CSA STAFF NOTICE 31-313 NI 31-103 REGISTRATION REQUIREMENTS AND EXEMPTIONS AND RELATED INSTRUMENTS FREQUENTLY ASKED QUESTIONS AS OF DECEMBER 18, 2009 Background On September 28, 2009, new National Instrument 31-103 Registration Requirements and Exemptions and amendments to related instruments including NI 33-109 Registration Information came into force. We have compiled this list of frequently asked questions (FAQs) from the enquiries we have received concerning NI 31-103 and NI 33-109 in order to assist those working with these instruments.
NI 31-103 Registration Requirements and Exemptions NI 31-103 QUESTION ANSWER SECTION
PART 1 INTERPRETATION 1.1 Definitions of terms How will accounting terms Proposed amendments to NI 31-103 necessary to used throughout this in NI 31-103 work with accommodate IFRS were published for comment on Instrument International Financial October 23, 2009, except in Québec and New Brunswick Reporting Standards (IFRS) where the proposed amendments will be published in early Amendments? 2010. The comment period will end on January 21, 2010 PART 2 CATEGORIES OF REGISTRATION FOR INDIVIDUALS
2.2 Client mobility Are sections 2.2 [Client exemption – mobility exemption – individuals individuals] and 8.30 [Client mobility exemption – firms] independent of each other? How do the firm and individual limits work together?
The individual limits are per individual. For example several individuals working for a firm could each have 5 clients in the same local jurisdiction, if their firm was registered in the jurisdiction. Even if a firm is registered in a local jurisdiction and has more than 10 clients served by registered individuals it can have unregistered individuals using the exemption in the jurisdiction.
If a firm is not registered in a jurisdiction, the firm may not exceed its 10 client limit, shared among its representatives.
2.3 Individuals acting for Do permitted individuals of Although individuals acting on behalf of a registered IFM
Sections 2.2 [Client mobility exemption – individuals] and 8.30 [Client mobility exemption – firms] are independent of each other: individuals may rely on section 2.2 in circumstances where they are not registered in the local jurisdiction even though their firm does not rely on section 8.30 because the firm is registered in the local jurisdiction. The limits are per jurisdiction. For example a firm using the exemption could have 10 clients in each of several local jurisdictions where it is not registered. An individual could also be using the exemption to have 5 clients in each of several jurisdictions where the individual is not registered.
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investment fund an investment fund managers manager (IFM) need to file Form 33-109F4 Registration of Individuals and Review of Permitted Individuals?
PART 3 REGISTRATION REQUIREMENTS – INDIVIDUALS
Division 1 General proficiency requirements
3.4 Proficiency – initial and Has the CSA published any ongoing additional guidance relating to the proficiency requirement in section 3.4?
3.6 Mutual fund dealer – How do proficiency time chief compliance limits apply to chief officer compliance officers (CCO) in Québec? 3.8 Scholarship plan dealer – chief compliance officer 3.10 Exempt market dealer – chief compliance officer 3.13 Portfolio manager – chief compliance officer
In Québec therefore subsection 16.9(2) of NI 31-103 does not constitute a “grandfathering” clause for individuals acting as personne responsable (ou chef) de la conformité prior to September 28, 2009.
As a result, there are in Québec the following 2 options: 1. If the individual acting as personne responsable (ou chef) de la conformité in Québec prior to September 28, 2009 was identified as compliance officer or CCO in one of the CCO jurisdictions, the “grandfathering” clause in subsection 16.9(2) applies to this individual. The individual is therefore not required to meet the proficiency
are not required to register pursuant to section 2.3 of NI 31-103, permitted individuals of an IFM must nonetheless file Form 33-109F4 Registration of Individuals and Review of Permitted Individuals. “Permitted individual” is defined in section 1.1 of National Instrument 33-109 Registration Information.
CSA Staff Notice 33-315 Suitability Obligation and Know Your Product was published on September 2, 2009. It discusses the requirement for registered individuals to “know your product”, which forms part of the ongoing proficiency obligation.
The CCO category is new in Québec. Prior to September 28, 2009, an individual could act in Québec in a similar capacity, with activities normally performed by a CCO but without however being identified on NRD in this category. Prior to September 28, 2009, the CCO or compliance officer categories existed only in Ontario, British Columbia and New Brunswick (the CCO jurisdictions). In Québec individuals acting as personne responsable (ou chef) de la conformité prior to the coming into force of NI 31-103 must register before December 28, 2009 pursuant to subsection 16.9(1) of NI 31-103 and have until September 2010 pursuant to subsection 16.9(3) to meet the proficiency requirements set out in sections 3.6, 3.8, 3.10 and 3.13 as the case may be, for the following reasons: Subsection 16.9(2), when referring to “the individual identified on the National Registration Database as the firm’s compliance officer”, refers to such compliance officers as were identified prior to September 28, 2009. This section can only apply in the CCO jurisdictions. In these jurisdictions, proficiency requirements applied to the compliance officer.
NI 31-103 QUESTION ANSWER SECTION
requirements of NI 31-103, so long as the individual remains registered as the firm’s CCO.
2. If the individual acting as personne responsable (ou chef) de la conformité in Québec prior to September 28, 2009 was not identified as compliance officer or CCO in one of the CCO jurisdictions, subsection 16.9(3) applies: the individual is required to meet the proficiency requirements of NI 31-103, but has 12 months to do so.
