Keeping Reforms in Sight:

Transcription

1 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements Investment Management Group August 2009 Investment Management Advisories Canadian Securities Regulators Release Final Registration Rule (July 2009) What s New? - Investment Dealers IIROC Members What s New? - Mutual Fund Dealers MFDA Members What s New? - Exempt Market Dealers What s New? - Advisers - Portfolio Managers What s New? - Investment Fund Managers Impact on the Hedge Fund Industry Impact on Non-Canadian Securities Market Participants

2 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements JULY 2009 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE After over five years of consultation, on July 17, 2009, the Canadian Securities Administrators (CSA) released, in final form, National Instrument Registration Requirements and Exemptions and various related instruments, including amendments to or revocations of various national and local existing instruments. National Instrument and the related instruments will come into force on September 28, 2009, subject to governmental approvals. The various amendments to provincial securities legislation enacted over the past few years that are necessary to allow National Instrument to be implemented, including Schedule 26 to Bill 162 in Ontario, are also expected to be proclaimed in force on the same time-table. National Instrument , the various provincial securities legislative amendments and the related instruments will put in place Canada s first-ever comprehensive registration regime for financial services firms and individuals. These instruments contain significant new requirements that, to varying degrees, will impact virtually every financial services firm carrying on business in Canada. While much of National Instrument is identical across all of the provinces and territories of Canada, there remain significant areas where the CSA could not reach agreement and accordingly, industry participants will be subject to different regulation depending upon the province and territory within which they operate. Although the CSA explain they have made no material changes to the version of National Instrument last released for comment in February 2008 (which would have necessitated an additional comment period), the final version of National Instrument has been reorganized and significantly rewritten (along with receiving an expanded name), with many requirements altered, often in subtle, but substantive ways from the last published version. In addition, the CSA have elaborated on their views and expectations described in the Companion Policy to National Instrument , which, in many cases, significantly changes the meaning and scope of the applicable requirements. The CSA have also pulled back from previously proposed requirements and have not carried forward some proposed requirements, pending further review. The CSA also published on July 17, 2009 a final version of National Instrument Prospectus and Registration Exemptions and instruments related to that instrument. National Instrument , which is expected to also come into force on September 28, 2009, is intended to complement National Instrument in that the registration exemptions provided for in National Instrument will be revoked six months from the implementation date. The only registration exemptions that will be available after that date will be those found in National Instrument , other than those that are expected to be provided for by blanket order in the western provinces and the territories.

3 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE We highlight in this Investment Management Advisory the more important requirements of National Instrument , along with some of the significant changes made since the last published version. NATIONAL INSTRUMENT THE FRAMEWORK National Instrument reinforces the CSA s objective of ensuring that only qualified firms and individuals provide advising and trading services in the Canadian capital markets. The CSA explain in the Companion Policy, aptly in our view, [r]egistrants act as gatekeepers of the integrity of the capital markets. They should not, by act or omission, facilitate conduct that brings the market into disrepute. Registration will be granted by a securities regulator unless it appears that the applicant is not suitable for registration or that the registration itself is objectionable, and provided the applicant meets the fit and proper standards of registration: proficiency, integrity and financial solvency. Once registered, the registrant (firm and individual) must meet on-going conduct requirements, such as dealing fairly, honestly and in good faith with clients, dealing appropriately with conflicts of interest, ensuring that a client s investments are suitable for the client, maintaining adequate capital and insurance, having a compliance system, maintaining appropriate records and dealing with conflicts of interest. Under National Instrument , the test for determining whether a firm or individual is required to be registered will depend on the concept of the business trigger, that is, whether the firm or individual is in the business of : Trading in securities as a principal or agent; whereupon registration as a dealer will be necessary Advising others about acquiring or disposing of securities; whereupon registration as an adviser will be necessary. In addition, acting as an investment fund manager will necessitate the firm to be registered as an investment fund manager. Firms that are currently registered as dealers will generally continue to be registered in the same category: investment dealer, mutual fund dealer or scholarship plan dealer. The investment counsel and portfolio manager categories for advisers are combined into one category called portfolio manager. New categories for a firm are exempt market dealer, restricted dealer, restricted adviser and investment fund manager. The following categories of registration have been eliminated: international dealer, limited market dealer, foreign dealer, international adviser, securities adviser and investment counsel. Registration with the CSA is permanent, subject to annual payment of fees, compliance with on-going fit and proper and conduct requirements, and the ability of the Director of the applicable securities regulator to revoke or suspend registration or impose conditions on registration at any time, subject to the registrant s opportunity to be heard. 2

