BCN 2008/11 - Request for Comment Proposed National Instrument 31-103 Registration Requirements, Proposed Companion Policy 31-103CP Registration Requirements, Proposed BC Instrument 33-5XX Registration Requirements, and Proposed consequential amendments to national and local instruments [BCN - Lapsed]

Concurrently Published:

• 31-102 - National Registration Database [NI Amendment Proposed - Lapsed]
• 31-102 - National Registration Database [NI Amendment Instrument Proposed - Lapsed]
• 31-102CP - National Registration Database [CP Proposed - Lapsed]
• 31-103 - Registration Requirements [NI Proposed - Lapsed]
• 31-103CP - Registration Requirements [CP Proposed - Lapsed]
• 31-503 - Exchange Contracts Dealers Trading in Commodity Pool Securities Amendment Instrument [BCI Amendment Proposed - Lapsed]
• 32-501 - Advising & Related Trading Under an Exemption Amendment Instrument [BCI Amendment Proposed - Lapsed]
• 32-503 - Registration Exemption for Salespersons’ Corporations Amendment Instrument [BCI Amendment Proposed - Lapsed]
• 33-109 - Registration Information [NI Amendment Proposed - Lapsed]
• 33-109CP - Registration Information [CP Amendment Proposed - Lapsed]
• 33-109F1 - Notice of Termination of Registered Individuals and Permitted Individuals [F Amendment Proposed - Lapsed]
• 33-109F2 - Change or Surrender of Individual Categories [F Amendment Proposed - Lapsed]
• 33-109F3 - Business Locations other than Head Office [F Amendment Proposed - Lapsed]
• 33-109F4 - Application for Registration of Individuals and Review of Permitted Individuals [F Amendment Proposed - Lapsed]
• 33-109F5 - Change of Information in Form 33-109F4 General Instructions [F Amendment Proposed - Lapsed]
• 33-109F6 - Application for Registration as a Dealer, Adviser or Investment Fund Manager for Securities and/or Derivatives [Paper Version] [F Amendment Proposed - Lapsed]
• 33-109F7 - Notice of Reinstatement of Registered Individuals and Permitted Individuals [F Amendment Proposed - Lapsed]
• 33-506 - Exemption from Cold Calling Restrictions for Registered Dealers [BCI Amendment Proposed - Lapsed]
• 45-502 - Cooperative Associations [BCI Amendment Proposed - Lapsed]
• 45-512 - Real Estate Securities [BCI Amendment Proposed - Lapsed]
• 45-512CP - Real Estate Securities [CP Proposed - Lapsed]

Introduction

The Canadian Securities Administrators are republishing for comment proposed National Instrument 31-103 Registration Requirements, Companion Policy 31-103CP Registration Requirements, and proposed consequential amendments.

The British Columbia Securities Commission is republishing for comment proposed a local rule, BC Instrument 33-5XX Registration Requirements and proposed consequential amendments. 

We first published for comment the proposed national rule, its companion policy and the local rule on February 20, 2007. The attached CSA Notice describes the significant changes to the national rule and companion policy since the first publication. This notice describes the local impact of those changes and changes to the local rule since the first publication.

BC approach to business trigger

In the first publication, the national rule required dealer registration when a person is in the business of dealing in securities. The national rule now requires dealer registration when a person is in the business of trading in securities¹. Some provinces plan to build the 'business trigger' into their securities acts, while Manitoba, British Columbia and New Brunswick will retain their current 'trade triggers' (i.e. a person that trades in a security must register as a dealer).

As described in the first publication, British Columbia will implement the ‘business trigger’ by providing an exemption from dealer registration for persons who are not in the business of trading in securities. This is a technical, not a substantive, difference. The exemption is in revised National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

BC approach to registration exemptions

Although the BCSC proposes to retain certain NI 45-106 registration exemptions, the BCSC also proposes to adopt the exempt market dealer category for a limited purpose - namely, to provide a seamless interface for market participants with other CSA jurisdictions. The NI 45-106 registration exemptions will not be available to persons registered in another category or another jurisdiction (unless that jurisdiction is Manitoba - see below).

BC and Manitoba propose to maintain the NI 45-106 registration exemptions for capital-raising and safe securities, subject to certain conditions:

• the exemptions will not be available to a person operating outside of BC or Manitoba;

• the exemptions will not be available to a person who is registered in any category (e.g. a mutual fund dealer or adviser) in any jurisdiction (including BC and Manitoba);

• a person relying on the exemptions must provide the investor with a risk acknowledgement form similar to that currently required under the BCSC’s offering memorandum exemption.

A person who is unable to rely on the registration exemptions must register as an exempt market dealer in BC in order to sell prospectus-exempt securities to BC residents. 

A person that relies on the exemptions must file an annual report with the Commission outlining its use of the exemptions. 

