NIN 97/39 - Registration to Act as an Adviser or to Trade in Securities or Exchange Contracts [NIN - Rescinded]
| Published Date: | 1997-10-17 |
|---|---|
| Effective Date: | 1997-10-14 |
The Securities Act prohibits any person from acting as an adviser with respect to securities or exchange contracts unless that person is properly registered as an adviser in British Columbia or can rely on a specific exemption from the adviser registration requirement. The Act similarly requires every person who trades in securities or exchange contracts to be registered to trade in British Columbia or be able to rely on a trading registration exemption.
These registration requirements are intended to ensure that the investing public receives investment advice and trading services from those who have met established standards of education, experience and ethical conduct and, in addition, are prepared to comply with specific ongoing regulatory obligations, including the obligation to ‘know the client' and determine that a specific transaction is suitable for that client.
This Notice states the position of Commission staff on the types of activities that constitute advising and summarizes the exemptions from the adviser registration requirement available under the Act, the Securities Rules and various Blanket Orders. The Notice also provides guidance on the meaning of "trade" and on the distinction between trading and advising. A series of "Questions and Answers" is included as a schedule to the Notice.
What is Advising?
The Act defines an adviser as "a person engaging in, or holding himself, herself or itself out as engaging in, the business of advising another with respect to investment in or the purchase or sale of securities or exchange contracts".
Advising is, generally speaking, offering an opinion about the investment merits of, or recommending investment in, securities or exchange contracts.
In a decision of April 4, 1995, In the Matter of Robert Anthony Donas, the Commission found that the respondent had violated the adviser registration requirements of the Act by preparing and disseminating two newsletters in which he offered opinions about the investment merits of a reporting issuer and recommended investment in the issuer's securities.
The Commission said
A person who does nothing more than provide factual information about an issuer and its business activities is not advising in securities. A person who recommends an investment in an issuer or the purchase or sale of an issuer's securities, or who distributes or offers an opinion on the investment merits of an issuer or an issuer's securities, is advising in securities. If a person advising in securities is distributing or offering the advice in a manner that reflects a business purpose, the person is required to be registered under the Act.
The Commission determined that the respondent was in the business of advising in securities, even though he received no direct compensation for his advice, because his actions reflected a business purpose.
It is important to note that implementing an investment program on someone else's behalf (i.e. making their investment decisions for them), or trading someone else's securities under discretionary authority granted by them, involves implicit advice and constitutes advising under the Act. If the advising is done for a business purpose, adviser registration, or an applicable exemption from the adviser registration requirement, is required.
Exemptions from the Requirement to Register as an Adviser
Section 44 of the Act sets out certain exemptions from the adviser registration requirement. These exemptions are available only to a limited group of regulated professionals, registered dealers (and their registered partners, directors and employees), financial institutions and the media and are subject to several conditions. Blanket Order (BOR) #95/15 also provides an exemption from the adviser registration requirement for persons acting as advisers with respect to the types of securities outlined in that BOR. These are certain of the securities described in section 46 of the Act that, by their nature, are relatively "safe" (e.g., federal and provincial government bonds, GICs) or that are regulated (or whose issuers are regulated) under other statutes.
Other exemptions from the adviser registration requirement of the Act are contained in section 86 of the Securities Rules (for brokers or investment dealers acting as portfolio managers and registered as portfolio managers with a self regulatory organization), BOR#96/20 (for trust companies acting as executors or administrators of estates or in a similar capacity) and BOR#95/16 (for persons advising on certain negotiable promissory notes or commercial paper with an investment grade credit rating).
If a person is offering advice on securities or exchange contracts in a way that reflects a business purpose, that person must ensure that proper registration with the Commission has been obtained, that one of the adviser registration exemptions referred to above is clearly applicable, or that a discretionary order exempting the person from the registration requirement has been obtained from the Commission.
It is important to note that registration to trade in securities or exchange contracts (see below) does not provide a blanket exemption from the requirement to register to advise. Although, as noted above, section 44 of the Act allows registered dealers and their registered salespersons to act as advisers without adviser registration, these exemptions are only available in the following circumstances:
(a) a registered dealer is exempt from the adviser registration requirement where it distributes research reports or similar analysis prepared by an employee, provided the advice distributed is "solely incidental" to their business as a registered dealer and advising is not featured in any advertising of their business; and
(b) a registered dealer, or a person registered as a partner, director, officer or salesperson of that registered dealer, is exempt from the adviser registration requirement where they give advice that is "reasonably in fulfillment of [their] duty to ensure the suitability of a proposed purchase or sale for a client"; for example, a salesperson would have to be advising clients for whom the ‘know your client' process has been completed and would have to understand and be acting in furtherance of the client's specific investment needs and objectives.
