NOTICE OF AMENDMENTS TO NATIONAL INSTRUMENT 31-103 REGISTRATION REQUIREMENTS, EXEMPTIONS AND ONGOING REGISTRANT OBLIGATIONS AND AMENDMENTS TO COMPANION POLICY 31-103CP REGISTRATION REQUIREMENTS, EXEMPTIONS AND ONGOING REGISTRANT OBLIGATIONS November 25, 2011 Introduction The Canadian Securities Administrators (the CSA or we) are implementing amendments (the Amendments) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103 or the Rule) and Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations (the Companion Policy) related to the exemptions for members of a self-regulatory organization (SRO) and their dealing representatives in Parts 3 and 9 of the Rule. The Amendments are subject to approvals, including ministerial approvals. On May 13, 2011 we published similar material for comment (the May 2011 Proposal). Contents of this notice This notice gives an overview of the Amendments and contains the following annexes: Annex A – Amending instrument to NI 31-103 Annex B - Amendments to the Companion Policy Annex C - Adoption of the Amendments Purpose and substance of the Amendments Sections 9.3 and 9.4 of NI 31-103 provide exemptions to registered firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC) or the Mutual Fund Dealers Association of Canada (MFDA) from a number of provisions in NI 31-103, on the basis that these SROs have provisions that deal with the same subject matter. Similarly, section 3.16 provides exemptions for registered individuals who are dealing representatives of these registered firms from certain provisions in NI 31-103, on the basis that they are subject to SRO provisions that deal with the same subject matter.
Under the Amendments, these exemptions will not be available to these registered firms and registered individuals unless these firms and individuals comply with the corresponding SRO provision set out in Appendix G or Appendix H of NI 31-103. This will mean that registered firms or registered individuals that do not comply with an SRO provision will have to comply with the corresponding NI 31-103 provision; if they do not, they will be subject to the same enforcement regime that applies to other registrants that fail to comply with NI 31-103. Specifically, we are amending sections 3.16, 9.3 and 9.4 of NI 31-103 in order to add, as a condition to the exemptions provided in these sections, that the registered individual or the registered firm comply with, in the case of an investment dealer firm, the specified corresponding provisions of by-laws, rules, regulations and policies of IIROC or, in the case of a mutual fund dealer firm, the specified corresponding provisions of by-laws, rules, regulations and policies of the MFDA. The Amendments to the Companion Policy are designed to clarify the application of the Amendments to the Rule. Response to comments received on the May 2011 Proposal We received two comment letters on the May 2011 Proposal, from BMO Private Client Group and Royal Mutual Funds Inc., and thank both commenters. Copies of the comment letters are posted on the following websites: www.lautorite.qc.ca www.osc.gov.on.ca The only comment within the scope of the May 2011 Proposal expressed a preference for the current enforcement regime, the commenter being of the view the Amendments to the Rule would increase the regulatory burden for registrants and their dealing representatives by creating a “double jeopardy situation” for IIROC or MFDA member firms. We do not agree. We are of the view that compliance with the corresponding IIROC and MFDA provisions is an appropriate condition to the exemptions provided in Parts 3 and 9 of the Rule. Changes to the May 2011 Proposal We have not made any changes to the Rule which were not set out in the May 2011 Proposal. We have made a change to the Companion Policy in order to clarify that we consider an individual or a firm that has an exemption from an SRO provision and complies with the terms of that exemption to have complied with that SRO provision. Adoption of the Amendments Provided all necessary approvals are obtained, including ministerial approvals, the Amendments to the Rule will come into force on February 28, 2012. The changes to the Companion Policy 2