3.6 Mutual fund dealer – Can the chief compliance chief compliance officer (CCO) of a portfolio officer manager (PM) whose proficiency is 3.10 Exempt market dealer grandfathered under – chief compliance subsection 16.9(2) continue officer to be its CCO if the firm is registered as a mutual fund 3.13 Portfolio manager – dealer (MFD), exempt chief compliance market dealer (EMD) or officer investment fund manager (IFM)? 3.14 Investment fund manager – chief compliance officer 3.9 Exempt market Will exemptions from the dealer – dealing proficiency requirements representative for exempt market dealer (EMD) dealing representatives in section 3.9 be available? PART 4 RESTRICTIONS ON REGISTERED INDIVIDUALS
4.2 Associate advising If a firm has previously representatives – pre- designated an adviser to approval of advice review the advice of an associate advising representative (AAR), does it need to re-designate an
adviser to review the AAR’s the designated advising representative changes advice under subsection
4.2(2) ? This also applies in those jurisdictions that did not have the category of associate advising representative but imposed supervision on “junior” advisers through terms and conditions, if an adviser was designated to review the advice.
PART 7 CATEGORIES OF REGISTRATION FOR FIRMS
Although PM CCO proficiency set out in section 3.13 is available as an alternative to other proficiency requirements for CCOs of MFDs, EMDs and IFMs in sections 3.6, 3.10 and 3.14, respectively, there is no corresponding provision that would accommodate a PM CCO whose proficiency is grandfathered under subsection 16.9(2) on the basis of different qualifications than are prescribed in section 3.13. This was not our intention, and we will be issuing an order providing an exemption from proficiency requirements for the CCO of an MFD, EMD or IFM where the firm was registered as a PM on the date NI 31-103 came into force and the individual was on that date designated as the CCO of the firm, for so long as they remain registered as the firm’s CCO. We will always consider applications for exemptive relief. However, proficiency is one of the fundamental fitness criteria for individual registrants, so we anticipate granting exemptions from the EMD dealing representative proficiency requirements set out in section 3.9 only in rare cases.
No. If a firm has previously designated an adviser, it does not need to re-designate under NI 31-103 unless: the firm has hired new AARs subsequent to the original designation, or
NI 31-103 QUESTION ANSWER SECTION
7.1 Dealer categories A. Can an exempt market dealer (EMD) trade prospectus-qualified securities to clients such as accredited investors or those making a minimum purchase in an amount sufficient to qualify for prospectus-exempt distribution?
B. If so, can the EMD provide the investor with a copy of the prospectus?
Can an exempt market dealer (EMD) underwrite a distribution that is not exempt from the prospectus requirement?
Can an exempt market No. Although clause 7.1(2)(d)(ii) would permit an EMD to dealer (EMD) underwrite a trade in such circumstances, clause 7.1(2)(d)(iv) restricts prospectus-qualified an EMD to underwriting permitted distributions that are, in distribution if it only fact, made under a prospectus exemption. distributes securities to accredited investors or other clients who may purchase securities offered under a prospectus exemption?
When will the jurisdictions The jurisdictions that have agreed to this alternative that are participating in the approach will issue local blanket orders to exempt certain “alternative approach to intermediaries from EMD registration shortly before the regulating certain registration exemptions in NI 45-106 Prospectus and intermediaries in the Registration Exemptions expire (March 27, 2010). exempt market” described in Appendix D to the CSA Notice of NI 31-103 (published on July 17, 2009) issue their exemptions from exempt market dealer (EMD) registration?
Must a mutual fund dealer in Québec or Manitoba also have to register as an EMD in Québec in order to sell principal protected notes (PPNs)?
A. Yes. As set out in clause 7.1(2)(d)(ii), an EMD can trade a prospectus-qualified security in circumstances where an exemption from the prospectus requirement would be available. B. Yes, the EMD may provide the investor with a copy of the prospectus.
No. As set out in clause 7.1(2)(d)(iv), an EMD may only underwrite a distribution of securities that is made under an exemption from the prospectus requirement.
PPNs include the instruments commonly described as market-linked GICs (market-linked GICs) and linked notes (market-linked notes). Market-linked GICs are described as term deposits that guarantee principal through a CDICinsured (or equivalent) deposit-taking institution, with a return linked to a number of underlying investments, including stock market indices, mutual funds or hedge funds. Market-linked notes are described as debt instruments that provide a principal guarantee through the credit-worthiness of the issuer, with returns linked to a variety of underlying investments, including stock market
NI 31-103 QUESTION ANSWER SECTION
indices, mutual funds, and hedge funds. If certain conditions are met in connection with the type of PPN being sold, registration in the EMD category is not required for a mutual fund dealer in Québec.
The treatment of PPNs in Québec varies according to whether the PPN is a market-linked GIC or a market-linked note:
market-linked GICs are term deposits to which the Securities Act (Québec) applies. Paragraph 9° of section 3 of the Act provides that the dealer registration requirement set out in section 148 of the Act does not apply to term deposits. The sale of market-linked GICs does not therefore require registration
market-linked notes are debt securities to which the Securities Act (Québec) applies. Paragraph 14° of section 3 of the Act provides that the dealer registration requirement set out in section 148 of the Act does not apply to debt securities issued or guaranteed by a bank or an authorized foreign bank listed in Schedule I, II or III to the Bank Act, except a debt security conferring a right of payment ranking lower than a deposit contemplated in paragraph 9° of section 3 and entrusted to the issuer or the guarantor of the debt security
PPNs which meet the conditions of these exemptions may be sold in Québec by mutual fund dealers not also registered as EMDs.
In Manitoba, market-linked GICs and market-linked notes are securities. The Manitoba Securities Commission has issued relief which will permit registered mutual fund dealers to trade these products without registration as an EMD.
7.3 Investment fund When is investment fund manager category manager (IFM) registration required? Examples: A. I manage a real estate investment trust (REIT). Policy and in the Companion Policy to NI 81-106 Do I need to register as an IFM? B. I manage a fund that does not invest in securities. Do I need to register as an IFM?
