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COMPANION POLICY CP REGISTRATION REQUIREMENTS AND EXEMPTIONS. Table of Contents - PDF
COMPANION POLICY CP REGISTRATION REQUIREMENTS AND EXEMPTIONS. Table of Contents
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Elaine Dinah Lynch
1 COMPANION POLICY CP REGISTRATION REQUIREMENTS AND EXEMPTIONS Table of Contents Part 1 Definitions and fundamental concepts 1.1 Introduction 1.2 Definitions 1.3 Fundamental concepts Individual registration Part 2 Categories of registration for individuals 2.1 Individual categories 2.2 Client mobility exemption individuals Part 3 Registration requirements individuals Division 1 General proficiency requirements 3.3 Time limits on examination requirements Division 2 Education and experience requirements 3.4 Proficiency initial and ongoing 3.11 Portfolio manager advising representative 3.12 Portfolio manager associate advising representative Division 3 Membership in a self-regulatory organization 3.16 Exemptions from certain requirements for SRO-approved persons Part 4 Restrictions on registered individuals 4.2 Associate advising representatives pre-approval of advice Part 5 Ultimate designated person and chief compliance officer 5.1 Responsibilities of the ultimate designated person 5.2 Responsibilities of the chief compliance officer Part 6 Suspension and revocation of registration individuals 6.1 If individual ceases to have authority to act for firm 6.2 If IIROC approval is revoked or suspended 6.3 If MFDA approval is revoked or suspended 6.6 Revocation of a suspended registration individual Firm registration Part 7 Categories of registration for firms 7.1 Dealer categories 7.2 Adviser categories 7.3 Investment fund manager category Part 8 Exemptions from the requirement to register Division 1 Exemptions from dealer and underwriter registration 8.5 Trades through or to a registered dealer 8.6 Adviser non-prospectus qualified investment fund 8.19 Self-directed registered education savings plan Division 2 Exemptions from adviser registration 8.25 Advising generally Division 3 Exemptions from investment fund manager registration 8.28 Capital accumulation plan exemption Division 4 Mobility exemption firms 8.30 Client mobility exemption firms Part 9 Membership in a self-regulatory organization 9.3 Exemptions from certain requirements for SRO members Part 10 Suspension and revocation of registration firms Division 1 When a firm s registration is suspended 10.1 Failure to pay fees 10.2 If IIROC membership is revoked or suspended 10.3 If MFDA membership is revoked or suspended July 17, (2009) 32 OSCB (Supp-2)
2 Division 2 Revoking a firm s registration 10.5 Revocation of a suspended registration firm 10.6 Exception for firms involved in a hearing Business operations Part 11 Internal controls and systems Division 1 Compliance 11.1 Compliance system 11.2 Designating an ultimate designated person 11.3 Designating a chief compliance officer Division 2 Books and records 11.5 General requirements for records 11.6 Form, accessibility and retention of records Division 3 Certain business transactions 11.8 Tied selling 11.9 Registrant acquiring a registered firm s securities or assets Registered firm whose securities are acquired Part 12 Financial condition Division 1 Working capital 12.1 Capital requirements Division 2 Insurance 12.4 Insurance adviser 12.6 Global bonding or insurance Division 4 Financial reporting Delivering financial information investment fund manager Client relationships Part 13 Dealing with clients individuals and firms Division 1 Know your client and suitability 13.2 Know your client 13.3 Suitability Division 2 Conflicts of interest 13.4 Identifying and responding to conflicts of interest 13.5 Restrictions on certain managed account transactions 13.6 Disclosure when recommending related or connected securities Division 3 Referral arrangements 13.7 Definitions referral arrangements 13.8 Permitted referral arrangements 13.9 Verifying the qualifications of the person or company receiving the referral Disclosing referral arrangements to clients Division 5 Complaints Handling complaints Dispute resolution service Part 14 Handling client accounts firms Division 2 Disclosure to clients 14.2 Relationship disclosure information 14.4 When the firm has a relationship with a financial institution Division 3 Client assets 14.6 Holding client assets in trust Division 4 Client accounts Allocating investment opportunities fairly Division 5 Account activity reporting Client statements Appendices Appendix A - Contact information Appendix B - Terms not defined in NI or this Companion Policy Appendix C - Proficiency requirements for individuals acting on behalf of a registered firm July 17, (2009) 32 OSCB (Supp-2)
3 Part 1 Definitions and fundamental concepts 1.1 Introduction This Companion Policy sets out how the Canadian Securities Administrators (the CSA or we) interpret or apply the provisions of National Instrument Registration Requirements and Exemptions (NI ) and related securities legislation. Except for Part 1, the numbering of Parts, Divisions and sections in this Companion Policy correspond to the numbering in NI Any general guidance for a Part or a Division appears immediately after the Part or Division name. Any specific guidance on sections in NI follows any general guidance. If there is no guidance for a Part, Division or section, the numbering in this Companion Policy will skip to the next provision that does have guidance. All references in this Companion Policy to sections, Parts and Divisions are to NI , unless otherwise noted. For additional requirements that may apply to them, registrants should refer to: National Instrument National Registration Database (NI ) and the Companion Policy to NI National Instrument Registration Information (NI ) and the Companion Policy to NI National Policy Process for Registration in Multiple Jurisdictions (NP ), and securities legislation in their jurisdiction Registrants that are members of a self-regulatory organization (SRO) must also comply with their SRO s requirements. Delivering disclosure and notices Registrants must deliver all disclosure and notices required under NI to the registrant s principal regulator, except for notices under sections: 8.18 International dealer 8.26 International adviser 11.9 Registrant acquiring a registered firm s securities or assets, and Registered firm whose securities are acquired Registrants must deliver these notices to the regulator in each jurisdiction where they are registered. These documents may be delivered electronically. Registrants should refer to National Policy Delivery of Documents by Electronic Means and, in Québec, Notice Delivery of Documents by Electronic Means. See Appendix A for contact information for each regulator. 1.2 Definitions Unless defined in NI , terms used in NI and in this Companion Policy have the meaning given to them in the securities legislation of each jurisdiction or in National Instrument Definitions. See Appendix B for a list of some terms that are not defined in NI or this Companion Policy but are defined in other securities legislation. In this Companion Policy, regulator means the regulator or securities regulatory authority in a jurisdiction. Permitted client The following discussion provides guidance on the term permitted client, which is defined in section 1.1 of NI Permitted client is used in the following sections: 8.18 International dealer July 17, (2009) 32 OSCB (Supp-2)
