Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST 2009 www.blgcanada.com What s New? NATIONAL INSTRUMENT 31-103 INVESTMENT DEALERS IIROC MEMBERS The long-anticipated changes to the registration regime under Canada s securities regulation have now been finalized with the release of National Instrument 31-103 Registration Requirements and Exemptions on July 17, 2009. The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule [available here] outlines the scope of National Instrument 31-103, as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments. Firms registered as investment dealers that are members of the Investment Industry Regulatory Organization of Canada (IIROC) and their representatives (Approved Persons) will not be as affected as other registrants by National Instrument 31-103, given the scope of regulation by IIROC. IIROC members have been exempted from some of the rules set out in National Instrument 31-103, in recognition that IIROC regulates the area and IIROC members must comply with IIROC rules. In other cases, even where National Instrument 31-103 applies to IIROC members, the rules are more broadly written and largely consistent with IIROC regulation, so that National Instrument 31-103 does not impose any greater requirements than what is currently required under IIROC regulation. Amendments to IIROC Rules IIROC published amendments to its rules on July 17, 2009 that are designed to bring those rules into conformity with National Instrument 31-103. The proposed IIROC
rule amendments have not yet been adopted, and are subject to approval by the applicable securities regulatory authorities. If approved, the rule amendments are proposed to be effective on the same date that National Instrument 31-103 comes into force, being September 28, 2009. The IIROC rule amendments are designed to Simplify the categories of Approved Persons. IIROC proposes to reduce the current 46 existing approval categories to 11 new approval categories, which will focus solely on functions. The various supervisor categories also will be merged into a new supervisor category (those approved to supervise the business activities of other approved persons). Have only those individiuals who exercise the mind and management of the IIROC member require approval (i.e. no longer basing required approvals on merely holding an officer position) Move toward a principles-based approach for registration-related requirements to allow IIROC members greater flexibility in developing compliance and supervision structures and processes that are applicable to their business Harmonize the IIROC rules with those of the CSA and Mutual Fund Dealers Association of Canada as much as possible. IIROC members also will be required to comply with new IIROC rules proposed to implement the Client Relationship Model (CRM), which is a related parallel initiative of the Canadian securities regulators, including the self-regulatory organizations. The IIROC proposals regarding CRM include All IIROC members will have to provide their retail clients with certain prescribed information (relationship disclosure) regarding the relationship they are entering into with a client The relationship disclosure to be provided for order-execution only and for managed accounts is less extensive. Managed accounts must be monitored and supervised according to the specific standards imposed under IIROC rules and the relationship disclosure must include a statement that ongoing suitability reviews are provided as part of the managed account services. IIROC does not propose to mandate a prescribed format for the relationship disclosure, however it must be provided to the client in writing at the time of account opening, written in plain language and included under a heading entitled Relationship Disclosure. IIROC is also proposing to supplement its current rules relating to the management of conflicts of interest by 2
Requiring that IIROC members develop and maintain policies and procedures to identify, avoid, disclose, and address all real and potential conflicts and Adopting a general rule to require that where conflict situations cannot be avoided, they will be disclosed and addressed in manner that is consistent with the best interests of the client (disclosure should occur at the account opening stage for a new client, as conflicts occur for existing clients, or prior to entering into a transaction with an existing client). In addition to IIROC s current suitability requirements for trades accepted and recommendations made on retail client accounts, it is proposed that IIROC members will also have to perform an account suitability review when the following trigger events occur a trade is accepted a recommendation is made securities are transferred or deposited into the account there is a change of registered representative, investment representative, or portfolio manager responsible for the account or there is a material change to the know-your-client information for the account. The suitability review is intended by IIROC to occur within one day after the IIROC member or its representative becomes aware that one of the trigger events has occurred, and in any case should be completed prior to, or at the time of, any subsequent trade on the account. IIROC is also considering requiring specified disclosures regarding account performance reporting, including security position cost disclosure, account activity disclosure and account percentage return disclosure. Account percentage return disclosure would not be required to be provided to clients, however, clients must be told at account opening whether they will be provided with this disclosure. Recent IIROC Notices re Registration IIROC notice 09-0192 released on June 26, 2009 sets out IIROC registration staff s current approach when conducting suitability reviews for individuals seeking IIROC approval and/or registration and when evaluating termination, regulatory, criminal, civil or financial disclosures filed on NRD. This notice also provides guidance on best hiring practices that IIROC members are encouraged to adopt. 3