B. If the fund falls within the definition of investment fund, you must register unless otherwise exempt. The definition of investment fund is not restricted to funds that invest in securities. There are, for example, funds that invest in uranium or gold bullion.
Note that sections 16.5 and 16.6 provide temporary
All managers of investment funds must register as IFMs unless an applicable exemption is available. The threshold question is whether a collective investment vehicle is an “investment fund”. The next step is to identify who is the “investment fund manager” for the investment fund. Both terms are defined in local jurisdictions’ securities legislation. There is also guidance in section 7.3 of the Companion Investment Fund Continuous Disclosure (81-106 Companion Policy). Examples: A. No. Subsection 1.2(2), of the 81-106 Companion Policy provides that business income trusts, REITs and royalty trusts are not investment funds.
NI 31-103 QUESTION ANSWER SECTION
exemptions for a Canadian investment fund manager registered in its principal jurisdiction and for foreign investment fund managers, respectively.
Must an otherwise unregistered firm that is temporarily exempt from registration as an investment fund manager (IFM) under section 16.4 comply with the requirements in NI 31-103 if it seeks registration before the temporary exemption expires?
If a firm was already registered when NI 31-103 was implemented, will it lose the benefit of the transitional exemptions set out in Part 16 if it adds registration in another category?
PART 8 EXEMPTIONS FROM THE REQUIREMENT TO REGISTER
Division 1 Exemptions from dealer and underwriter registration
8.5 Trades through or to a Can a foreign dealer rely on registered dealer the exemption in section 8.5 for trades through or to a registered dealer?
However, if the dealer in the other jurisdiction is engaged in other trading activities in the local jurisdiction in connection with the transaction, it would no longer be a trade solely
Yes. While section 16.4 provides a one-year exemption from registration, a firm that chooses to register before the end of that period must comply with NI 31-103 as soon as it becomes registered. The transition provisions that provide temporary exemptions from certain IFM requirements (sections 16.8 [Registration of ultimate designated persons], 16.9 [Registration of chief compliance officers], 16.11 [Capital requirements] and 16.13 [Insurance requirements]) only apply to firms that were already registered when NI 31-103 came into force.
No. A firm would not lose the benefit of the transitional exemptions provided in Part 16 for firms that are registered on the day NI 31-103 came into force (sections 16.8 [Registration of ultimate designated persons], 16.9 [Registration of chief compliance officers], 16.11 [Capital requirements] and 16.13 [Insurance requirements]) if it adds another registration category to what it had on the day when NI 31-103 came into force. Note also that subsection 16.4(3) provides a one-year transitional exemption from the investment fund manager (IFM) insurance requirement for a registered dealer or adviser that was acting as an IFM when NI 31-103 came into force.
Yes. The exemption requires only that all trading activity that occurs within the local jurisdiction is done through or to a local registered dealer. On that basis, we would regard the “jitney” of a trade through or to an appropriately registered dealer in a local Canadian jurisdiction by an unregistered dealer who is located in a foreign jurisdiction as a trade solely through a registered dealer in the local jurisdiction, consistent with the exemption in section 8.5. The fact that the transaction is executed through an agency arrangement involving intermediation by a dealer in another jurisdiction does not in itself mean that the “trade” in the local jurisdiction ceases to be made “solely” through a registered dealer.
NI 31-103 QUESTION ANSWER SECTION
through a registered dealer and the exemption would not be available. It is important to bear in mind that a “trade” includes acts in furtherance of a trade.
For example, the trade would not be solely through a registered dealer if the foreign dealer or its client interacted directly with the (prospective) purchaser in the local jurisdiction. One way this could occur would be if the foreign dealer or its foreign client contacted the potential purchaser in the local jurisdiction and directly solicited the purchase of securities. The unregistered foreign dealer should instead solicit the purchase by contacting the registered dealer in the local jurisdiction, leaving it to the local registered dealer to contact potential purchasers in the local jurisdiction.
Is this exemption only available to issuers selling their own shares?
Can a plan administrator rely on the exemption in section 8.5 in connection with its activity of placing sell orders with brokers in respect of shares of issuers held by plan participants?
8.18 International dealer Must a foreign dealer use the international dealer exemption in section 8.18 to trade through or to a registered dealer?
A. Can a registered firm also rely on the international dealer exemption? B. If so, what notice should it provide to clients? If a firm is relying on the exemption in section 8.18 in more than one jurisdiction, must it file a Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service (as required by subsection 8.18(5)) with each regulator or can it use the passport system?
No, the exemption is not limited to issuers or sales of one’s own shares.
Yes, a plan administrator can rely on the exemption in section 8.5 in connection with its activity of placing sell orders with dealers in respect of shares of issuers held by plan participants. The Companion Policy discussion of section 8.5 is not meant to suggest that the exemption is only available in respect of trades in a person or company's own securities. Section 8.16 [Plan administrator] covers the activity of the plan administrator receiving sell orders from plan participants.
No. If a foreign dealer’s trading activities fall within the exemption in section 8.5 [Trades through or to a registered dealer], it does not need to rely on any other exemption from registration.
A. The exemption in section 8.18 is available to a firm that is registered in a jurisdiction in Canada. B. A registered firm that is relying on the exemption may meet the client notification requirement in clause 8.18(4)(b)(i) by notifying the client that it is not registered in the jurisdiction in respect of the activities for which the exemption is being relied upon. If a firm is relying on the exemption in more than one jurisdiction, it must file a Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service with the regulator in each jurisdiction where it relies on the exemption – see subsection 1.3(2).
NI 31-103 QUESTION ANSWER SECTION
Subsection 8.18(5) requires No. Subsection 8.18(5) does not prescribe the form of a firm to notify the annual notice to the regulator, so an email or letter will be regulator each year that it acceptable. continues to rely on the exemption. Does that mean a firm has to file Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service every year ?