Even if the above requirements are met, the registered dealer (or registered partner, director or employee, as applicable) could advise only with respect to the types of securities for which it, he or she is registered to trade. For example, a salesperson registered to trade in mutual fund securities would not be entitled to advise his or her clients with respect to other types of securities.
Similarly, reliance on an exemption from the requirement to register to trade securities does not entitle a person to advise on those securities. Adviser registration or an applicable adviser registration exemption would be required.
Registration to Trade in Securities
The Act defines "trade" very broadly. Generally, a trade occurs whenever a person disposes of a security for valuable consideration or whenever a registrant (e.g. ‘stockbroker') receives a buy or sell order from a person. A trade also occurs whenever a person enters into an exchange contract, transfers ownership of a security under a realization on collateral for a debt, participates as a trader in a transaction through the facilities of an exchange, or engages in any act, advertisement, solicitation or negotiation directly or indirectly in furtherance of a trade. Every person who trades a security in British Columbia must be registered to trade in the province or be able to rely on one of the exemptions from the trading registration requirement.
There are approximately 14,000 individuals and 200 firms (dealers) currently registered to trade in some or all types of securities or exchange contracts in British Columbia.
Obviously, public investors are not expected to register under the Act to conduct their securities trades. There is a specific trading exemption in the Act that enables investors to trade without being registered, provided they trade solely through a registered dealer. Other exemptions from the trading registration requirement are available for specific types of transactions and for trades to investors who do not, due to their sophistication or knowledge of the issuer, need all of the protections afforded by the Act. For example, trading registration exemptions are, in certain circumstances, available where a person trades securities of a "private issuer" or where an issuer trades its securities with (e.g. issues securities to) its emp1oyees, officers or directors.
The Difference between Trading and Advising
Trading in securities and advising about securities (or exchange contracts) are two different things. Registration to trade securities does not entitle a person to act as an adviser in securities and vice versa. The qualifications, capital requirements and rules of conduct specified under securities laws and policies are different for each activity.
As outlined above, advising is offering opinions about the investment merits of, or recommending investment in, securities or exchange contracts. Trading is defined very broadly and includes, among other things, the disposition of a security for valuable consideration and any act in furtherance of a trade.
Most investors do not retain the services of a registered adviser for investment advice. They instead make their own investment decisions or rely on the advice of a stockbroker (e.g. registered salesperson) who is, in most cases, registered only to trade. That is possible because, as noted above, a registered salesperson is exempt from the requirement to register as an adviser, provided the salesperson only gives advice on those securities (or exchange contracts) he or she is registered to trade and the salesperson is acting in fulfillment of his or her duty to ensure the suitability of a proposed purchase or sale for a client.
It is important to note that "trade" is defined very broadly under the Act to include "any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of" a trade (see above). Therefore it is not, for example, only the actual disposition of a security that constitutes a trade; any act in furtherance of a disposition also constitutes a trade, for which trading registration or an applicable registration exemption is required. The onus is on issuers or others potentially conducting a trade and their counsel to determine whether, based on the facts and circumstances of a particular transaction, a trade will occur. Provided an act in furtherance of a trade does not "cross the line" so that it constitutes advising, adviser registration is not required. For example, the provision of factual, publicly available information concerning an issuer would not, on its own, constitute advising. However, if that factual information is accompanied by opinions concerning the merits of the issuer's securities or recommendations to purchase or sell, adviser registration or an applicable adviser registration exemption would be required.
Prospectus Requirement
The Securities Act also requires any person that distributes a security in British Columbia either to file a prospectus with the Commission or to rely on an exemption from the prospectus requirement. Most distributions that are exempt from the prospectus requirements of the Act are also exempt from the trading registration requirements, meaning that the persons who sell such securities (sometimes referred to as "exempt products") do not need to be registered to trade under the Act.
It is important to note that, although in most instances there are parallel prospectus and trading registration exemptions, there are generally no parallel adviser registration exemptions under the Act. Therefore persons who sell "exempt products" under prospectus and trading registration exemptions are not permitted to advise investors on the merits of, or recommend investment in, such securities, unless they are registered as advisers or able to rely on one of the specific adviser registration exemptions noted above.
Currently "full service" dealers are, subject to any conditions imposed on their registration, generally permitted to trade and advise in any types of securities, including "exempt products". Since full service dealers' trading registration is not restricted to particular types of securities, such dealers (and their registered partners, directors and employees, as applicable) are able to rely on the registered dealer adviser registration exemptions noted above to advise in exempt products. However, "limited" dealers (e.g. mutual fund dealers) are unable to rely on these adviser registration exemptions to advise in exempt products because their registration does not extend to such products; therefore, they are presently permitted to trade in such products (because such products are exempt from the trading registration requirements), but not advise in such products.
