Keeping Reforms in Sight:

Transcription

1 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements Investment Management Group August 2009 Investment Management Advisories Canadian Securities Regulators Release Final Registration Rule (July 2009) What s New? - Investment Dealers IIROC Members What s New? - Mutual Fund Dealers MFDA Members What s New? - Exempt Market Dealers What s New? - Advisers - Portfolio Managers What s New? - Investment Fund Managers Impact on the Hedge Fund Industry Impact on Non-Canadian Securities Market Participants

2 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements JULY 2009 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE After over five years of consultation, on July 17, 2009, the Canadian Securities Administrators (CSA) released, in final form, National Instrument Registration Requirements and Exemptions and various related instruments, including amendments to or revocations of various national and local existing instruments. National Instrument and the related instruments will come into force on September 28, 2009, subject to governmental approvals. The various amendments to provincial securities legislation enacted over the past few years that are necessary to allow National Instrument to be implemented, including Schedule 26 to Bill 162 in Ontario, are also expected to be proclaimed in force on the same time-table. National Instrument , the various provincial securities legislative amendments and the related instruments will put in place Canada s first-ever comprehensive registration regime for financial services firms and individuals. These instruments contain significant new requirements that, to varying degrees, will impact virtually every financial services firm carrying on business in Canada. While much of National Instrument is identical across all of the provinces and territories of Canada, there remain significant areas where the CSA could not reach agreement and accordingly, industry participants will be subject to different regulation depending upon the province and territory within which they operate. Although the CSA explain they have made no material changes to the version of National Instrument last released for comment in February 2008 (which would have necessitated an additional comment period), the final version of National Instrument has been reorganized and significantly rewritten (along with receiving an expanded name), with many requirements altered, often in subtle, but substantive ways from the last published version. In addition, the CSA have elaborated on their views and expectations described in the Companion Policy to National Instrument , which, in many cases, significantly changes the meaning and scope of the applicable requirements. The CSA have also pulled back from previously proposed requirements and have not carried forward some proposed requirements, pending further review. The CSA also published on July 17, 2009 a final version of National Instrument Prospectus and Registration Exemptions and instruments related to that instrument. National Instrument , which is expected to also come into force on September 28, 2009, is intended to complement National Instrument in that the registration exemptions provided for in National Instrument will be revoked six months from the implementation date. The only registration exemptions that will be available after that date will be those found in National Instrument , other than those that are expected to be provided for by blanket order in the western provinces and the territories.

3 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE We highlight in this Investment Management Advisory the more important requirements of National Instrument , along with some of the significant changes made since the last published version. NATIONAL INSTRUMENT THE FRAMEWORK National Instrument reinforces the CSA s objective of ensuring that only qualified firms and individuals provide advising and trading services in the Canadian capital markets. The CSA explain in the Companion Policy, aptly in our view, [r]egistrants act as gatekeepers of the integrity of the capital markets. They should not, by act or omission, facilitate conduct that brings the market into disrepute. Registration will be granted by a securities regulator unless it appears that the applicant is not suitable for registration or that the registration itself is objectionable, and provided the applicant meets the fit and proper standards of registration: proficiency, integrity and financial solvency. Once registered, the registrant (firm and individual) must meet on-going conduct requirements, such as dealing fairly, honestly and in good faith with clients, dealing appropriately with conflicts of interest, ensuring that a client s investments are suitable for the client, maintaining adequate capital and insurance, having a compliance system, maintaining appropriate records and dealing with conflicts of interest. Under National Instrument , the test for determining whether a firm or individual is required to be registered will depend on the concept of the business trigger, that is, whether the firm or individual is in the business of : Trading in securities as a principal or agent; whereupon registration as a dealer will be necessary Advising others about acquiring or disposing of securities; whereupon registration as an adviser will be necessary. In addition, acting as an investment fund manager will necessitate the firm to be registered as an investment fund manager. Firms that are currently registered as dealers will generally continue to be registered in the same category: investment dealer, mutual fund dealer or scholarship plan dealer. The investment counsel and portfolio manager categories for advisers are combined into one category called portfolio manager. New categories for a firm are exempt market dealer, restricted dealer, restricted adviser and investment fund manager. The following categories of registration have been eliminated: international dealer, limited market dealer, foreign dealer, international adviser, securities adviser and investment counsel. Registration with the CSA is permanent, subject to annual payment of fees, compliance with on-going fit and proper and conduct requirements, and the ability of the Director of the applicable securities regulator to revoke or suspend registration or impose conditions on registration at any time, subject to the registrant s opportunity to be heard. 2

4 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE The registration requirements contained in National Instrument for dealers and advisers include Proficiency requirements (other than for IIROC members who must comply with IIROC rules), including new proficiency requirements for advising representatives and associate advising representatives and for the chief compliance officer for a registered firm Designation and registration of an ultimate designated person New minimum capital requirements, which will result in an increase in minimum capital requirements for most non-sro registrants, other than for portfolio managers that hold client assets Modernized insurance requirements for non-sro registrants, with a formula for calculating insurance limits, rather than a flat rate and recognition of equivalent forms of insurance A prohibition on registrants (other than IIROC members) lending money, extending credit or providing margin to clients New guidelines for account opening and know-your-client information, record-keeping, holding and custody of client assets, account activity reporting, referral arrangements, compliance regimes and complaint handling New requirements for non-sro registrants to prepare and deliver to clients specified relationship disclosure information Exemptions from certain conduct rules when the registrant is dealing with a permitted client (essentially a person or company that falls within a prescribed sub-set of super accredited investors), provided, for some requirements, that the permitted client supplies the registrant with an express waiver Significantly enhanced initial firm registration requirements, including requirements to file business plans and policies and procedures manuals. National Instrument contains registration exemptions for specific circumstances, including mobility registration exemptions which are available to those registrants who wish to continue to deal with or advise a limited number of clients with whom they have a pre-existing relationship and who move to another Canadian province or territory. Legislative amendments made in conjunction with the coming into force of National Instrument require firms acting as an investment fund manager in Canada to register in the new category of investment fund manager. This registration requirement applies to managers of all investment funds managed in a Canadian jurisdiction, whether distributed via prospectus or pursuant to prospectus exemptions. Registration will be required in the jurisdiction in which the investment fund manager has its head office, with investment fund managers without a head office in Canada being exempt from registration for a twoyear period. Investment fund managers will be subject to many of the same fit and proper and conduct rules as apply to other registrants, but the only registered individuals for an investment fund manager will be its UDP and CCO. 3

5 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Significant Changes The final version of National Instrument contains a number of enhanced or changed requirements for various registrants. We highlight these new requirements below under the applicable category of registration. We intend to collect examples of ambiguous or unclear drafting, along with examples of what we believe are unintended consequences of the requirements, such that we will seek clarification from the regulators. We expect the CSA will publish, at some point, either before or after National Instrument comes into force, a list of FAQs. We would be pleased to provide the regulators with your views or concerns about any specific provisions you find ambiguous or unclear. Investment Dealers: National Instrument now exempts investment dealers (members of IIROC) from additional provisions, where the IIROC rules regulate the particular area. IIROC published (also on July 17, 2009) proposed amendments to the IIROC rules relating to the implementation of National Instrument IIROC members will need to review those rules in due course to determine the impact on their business and operations. Mutual Fund Dealers: The CSA have confirmed that mutual fund dealers may trade in securities of any entity that fits within the definition of mutual fund so provided in applicable securities legislation. Mutual fund dealers are not restricted to trading in prospectus qualified mutual funds and do not have to be registered as exempt market dealers to trade in securities of prospectus exempt mutual funds, including pooled funds. The CSA also clarify that mutual fund dealers may also rely on the registration exemption for specified debt to trade in these securities without any additional registration. Not surprisingly, mutual fund dealers will not be eligible to trade in exchange traded funds to the extent that these vehicles are not mutual funds. In British Columbia, mutual fund dealers may also trade in securities of scholarship plans. Mutual fund dealers must look to National Instrument for proficiency requirements for representatives and for know-your-client requirements unlike investment dealers which are exempt from National Instrument in respect of these requirements, if they comply with IIROC rules. National Instrument will require mutual fund dealers to send out quarterly client statements, which is a change from the current MFDA rules. A 24-month transition period is provided for. The CSA indicate that they expect that the MFDA will be publishing shortly amendments to its Rules, which amendments will coordinate the MFDA rules with National Instrument

6 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Exempt Market Dealers: The CSA have confirmed that exempt market dealers may trade in securities of any security pursuant to applicable prospectus exemptions, including prospectus-qualified securities where the trade is made in reliance on a prospectus exemption. This means that EMDs may trade for their clients in securities of any investment fund (prospectus-qualified or not), provided that a prospectus exemption is available in respect of that trade. However, the final version of National Instrument has been changed from previous versions to limit EMDs to acting as underwriters only in respect of prospectus-exempt securities. EMDs will not, therefore, be able to act as underwriters in respect of prospectus-qualified securities, even where they are only trading in those securities pursuant to applicable exemptions. The distinction between EMDs that handle, hold or have access to client assets and those that do not, has been eliminated from the final version of National Instrument All EMDs will be subject to the same capital, insurance and audited financial reporting obligations. Significantly however, the securities regulators in Alberta, British Columbia, Manitoba and the three territories of Canada have decided to exempt firms (and their representatives) that are not otherwise registered in any province or territory, from registration as EMDs, if they are in the business of trading in those jurisdictions securities under specified exemptions (including accredited investor, family, friends and business associates, offering memorandum and minimum purchase), provided they comply with certain conditions. These conditions include a prohibition on providing suitability advice about the trade and providing other financial services to the client (except in British Columbia). Prescribed risk disclosure must be given to the client and notices filed with the regulators. The regulators of these jurisdictions will issue a blanket order shortly providing for this exemption. The regulator in Saskatchewan continue to consider whether or not to adopt this exemption. Scholarship Plan Dealers: Scholarship plan dealer representatives must meet enhanced proficiency within 12 months of the implementation of National Instrument These dealers also are exempt from providing client statements, other than annually, given the business model of the industry. Portfolio Managers: The proficiency requirements for advising representatives and associate advising representatives are largely consistent with the earlier versions of National Instrument However the CSA have elaborated on what they will consider as relevant investment management experience that an advising 5

7 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE representative or associate advising representative must demonstrate. For example, only experience gained at an IIROC-member investment dealer (previous versions referred to registered dealers more generically) or an adviser will count towards the applicable experience required. The 36-month time period within which an applicant must have taken a specified course has been maintained, which means that applicants will continue to have to either retake courses or demonstrate relevant experience if they have not been registered as an advising representative during that period. Portfolio managers must designate (by notice to the applicable regulator) supervisors for all associate advising representatives and to the extent this has not been done for any associate advising representative by the time National Instrument comes into force, portfolio managers will have to do this within 7 days of the implementation date. Portfolio managers that both advise and manage a pooled fund (described in National Instrument as a non-prospectus qualified investment fund ) do not have to be registered as an exempt market dealer to trade in securities of that fund to managed accounts of that adviser. The applicable managed account and pooled fund cannot be created or used primarily for the purpose of qualifying for the exemption ; a somewhat vague, but intuitively understandable, limitation. Notice must be given to the regulator by the adviser within 7 days after it first relies on the exemption after National Instrument comes into force, which for existing pooled funds will be on or before October 5, A portfolio manager is prohibited from knowingly causing investment portfolios managed by it (including an investment fund) from making certain enumerated purchases or sales of securities. The applicable section in National Instrument has been modified from the previous versions and is designed to replace section 118 of the Securities Act (Ontario) and equivalent provisions in other jurisdictions, which are being repealed. The CSA explain in the Companion Policy that this provision is intended to prohibit inter-fund trades and goes on to state that an inter-fund trade occurs when the adviser for an investment fund knowingly directs a trade in portfolio securities to another investment fund that it acts for or instructs the dealer to execute the trade with the other investment fund. We believe that the drafting of the applicable requirement does not support this conclusion nor do we agree with the conclusion, and we intend to request further clarification from the regulators. However, we note that the revised drafting of the prohibition does not prohibit cross-trading between managed accounts of a portfolio manager, which is a welcome change from the previously published version of National Instrument Investment Fund Managers: Managers of investment funds that are located in Canada, where the manager is also located in Canada, must register in the province or territory where the manager s head office is located. No other 6