What must an international To comply with subsection 8.18(6) in Ontario, a firm must dealer in Ontario do to rely pay participation fees under Part 3 of OSC Rule 13-502 on subsection 8.18(6)? Fees. By December 1 of each year, the firm must file a completed Form 13-502F4 Capital Markets Participation Fee Calculation. The firm must pay its participation fee by cheque, draft, money order or other acceptable means no later than December 31 each year. The filings and payments should be sent to the Ontario Securities Commission (Attention: Manager, Registrant Regulation).
8.22 Small security holder How should "market value" Where possible, market value should be determined by selling and purchase be determined? reference to a quoted value on a recognized exchange or arrangements marketplace. If market value is not quoted on an exchange (e.g. bonds) market value may be determined by reference to quotes that are available through brokers. We recognize that it is not always possible to obtain a market value by these methods. In such cases, we will accept a valuation policy that is consistently applied and is based on measures considered reasonable in the industry, such as value at cost where there has been no material subsequent event (e.g. a market event or new capital raising by the issuer).
Division 2 Exemptions from adviser registration
8.26 International adviser How does a foreign adviser act as a sub-adviser to a registered adviser if dealers and advisers are not “permitted clients” for the purposes of the international adviser exemption?
A. Can a registered firm also rely on the international adviser exemption?
Foreign sub-advisers may continue to rely on the sub-adviser exemption that remains in section 7.3 of OSC Rule 35-502 Non Resident Advisers, and apply for discretionary relief in other jurisdictions. In Québec, a general exemption has been granted on December 18, 2009 on the same terms and conditions as the exemptive relief available in the other jurisdictions. This general exemption will take effect on December 28, 2009 since the exemption available under section 5 of the Regulation to amend the Securities Regulation (former 194.2 of the Securities Regulation) remains in force only until that date.
A. The exemption in section 8.26 is available to a firm that is registered in the local jurisdiction or elsewhere in Canada. B. A registered firm that is relying on the exemption may
NI 31-103 QUESTION ANSWER SECTION
B. If so, what notice should it provide to clients?
If a firm is relying on the If a firm is relying on the exemption in more than one exemption in section 8.26 jurisdiction, it must file a Form 31-103F2 Submission to in more than one Jurisdiction and Appointment of Agent for Service with the jurisdiction, must it file a regulator in each jurisdiction where it relies on the Form 31-103F2 Submission exemption – see subsection 1.3(2). to Jurisdiction and Appointment of Agent for Service (as required by subsection 8.26(5)) with each regulator or can it use the passport system?
Subsection 8.26(5) requires No. Subsection 8.26(5) does not prescribe the form of a firm to notify the annual notice to the regulator, so an email or letter will be regulator each year that it acceptable. continues to rely on the exemption. Does that mean a firm has to file Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service every year ?
What must an international To comply with subsection 8.26(6) in Ontario, a firm must adviser in Ontario do to rely pay participation fees under Part 3 of OSC Rule 13-502 on subsection 8.26(6)? Fees. By December 1 of each year, the firm must file a completed Form 13-502F4 Capital Markets Participation Fee Calculation. The firm must pay its participation fee by cheque, draft, money order or other acceptable means no later December 31 each year. The filings and payments should be sent to the Ontario Securities Commission (Attention: Manager, Registrant Regulation).
Do revenues derived from “portfolio management activities” under paragraph 8.26(4)(d) include revenues from sub-advisory activities?
Division 4 Mobility exemption – firms
8.30 Client mobility Are sections 2.2 [Client exemption – firms mobility exemption – individuals] and 8.30 [Client mobility exemption – firms] independent of each other? How do the firm and individual limits work together?
meet the client notification requirement in clause 8.26(4)(e)(i) by notifying the client that it is not registered in the jurisdiction in respect of the activities for which the exemption is being relied upon.
Yes, in making the calculation required under paragraph 8.26(4)(d), it is necessary to include all revenues derived from portfolio management activities in Canada, which would include any sub-adviser arrangements.
Sections 2.2 [Client mobility exemption – individuals] and 8.30 [Client mobility exemption – firms] are independent of each other: Individuals may rely on section 2.2 in circumstances where they are not registered in the local jurisdiction even though their firm does not rely on section 8.30 because the firm is registered in the local jurisdiction. The limits are per jurisdiction. For example a firm using the exemption could have 10 clients in each of several local jurisdictions where it is not registered. An individual could
NI 31-103 QUESTION ANSWER SECTION
also be using the exemption to have 5 clients in each of several jurisdictions where the individual is not registered.
The individual limits are per individual. For example several individuals working for a firm could each have 5 clients in the same local jurisdiction, if their firm was registered in the jurisdiction. Even if a firm is registered in a local jurisdiction and has more than 10 clients served by registered individuals it can have unregistered individuals using the exemption in the jurisdiction.
If a firm is not registered in a jurisdiction, the firm may not exceed its 10 client limit, shared among its representatives.
Can a person or company that is not registered in any jurisdiction in Canada rely on the client mobility exemption?
PART 11 INTERNAL CONTROLS AND SYSTEMS
Division 1 Compliance 11.2 Designating an When can someone be ultimate designated designated for registration person as a firm’s ultimate designated person (UDP) on the basis that they are acting in a capacity similar to that of the chief executive officer (CEO) or sole proprietor?
To designate someone else in these circumstances would require an exemptive relief order. Given that the intention of section 11.2 is to ensure responsibility for its compliance system rests at the very top of a firm, we would only anticipate granting relief in rare cases.
