- It’s Going to Get Tougher to Get Registered as an Exempt Market Dealer
- January 12, 2015 | Authors: Peter A. Dunne; Brian P. Koscak
- Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
Both the Canadian Securities Administrators (“the CSA”) and the Ontario Securities Commission (“the OSC”) have recently announced changes to the exempt market dealer (“EMD”) registration requirements that will make it tougher to get registered as an EMD. The CSA have recently announced that chief compliance officers (“CCOs”) for EMDs will have to satisfy certain experience requirements before registration will be granted. We will also discuss the OSC’s new requirement for pre-registration interviews as part of the approval process for EMD registration.
I. New Experience Requirements for CCOs of EMDs
On October 16, 2014, the CSA published the final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) and related instruments (“the Amendments”). As part of the Amendments, the CSA will soon require a CCO of an EMD to have 12 months of relevant securities experience in the 36-month period before applying for registration (section 3.10 of NI 31-103). The proposed Amendments are expected to become effective on January 11, 2015.
The CSA position is that the experience requirement for CCOs of EMDs is consistent with the proficiency principle articulated in section 3.4 of NI 31-103. Section 3.4 states that the CCO of a dealer firm must have “the education, training and experience that a reasonable person would consider necessary to perform the activity competently, and the ability to design and implement an effective compliance system” [emphasis added] (“the CCO Proficiency Standard”). Experience is already a component of the CCO Proficiency Standard.
Section 3.4 of the Companion Policy to NI 31-103CP explains the CCO Proficiency Standard as follows:
CCOs must have a good understanding of the regulatory requirements applicable to the firm and individuals acting on its behalf. CCOs must also have the knowledge and ability to design and implement an effective compliance system.
The CSA stated that careful consideration was given to the requirement for 12 months of relevant securities experience in light of comments received, and concluded that it aligns with its mandate to provide protection to investors and to foster fair and efficient capital markets and confidence in the capital markets.
What Experience Will be Required?
Our initial observation is that the CSA has not moved the guidance very far beyond the existing CCO Proficiency Standard. We assume that registration officers of Canadian securities regulators have been bearing that standard in mind when considering applications to date in the context of the CCO Proficiency Requirement, so query whether there has been a meaningful change.
Assuming a meaningful change is intended, we are concerned that the obvious and most direct experience requirement will be past experience as a registered CCO. Arguably, anything short of that would be in doubt. Clearly, the CSA can’t intend that we default to a requirement that only past registered CCO experience will be sufficient or the pool of CCOs will never grow. Something short of that must be sufficient.1
Although we expect a greater understanding of the CCO experience requirement for EMDs will evolve over time, our concern is what applicants can do in the short run to determine whether an application will be successful. We are also concerned that until such time, the experience requirement will evolve on a piecemeal basis that may be inconsistently applied across jurisdictions by different CSA members. Accordingly, applicants for EMD firm registration should consult with counsel prior to filing in order to obtain some insight into whether a proposed CCO candidate has the type of experience contemplated by the regulators. Why risk the time, money and effort in applying to be an EMD only find out that the CCO applicant’s experience is unacceptable?
II. OSC Pre-Registration Interviews of EMD Applicants
Another way it will get harder to get registered as an EMD, at least in Ontario, is that the OSC has recently introduced a pre-registration interview.
Why is the OSC Doing This?
The OSC wants to ensure firm applicants, such as EMDs, understand their obligations under Ontario securities law and establish an adequate compliance system. In fact, the OSC is viewing this as a firm’s first compliance review (before it is even registered as an EMD).
As OSC Staff Notice 33-745 states:
[t]his will allow us to focus on the firm’s fitness for registration, enhancing the firm’s understanding of regulatory obligations prior to registration and establishing positive communications with the registrant.
What Does This Mean for New EMD Applicants?
This means the OSC will be asking new EMD applicants a lot more questions about their business models and related policies and procedures manual (“PPM”) during the application process and requiring written responses and/or holding in-person interviews. (Yes, in-person interviews!)
The Ultimate Designated Person and Chief Compliance Officer of an EMD applicant better know their PPM ‘inside and out’ and be prepared for a sit-down with OSC staff who may ask them questions to assess their understanding of their registrant obligations under Ontario securities law.
The broader implications of an interview process should be considered by applicants. For example, the OSC has not previously required EMD applicants to submit their PPM as part of the registration application process. However, the OSC might now request a copy of the PPM, or sections of it, in order to test interviewees on their knowledge of their own policies and procedures.
EMD applicants are at some risk if they use a template PPM obtained from another firm or from a consultant without reviewing and tailoring it to their particular operations. In fact, if an EMD applicant is not sure about its legal obligations, it should contact an experienced securities registration lawyer.
An EMD’s PPM must be a ‘living and breathing document’, so to speak, that reflects how an EMD operates its business in a legally compliant manner.
If you think after you prepare your PPM that it will sit on your book shelf and collect dust, think again!
You need to constantly update your PPM to reflect changes in securities law and your business practices.
Be careful not to create what you think is the ‘blue ribbon’ PPM that does not reflect your intended business practices since it will be the ‘roadmap’ the OSC follows when investigating/reviewing what you actually did.
How Can an EMD Applicant Prepare for an OSC Pre-Registration Review?
Below is list of suggested practices for an OSC pre-registration review as set out in OSC Staff Notice 33-745:
1. establish an effective compliance system prior to commencing registerable activities,
2. ensure that written policies and procedures adequately address all aspects of business operations,
3. be prepared to answer detailed questions (in writing or in person) regarding the firm’s business plan and compliance systems including:
a. products and services that will be offered,
b. business growth plans,
c. details on referral arrangements, if any,
d. supervisory structure within the context of the firm's growth objectives,
e. marketing plans,
f. material business contracts, and
g. oversight for outsourced business arrangements
4. be prepared to provide,
a. the firm's application or membership in OBSI, if applicable,
b. details regarding planned custodial arrangements,
c. copies of business plans and a firm’s PPM, and
d. copies of other information such as offering documents, referral agreements, KYC documents, and disclosure documents.
Firms are encouraged to:
compile records requested on a timely basis; and
perform an initial self-assessment to determine compliance with Ontario securities law, or engage a compliance lawyer to perform the assessment prior to registration, and rectify all deficient areas prior to applying for registration.
What Should an EMD Applicant Not Do?
Below is list of unacceptable practices for an OSC pre-registration review as set out in OSC Staff Notice 33-745:
Firms are encouraged to avoid the following practices:
1. conduct the following after submission of a registration application:
draft the written policies and procedures manual, and
search for possible service providers.
2. provide documents related to the registration process in stages; complete documentation relating to the registration application should be provided at the time of registration including audited financial statements.
Relevance for the CCO Experience Requirement
We note that the points discussed above in connection with the OSC interview process have broad application to the CCO experience requirement as well. At least in Ontario, CCO applicants for EMDs can expect to cover these points and to have their answers weigh into the assessment of their relevant experience.
1 In contrast, we note that the Amendments set out in the Companion Policy certain experience requirements for advising representatives and associate advising representatives of portfolio managers (see also CSA Staff Notice 31-332 Relevant Investment Management Experience for Advising Representatives and Associate Advising Representatives of Portfolio Managers published on January 17, 2013).
2Source: The pre-registration review process discussed above is set out in OSC Staff Notice 33-745- Annual Summary Report for Dealers, Advisers and Investment Fund Managers.