would become effective on the same date. Additional information about the adoption processes for some jurisdictions is provided in Annex C of this Notice. Where to find more information The Rule and the Companion Policy are available on websites of CSA members, including: www.lautorite.qc.ca www.albertasecurities.com www.bcsc.bc.ca www.gov.ns.ca/nssc www.nbsc-cvmnb.ca www.osc.gov.on.ca www.sfsc.gov.sk.ca Questions Please refer your questions to any of the following CSA staff: Sarah Corrigall-Brown Senior Legal Counsel, Legal Services Capital Markets Regulation Division British Columbia Securities Commission Tel: 604-899-6738 1-800-373-6393 scorrigall-brown@bcsc.bc.ca Navdeep Gill Legal Counsel, Market Regulation Alberta Securities Commission Tel: 403-355-9043 navdeep.gill@asc.ca Dean Murrison Deputy Director, Legal and Registration Saskatchewan Financial Services Commission Tel: 306-787-5879 dean.murrison @gov.sk.ca Chris Besko Legal Counsel, Deputy Director The Manitoba Securities Commission Tel: 204-945-2561 Toll Free (Manitoba only): 1-800-655-5244 chris.besko@gov.mb.ca 3
Robert F. Kohl Senior Legal Counsel, Compliance and Registrant Regulation Ontario Securities Commission Tel: 416-593-8233 rkohl@osc.gov.on.ca Sophie Jean Analyste expert en réglementation – pratiques de distribution Autorité des marchés financiers Tel: 514-395-0337, ext. 4786 Toll-free: 1-877-525-0337 sophie.jean@lautorite.qc.ca Brian W. Murphy Deputy Director, Capital Markets Nova Scotia Securities Commission Tel: 902-424-4592 murphybw@gov.ns.ca Ella-Jane Loomis Legal Counsel New Brunswick Securities Commission Tel: 506- 643-7857 ella-jane.loomis@gnb.ca Katharine Tummon Superintendent of Securities Prince Edward Island Securities Office Tel: 902-368-4542 kptummon@gov.pe.ca Craig Whalen Manager of Licensing, Registration and Compliance Office of the Superintendent of Securities Government of Newfoundland and Labrador Tel: 709-729-5661 cwhalen@gov.nl.ca Louis Arki, Director, Legal Registries Department of Justice, Government of Nunavut Tel: 867-975-6587 larki@gov.nu.ca 4
Donn MacDougall Deputy Superintendent, Legal & Enforcement Office of the Superintendent of Securities Government of the Northwest Territories Tel: 867-920-8984 donald_macdougall@gov.nt.ca Frederik J. Pretorius Manager Corporate Affairs (C-6) Dept of Community Services Government of Yukon Tel: 867-667-5225 Fred.Pretorius@gov.yk.ca 5
ANNEX A THE MANITOBA SECURITIES COMMISSION MSC RULE 2011-10 (Section 149.1, The Securities Act) AMENDING INSTRUMENT TO NATIONAL INSTRUMENT 31-103 1. National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations is amended by this Instrument. 2. Section 1.1 is amended by (a) adding the following after the definition of "IIROC" "IIROC Provision" means a by-law, rule, regulation or policy of IIROC named in Appendix G, as amended from time to time; and (b) adding the following after the definition of "MFDA" "MFDA Provision" means a by-law, rule, regulation or policy of the MFDA named in Appendix H, as amended from time to time; 3. Section 3.16 is amended by (a) adding the following after subsection (1): 3.16(1.1) Subsection (1) only applies to a registered individual who is a dealing representative of a member of IIROC in respect of a requirement specified in any of paragraphs (1)(a) to (c) if the registered individual complies with the corresponding IIROC Provisions that are in effect. , and (b) adding the following after subsection (2): 3.16(2.1) Subsection (2) only applies to a registered individual who is a dealing representative of a member of the MFDA in respect of a requirement specified in paragraphs (2)(a) or (b) if the registered individual complies with the corresponding MFDA Provisions that are in effect. 6