If a firm does not have a CEO and is not a sole proprietorship, and no other person qualifies under paragraph 11.2(2)(b), the most senior decision maker in the firm is the individual who would be most likely to be acting in a similar capacity to a CEO or sole proprietor. They might have the title of managing partner or president, for example, and would be the individual we would expect to see designated as UDP under paragraph 11.2(2)(c).
We note that in larger organizations, the UDP is sometimes supported by an officer who has a compliance oversight role and title within the organization that is more senior than the chief compliance officer. This is an acceptable arrangement, so long as it is understood that it in no way
No. The client mobility exemption is only available to a person or company that is registered in a jurisdiction of Canada.
The primary purpose of paragraph 11.2(2)(c) is to address the situation where a firm does not have a CEO or sole proprietor (for example, because it is organized as a partnership). It is not normally possible to act in a capacity similar to a CEO or sole proprietor when someone else is the actual CEO or sole proprietor. Consequently, designation pursuant to paragraph 11.2(2)(c) is not available when the firm has a CEO or sole proprietor. If a firm has a CEO or sole proprietor, that person must be designated for registration as its UDP, unless another person qualifies under paragraph 11.2(2)(b).
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diminishes the UDP’s regulatory responsibilities. Division 3 Certain business transactions
11.9 Registrant acquiring a Does the exemption in A wind-up and dissolution is not an amalgamation, merger, registered firm’s subsection 11.9(3) extend arrangement or treasury issue and does not qualify as a securities or assets to the situation of a parent reorganization. The exemption in subsection 11.9(3) would company registrant that therefore not be available. proposes to acquire all of the assets of its wholly-owned registered subsidiary and then cause it to be wound up and dissolved?
11.9 Registrant acquiring a Are sections 11.9 and 11.10 No. Paragraph 11.9(3)(b) and subsection 11.10(1) both registered firm’s intended to capture minor include 10% thresholds that may apply to the purchase of securities or assets purchases by individual securities of the firm by its registered individuals. registrants of securities of 11.10 Registered firm whose their registered employer? securities are acquired
If the firm is registered in No. If a firm is required to give notice, it must be filed with more than one jurisdiction, each regulator – see subsection 1.3(2). can the notices required under sections 11.9 and 11.10 be delivered to the principal regulator alone?
PART 12 FINANCIAL CONDITION
Division 1 Working capital 12.1 Capital requirements If a firm is registered in a Yes. The exemptions for IIROC and MFDA member firms in category that requires section 9.3 do not include an exemption from the membership in the requirement to file Form 31-103F1 Calculation of Excess Investment Industry Working Capital with the regulator if a firm is also registered Regulatory Organization of in a category that does not require SRO membership. Canada (IIROC) or the Mutual Fund Dealers Association of Canada (the MFDA), and also in another category that does not require membership in either self-regulatory organization (SRO), will the firm still need to file Form 31-103F1 Calculation of Excess Working Capital with the regulator?
Example: A firm that is registered as an investment fund manager and a mutual fund dealer and is a
NI 31-103 QUESTION ANSWER SECTION
member of the MFDA. Division 2 Insurance 12.3 Insurance – dealer How do I make the calculations required in 12.4 Insurance – adviser sections 12.3, 12.4 and 12.5? 12.5 Insurance – investment fund manager
What is the timing of the calculation of insurance requirements – when must a firm adjust its insurance?
What are the “assets under management” that must be included in the insurance calculations of a firm registered in the categories of portfolio manager (PM) and investment fund manager (IFM)?
To calculate the PM insurance requirement look to section 12.4. The required level of insurance will depend on whether the PM holds or has access to client assets. See section 12.4 of the Companion Policy for what we consider to be holding or having access to client assets.
Division 4 Financial reporting How will accounting terms in NI 31-103 work with International Financial Reporting Standards (IFRS) Amendments? 12.12 Delivering financial Is there a transition information – dealer provision applicable to the requirement to deliver Form 12.13 Delivering financial 31-103F1 Calculation of information – adviser Excess Working Capital? 12.14 Delivering financial information – investment fund manager
In Ontario, we do not expect a firm that calculates its
The calculation required in paragraphs 12.3(2)(b) and (c), 12.4(3)(a) and (b) and 12.5(a) and (b) is based on the lesser of 1% of assets or $25 million (and not 1% of $25 million). The word “and” following “Appendix A” in subsections 12.3(2), 12.4(2) and (3), and 12.5(2) should be ignored. We will remove it in amendments in order to clarify the meaning of these provisions.
The insurance provisions say that the registered firm must “maintain" bonding or insurance in the amounts specified. We do not expect that the calculation would differ materially from day-to-day. If there is a material change in a firm’s circumstances, it should consider the potential impact on its ability to meet its insurance requirements.
Insurance requirements are not cumulative. So, for a firm registered in the categories of PM and IFM, insurance coverage must be in the higher amount of the calculations with respect to its IFM or PM registration. Despite being registered as both a PM and an IFM, when calculating the IFM insurance requirement under subsection 12.5(2), an IFM should only include the total assets under management of its own investment funds. It is only with respect to its own funds that the registrant is acting as an IFM.
Proposed amendments to NI 31-103 necessary to accommodate IFRS were published for comment on October 23, 2009, except in Québec and New Brunswick where the proposed amendments will be published in early 2010. The comment period will end on January 21, 2010. There is no transition provision applicable to the requirement to use Form 31-103F1 Calculation of Excess Working Capital. Registered firms are required to deliver Form 31-103F1 Calculation of Excess Working Capital. However, we recognize that there may be some discrepancies where firms rely on the transitional relief from section 12.1 [Capital requirements] that is provided under section 16.11 for firms that continue to comply with former non-harmonized capital requirements. If a firm relies on section 16.11 it must also deliver the capital calculations required under former requirements, if any.
