After assimilating an avalanche of comments, the Canadian Securities Administrators are back for a second crack at fundamental reform of the registration regime.

Overhauling the registration system is a massive undertaking that will affect almost all corners of the financial services industry. The CSA proposals promise a host of sweeping changes, including moving to a permanent registration system and replacing the trade trigger that currently drives the requirement to register with a business trigger. The CSA also proposes to harmonize and streamline significantly the registration categories across the country and imposes significant obligations — such as capital, proficiency and conduct requirements — on the groups that will be captured by the new regime.

The CSA’s goal with these reforms is to reduce the regulatory burden while increasing investor protection in certain areas, such as restricting referral arrangements, imposing complaint-handling requirements and enhancing conflict-of-interest requirements. The reforms will also modernize the system to capture more accurately the activities that require the sort of regulatory oversight implied by registration.

In doing so, the registration reforms will also deal with one of the big complaints voiced by the International Monetary Fund in its recent report on the Canadian regulatory system. The IMF is particularly concerned about the lack of regulation and supervision for investment fund managers — a situation that should be remedied by the imposition of registration and its accompanying obligations.

The first version of this reform effort was unveiled over a year ago, in February 2007. Initially, the CSA had hoped to have the new regime implemented by the end of 2007. Obviously, that didn’t happen. In fact, the CSA didn’t get the second draft of the reform out until the end of February 2008.

That said, it’s not surprising it took so long to revise the initial proposals, which attracted more than 260 comments. And, as a result of all of these comments, the regulators that comprise the CSA have been inspired to make a number of changes to their proposals.

The basic goals of the original proposals as publicized — to harmonize, streamline and modernize the registration regime — remain intact. But there are some significant changes.

For example, the CSA has added further detail to just what does and doesn’t trigger registration. Certain parts of the “fit and proper” requirements have been tweaked. And it has added some exemptions from the rule and changed others. It has also expanded the list of requirements that don’t have to be met by firms that are members of self-regulatory organizations, on the basis that these requirements will be covered in the SROs’ rules (including solvency requirements, certain disclosure requirements and proficiency requirements for investment dealers).

For firms that fall under the direct supervision of the provincial securities commissions, the revised rule replaces the requirement to provide a relationship disclosure document to clients with a principle-based requirement that the firms provide information that “a reasonable client would consider important.” The CSA suggests that, in many cases, this obligation can be fulfilled using existing disclosure documents.

This new tactic for delivering so-called “relationship disclosure” will probably be welcomed by the securities industry, which has encouraged regulators to move toward a more principles-based approach. In fact, the industry lobby group, the Investment Industry Association of Canada, is highly critical of the more prescriptive model for such disclosure — known as the “client relationship model” — that the Investment Dealers Association of Canada is proposing. (See page 10.)

What won’t make the industry happy is that a couple of its major complaints with the previous reform effort have not been considered in the revised proposals. One of the top issues for many registered reps is personal incorporation.

By historical accident, mutual fund reps in some provinces have been able to incorporate, enabling them to save taxes by flowing their revenue through a corporation. Advisors at investment dealers, however, have not enjoyed the same treatment.

The regulators have been reluctant to allow personal incorporation among all reps for fear that this could prevent clients suing the dealers, as well as their reps, if something went awry. Yet, at the same time, they are loath to take that ability away from reps at fund dealers. The CSA indicates that this issue is ongoing, but is not to be resolved by the proposed registration reforms.

@page_break@Another issue for dealers is the ability to serve clients in multiple jurisdictions without having to register in each province. The original proposals did provide a limited “mobility exemption,” which would have allowed individual brokers to serve up to five clients and firms to serve up to 10 clients who had moved to a different province without registering in that province. The industry was hoping for a much more liberal exemption, but that section is unchanged in the revised version of the proposed rules.

Nor do the proposed rules deal with fee-only financial planners. Some commentators have suggested that they should be required to register, too, because they provide advice. But the proposals remain focused around advice concerning specific securities. The CSA notes that various regulators “are considering the issues associated with financial planners, but no proposals are being made at this time.”

One area that has undergone some significant revision from the first draft is the part dealing with exempt-market dealers. Under the new proposals, exempt-market dealers that don’t handle or hold client assets won’t have to adhere to capital or insurance requirements.

The latest version of the proposals also introduces the concept of “permitted clients,” which are essentially a new class of accredited investors. The new category would apply primarily to institutional investors, corporate clients and individual investors with at least $5 million in financial assets. These clients will be able to waive the requirement that their dealer must determine suitability for them. Also, exempt-market dealers that are dealing with permitted clients (whether the dealer holds client assets or not) won’t have to follow the know-your-client rule, meet suitability obligations or follow account opening or complaint-handling requirements.

The rationale for this, the CSA explains, is that there are high-end investors who don’t necessarily need the protection required by the average investor: “We believe that, at the upper end of the accredited investor spectrum, there are investors who are sufficiently sophisticated, or have sufficient resources to obtain expert advice that they may neither need, nor wish for, the same level of protection as that which the registration regime extends to other investors.”

The expectation is that the change will reduce the regulatory burden for firms serving investors who don’t require much regulatory protection.

But not all provinces are on board with the latest plans for the exempt market. Although one of the overarching goals of this initiative is harmonization, there will, of course, be regional deviations. Notably, the proposals indicate that British Columbia and Manitoba aren’t going to require exempt-market dealers to register (unless those firms are also registered in another category).

There will be other jurisdictional differences, as well. Among them, Manitoba is not seeking to move to the business trigger. B.C. and New Brunswick aren’t introducing the new trigger via legislation but by adopting regulatory exemptions.

Additionally, the proposed rules also set out a regime for mutual fund dealers in Quebec. They will not be required to become members of the Mutual Fund Dealers Association of Canada, and will remain under the direct supervision of the Autorité des marchés financiers. But they will be subject to securities legislation in the province.

Finally, the revised proposals also introduce new transition provisions. Investment fund managers and exempt-market dealers will have six months after the rules take affect to apply for registration. Fund managers will have a year to comply with the capital and insurance requirements. There will also be six-month transition periods to comply with the referral arrangement requirements and the relationship disclosure provisions.

This latest version of the registration reform effort is out for comment until the end of May. Beyond that, it’s impossible to predict if and when such a sweeping reform initiative is likely to be implemented.

That’s doubly true in this case, in which legislative changes are also part of the package. IE