8 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE registration will be required at this time, although the CSA indicate that they will publish for comment in due course a proposal that may require investment fund managers to register in other provinces and territories. Useful additional clarification is provided on the required quarterly reporting of NAV adjustments. Fund managers may use the materiality thresholds established by the Investment Funds Institute of Canada when determining whether or not a NAV error has occurred. An investment fund manager will be required to issue a trade confirmation when it processes a redemption request received directly from a client (that is, not through a registered dealer). This has implications for investment fund managers that have many of the securityholders of their funds registered in client name. Non-Canadian Industry Participants: An entity that is not incorporated under the laws of Canada may be registered in any category of registration, except where restricted by SRO rules. Non-Canadian dealers and advisers operating in a Canadian province or territory may rely on the international dealer exemption or the international adviser exemption, as applicable, provided all conditions to that exemption are met. The most significant of these conditions are restrictions on trading with or advising only permitted clients and only on foreign securities. The list of permitted clients has been expanded from the earlier versions of National Instrument , but it continues to be a sub-set of super-accredited investors, and international advisers cannot advise Canadian registrants. This last prohibition is new to the final version of National Instrument and is not explained. The definition of foreign security keys off the locale where the issuer is incorporated or established, which means that international dealers and international advisers may only trade in, or advise on, securities of issuers not incorporated in Canada, although international advisers may advise on Canadian issuers if such advice is incidental to their advice on non-canadian securities. In Ontario, non-canadian dealers and advisers that are relying on these exemptions will continue to have to pay regulatory fees to the Ontario Securities Commission, under OSC Rule Fees, even though they are no longer registered in this province. Significantly, the CSA have removed the sub-adviser exemption from the final version of National Instrument , which was in the previous versions of National Instrument and was to be a national expansion of the currently Ontario-only exemption available to advising firms that act as subadvisers to registered portfolio managers. The CSA indicate that they intend to review the exemption 7

9 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE taking into account the regulatory responses to cross-border activity, but that the Ontario-only exemption will continue, with the other CSA members willing to provide exemptions from the requirement to be registered as an adviser, if applied for. No further explanation is given about this decision, which we don t understand and consider disappointing. Non-Canadian portfolio managers to investment funds that are managed outside of Canada, but that are distributed within Canada, no longer have to be concerned about registration as an adviser in Canada. Consistent with the earlier versions of National Instrument , the flow-through regulatory theory that previously applied in Ontario in respect of advice provided to funds, and indirectly to investors in those funds, has been rejected. Entities that do not have an office in Canada and that act as investment fund managers of investment funds that are distributed in Canada, even where these funds are established in Canada, do not have to be registered in Canada as investment fund managers, at least for now. The CSA proposal referred to above (under Investment Fund Managers) may contain a proposal for registration of these entities. The Ontario Securities Commission have confirmed that they interpret OSC Rule Fees so as to require these entities (referred to in OSC Rule as unregistered investment fund managers) to pay annual participation fees to the OSC under that Rule. We have provided the OSC with a number of submissions about this interpretation, given that we believe this interpretation is not appropriate. All Registrants: Any firm that obtained an exemption from a rule or legislative provision before the implementation of National Instrument may continue to rely on that exemption, in respect of requirements in National Instrument that are substantially similar to the earlier requirements, to the same extent and on the same conditions. For example, investment fund managers that are today registered as mutual fund dealers may continue to rely on the earlier series of exemptions granted from having to become members of the MFDA. The CSA expand on the expected content of relationship disclosure information when a registrant is trading or advising on a mutual fund, much of which we find curious in light of the extensive prospectus disclosure for mutual funds that must be provided to clients and that is otherwise available to investors. The CSA also indicate that they expect to, within the next two years, propose amendments to National Instrument to add requirements or guidance for cost disclosure and performance reporting to clients. These elements are part of the client relationship model and have been developed by the MFDA and IIROC for their members. The CSA are waiting to review those proposals and will ensure that National Instrument contains consistent rules. 8

10 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Clarity is provided around referral arrangements. Provision of names and contact information of potential clients is considered to be a referral arrangement if the registrant pays for that information. This has important implications to certain sectors of the financial services industry where client lists are routinely purchased from other businesses. The CSA have also confirmed that the referral arrangement requirements apply to arrangements between affiliates. Certain conduct rules do not apply in respect of registrants when they are dealing with permitted clients and those clients waive the specific requirement. For example, a permitted client can waive the requirement for a registrant to ensure that a trade or specific advice is suitable for that client. The distinction between activity records and relationship records has been eliminated from the record-keeping requirements and the CSA s expectations for record-keeping are described in greater detail in the Companion Policy. We note that there is no transition for the record-keeping requirements and registrants should ensure that their practices are consistent with the new requirements. The CSA have confirmed that most notices and filings with the regulators can be conducted with the registrant s principal regulator, which will be the regulator in the province where the firm has its head office, or the individual has its working office. This concept fits with the principles behind the passport system, which now will operate for registration applications and filings through the implementation of amendments to Multilateral Instrument Passport System and the implementation of National Policy Process for Registration in Multiple Jurisdictions. These amendments and the new National Policy will also come into force on September 28, New Registration Exemptions: While the securities-related activities of federally regulated financial institutions are not separately addressed in National Instrument , generally, each province and territory is maintaining the status quo on securities-related requirements applicable to these institutions. Ontario has amended the Securities Act (Ontario) to provide a specific exemption from the dealer, adviser and investment fund manager registration requirements for financial institutions that carry on dealing, advising and investment fund manager activities in accordance with the institutions governing legislation. The CSA have, however, included in National Instrument what they describe as a new exemption for banks, hedge funds and pension funds. This exemption is consistent with the long-standing registration exemption available when trades are made solely through an agent who is a registered dealer or to a registered dealer who is purchasing as principal. The CSA s description of this exemption does not, in our view, fit with the scope of the exemption, nor does its explanation in the Companion Policy about this exemption provide much additional clarity. 9

11 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Transition and Key Dates There are a number of transition periods provided under National Instrument for firms and individuals that are currently registered or are currently carrying on business in the exempt market or as a fund manager. These transition periods range from 3-24 months following implementation of National Instrument Most existing registrants will be automatically converted over on the National Registration Database to the corresponding category of registration under National Instrument The conversion will take place during an NRD freeze-period from September 25 to October 12, Firms will have read-only access to NRD during the freeze period, and authorized firm representatives will be unable to create new submissions via NRD. During the freeze period firms will only be required to file, using the new paper forms, material information (eg. reinstatements, terminations for cause, etc.). Key dates include: Monday, September 28, 2009 Implementation of National Instrument except as specifically mentioned in Part 16 of National Instrument , registrants must comply with all of the new requirements of National Instrument as of that date. Unregistered firms established after this date will apply for registration under the new regime. Wednesday, October 28, 2009 (one month from implementation) international dealers, so registered prior to September 28, 2009, must file a completed Form F2 if they intend to carry on business in Canada under the international dealer registration exemption. Their registration as international dealers will be revoked as of September 28, Monday, December 28, 2009 (three months from implementation) All existing registrants (as of September 28, 2009) must designate a UDP and a CCO for the firm, and apply for registration of these individuals. Monday, March 28, 2010 (six months from implementation) All existing registrants (as of September 28, 2009) must satisfy new bonding and insurance requirements ensure referral arrangements that were in place before September 28, 2009 comply with new requirements. Note that any new referral arrangement entered into after September 28, 2009 must comply with the new requirements. 10

12 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Tuesday, September 28, 2010 (12 months from implementation): Firms acting as investment fund managers as of September 28, 2009 must apply for registration in that category and hence must meet all applicable fit and proper requirements. Firms active in the exempt market (that is, that existed as operating entities) as of September 28, 2009 must apply for registration as exempt market dealers and hence must meet all applicable fit and proper requirements. International advisers registered in that category in Ontario as of September 28, 2009 must file a completed Form F2 if they intend to carry on business in Canada under the international adviser exemption. Their registration will be revoked as of September 28, All registered firms as of September 28, 2009 must begin to deliver relationship disclosure to clients. We note that there is no discussion about delivery to existing clients and we intend to seek clarity on this point from the regulators. All registered firms as of September 28, 2009 must satisfy new capital requirements. Representatives of scholarship plan dealers and exempt market dealers must satisfy new proficiency requirements. CCOs of exempt market dealers must meet new proficiency requirements. Wednesday, September 28, 2011 (24 months from implementation): All registered firms must ensure that independent dispute resolution or mediation services are made available to clients to resolve complaints. Mutual fund dealers must comply with new requirements for delivery of client statements. 11

13 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE UNDERSTANDING NATIONAL INSTRUMENT Understanding the new Canadian registration regime and knowing how all the pieces fit together and how they will impact your business is vital. BLG s Investment Management Group has monitored the progress of National Instrument since the CSA first established its formal registration reform project in Our series of advisories - Keeping Reforms in Sight were first published in March 2007 following the publication of the first version of National Instrument and then updated and republished in April 2008 when National Instrument was published for further comment. The second set of our advisories is [available here]. In order to assist our clients in keeping on top of the significant changes to the Canadian regulatory landscape represented by National Instrument , we will be publishing a third series of advisories in our series Keeping Reforms in Sight. These advisories will include an updated National Instrument At a Glance, which will outline the essential features for each registration category, as well as the transition to the new regime. Other advisories will include What s New advisories for each of the key registration categories and an outline of the implications of National Instrument for non-canadian advisers and dealers. We will also provide additional commentary on the impact of the new version of National Instrument Prospectus and Registration Exemptions which was published in final form, also on July 17, 2009, along with a final revised National Instrument Resale of Securities and OSC Rule Ontario Prospectus and Registration Exemptions. Please plan to attend BLG s Symposium on Registration Reform The Finale. The invitation to the Symposium is [available here]. Seminars will be held on August 19 in Toronto, September 10 in Vancouver, September 11 in Calgary and September 15 in Montréal. BLG s registrant regulation and compliance experts will outline what the new Canadian registration regime will mean for you. BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. 12

14 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE This Investment Management Advisory was written by: Prema K.R. Thiele Rebecca A. Cowdery Marsha P. Gerhart If you would like to discuss NI and how it will apply to your business, or if you wish to be added to our distribution list for our series Keeping Reforms in Sight or if you have questions about our Registration Reform Symposium please contact your usual lawyer in BLG s Investment Management Group, the authors of this Advisory or any of the following lawyers: TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart [email protected] [email protected] [email protected] [email protected] VANCOUVER: MONTRÉAL: Jason J. Brooks H. Scott McEvoy François Brais [email protected] [email protected] [email protected] BLG s Investment Management Group leaders are: John E. Hall National Group Leader [email protected] Brad J. Pierce Calgary Regional Leader [email protected] François Brais Montréal Regional Leader [email protected] Jeremy S.T. Farr Ottawa Regional Leader [email protected] Lynn M. McGrade Toronto Regional Leader [email protected] Jason J. Brooks Vancouver Regional Leader [email protected] 13

15 CANADIAN SECURITIES REGULATORS RELEASE FINAL REGISTRATION RULE Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling BLG-LAW1 or ing [email protected] and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at Borden Ladner Gervais LLP O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada

16 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST What s New? NATIONAL INSTRUMENT INVESTMENT DEALERS IIROC MEMBERS The long-anticipated changes to the registration regime under Canada s securities regulation have now been finalized with the release of National Instrument Registration Requirements and Exemptions on July 17, The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule outlines the scope of National Instrument , as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments. Firms registered as investment dealers that are members of the Investment Industry Regulatory Organization of Canada (IIROC) and their representatives (Approved Persons) will not be as affected as other registrants by National Instrument , given the scope of regulation by IIROC. IIROC members have been exempted from some of the rules set out in National Instrument , in recognition that IIROC regulates the area and IIROC members must comply with IIROC rules. In other cases, even where National Instrument applies to IIROC members, the rules are more broadly written and largely consistent with IIROC regulation, so that National Instrument does not impose any greater requirements than what is currently required under IIROC regulation. Amendments to IIROC Rules IIROC published amendments to its rules on July 17, 2009 that are designed to bring those rules into conformity with National Instrument The proposed IIROC

17 rule amendments have not yet been adopted, and are subject to approval by the applicable securities regulatory authorities. If approved, the rule amendments are proposed to be effective on the same date that National Instrument comes into force, being September 28, The IIROC rule amendments are designed to Simplify the categories of Approved Persons. IIROC proposes to reduce the current 46 existing approval categories to 11 new approval categories, which will focus solely on functions. The various supervisor categories also will be merged into a new supervisor category (those approved to supervise the business activities of other approved persons). Have only those individiuals who exercise the mind and management of the IIROC member require approval (i.e. no longer basing required approvals on merely holding an officer position) Move toward a principles-based approach for registration-related requirements to allow IIROC members greater flexibility in developing compliance and supervision structures and processes that are applicable to their business Harmonize the IIROC rules with those of the CSA and Mutual Fund Dealers Association of Canada as much as possible. IIROC members also will be required to comply with new IIROC rules proposed to implement the Client Relationship Model (CRM), which is a related parallel initiative of the Canadian securities regulators, including the self-regulatory organizations. The IIROC proposals regarding CRM include All IIROC members will have to provide their retail clients with certain prescribed information (relationship disclosure) regarding the relationship they are entering into with a client The relationship disclosure to be provided for order-execution only and for managed accounts is less extensive. Managed accounts must be monitored and supervised according to the specific standards imposed under IIROC rules and the relationship disclosure must include a statement that ongoing suitability reviews are provided as part of the managed account services. IIROC does not propose to mandate a prescribed format for the relationship disclosure, however it must be provided to the client in writing at the time of account opening, written in plain language and included under a heading entitled Relationship Disclosure. IIROC is also proposing to supplement its current rules relating to the management of conflicts of interest by 2