4 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE The registration requirements contained in National Instrument for dealers and advisers include Proficiency requirements (other than for IIROC members who must comply with IIROC rules), including new proficiency requirements for advising representatives and associate advising representatives and for the chief compliance officer for a registered firm Designation and registration of an ultimate designated person New minimum capital requirements, which will result in an increase in minimum capital requirements for most non-sro registrants, other than for portfolio managers that hold client assets Modernized insurance requirements for non-sro registrants, with a formula for calculating insurance limits, rather than a flat rate and recognition of equivalent forms of insurance A prohibition on registrants (other than IIROC members) lending money, extending credit or providing margin to clients New guidelines for account opening and know-your-client information, record-keeping, holding and custody of client assets, account activity reporting, referral arrangements, compliance regimes and complaint handling New requirements for non-sro registrants to prepare and deliver to clients specified relationship disclosure information Exemptions from certain conduct rules when the registrant is dealing with a permitted client (essentially a person or company that falls within a prescribed sub-set of super accredited investors), provided, for some requirements, that the permitted client supplies the registrant with an express waiver Significantly enhanced initial firm registration requirements, including requirements to file business plans and policies and procedures manuals. National Instrument contains registration exemptions for specific circumstances, including mobility registration exemptions which are available to those registrants who wish to continue to deal with or advise a limited number of clients with whom they have a pre-existing relationship and who move to another Canadian province or territory. Legislative amendments made in conjunction with the coming into force of National Instrument require firms acting as an investment fund manager in Canada to register in the new category of investment fund manager. This registration requirement applies to managers of all investment funds managed in a Canadian jurisdiction, whether distributed via prospectus or pursuant to prospectus exemptions. Registration will be required in the jurisdiction in which the investment fund manager has its head office, with investment fund managers without a head office in Canada being exempt from registration for a twoyear period. Investment fund managers will be subject to many of the same fit and proper and conduct rules as apply to other registrants, but the only registered individuals for an investment fund manager will be its UDP and CCO. 3

5 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Significant Changes The final version of National Instrument contains a number of enhanced or changed requirements for various registrants. We highlight these new requirements below under the applicable category of registration. We intend to collect examples of ambiguous or unclear drafting, along with examples of what we believe are unintended consequences of the requirements, such that we will seek clarification from the regulators. We expect the CSA will publish, at some point, either before or after National Instrument comes into force, a list of FAQs. We would be pleased to provide the regulators with your views or concerns about any specific provisions you find ambiguous or unclear. Investment Dealers: National Instrument now exempts investment dealers (members of IIROC) from additional provisions, where the IIROC rules regulate the particular area. IIROC published (also on July 17, 2009) proposed amendments to the IIROC rules relating to the implementation of National Instrument IIROC members will need to review those rules in due course to determine the impact on their business and operations. Mutual Fund Dealers: The CSA have confirmed that mutual fund dealers may trade in securities of any entity that fits within the definition of mutual fund so provided in applicable securities legislation. Mutual fund dealers are not restricted to trading in prospectus qualified mutual funds and do not have to be registered as exempt market dealers to trade in securities of prospectus exempt mutual funds, including pooled funds. The CSA also clarify that mutual fund dealers may also rely on the registration exemption for specified debt to trade in these securities without any additional registration. Not surprisingly, mutual fund dealers will not be eligible to trade in exchange traded funds to the extent that these vehicles are not mutual funds. In British Columbia, mutual fund dealers may also trade in securities of scholarship plans. Mutual fund dealers must look to National Instrument for proficiency requirements for representatives and for know-your-client requirements unlike investment dealers which are exempt from National Instrument in respect of these requirements, if they comply with IIROC rules. National Instrument will require mutual fund dealers to send out quarterly client statements, which is a change from the current MFDA rules. A 24-month transition period is provided for. The CSA indicate that they expect that the MFDA will be publishing shortly amendments to its Rules, which amendments will coordinate the MFDA rules with National Instrument

