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National Instrument 31-103: Protecting Investors - Robert P. Kinghan

 

October 06, 2009

Of great interest to the public, due in part to the increased amount of investor fraud that has come to light most recently, the Canadian Securities Administrators ("CSA") has taken steps to protect investments and strengthen market integrity while maintaining efficient and competitive capital markets.

The CSA published National Instrument 31-103 on July 17, 2009 and it becomes effective in all Canadian jurisdictions, other than Ontario, on September 28, 2009. In Ontario, it becomes effective on a date to be announced by the Ontario government. It is expected that this date will also be September 28, 2009.

The Instrument is designed to harmonize the registration regime for firms and individuals. The main changes brought about by the Instrument are: the adoption of a "business trigger" for dealer registration instead of the "trade trigger" that currently exists in all jurisdictions, other than Quebec; the registration categories and their requirements and exemptions have been redefined; new registration exemption requirements for international dealers and advisers; new exam-based proficiency requirements (rather than course-based); increased minimum capital requirements; and increased requirements for potential and actual conflicts of interest.

The "business trigger" test is broader than the "trade trigger" test and takes into consideration factors such as: the expectation of remuneration for the business activity; the holding out as being willing to engage in dealing or advising in securities; solicitation in connection with the business activity; and the frequency a person or company undertakes an activity. An entity acting as an investment fund manager will always be considered to be conducting that activity as a business.

The number of registration categories has been reduced and, as mentioned, their requirements and exemptions have been redefined. Minimum requirements have been introduced to ensure potential registrants qualify by assessing their integrity, solvency and proficiency.

Also of interest are the conduct rules for advisers and dealers relating to know-your-client obligations. A registrant must learn about each client and keep the information current. This information is to include: income level; net worth; risk tolerance; employment status; and, investment objectives, knowledge, experience and timeframe. In addition, a "relationship disclosure document" must be prepared and delivered to non-accredited investor clients that includes twelve different elements including how the registrant will ensure that investments are suitable for each client. Registrants will have six months from the effective date to comply with the various client relationship requirements.

The purpose of the Instrument is to increase the protection of investors while also providing an efficient system for registrants. The Instrument provides for enhanced rules for consumer disclosure, proficiency standards for registrants and the framework for investor complaints and conflicts of interest. A key element of the new regime is fostering a culture of compliance. Time will tell if it is successful in establishing this compliance and increasing investor confidence. This update is intended for general information purposes and should not be relied upon as legal advice.

This article was first published in the October 6, 2009 edition of the Ottawa Business Journal.