18 Requiring that IIROC members develop and maintain policies and procedures to identify, avoid, disclose, and address all real and potential conflicts and Adopting a general rule to require that where conflict situations cannot be avoided, they will be disclosed and addressed in manner that is consistent with the best interests of the client (disclosure should occur at the account opening stage for a new client, as conflicts occur for existing clients, or prior to entering into a transaction with an existing client). In addition to IIROC s current suitability requirements for trades accepted and recommendations made on retail client accounts, it is proposed that IIROC members will also have to perform an account suitability review when the following trigger events occur a trade is accepted a recommendation is made securities are transferred or deposited into the account there is a change of registered representative, investment representative, or portfolio manager responsible for the account or there is a material change to the know-your-client information for the account. The suitability review is intended by IIROC to occur within one day after the IIROC member or its representative becomes aware that one of the trigger events has occurred, and in any case should be completed prior to, or at the time of, any subsequent trade on the account. IIROC is also considering requiring specified disclosures regarding account performance reporting, including security position cost disclosure, account activity disclosure and account percentage return disclosure. Account percentage return disclosure would not be required to be provided to clients, however, clients must be told at account opening whether they will be provided with this disclosure. Recent IIROC Notices re Registration IIROC notice released on June 26, 2009 sets out IIROC registration staff s current approach when conducting suitability reviews for individuals seeking IIROC approval and/or registration and when evaluating termination, regulatory, criminal, civil or financial disclosures filed on NRD. This notice also provides guidance on best hiring practices that IIROC members are encouraged to adopt. 3

19 Impact of National Instrument The following table focuses on certain provisions of National Instrument and explains how they apply to registered investment dealers that are members of IIROC and their representatives. NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Registration A new business trigger regime for dealers No transition period for this new Trigger has been introduced to be consistent with registration trigger - effective immediately. current business trigger regime for advisers. Registration as an investment dealer will depend on an assessment of whether the firm is in the business of trading in securities. Investment dealers must be members of IIROC. Trading and Investment dealers may trade in, and No transition period for this ability to trade Underwriting underwrite, any and all securities. or underwrite - effective immediately. Registration Limited exemptions available from the No transition period for exemptions Exemptions dealer registration requirement e.g. trades effective immediately. relating to dividend reinvestments and trades in specified debt. There are also new registration exemptions that will be available to non-canadian dealers and advisers that carry on business in Canada and, if all conditions are met, will mean that those entities do not need to be registered in Canada. 4

20 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Mobility Exemption From Registration In limited circumstances, investment dealers, and their representatives, will be permitted to continue to deal with clients (and their immediate family members) who move to another province or territory without registering in that other province or territory under a mobility exemption. No transition period for the mobility exemption effective immediately Individual Registration Categories Ultimate Designated Person (UDP) must be the chief executive officer of the firm - responsible for promoting compliance and supervising the activities of the firm that are directed towards ensuring compliance with securities legislation. Investment dealers have a 3-month transition period (to December 28, 2009) in which to appoint and apply for registration of the UDP and CCO. Chief Compliance Officer (CCO) responsible for establishing and maintaining policies and procedures for assessing compliance and for day-to-day monitoring of adherence to policies and procedures. CCOs must report annually to the board of directors. CCOs subject to minimum proficiency requirements established by IIROC. IIROC has indicated that firms may no longer have more than one individual registered as CCO. Individual dealing representatives for an investment dealer must be registered and comply with minimum proficiency requirements set by IIROC. Permitted Individuals Permitted individuals are those individuals who form part of the mind and management of a firm. Under new National Instrument , this is a smaller group than included in the current definition of permitted individual. Permitted individuals must submit, and keep updated, information on NRD. All existing permitted individuals will be converted on NRD during the freezeperiod (September 25 October 12, 2009) to the new category. Those individuals who do not fall within the new definition of permitted individual can be removed from NRD by filing an individual notice of termination, or a bulk submission (for 10 or more individuals) this should be done before December 31, 2009 in order to avoid fees. 5

21 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Proficiency Minimum proficiency requirements for representatives of investment dealers continue to be set by IIROC and will be unchanged by National Instrument N/A Minimum proficiency requirements for the CCO for an investment dealer are set by IIROC and will be unchanged by National Instrument Capital Minimum capital requirements for investment dealers are prescribed by IIROC and will be unchanged by National Instrument N/A Insurance Insurance requirements for investment dealers are based on IIROC requirements and will be unchanged by National Instrument N/A Financial Reporting Financial reporting obligations for an investment dealer are established by IIROC and will be unchanged by National Instrument N/A KYC, Suitability and Relationship Disclosure Investment dealers are exempt from the requirements of National Instrument with respect to account opening, suitability, KYC and relationship disclosure, but must comply with IIROC rules. N/A Record Keeping Maintain records to accurately record business and demonstrate compliance with securities legislation. Records must be kept in a manner that permits access by the regulators in a reasonable period of time and allow regulators to read them. Records must be kept for 7 years from the date created. Records must also be maintained in accordance with IIROC requirements. No transition period for the record keeping requirements - effective immediately. Client Statements Quarterly statements of account required to be provided to each client unless activity in account during a month or client requests monthly statements. No transition period for client statements - effective immediately. 6

22 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Compliance Systems Investment dealers must establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to assure compliance with securities legislation and to manage risks associated with the business in accordance with prudent business practices. No transition period for compliance system requirements - effective immediately. CCO and UDP to have access to the board of directors. Complaint Handling and Dispute Resolution Investment dealers must document and respond to each complaint made to the firm about products or services offered by the firm. Investment dealers must participate in an independent dispute resolution or mediation service. No transition provision for the complaint handling requirement but a two-year transition period (to September 28, 2011) in which to meet dispute resolution or mediation service requirements. Margin/ Extending Credit to Clients Investment dealers are exempt from the prohibition contained in National Instrument on registrants lending money, extending credit and providing margin to clients. This is not a change for existing investment dealers. N/A Conflicts of Interest Investment dealers must make reasonable efforts to identify existing and potential material conflicts of interest and must respond to them. Requirement to provide written disclosure of a conflict of interest where a reasonable client would expect to be informed of the conflict when entering into a proposed transaction. No transition period for these requirements - effective immediately Requirements to disclose prescribed information about trading in securities of related and connected issuers. Referral Arrangements Investment dealers must comply with rules regarding referral arrangements disclosure to clients and written agreement reflecting the arrangements. Six month transition period (to March 28, 2010) in which to meet the referral arrangement requirements. 7

23 This Investment Management Advisory was written by: Julie Hesse (Toronto) Leigh-Ann Ronen (Toronto) BLG s series Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements consists of nine advisories starting with Canadian Securities Regulators Release Final Registration Rule released by our Investment Management Group in July BLG s Investment Management Advisories are available on our website at [click on Publications and then select Capital Markets to search current publications]. Please contact your usual lawyer in BLG s Investment Management Group, the authors of this Advisory or any of the following lawyers to discuss the implications of National Instrument on your business. TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart [email protected] [email protected] [email protected] [email protected] VANCOUVER: CALGARY: MONTRÉAL: Jason J. Brooks H. Scott McEvoy Angie Redecopp François Brais [email protected] [email protected] [email protected] [email protected] BLG s Investment Management Group leaders are: John E. Hall National Group Leader [email protected] Brad J. Pierce Calgary Regional Leader [email protected] François Brais Montréal Regional Leader [email protected] Jeremy S.T. Farr Ottawa Regional Leader [email protected] Lynn M. McGrade Toronto Regional Leader [email protected] Jason J. Brooks Vancouver Regional Leader [email protected] 9

24 BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling BLG-LAW1 or ing [email protected] and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at Borden Ladner Gervais LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada

25 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST What s New? NATIONAL INSTRUMENT MUTUAL FUND DEALERS MFDA MEMBERS The long-anticipated changes to the registration regime under Canada s securities regulation have now been finalized with the release of National Instrument Registration Requirements and Exemptions on July 17, The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule outlines the scope of National Instrument , as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments. Firms registered as mutual fund dealers that are members of the Mutual Fund Dealers Association of Canada (MFDA) and their respective representatives will not be as affected as other registrants by National Instrument , given the scope of regulation by the MFDA. MFDA members have been exempted from some of the rules set out in National Instrument , in recognition that the MFDA regulates the area and MFDA members must comply with MFDA by-laws, rules and policies (MFDA rules). Mutual fund dealers registered in Québec are not required to be members of the MFDA and will remain under the direct supervision of the Autorité des marchés financiers, while their representatives will continue to be required to be members of

26 the Chambre de la sécurité financière. Québec mutual fund dealers and representatives have been exempted from the same rules set out in National Instrument as mutual fund dealers that are members of the MFDA. Amendments to MFDA Rules The MFDA is expected to publish amendments to the MFDA rules, designed to bring the MFDA rules into conformity with National Instrument once National Instrument comes into force. MFDA members also will be required to comply with new MFDA rules proposed to implement the Client Relationship Model (CRM), which is a related parallel initiative of the Canadian securities regulators, including the self-regulatory organizations. The MFDA notice regarding CRM was published on April 24, 2009 and the revised MFDA rules related to CRM were re-published for a 90-day comment period, which ended in July The MFDA proposals regarding CRM include Requirements on a dealer to provide a clear definition of the relationship between the client and the dealer and the rules and responsibilities that each party will assume when an account is opened. Clients must be provided with adequate information regarding the client/dealer relationship at the time the relationship is established in order to allow them to understand the basic obligations of their dealer and what to expect regarding service levels Enhanced dealer responsibilities to ensure that a client s investments remain consistent with the client s needs and objectives Mandatory periodic reporting of account performance to clients Enhanced procedures for discharging dealers supervisory obligations in connection with client accounts. On account opening, all MFDA members and their respective representatives will be required to provide their clients with certain specified information (relationship disclosure) regarding the relationship they are entering into with a client. The MFDA does not propose to mandate a prescribed format for the relationship disclosure which may be provided in one document or several. The MFDA proposes to issue Member Regulation Notices to provide additional guidance as to the level of detail to be set out in the relationship disclosure, the procedures for supervisory review and approval of 2

27 relationship disclosure, the procedures for maintaining evidence of disclosure and the process of account performance reporting (ie., standard industry practices in calculating rates of return). The MFDA has pointed out differences between its CRM proposals and those of the Investment Industry Regulatory Organization of Canada (IIROC), which are intended for registered investment dealers. Some of the differences include differences in the content of relationship disclosure and the requirements for account performance reporting, with the MFDA not proposing to require preparation of customer account cost reports and the same degree of customer account performance information as IIROC. The proposed MFDA rules are expected to be published in final form in the fall of 2009, subject to oversight by the CSA. Impact of National Instrument A mutual fund dealer that acts as an investment fund manager, in addition to its principal business as a mutual fund dealer, must also register as an investment fund manager by the prescribed deadline and comply with the requirements of National Instrument applicable to that category of registrant. A mutual fund dealer that is in the business of trading in securities (other than mutual funds, specified debt or investment vehicles that are not securities) that are or could be distributed pursuant to a prospectus exemption must also register as an exempt market dealer by the prescribed deadline and comply with the requirements of National Instrument applicable to that category of registrant. Finally, if any mutual fund dealer wishes to trade in securities of scholarship plans, it must apply to become registered as a scholarship plan dealer (except in British Columbia, where mutual fund dealers may also trade in scholarship plans). MFDA members must comply with National Instrument and understand its application and implications to their business. The following table focuses on various provisions of National Instrument and explains how they apply to mutual fund dealers that are members of the MFDA and their representatives. 3

28 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Registration Trigger A new business trigger regime for dealers has been introduced to be consistent with current business trigger regime for advisers. Registration as a mutual fund dealer will depend on an assessment of whether the firm is in the business of trading in securities issued by mutual funds. Mutual fund dealers must be members of the MFDA. No transition period for this new registration trigger - effective immediately. Trading Mutual fund dealers may trade securities of any investment vehicle that falls within the definition of mutual fund contained in securities legislation, which includes redeemable pooled or hedge funds, whether or not those securities are prospectus qualified. Mutual fund dealers may also rely on registration exemptions provided for in National Instrument to trade in securities permitted to be traded under those registration exemptions, which include specified debt. No additional registration is required to carry out this trading activity. No transition period for this ability to trade - effective immediately. Underwriting Mutual fund dealers may not underwrite securities. No transition for prohibition effective immediately. Registration Exemptions Limited exemptions available from the dealer registration requirement e.g. trades relating to dividend reinvestments and trades in specified debt. There are also new registration exemptions that will be available to non-canadian dealers and advisers that carry on business in Canada and, if all conditions are met, will mean that those entities do not need to be registered in Canada. No transition period for exemptions effective immediately. Mobility Exemption From Registration In limited circumstances, mutual fund dealers, and their representatives, will be permitted to continue to deal with clients (and their immediate family members) who move to another province or territory without registering in that other province or territory under a mobility exemption. No transition period for the mobility exemption effective immediately. 4