4 8.26 International adviser 13.2 Know your client 13.3 Suitability Disclosure when recommending the use of borrowed money 14.2 Relationship disclosure information, and 14.4 When the firm has a relationship with a financial institution Exemptions from registration when dealing with permitted clients NI exempts international dealers and international advisers from the registration requirement if they deal with certain permitted clients and meet certain other conditions. Exemptions from other requirements when dealing with permitted clients Under section 13.3, permitted clients may waive their right to have a registrant determine that a trade is suitable. In order to rely on this exemption, the registrant must determine that a client is a permitted client at the time the client waives their right to suitability. Under sections 13.13, 14.2 and 14.4, registrants do not have to provide certain disclosures to permitted clients. In order to rely on these exemptions, registrants must determine that a client is a permitted client at the time the client opens an account. Determining assets The definition of permitted client includes monetary thresholds based on the value of the client s assets. The monetary thresholds in paragraphs (o) and (q) of the definition are intended to create bright-line standards. Investors who do not satisfy these thresholds do not qualify as permitted clients under the applicable paragraph. Paragraph (o) of the definition Paragraph (o) refers to an individual who beneficially owns financial assets with an aggregate realizable value that exceeds $5 million, before taxes but net of any related liabilities. In general, determining whether financial assets are beneficially owned by an individual should be straightforward. However, this determination may be more difficult if financial assets are held in a trust or in other types of investment vehicles for the benefit of an individual. Factors indicating beneficial ownership of financial assets include: possession of evidence of ownership of the financial asset entitlement to receive any income generated by the financial asset risk of loss of the value of the financial asset, and the ability to dispose of the financial asset or otherwise deal with it as the individual sees fit For example, securities held in a self-directed RRSP for the sole benefit of an individual are beneficially owned by that individual. Securities held in a group RRSP are not beneficially owned if the individual cannot acquire and deal with the securities directly. Financial assets is defined in section 1.1 of National Instrument Prospectus and Registration Exemptions (NI ). Realizable value is typically the amount that would be received by selling an asset. Market value may be used to estimate realizable value when a market for an asset exists. July 17, (2009) 32 OSCB (Supp-2)
5 Paragraph (q) of the definition Paragraph (q) refers to a person or company that has net assets of at least $25 million. Net assets under this paragraph is total assets minus total liabilities. The value attributed to assets should reasonably reflect their estimated fair value. 1.3 Fundamental concepts This section describes the fundamental concepts that form the basis of the registration regime: requirement to register business trigger for trading and advising, and fitness for registration Requirement to register The requirement to register is found in securities legislation. Firms must register if they are: in the business of trading in the business of advising holding themselves out as being in the business of trading or advising acting as an underwriter, or acting as an investment fund manager Individuals must register if they trade, underwrite or advise on behalf of a registered dealer or adviser, or act as the ultimate designated person (UDP) or chief compliance officer (CCO) of a registered firm. Individuals who act on behalf of a registered investment fund manager do not have to register. There is no renewal requirement for registration, but fees must be paid every year to maintain registration. Multiple categories Registration in more than one category may be necessary. For example, an adviser that also manages an investment fund may have to register as a portfolio manager and an investment fund manager. An adviser that manages a portfolio and distributes units of an investment fund may have to register as a portfolio manager and as a dealer. Registration exemptions NI provides exemptions from the registration requirement. Some exemptions do not need to be applied for if the conditions of the exemption are met. In other cases, on receipt of an application, the regulator has discretion to grant exemptions for specified dealers, advisers or investment fund managers, or activities carried out by them if registration is required but specific circumstances indicate that it is not otherwise necessary for investor protection or market integrity. Business trigger for trading and advising We refer to trading or advising in securities for a business purpose as the business trigger for registration. We look at the type of activity and whether it is carried out for a business purpose to determine if an individual or firm must register. We consider the factors set out below, among others, to determine if the activity is for a business purpose. For the most part, these factors are from case law and regulatory decisions that have interpreted the business purpose test for securities matters. Factors in determining business purpose This section describes factors that we consider relevant in determining whether an individual or firm is trading or advising in securities for a business purpose and, therefore, subject to the dealer or adviser registration requirement. July 17, (2009) 32 OSCB (Supp-2)
6 This is not a complete list. We do not automatically assume that any one of these factors on its own will determine whether an individual or firm is in the business of trading or advising in securities. (a) Engaging in activities similar to a registrant We usually consider an individual or firm engaging in activities similar to those of a registrant to be trading or advising for a business purpose. Examples include promoting securities or stating in any way that the individual or firm will buy or sell securities. If an individual or firm sets up a business to carry out any of these activities, we may consider them to be trading or advising for a business purpose. (b) Intermediating trades or acting as a market maker In general, we consider intermediating a trade between a seller and a buyer of securities to be trading for a business purpose. This typically takes the form of the business commonly referred to as a broker. Making a market in securities is also generally considered to be trading for a business purpose. (c) Directly or indirectly carrying on the activity with repetition, regularity or continuity Frequent or regular transactions are a common indicator that an individual or firm may be engaged in trading or advising for a business purpose. The activity does not have to be their sole or even primary endeavour for them to be in the business. We consider regularly trading or advising in any way that produces, or is intended to produce, profits to be for a business purpose. We also consider any other sources of income and how much time an individual or firm spends on all activities associated with the trading or advising. (d) Being, or expecting to be, remunerated or compensated Receiving, or expecting to receive, any form of compensation for carrying on the activity, including whether the compensation is transaction or value based, indicates a business purpose. It does not matter if the individual or firm actually receives compensation or in what form. Having the capacity or the ability to carry on the activity to produce profit is also a relevant factor. (e) Directly or indirectly soliciting Contacting anyone to solicit securities transactions or to offer advice may reflect a business purpose. 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. Business trigger examples This section explains how the business trigger might apply to some common situations. (a) Securities issuers A securities issuer is an entity that issues or trades in its own securities. In general, securities issuers with an active nonsecurities business do not have to register as a dealer if they: do not hold themselves out as being in the business of trading in securities trade in securities infrequently are not, or do not expect to be, compensated for trading in securities do not act as intermediaries, and do not produce, or intend to produce, a profit from trading in securities However, securities issuers may have to register as a dealer if they: frequently trade in securities employ or otherwise contract individuals to perform activities on their behalf that are similar to those performed by a registrant (other than underwriting in the normal course of a distribution or trading for their own account) July 17, (2009) 32 OSCB (Supp-2)
