With the prospect of a federal government-backed national securities regulator on the horizon, Canada’s provincial securities regulators have finally reached agreement on an issue that has long been an irritant: reform of provincial registration requirements.

The Canadian Securities Administrators have finalized their ambitious overhaul of the registration system, completing one of the biggest harmonization projects ever undertaken by the CSA. In mid-July, the CSA published the final version of the registration reform rule. The new regime is expected to take effect at the end of September, although various elements of the rule will be phased in over the next couple of years.

The long-standing inability to agree on completely uniform rules — and uniform interpretation of those rules — is one reason why the dream of a national regulator has never died. Although the adoption of registration reform represents the last piece of the passport model, which all provinces except Ontario had previously supported as their preferred alternative to a national regulator, work on a national body continues, led by the Department of Finance, with the support of at least a couple of provinces. In the meantime, the newly harmonized registration rule will have an impact on just about everyone in the financial services industry.

Among other things, the new rule rationalizes the long list of registration categories that currently exist across the country. It changes the basis of registration (from a “trade trigger” to a “business trigger”) and introduces a system of permanent registration. The new regime will also impose new registration obligations on a broader range of industry players — most significantly, investment fund managers, exempt-market dealers and chief compliance officers.

The biggest direct impact will be felt by firms that didn’t have to be registered in the past but will now have to register under the new system. This will bring higher capital requirements and proficiency standards, and intensified regulatory oversight for these players. Regulators hope the new regime will have two main effects on the entire industry: increased investor protection and a reduced regulatory burden.

If those two goals sound like they are diametrically opposed, in many ways they are. Yet the regulators believe that the new regime manages to move in both directions at the same time. “We’ve worked extremely hard at achieving regulatory balance in coming up with a massive rebuilding of the registration house in Canada,” says David Wilson, chairman of the Ontario Securities Commission.

Wilson calls the initiative “a complete renovation of the registration structure in Canada” that modernizes the regime and enhances “the gatekeeper function,” in terms of determining who can deal with investors and what rules they must follow.

In particular, the introduction of a requirement for firms to have a registered chief compliance officer and “ultimate designated person” is expected to create a new level of accountability, both to the regulators and within firms.

Jean St-Gelais, chairman of the CSA and president and CEO of the Autorité des marchés financiers, says: “We want to avoid those instances in which you reach out to a firm and they say, ‘Well, we’re very busy, we have all this business to do’ and you ask about compliance and they say, ‘Yes, we have it. We have this guy that takes care of that [but] I don’t recall his name.’ We want to change this type of thing.”

Chris Jepson, senior legal counsel, compliance and registrant regulation, with the OSC, says registering compliance officers will help firms create a more accountable culture.

“They will not be scapegoats,” he stresses. “Firms will be held accountable for acting on that culture of compliance, acting on the system that the CCO is supposed to administer.”

Although the new requirements will certainly not come for free (the CSA could not provide an estimate of the projected cost of the new regime), the regulators hope that the new regime will also reduce regulatory burdens. The dramatic reduction of registration categories should help.

The introduction of the passport system for registration, which is occurring simultaneously, also makes it much easier for advisors to register in multiple provinces. And not only does the new regime harmonize the registration categories between provinces, Jepson says, it also cleans up the requirements within them, which had become overly complex.

The move to permanent registration also means registered reps won’t constantly have to renew their registration and that they should be able to transfer more easily between firms.

@page_break@Moreover, many of the requirements imposed by the new rule are harmonized with rather than duplicated by those that exist at the self-regulatory organizations.

“I think it’s fair to say that this project respects the roles of the SROs,” Jepson says. “And, if anything, the world of the [Investment Industry Regulatory Organization of Canada] member will become a little less complex.”

For example, the SROs will continue to establish things such as proficiency requirements and solvency rules. In some areas, new SRO requirements are a work in progress. Both IIROC and the Mutual Fund Dealers Association of Canada have their own versions of the client relationship model and new complaint-handling rules in the works.

The public comment period for their CRM proposals closed in late July, and Jepson says that, assuming there are no material changes to the latest versions, the securities commissions see “a realistic possibility” that the SROs’ CRM rules will come into force by yearend.

In terms of the complaint handling rules, Jepson says, the SROs are expected to submit their rules to the CSA for approval sometime this summer. He expects the process “to move as expeditiously as possible,” but does not give a firm implementation date.

Whether registration reform really does deliver increased investor protection with a reduced regulatory burden remains to be seen.

Some smaller firms have complained that the new regime will increase their regulatory burden. The OSC’s Wilson notes that the rules do build in some flexibility and include lengthy transition periods, that will give firms some room to meet the new requirements.

It appears that the regulators have almost managed to eliminate most of the small discrepancies among provinces that have created costs when dealing with the CSA.

In earlier versions of the registration rule, there was some question as to whether all the provinces would support the move to a “business trigger” for registration. While it appears that the provinces have effectively agreed on that issue, the new basis for registration is being implemented in slightly different ways in some provinces. The CSA insists, however, that the result will be “functionally equivalent.”

A bigger area of deviation is the new “exempt market dealer” category. While the requirements for EMDs will be the same in all provinces, Alberta, British Columbia, Manitoba and the territories will provide an exemption from registration for firms that are just dealing in the exempt market, subject to a number of conditions. Jepson calls it a “very limited exemption.” (Saskatchewan hasn’t decided which way to go on this, and will announce its decision at a later date.)

“It’s too bad — that’s the part we couldn’t reach [agreement on],” says St-Gelais. “To me, it’s fairly minor, in terms of the number of people and the impact on the Canadian market. But that’s the reality.”

Wilson maintains that if a national regulator does emerge from this latest effort, none of the work on registration reform will have been wasted: the new rules will presumably be incorporated into the new national body.

And, even in a best-case scenario, a national regulator is at least a couple of years away. In the meantime, this new registration regime should represent a step forward.

“Regardless of the structure,” says St-Gelais, “if everything is harmonized and if we have the best possible [registration regime], it’s good for the Canadian market.” IE