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working capital based on consolidated financial statements in reliance on the transitional relief in section 16.11 to deliver a Form 31-103F1 Calculation of Excess Working Capital.
If a firm has multiple registrations, is it required to deliver multiple capital calculations using Form 31- 103F1 Calculation of Excess Working Capital?
if the firm is a mutual fund dealer registered in Québec which is also registered as an exempt market dealer in Québec, it will need to file Form 31-103F1 Calculation of Excess Working Capital quarterly as well as the bimonthly net free capital calculation as set out in Appendix I of the Regulation respecting the trust accounts and financial resources of securities firms.
A firm that is a member of a self-regulatory organization (SRO) may also have capital calculation delivery requirements under the SRO’s rules.
12.12 Delivering financial Is there a transition period information – dealer for former limited market dealers in respect of the requirements to deliver audited annual financial statements and Form 31- 103F1 Calculation of Excess Working Capital?
PART 13 DEALING WITH CLIENTS – INDIVIDUALS AND FIRMS
Division 1 Know your client and suitability
13.3 Suitability Has the CSA published any Yes. CSA Staff Notice 33-315 Suitability Obligation and additional guidance on Know Your Product was published on September 2, 2009. section 13.3?
Division 2 Conflicts of interest Are registrants still required to provide a specified statement of policies disclosure as was
No. If a firm has multiple registrations, it only needs to file only one Form 31-103F1 Calculation of Excess Working Capital to the regulators, but must include all required information. For example, if the firm is a portfolio manager (PM) and investment fund manager (IFM), it will need to file Form 31-103F1 Calculation of Excess Working Capital quarterly and report any net asset value (NAV) adjustments quarterly (to comply with IFM requirements, notwithstanding that a PM has no such requirements)
Yes. For former limited market dealers in Ontario and Newfoundland and Labrador “mapped-over” to exempt market dealers (EMDs) under section 16.3, a transitional relief order was issued on September 28, 2009, exempting them from the requirements in subsection 12.12(1) to deliver audited annual financial statements and prescribed capital calculations for a period of one year, consistent with the other solvency-related transitional relief provided in section 16.3. The relief is only available to the extent a mapped-over EMD is not registered in another category that requires delivery of financial statements or client statements during the applicable transition period.
No. There is no prescribed form of disclosure required in the conflicts of interest provisions of NI 31-103. The Companion Policy provides additional guidance in regards to disclosure about relationships with related or connected
NI 31-103 QUESTION ANSWER SECTION
previously required in issuers. some jurisdictions (e.g. in Ontario, section 223 of the Regulations)?
Division 3 Referral Arrangements
13.7 Definitions – referral Does “referral fee” include Yes. “Referral fee” is defined in section 13.7 as any form of arrangements non-monetary compensation. For example, gift certificates would be compensation? included. PART 14 HANDLING CLIENT ACCOUNTS – FIRMS
Division 2 Disclosure to clients 14.2 Relationship Does section 14.2 apply to disclosure information clients who opened accounts before NI 31-103 came into effect? 14.4 When the firm has a Does section 14.4 apply to relationship with a accounts opened before NI financial institution 31-103 came into effect? 14.5 Notice to clients by Does the non-resident non-resident notice provision in section registrants 14.5 apply to a Canadian registrant whose head office is located in another Canadian jurisdiction?
Division 3 Client Assets 14.6 Holding client assets in Is there an exemption for a No. NI 31-103 does not provide an exemption from the trust Canadian manager of an requirement in paragraph 14.6(c). However, we recognize offshore fund that may that it may be difficult to comply in the circumstances have difficulty satisfying described. We will consider granting discretionary relief on the requirement of terms consistent with section 14.7. paragraph 14.6(c) that cash be held effectively in Canada?
Division 5 Account activity reporting
14.12 Content and delivery of Must all of the information There is no prescribed confirmation document that must be trade confirmation required in subsection delivered to the client separately from any other
Yes. Section 14.2 applies to all clients, including those clients who opened accounts prior to September 28, 2009. Section 16.14 provides a one-year transition period from the requirements in section 14.2. No. Section 14.4 applies only to new accounts opened after September 28, 2009. Yes. However, it was not our intention to include registrants based in Canada if they have a physical place of business in the jurisdiction. We anticipate issuing an order that provides relief from section 14.5 for registered firms that have their head office in a Canadian jurisdiction and a physical place of business in the local jurisdiction.
NI 31-103 QUESTION ANSWER SECTION
14.12(1) be provided to the documentation related to the transaction. The requirement client in a single for a written confirmation of a transaction can be satisfied document? by promptly delivering to the client a subscription agreement or other document or combination of documents which, taken together, provide all of the information listed in subsection 14.12(1).
14.12 Content and delivery of Can confirmations and Yes. Confirmations and client statements can be delivered trade confirmation client statements be electronically (i.e., internet, fax or other “written” form) if the delivered electronically? client agrees. See NP 11-201 Delivery of Documents by 14.13 Semi-annual Electronic Means. confirmations for certain automatic plans
14.14 Client statements 14.14 Client statements Must a registrant provide a monthly statement if there is no activity in the account?
If my firm was not subject to client statement requirements before NI 31- 103 came into force, do I have to send out client statements that include transactions that took place before then?
How should "market value" Where possible, market value should be determined by for the purposes of reference to a quoted value on a recognized exchange or subsection 14.14(5) be marketplace. If market value is not quoted on an exchange determined? (e.g. bonds) market value may be determined by reference to quotes that are available through brokers. We recognize that it is not always possible to obtain a market value by these methods. In such cases, we will accept a valuation policy that is consistently applied and is based on measures considered reasonable in the industry, such as value at cost where there has been no material subsequent event (e.g. a market event or new capital raising by the issuer).