7 solicit investors actively, or act as an intermediary by investing client money in securities For example, an investment fund manager that carries out the activities described above may have to register as a dealer. Securities issuers that are in the business of trading should consider whether they qualify for the exemption from the registration requirement for trades through a registered dealer in section 8.5 of NI In most cases, securities issuers are subject to the prospectus requirements in securities legislation. Regulators have the discretionary authority to require an underwriter for a prospectus distribution. (b) Venture capital and private equity This guidance does not apply to labour sponsored or venture capital funds as defined in National instrument Investment Fund Continuous Disclosure (NI ). Venture capital and private equity investing are distinguished from other forms of investing by the role played by venture capital and private equity management companies (collectively, VCs). This type of investing includes a range of activities that may require registration. VCs typically raise money under one of the prospectus exemptions in NI , including for trades to accredited investors. The investors typically agree that their money will remain invested for a period of time. The VC uses this money to invest in securities of companies that are not publicly traded. The VC usually becomes actively involved in the management of the company, often over several years. Examples of active management in a company include the VC having: representation on the board of directors direct involvement in the appointment of managers a say in material management decisions The VC looks to realize on the investment either through a public offering of the company s securities, or a sale of the business. At this point, the investors money can be returned to them, along with any profit. Investors rely on the VC s expertise in selecting and managing the companies it invests in. In return, the VC receives a management fee or carried interest in the profits generated from these investments. They do not receive compensation for raising capital or trading in securities. Applying the business trigger factors to the VC activities as described above, there would be no requirement for the VC to register as: a portfolio manager, if the advice provided in connection with the purchase and sale of companies is incidental to the VC s active management of these companies, or a dealer, if both the raising of money from investors and the investing of that money in companies are occasional and uncompensated activities If the VC is actively involved in the management of the companies it invests in, the investment portfolio would generally not be considered an investment fund. As result, the VC would not need to register as an investment fund manager. The business trigger factors and investment fund manager analysis may apply differently if the VC engages in activities other than those described above. (c) One-time activities In general, we do not require registration for one-time trading or advising activities. This includes trading or advising that: is carried out by an individual or firm acting as a trustee, executor, administrator, personal or other legal representative, or July 17, (2009) 32 OSCB (Supp-2)
8 relates to the sale of a business (d) Incidental activities If trading or advising activity is incidental to a firm s primary business, we may not consider it to be for a business purpose. For example, merger and acquisition specialists that advise the parties to a transaction between companies are not normally required to register as dealers or advisers in connection with that activity, even though the transaction may result in trades in securities and they will be compensated for the advice. The primary business purpose in this example is to carry out the transaction. Any advice on trades in the securities is incidental to that purpose and is limited to the parties to the transaction. Another example is professionals, such as lawyers, accountants, engineers, geologists and teachers, who may provide advice on securities in the normal course of their professional activities. We do not consider them to be advising on securities for a business purpose. For the most part, any advice on securities will be incidental to their professional activities. This is because they: do not regularly advise on securities are not compensated separately for advising on securities do not solicit clients on the basis of their securities advice, and do not hold themselves out as being in the business of advising on securities Registration trigger for investment fund managers Investment fund managers are subject to a registration trigger. This means that if a firm carries on the activities of an investment fund manager, it must register. However, investment fund managers are not subject to the business trigger. Fitness for registration The regulator will only register an applicant if they appear to be fit for registration. Following registration, individuals and firms must maintain their fitness in order to remain registered. If the regulator determines that a registrant has become unfit for registration, the regulator may suspend or revoke the registration. See Part 6 of this Companion Policy for guidance on suspension and revocation of individual registration. See Part 10 of this Companion Policy for guidance on suspension and revocation of firm registration. Terms and conditions The regulator may impose terms and conditions on a registration at the time of registration or at any time after registration. Terms and conditions imposed at the time of registration are generally permanent, for example, in the case of a restricted dealer who is limited to specific activities. Terms and conditions imposed after registration are generally temporary. For example, if a registrant does not maintain the required capital, it may have to file monthly financial statements and capital calculations until the regulator s concerns are addressed. Opportunity to be heard Applicants and registrants have an opportunity to be heard by the regulator before their application for registration is denied. They also have an opportunity to be heard before the regulator imposes terms and conditions on their registration if they disagree with the terms and conditions. Assessing fitness for registration - firms We assess whether a firm is or remains fit for registration through the information it is required to provide on registration application forms and as a registrant, and through compliance reviews. Based on this information, we consider whether the firm is able to carry out its obligations under securities legislation. For example, registered firms must be financially viable. A firm that is insolvent or has a history of bankruptcy may not be fit for registration. In addition, when determining whether a firm whose head office is outside Canada is, and remains, fit for registration, we will consider whether the firm maintains registration or regulatory organization membership in the foreign jurisdiction that is appropriate for the securities business it carries out there. July 17, (2009) 32 OSCB (Supp-2)