4. Section 9.3 is amended by (a) adding the following after subsection (1): 9.3(1.1) Subsection (1) only applies to a registered firm in respect of a requirement specified in any of paragraphs (1)(a) to (q) if the registered firm complies with the corresponding IIROC Provisions that are in effect. , and (b) adding the following after subsection (2): 9.3(2.1) Subsection (2) only applies to a registered firm in respect of a requirement specified in any of paragraphs (2)(a) to (m) if the registered firm complies with the corresponding IIROC Provisions that are in effect. 5. Section 9.4 is amended by (a) adding the following after subsection (1): 9.4(1.1) Subsection (1) only applies to a registered firm in respect of a requirement specified in any of paragraphs (1)(a) to (q) if the registered firm complies with the corresponding MFDA Provisions that are in effect. , and (b) adding the following after subsection (2): 9.4(2.1) Subsection (2) only applies to a registered firm in respect of a requirement specified in any of paragraphs (2)(a) to (k) if the registered firm complies with the corresponding MFDA Provisions that are in effect. 6. The Instrument is amended by adding the following appendices after Appendix F: APPENDIX G - EXEMPTIONS FROM CERTAIN REQUIREMENTS FOR IIROC MEMBERS (Section 9.3 [exemptions from certain requirements for IIROC members]) NI 31-103 Provision IIROC Provision section 12.1 [capital 1. Dealer Member Rule 17.1; and requirements] 2. Form 1 Joint Regulatory Financial Questionnaire and Report - Part I, Statement B, “Notes and Instructions” section 12.2 [notifying the 1. Dealer Member Rule 5.2; and regulator of a subordination 2. Dealer Member Rule 5.2A agreement] section 12.3 [insurance – 1. Dealer Member Rule 400.2 [Financial Institution dealer] Bond]; 7
2. Dealer Member Rule 400.4 [Amounts Required]; and 3. Dealer Member Rule 400.5 [Provisos with respect to Dealer Member Rules 400.2, 400.3 and 400.4] section 12.6 [global bonding 1. Dealer Member Rule 400.7 [Global Financial or insurance] Institution Bonds] section 12.7 [notifying the 1. Dealer Member Rule 17.6; regulator of a change, claim or 2. Dealer Member Rule 400.3 [Notice of Termination]; cancellation] and 3. Dealer Member Rule 400.3B [Termination or Cancellation] section 12.10 [annual 1. Dealer Member Rule 16.2 [Dealer Member Filing financial statements] Requirements]; and 2. Form 1 Joint Regulatory Financial Questionnaire and Report section 12.11 [interim financial 1. Dealer Member Rule 16.2 [Dealer Member Filing information] Requirements]; and 2. Form 1 Joint Regulatory Financial Questionnaire and Report section 12.12 [delivering 1. Dealer Member Rule 16.2 [Dealer Member Filing financial information – dealer] Requirements] subsection 13.2(3) [know your 1. Dealer Member Rule 1300.1(a)-(n) [Identity and client] Creditworthiness]; 2. Dealer Member Rule 1300.2; 3. Dealer Member Rule 2500, Section II [Opening New Accounts]; and 4. Form 2 New Client Application Form section 13.3 [suitability] 1. Dealer Member Rule 1300.1(o) [Business Conduct]; 2. Dealer Member Rule 1300.1(p) [Suitability Generally]; 3. Dealer Member Rule 1300.1(q) [Suitability Determination Required When Recommendation Provided]; 4. Dealer Member Rule 1300.1(r) and Dealer Member Rule 1300.1(s) [Suitability Determination Not Required]; 5. Dealer Member Rule 1300.1(t) [Corporation Approval]; 6. Dealer Member Rule 2700, Section I [Customer Suitability]; and 7. Dealer Member Rule 3200 [Minimum Requirements for Dealer Members Seeking Approval Under Rule 1300.1(t) for Suitability Relief for Trades not Recommended by the Member] section 13.12 [restriction on 1. Dealer Member Rule 100 [Margin Requirements] lending to clients] section 13.13 [disclosure when 1. Dealer Member Rule 29.26 8