6 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Exempt Market Dealers: The CSA have confirmed that exempt market dealers may trade in securities of any security pursuant to applicable prospectus exemptions, including prospectus-qualified securities where the trade is made in reliance on a prospectus exemption. This means that EMDs may trade for their clients in securities of any investment fund (prospectus-qualified or not), provided that a prospectus exemption is available in respect of that trade. However, the final version of National Instrument has been changed from previous versions to limit EMDs to acting as underwriters only in respect of prospectus-exempt securities. EMDs will not, therefore, be able to act as underwriters in respect of prospectus-qualified securities, even where they are only trading in those securities pursuant to applicable exemptions. The distinction between EMDs that handle, hold or have access to client assets and those that do not, has been eliminated from the final version of National Instrument All EMDs will be subject to the same capital, insurance and audited financial reporting obligations. Significantly however, the securities regulators in Alberta, British Columbia, Manitoba and the three territories of Canada have decided to exempt firms (and their representatives) that are not otherwise registered in any province or territory, from registration as EMDs, if they are in the business of trading in those jurisdictions securities under specified exemptions (including accredited investor, family, friends and business associates, offering memorandum and minimum purchase), provided they comply with certain conditions. These conditions include a prohibition on providing suitability advice about the trade and providing other financial services to the client (except in British Columbia). Prescribed risk disclosure must be given to the client and notices filed with the regulators. The regulators of these jurisdictions will issue a blanket order shortly providing for this exemption. The regulator in Saskatchewan continue to consider whether or not to adopt this exemption. Scholarship Plan Dealers: Scholarship plan dealer representatives must meet enhanced proficiency within 12 months of the implementation of National Instrument These dealers also are exempt from providing client statements, other than annually, given the business model of the industry. Portfolio Managers: The proficiency requirements for advising representatives and associate advising representatives are largely consistent with the earlier versions of National Instrument However the CSA have elaborated on what they will consider as relevant investment management experience that an advising 5

7 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE representative or associate advising representative must demonstrate. For example, only experience gained at an IIROC-member investment dealer (previous versions referred to registered dealers more generically) or an adviser will count towards the applicable experience required. The 36-month time period within which an applicant must have taken a specified course has been maintained, which means that applicants will continue to have to either retake courses or demonstrate relevant experience if they have not been registered as an advising representative during that period. Portfolio managers must designate (by notice to the applicable regulator) supervisors for all associate advising representatives and to the extent this has not been done for any associate advising representative by the time National Instrument comes into force, portfolio managers will have to do this within 7 days of the implementation date. Portfolio managers that both advise and manage a pooled fund (described in National Instrument as a non-prospectus qualified investment fund ) do not have to be registered as an exempt market dealer to trade in securities of that fund to managed accounts of that adviser. The applicable managed account and pooled fund cannot be created or used primarily for the purpose of qualifying for the exemption ; a somewhat vague, but intuitively understandable, limitation. Notice must be given to the regulator by the adviser within 7 days after it first relies on the exemption after National Instrument comes into force, which for existing pooled funds will be on or before October 5, A portfolio manager is prohibited from knowingly causing investment portfolios managed by it (including an investment fund) from making certain enumerated purchases or sales of securities. The applicable section in National Instrument has been modified from the previous versions and is designed to replace section 118 of the Securities Act (Ontario) and equivalent provisions in other jurisdictions, which are being repealed. The CSA explain in the Companion Policy that this provision is intended to prohibit inter-fund trades and goes on to state that an inter-fund trade occurs when the adviser for an investment fund knowingly directs a trade in portfolio securities to another investment fund that it acts for or instructs the dealer to execute the trade with the other investment fund. We believe that the drafting of the applicable requirement does not support this conclusion nor do we agree with the conclusion, and we intend to request further clarification from the regulators. However, we note that the revised drafting of the prohibition does not prohibit cross-trading between managed accounts of a portfolio manager, which is a welcome change from the previously published version of National Instrument Investment Fund Managers: Managers of investment funds that are located in Canada, where the manager is also located in Canada, must register in the province or territory where the manager s head office is located. No other 6