9 Assessing fitness for registration - individuals We use three fundamental criteria to assess whether an individual is or remains fit for registration: proficiency integrity, and solvency (a) Proficiency Individual applicants must meet the applicable education, training and experience requirements prescribed by securities legislation and demonstrate knowledge of securities legislation and the products they recommend. Registered individuals should continually update their knowledge and training to keep pace with new products, services and developments in the industry that are relevant to their business. See section 3.4 of this Companion Policy for more specific guidance on proficiency. (b) Integrity Registered individuals must conduct themselves with integrity and have an honest character. The regulator will assess the integrity of individuals through the information they are required to provide on registration application forms and as registrants, and through compliance reviews. For example, applicants are required to disclose information about conflicts of interest, such as other employment or partnerships, service as a member of a board of directors, or relationships with affiliates, and about any regulatory or legal actions against them. (c) Solvency The regulator will assess the overall financial condition of an individual applicant or registrant. An individual that is insolvent or has a history of bankruptcy may not be fit for registration. Depending on the circumstances, the regulator may consider the individual s contingent liabilities. The regulator may take into account an individual s bankruptcy or insolvency when assessing their continuing fitness for registration. Part 2 Categories of registration for individuals 2.1 Individual categories Multiple individual categories Individuals who carry on more than one activity requiring registration on behalf of a registered firm must: register in all applicable categories, and meet the proficiency requirements of each category For example, an advising representative of a portfolio manager who is also the firm s CCO must register in the categories of advising representative and CCO. They must meet the proficiency requirements of both of these categories. Multiple firms We will not usually register an individual as a dealing, advising or associate advising representative for more than one registered firm even if the firms are affiliated. We will consider applications for individuals to act as a representative of more than one firm on a case-by-case basis. Before we approve an application, we must be satisfied that: there are valid business reasons for the individual to be registered with both firms the applicant s sponsoring firms have demonstrated that they have policies and procedures addressing any conflicts of interest that may arise as a result of the dual registration, and the sponsoring firms will be able to deal with these conflicts July 17, (2009) 32 OSCB (Supp-2)
10 We may consider other relevant factors. Individual registered in a firm category An individual can be registered in both a firm and individual category. For example, a sole proprietor who is registered in the firm category of portfolio manager must also be registered in the individual category of advising representative. 2.2 Client mobility exemption individuals The mobility exemption in section 2.2 of NI allows registered individuals to continue dealing with and advising clients who move to another jurisdiction, without registering in that other jurisdiction. Section 8.30 Client mobility exemption firms contains a similar exemption for registered firms. The exemption becomes available when the client (not the registrant) moves to another jurisdiction. An individual may deal with up to five eligible clients in each other jurisdiction. Each of the client, their spouse and any children are an eligible client. An individual may only rely on the exemption if: they and their sponsoring firm are registered in their principal jurisdiction they and their sponsoring firm only act as a dealer, underwriter or adviser in the other jurisdiction as permitted under their registration in their principal jurisdiction they comply with Part 13 Dealing with clients individuals and firms they act fairly, honestly and in good faith in their dealings with the eligible client, and their sponsoring firm has disclosed to the eligible client that the individual and if applicable, their sponsoring firm, are exempt from registration in the other jurisdiction and are not subject to the requirements of securities legislation in that jurisdiction As soon as possible after an individual first relies on this exemption, their sponsoring firm must complete and file Form F3 Use of mobility exemption (Form F3) with the other jurisdiction. Part 3 Registration requirements individuals Division 1 General proficiency requirements Individuals must pass exams not courses to meet the education requirements in Part 3. For example, an individual must pass the Canadian Securities Course Exam, but does not have to complete the Canadian Securities Course. Individuals are responsible for completing the necessary preparation to pass an exam and for proficiency in all areas covered by the exam. 3.3 Time limits on examination requirements Under section 3.3 of NI , there is a time limit on the validity of exams prescribed in Part 3. Individuals must pass an exam within 36 months before they apply for registration. However, the time limit does not apply if the individual: was registered in the same category in Canada for a total of 12 months during the 36-month period, or gained relevant securities industry experience for a total of 12 months during the 36-month period The 12 months of registration and relevant securities industry experience referred to in subsection 3.3(2) do not have to be consecutive, or with the same firm or organization. The individual must have been registered for a total of 12 months or obtained a total of 12 months of experience within the 36-month period before the date they apply for registration. These time limits do not apply when individuals transfer to a new firm. This is because they do not have to apply for registration when they transfer. See Part 6 of this Companion Policy for guidance on individuals who transfer to a new firm. Relevant securities industry experience The securities industry experience under subsection 3.3(2)(b) should be relevant to the category applied for. It may include experience acquired: July 17, (2009) 32 OSCB (Supp-2)