recommending the use of borrowed money] section 13.15 [handling 1. Dealer Member Rule 2500B [Client Complaint complaints] Handling]; and 2. Dealer Member Rule 2500, Section VIII [Client Complaints] subsection 14.2(2) 1. Dealer Member Rules of IIROC that set out the [relationship disclosure requirements for relationship disclosure information information] similar to those contained in IIROC's Client Relationship Model proposal, published for comment on January 7, 2011; IIROC has not yet assigned a number to the relationship disclosure dealer member rule in its Client Relationship Model proposal. We will refer to the dealer member rule number when IIROC has assigned one. 2. Dealer Member Rule 29.8; 3. Dealer Member Rule 200.1(c); 4. Dealer Member Rule 200.1(h); 5. Dealer Member Rule 1300.1(p) [Suitability Generally]; 6. Dealer Member Rule 1300.1(q) [Suitability Determination Required When Recommendation Provided]; 7. Dealer Member Rule 1300.2; and 8. Dealer Member Rule 2500B, Part 4 [Complaint procedures / standards] section 14.6 [holding client 1. Dealer Member Rule 17.3 assets in trust] section 14.8 [securities subject 1. Dealer Member Rule 17.2A to a safekeeping agreement] 2. Dealer Member Rule 2600 – Internal Control Policy Statement 5 [Safekeeping of Clients' Securities] section 14.9 [securities not 1. Dealer Member Rule 17.3; subject to a safekeeping 2. Dealer Member Rule 17.3A; and agreement] 3. Dealer Member Rule 200.1(c) section 14.12 [content and 1. Dealer Member Rule 200.1(h) delivery of trade confirmation] 9
APPENDIX H - EXEMPTIONS FROM CERTAIN REQUIREMENTS FOR MFDA MEMBERS (Section 9.4 [exemptions from certain requirements for MFDA members]) NI 31-103 Provision MFDA Provision section 12.1 [capital 1. Rule 3.1.1 [Minimum Levels]; requirements] 2. Rule 3.1.2 [Notice]; 3. Rule 3.2.2 [Member Capital ; 4. Form 1 MFDA Financial Questionnaire and Report; and 5. Policy No. 4 [Internal Control Policy Statements – Policy Statement 2: Capital Adequacy] section 12.2 [notifying the 1. Form 1 MFDA Financial Questionnaire and Report, regulator of a subordination Statement F [Statement of Changes in Subordinated agreement] Loans]; and 2. Membership Application Package – Schedule I (Subordinated Loan Agreement) section 12.3 [insurance – 1. Rule 4.1 [Financial Institution Bond]; dealer] 2. Rule 4.4 [Amounts Required]; 3. Rule 4.5 [Provisos]; and 4. Policy No. 4 [Internal Control Policy Statements – Policy Statement 3: Insurance] section 12.6 [global bonding 1. Rule 4.7 [Global Financial Institution Bonds] or insurance] section 12.7 [notifying the 1. Rule 4.2 [Notice of Termination]; and regulator of a change, claim or 2. Rule 4.3 [Termination or Cancellation] cancellation] section 12.10 [annual 1. Rule 3.5.1 [Monthly and Annual]; financial statements] 2. Rule 3.5.2 [Combined Financial Statements]; and 3. Form 1 MFDA Financial Questionnaire and Report section 12.11 [interim financial 1. Rule 3.5.1 [Monthly and Annual]; information] 2. Rule 3.5.2 [Combined Financial Statements]; and 3. Form 1 MFDA Financial Questionnaire and Report section 12.12 [delivering 1. Rule 3.5.1 [Monthly and Annual] financial information – dealer] section 13.3 [suitability] 1. Rule 2.2.1 [“Know-Your-Client”]; and 2. Policy No. 2 [Minimum Standards for Account Supervision] section 13.12 [restriction on 1. Rule 3.2.1 [Client Lending and Margin]; and lending to clients] 2. Rule 3.2.3 [Advancing Mutual Fund Redemption Proceeds] section 13.13 [disclosure when 1. Rule 2.6 [Borrowing for Securities Purchases] recommending the use of borrowed money] section 13.15 [handling 1. Rule 2.11 [Complaints] 10