8 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE registration will be required at this time, although the CSA indicate that they will publish for comment in due course a proposal that may require investment fund managers to register in other provinces and territories. Useful additional clarification is provided on the required quarterly reporting of NAV adjustments. Fund managers may use the materiality thresholds established by the Investment Funds Institute of Canada when determining whether or not a NAV error has occurred. An investment fund manager will be required to issue a trade confirmation when it processes a redemption request received directly from a client (that is, not through a registered dealer). This has implications for investment fund managers that have many of the securityholders of their funds registered in client name. Non-Canadian Industry Participants: An entity that is not incorporated under the laws of Canada may be registered in any category of registration, except where restricted by SRO rules. Non-Canadian dealers and advisers operating in a Canadian province or territory may rely on the international dealer exemption or the international adviser exemption, as applicable, provided all conditions to that exemption are met. The most significant of these conditions are restrictions on trading with or advising only permitted clients and only on foreign securities. The list of permitted clients has been expanded from the earlier versions of National Instrument , but it continues to be a sub-set of super-accredited investors, and international advisers cannot advise Canadian registrants. This last prohibition is new to the final version of National Instrument and is not explained. The definition of foreign security keys off the locale where the issuer is incorporated or established, which means that international dealers and international advisers may only trade in, or advise on, securities of issuers not incorporated in Canada, although international advisers may advise on Canadian issuers if such advice is incidental to their advice on non-canadian securities. In Ontario, non-canadian dealers and advisers that are relying on these exemptions will continue to have to pay regulatory fees to the Ontario Securities Commission, under OSC Rule Fees, even though they are no longer registered in this province. Significantly, the CSA have removed the sub-adviser exemption from the final version of National Instrument , which was in the previous versions of National Instrument and was to be a national expansion of the currently Ontario-only exemption available to advising firms that act as subadvisers to registered portfolio managers. The CSA indicate that they intend to review the exemption 7

9 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE taking into account the regulatory responses to cross-border activity, but that the Ontario-only exemption will continue, with the other CSA members willing to provide exemptions from the requirement to be registered as an adviser, if applied for. No further explanation is given about this decision, which we don t understand and consider disappointing. Non-Canadian portfolio managers to investment funds that are managed outside of Canada, but that are distributed within Canada, no longer have to be concerned about registration as an adviser in Canada. Consistent with the earlier versions of National Instrument , the flow-through regulatory theory that previously applied in Ontario in respect of advice provided to funds, and indirectly to investors in those funds, has been rejected. Entities that do not have an office in Canada and that act as investment fund managers of investment funds that are distributed in Canada, even where these funds are established in Canada, do not have to be registered in Canada as investment fund managers, at least for now. The CSA proposal referred to above (under Investment Fund Managers) may contain a proposal for registration of these entities. The Ontario Securities Commission have confirmed that they interpret OSC Rule Fees so as to require these entities (referred to in OSC Rule as unregistered investment fund managers) to pay annual participation fees to the OSC under that Rule. We have provided the OSC with a number of submissions about this interpretation, given that we believe this interpretation is not appropriate. All Registrants: Any firm that obtained an exemption from a rule or legislative provision before the implementation of National Instrument may continue to rely on that exemption, in respect of requirements in National Instrument that are substantially similar to the earlier requirements, to the same extent and on the same conditions. For example, investment fund managers that are today registered as mutual fund dealers may continue to rely on the earlier series of exemptions granted from having to become members of the MFDA. The CSA expand on the expected content of relationship disclosure information when a registrant is trading or advising on a mutual fund, much of which we find curious in light of the extensive prospectus disclosure for mutual funds that must be provided to clients and that is otherwise available to investors. The CSA also indicate that they expect to, within the next two years, propose amendments to National Instrument to add requirements or guidance for cost disclosure and performance reporting to clients. These elements are part of the client relationship model and have been developed by the MFDA and IIROC for their members. The CSA are waiting to review those proposals and will ensure that National Instrument contains consistent rules. 8