11 during employment at a registered dealer, a registered adviser or an investment fund manager in related investment fields, such as investment banking, securities trading on behalf of a financial institution, securities research, portfolio management, investment advisory services or supervision of those activities in legal, accounting or consulting practices related to the securities industry in other professional service fields that relate to the securities industry, or in a securities-related business in a foreign jurisdiction Division 2 Education and experience requirements See Appendix C for a chart that sets out the proficiency requirements for each individual category of registration. Granting exemptions The regulator may grant an exemption from any of the education and experience requirements in Division 2 if it is satisfied that an individual has qualifications or relevant experience that is equivalent to, or more appropriate in the circumstances than, the prescribed requirements. Proficiency for representatives of investment dealers IIROC sets the proficiency requirements for dealing representatives of its members. Proficiency for representatives of restricted dealers and restricted portfolio managers The regulator will decide on a case-by-case basis what education and experience are required for registration as: a dealing representative or CCO of a restricted dealer an advising representative or CCO of a restricted portfolio manager The regulator will determine these requirements when it assesses the individual s fitness for registration. 3.4 Proficiency initial and ongoing Under section 3.4 of NI , registered individuals, including CCOs, must not perform an activity that requires registration unless they have the education, training and experience that a reasonable person would consider necessary to perform the activity competently. Registered firms should ensure that registered individuals acting on their behalf meet this requirement at all times. For example, firms should perform their own analysis of all products they recommend to clients and provide product training to ensure their registered representatives have a sufficient understanding of the products and their risks to meet their suitability obligations under section Similarly, registered individuals should have a thorough understanding of a product before they recommend it to a client Portfolio manager advising representative 3.12 Portfolio manager associate advising representative The 12 months of relevant investment management experience referred to in section 3.11 of NI and 24 months of relevant investment management experience referred to in section 3.12 do not have to be consecutive, or with the same firm or organization. The individual must obtain a total of this experience within the 36-month period before the date they apply for registration. For individuals with a CFA charter, the regulator will decide on a case-by-case basis whether the experience they gained to earn the charter qualifies as relevant investment management experience. Relevant investment management experience Relevant investment management experience under sections 3.11 and 3.12 may vary according to the level of specialization of the individual. It may include: July 17, (2009) 32 OSCB (Supp-2)
12 securities research and analysis experience, demonstrating an ability in, and understanding of, portfolio analysis or portfolio security selection, or management of investment portfolios on a discretionary basis, including investment decision making, rebalancing and evaluating performance Advising representatives Advising representatives may acquire relevant investment management experience during employment in a portfolio management capacity with a registered investment dealer or adviser firm. Associate advising representatives Relevant investment management experience for associate advising representatives may include working at: an unregistered portfolio manager of a Canadian financial institution an adviser that is registered in another jurisdiction of Canada, or an adviser in a foreign jurisdiction Division 3 Membership in a self-regulatory organization 3.16 Exemptions from certain requirements for SRO approved persons Section 3.16 exempts registered individuals who are dealing representatives of IIROC or MFDA members from the requirements in NI for suitability and disclosure when recommending the use of borrowed money. This is because IIROC and the MFDA have their own rules for these matters. In Québec, these requirements do not apply to dealing representatives of a mutual fund dealer who comply with the applicable Québec regulations. This section also exempts registered individuals who are dealing representatives of IIROC from the know your client obligations in section Part 4 Restrictions on registered individuals 4.2 Associate advising representatives pre-approval of advice The associate advising representative category is primarily meant to be an apprentice category for individuals who intend to become an advising representative but who do not meet the education or experience requirements for that category when they apply for registration. It allows an individual to work at a registered adviser while completing the proficiency requirements for an advising representative. For example, a previously registered advising representative could work in an advising capacity while acquiring the relevant work experience required for an advising representative under section 3.11 of NI However, associate advising representatives are not required to subsequently register as a full advising representative. They can remain as an associate advising representative indefinitely. This category also accommodates, for example, individuals who provide specific advice to clients, but do not manage client portfolios without supervision. As required by section 4.2, registered firms must designate an advising representative to approve the advice provided by an associate advising representative. The designated advising representative must approve the advice before the associate advising representative gives it to the client. The appropriate processes for approving the advice will depend on the circumstances, including the associate advising representative s level of experience. Registered firms that have associate advising representatives must: document their policies and procedures for meeting the supervision and approval obligations as required under section 11.1 implement controls as required under section 11.1 maintain records as required under section 11.5, and notify the regulator of the names of the advising representative and the associate advising representative whose advice they are approving no later than the seventh day after the advising representative is designated July 17, (2009) 32 OSCB (Supp-2)
13 Part 5 Ultimate designated person and chief compliance officer Sections 11.2 and 11.3 of NI require registered firms to designate a UDP and a CCO. The UDP and CCO must be registered and perform the compliance functions set out in sections 5.1 and 5.2. While the UDP and CCO have specific compliance functions, they are not solely responsible for compliance it is the responsibility of the firm as a whole. The same person as UDP and CCO The UDP and the CCO can be the same person if they meet the requirements for both registration categories. We prefer firms to separate these functions, but we recognize that it might not be practical for some registered firms. UDP or CCO as advising or dealing representative The UDP or CCO may also be registered in trading or advising categories. For example, a small registered firm might conclude that one individual can adequately function as UDP and CCO, while also carrying on advising and trading activities. We may have concerns about the ability of a UDP or CCO of a large firm to conduct these additional activities and carry out their UDP, CCO and advising responsibilities at the same time. 5.1 Responsibilities of the ultimate designated person The UDP is responsible for promoting a culture of compliance and overseeing the effectiveness of the firm s compliance system. They do not have to be involved in the day-to-day management of the compliance group. There are no specific education or experience requirements for the UDP. However, they are subject to the proficiency principle in section Responsibilities of the chief compliance officer The CCO is an operating officer who is responsible for the monitoring and oversight of the firm s compliance system. This includes: establishing or updating policies and procedures for the firm s compliance system, and managing the firm s compliance monitoring and reporting according to the policies and procedures At the firm s discretion, the CCO may also have authority to take supervisory or other action to resolve compliance issues. The CCO must meet the proficiency requirements set out in Part 3. No other compliance staff have to be registered unless they are also advising or trading. The CCO may set the knowledge