29 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Individual Registration Categories Permitted Individuals Proficiency Ultimate Designated Person (UDP) must be the chief executive officer of the firm - responsible for promoting compliance and supervising the activities of the firm that are directed towards ensuring compliance with securities legislation. Chief Compliance Officer (CCO) responsible for establishing and maintaining policies and procedures for assessing compliance and for day-to-day monitoring of adherence to policies and procedures. CCOs must report annually to the board of directors. CCOs subject to minimum proficiency requirements. Individual dealing representatives for a mutual fund dealer must be registered and comply with minimum proficiency requirements. Permitted individuals are those individuals who form part of the mind and management of a firm. Under new National Instrument , this is a smaller group than included in the current definition of permitted individual. Permitted individuals must submit, and keep updated, information on NRD. Dealing representatives of mutual fund dealers will be required to have passed the Canadian Investment Funds Course Exam, the Canadian Securities Course Exam, or the Investment Funds in Canada Course Exam, or meet the proficiency requirements for an advising representative. CCOs of mutual fund dealers will be required to have passed the Canadian Investment Funds Course Exam, the Canadian Securities Course Exam, or the Investment Funds in Canada Course Exam and the PDO Exam or the Mutual Fund Dealers Compliance Exam, or meet the proficiency requirements for CCOs of portfolio managers. Mutual fund dealers have a 3-month transition period (to December 28, 2009) in which to appoint and apply for registration of the UDP and CCO. All existing permitted individuals will be converted on NRD during the freeze-period (September 25 October 12, 2009) to the new category. Those individuals who do not fall within the new definition of permitted individual can be removed from NRD by filing an individual notice of termination, or a bulk submission (for 10 or more individuals) this should be done before December 31, 2009 in order to avoid fees. Existing registered salespersons and CCOs are grandfathered with respect to proficiency requirements. Newly appointed CCOs of existing registrants, who apply for registration within the 3-month transition period noted above, have a 12-month transition period (to September 28, 2010) in which to obtain the requisite proficiency. 5

30 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Capital Mutual fund dealers exempt from capital requirements under National Instrument provided they comply with the capital requirements prescribed by the MFDA. Not applicable. Insurance Mutual fund dealers exempt from the insurance requirements under National Instrument provided they comply with the insurance requirements prescribed by the MFDA. Not applicable. Financial Reporting Mutual fund dealers exempt from the financial reporting obligations under National Instrument provided they comply with the reporting obligations prescribed by the MFDA. Not applicable. KYC, Suitability and Relationship Disclosure Mutual fund dealers must comply with the KYC requirements set out in National Instrument Mutual fund dealers are exempt from suitability requirements and relationship disclosure requirements under National Instrument provided they comply with the suitability and relationship disclosure requirements prescribed by the MFDA. No transition for new KYC requirements effective immediately. Record Keeping Maintain records to accurately record business and demonstrate compliance with securities legislation. Records must be kept in a manner that permits access by the regulators in a reasonable period of time and allow regulators to read them. Records must be kept for 7 years from the date created. No transition period for the record keeping requirements - effective immediately. Client Statements Quarterly statements of account required to be provided to each client. Two-year transition period for this new requirement to September 28,

31 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Compliance Systems Mutual fund dealers must establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to assure compliance with securities legislation and to manage risks associated with the business in accordance with prudent business practice. No transition period for compliance system requirements - effective immediately. CCO and UDP to have access to the board of directors. Complaint Handling, Dispute Resolution Mutual fund dealers must document and respond to each complaint made to the firm about products or services offered by the firm. Mutual fund dealers must participate in an independent dispute resolution or mediation service. No transition period for the complaint handling requirement but a two-year transition period (to September 28, 2011) in which to meet dispute resolution or mediation service requirements. Extending Credit to Clients Mutual fund dealers are not permitted to lend money, extend credit or provide margin to clients. This is not a change for existing mutual fund dealers. No transition period for this prohibition - effective immediately. Conflicts of Interest Mutual fund dealers must make reasonable efforts to identify existing and potential material conflicts of interest and must respond to them. Requirement to provide written disclosure of a conflict of interest where a reasonable client would expect to be informed of the conflict when entering into a proposed transaction. No transition period for these requirements - effective immediately. Requirements to disclose prescribed information about trading in securities of related and connected issuers. Referral Arrangements Mutual fund dealers must comply with rules regarding referral arrangements disclosure to clients and written agreement reflecting the arrangements, in addition to those prescribed by the MFDA. Six-month transition period (to March 28, 2010) in which to meet the referral arrangement requirements. 7

32 This Investment Management Advisory was written by: Sarah K. Gardiner (Toronto) Neda Bizzotto (Toronto) BLG s series Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements consists of nine advisories starting with Canadian Securities Regulators Release Final Registration Rule released by our Investment Management Group in July BLG s Investment Management Advisories are available on our website at [click on Publications and then select Capital Markets to search current publications]. Please contact your usual lawyer in BLG s Investment Management Group, the authors of this Advisory or any of the following lawyers to discuss the implications of National Instrument on your business. TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart [email protected] [email protected] [email protected] [email protected] VANCOUVER: CALGARY: MONTRÉAL: Jason J. Brooks H. Scott McEvoy Angie Redecopp François Brais [email protected] [email protected] [email protected] [email protected] BLG s Investment Management Group leaders are: John E. Hall National Group Leader [email protected] Brad J. Pierce Calgary Regional Leader [email protected] François Brais Montréal Regional Leader [email protected] Jeremy S.T. Farr Ottawa Regional Leader [email protected] Lynn M. McGrade Toronto Regional Leader [email protected] Jason J. Brooks Vancouver Regional Leader [email protected] 8

33 BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling BLG-LAW1 or ing [email protected] and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at Borden Ladner Gervais LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada

34 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST What s New? NATIONAL INSTRUMENT EXEMPT MARKET DEALERS The long-anticipated changes to the registration regime under Canada s securities regulation have now been finalized with the release of National Instrument Registration Requirements and Exemptions on July 17, The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule outlines the scope of National Instrument , as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments. Firms and individuals that participate in the marketing and sale of securities in the exempt market must be aware of National Instrument and its implications on their securities-related activities, including the requirement for those in the business of trading in securities in reliance on prospectus exemptions to be registered as an exempt market dealer (EMD) in each province and territory in which they carry on their activities. The new EMD registration requirements will have a significant impact on firms involved in the exempt market. For firms not currently registered as limited market dealers (LMD) in Ontario and/or Newfoundland and Labrador, the initial question will be whether their activities will trigger the registration requirements and if so, whether an exemption will be available. Firms and individuals carrying on business in Alberta, British Columbia, Manitoba, Nunavut, the Yukon Territory and the Northwest Territories may, subject to compliance with specified conditions, be exempt from registration as an EMD when they trade in securities that are or could be distributed under the following prospectus exemptions: accredited investor, family, friends and business associates, offering memorandum, and

35 minimum purchase. This exemption from EMD registration will not be available to firms or individuals registered in any category of registration in any Canadian or possibly any non-canadian jurisdiction. This exemption will be subject to other specified conditions, including prohibitions on providing suitability advice about the trade, on providing other financial services to the client (except in British Columbia) and on holding or having access to client assets. In addition, prescribed risk disclosure about dealing with a firm or individual relying on this exemption must be given to clients and notices filed with the regulators. The regulators of these jurisdictions have indicated that they will issue blanket orders shortly providing for this registration exemption. The regulator in Saskatchewan is considering whether or not to also adopt this exemption. The following table focuses on various provisions of National Instrument and explains how they apply to EMDs and their representatives. Firms that are currently registered as LMDs in Ontario and/or Newfoundland and Labrador, and their representatives, will be automatically converted over to the new EMD category in those provinces and will not be required to apply for registration as an EMD. Many of the requirements that apply to EMDs will be new to existing LMDs and for the most part, must be complied with in respect of activities conducted after September 28, This table does not apply to firms entitled to rely on the exemptions from registration that will be provided for by the British Columbia, Alberta, Manitoba and territorial securities regulators. NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Registration Trigger A new business trigger regime for dealers has been introduced to be consistent with current business trigger regime for No transition period for this new registration trigger effective immediately. advisers. Registration as an EMD will depend on an assessment of whether the firm is in the business of trading in securities and the nature of the securities being traded. Existing LMDs will be automatically converted to the EMD category on NRD during the NRD freeze period September 25 October 12, 2009, but only in the provinces where they are registered as LMDs. EMD is a new firm registration category for firms that are in the business of trading in securities that are or could be distributed pursuant to a prospectus exemption. Firms active as dealers in the exempt market (but not registered as an LMD) on September 28, 2009 will have a 12-month transition period (to September 28, 2010) in which to apply for registration as an EMD, EMDs are not required to be members of a self-regulatory organization. unless an exemption is available. Firms must be in compliance with National Instrument at the time of applying for registration. 2

36 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Trading EMDs may trade in any security that has been, or could be distributed pursuant to a prospectus exemption. EMDs may also rely on registration exemptions provided for in National Instrument to trade in securities permitted to be traded under those registration exemptions, which include specified debt. No transition period for this ability to trade effective immediately for registered LMDs/EMDs and non-registered EMDs entitled to rely on the transition period noted above. Underwriting EMDs can only act as an underwriter in respect of prospectus-exempt securities. No transition period for the underwriting restriction effective immediately for registered LMDs/EMDs. Registration Exemptions Limited exemptions available from the dealer registration requirement including for trades relating to dividend reinvestments and trades in specified debt. There are also new registration exemptions which will be available to non-canadian dealers and advisers that carry on business in Canada and, if all conditions are met, will mean that those entities do not need to be registered in Canada. No transition period for exemptions effective immediately. Mobility Exemption From Registration In limited circumstances, EMDs and their representatives will be permitted to continue to deal with clients (and their immediate family members) who move to another province or territory without registering in that other province or territory under a mobility exemption. No transition period for the mobility exemption effective immediately. Individual Registration Categories Ultimate Designated Person (UDP) must be the chief executive officer of the firm - responsible for promoting compliance and supervising the activities of the firm that are directed towards ensuring compliance with securities legislation. Chief Compliance Officer (CCO) responsible for establishing and maintaining policies and procedures for assessing compliance and for day-to-day monitoring of adherence to policies and procedures. CCOs must report annually to the board of directors. CCOs subject to minimum proficiency requirements. Individual dealing representatives for an EMD must be registered and comply with minimum proficiency requirements. An LMD that converts to the EMD category has a 3-month transition period (to December 28, 2009) in which to appoint and apply for registration of the UDP and CCO. An individual who is currently registered as a dealing representative for an LMD will be automatically converted on NRD to be a dealing representative for the firm registered as an EMD during the NRD freeze period September 25 October 12,

37 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Permitted Individuals Permitted individuals are those individuals who form part of the mind and management of a firm. Under new National Instrument , this is a smaller group than included in the current definition of permitted individual. Permitted individuals must submit, and keep updated, information on NRD. All existing permitted individuals will be converted on NRD during the freeze-period to the new category. Those individuals who do not fall within the new definition of permitted individual can be removed from NRD by filing an individual notice of termination, or a bulk submission (for 10 or more individuals) this should be done before December 31, 2009 in order to avoid fees. Proficiency There are minimum proficiency requirements for a dealing representative and for the CCO of an EMD Dealing representative (i) Canadian Securities Course Exam or (ii) Exempt Market Products Exam; or (iii) advising representative proficiency CCO (i) PDO Exam and either, (a) Canadian Securities Course Exam or (b) Exempt Market Products Exam; or (ii) portfolio manager CCO proficiency Existing registered dealing representatives for an LMD that converts to the EMD category, have a 12-month transition period (to September 28, 2010) in which to obtain the requisite proficiency. The registered CCO of an LMD that converts to an EMD who applies for registration within the 3-month transition period noted above, will have a 12-month transition period (to September 28, 2010) in which to obtain the requisite proficiency. New CCOs (not presently registered as such), who apply for registration within 3-month transition period, noted above, will also have the oneyear transition period to comply with new proficiency requirements. Capital $50,000 minimum capital requirement at all times (unless also registered as an investment fund manager, in which case - $100,000). LMDs that convert to the EMD category have a 12-month transition period (to September 28, 2010) in which to meet minimum capital requirements. Insurance Minimum insurance must be maintained and is based on a formula. LMDs that convert to the EMD category have a 6-month transition period (to March 28, 2010) in which to meet minimum insurance requirements. Financial Reporting Annual audited financial statements to be filed within 90 days of year-end along with prescribed form showing calculation of excess working capital. LMDs that convert to the EMD category have no transition period for financial reporting requirements effective immediately. Note: The CSA propose to require all registrants who are not members of IIROC or the MFDA to prepare financial statements in accordance with the International Financial Reporting Standards as of January 1,

38 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) KYC, Suitability and Relationship Disclosure EMDs must collect know-your-client (KYC) information for all clients, excluding other registered firms and financial institutions, and reduced requirements for permitted clients that have given written waiver from suitability requirement LMDs that convert to the EMD category have no transition period for KYC and suitability requirements, which are effective immediately but have a 12-month transition period (to September 28, 2010) in which to meet relationship disclosure requirements. conduct suitability assessments of investments for clients, except for permitted clients that have given written waiver from suitability requirement provide relationship disclosure information to all clients, excluding other registered firms, financial institutions and permitted clients that have given written waiver from relationship disclosure requirement. Record Keeping Maintain records to accurately record business and demonstrate compliance with securities legislation. Records must be kept in a manner that permits access by the regulators in a reasonable period of time and allow regulators to read them. Records must be kept for 7 years from the date created. LMDs that convert to the EMD category have no transition period for the record keeping requirements - effective immediately. Client Statements Quarterly statements of account required to be provided to each client unless activity during a month or a client requests, in which case monthly reporting. LMDs that convert to the EMD category have no transition period for the client statement requirements - effective immediately. Compliance Systems EMDs must establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to assure compliance with securities legislation and to manage risks associated with the business in accordance with prudent business practices. LMDs that convert to the EMD category have no transition period for compliance system requirements - effective immediately. CCO and UDP to have access to the board of directors. 5