The BCSC proposes the above approach to:

• maintain the registration exemptions for non-registrants in British Columbia - these exemptions have not been problematic and they have enabled issuers to raise capital more quickly and cheaply than would be possible if they had to use registrants to sell their securities;
  
• provide a uniform category of registration for market participants who deal in exempt securities in multiple jurisdictions so those persons can use the passport system;
  
• ensure that persons who are otherwise registered, in British Columbia or other jurisdictions, are subject to the same substantive requirements when they sell exempt securities to investors in British Columbia;
  
• keep track of unregistered persons who sell exempt securities; 
  
• ensure that investors know they are not dealing with a registrant and that the investment is risky.

Our consultations indicate that repealing the capital raising exemptions in British Columbia would negatively impact small issuers that rely on the relief. The consultations did not demonstrate that there is a market problem, today, caused by the capital raising exemptions. While harmonizing is important, we believe it should not come at the expense of regulation that makes sense for BC industry and investors.

Exchange contract dealers

In the first publication, for harmonization purposes, we proposed that exchange contracts dealers in BC be required to become members of the Investment Dealers Association (IDA). After conducting a thorough review of the status of these dealers and their business models, we determined that IDA membership is not an effective way to regulate an introducing broker ² who deals in exchange contracts in BC. We will continue to directly regulate exchange contract dealers ³ as ‘restricted dealers’.

We propose to revoke the requirement that registrants provide each prospective client with BC Form 91-903F Risk Disclosure Statement (Exchange Contracts). This form discloses risks and other significant aspects of trading in futures and options. Registrants will have similar obligations under the national rule. 

Dealing honestly, fairly and in good faith

We propose to repeal Part 5 of the Securities Rules, but preserve critical elements in our local rule (BC Instrument 33-5XX Registration Requirements). For example, we propose to move to the local rule the content of section 14 of the Securities Rules, which requires registrants to act in good faith and to deal honestly and fairly with their clients.

Multiple registrations

Although we signaled in the first publication that we would try to avoid this, we will require multiple registrations. The current SRO structures and limitations of the National Registration Database have led us to this decision. In addition, requiring multiple registrations acknowledges that there are different risks associated with different activities. 

The national rule sets out permitted activities for each category of registration. We have made every effort to reduce duplication of requirements for registrants that hold multiple registrations. 

Fund manager capital requirements

The CSA Notice to the first publication asked readers whether it is appropriate to require all investment fund managers to maintain $100,000 excess working capital. Some commenters said that the capital requirement was fair while most said that the proposed capital requirement was too high. In the BCSC’s consultations, we heard the latter.

The CSA is still proposing a $100,000 minimum capital requirement for investment fund managers. This amount is based on the CSA’s assessment of the business model and all the unique functions an investment fund manager is responsible for (fund accounting, transfer agency, trust accounting), regardless of its size, or whether it holds client assets. 

To calculate minimum capital, seed capital may be used. Any investment by an investment fund manager in its own funds would be included as a current asset on its balance sheet.  However, a market risk deduction would have to be considered in making the final calculation.

Conflicts

Part 6 of the national rule sets out requirements for registrants on conflicts. Part 15 of the Act restricts self-dealing in mutual funds. Subject to proposed legislative amendments, there may be some duplication of requirements between Part 6 of the national rule and Part 15 of the Act. We may consider issuing a blanket order exempting registrants from certain provisions in Part 15 of the Act if they comply with similar requirements under Part 6 of the national rule. 

Local amendments to the Securities Rules

1.      Consequential amendments - local amendments

To implement the national rule, we must amend or revoke some local instruments, forms and policies. In addition to specific local changes we list in this notice, we may identify other necessary changes as we consider the comments we receive on the second publication of the rule.

We propose to repeal the registration related sections of the Securities Rules (Parts 5 and 6).  We also propose to amend other local instruments and forms.  We attach the proposed amending instrument for the Rules as Appendix A, and the proposed new BC Instrument as Appendix B.  We attach the proposed text for amendments to the local instruments as Appendices C to H to this notice.

The proposed amendments:

• remove provisions that will be replaced by provisions in the rule
• make necessary reference changes 

2.      Consequential amendments to the Securities Rules arising from the proposed national rule

The Securities Rules made pursuant to B.C. Reg 194/97 [as amended], are amended as follows:

1. Part 5 is repealed
2. Part 6 is repealed

3.      Local instruments, policies and forms

We also propose to amend, repeal or revoke the following BC Instruments, policies and forms to eliminate local requirements, exemptions and guidance that are no longer necessary.