The Commission is considering adopting a Rule that would generally prohibit registrants from trading in securities other than those for which they are specifically registered to trade. Registrants would therefore be barred from trading exempt products (i.e. exempt from the prospectus and registration requirements of the Act), unless their registration covered the relevant securities being traded.
A "Questions and Answers" section applying many of the points raised above is attached as a schedule to this Notice.
DATED at Vancouver, British Columbia, on October 14, 1997
Paul C. Bourque
Executive Director
Questions and Answers
Q: I am a mutual fund salesperson employed by a mutual fund dealer. Can I recommend to my clients that they purchase "exempt products" (e.g. limited partnership units offered by way of offering memorandum) for their portfolios?
A: No. If the securities are being offered under applicable exemptions from the trading registration and prospectus requirements of the Securities Act, you are currently permitted to trade in such securities (e.g. execute an order) without registration, but are not permitted to advise on such securities without proper registration as an adviser.
Q: Our firm, a mutual fund dealer, would like to hold a seminar for clients and potential clients. Can we give opinions on the merits of particular mutual funds at the seminar?
A: Probably. Registered dealers, including mutual fund dealers, are generally exempt from the requirement to register as advisers with respect to securities they are registered to trade where: a) they are distributing research reports or similar analysis prepared by an employee and the advice so distributed is "solely incidental" to their business and advising is not featured in any advertising of their business; or b) the advice given is reasonably in fulfillment of their duty to ensure the suitability of a proposed purchase for a client (see page 3 of Notice).
If your firm is providing analysis similar to that contained in a research report at the seminar and it otherwise fits the circumstances outlined in a) above, your firm would be entitled to advise on mutual funds at the seminar. (However, your firm would not be able to rely on the second exemption from the adviser registration requirement noted above, as your firm would be speaking to clients and members of the public generally at the seminar and, therefore, could not be acting in fulfillment of its duty to ensure the suitability of a proposed purchase for a client.)
Q: Our firm, a mutual fund dealer, would like to hold a seminar where we will talk about "exempt products" (e.g. limited partnership units offered by way of offering memorandum). Can we do this?
A. Probably not. Your firm could not hold a seminar concerning only exempt products, as this would most certainly constitute explicit or implicit advising on these securities, for which adviser registration or an applicable adviser registration exemption would be required. The registered dealer exemptions noted above would not be
applicable in this case, as your firm would be advising in ‘exempt products', rather than mutual fund securities, and your firm's registration does not extend beyond mutual fund securities.
Your firm would generally only be permitted to provide information about ‘exempt products' at a seminar if it was speaking about a number of different investment opportunities (i.e. different mutual fund securities) at the seminar and any reference to ‘exempt products' was limited to strictly factual information. Neither opinions on the merits of the exempt products, nor recommendations to purchase, can be given.
Q: I am a director of a reporting issuer that is planning to do a "road show" in connection with a proposed offering. I am not registered with the Commission as an adviser and no exemptions from the adviser registration requirement appear to be available to me. What can I say about the issuer at my presentations?
A: You should provide only factual, previously disclosed information concerning the issuer at your presentations. As you are not registered as an adviser with the Commission and are not exempt from the adviser registration requirement, you cannot provide opinions concerning the investment merits of, or recommend investment in, the issuer's securities. If anyone asks you whether you would recommend investment in the issuer's securities, you should inform the person that you are unable to provide your opinion on the merits of the securities or to recommend investment as you are not registered to do so. If the person wishes to seek investment advice, they can consult a registered adviser.
Q: I am a financial planner. I commonly provide clients with general tax planning advice, including advice concerning the benefits of RRSPs and the different tax treatment accorded interest income (e.g. from debt securities), dividends (e.g. from preferred shares) and capital gains (e.g. common shares). Do I need to register with the Commission as an adviser to provide this advice?
A: No. Provided you do not provide opinions concerning the merits of specific securities, or recommend that your clients purchase or sell specific securities, you need not register with the Commission as an adviser. Note, however, that the line between what constitutes "advising" under the Act and what does not can be a very fine one. Those in the business of financial planning must be very careful that their advice does not "cross the line".
Q: I provide investor relations services to an issuer. I am not registered as an adviser under the Act. I want to call people up and tell them that the issuer is a great company and that they should "get in now" before the share price goes up. Can I do this without adviser registration?
A: No. Telling people that an issuer is a great company that they should invest in constitutes advising under the Act, for which adviser registration (or an applicable exemption) is required.