39 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Complaint Handling, Dispute Resolution EMDs must document and respond to each complaint made to the firm about products or services offered by the firm. EMDs must participate in an independent dispute resolution or mediation service. LMDs that convert to the EMD category have no transition provision for the complaint handling requirement but have a two-year transition period (to September 28, 2011) in which to meet dispute resolution or mediation service requirements. Extending Credit to Clients EMDs are not permitted to lend money, extend credit or provide margin to clients. This is a change for existing LMDs. LMDs that convert to the EMD category have no transition period for this prohibition - effective immediately. Conflicts of Interest EMDs must make reasonable efforts to identify existing and potential material LMDs that convert to the EMD category have no transition period for these requirements - conflicts of interest and must respond to effective immediately. them. Requirement to provide written disclosure of a conflict of interest where a reasonable client would expect to be informed of the conflict when entering into a proposed transaction. Requirements to disclose prescribed information about trading in securities of related and connected issuers. Referral Arrangements EMDs must comply with rules regarding referral arrangements disclosure to LMDs that convert to the EMD category have a 6- month transition period (to March 28, clients and written agreement reflecting 2010) in which to meet the referral the arrangements. arrangement requirements. 6

40 This Investment Management Advisory was written by: Marsha P. Gerhart (Toronto) Jason J. Brooks (Vancouver) William J. E. Jones (Toronto) BLG s series Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements consists of nine advisories starting with Canadian Securities Regulators Release Final Registration Rule released by our Investment Management Group in July BLG s Investment Management Advisories are available on our website at [click on Publications and then select Capital Markets to search current publications]. Please contact your usual lawyer in BLG s Investment Management Group, the authors of this Advisory or any of the following lawyers to discuss the implications of National Instrument on your business. TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart [email protected] [email protected] [email protected] [email protected] VANCOUVER: CALGARY: MONTRÉAL: Jason J. Brooks H. Scott McEvoy Angie Redecopp François Brais [email protected] [email protected] [email protected] [email protected] BLG s Investment Management Group leaders are: John E. Hall National Group Leader [email protected] Brad J. Pierce Calgary Regional Leader [email protected] François Brais Montréal Regional Leader [email protected] Jeremy S.T. Farr Ottawa Regional Leader [email protected] Lynn M. McGrade Toronto Regional Leader [email protected] Jason J. Brooks Vancouver Regional Leader [email protected] 7

41 BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling BLG-LAW1 or ing [email protected] and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at Borden Ladner Gervais LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada

42 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST What s New? NATIONAL INSTRUMENT ADVISERS PORTFOLIO MANAGERS The long-anticipated changes to the registration regime under Canada s securities regulation have now been finalized with the release of National Instrument Registration Requirements and Exemptions on July 17, The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule outlines the scope of National Instrument , as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments. Those firms that are in the business of advising others in securities will be required to be registered as an adviser, in the category of portfolio manager (unless they seek registration as a restricted portfolio manager). Portfolio managers that act as managers of investment funds must also become registered in the new category of registrant investment fund manager. Portfolio managers that also are in the business of trading in securities, in addition to their principal business as portfolio managers, must also be registered as a dealer, unless they are entitled to rely on an available exemption. Portfolio managers registered in more than one category of registration must comply with the requirements of National Instrument applicable to each category of registrant. Firms acting as portfolio managers, whether located in Canada or not and including those that are registered in other categories, must be aware of National Instrument and its implications. The following table focuses on the various provisions of National Instrument that apply to portfolio managers and explains how they apply to these registrants.

43 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Registration Trigger If a firm is in the business of advising in securities, then it must be registered as an adviser (portfolio manager or restricted portfolio manager). The category of investment counsel has been eliminated. Advisers are not required to be members of a self-regulatory organization. No transition period for this registration trigger - effective immediately. Registration Exemptions Dealer Registration Exemption for Proprietary Pooled Funds Registration exemptions include exemptions for a person or a company that provides advice that does not purport to be tailored to the needs of the person or company receiving the advice (for example, through an investment newsletter or website), provided specified disclosures are given. The Ontario registration category of international adviser, and its equivalent in other jurisdictions, has effectively been replaced by an exemption for a non-canadian adviser that provides advice on foreign securities, or Canadian issuers if the advice is incidental to its providing advice on a foreign security. The look through theory of registrable activity that, before National Instrument , in certain provinces resulted in the determination that a non-candian adviser needed to be registered in circumstances where it advised a non-canadian investment fund whose securities were distributed in Canada, has been eliminated. The sub-adviser exemption that would have permitted non-canadian advisers to be subadvisers to Canadian registrants without registration, contained in previous drafts of National Instrument has been removed from the final version pending further review of the exemption. The current sub-adviser exemption contained in OSC Rule Non-Resident Advisers will be retained in Ontario and discretionary relief will continue to be available in other jurisdictions. Advisers with their own non-prospectused pooled funds will be able to trade securities of the funds to the managed account of a client of the adviser without having to become registered as an exempt market dealer provided the adviser acts as the fund s adviser and investment fund manager. No transition period for exemptions effective immediately. A firm intending to rely on the international adviser registration exemption must file a completed Form F2 with the regulators of those provinces and territories where it intends to provide advice. An Ontario registered international adviser and an Alberta portfolio manager/investment counsel (foreign) have a 12-month transition period (to September 28, 2010) in which to decide whether to seek full registration as an adviser or rely on the international adviser exemption. Equivalent registrants in British Columbia also are expected to have a similar transition period. No transition period for exemptions effective immediately. Prescribed notice to the regulators of the jurisdictions where the adviser operates is required within 7 days of the adviser s first use of this exemption. For advisers relying on this exemption on September 28, 2009, this notice must be provided by October 6,

44 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Mobility Exemption from Registration In limited circumstances, advisers will be permitted to continue to advise clients (and their immediate family members) who move to another province or territory without registering in that other province or territory under a mobility exemption. No transition period for the mobility exemption effective immediately. Individual Registration Categories Ultimate Designated Person (UDP) must be the chief executive officer of the firm - responsible for promoting compliance and supervising the activities of the firm that are directed towards ensuring compliance with securities legislation. Chief Compliance Officer (CCO) responsible for establishing and maintaining policies and procedures for assessing compliance and for day-to-day monitoring of adherence to policies and procedures. CCOs must report annually to the board of directors. CCOs subject to minimum proficiency requirements. Associate Advising Representative primarily intended to be an apprentice category for individuals who are working toward full adviser registration but do not yet fully meet all the experience or education requirements. An associate advising representative must be supervised by an advising representative who has been designated by the registered firm to review and approve the advice provided by the associate. Advisers have a 3-month transition period (to December 28, 2009) in which to appoint and apply for registration of the UDP and CCO. An adviser must provide its principal regulator with the names of those designated to supervise the advice given by associate advising representatives. This notice must be given within 7 days following the date of designation. This means that unless this information was provided prior to National Instrument coming into force in respect of any associate advising representatives, firms must give their principal regulator this required notice by October 6, Individual advising representatives must also continue to be registered. Permitted Individuals Permitted individuals are those individuals who form part of the mind and management of a firm. Under new National Instrument , this is a smaller group than included in the current definition of permitted individual. Permitted individuals must submit, and keep updated, information on NRD. All existing permitted individuals will be converted on NRD during the freeze-period (September 25 October 12, 2009) to the new category. Those individuals who do not fall within the new definition of permitted individual can be removed from NRD by filing an individual notice of termination, or a bulk submission (for 10 or more individuals) this should be done before December 31, 2009 in order to avoid fees. 3

45 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Proficiency CCOs of a portfolio manager will be required to (i) have earned a CFA Charter or professional designation as a lawyer, CA, CGA or CMA, a notary in Québec, or the equivalent in a foreign jurisdiction, passed the Canadian Securities Course Exam and the PDO Exam and have either gained 36 months of relevant securities experience while working at an investment dealer, a registered adviser or an investment fund manager, or provided professional services in the securities industry for 36 months and worked at a registered dealer, a registered adviser or an investment fund manager for 12 months; (ii) have passed the Canadian Securities Course Exam and the PDO Exam and have either worked at an investment dealer or a registered adviser for 5 years; including for 36 months in a compliance capacity, or worked for 5 years at a Canadian financial institution in a compliance capacity relating to portfolio management and worked at a registered dealer or a registered adviser for 12 months; or (iii) have passed the PDO Exam and met the proficiency requirements for registration as an advising representative of a portfolio manager. Existing registered advising representatives, associate advising representatives and CCOs are grandfathered with respect to proficiency requirements. Newly appointed CCOs for existing registrants, who apply for registration within 3 months of date that National Instrument comes into force, have a 12-month transition period (to September 28, 2010) in which to obtain the requisite proficiency. An advising representative of a portfolio manager will be required to have (i) the CFA Charter and 12 months of relevant investment management experience in the 36-month period before applying for registration; or (ii) have the CSI Global s Canadian Investment Manager designation and 48 months of relevant investment management experience, 12 months of which was in the 36-month period before applying for registration. An associate advising representative of a portfolio manager will be required to have (i) completed Level 1 of the CFA program and 24 months of relevant investment management experience; or (ii) received the Canadian Investment Manager designation and 24 months of relevant investment management experience. 4

46 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Capital Minimum working capital for an adviser not also registered in another category is $25,000. If a firm is registered in more than one category, it must meet the highest capital requirement of its categories of registration. Exemption available for a firm that is registered as an adviser and also as an investment fund manager, where it qualifies for a dealer registration exemption to allow it to trade securities of non-prospectus qualified pooled funds managed by the firm to managed accounts. In this circumstance, the minimum working capital remains at the adviser level of $25,000. Registered advisers on date that National Instrument comes into force that must also be registered as an investment fund manager will have 12 months to comply with investment fund manager working capital requirements (to September 28, 2010). Insurance Insurance requirements depend upon whether the adviser holds or has access to client assets. Advisers that do not hold or have access to client assets must maintain bonding or insurance in respect of enumerated clauses in the amount of $50,000 for each clause. Registered advisers on date that National Instrument comes into force will have 6 months to comply with new insurance requirements (to March 28, 2010). Advisers that hold or have access to client assets must maintain bonding or insurance in respect of each enumerated clause and in the highest of the following amounts for each clause: one percent of assets under management that the adviser holds or has access to, or $25,000,000, whichever is less; one percent of the adviser s total assets, or $25,000,000, whichever is less; $200,000; the amount determined to be appropriate by a resolution of the adviser s directors. Auditor Appoint an auditor and direct the auditor, in writing, to conduct any audit or review required by the regulator. File copy of this direction within 7 days of any change in auditor. This is not new for registered advisers. No transition period for auditor requirement effective immediately 5

47 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Financial Reporting Annual audited financial statements to be filed within 90 days of year-end along with prescribed form showing calculation of excess working capital. No transition period for financial reporting requirements effective immediately. Note: The CSA propose to require all registrants who are not members of IIROC or the MFDA to prepare financial statements in accordance with the International Financial Reporting Standards as of January 1, KYC, Suitability and Relationship Disclosure Advisers must collect know-your-client (KYC) information for all clients, excluding other registered firms and financial institutions, with reduced requirements for permitted clients that have given written waiver from suitability requirement. KYC information should be periodically updated to ensure that ongoing suitability determinations are supportable No transition period for KYC and suitability requirements, which are effective immediately but a 12-month transition period (to September 28, 2010) in which to meet relationship disclosure requirements. conduct suitability assessment of investments for clients, except for permitted clients that have given written waiver from suitability requirement (not applicable to managed accounts); and provide relationship disclosure information to all clients, excluding other registered firms and financial institutions, and permitted clients that have given written waiver from relationship disclosure requirement (not applicable to managed accounts). Record Keeping Maintain records to accurately record business and demonstrate compliance with securities legislation. Records must be kept in a manner that permits access by the regulators in a reasonable period of time and allow regulators to read them. Records must be kept for 7 years from the date created. No transition period for the record keeping requirements - effective immediately. 6

