Regulators have big plans to overhaul the registration system in Canada, but critics say the proposed reforms may fall short of the kind of shakeup that’s really necessary.

The Canadian Securities Administrators is effectively proposing to sweep all its disparate registration requirements into one new rule, then rationalize the registration categories across the country and reform the way the system works. The CSA hopes such change will reduce the regulatory burden on the industry and enhance inves-tor protection.

The plan should be viewed largely as a positive development for the securities industry, says Prema Thiele, a partner at Borden Ladner Gervais LLP in Toronto. “I would say to our clients that we want rules that are modern and make sense for 2007’s capital markets, and that’s what I think the CSA has tried to do here.”

However, Ian Russell, president and CEO of the Investment Industry Association of Canada, says the plan doesn’t go far enough.

“It’s a good effort at addressing the costs and inefficiencies in our system,” he says, “but frankly, it’s half a loaf. It doesn’t go anywhere near the distance we need to go.”

At a press conference to introduce the plan, David Gilkes, manager of registrant regulation with the Ontario Securities Commission, explained that the rule consolidates more than 20 categories of firm registration down to eight, and slims 239 possible individual categories down to about 30.

The simplicity should be welcomed by the industry. What may be less positive for some firms, however, are the new categories of registration that are to be introduced.

Investment fund managers, including mutual fund and hedge fund managers, for example, will be required to register under the new rule. A new category is also being introduced to capture players in the exempt market, which includes firms that currently fall into the limited-market dealer category in Ontario, along with firms such as scholarship-plan dealers.

Additionally, the rule requires firms to register an “ultimate designated person” and a chief compliance officer. The measure is designed to promote a compliance culture within firms and give regulators more direct access to individual registrants.

For firms that haven’t had to register in the past, the new obligation means more than just a few forms to fill out and fees to pay. Registration brings increased oversight, capital requirements, insurance obligations, proficiency standards and compliance responsibilities.

Most hedge fund firms operating in Canada already have the requisite compliance systems in place, says Phil Schmitt, chairman of the Canadian chapter of the Alternative Investment Management Asso-ciation. Some smaller firms may be troubled by the proposed capital requirements, Schmitt says, but registration shouldn’t be an overwhelming issue for most firms.

The CSA proposal also changes the way the entire registration system works. It introduces the concept of permanent registration, which would end annual renewals. Under the plan, regulators will also be able to intervene with registration at any time; they don’t have to wait for a renewal application to decide whether they want to revoke registration, impose terms and conditions or otherwise restrict it.

Randee Pavalow, the OSC’s director of capital markets, says the system means regulators might be motivated to intervene with a registration if they learn through complaints, compliance exams or other means that a registrant is not living up to his or her obligations. Before a registration can be restricted, the registrant would have the right to be heard by the relevant regulator’s director and, beyond that, be able to appeal for a full-blown commission hearing.

Further, the rule proposes adopting a “business trigger” rather than a “trade trigger” for establishing who must register. Essentially, this means any firm or individual in the business of dealing in securities must register. The shift is expected to mean that a narrower range of activities will necessitate registration and, by extension, that there will be less need for exemptions from registration.

The overall impact is somewhat unclear. There are currently about 128,000 individuals registered, and Gilkes estimates that perhaps between 10,000 and 20,000 would no longer be required to do so because of the changing categories and the trigger.

Others, however, would be newly captured by the changes. Firms operating in the exempt market and fund managers will now have to register, but many foreign firms will not, as a variety of foreign and international categories are slated to be scrapped. International fund managers, for example, would be exempt from the fund-manager registration requirement. The result probably would be an overall net reduction in the number of registrants, says Gilkes.

@page_break@Yet the regulators can’t say for sure how the registrant population will be affected, because a comprehensive cost/benefit analysis doesn’t accompany the rule proposal.

Pavalow says such an analysis was done about a year ago on the issue of adopting the business trigger; it was favourable, but is not being released because it is now somewhat outdated.

She adds that a C/B analysis is being done on one of the rule’s important innovations for dealers: the proposal to improve disclosure to clients. That proposal is to be implemented through self-regulatory organization bylaws for the SRO dealers and by the commissions for non-SRO firms by introducing a new “client relationship” document.

Absent an actual C/B analysis, the CSA notice indicates it expects the overall benefits of the proposed registration overhaul will substantially outweigh the costs. It expects the benefits will include reducing the regulatory burden by: harmonizing registration categories, requirements and exemptions; adopting a permanent registration regime and streamlining transfer procedures; and reducing the number of exemption applications by moving to a business trigger.

The CSA says the proposed rule should also increase investor protection by imposing registration requirements on a wider selection of firms, as well as imposing a number of compliance and conduct requirements on them. Firms that currently don’t belong to an SRO would be subject to similar requirements as those for SRO firms, including the introduction of disclosure, conflict management and complaint-handling requirements. They would also be required to join a dispute-resolution service, probably the Ombudsman for Banking Services and Investments.

The CSA says costs associated with the proposed reforms, depending on the jurisdiction, would include obtaining and maintaining registration for exempt-market dealers and investment fund managers, and increased capital and insurance requirements for some registrants.

Although the IIAC’s Russell applauds the proposed streamlining of registration categories, the introduction of permanent registration and levelling the exempt-market playing field between SRO and non-SRO firms, the proposal should go further in adopting a less restrictive, principles-based approach in certain areas, he says, adding that registrants still have 13 jurisdictions to deal with and in which to pay fees.

Moreover, Russell says, harmonizing can only take the industry so far. Although it creates a more uniform system today, a multi-jurisdictional effort doesn’t have the flexibility to evolve with dynamic capital markets.

“There are some very good things in the proposal with the best of intentions to try to make the existing system work better,” Russell says. “But the reality is the existing system is an anachronism in a fluid, dynamic, innovative marketplace.”

Such a reality probably will also impact implementation of such wide-ranging reforms. The CSA says that it hopes to have the new rule finalized by yearend. Given the sweeping effort, it’s fair to expect plenty of demand for modifications.

The CSA is expecting extensive comments and is issuing the rule for a 120-day comment period rather than the usual 90 days. It’s also planning a series of two-day consultations in Vancouver, Calgary, Edmonton, Toronto and Montreal in the first two weeks of May. An archived Webcast will also be available online for those who can’t attend.

Regulatory staff will then read the comments, craft responses and, if they make any material changes, ask for comments again. Moreover, some elements of the rule require legislative amendments, which would have to be drafted and passed by the various provincial legislatures, representing another significant implementation challenge.

The regulators’ history with much more modest efforts suggest that their timeline is optimistic in the extreme. Recall the fund governance issue, for example. It took about three years from the time that rule was first proposed until it was finally adopted — and that was five years from the initial concept proposal.

BLG’s Thiele says that a draft rule is a long way from a new regime, but she is telling clients that this is not going away. The CSA has been working on some of the initiatives for a long time, so the rule is inevitable, even if it takes longer to achieve.

Of course, the timeline isn’t the regulators’ fault; it is a reality of Canada’s provincial regulatory structure. Probably the only way that the implementation process could be less cumbersome would be with a single regulator administering a single securities act.

In the meantime, Thiele says, proponents of a national regulator should be pleased with the level of harmonization the proposed rule would bring to registration, as harmonization is a necessary step toward a national regulator. IE