The Canadian Securities Administrators (the “CSA”) and the Ontario Securities Commission (the “OSC”) recently introduced amendments to the exempt market dealer (“EMD”) registration category. Some of these amendments will undoubtedly make it more difficult for EMDs to become registered or restrict their business activities.
As of January 11, 2015, the chief compliance officer (“CCO”) of an EMD is now required to have 12 months of relevant securities industry experience in the 36-month period before applying for registration (section 3.10 in NI 31-103). The CSA’s rationale for introducing this experience requirement was that it was consistent with the proficiency standard stated in section 3.4 of NI 31-103. Section 3.4 states that a CCO must have “the education, training and experience that a reasonable person would consider necessary to perform the activity competently”. This includes having the knowledge and ability to design and implement an effective compliance system.
The CSA has not provided any additional guidance for this experience requirement beyond what is stated in section 3.4. The immediate concern is that CSA members will only permit an applicant with past experience as a registered CCO to become a CCO of an EMD. However, if this happens, the pool of qualified CCOs will not increase and may possibly shrink. It is more likely that this experience requirement will develop over time on a fragmented and possibly inconsistent basis among the CSA members.
On September 25, 2014, the OSC began pre-registration reviews as part of the registration process, which the OSC is referring to as “Registration as the first Compliance Review”. The procedures include reviewing an EMD applicant’s financial condition, business plan and at a high level, the policies and procedures manual (the “PPM”). OSC staff may gather information through written requests, holding interviews of the Ultimate Designated Person (“UDP”) and CCO, or both. If OSC staff opt to interview the UDP and CCO of an EMD applicant, they should be prepared to answer questions about their PPM as well as their understanding of their obligations under securities legislation. The one potential advantage of this process is that a CCO applicant can make the case that he/she satisfies the new experience requirement. For more information about the OSC’s pre-registration review process, please refer to OSC Staff Notice 33-745.
Trading on a Marketplace
On July 11, 2015, an EMD will no longer be permitted to trade a security that is listed, quoted or traded on a domestic or foreign marketplace whether the trade is on or off the marketplace, unless the trade requires reliance on a further exemption from the prospectus requirement. This includes prohibiting an EMD from establishing an omnibus account with an investment dealer and trading securities for clients through that account. The CSA’s rationale for this change was to ensure consistency with IIROC’s marketplace rules, which prohibit an IIROC dealer from trading freely tradeable exchange-traded securities off marketplace.
Please note that there have been other amendments to NI 31-103. The above are the highlights.
This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer or compliance advisor for matters related to your situation before relying on any of the statements made in this article.