48 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Client Statements Quarterly statements of account required to be provided to each client unless client No transition period for client reporting - effective immediately. requests other reporting. Client Assets Client assets must be held in trust, segregated from adviser's own property and No transition for safekeeping and custody requirements - effective immediately. in accordance with safekeeping requirements. This is not new for advisers. Compliance Systems Advisers must establish, maintain and apply policies and procedures that establish No transition period for compliance system requirements - effective immediately. a system of controls and supervision sufficient to assure compliance with securities legislation and to manage risks associated with the business in accordance with prudent business practices. CCO and UDP to have access to board of directors. Complaint Handling, Dispute Resolution Advisers must document and respond to each complaint made to the firm about products or services offered by the firm. No transition provision for the complaint handling requirements but a 24-month transition period (to September 28, 2011) in which to meet dispute resolution or Advisers must participate in an mediation service requirements. independent dispute resolution or mediation service. Extending Credit to Clients Advisers are not permitted to lend money, extend credit or provide margin to clients. This is not a change for advisers. No transition period for this prohibition - effective immediately. 7

49 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Conflicts of Interest Advisers must make reasonable efforts to identify existing and potential material No transition period for these requirements and restrictions - effective conflicts of interest and must respond to immediately. them. Requirement to provide written disclosure of a conflict of interest when there is a reasonable likelihood that the client would consider the conflict important when entering into a proposed transaction. Requirements to disclose prescribed information about advising on securities of related and connected issuers. Advisers are restricted in carrying out certain specified self-dealing transactions for investment portfolios managed by them, including managed accounts and investment funds. Restrictions are intended to replace prohibitions presently contained in securities legislation. CSA indicate their views that the new provision is intended to prohibit inter-fund trading, including crosses placed through registered dealers. Allocation of Investments Advisers must ensure fairness in allocating investment opportunities among clients, No transition for fairness policies and client disclosure requirements - effective have policies that provide for this and immediately. provide specified disclosure to clients about fairness policies. Fairness policies are not new for advisers, but the client disclosure requirements have changed. Referral Arrangements Advisers must comply with rules regarding referral arrangements disclosure to clients Six month transition period (to March 28, 2010) in which to meet the referral and written agreement reflecting the arrangement requirements. arrangements. 8

50 This Investment Management Advisory was written by: H. Scott McEvoy (Vancouver) Kyle S. Pohanka (Toronto) BLG s series Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements consists of nine advisories starting with Canadian Securities Regulators Release Final Registration Rule released by our Investment Management Group in July BLG s Investment Management Advisories are available on our website at [click on Publications and then select Capital Markets to search current publications]. Please contact your usual lawyer in BLG s Investment Management Group, the authors of this Advisory or any of the following lawyers to discuss the implications of National Instrument on your business. TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart [email protected] [email protected] [email protected] [email protected] VANCOUVER: CALGARY: MONTRÉAL: Jason J. Brooks H. Scott McEvoy Angie Redecopp François Brais [email protected] [email protected] [email protected] [email protected] BLG s Investment Management Group leaders are: John E. Hall National Group Leader [email protected] Brad J. Pierce Calgary Regional Leader [email protected] François Brais Montréal Regional Leader [email protected] Jeremy S.T. Farr Ottawa Regional Leader [email protected] Lynn M. McGrade Toronto Regional Leader [email protected] Jason J. Brooks Vancouver Regional Leader [email protected] 9

51 BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling BLG-LAW1 or ing [email protected] and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at Borden Ladner Gervais LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada

52 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST What s New? NATIONAL INSTRUMENT INVESTMENT FUND MANAGERS The long-anticipated changes to the registration regime under Canada s securities regulation have now been finalized with the release of National Instrument Registration Requirements and Exemptions on July 17, The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule outlines the scope of National Instrument , as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments. National Instrument introduces a new category of registration in each Canadian province and territory: investment fund manager. This registration category will apply to managers of all types of investment funds managed in Canada, whether reporting issuers or not, including mutual funds, pooled funds, closed-end funds, exchange-traded funds and hedge funds. The question of where an investment fund manager will be required to be registered has been clarified somewhat in the final version of National Instrument An investment fund manager must apply for registration (for existing fund managers, by September 28, 2010) in its principal jurisdiction, which will be the province or territory where its head office is located. National Instrument gives an investment fund manager a two-year exemption from having to register in any other jurisdiction, if it applies for registration and becomes registered in its principal jurisdiction. Similarly, an investment fund manager that distributes its funds in Canada, but does not manage the funds or have its head office in Canada, will not be required to register in Canada for at least another two-year period (until September 28, 2011). The CSA indicate that they intend to publish an amendment to National

53 Instrument for comment, during the next year that will explain under what circumstances a fund manager will need to register in more than one Canadian province or territory and under what circumstances a fund manager with its head office outside Canada would need to register. An investment fund manager that also is in the business of trading in securities, in addition to its principal business as an investment fund manager, must be registered as a dealer, in which case it must also comply with the requirements of National Instrument applicable to that category of registrant. An investment fund manager that carries out wholesaling activities with registered dealers in the course of promoting its funds, generally will not have to be registered as a dealer, unless it also trades in securities of the funds directly with investors. Investment fund managers that are in the business of trading in securities that are or could be distributed pursuant to a prospectus exemption must register as an exempt market dealer by the prescribed deadlines and comply with the requirements of National Instrument applicable to that category of registrant. Similarly, an investment fund manager that is in the business of advising others in securities (that is, acting as a portfolio manager) must be registered as a portfolio manager, in which case it must also comply with the requirements of National Instrument applicable to that category of registrant. Firms acting as investment fund managers, including those that are registered in other categories, must be aware of National Instrument and its implications. The following table focuses on the various provisions of National Instrument that apply to investment fund managers and explains how they apply to these registrants. NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Registration Trigger If a firm is acting as an investment fund manager then it must be registered as an investment fund manager. There is no concept of being in the business of acting as an investment fund manager. Note that securities legislation in most provinces and territories defines investment fund manager as a person or company that directs the business, operations or affairs of an investment fund. Securities legislation also defines investment fund to include nonredeemable investment funds and mutual funds. This includes investment funds offered by prospectus and those whose securities are distributed under prospectus exemptions. Investment fund managers are not required to be members of a self-regulatory organization. Investment fund managers active as of September 28, 2009 have one year to apply for registration in their principal jurisdiction September 28, May be required to apply for registration in other provinces and territories by September 28, 2011 (dependent on CSA proposals). Investment fund managers that are newly established after September 28, 2009 must apply for registration and obtain registration as an investment fund manager before commencing any fund management activities. Investment fund managers that do not manage funds in Canada and/or do not have a head office in Canada, may be required to apply for registration in a Canadian province or territory by September 28, 2011 (dependent on CSA proposals). 2

54 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Registration Exemptions Limited exemptions from investment fund manager registration for managers of specific types of investment funds, including funds operated as investment clubs, or a loan and trust pool administered by a registered trust company. Also, an exemption from investment fund manager registration granted to managers of investment funds that are investment options for capital accumulation plans (and that are not otherwise made available to other investors). No transition period for exemptions effective immediately. Individual Registration Categories Ultimate Designated Person (UDP) must be the chief executive officer of the firm - responsible for promoting compliance and supervising the activities of the firm that are directed towards ensuring compliance with securities legislation. UDPs and CCOs must be appointed and apply for registration (and CCOs comply with the proficiency requirements) by the time the firm applies for registration (deadline: September 28, 2010). Chief Compliance Officer (CCO) responsible for establishing and maintaining policies and procedures for assessing compliance and for day-to-day monitoring of adherence to policies and procedures. CCOs must report annually to the board of directors. CCOs subject to minimum proficiency requirements. No other individual must be registered as a representative of an investment fund manager. Permitted Individuals Permitted individuals are those individuals who form part of the mind and management of a firm. Under new National Instrument , this is a smaller group than included in the current definition of permitted individual. Permitted individuals must submit, and keep updated, information on NRD. Permitted individuals must submit the prescribed information with the initial application for registration of the firm as an investment fund manager (deadline: September 28, 2010). 3

55 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Proficiency CCOs of investment fund managers will be required to have (i) earned a CFA Charter or a professional designation as a lawyer, CA, CGA, or CMA, a notary in Québec, or the equivalent in a foreign jurisdiction, passed the Canadian Securities Course Exam and the PDO Exam, and either worked for an investment fund manager, registered dealer or registered adviser for 36 (nonconsecutive) months, or provided professional services in the securities industry for 36 (non-consecutive) months and worked in a relevant capacity at an investment fund manager for 12 (nonconsecutive) months, or (ii) passed the Canadian Investment Funds Course Exam, the Canadian Securities Course Exam, or the Investment Funds in Canada Course Exam, passed the PDO Exam, and worked for an investment fund manager, registered dealer or registered adviser for five (nonconsecutive) years, including for 36 (nonconsecutive) months in a compliance capacity or (iii) meet the proficiency requirements for CCOs of portfolio managers. CCOs must comply with the proficiency requirements by the time the firm applies for registration (deadline: September 28, 2010). No other representative is required to be registered (other than the UDP) or have specified proficiency. Capital Minimum working capital of $100,000. Exemption available for a firm that is also registered as an adviser, where it qualifies for a dealer registration exemption to allow it to trade securities of non-prospectus qualified investment funds managed by the firm to managed accounts. In this circumstance, the minimum working capital remains at the adviser level of $25,000. Firm must have required capital by the time it applies for registration as investment fund manager (deadline: September 28, 2010). Registered dealers and advisers that also act as investment fund managers on the date that National Instrument comes into force will have 12 months to comply with investment fund manager working capital requirements (to September 28, 2010). 4

56 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Insurance Bonding or insurance that contains certain clauses and provides for double aggregate limit or a full reinstatement of coverage with a single loss limit in the greater of: (a) 1% of assets under management or $25,000,000, whichever is less; (b) 1% of the manager s total assets or $25,000,000, whichever is less; (c) $200,000; or (d) the amount the directors of the fund manager determine to be appropriate. Firm must have required insurance in place by the time it applies for registration as investment fund manager (deadline: September 28, 2010). Registered dealers and advisers that also act as investment fund managers on the date that National Instrument comes into force will have 12 months to comply with investment fund manager insurance requirements (to September 28, 2010). Auditor Appoint an auditor for fund manager and direct the auditor, in writing, to conduct any audit or review required by the regulator. File copy of this direction with registration package and within 7 days of any change in auditor. Firm must have appointed an auditor by the time it applies for registration as investment fund manager (deadline: September 28, 2010). Financial Reporting Annual audited financial information to be filed within 90 days of year-end, along with prescribed form showing calculation of excess working capital. Quarterly unaudited financial information to be filed within 30 days after quarter end, along with prescribed form showing calculation of excess working capital. Also an annual report and a quarterly report describing any net asset value adjustment made during the period must be filed with the applicable financial information. Investment fund managers may use the IFIC error correction standards in determining whether or not there has been a material error in calculating net asset value, but must have policies in place that clearly define what constitutes a material error and set out what will be done to correct material errors. Effective once firm is registered as an investment fund manager. Note: The CSA propose to require all registrants who are not members of IIROC or the MFDA to prepare financial statements in accordance with the International Financial Reporting Standards as of January 1,

57 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Record Keeping An investment fund manager must maintain records to accurately record its business and demonstrate compliance with securities legislation. Records must be kept in a manner that permits access by the regulators in a reasonable period of time and allow regulators to read them. Records must be kept for 7 years from the date created. Effective once firm is registered as an investment fund manager. Client Statements Investment fund managers not required to do any client reporting. N/A Client Assets Client assets must be held in trust, segregated from investment fund manager s own property. Cash held on behalf of a client (for example, pending subscription in a fund), must be held in a designated trust account with specified types of financial institutions. Effective once firm is registered as an investment fund manager. Compliance Systems Investment fund managers must establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to assure compliance with securities legislation and to manage risks associated with the business in accordance with prudent business practices. Effective once firm is registered as an investment fund manager, however, at the time of application for registration, firm must provide a copy of written compliance manual. Deadline for application: September 28, CCO and UDP to have access to board of directors. Complaint Handling and Dispute Resolution Investment fund managers are exempt from the complaint handling and dispute resolution requirements. N/A 6

58 NI Commentary Transition effective immediately means September 28, 2009 (NI expected to be in force on September 28, 2009) Conflicts of Interest Investment fund managers must make reasonable efforts to identify existing and Effective once firm is registered as an investment fund manager. potential material conflicts of interest and must respond to them. Requirement to provide written disclosure of a conflict of interest where a reasonable client would expect to be informed of the conflict when entering into a proposed transaction. The conflicts of interest requirements primarily apply to investment fund managers of investment funds that are not subject to National Instrument , i.e. funds that are not reporting issuers, like hedge funds and pooled funds. Managers of funds that are reporting issuers (and so governed by National Instrument ) are exempt from these requirements. Referral Arrangements Investment fund managers must comply with rules regarding referral arrangements Effective once firm is registered as an investment fund manager. disclosure to clients and written agreement reflecting the arrangements. 7

59 This Investment Management Advisory was written by: Kathryn M. Fuller (Toronto) Francesca F. Smirnakis (Toronto) BLG s series Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements consists of nine advisories starting with Canadian Securities Regulators Release Final Registration Rule released by our Investment Management Group in July BLG s Investment Management Advisories are available on our website at [click on Publications and then select Capital Markets to search current publications]. Please contact your usual lawyer in BLG s Investment Management Group, the authors of this Advisory or any of the following lawyers to discuss the implications of National Instrument on your business. TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart [email protected] [email protected] [email protected] [email protected] VANCOUVER: CALGARY: MONTRÉAL: Jason J. Brooks H. Scott McEvoy Angie Redecopp François Brais [email protected] [email protected] [email protected] [email protected] BLG s Investment Management Group leaders are: John E. Hall National Group Leader [email protected] Brad J. Pierce Calgary Regional Leader [email protected] François Brais Montréal Regional Leader [email protected] Jeremy S.T. Farr Ottawa Regional Leader [email protected] Lynn M. McGrade Toronto Regional Leader [email protected] Jason J. Brooks Vancouver Regional Leader [email protected] 8

60 BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling BLG-LAW1 or ing [email protected] and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at Borden Ladner Gervais LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada

61 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST 2009 NATIONAL INSTRUMENT IMPACT ON THE HEDGE FUND INDUSTRY The long-anticipated changes to the registration regime under Canada s securities regulation have now been finalized with the release of National Instrument Registration Requirements and Exemptions on July 17, Touted by the media as a hedge fund rule, National Instrument is considerably more far-reaching in scope and effect. Managers of hedge funds 1 are just one group of securities industry market participants that will be affected by the new registration regime. The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule outlines the scope of National Instrument , as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments. Although the CSA indicate that they have made no material changes to the final version of National Instrument (from the previously published draft which would have necessitated an additional comment period), the devil is in the details, and many of the details have been tweaked. As well, transitional provisions for meeting the new registration, proficiency, capital and insurance requirements have now been provided. This Investment Management Advisory summarizes the impact that National Instrument will have on the hedge fund industry and the timelines for implementation of the new requirements. 1 Privately offered investment funds are colloquially referred to as hedge funds, regardless of their investment mandate and, in this Advisory, the term hedge fund is intended to capture all privately offered investment funds.