We propose to amend:

• BC Instrument 31-503 Exchange Contract Dealers Trading in Commodity Pool Securities
• BC Instrument 32-501 Advising and Related Trading Under an Exemption
• BC Instrument 32-503 Registration Exemption for Salespersons’ Corporations
• BC Instrument 33-506 Exemption from cold calling restrictions for registered dealers
• BC Rule 45-502 Cooperative Associations
• BC Instrument 45-512 Real Estate Securities
• BC Instrument 45-514 The Employee Investment Act

We propose to revoke: 

• BC Policy 12-602 Exempt Purchaser Status
• BC Policy 31-601 Registration Requirements
• BC Interpretation Note 31-701 Advising under the Securities Act
• BC Interpretation Note 31-702 Web-posted Notice Confirming Registration
• BC Instrument 32-502 Exemption from Suitability Requirements
• BC Instrument 32-504 Registrant Disclosure of Conflicts of Interest
• BC Instrument 32-505 Exemption for Mutual Fund Dealers to Sell Securities of Certain Employee Venture Capital Corporations and Venture Capital Corporations
• Blanket Order 33-502 Registration Requirements for Members of the Investment Dealers Association Canada
• BC Instrument 33-504 Exemption from section 80(2) of the Securities Rules
• BC Instrument 33-508 Exemption from sections 16 and 73 of the Securities Rules - Registrant Ownership
• BC Instrument 33-513 Exemption from Financial Statement, Capital and Bonding Requirements for MFDA Members
• BC Instrument 33-514 Exemption from Capital, Bonding and Financial Reporting Requirements for Certain Portfolio Managers and Investment Counsel
• BC Instrument 33-515 Exemption from Financial Statement, Capital and Bonding Requirements for IDA Members
• BC Interpretation Note 33-701 Trading by Limited Dealers under Registration and Prospectus Exemptions
• BC Interpretation Note 33-702 Powers of Attorney and Trading Authorities- Registrants’ Duties
• BC Interpretation Note 33-703 Dealers and their Salespersons
• Blanket Order (BC) 35-501 Remote Access Trades on the Canadian Venture Exchange
• Companion Policy 45-502 CP Cooperative Associations
• BC Instrument 45-510 Trades in Self-Directed Registered Educational Savings Plans
• BC Instrument 45-513 Resale Relief for Eligible Real Estate Securities
• BC Instrument 45-527 Exemptions for Certain Supra-National Agencies
• BC Interpretation Note 45-701 Meaning of “Fully Managed” Accounts
• BC Notice 45-702 Exemptive Relief for Certain Real Estate Securities
• BC Interpretation Note 45-703 Offering Documents Requiring Written Underwriting Procedures and Registration as an Underwriter
• BC Instrument 81-502 Confirmation of Purchase and Sale for Units of Certain Mutual Funds
• BC Instrument 81-504 Transactions Between Mutual Funds and Responsible Persons Relating to Certain Debt Securities, Mortgages, and Equity Securities

We also propose to revoke or amend: 

• BC Form 31-901F Application for Registration as Dealer, Adviser, or Underwriter
• BC Form 33-109F2 Change or Surrender of Individual Categories
• BC Form 33-109F3 Business Locations other than Head Office
• BC Form 33-109F5 Change of Registration Information
• BC Form 33-903F Report of Risk Adjusted Capital
• BC Form 33-904F Subordination Agreement
• BC Form 33-905F Report of Working Capital
• BC Form 33-906F Statement of Financial Condition (audited)
• BC Form 33-907F Conflict of Interest Rules Statement
• BC Form 33-908F Statement and Undertaking
• BC Form 35-901F Additional Information from Out of Province Registrants
• BC Form 91-903 Risk Disclosure Statement (exchange contracts)

Real estate securities

We have combined BC Instrument 45-513 Resale Relief for Eligible Real Estate Securities with BC Instrument 45-512 Real Estate Securities. The guidance for these Instruments is currently in BC Notice 45-702 Exemptive relief for certain real estate securities. This guidance will now be a companion policy to the revised BC Instrument 45-512.

Act amendments

On May 18, 2007, Bill 20, the Securities Amendment Act 2006 received royal assent. On October 23, 2007, Bill 28 the Securities Amendment Act 2007 received royal assent.  These acts contain important amendments including a new registration requirement for investment fund managers that will provide a foundation for the national registration rule.

The government will not proclaim the registration related amendments into force and effect until the national rule comes into force.

Effective date

The effective date for BC Instrument 33-5XX Registration Requirements, and most local instruments, forms or policies that we have amended or revoked, is the date the national rule comes into force.

In some cases, we need to keep certain provisions of the Securities Rules and BC Policy 31-601 Registration Requirements for a period after the national rule comes into force to allow for an orderly transition. This chart lists documents or provisions with effective dates other than the date when the national rule comes into force.

Comments

The CSA notice describes where you can send your comments about the proposed national rule. All comments received by May 29, 2008 will be considered. You should send your comments on the proposed local rule and proposed local consequential amendments by the same date to:

BC Securities Commission

P.O. Box 10142, Pacific Centre

701 West Georgia St.

Vancouver, BC V7Y 1L2

Attention:  Laura Bliss, Senior Legal Counsel

lbliss@bcsc.bc.ca.

February 29, 2008

¹ This does not reflect a policy change.  The change from 'in the business of dealing in securities' to 'in the    business of trading in securities' was made in response to comments received.  See CSA Notice.

² Not dealing in foreign exchange contracts.

³ Foreign exchange contract dealers are required to register with the IDA.

This Notice may refer to other documents. These documents can be found at the BC. Securities Commission public website atwww.bcsc.bc.cain the section Securities Law & Policy: Policies & Instruments.