and skills necessary or desirable for individuals who report to them. If a firm is registered in multiple categories, the CCO must meet the most stringent of the proficiency requirements of the firm s categories of registration. Firms must designate one CCO. However, in large firms, the scale and kind of activities carried out by different operating divisions may warrant the designation of more than one CCO. We will consider applications, on a case-by-case basis, for different individuals to act as the CCO of a firm s operating divisions. We will not usually register the same person as CCO of more than one firm unless the firms are affiliated, and the scale and kind of activities carried out make it reasonable for the same person to act as CCO of more than one firm. We will consider applications, on a case-by-case basis, for the CCO of one registered firm to act as the CCO of another registered firm. Subsection 5.2(c) of NI requires the CCO to report to the UDP any instances of non-compliance with securities legislation that: create a reasonable risk of harm to a client or to the market, or are part of a pattern of non-compliance The CCO should report non-compliance to the UDP even if it has been corrected. Subsection 5.2(d) requires the CCO to submit an annual report to the board of directors. July 17, (2009) 32 OSCB (Supp-2)
14 Part 6 Suspension and revocation of registration individuals The requirements for surrendering registration and additional requirements for suspending and revoking registration are found in the securities legislation of each jurisdiction. The guidance for Part 6 relates to requirements under both securities legislation and NI There is no renewal requirement for registration. A registered individual may carry on the activities for which they are registered until their registration is: suspended automatically under NI suspended by the regulator under certain circumstances, or surrendered by the individual 6.1 If individual ceases to have authority to act for firm Under section 6.1 of NI , if a registered individual ceases to have authority to act on behalf of their sponsoring firm because their working relationship with the firm ends or changes, the individual s registration with the registered firm is suspended until reinstated or revoked under securities legislation. This applies whether the individual or the firm ends the relationship. If a registered firm terminates its working relationship with a registered individual for any reason, the firm must complete and file a notice of termination on Form F1 Notice of Termination of Registered Individuals and Permitted Individuals (Form F1) no later than five days after the effective date of the individual s termination. This includes when an individual resigns, is dismissed or retires. The firm must file additional information about the individual s termination prescribed in Part 5 of Form F1 if: the individual resigned (either voluntarily or at the firm s request) the individual was dismissed (whether or not for cause), or the firm indicates other as the reason for termination on Form F1 The firm must file this information no later than 30 days after the date of termination. The regulator uses this information to determine if there are any concerns about the individual s conduct that may be relevant to their ongoing fitness for registration. Under NI , the firm must provide this information to the individual on request. Suspension An individual whose registration is suspended must not carry on the activity they are registered for. The individual otherwise remains a registrant and is subject to the jurisdiction of the regulator. A suspension remains in effect until the regulator reinstates or revokes the individual s registration. If an individual who is registered in more than one category is suspended in one of the categories, the regulator will consider whether to suspend the individual s registration in other categories or to impose terms and conditions, subject to an opportunity to be heard. Automatic suspension An individual s registration will automatically be suspended if: they cease to have working relationship with their sponsoring firm the registration of their sponsoring firm is suspended or revoked, or they cease to be an approved person of an SRO An individual must have a sponsoring firm to be registered. If an individual leaves their sponsoring firm for any reason, their registration is automatically suspended. Automatic suspension is effective on the day that an individual no longer has authority to act on behalf of their sponsoring firm. July 17, (2009) 32 OSCB (Supp-2)
15 Individuals do not have an opportunity to be heard by the regulator in the case of any automatic suspension. Suspension in the public interest An individual s registration may be suspended if the regulator exercises its power under securities legislation and determines that it is no longer in the public interest for the individual to be registered. The regulator may do this if it has serious concerns about the ongoing fitness of the individual. For example, this may be the case if an individual is charged with a crime, in particular fraud or theft. Reinstatement Reinstatement means that a suspension on a registration has been lifted. Once reinstated, an individual may resume carrying on the activity they are registered for. If a suspended individual joins a new sponsoring firm, they will have to apply for reinstatement under the process set out in NI In certain cases, the reinstatement or transfer to the new firm will be automatic. Automatic transfers Subject to certain conditions set out in NI , an individual s registration may be automatically reinstated if they: transfer directly from one sponsoring firm to another registered firm in the same jurisdiction join the new sponsoring firm within 90 days of leaving their former sponsoring firm seek registration in the same category as the one previously held, and complete and file Form F7 Reinstatement of Registered Individuals and Permitted Individuals (Form F7) This allows individuals to engage in activities requiring registration from their first day with the new sponsoring firm. Individuals are not eligible for an automatic reinstatement if they: have new information to disclose regarding regulatory, criminal, civil or financial matters as described in Item 9 of Form F7, or as a result of allegations of criminal activity, breach of securities legislation or breach of SRO rules: o o were dismissed by their former sponsoring firm, or were asked by their former sponsoring firm to resign In these cases, the individual must apply to have their registration reinstated under NI using Form F4 Registration of Individuals and Review of Permitted Individuals. 6.2 If IIROC approval is revoked or suspended 6.3 If MFDA approval is revoked or suspended Registered individuals acting on behalf of member firms of an SRO are required to be an approved person of the SRO. If an SRO suspends or revokes its approval of an individual, the individual s registration in the category requiring SRO approval will be automatically suspended. This automatic suspension of individuals does not apply to mutual fund dealers registered only in Québec. If an SRO suspends an individual for reasons that do not involve significant regulatory concerns and subsequently reinstates the individual s approval, the individual s registration will usually be reinstated by the regulator as soon as possible. Revocation 6.6 Revocation of a suspended registration individual If an individual s registration has been suspended under Part 6 of NI but not reinstated, it will be automatically revoked on the second anniversary of the suspension. July 17, (2009) 32 OSCB (Supp-2)