62 National Instrument expands and further clarifies existing regulation of hedge fund managers, advisers (portfolio managers) and distributors by Introducing a new category of registration for investment fund managers Introducing the registration category of exempt market dealer across Canada, except in certain provinces and the territories where exemptions will be available for purely local market participants Introducing the business trigger test for dealers for determining when registration is required Increasing capital and insurance requirements for some categories of registration Changing proficiency requirements for individual registrants Enhancing compliance and supervisory expectations Governing referral arrangements Requiring specific client complaint handling procedures, including dispute resolution Changes in financial reporting requirements. At the same time, National Instrument eliminates the registration requirement for non-canadian advisers and dealers who provide services to certain institutions and ultra-high net worth individuals, provided specified conditions are followed. There will be some grandfathering of individuals registered under the current regime. Transitional provisions give existing registrants and unregistered market participants as much as two years to comply with certain provisions of National Instrument New market participants starting operations after September 28, 2009 will not benefit from these transitional rules. Registration of Investment Fund Managers The new registration category of investment fund manager will apply to Canadian managers of all investment funds, including hedge funds and retail mutual funds. Individuals who act as the investment fund manager s chief compliance officer and ultimate designated person must also register. Investment fund manager is defined in applicable securities regulation as a person or company that directs the business, operations or affairs of an investment fund. The term investment fund includes all redeemable mutual funds and non-redeemable investment funds, whether established as a corporation, trust or limited partnership, formed for the purpose of pooling investors money in order to make investments in securities. This category of registration will capture, for example, general partners of hedge funds organized as limited partnerships unless they delegate management duties to a registered investment fund manager. Pure private equity fund managers, whose mandate is to exercise control over or to participate in management of investee companies, are not intended to be caught by this registration requirement. 2

63 Capital, insurance, and operational requirements apply to an investment fund manager, and proficiency requirements apply to its chief compliance officer, but an investment fund manager that is active on September 28, 2009, will have the benefit of transitional provisions, as discussed below. An investment fund manager will be required to register in the province or territory where its head office is located, but if it is active as of September 28, 2009, it will have a one year transition period (to September 28, 2010) in which to apply for registration in that province or territory. An investment fund manager will have a two-year transition period (to September 28, 2011) in which to apply for registration in each of the other provinces and territories where it has operations. Similarly, investment fund managers that do not have a head office in Canada will not have to be registered under National Instrument for at least two years, but may still be required to pay market participation fees in Ontario. During this two-year transition period, the CSA expect to publish for comment amendments to National Instrument that will outline whether and where investment fund managers will be required to register in addition to the province or territory where their head office is located. Registration of Exempt Market Dealers National Instrument introduces a new registration category for dealers - exempt market dealer - that will replace the limited market dealer (LMD) category in Ontario and Newfoundland and Labrador and will apply across Canada. Hedge fund managers will have to register as an exempt market dealer in every province and territory where they wish to market and sell their funds, unless they engage a dealer that is registered in the prospective purchaser s province or territory. Each officer and employee of a registered exempt market dealer that carries out the trading activities for the firm, and the firm s chief compliance officer and ultimate designated person, must also be registered. Firms and individuals resident in Alberta, British Columbia, Manitoba, the Northwest Territories, Nunavut and the Yukon Territory, and possibly Saskatchewan, may be exempted from the exempt market dealer registration requirement, but only in very limited circumstances, including where they are not registered in any other category anywhere in Canada. Unlike LMDs, a registered exempt market dealer will be subject to minimum capital and insurance as well as proficiency requirements for its dealing representatives and its chief compliance officer. Exempt market dealers will be subject to know-your-client and suitability requirements, except in respect of trades to permitted clients who waive those requirements. Permitted clients include certain institutional investors such as banks and trust companies, government agencies, pension plans, registrants, advisers acting on behalf of managed accounts, investment funds managed or advised by a registrant, individuals with more than $5 million in financial assets and companies with net assets of at least $25 million. Existing registered LMDs will automatically be converted to the new exempt market dealer category and, although there will be a transition period before the new capital, insurance and proficiency requirements 3

64 must be met, those firms will have to comply with many of the new provisions aimed at prudent business practice, as soon as National Instrument comes into force. Registration of Portfolio Managers National Instrument will continue the current regime of requiring all advisers to register in each province and territory where they provide advice, but in one of only two categories: portfolio manager or restricted portfolio manager. In this context, advisers are persons who engage in, or hold themselves out as engaging in, the business of advising others as to the investing in or buying or selling of securities. Portfolio managers will not be limited as to their advising activities. Some provinces, such as Québec and Ontario, will continue to maintain a parallel regulatory regime for advising and trading in exchange-traded commodities and futures, and separate registration will be required for those activities. As the name suggests, restricted portfolio managers will be subject to conditions of registration that limit their advising activities (for example, they may be limited to advising in respect of a specific type of security or in respect of securities of issuers within a specific industry). Officers and employees of a registered adviser that carry out the advising activities, as well as the chief compliance officer and ultimate designated person of the firm, must be registered. There are capital, insurance, proficiency and conduct requirements for advisers under National Instrument , in many instances with higher thresholds than under existing regulations. Permitted Individuals Although not required to register, directors and senior officers of a registrant firm that do not themselves conduct registrable activities must nonetheless provide information to the regulators as permitted individuals, but the universe of individuals required to be designated as permitted individuals is smaller under the new registration regime than before. Registration Requirements and the Business Trigger Only advisers and dealers that are in the business of advising or trading will be required to register. As a result, many firms currently registered as LMDs, for example, only because their activities fall within a very broad definition of trading, may not be required to register under National Instrument To determine whether a particular firm or individual is in the business, the regulators will look at factors such as whether the firm is paid for its activities, whether the firm is acting as an intermediary and whether the firm or individuals actively solicit clients. There is no such business trigger test for investment fund managers. Firms that act as investment fund managers must register. Capital and Insurance Requirements The new capital and insurance requirements of National Instrument are certain to have a significant impact on many hedge fund industry participants. Minimum capital required for investment fund managers will be $100,000; for dealers $50,000; and for portfolio managers $25,000. Minimum working capital will be adjusted upward to reflect deductibles under required insurance policies, guarantees provided by the firm, unresolved differences (for example disputed settlements of purchase or sales of securities) and margin rates on securities owned by the firm and counted as current assets. For firms registered in more than one category, these minimums are not cumulative. Existing registrants will have a one-year transition period before being required to meet the increased capital requirements. 4

65 Insurance or bonding requirements will also increase for firms with significant assets or assets under management, based on a formula, from a minimum of $50,000 to as much as $25,000,000. National Instrument specifies the types and level of insurance or bonding required. Existing regisrants will have a six-month transition period before being required to meet the new insurance requirements. Proficiency Requirements Dealing representatives of exempt market dealers will be required to have passed the Canadian Securities Course Exam (or the equivalent U.S. courses), the Exempt Market Products Exam (which is new), or meet the requirements of an advising representative of a portfolio manager. Chief compliance officers for registrant firms must meet specified educational and experience requirements (for example, a lawyer or accountant would qualify if they passed the Canadian Securities Course Exam and the PDO Exam and had 36 months of relevant experience in the industry). Advising representatives of a portfolio manager will qualify with a full CFA charter and one year of relevant experience, or the Canadian Investment Management designation and four years of relevant experience, which appears at first blush to ease the current requirements. An individual can be registered as an associate advising representative with the Canadian Investment Management designation or Level 1 of the CFA program, plus 24 months of relevant experience, but an individual with only Level 1 of the CFA program will no longer be upgraded to full advising representative status merely with the passage of time. An advising representative may be designated as the chief compliance officer of a portfolio manager if he or she has passed the PDO Exam. Compliance National Instrument emphasizes that compliance is not the sole responsibility of the ultimate designated person or the chief compliance officer but that compliance is a firm-wide responsibility. A registered firm will be required to establish and enforce a system of controls and supervision that ensures the firm s compliance with all applicable requirements and that manages the risks to which the business is subject. This system of controls must be documented in the form of written policies and procedures. The registered firm will also be required to ensure that its compliance monitoring and supervision policies and procedures take into account conflicts of interest management issues. Some exemptions from these compliance rules are available to registrants that deal with permitted clients, but only in very limited circumstances. Delegation National Instrument recognizes that many fund management duties, for example back office administration, are delegated to third party service providers. All registrant firms will be required to conduct appropriate due diligence on all such service providers and to regularly monitor their activities. Ultimate responsibility for the actions of the service providers will remain with the registrant. Referral Arrangements National Instrument codifies current CSA policies and suggested best practices regarding referral arrangements. All such arrangements will have to be in writing and clearly allocate responsibility for discharging regulatory duties, such as know-your-client and suitability requirements. Registrants will have to ensure that investors are fully informed of all such arrangements and payments made under them. Financial Reporting National Instrument will require all registrants to file annual audited financial statements and required forms with the regulators. Certain dealers and investment fund managers must also file quarterly unaudited statements. Investment fund managers will also be required to file, annually and 5

66 quarterly, a description of any net asset value adjustments made in the period. All registrants will be required to immediately report any shortfall in minimum regulatory capital. The CSA propose to require all registrants who are not members of an SRO to prepare financial statements in accordance with International Financial Reporting Standards as of January 1, Grandfathering and Transitional Provisions There are grandfathering and transitional provisions in National Instrument for existing registrants and market participants who will be subject to the new rule. For example, a hedge fund manager in Ontario that is currently registered as an IC/PM and LMD in Ontario, and that wants to make units of its funds available for direct purchase throughout Canada, will be required to register under National Instrument as an investment fund manager and portfolio manager in Ontario and as an exempt market dealer in every province and territory where the fund is marketed and sold. It will also be required to meet all requirements of National Instrument applicable to those categories of registration, but with the benefit of the following transitional provisions. The firm will automatically be registered as a portfolio manager and exempt market dealer in Ontario as of September 28, 2009 when National Instrument comes into force The firm will have one year (to September 28, 2010) to apply for registration as an exempt market dealer in the other provinces and territories where the fund is directly marketed and sold The firm will have one year (to September 28, 2010) to apply for registration as an investment fund manager in Ontario Individuals within the firm that are currently registered as advising officers or representatives will automatically be registered as advising representatives under the new regime and will not have to meet the new proficiency requirements of National Instrument so long as they remain so registered Individuals within the firm that are currently registered as trading officers or representatives under the LMD registration will automatically be registered as dealing representatives under the new regime and will have one year (to September 28, 2010) to meet the proficiency requirements of a dealing representative of an exempt market dealer The firm will have three months (to December 28, 2009) to designate and apply for registration of an ultimate designated person The firm will have three months (to December 28, 2009) to designate and apply for registration of a chief compliance officer, and if the individual so designated was already identified to the Ontario Securities Commission (OSC) as the compliance officer of the firm on the date National Instrument comes into force, then so long as that person continues to act as the firm s chief compliance officer, he or she need not meet the proficiency requirements of National Instrument for a chief compliance officer of a portfolio manager and exempt market dealer. However, that person must meet the proficiency requirements of a chief compliance officer for an investment fund manager once the firm applies for registration in that category (deadline for application September 28, 2010) The firm will have one year (to September 28, 2010) to meet the new capital requirements for a portfolio manager and exempt market dealer, and will have to meet the capital requirements of an investment fund manager once the firm applies for registration in that category (deadline for application September 28, 2010) 6

