The Canadian securities administrators’ registration reform project — released on Feb. 20 as a proposed national rule — will simplify existing requirements and provide greater uniformity to our multi-jurisdictional regulatory system if it’s adopted. In tandem with the changes to the passport system that the CSA proposed on March 28, the RRP could bring a single registration system for Canada closer to reality.
To obtain national registration, securities firms and their individual employees will have to apply for registration only in Ontario and one other province. As Ontario does not participate in the passport system, the other province would act as the principal regulator for the remaining 11 jurisdictions. The firm would thus be registered in all jurisdictions, but would remain subject to a number of local requirements and to payment of fees in all 13 provinces and territories.
The RRP will achieve efficiencies and cost savings by: streamlining registration categories for dealers and individuals; introducing the concept of permanent dealer registration (subject to annual fees); and providing substantial uniformity in registration requirements, including registration of intermediaries carrying on business in the private-placement markets.
Until recently, the exempt market was the poster child for regulatory disharmony, with interminable disagreements among regulatory authorities over criteria for exemptions and registration standards.
But the RRP will create an “exempt market dealer” registration category for all such participants, with common proficiency and other standards. This decision complements the earlier near consensus on the conditions for prospectus exemption, notably collapsing most criteria into the “accredited investor” definition.
Private-placement financings in the national market totalled almost $34 billion last year. The volume of these transactions reflects the efficiency of the private-placement market, in terms of financing costs and eventual access to public markets. The CSA’s agreement on a common registration model for this rapidly growing market will yield additional efficiencies, strengthen investor protection and confidence, and impose fairer regulatory treatment for market participants.
The market for exempt securities has been treated as a sophisticated market, based on a definition of accredited investors using defined income and asset thresholds. In fact, the level of sophistication of actual retail investors in this market is quite unclear, as is compliance with the accredited investor rules themselves. Regulators rely largely on client complaints to identify possible infractions. EMD registration, with its mandatory record-keeping and oversight, will shed needed light on exempt market activity.
Recent Investment Dealers Association of Canada initiatives to impose a client priority rule and develop rules for dealers distributing securities acquired by non-registered persons in private placements underscore the investor protection concerns that exist in the exempt marketplace. These concerns are well placed. Investors who purchase securities in any of Canada’s markets should have confidence that the statutory “know your client” and suitability obligations are not just window dressing but obligations dutifully carried out by all intermediaries.
Nevertheless, the imposition of registration and the accompanying regulatory standards in the exempt market may trigger objections from small issuers that rely on non-registrants and EMDs to distribute their securities in private placements. Regulators should approach such concerns carefully and should measure the potential costs of the proposed rules against better safeguards for investors.
In Ontario and in Newfoundland and Labrador, dealer infrastructures are already in place for firms and individuals that carry on a business of selling prospectus-exempt securities. Under the new passport system’s proposals for registration, an EMD may be registered in all provinces and territories automatically when it is registered by its principal regulator. This will give such dealers easy access to markets across Canada. Moreover, by requiring these dealers to meet the new regulations for EMD registration, the RRP will impose registration proficiency standards as well as a dealer infrastructure that will protect investors.
Registration of EMDs under the RRP and the passport system proposal will bring greater uniformity to regulation of the exempt marketplace, bolster investor protection and create a more level playing field among dealer registrants and other intermediaries. The proposals may increase costs for some market participants, but it is far from certain that the cost burden will increase significantly — and its impact on financing costs and access to capital for small business may turn out to be negligible.
The B.C. Securities Commission has indicated that it is considering opting out of this part of the RRP. Before the BCSC does this, it should undertake a comprehensive cost/benefit analysis that takes into account the benefits of improved scrutiny of exempt market activity, augmented investor protection and market confidence. Any consideration of opting out should be especially cautious, in view of the potential benefits to the exempt market and investors, the overarching objective of regulatory uniformity in exempt markets and progress toward an effective passport system and more efficient markets in Canada. IE
Ian Russell is president and CEO of the Investment Industry Association of Canada.
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