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Exempt Market Participant Information Sessions – April 2008 Shaun Fluker - Faculty of Law, University of Calgary Karen Andreychuk - Legal Counsel, Market.

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Presentation on theme: "Exempt Market Participant Information Sessions – April 2008 Shaun Fluker - Faculty of Law, University of Calgary Karen Andreychuk - Legal Counsel, Market."— Presentation transcript:

1 Exempt Market Participant Information Sessions – April 2008 Shaun Fluker - Faculty of Law, University of Calgary Karen Andreychuk - Legal Counsel, Market Regulation

2 Overview of Session Context Summary of 2007 comments Revisions to 2007 proposal There will be time for questions at the end of each section of the presentation

3 Section One Context

4 CSA Registration Reform Project CSA Registration Reform Project initiated in 2004 Update, harmonize and coordinate rules National Instrument 31-103 Registration Requirements Exempt-market dealers 2007 legislative amendments

5 Ongoing Dialogue October 2006 information session (Calgary) 2007 comment period ended June 30 May 2007 CSA information sessions (Calgary) April 2008 ASC information sessions (Calgary and Edmonton) NI 45-106F1 filings Websites (;; Canadian Bar Association (Alberta)

6 What is Registration? Alberta securities legislation requires persons to have a license to trade in securities Registrants subject to background and character checks and must comply with proficiency and conduct rules Registration is a primary regulatory tool used by ASC to protect investors and promote investor confidence in the capital market All trades in Alberta are subject to Alberta securities legislation

7 The Exempt Market Prospectus-exempt securities Exception to the legislated rule Significant increase in capital raised between 2003 and 2006 ‘Need to know’ rationale Dual exemptions

8 Retail Dual Exemptions Offering Memorandum (NI 45-106, s. 2.9) –“eligible investor” or less than $10,000 –Net income of $75,000/$125,000 Accredited Investor (NI 45-106, s. 2.3) –Net income of $200,000/$300,000 Close friends/business associates (NI 45-106, s. 2.5)

9 Ontario Universal Registration 1985 OSC white paper recommends registration with full requirements for market intermediaries in exempt market Questioning the ‘need to know’ rationale 1987 Limited Market Dealer registration Conduct rules (KYC, suitability, recordkeeping) 2005 LMD survey in Ontario

10 Section One - Summary CSA Registration Reform Project Ongoing dialogue Issue is how to regulate Questions?

11 Section Two 2007 Written Comments

12 2007 comment letters Letters and summary of comments posted on (follow links Registration Reform Project and National Registration Rule) 121 of 270 letters substantively comment on exempt-market dealer registration 116/121 letters oppose one or more of the proposed registration requirements Many letters provide more than one rationale for opposition

13 Overview of Commentary

14 Buyer Beware Product sale between manufacturer and customer No financial advice or services Individual freedom – risk taking Investors are customers not clients Car sales analogy 56 letters

15 Status Quo If it ain’t broke, don’t fix it NI 45-106 Ontario LMD model Commentators in this category often overlap in Buyer Beware 42 letters

16 Privacy KYC obligations invade individual privacy Customers unwilling to divulge information Commentators in this category often overlap in Buyer Beware and Status Quo 38 letters

17 Adverse Impact Increased transaction costs will impair junior issuer capital raising and/or real estate development 38 letters

18 Market Failure Regulation must address harm caused by inefficient markets ASC hasn’t met its onus to demonstrate harm EMD proposal penalizes many for the sake of few Costs outweigh benefits 28 letters

19 Regulatory Capture ASC catering to demands of IDA or MFDA to increase their membership and/or eliminate competition Composition of RRP steering committee 23 letters

20 Barrier to Entry EMD proposal precludes individuals from pursuing right to earn a living Forces existing exempt-market participants out of business 22 letters

21 Duplicative Unnecessary overlap with Real Estate Council of Alberta 3 letters

22 Comments on Requirements Proficiency: Canadian Securities Exam covers content not relevant to my industry (or product). Consider industry experience or equivalent education in lieu of. Consider requirements particular to industry (general) Minimum Capital and Insurance: No purpose where firm does not have custody of client assets. Too onerous. Excessive barrier to entry.

23 Comments on Requirements Financial Reporting/records: No purpose where firm does not take custody of client assets. Not relevant or too onerous. Already required by NI 45-106. Know-Your-Client and Suitability: Not relevant to single product sales. Investors are not clients. Investors sophisticated to take full responsibility for risks. Investors unwilling to disclose information.

24 Section Two - Summary Investors are clients Exempt market is not analogous to car market NI 45-106 exemptions are exceptions from the legislated rule that a person be registered to trade Questions?

25 Section Three Changes to the 2007 Proposal

26 2008 Comment Period Revised proposed NI 31-103 published for comment February 29, 2008 at Comment period ends May 29, 2008 Submit written comments by May 29, 2008 to CSA: John Stevenson, Secretary Ontario Securities Commission 20 Queen Street West 19 th Floor, Box 55 Toronto, ON M5H 3S8 Fax (416) 593-2318 Email:

27 Overview of Changes from 2007 Proficiency Solvency Conduct rules Transition periods

28 Proficiency Canadian Securities Exam only Prescribes entry level knowledge of capital markets Provides regulators with a measurable benchmark of registrants’ past experience

29 Solvency Exempt market dealers that do not handle, hold, or have access to any client assets: –No minimum capital or insurance requirement –No audit –Must file internally generated certified financial statements (no GAAP requirements) Exempt market dealers that handle client assets –Unchanged from 2007 proposal

30 Conduct Rules Dealing with a Permitted Client: –No suitability obligation –No relationship disclosure obligation –No complaint handling obligation Exempt market dealers that do not handle any client assets –No account opening or account activity requirement –Exemptions from some relationship disclosure requirements

31 Other Requirements Registration requirements unchanged from 2007 include: –Background and character checks –Recordkeeping –Managing conflicts and referrals –Compliance and supervision

32 Timeline for Implementation May 29, 2008 – Comment period ends Summer-Fall 2008 – CSA Registration Reform Working Group reviews comments and finalizes Rule Spring 2009 – Implementation

33 Transition Periods Transitions section new in 2008 Firm registration: 6-month transition Individual Registration: 6-month transition Individual Proficiency: 12-month transition

34 Section Three – Conclusion Questions?

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