10 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Clarity is provided around referral arrangements. Provision of names and contact information of potential clients is considered to be a referral arrangement if the registrant pays for that information. This has important implications to certain sectors of the financial services industry where client lists are routinely purchased from other businesses. The CSA have also confirmed that the referral arrangement requirements apply to arrangements between affiliates. Certain conduct rules do not apply in respect of registrants when they are dealing with permitted clients and those clients waive the specific requirement. For example, a permitted client can waive the requirement for a registrant to ensure that a trade or specific advice is suitable for that client. The distinction between activity records and relationship records has been eliminated from the record-keeping requirements and the CSA s expectations for record-keeping are described in greater detail in the Companion Policy. We note that there is no transition for the record-keeping requirements and registrants should ensure that their practices are consistent with the new requirements. The CSA have confirmed that most notices and filings with the regulators can be conducted with the registrant s principal regulator, which will be the regulator in the province where the firm has its head office, or the individual has its working office. This concept fits with the principles behind the passport system, which now will operate for registration applications and filings through the implementation of amendments to Multilateral Instrument Passport System and the implementation of National Policy Process for Registration in Multiple Jurisdictions. These amendments and the new National Policy will also come into force on September 28, New Registration Exemptions: While the securities-related activities of federally regulated financial institutions are not separately addressed in National Instrument , generally, each province and territory is maintaining the status quo on securities-related requirements applicable to these institutions. Ontario has amended the Securities Act (Ontario) to provide a specific exemption from the dealer, adviser and investment fund manager registration requirements for financial institutions that carry on dealing, advising and investment fund manager activities in accordance with the institutions governing legislation. The CSA have, however, included in National Instrument what they describe as a new exemption for banks, hedge funds and pension funds. This exemption is consistent with the long-standing registration exemption available when trades are made solely through an agent who is a registered dealer or to a registered dealer who is purchasing as principal. The CSA s description of this exemption does not, in our view, fit with the scope of the exemption, nor does its explanation in the Companion Policy about this exemption provide much additional clarity. 9

11 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Transition and Key Dates There are a number of transition periods provided under National Instrument for firms and individuals that are currently registered or are currently carrying on business in the exempt market or as a fund manager. These transition periods range from 3-24 months following implementation of National Instrument Most existing registrants will be automatically converted over on the National Registration Database to the corresponding category of registration under National Instrument The conversion will take place during an NRD freeze-period from September 25 to October 12, Firms will have read-only access to NRD during the freeze period, and authorized firm representatives will be unable to create new submissions via NRD. During the freeze period firms will only be required to file, using the new paper forms, material information (eg. reinstatements, terminations for cause, etc.). Key dates include: Monday, September 28, 2009 Implementation of National Instrument except as specifically mentioned in Part 16 of National Instrument , registrants must comply with all of the new requirements of National Instrument as of that date. Unregistered firms established after this date will apply for registration under the new regime. Wednesday, October 28, 2009 (one month from implementation) international dealers, so registered prior to September 28, 2009, must file a completed Form F2 if they intend to carry on business in Canada under the international dealer registration exemption. Their registration as international dealers will be revoked as of September 28, Monday, December 28, 2009 (three months from implementation) All existing registrants (as of September 28, 2009) must designate a UDP and a CCO for the firm, and apply for registration of these individuals. Monday, March 28, 2010 (six months from implementation) All existing registrants (as of September 28, 2009) must satisfy new bonding and insurance requirements ensure referral arrangements that were in place before September 28, 2009 comply with new requirements. Note that any new referral arrangement entered into after September 28, 2009 must comply with the new requirements. 10

12 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Tuesday, September 28, 2010 (12 months from implementation): Firms acting as investment fund managers as of September 28, 2009 must apply for registration in that category and hence must meet all applicable fit and proper requirements. Firms active in the exempt market (that is, that existed as operating entities) as of September 28, 2009 must apply for registration as exempt market dealers and hence must meet all applicable fit and proper requirements. International advisers registered in that category in Ontario as of September 28, 2009 must file a completed Form F2 if they intend to carry on business in Canada under the international adviser exemption. Their registration will be revoked as of September 28, All registered firms as of September 28, 2009 must begin to deliver relationship disclosure to clients. We note that there is no discussion about delivery to existing clients and we intend to seek clarity on this point from the regulators. All registered firms as of September 28, 2009 must satisfy new capital requirements. Representatives of scholarship plan dealers and exempt market dealers must satisfy new proficiency requirements. CCOs of exempt market dealers must meet new proficiency requirements. Wednesday, September 28, 2011 (24 months from implementation): All registered firms must ensure that independent dispute resolution or mediation services are made available to clients to resolve complaints. Mutual fund dealers must comply with new requirements for delivery of client statements. 11

