cost of not less than $150,000 or hold securities having a NAV of not less than $150,000.

Private investment fund – loan and trust pools - an exemption to an investment fund and a trust company that is solely administered by the trust company.

Mortgages - an exemption to a person dealing in mortgages who is licensed or exempt from licensing under mortgage brokerage laws.

Personal Property Security Act - an exemption to a person dealing in a security (other than to an individual) evidencing indebtedness secured under personal property security legislation.

Variable insurance contract - an exemption to an insurance company dealing in (i) a contract of group insurance; (ii) a whole life insurance contract providing for a payment at maturity of an amount not less than 75% of the premium paid; (iii) an arrangement for the investment of policy dividends and policy proceeds; and (iv) a variable life annuity.

Schedule III banks and cooperative associations – evidence of deposit - an exemption to a person dealing in a deposit issued by a Schedule III bank or federal co-op.

Plan administrators - an exemption in dealing in securities of an issuer by a trustee, custodian or administrator acting on behalf of employees, executive, directors and consultants of the issuer pursuant to a plan of the issuer.

Non-resident dealers - See "Non-resident Dealers, Advisers and Investment Funds" below.

Adviser Registration Exemptions

NI 31-103 proposes these exemptions from the adviser registration requirement:

Advising generally - an exemption to a person that carries on an advisory business either directly or through publications if the advice is not tailored to needs of specific clients.

Advice incidental to the services of a financial institution - an exemption to Canadian financial institutions, Schedule III banks, the Business Development Bank of Canada, a société d’entraide économique or the Fédération des sociétés d’entraicle économique du Québec, provided the advice is incidental to their principal services.

Sub-advisers - an exemption to advisers not ordinarily resident in a jurisdiction providing advice to a registered adviser provided, among other things, (i) the non-registered adviser and registered adviser enter into an agreement that stipulates that the registered adviser will be responsible for any losses to its clients that arise out of a failure of non-registered adviser to perform its services in accordance with the standard and duty of care; (ii) the non-registered adviser has no direct contact with the registered adviser’s clients unless the registered adviser is present; (iii) the non-registered adviser is registered in the jurisdiction in which it is a resident; and (iv) in Manitoba, the non-registered adviser is not registered in any Canadian jurisdiction.

Non-resident advisers, investment funds and investment fund managers - See "Non-resident Dealers, Advisers and Investment Funds" below.

Mobility Exemptions

NI 31-103 introduces limited exemptions that permit a registrant to continue servicing a client and certain family members of that client that move to a jurisdiction in which the registrant is not registered.

International Dealers

Currently, as a result of the universal registration requirement in Ontario and Newfoundland and Labrador, a dealer located outside of Canada may only trade securities with a resident of one of those provinces if it is registered as a dealer in that province. A non-resident dealer may register with the securities regulator of Ontario or Newfoundland and Labrador as an international dealer or, if relief from the Canadian residency requirement is obtained, as an LMD.

Under NI 31-103, the Canadian residency requirement for all registrants will be eliminated. In addition, the category of international dealer registration will be eliminated and replaced with an "international dealer" exemption from registration. The exemption will generally mirror the conditions imposed on an international dealer. However, instead of being permitted to trade with accredited investors that are not individuals, under the exemption, a non resident dealer will only be permitted to trade with a more limited universe of permitted clients, in particular:

  • regulated financial institutions;
  • registered dealers and advisers;
  • federal, provincial, territorial and municipal governments and crown corporations;
  • regulated pension funds;
  • investment finds advised by a registered portfolio manager; and
  • accounts fully-managed by a regulated trust company or adviser.

The "international dealer" exemption from registration will only be available to persons or companies that have no establishment, officers, employees or agents in Canada, and who are registered to carry on the business of dealing in securities in their home jurisdiction. In order to rely on the exemption, the non-resident dealer will have to formally submit to the jurisdiction and appoint an agent for service. Before dealing with any permitted client, the non-resident dealer will also have to notify the client of its non-resident status.

Although only Ontario and Newfoundland and Labrador currently have an "international dealer" category of registration under NI 31-103, the "international dealer" exemption from registration will apply throughout Canada. Currently, a non-resident dealer is not required to be registered as a dealer in order to trade securities under the prospectus exemptions under NI 45-106 with residents of any province other than Ontario and Newfoundland and Labrador.