Impact of National Instrument 31-103 The following table focuses on certain provisions of National Instrument 31-103 and explains how they apply to registered investment dealers that are members of IIROC and their representatives. NI 31-103 Commentary Transition effective immediately means September 28, 2009 (NI 31-103 expected to be in force on September 28, 2009) Registration A new business trigger regime for dealers No transition period for this new Trigger has been introduced to be consistent with registration trigger - effective immediately. current business trigger regime for advisers. Registration as an investment dealer will depend on an assessment of whether the firm is in the business of trading in securities. Investment dealers must be members of IIROC. Trading and Investment dealers may trade in, and No transition period for this ability to trade Underwriting underwrite, any and all securities. or underwrite - effective immediately. Registration Limited exemptions available from the No transition period for exemptions Exemptions dealer registration requirement e.g. trades effective immediately. relating to dividend reinvestments and trades in specified debt. There are also new registration exemptions that will be available to non-canadian dealers and advisers that carry on business in Canada and, if all conditions are met, will mean that those entities do not need to be registered in Canada. 4
NI 31-103 Commentary Transition effective immediately means September 28, 2009 (NI 31-103 expected to be in force on September 28, 2009) Mobility Exemption From Registration In limited circumstances, investment dealers, and their representatives, will be permitted to continue to deal with clients (and their immediate family members) who move to another province or territory without registering in that other province or territory under a mobility exemption. No transition period for the mobility exemption effective immediately Individual Registration Categories Ultimate Designated Person (UDP) must be the chief executive officer of the firm - responsible for promoting compliance and supervising the activities of the firm that are directed towards ensuring compliance with securities legislation. Investment dealers have a 3-month transition period (to December 28, 2009) in which to appoint and apply for registration of the UDP and CCO. Chief Compliance Officer (CCO) responsible for establishing and maintaining policies and procedures for assessing compliance and for day-to-day monitoring of adherence to policies and procedures. CCOs must report annually to the board of directors. CCOs subject to minimum proficiency requirements established by IIROC. IIROC has indicated that firms may no longer have more than one individual registered as CCO. Individual dealing representatives for an investment dealer must be registered and comply with minimum proficiency requirements set by IIROC. Permitted Individuals Permitted individuals are those individuals who form part of the mind and management of a firm. Under new National Instrument 33-109, this is a smaller group than included in the current definition of permitted individual. Permitted individuals must submit, and keep updated, information on NRD. All existing permitted individuals will be converted on NRD during the freezeperiod (September 25 October 12, 2009) to the new category. Those individuals who do not fall within the new definition of permitted individual can be removed from NRD by filing an individual notice of termination, or a bulk submission (for 10 or more individuals) this should be done before December 31, 2009 in order to avoid fees. 5
NI 31-103 Commentary Transition effective immediately means September 28, 2009 (NI 31-103 expected to be in force on September 28, 2009) Proficiency Minimum proficiency requirements for representatives of investment dealers continue to be set by IIROC and will be unchanged by National Instrument 31-103. Minimum proficiency requirements for the CCO for an investment dealer are set by IIROC and will be unchanged by National Instrument 31-103. Capital Minimum capital requirements for investment dealers are prescribed by IIROC and will be unchanged by National Instrument 31-103. Insurance Insurance requirements for investment dealers are based on IIROC requirements and will be unchanged by National Instrument 31-103. Financial Reporting Financial reporting obligations for an investment dealer are established by IIROC and will be unchanged by National Instrument 31-103. KYC, Suitability and Relationship Disclosure Investment dealers are exempt from the requirements of National Instrument 31-103 with respect to account opening, suitability, KYC and relationship disclosure, but must comply with IIROC rules. Record Keeping Maintain records to accurately record business and demonstrate compliance with securities legislation. Records must be kept in a manner that permits access by the regulators in a reasonable period of time and allow regulators to read them. Records must be kept for 7 years from the date created. Records must also be maintained in accordance with IIROC requirements. No transition period for the record keeping requirements - effective immediately. Client Statements Quarterly statements of account required to be provided to each client unless activity in account during a month or client requests monthly statements. No transition period for client statements - effective immediately. 6