13 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE UNDERSTANDING NATIONAL INSTRUMENT Understanding the new Canadian registration regime and knowing how all the pieces fit together and how they will impact your business is vital. BLG s Investment Management Group has monitored the progress of National Instrument since the CSA first established its formal registration reform project in Our series of advisories - Keeping Reforms in Sight were first published in March 2007 following the publication of the first version of National Instrument and then updated and republished in April 2008 when National Instrument was published for further comment. The second set of our advisories is [available here]. In order to assist our clients in keeping on top of the significant changes to the Canadian regulatory landscape represented by National Instrument , we will be publishing a third series of advisories in our series Keeping Reforms in Sight. These advisories will include an updated National Instrument At a Glance, which will outline the essential features for each registration category, as well as the transition to the new regime. Other advisories will include What s New advisories for each of the key registration categories and an outline of the implications of National Instrument for non-canadian advisers and dealers. We will also provide additional commentary on the impact of the new version of National Instrument Prospectus and Registration Exemptions which was published in final form, also on July 17, 2009, along with a final revised National Instrument Resale of Securities and OSC Rule Ontario Prospectus and Registration Exemptions. Please plan to attend BLG s Symposium on Registration Reform The Finale. The invitation to the Symposium is [available here]. Seminars will be held on August 19 in Toronto, September 10 in Vancouver, September 11 in Calgary and September 15 in Montréal. BLG s registrant regulation and compliance experts will outline what the new Canadian registration regime will mean for you. 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. 12

14 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE This Investment Management Advisory was written by: Prema K.R. Thiele Rebecca A. Cowdery Marsha P. Gerhart If you would like to discuss NI and how it will apply to your business, or if you wish to be added to our distribution list for our series Keeping Reforms in Sight or if you have questions about our Registration Reform Symposium please contact your usual lawyer in BLG s Investment Management Group, the authors of this Advisory or any of the following lawyers: TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart pthiele@blgcanada.com lcook@blgcanada.com rcowdery@blgcanada.com mgerhart@blgcanada.com VANCOUVER: MONTRÉAL: Jason J. Brooks H. Scott McEvoy François Brais jbrooks@blgcanada.com smcevoy@blgcanada.com fbrais@blgcanada.com BLG s Investment Management Group leaders are: John E. Hall National Group Leader jhall@blgcanada.com Brad J. Pierce Calgary Regional Leader bpierce@blgcanada.com François Brais Montréal Regional Leader fbrais@blgcanada.com Jeremy S.T. Farr Ottawa Regional Leader jfarr@blgcanada.com Lynn M. McGrade Toronto Regional Leader lmcgrade@blgcanada.com Jason J. Brooks Vancouver Regional Leader jbrooks@blgcanada.com 13

15 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE 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: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: 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 BLG-LAW1 or ing 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 Borden Ladner Gervais LLP O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: 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: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada

16 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST What s New? NATIONAL INSTRUMENT 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 Registration Requirements and Exemptions on July 17, 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 outlines the scope of National Instrument , 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 , given the scope of regulation by IIROC. IIROC members have been exempted from some of the rules set out in National Instrument , in recognition that IIROC regulates the area and IIROC members must comply with IIROC rules. In other cases, even where National Instrument applies to IIROC members, the rules are more broadly written and largely consistent with IIROC regulation, so that National Instrument 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 The proposed IIROC

17 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 comes into force, being September 28, 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

18 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 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

19 Impact of National Instrument The following table focuses on certain provisions of National Instrument and explains how they apply to registered investment dealers that are members of IIROC and their representatives. NI Commentary Transition effective immediately means September 28, 2009 (NI 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

20 NI Commentary Transition effective immediately means September 28, 2009 (NI 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 , 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