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On July 17, 2009 the Canadian Securities Administrators ("CSA") published new rules regarding registration requirements for securities dealers, advisors and investment fund managers. The new rules are contained in National Instrument 31-103 Registration Requirements and Exemptions ("NI 31-103") and related amendments to securities legislation. The purpose of the new rules is to harmonize, streamline and modernize registration requirements throughout Canada for securities dealers and advisors and investment fund managers. NI 31-103 will come into force on September 28, 2009.

"Business Trigger" for Registration

A key component of the new registration rules is the introduction of the "business trigger" for registration. Presently, the Ontario Securities Act, for example, provides that no person or company shall trade in a security or act as an advisor unless the person or company is registered in the appropriate category with the Ontario Securities Commission. Under NI 31-103, dealer and advisor registration will be required where an individual or firm conducts trading or advising activity as a "business". Accordingly, the firm or individual must (a) consider whether their activities constitute trading or advising in connection with securities, and (b) determine whether they are carrying out those activities for a business purpose. The following factors, among others, will be used by the securities regulatory authorities in determining whether a person is engaged in the business of trading or advising in securities, and therefore subject to the registration requirement:

• whether the person is engaging in activities similar to those of a person registered as a securities dealer or advisor (for example, promoting securities or stating in any way that the person will buy or sell securities);
• whether the person is intermediating a trade between a seller and a buyer of securities (for example, acting as a broker or making a market in securities);
• whether the person is engaged, directly or indirectly, in regular trading or advising activities that in any way produce, or are intended to produce, profits;
• whether the person receives, or expects to receive, any form of compensation for carrying on the activity, including whether the compensation is transaction or value based, regardless of whether the person actually receives any form of compensation; or
• whether the person contacts anyone to solicit securities transactions or to offer advice (solicitation includes contacting someone by any means, including advertising that proposes buying or selling securities or participating in a securities transaction, or that offers services or advice for these purposes).

The above is not an exhaustive list and the CSA has stated that they will not automatically assume that any one of the above factors on its own will determine whether a person is in the business of trading or advising in securities. Firms engaged in investment fund manager activities are automatically required to register under NI 31-103 and the "business trigger" analysis is not conducted for such firms.

Registration Categories

Under the new registration rules, firms acting as securities dealers will be required to register under one of the following categories: investment dealer, mutual fund dealer, scholarship plan dealer, exempt market dealer or restricted dealer.

The "exempt market dealer" category replaces the current category of "limited market dealer" in Ontario and in Newfoundland and Labrador while this is a new category of registration in the other jurisdictions. The exempt market dealer category restricts an individual or firm to acting as a dealer in the "exempt market", which refers to trades involving exemptions from the prospectus requirement such as the sale of securities to "accredited investors" or trades involving the purchase of a minimum of $150,000 of a security in a single transaction. A person or company currently registered as a limited market dealer in Ontario or Newfoundland and Labrador will be automatically registered as an exempt market dealer under NI 31-103 when it comes into force.

The "restricted dealer" category is intended to accommodate firms that carry out limited dealing activities and do not fall under any other firm category. This category is designed to provide flexibility to the various securities regulatory authorities in recognition of unique business models including certain existing local registration categories that will be converted into this category.

Firms acting as advisors are required to register as portfolio managers or restricted portfolio managers. The category of "restricted portfolio manager" is intended to accommodate specialist advisors who have specialized expertise but may not have the proficiency required for full portfolio manager registration.

Investment fund managers will be required to register under the new category of "investment fund manager".

Exemptions from Registration

NI 31-103 retains certain existing exemptions from the dealer and advisor registration requirements including exemptions relating to: (a) a trade through or to a registered dealer, (b) trades to a security holder of an issuer under a reinvestment plan, (c) a trade in a security of an investment fund that is a "private investment club", (d) a trade in a mortgage on real property, (e) a trade to a person secured in accordance with personal property security legislation, (f) a trade in a variable insurance contract, and (g) a trade involving certain government or bank debt securities.

New registration exemptions include exemptions relating to certain "permitted clients" (ie. institutional and corporate investors and very high net worth individuals) and an exemption allowing a registrant in a given province or territory to continue dealing with a certain number of clients who have moved to another province or territory ("Mobility Exemption"). Under the Mobility Exemption, a registrant firm may continue to deal with up to 10 clients who have moved to another jurisdiction without having to register in that other jurisdiction.

The above is only a general summary of some of the provisions of NI 31-103. Other important provisions under NI 31-103 and the accompanying amendments to securities legislation include rules for registrants relating to proficiency standards, consumer disclosure, referral arrangements, investor complaints, conflicts of interest and "know your client" rules. Readers are advised to consult with a legal advisor familiar with NI 31-103 and the accompanying changes to securities legislation should they have a particular question or concern regarding the new registration rules.

For further information on the new registration requirements and exemptions for securities dealers and advisors and how this may impact your business, please contact:

Jim Sahdra at jsahdra@kmblaw.com or (905) 276-0423.

The comments in this newsletter are of a general nature and are not designed to replace professional advice in specific situations. If you would like extra copies of this newsletter, or you know of anyone who would be interested in joining our mailing list, please contact Cheryl Woolcott at (905) 276-9111.