International Advisers

Currently, a non-resident adviser that provides advice to (i) a resident of Ontario or (ii) a non- resident investment fund that distributes securities to residents of Ontario must be either registered as an international adviser with the Ontario Securities Commission ("OSC") or exempt from registration under OSC Rule 35-502 Non-Resident Adviser.

Under NI 31-103, the category of international adviser registration and the exemptions from registration under OSC Rule 35-502 will be eliminated and replaced with the following exemptions from registration. It should be noted that the existing exemption under OSC Rule 35-502 for unsolicited advice to not more than five clients in Canada during any 12 month period has not been replaced.

International Portfolio Manager

Similar to the replacement of the international dealer category of registration with the "international dealer" exemption from registration, under the "international portfolio manager" exemption, a non-resident adviser will only be permitted to provide advice to a more limited universe of permitted clients, in particular:

  • regulated financial institutions;
  • federal, provincial, territorial and municipal governments and crown corporations;
  • regulated pension finds;
  • investment funds advised by a registered portfolio manager; and
  • accounts fully-managed by a regulated trust company.

The "international portfolio manager" exemption from registration will only be available to persons or companies that have no establishment, officers, employees or agents in Canada, and who are registered to carry on and engage in the business of a portfolio manager in their home jurisdiction. In order to rely on the exemption, the non-resident adviser will have to formally submit to the jurisdiction and appoint an agent for service. Before acting as portfolio manager to any permitted client, the non-resident adviser will also have to notify the client of its non-resident status. The non-resident adviser will not permitted to solicit new clients in Canada or to advise clients in Canada with respect to securities of Canadian issuers, unless providing advice on securities of a Canadian issuer is incidental to providing advice on securities of a foreign issuer. In addition, not more than 10% of the aggregate consolidated gross revenue of the non-resident adviser and its affiliates for any fiscal year may be derived from portfolio management activities of the non-resident adviser and its affiliates in Canada.

Privately Placed Funds Offered Primarily Abroad and International Investment Fund Manager

A non-resident adviser that acts as an adviser to or manages an investment fund that distributes securities to residents of Canada will be exempt from the registration requirement provided that:

  • the securities of the find are primarily offered outside of Canada;
  • the securities of the find are only distributed in Canada through one or more registered dealers; and
  • the securities of the find are distributed in Canada in reliance upon an exemption from the prospectus requirement.

The "privately placed funds offered primarily abroad" and "international investment find manager" exemptions from registration, which are largely taken from OSC Rule 35-502, will only be available to persons or companies that have no establishment, officers, employees or agents in Canada, and who engage in the business of a portfolio manager in their home jurisdiction. Before acting as an adviser to any client, the non-resident adviser will have to notify the client of its non-resident status.

Sub-advisers

A non-resident adviser that acts as an adviser to a registered adviser will be exempt from the registration requirement provided that, among other things, the registered adviser 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 non-resident adviser so acting as an adviser (i) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the registered adviser and each client of the registered adviser for whose benefit the advice is or portfolio management services are to be provided, or (ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances. This "sub-adviser" exemption from registration is largely taken from OSC Rule 35-502.

Except in certain circumstances, there is currently no requirement for a non-resident adviser to be registered or to rely on an exemption therefrom in order to provide advice to a non-resident investment fund that distributes securities to residents of any province or territory of Canada other than Ontario. Although this will change under NI 31-103, the new exemptions from registration in NI 31-103 will be available throughout Canada.

Changes to Québec Regulatory Framework for Restricted Practice Dealers

In Québec, the AMF is proposing a major overhaul of the regulatory framework for mutual fund and other restricted practice dealers, including:

  • mutual fund dealers and other restricted practice dealers such as scholarship plan dealers moving from the current regime of the Québec Act Respecting the Distribution of Financial Products and Services to the substantially different regulatory regime of the Québec Securities Act,
  • requiring membership of mutual fund dealer firms with an SRO recognized by the AMF – either the MFDA or the Chambre de la sécurité financière (CSF) exclusively or the MFDA and CSF jointly, and
  • requiring calculation of minimal capital of mutual fund dealer firms in accordance with MFDA rules.

Transition Period

No transition rule or timeframe is included in NI 31-103. The CSA has announced that it is considering an appropriate transition period.

Expertise