Does a former limited market dealer “mapped- over” to exempt market dealer (EMD) under section 16.3 have transitional relief from the requirement to deliver client statements?
PART 16 TRANSITION
Only if the firm is a registered dealer and a client has asked for monthly statements, unless the registrant is a mutual fund dealer. Otherwise, statements may be sent on a quarterly basis, except in the case of scholarship plan dealers, who must provide an annual statement.
No. If a firm was not subject to client statement requirements before NI 31-103 came into force, only transactions that took place after that date are required to be included in the firm's first monthly or quarterly client statements.
Yes. For former limited market dealers in Ontario and Newfoundland and Labrador “mapped-over” to EMDs under section 16.3, a transitional relief order was issued on September 28, 2009, exempting them from the requirements in section 14.14 to deliver client statements for a period of two years, consistent with the transitional relief provided for mutual fund dealers (MFDs) in section 16.17. The relief is not available to a mapped-over EMD that is also registered in a category other than MFD or investment fund manager (IFM).
NI 31-103 QUESTION ANSWER SECTION
Are the transition periods flexible?
What if a registrant does The registrant should immediately contact the regulator. A not meet an applicable registrant in that situation might be required to cease to requirement under NI 31- conduct registerable activities until they comply with the 103 before the end of the requirement, or a temporary exemption might be granted applicable transition subject to terms and conditions, depending on the period? circumstances. 16.3 Change of registration What is the passport The mapped-over EMD should file a complete Form 33-categories – limited procedure for registration 109F6 Firm Registration with its PR. The application should market dealers of a former limited market be filed before the expiry of the transition period in section dealer that has been 16.7. 16.7 Registration of exempt “mapped-over” to exempt market dealers market dealer (EMD) in Ontario or Newfoundland and Labrador, but has its principal regulator (PR) in another jurisdiction?
Given the different transition periods in section 8.5 of NI 45-106 Prospectus and Registration Exemptions (expiry of registration exemptions on March 27, 2010) and section 16.7 of NI 31-103, when must a person or company register as an exempt market dealer (EMD) if it is in the business of trading in exempt market securities and unable to rely on the “alternative approach to regulating certain intermediaries in the exempt market” described in Appendix D to the CSA Notice of NI 31-103 (published on July 17, 2009)?
When will the jurisdictions The jurisdictions that have agreed to this alternative that are participating in the approach will issue local blanket orders to exempt certain “alternative approach to intermediaries from EMD registration shortly before the regulating certain registration exemptions in NI 45-106 Prospectus and intermediaries in the Registration Exemptions expire (March 27, 2010). exempt market” described in Appendix D to the CSA Notice of NI 31-103 (published on July 17, 2009) issue their exemptions from exempt market dealer (EMD) registration?
We will always consider applications for exemptive relief. However, we anticipate granting extensions of the transition periods only in rare circumstances.
If the person or company was in the business of trading in exempt market securities in a jurisdiction when NI 31-103 came into effect, they may rely on the transition period in section 16.7 of NI 31-103 in that jurisdiction. They must apply for registration by September 28, 2010. If the person or company did not start operating in the exempt market until after September 28, 2009, they must register by March 28, 2010, which is when the registration exemptions in NI 45-106 Prospectus and Registration Exemptions expire. The person or company should apply for registration well in advance of March 28, 2010 to ensure that registration is granted by that date.
NI 31-103 QUESTION ANSWER SECTION
16.11 Capital requirements If a firm was already registered when NI 31-103 16.13 Insurance was implemented, will it requirements lose the benefit of the transitional exemptions set out in Part 16 if it adds registration in another category?
FORMS FORM 31-103F1 How is "market value" CALCULATION OF EXCESS determined? WORKING CAPITAL
What margin rate applies to The Canadian and United States exchanges listed in clause securities (other than (e)(ii) of Schedule 1 (50% margin) should not have been bonds and debentures) included there. Clause (e)(i) sets out the appropriate rates. listed on exchanges in Canada or the United States?
Who should sign the management certification at the end of Form 31-103F1 Calculation of Excess Working Capital?
FORM 31-103F2 If I am relying on the When submitting your firm’s Form 31-103F2 Submission to SUBMISSION TO international adviser or Jurisdiction and Appointment of Agent for Service, include JURISDICTION AND international dealer the name of the chief compliance officer or equivalent, their APPOINTMENT OF AGENT exemptions in sections 8.18 email address, and their telephone and fax numbers, as FOR SERVICE and 8.26, respectively, how well as the firm’s National Registration Database number, if can I ensure my firm it has one. receives communications from the regulator in a timely manner?
NI 33-109 Registration Information
No. A firm would not lose the benefit of the transitional exemptions provided in Part 16 for firms that are registered on the day NI 31-103 came into force (sections 16.8 [Registration of ultimate designated persons], 16.9 [Registration of chief compliance officers], 16.11 [Capital requirements] and 16.13 [Insurance requirements]) if it adds another registration category to what it had on the day when NI 31-103 came into force. Note also that subsection 16.4(3) provides a one-year transitional exemption from the investment fund manager (IFM) insurance requirement for a registered dealer or adviser that was acting as an IFM when NI 31-103 came into force.
Where possible, market value is determined by reference to a quoted value on a recognized exchange or marketplace. If market value is not quoted on an exchange (e.g. bonds) market value may be determined by reference to quotes that are available through brokers. We recognize that it is not always possible to obtain a market value by these methods. In such cases, we will accept a valuation policy that is consistently applied and is based on measures considered reasonable in the industry, such as value at cost where there has been no material subsequent event (e.g. a market event or new capital raising by the issuer).