16 Revocation means that the regulator has terminated the individual s registration. An individual whose registration has been revoked must submit a new application if they want to be registered again. Surrender Surrender means an individual wants to terminate their registration in some, but not all, of the jurisdictions in which they are registered. An individual may apply to surrender their registration at any time by completing Form F2 Change or Surrender of Individual Categories (Form F2) and having their sponsoring firm file it. An individual who is registered in one or more jurisdictions and wants to terminate their registration in all jurisdictions does not have to file Form F2. This is because their sponsoring firm is required to file Form F1. Part 7 Categories of registration for firms The categories of registration for firms have two main purposes: to specify the type of business that the firm may conduct, and to provide a framework for the requirements the registrant must meet Firms registered in more than one category A firm may be required to register in more than one category. For example, a portfolio manager that manages an investment fund must register both as a portfolio manager and as an investment fund manager. Individual registered in a firm category An individual can be registered in both a firm and individual category. For example, a sole proprietor who is registered in the firm category of portfolio manager must also be registered in the individual category of advising representative. 7.1 Dealer categories Underwriting is a subset of dealing activity for specified categories. Investment dealers may underwrite any securities. Exempt market dealers may underwrite securities in limited circumstances. Exempt market dealer Under subsection 7.1(2)(d) of NI , exempt market dealers may only act as a dealer in the exempt market. The permitted activities of an exempt market dealer are determined with reference to the prospectus exemptions in NI and include trades to accredited investors and purchasers of at least $150,000 of a security and trades to anyone under the offering memorandum exemption. Exempt market dealers can sell investment funds (whether or not they are prospectus-qualified) under these exemptions without registering as a mutual fund dealer or being a member of the MFDA. Restricted dealer The restricted dealer category in subsection 7.1(2)(e) permits specialized dealers that may not qualify under another dealer category to carry on a limited trading business. It is intended to be used only if there is a compelling case for the proposed trading to take place outside the other registration categories. The regulator will impose terms and conditions that restrict the dealer s activities. The CSA will co-ordinate terms and conditions for restricted dealers. 7.2 Adviser categories The registration requirement in section 7.2 of NI applies to advisers who give specific advice. Advice is specific when it is tailored to the needs and circumstances of a client or potential client. For example, an adviser who recommends a security to a client is giving specific advice. July 17, (2009) 32 OSCB (Supp-2)
17 Restricted portfolio manager The restricted portfolio manager category in subsection 7.2(2)(b) permits individuals or firms to advise in specific securities, classes of securities or securities of a class of issuers. The regulator will impose terms and conditions on a restricted portfolio manager s registration that limit the manager s activities to a specific area, for example, securities of oil and gas issuers. 7.3 Investment fund manager category Investment fund managers direct the business, operations or affairs of an investment fund. They organize the fund and are responsible for its management and administration. If an entity is uncertain about whether it must register as an investment fund manager, it should consider whether the fund is an investment fund for the purposes of securities legislation. See section 1.2 of the Companion Policy to NI for guidance on the general nature of investment funds. An investment fund manager may: advertise to the general public a fund it manages without being registered as an adviser, and promote the fund to registered dealers without being registered as a dealer If an investment fund manager acts as portfolio manager for a fund it manages, it should consider whether it may have to be registered as an adviser. If it distributes units of the fund directly to investors, it should consider whether it may have to be registered as a dealer. An investment fund manager may delegate or outsource certain functions to other service providers. However, the investment fund manager is responsible for these functions and must supervise the service provider. See Part 11 of this Companion Policy for more guidance on outsourcing. Limited partnerships Investment funds organized as limited partnerships of investment vehicles should consider which entity or entities may need to be registered as an investment fund manager. Multiple registrations may not be necessary if each general partner in the affiliated group enters into a contract with a single registered investment fund manager within the group. In this case, the investment fund manager may not be one of the general partners. Part 8 Exemptions from the requirement to register NI provides several exemptions from the registration requirement. There may be additional exemptions in securities legislation. If a firm is exempt from registration, the individuals acting on its behalf are also exempt from registration. Division 1 Exemptions from dealer and underwriter registration We provide no specific guidance for the following exemptions because there is guidance on them in the Companion Policy to NI : 8.12 Mortgages 8.17 Reinvestment plan 8.20 Exchange contract Alberta, British Columbia, New Brunswick and Saskatchewan 8.5 Trades through or to a registered dealer This exemption is available when no intermediary is involved in a trade, for example, when an individual or firm trades their own securities directly with a registered dealer. An individual or firm will have to register, however, if they trade another party's securities with a registered dealer. July 17, (2009) 32 OSCB (Supp-2)
18 8.6 Adviser non-prospectus qualified investment fund Under the exemption in section 8.6 of NI , registered advisers do not have to register as a dealer for a trade in a security of a non-prospectus qualified investment fund if they: act as the fund s adviser and investment fund manager, and distribute units of the fund only into their clients managed accounts The exemption is also available to those who qualify for the international adviser exemption under section Registered advisers often create non-prospectus qualified investment funds as a way to efficiently invest their clients money. In issuing units of those funds to clients, they are in the business of trading in securities. Subsection 8.6(2) limits the availability of this exemption to legitimate fully managed accounts. We do not intend for the exemption to be used to distribute the adviser s own non-prospectus qualified investment funds on a retail basis. Advisers relying on the exemption in section 8.6 should consider whether they may have to register as an investment fund manager Self-directed registered education savings plan We consider the creation of a self-directed registered education savings plan, as defined in section 8.19 of NI , to be a trade in a security, whether or not the assets held in the plan are securities. This is because the definition of "security" in securities legislation of most jurisdictions includes "any document constituting evidence of an interest in a scholarship or educational plan or trust. Section 8.19 provides an exemption from the dealer registration requirement for the trade when the plan is created but only under the conditions described in subsection 8.19(2). Division 2 Exemptions from adviser registration 8.25 Advising generally Section 8.25 of NI contains an exemption from the requirement to register as an adviser if the advice is not tailored to the needs of the recipient. In general, we would not consider advice about specific securities to be tailored to the needs of the recipient if it: is a general discussion of the merits and risks of the security is delivered through investment newsletters, articles in general circulation newspapers or magazines, websites, , Internet chat rooms, bulletin boards, television or radio, and does not claim to be tailored to the needs and circumstances of any recipient This type of general advice can also be given at conferences. However, if a purpose of the conference is to solicit the audience and generate specific trades in specific securities, we may consider the advice to be tailored or we may consider the individual or firm giving the advice to be engaged in trading activity. Under subsection 8.25(3), if an individual or firm relying on the exemption has a financial or other interest in the securities they recommend, they must disclose the interest to the recipient when they make the recommendation. Division 3 Exemptions from investment fund manager registration 8.28 Capital accumulation plan exemption Section 8.28 of NI provides an exemption from the investment fund manager registration requirement to an individual or firm that administers a capital accumulation plan. If an investment fund manager is also required to register as a dealer or adviser, this exemption only applies to their activities as an investment fund manager. July 17, (2009) 32 OSCB (Supp-2)
19 Division 4 Mobility exemption firms 8.30 Client mobility exemption firms The mobility exemption in section 8.30 of NI allows registered firms to continue dealing with and advising clients who move to another jurisdiction, without registering in that other jurisdiction. Section 2.2 Client mobility exemption individuals contains a similar exemption for registered individuals. The exemption becomes available when the client (not the registrant) moves to another jurisdiction. A registered firm may deal with up to 10 eligible clients in each other jurisdiction. Each of the client, their spouse and any children are an eligible client. A firm may only rely on the exemption if: it is registered in its principal jurisdiction it only acts as a dealer, underwriter or adviser in the other jurisdiction as permitted under its registration in its principal jurisdiction the individual acting on its behalf is eligible for the exemption in section 2.2 it complies with Parts 13 Dealing with clients individuals and firms and 14 Handling client accounts firms, and it acts fairly, honestly and in good faith in its dealings with the eligible client Firm s responsibilities for individuals relying on the exemption In order for a registered individual to rely on the exemption in section 2.2, their sponsoring firm must disclose to the eligible client that the individual and if applicable, the firm, are exempt from registration in the other jurisdiction and are not subject to the requirements of securities legislation in that jurisdiction. As soon as possible after an individual first relies on the exemption in section 2.2, their sponsoring firm must complete and file Form F3 in the other jurisdiction. The registered firm must have appropriate policies and procedures for supervising individuals who rely on a mobility exemption. Registered firms must also keep appropriate records to demonstrate they are complying with the conditions of the mobility exemption. Part 9 Membership in a self-regulatory organization 9.3 Exemptions from certain requirements for SRO members Section 9.3 of NI contains an exemption from certain requirements for investment dealers that are IIROC members and, except in Québec, for mutual fund dealers that are MFDA members. However, if an SRO member is registered in another category, this section does not exempt them from their obligations as a registrant in that category. For example, if a firm is registered as an investment fund manager and as an investment dealer with IIROC, section 9.3 does not exempt them from their obligations as an investment fund manager under NI Part 10 Suspension and revocation of registration firms The requirements for surrendering registration and additional requirements for suspending and revoking registration are found in the securities legislation of each jurisdiction. The guidance for Part 10 relates to requirements under both securities legislation and NI There is no renewal requirement for registration but firms must pay fees every year to maintain their registration and the registration of individuals acting on their behalf. A registered firm may carry on the activities for which it is registered until its registration is: suspended automatically under NI suspended by the regulator under certain circumstances, or surrendered by the firm July 17, (2009) 32 OSCB (Supp-2)
20 Division 1 When a firm s registration is suspended Suspension A firm whose registration has been suspended must not carry on the activity it is registered for. The firm otherwise remains a registrant and is subject to the jurisdiction of the regulator. A suspension remains in effect until the regulator reinstates or revokes the firm s registration. If a firm that is registered in more than one category is suspended in one of the categories, the regulator will consider whether to suspend the firm s registration in other categories or to impose terms and conditions, subject to an opportunity to be heard. Automatic suspension A firm s registration will automatically be suspended if: it fails to pay its annual fees within 30 days of the due date it ceases to be a member of IIROC, or except in Québec, it ceases to be a member of the MFDA Firms do not have an opportunity to be heard by the regulator in the case of any automatic suspension Failure to pay fees Under section 10.1 of NI , a firm s registration will be automatically suspended if it has not paid its annual fees within 30 days of the due date If IIROC membership is revoked or suspended Under section 10.2 of NI , if IIROC suspends or revokes a firm s membership, the firm s registration as an investment dealer is suspended until reinstated or revoked If MFDA membership is revoked or suspended Under section 10.3 of NI , if the MFDA suspends or revokes a firm s membership, the firm s registration as a mutual fund dealer is suspended until reinstated or revoked. Section 10.3 does not apply in Québec. Suspension in the public interest A firm s registration may be suspended if the regulator exercises its power under securities legislation and determines that it is no longer in the public interest for the firm to be registered. The regulator may do this if it has serious concerns about the ongoing fitness of the firm or any of its registered individuals. For example, this may be the case if a firm or one or more of its registered or permitted individuals is charged with a crime, in particular fraud or theft. Reinstatement Reinstatement means that a suspension on a registration has been lifted. Once reinstated, a firm may resume carrying on the activity it is registered for. Division 2 Revoking a firm s registration Revocation 10.5 Revocation of a suspended registration firm 10.6 Exception for firms involved in a hearing Under sections 10.5 and 10.6 of NI , if a firm s registration has been suspended under Part 10 and has not been reinstated, it is revoked on the second anniversary of the suspension, except if a hearing concerning the suspended registrant has commenced. In this case the registration remains suspended. Revocation means that the regulator has terminated the firm s registration. A firm whose registration has been revoked must submit a new application if it wants to be registered again. July 17, (2009) 32 OSCB (Supp-2)