Registration reform comes into force this month

By Kanupriya Vashisht | September 15, 2009 | Last updated on September 15, 2009
5 min read

Starting September 28, Canada’s long-awaited consolidated National Instrument 31-103 will come into force, replacing the myriad regulations and policy statements found in different sets of provincial securities acts.

Initiated by the Canadian Securities Administrators (CSA), the revised proposals relate specifically to registration requirements for dealers, advisors and investment fund managers, and constitute an overhaul of existing registration tenets and registration-exempt activities across all CSA jurisdictions.

Once in effect, the revised rules will require advisors to pass exams, not courses, to fulfill educational requirements for registration.

The instrument is likely to impact the approximately 2,000 firms and 130,000 individuals currently registered under securities legislation. Here are some key changes and requirements that will impact MFDA members.

Exempt Market Dealers (EMDs) This is a new category of registration for entities in the business of dealing in exempt securities. While the EMD category may be new, MFDA members and approved persons still won’t be permitted to sell exempt securities through any other entity or refer clients to another party to purchase exempt securities.

Salespersons of an EMD will be required pass either:

• the Canadian Securities Course exam; • the Exempt Market Products exam; or • satisfy the requirements of an advising representative for a portfolio manager.

Chief compliance officers of an EMD selling exempt securities must pass the Partner Director Officer (PDO) exam and either:

• the Canadian Securities Course exam; • the Exempt Market Products exam; or • satisfy the requirements of a CCO for a portfolio manager.

In Ontario and Newfoundland, the CCO and salespersons of a member firm with an existing limited market dealer (LMD) license will have 12 months from September 28, 2009 to obtain proficiency. In the other provinces and territories, if the firm is active in selling exempt securities, the CCO and salespersons will also have 12 months to gain proficiency. If the member firm isn’t active in selling exempt securities prior to September 28, 2009 or obtains membership in the MFDA after September 28, 2009, it must obtain an EMD license and individuals must satisfy the above proficiency prior to selling exempt securities.

The previous mutual fund officers, partners and directors course and the new mutual fund dealers compliance exam will no longer satisfy the proficiency requirements of a CCO of an EMD.

Dealer registration MFDA members hoping to sell exempt securities after September 28 will be required to obtain EMD registration in all applicable provinces and territories. In Ontario and Newfoundland, members with LMD registration will not have to apply for an EMD license, as LMD registration will convert automatically to EMD registration.

In provinces and territories other than Ontario and Newfoundland, members which have been actively selling exempt securities prior to September 28 will have 12 months to apply for the EMD license.

Ultimate Designated Person (UDP) A brand new individual category, the chief executive officer will in most cases be the UDP of the member firm, and be responsible for promoting a culture of compliance and overseeing the effectiveness of the firm’s compliance system.

The firm’s CCO will report to the UDP, and the positions may be held by the same person if the individual meets the requirements for both categories. Member firms will have three months, from September 28, 2009, to designate and apply for registration for their UDP. Members will also have to notify the MFDA upon successful registration of their UDP.

There are no proficiency requirements for the UDP.

Branch managers The individual “branch manager” category of registration is being scrapped from NI 31-103. Dealers will now be required to establish a system of controls and supervision to provide reasonable assurance that the dealer, and individuals acting on its behalf, comply with securities legislation and manage risks associated with its business.

Client mobility MFDA by-laws require individuals to be registered and in compliance with securities legislation. While new client mobility provisions will not be added to the MFDA rulebook, members will be expected to be aware of and comply with the new requirements.

National Instrument 11-101 Principal Regulator System has been rescinded and replaced with NI 31-103. Sections 2.2 and 8.30 of NI 31-103 allow an approved person and a member, respectively, to maintain “eligible clients” (as defined in the instrument) in each jurisdiction without requiring registration in the jurisdiction subject to conditions.

Going forward, members will be expected to institute controls and procedures to comply with the conditions in NI 31-103 and prevent the opening of new accounts in jurisdictions where the conditions of the exemption cannot be satisfied.

Wherever the exemption conditions cannot be met (for example where the member or approved person has exceeded the eligible client limits), the member must freeze accounts or switch transactions (except for transactions made pursuant to an automatic contractual plan); and must either immediately apply for registration in the relevant jurisdiction, or advise the client in writing that:

• the member isn’t registered in the jurisdiction; • the member isn’t able to process further purchase or switch transactions for the account; and • the client must transfer his or her account to another dealer.

Referral arrangements MFDA Rule 2.4.2 currently limits with whom a member can have a referral arrangement. Further, any referral for securities-related business, the sale of investment products or financial services must be conducted through the member. MFDA rules further allow approved persons to enter into referral arrangements on their own accord provided the referrals do not involve securities related business, the sale of investment products or financial services and such activity is in compliance with MFDA Rule 1.2.1(d) relating to dual occupations.

NI 31-103 won’t impose limits as to who a registrant can enter into referral arrangements with. However, it will require all referral arrangements of approved persons to be conducted through their member firm.

Members will have six months, starting September 28, to comply with the new requirements for referral arrangements. This includes referral arrangements entered into prior to NI 31-103 coming into effect.

Investment Fund Managers (IFMs) IFM is a new registration category and will only apply to a limited number of MFDA members. Those operating as an IFM will have 12 months from September 28 to apply for registration as an IFM in their principal jurisdiction and 24 months to apply for IFM registration in the other jurisdictions where they operate.

MFDA members with IFM registration will also have to separately submit financial filings and subordinated loan agreements to the MFDA and provincial securities regulatory authority in their principal jurisdiction in compliance with the different filing requirements of each regulator.

Account Statements NI 31-103 will require dealers to deliver account statements to clients at least once every three months for both client name and nominee name accounts. Currently, members send out account statements annually as required by MFDA Rule 5.3.1.

All EMDs will be required to send quarterly account statements starting September 28, while MFDA members who hold only a mutual fund dealer license will have 24 months to comply with the quarterly statement requirement.

The revised rules will also require account statements to disclose information regarding client positions for client name and nominee name accounts. MFDA Rule 5.3.3(b) does not require, but does not prohibit, disclosure of client positions for client name accounts.

Further, if the firm engages third party service providers it will have to assure — in writing — that due-diligence will be conducted prior to outsourcing and that the firm, its auditors and regulators will have the same access to the work product of such service providers as they would if the firm performed the activities itself.

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Kanupriya Vashisht