67 The firm will have six months (to March 28, 2010) to ensure that all of its referral arrangements (both existing and new) meet the requirements of National Instrument The firm will have two years (to September 28, 2011) to make available to its clients a dispute resolution or mediation service in accordance with National Instrument This Investment Management Advisory was written by: Ronald M. Kosonic (Toronto) [email protected] BLG s series Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements consists of nine advisories starting with Canadian Securities Regulators Release Final Registration Rule released by our Investment Management Group in July BLG s Investment Management Advisories are available on our website at [click on Publications and then select Capital Markets to search current publications]. Please contact your usual lawyer in BLG s Investment Management Group, the author of this Advisory or any of the following lawyers to discuss the implications of National Instrument on your business. TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart [email protected] [email protected] [email protected] [email protected] VANCOUVER: CALGARY: MONTRÉAL: Jason J. Brooks H. Scott McEvoy Angie Redecopp François Brais [email protected] [email protected] [email protected] [email protected] BLG s Investment Management Group leaders are: John E. Hall National Group Leader [email protected] Brad J. Pierce Calgary Regional Leader [email protected] François Brais Montréal Regional Leader [email protected] Jeremy S.T. Farr Ottawa Regional Leader [email protected] Lynn M. McGrade Toronto Regional Leader [email protected] Jason J. Brooks Vancouver Regional Leader [email protected] 7

68 BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling BLG-LAW1 or ing [email protected] and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at Borden Ladner Gervais LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada

69 Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements AUGUST What s New? NATIONAL INSTRUMENT IMPACT ON NON-CANADIAN SECURITIES MARKET PARTICIPANTS The long-anticipated changes to the registration regime under Canada s securities regulation have now been finalized with the release of National Instrument Registration Requirements and Exemptions on July 17, The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone doing securities-related business in Canada on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule outlines the scope of National Instrument , as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments. National Instrument will affect virtually every financial services firm doing business in Canada and will have a unique impact on firms that are not located in Canada. Firms not located in Canada, but who carry on business with residents of Canada may register in one or more of the eight categories of registration mandated by National Instrument provided they comply with the general conditions of registration for the particular category or categories of registration. The eight registration categories contained in National Instrument are investment dealer, mutual fund dealer, scholarship plan dealer, exempt market dealer, restricted dealer, portfolio manager, restricted portfolio manager and investment fund manager. The CSA have eliminated registration categories that are presently relied on by non-canadian firms, such as international dealer and international adviser. However, new registration exemptions have been built into National Instrument which are intended for non-canadian firms that can comply with the applicable conditions.

70 Dealing Activities: Firms that are in the business of trading securities with residents of a Canadian province or territory will need to be registered as a dealer in the applicable jurisdictions, or, if they qualify, rely on specified registration exemptions. Firms that are in the business of trading securities that are or could be issued under prospectus exemptions, such as non-prospectused securities of Canadian and non-canadian investment funds, to residents of a Canadian province or territory must be registered under National Instrument as exempt market dealers (EMDs), unless their activities are confined to one of the western Canadian provinces or the territories where a registration exemption will be available. Firms and individuals trading in exempt market securities in any of Alberta, British Columbia, Manitoba, the Northwest Territories, Nunavut and the Yukon Territory, and possibly Saskatchewan, may be exempted from the EMD registration requirement, but only in very limited circumstances, including where they are not registered in any other category anywhere else in Canada (and, potentially in any other country). The EMD registration category will replace the limited market dealer (LMD) category currently applicable in Ontario and Newfoundland and Labrador and will apply across Canada. Each officer and employee of an EMD that carries on the trading activities for the firm, and the firm s chief compliance officer and ultimate designated person, must also be registered. Unlike LMDs, an EMD will be subject to minimum capital and insurance as well as proficiency requirements for its dealing representatives and its chief compliance officer. Exempt market dealers will also be subject to know-your-client and suitability requirements, except in respect of trades to permitted clients who waive those requirements. Permitted clients include certain institutional investors such as banks and trust companies, government agencies, pension funds, registrants, advisers acting on behalf of managed accounts, investment funds managed or advised by a registrant, individuals with more than $5 million in financial assets and companies with net assets of at least $25 million. Existing registered LMDs will be automatically converted to the new EMD category in Ontario and/or Newfoundland and Labrador, as applicable. They will have to comply with many of the new provisions aimed at prudent business practice, as soon as National Instrument comes into force, although there will be a transition period over which capital, insurance and proficiency requirements must be met. The international dealer category of registration presently available in Ontario and Newfoundland and Labrador is not being continued in National Instrument Firms that are today registered in this registration category will have their registration revoked as of September 28, These firms will have two options after September 28, They can apply to become registered in another dealer registration category, but must cease any registrable activity in Canada until such registration is granted or 2

71 2. They can carry out registrable activity in Canada pursuant to the international dealer registration exemption, which will be available as of September 28, This registration exemption will permit a firm that is registered in its home jurisdiction as a dealer to carry out certain specified activity in Canada, primarily with investors that are permitted clients (as discussed above). The specified activities include (a) An activity that is reasonably necessary to facilitate a distribution of securities offered primarily outside of Canada, other than a sale of a security (b) A trade in a debt security offered primarily outside of Canada with a permitted client during the security s distribution, and where no prospectus has been filed with a Canadian securities regulatory authority (c) A trade in a foreign (i.e. non-canadian) debt security with a permitted client, other than during the security s distribution (d) A trade in a foreign security with a permitted client unless the trade is made during the security s distribution under a prospectus that has been filed with a Canadian securities regulatory authority or (e) A trade in a foreign security with an investment dealer, or (f) A trade in a security with an investment dealer that is acting as principal. The international dealer registration exemption may only be relied upon by a firm whose head office is not in Canada; where it is engaged in the business of a dealer and is registered as a dealer under the securities legislation of its home jurisdiction; it is acting as principal or as agent for the issuer of the securities, for either a permitted client or non-resident of Canada; and if it has provided the proper notifications to the appropriate Canadian securities regulator(s) and provided specified notices to its clients. Firms must also make annual filings, including fee payments in some provinces, including Ontario, to continue to rely on the international dealer registration exemption. Advising Activities: Firms that are in the business of advising on securities with residents of a Canadian province or territory will need to be registered as advisers, in the categories of portfolio manager or restricted adviser, in the applicable jurisdictions or, if they qualify, rely on a specified registration exemption available to international advisers. The international adviser registration category presently available in Ontario (and its equivalents in certain of the other Canadian jurisdictions) is not being continued in National Instrument Firms that are today 3

72 registered in this registration category in Ontario or its equivalent in Alberta and British Columbia will have their registration revoked as of September 28, 2010, which provides these firms with a year to determine what registration they need, if any, in Ontario, Alberta or British Columbia, as applicable. These firms will have two options in Ontario, Alberta and British Columbia after September 28, 2010 (or earlier, if they chose to surrender their registration): 1. They can apply to become registered as a portfolio manager or restricted portfolio manager, but must cease any registrable activity in Ontario, Alberta and British Columbia, as applicable after September 28, 2010 until such registration is granted. Registration as a portfolio manager will give the firm the most flexibility in providing advice to residents of a jurisdiction without the restrictions on the type of advice or the type of clients associated with the current Ontario international adviser registration and its equivalent in Alberta and British Columbia, and under the new international adviser registration exemption described below, or 2. They can carry out registrable activity in Ontario (and elsewhere in Canada) pursuant to the international adviser registration exemption provided for in National Instrument This registration exemption will permit a firm that is registered in its home jurisdiction as an adviser to carry out specified activity in Canada, primarily with permitted clients (as discussed above), other than registered advisers or dealers. The conditions for this registration exemption include (a) The advice must be given only in respect of foreign (ie non-canadian) securities and not on Canadian securities, unless such advice is incidental to the advice on foreign securities (b) The adviser must be registered in or operate under a registration exemption and engage in the business of an adviser in its home jurisdiction (c) Not more than 10% of its consolidated gross revenues (together with that of its unregistered affiliates) can be derived from its advising activities in Canada and (d) It provides the proper notifications to its Canadian clients and the applicable securities regulators before advising Canadian clients. The non-canadian adviser must make annual filings and pay fees in Ontario to continue to rely on the international adviser exemption. Non-Canadian firms that today are registered as advisers in provinces or territories other than Ontario, Alberta and British Columbia, generally are restricted by terms and conditions on that registration to advising certain clients only. These firms do not generally have the benefit of a transition period for the implementation of National Instrument These firms should determine whether they can rely on the 4

73 international adviser exemption in that province or territory on and after September 28, If the exemption is not available, then it will be necessary for those firms to request an extension of their current registration subject to terms and conditions, until such time as they seek registration as a portfolio manager under the new rules. Finally, we note that the sub-adviser exemption that would have permitted non-canadian advisers to be sub-advisers to Canadian registrants without registration, contained in previous drafts of National Instrument has been removed from the final version pending further review of the exemption. The current subadviser exemption contained in OSC Rule Non-Resident Advisers will be retained in Ontario and discretionary relief may continue to be sought in other jurisdictions. Acting as an Investment Fund Manager: National Instrument introduces a new category of registration in each Canadian province and territory: investment fund manager. This registration category will apply to managers of all types of investment funds managed in Canada, whether reporting issuers or not, including mutual funds, pooled funds, closed-end funds, exchange-traded funds and hedge funds. For the time being, non-canadian based firms that manage investment funds outside of Canada and that do not have a head office in Canada will not be required to be registered as an investment fund manager in Canada. A Canadian-based investment fund manager must apply for registration (for existing fund managers, by September 28, 2010) in its principal jurisdiction, which will be the province or territory where its head office is located. National Instrument gives a Canadian-based investment fund manager a two-year exemption from having to register in any local jurisdiction, if it applies for registration and becomes registered in its principal jurisdiction. Similarly, an investment fund manager that distributes its funds in Canada, but does not manage the funds or have its head office in Canada, will not be required to register as an investment fund manager at least for another two-year period (until September 28, 2011). The CSA indicate that they intend to publish an amendment to National Instrument , for comment, during the next year or so that will explain under what circumstances a fund manager will need to register in more than one Canadian province or territory and under what circumstances a fund manager with its head office outside Canada would need to register. This Investment Management Advisory was written by: Laurie J. Cook (Toronto) [email protected] 5

74 BLG s series Keeping Reforms in Sight: Understanding the New Canadian Registration Requirements consists of nine advisories starting with Canadian Securities Regulators Release Final Registration Rule released by our Investment Management Group in July BLG s Investment Management Advisories are available on our website at [click on Publications and then select Capital Markets to search current publications]. Please contact your usual lawyer in BLG s Investment Management Group, the author of this Advisory or any of the following lawyers to discuss the implications of National Instrument on your business. TORONTO: Prema K.R. Thiele Laurie J. Cook Rebecca A. Cowdery Marsha P. Gerhart [email protected] [email protected] [email protected] [email protected] VANCOUVER: CALGARY: MONTRÉAL: Jason J. Brooks H. Scott McEvoy Angie Redecopp François Brais [email protected] [email protected] [email protected] [email protected] BLG s Investment Management Group leaders are: John E. Hall National Group Leader [email protected] Brad J. Pierce Calgary Regional Leader [email protected] François Brais Montréal Regional Leader [email protected] Jeremy S.T. Farr Ottawa Regional Leader [email protected] Lynn M. McGrade Toronto Regional Leader [email protected] Jason J. Brooks Vancouver Regional Leader [email protected] 6

75 BLG S REGISTRANT REGULATION AND COMPLIANCE PRACTICE Our Registrant Regulation and Compliance Practice is the largest practice of its kind in Canada, with recognized experts in this field. We work with Canadian and international advisers (portfolio managers and investment counsel), fund managers and dealers, including SRO members and limited (exempt) market dealers. We act for the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada and the Investment Industry Association of Canada, along with other industry trade associations and have excellent working relationships with the Canadian securities regulators and other government officials. We provide a full range of legal services, including advice and assistance on becoming and continuing to be registered with the Canadian securities regulators and/or members of the SROs. Our services for our clients have included developing and designing, as well as reviewing and assessing, compliance procedures and practices relating to regulatory and internal policy requirements, assisting in building or strengthening compliance capability, conducting audits and investigations, identifying operational problems and devising appropriate solutions and responding to regulatory developments. We also provide advice on structuring investment funds and offerings of investment funds, including hedge funds, pursuant to private placements and public offerings within Canada to comply with Canadian securities laws. We publish Investment Management Advisories from time to time on matters of interest to the investment management industry. If you did not receive this Advisory directly, please contact us by calling BLG-LAW1 or ing [email protected] and we will add you to our mailing list for future Advisories. If you received this Advisory in error, or if you do not wish to receive further Advisories, you may also ask to have your contact information removed from our mailing lists. This Investment Management Advisory was prepared as a service to our clients and other persons dealing with investment management issues. It is not intended to be a complete statement of the law or an opinion on the subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This Investment Management Advisory has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to our publications may be found at Borden Ladner Gervais LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C a l g a r y 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: fax: M o n t r é a l 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: fax: O t t a w a World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: legal fax: IP fax: To r o n t o Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: fax: Va n c o u v e r 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: fax: Wa t e r l o o R e g i o n Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada