In an effort to bolster investor protection and codify areas where they have been providing exemptive relief, Canadian securities regulators are proposing a series of changes to their registration rules for firms and individuals who trade in securities, provide investment advice or manage investment funds.
The Canadian Securities Administrators (CSA) published National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations for comment today that, among other things, aim to more clearly define the limits of exempt market dealer registrations, impose additional experience requirements on dealers’ chief compliance officers (CCO), and provide guidance on managing conflicts of interest for reps that also serve on corporate boards or have outside business interests.
The proposals also provide guidance concerning the requirement to register for start-ups, provide an exemption from the dealer registration requirement for trades in short-term debt, and set out that registrants cannot rely on exemptions to carry out activities that are permitted under their registrations.
Specifically, the proposed amendments dealing with the limits on exempt market dealers’ activities would prohibit EMDs from conducting brokerage activities, such as trading securities listed on an exchange in foreign or Canadian markets. It also clarifies that EMDs are prohibited from trading exchange-traded securities off marketplace, which would make the CSA rules consistent with the Investment Industry Regulatory Organization of Canada’s (IIROC) rules for investment dealers. And, it establishes that EMDs can only underwrite securities in limited circumstances, such as a private placement, but not a prospectus-offered security.
The CSA says that its move to add an experience component to the proficiency requirements for CCOs follows from its compliance reviews, which found a number of dealer firms that have CCOs “who are not adequately performing their responsibilities, and this deficiency is often associated with a finding that the CCO does not have the relevant experience.”
The amendments to ensure that registrants aren’t improperly relying on exemptions stem from concerns about possible client confusion, and the risk that firms could apply different conduct and oversight rules to activities carried out under exemptions, rather than under registration.
Along with the changes proposed today, the CSA’s notice also signals areas where there may be amendments in the future. For example, it notes that it considered expanding restrictions on certain managed account transactions to IIROC members that conduct advising activities. “We are not proceeding with these amendments because we are mindful that there may be significant unintended consequences in respect of trades made from IIROC members’ inventory accounts,” it notes, adding that it expects that IIROC will be examining these issues and changing its rules.
“We continue to expect IIROC members that conduct advisory activities to have policies and procedures that sufficiently mitigate the conflicts of interest inherent in trades made from inventory accounts to managed accounts,” it says.
It also notes that proficiency requirements for registered individuals “remain an area of active interest for the CSA”, beyond the amendments proposed today. “As we continue to monitor and assess the adequacy of current requirements, we may identify further improvements/enhancements that should be pursued,” it says.
In the meantime, the CSA notes that it will be developing a process to recognize additional examinations, and other proficiency requirements, as alternatives to the existing requirements. “We may consider publishing guidance on the minimum standards and other requirements to be met by educational providers that are interested in developing and administering an alternative examination,” it says.
Additionally, the CSA says it is considering whether to propose additional regulatory requirements to enhance the existing regulatory framework for safeguarding client assets. The current rules focus mostly on the segregation of client assets and do not establish a detailed custodial regime, it says.
“We are reviewing Canadian client asset protection practices, identifying risks to client assets in light of the current industry practices and legal requirements and exploring how to mitigate such risks. We are also considering recent international developments, including changes to custody rules for broker-dealers and investment advisers made by the U.S. Securities and Exchange Commission,” it says, noting that it will consider a number of options, which may include proposing amendments in the future.
Comments on today’s proposals are due by March 5, 2014.
“Both investors and industry participants will benefit from the proposed amendments, which include general improvements to the registrant regulatory framework as well as address specific problems identified during the monitoring of the application of the national registration rules,” said Bill Rice, chair of the CSA and president and CEO of the Alberta Securities Commission (ASC).
“The proposed amendments aim to improve compliance and investor protection by bringing further clarity to regulators’ expectations for registrants operating under national registration rules,” Rice added.