The most senior decision maker at the firm, who will typically have a title such as chief executive officer, president or managing partner, should be one of the signatories. The firm’s chief financial officer or functional equivalent, if there is one, should also sign. If your firm has only one officer, then only one signature is necessary.
NI 33-109 QUESTION ANSWER SECTION
2.3 Reinstatement How can a permitted individual be reinstated on the National Registration Database (NRD) if their position at the new sponsoring firm is not identical to their position at the old sponsoring firm?
2. Submit Form 33-109F7 Reinstatement of Registered Individuals and Permitted Individuals to reinstate the individual for the officer position and Form 33-109F2 Change or Surrender of Individual Categories to add the director position.
6.1 All registered firms What supporting documents If submitting Form 33-109F6 Firm Registration pursuant to to file Form 33- must registered firms submit this section, do not check off any of the boxes for question 109F6 – September with their Form 33-109F6 Firm 1.3 as the reason for submitting the form. Simply make a 30, 2010 Registration within one year of note in your cover letter or email that you are submitting implementation to their the form further to section 6.1 of NI 33-109. No supporting principal regulator (PR)? Must documents or audited financial statements are required. audited financial statements as per question 5.13 be included?
FORM 33-109F4 Is there a requirement for An individual is only required to update the questions in REGISTRATION OF individuals to update their items 12 to 17 if there is a change to the response INDIVIDUALS AND Form 33-109F4 Registration of previously provided. REVIEW OF PERMITTED Individuals and Review of INDIVIDUALS Permitted Individuals, since there are updated questions in the form?
Do permitted individuals of investment fund managers (IFM) need to submit Form 33- 109F4 Registration of Individuals and Review of Permitted Individuals?
When completing Schedule C of Form 33-109F4 Registration of Individuals and Review of Permitted Individuals, must a chief compliance officer (CCO) check off the “Officer – specify title” box, or only the CCO box?
For permitted individuals, NRD will not allow the individual to be reinstated with a sponsoring firm unless the position at the new sponsoring firm is identical to the position at the old sponsoring firm. So, if, for example, an officer wished to transfer to another sponsoring firm as an officer and director, the sponsoring firm would have to use one of two options: 1. Make a reactivation submission using Form 33-109F4 Registration of Individuals and Review of Permitted Individuals; or
Although individuals acting on behalf of a registered IFM are not required to register pursuant to section 2.3 of NI 31-103, permitted individuals of an IFM must nonetheless file Form 33-109F4 Registration of Individuals and Review of Permitted Individuals. “Permitted individual” is defined in section 1.1 of National Instrument 33-109 Registration Information.
If an individual’s only officer title is CCO, then only the CCO box should be checked-off. However, if they also have an officer title that is listed in the definition of “permitted individual” in section 1.1 of NI 33-109 (CEO, CFO, COO or functional equivalent), then they should also check the “Officer” box and specify their title.
NI 33-109 QUESTION ANSWER SECTION
In Québec, when should an authorized firm representative (AFR) submit a professional liability insurance policy and payment of fees payable to the Chambre de la sécurité financière (CSF)?
FORM 33-109F6 If I am a new applicant filing a After Form 33-109F6 Firm Registration is received, we will FIRM REGISTRATION Form 33-109F6 Firm contact you and provide you with a submission number in Registration (not a current order that you are able to make payment through the registrant updating my National Registration Database. information), when do I submit payment?
What supporting documents must registered firms submit with their Form 33-109F6 Firm Registration if registering in an additional jurisdiction or adding a registration category, such as investment fund manager (IFM)? Must audited financial statements as per question 5.13 be included?
If my firm has audited annual financial statements prepared for its most recent year end, but those audited statements are more than 90 days old as of the date of our application for registration, must we have new audited financial statements prepared?
Must a firm that has its head office outside of Canada be registered in the foreign jurisdiction where it is based?
FORM 33-109F7 My firm recently hired an REINSTATEMENT OF individual that had terms and REGISTERED conditions imposed on his/her INDIVIDUALS AND registration. What does this PERMITTED INDIVIDUALS mean for our firm?
Registration-related fees
When an individual is seeking registration in Québec as a dealing representative of a mutual fund dealer or of a scholarship plan dealer who is not already registered in one of these categories.
Item 1.3 specifies the questions that must be responded to if adding a jurisdiction or category. As question 5.13 is not specified, audited financial statements are not required. However, we will require exempt market dealers (EMDs) registering for the first time (i.e., not already registered in another category in any jurisdiction) and former limited market dealers “mapped-over” to EMD in Ontario and Newfoundland and Labrador under section 16.3 of NI 31-103 to provide audited financial statements, since we will not already have them.
In appropriate cases, where an applicant files audited annual financial statements prepared for its most recent year end, but those audited statements are more than 90 days old, we will accept unaudited financial statements for the period from the financial year end to the month end prior to application. Since these filings would be made as part of the initial application process, as attachments to the Form 33-109F6 Firm Registration, you may request the exemption at that time. No separate exemptive relief application need be filed in respect of this exercise of the Director's discretion.
Foreign firms applying for registration are normally expected to be registered in a relevant category in their home jurisdiction. This is part of the fit and proper assessment to be registered in Canadian jurisdictions and is also relevant to our compliance oversight capabilities.
By signing Form 33-109F7 Reinstatement of Registered Individuals and Permitted Individuals, the authorized partner or officer of the new sponsoring firm certifies that the individual’s terms and conditions remain in effect and agrees to assume any ongoing obligations that apply to the sponsoring firm in respect of the individual.
QUESTION Where can I get information on the fees payable to the regulators in different jurisdictions?
ANSWER There is a link to each of the CSA jurisdiction’s fee schedules on the National Registration Database information website at www.nrd-info.ca. The schedules are located under the left-hand navigation bar labelled “Regulatory fees”.