Transcript Exempt Market Participant Information Sessions

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
category
5
3
level
playing
field
duplicate
23
barrier
to entry
28
regulator
y capture
38
market
failure
38
adverse
impact
41
privacy
56
status
quo
60
40
number
20
0
buyer
beware
Overview of Commentary
Distribution of Commentary
22
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: [email protected]
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?