NI 31-103 Commentary Transition effective immediately means September 28, 2009 (NI 31-103 expected to be in force on September 28, 2009) Compliance Systems Investment dealers must establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to assure compliance with securities legislation and to manage risks associated with the business in accordance with prudent business practices. No transition period for compliance system requirements - effective immediately. CCO and UDP to have access to the board of directors. Complaint Handling and Dispute Resolution Investment dealers must document and respond to each complaint made to the firm about products or services offered by the firm. Investment dealers must participate in an independent dispute resolution or mediation service. No transition provision for the complaint handling requirement but a two-year transition period (to September 28, 2011) in which to meet dispute resolution or mediation service requirements. Margin/ Extending Credit to Clients Investment dealers are exempt from the prohibition contained in National Instrument 31-103 on registrants lending money, extending credit and providing margin to clients. This is not a change for existing investment dealers. Conflicts of Interest Investment dealers must make reasonable efforts to identify existing and potential material conflicts of interest and must respond to them. Requirement to provide written disclosure of a conflict of interest where a reasonable client would expect to be informed of the conflict when entering into a proposed transaction. No transition period for these requirements - effective immediately Requirements to disclose prescribed information about trading in securities of related and connected issuers. Referral Arrangements Investment dealers must comply with rules regarding referral arrangements disclosure to clients and written agreement reflecting the arrangements. Six month transition period (to March 28, 2010) in which to meet the referral arrangement requirements. 7
This Investment Management Advisory was written by: Julie Hesse (Toronto) Leigh-Ann Ronen (Toronto) 416-367-6224 416-367-6616 jhesse@blgcanada.com lronen@blgcanada.com For more information on National Instrument 31-103, please click [here] to access BLG s series Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements. Our series consists of nine advisories starting with Canadian Securities Regulators Release Final Registration Rule released by our Investment Management Group in July 2009. BLG s Investment Management Advisories are available on our website at www.blgcanada.com [click on Publications and then select Capital Markets to search current publications]. Please contact your usual lawyer in BLG s Investment Management Group, the authors of this Advisory or any of the following lawyers to discuss the implications of National Instrument 31-103 on your business. TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart 416-367-6082 416-367-6639 416-367-6340 416-367-6042 pthiele@blgcanada.com lcook@blgcanada.com rcowdery@blgcanada.com mgerhart@blgcanada.com VANCOUVER: CALGARY: MONTRÉAL: Jason J. Brooks H. Scott McEvoy Angie Redecopp François Brais 604-640-4102 604-640-4170 403-232-9504 514-954-3143 jbrooks@blgcanada.com smcevoy@blgcanada.com aredecopp@blgcanada.com fbrais@blgcanada.com BLG s Investment Management Group leaders are: John E. Hall National Group Leader 416-367-6643 jhall@blgcanada.com Brad J. Pierce Calgary Regional Leader 403-232-9421 bpierce@blgcanada.com François Brais Montréal Regional Leader 514-954-3143 fbrais@blgcanada.com Jeremy S.T. Farr Ottawa Regional Leader 613-787-3511 jfarr@blgcanada.com Lynn M. McGrade Toronto Regional Leader 416-367-6115 lmcgrade@blgcanada.com Jason J. Brooks Vancouver Regional Leader 604-640-4102 jbrooks@blgcanada.com 9
BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling 1-877-BLG-LAW1 or emailing subscriptions@blgcanada.com and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at http://www.blgcanada.com/home/website-electronic-privacy. 2009 Borden Ladner Gervais LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: 403 232-9500 fax: 403 266-1395 M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: 514 879-1212 fax: 514 954-1905 O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: 613 237-5160 1-800-661-4237 legal fax: 613 230-8842 IP fax: 613 787-3558 To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: 416 367-6000 fax: 416 367-6749 Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box 48600 Vancouver, British Columbia, Canada V7X 1T2 tel: 604 687-5744 fax: 604 687-1415 Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: 519 579-5600 fax: 519 579-2725 IP fax: 519 741-9149 www.blgcanada.com Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada