Exempt Market Participant Information Sessions – April 2008

Shaun Fluker - Faculty of Law, University of Calgary

Karen Andreychuk - Legal Counsel, Market Regulation

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

Section One

Context

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

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 (albertasecurities.com; rrp-info.ca;

exempt-issuers.com)• Canadian Bar Association (Alberta)

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

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

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)

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

Section One - Summary

• CSA Registration Reform Project• Ongoing dialogue• Issue is how to regulate

• Questions?

Section Two

2007 Written Comments

2007 comment letters

• Letters and summary of comments posted on www.rrp-info.ca (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

Overview of Commentary

Distribution of Commentary

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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

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

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

Adverse Impact

• Increased transaction costs will impair junior issuer capital raising and/or real estate development

• 38 letters

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

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

Barrier to Entry

• EMD proposal precludes individuals from pursuing right to earn a living

• Forces existing exempt-market participants out of business

• 22 letters

Duplicative

• Unnecessary overlap with Real Estate Council of Alberta

• 3 letters

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.

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.

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?

Section Three

Changes to the 2007 Proposal

2008 Comment Period

• Revised proposed NI 31-103 published for comment February 29, 2008 at www.albertasecurities.com

• 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

19th Floor, Box 55

Toronto, ON M5H 3S8

Fax (416) 593-2318

Email: jstevenson@osc.gov.on.ca

Overview of Changes from 2007

• Proficiency• Solvency• Conduct rules• Transition periods

Proficiency

• Canadian Securities Exam only• Prescribes entry level knowledge of capital

markets• Provides regulators with a measurable

benchmark of registrants’ past experience

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

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

Other Requirements

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

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

Transition Periods

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

Section Three – Conclusion

• Questions?