Custody requirements and EMD permitted activities targeted in proposed amendments to NI 31-103

July 14, 2016

The Canadian Securities Administrators (CSA) have proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in respect of custody arrangements for certain registered firms and permitted activities of exempt market dealers relating to prospectus-qualified securities.  The proposed amendments also incorporate relief previously granted in respect of the CRM2 requirements and effect minor housekeeping changes to NI 31-103.

The proposed amendments will require that registered firms ensure that a “Canadian custodian” or a “foreign custodian” holds securities and cash of a client or an investment fund in certain circumstances.  The terms “Canadian custodian” and “foreign custodian” would be newly defined in NI 31-103.  Self-custody and the use of a custodian that is not functionally independent of a registered firm would be prohibited under the proposed amendments, subject to certain exceptions.  The proposed amendments also contemplate certain disclosure requirements with respect to where and how client assets are held and accessed.  Registered firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) would be exempted from these particular elements of the proposed amendments so long as they comply with the corresponding IIROC and MFDA rules, as applicable.

NI 31-103 would also be amended to clarify that exempt market dealers are not permitted to participate in offerings of securities under prospectuses in any capacity.  According to the CSA, this includes, for example: (i) acting as an underwriter and selling group member for a distribution of securities offered under a prospectus; (ii) participating in the sale of special warrants convertible into securities that are prospectus-qualified; and (iii) establishing an omnibus account with an investment dealer and trading listed securities through the investment dealer on behalf of its clients. The CSA has proposed the addition of significant guidance to 31-103CP dealing with these matters.

Under the proposed amendments, the dealer registration exemption under section 8.6 of NI 31-103 for investment fund trades by an adviser to a managed account would incorporate an additional condition.  That condition would require that the adviser seeking to rely on the exemption or an affiliate of that adviser act as the investment fund manager of the fund. 

Finally, the proposed amendments would also make permanent temporary relief with respect to the CRM2 amendments granted by the CSA in May 2015 in CSA Staff Notice 31-341 Omnibus/Blanket Orders Exempting Registrants from Certain CRM2 Provisions of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (CSA Staff Notice 31-341).  The CSA has indicated that the proposed amendments regarding CRM2 “achieve the same results” as the blanket orders issued in connection with CSA Staff Notice 31-341. 

Amendments have also been proposed to National Instrument 33-109 Registration Information with corresponding amendments to OSC Rule 33-506 (Commodity Futures Act) Registration Information Requirements.  Those proposed amendments are discussed here.  The CSA has requested that comments on the proposed amendments be submitted by October 5, 2016.  For further information, please see the CSA Notice and Request for Comment.

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