complaints] 2. Policy No. 3 [Complaint Handling, Supervisory Investigations and Internal Discipline]; and 3. Policy No. 6 [Information Reporting Requirements] subsection 14.2(2) 1. Rule 2.2.5 [Relationship Disclosure] [relationship disclosure information] section 14.6 [holding client 1. Rule 3.3.1 [General]; assets in trust] 2. Rule 3.3.2 [Cash]; and 3. Policy No. 4 [Internal Control Policy Statements – Policy Statement 4: Cash and Securities, and Policy Statement 5: Segregation of Clients’ Securities] section 14.8 [securities subject 1. Rule 3.3.3 [Securities]; and to a safekeeping agreement] 2. Policy No. 4 [Internal Control Policy Statements – Policy Statement 4: Cash and Securities, and Policy Statement 5: Segregation of Clients’ Securities] section 14.9 [securities not 1. Rule 3.3.3 [Securities] subject to a safekeeping agreement] section 14.12 [content and 1. Rule 5.4.1 [Delivery of Confirmations]; delivery of trade confirmation] 2. Rule 5.4.2 [Automatic Payment Plans]; and 3. Rule 5.4.3 [Content] 7. This Instrument comes into force on February 28, 2012. 8. This Instrument may be cited as MSC Rule 2011-10. 11
ANNEX B Changes to the Companion Policy 1. Changes to Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations are set out in this Annex. 2. Section 3.16 is changed by adding the following as its fourth paragraph: We expect registered individuals who are dealing representatives of IIROC or MFDA members to comply with the by-laws, rules, regulations and policies of IIROC or the MFDA, as applicable (SRO provisions). These individuals cannot rely on the exemptions in section 3.16 unless they are complying with the corresponding SRO provisions specified in NI 31-103. We regard compliance with IIROC or MFDA procedures, interpretations, notices, bulletins and practices as relevant to compliance with the applicable SRO provisions. For these purposes, an individual that has an exemption from an SRO provision and complies with the terms of that exemption would be considered to have complied with that SRO provision. 3. Part 9 is changed by adding the following as a fifth paragraph: We expect registered firms that are members of IIROC or the MFDA to comply with the by-laws, rules, regulations and policies of IIROC or the MFDA, as applicable (SRO provisions). These firms cannot rely on the exemptions in Part 9 unless they are complying with the corresponding SRO provisions specified in NI 31-103. We regard compliance with IIROC or MFDA procedures, interpretations, notices, bulletins and practices as relevant to compliance with the applicable SRO provisions. For these purposes, a firm that has an exemption from an SRO provision and complies with the terms of that exemption would be considered to have complied with that SRO provision. 4. These changes become effective on February 28, 2012. 12
ANNEX C ADOPTION OF THE AMENDMENTS The Canadian Securities Administrators (the CSA or we) are implementing amendments (the Amendments) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations (31-103CP). The Amendments to NI 31-103 will be implemented as: a rule in each of Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, New Brunswick, Ontario and Prince Edward Island a regulation in each of Québec, the Northwest Territories, Nunavut and the Yukon Territory a commission regulation in Saskatchewan The changes to 31-103CP will be adopted as a policy in each of the jurisdictions represented by the CSA. In Ontario, the Amendments to NI 31-103 and other required materials were delivered to the Minister of Finance on November 25, 2011. The Minister may approve or reject the Rule or return it for further consideration. If the Minister approves the Rule or does not take any further action, the Amendments to NI 31-103 will come into force on February 28, 2012. In Québec, the Amendments to NI 31-103 are adopted as a regulation made under section 331.1 of the Securities Act (Québec) and must be approved, with or without amendment, by the Minister of Finance. The regulation will come into force on the date of its publication in the Gazette officielle du Québec or on any later date specified in the regulation. It is also published in the Bulletin of the Autorité des marchés financiers. In British Columbia, the implementation of the Amendments to NI 31-103 is subject to ministerial approval. Provided all necessary approvals are obtained, British Columbia expects the Rule to come into force on February 28, 2012. 13
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