CSA unveils registration requirements

The Canadian Securities Administrators have unveiled details of proposed harmonization of the country’s various registration requirements, opening an extended comment period of 120 days. Advisors planning to comment on the proposed new rules may need the extra 30 days to wade through it all.

The proposed National Instrument 31-103 Registration Requirements spans 138 pages, but the aim of the hefty document is to streamline and simplify the registration processes for the industry.

Because the new rule borrows the best practices from across the country, the requirements contained within it may not be “new” in all jurisdictions.

The new rule reduces the number of registration categories, streamlining some that have the same qualifications but simply had different names from province to province. The new rule also creates some new categories, such as the Ultimate Designated Person and the Chief Compliance Officer.

NI 31-103 entrenches a principles-based approach to regulation, as opposed to a prescriptive or rules-based approach.

Under the new national instrument, registrants would no longer have to apply for re-registration every year. Instead, the new system would rely on permanent registration, with revocation still possible if the registrant fails to maintain proficiency and integrity requirements.

This move allows for automatic transferal of registration, which would benefit both the individual registrant and the firm. Under past regimes, a registrant leaving Firm A for a new position with Firm B would have to wait until his or her termination notice had been processed.

Under the proposed new rules, Firm A simply transfers responsibility for the registration to Firm B and notifies the relevant regulator. The regulator would then follow up with a questionnaire to determine the reason for the termination.

According to David Gilkes, OSC manager, registrant regulation, capital markets, only 2% of termination notices involved bad acts, making the new approach less onerous for the other 98% of termination filings.

The proposed new rule includes provisions to allow for greater client mobility, removing mobility issues from the exemptions list and into the rule itself. Because Ontario has not signed on for this provision, it is contained in a separate multilateral instrument, MI 11-101.

The new rule will likely prove popular among advisors, as it allows them to maintain their client relationship should the client leave the province. For example, if a retiring oilfield worker plans to move home to New Brunswick, his advisor in Fort McMurray may continue to service this client account, as well as those of the client’s immediate family, without registering in New Brunswick.

The CSA proposal would end the prohibition on portfolio managers charging transaction-based fees.

“Consistent with most foreign jurisdictions, we propose to remove the prohibition, which will mean that advisors will be free to decide how they want to charge their clients,” the document says. “The risk that the original prohibition was intended to address will now be addressed through expanded disclosure of conflict of interest requirements in the Rule and the relationship disclosure requirements.

“Advisors will be able to move to a transaction-based fee structure (and be on equal footing with dealers), but their clients must receive disclosure about the basis upon which advisors are charging fees.”

The new rules would make mandatory a “relationship disclosure document” at the outset of any client relationship. This document must be in “plain language” to ensure the client understands its content, and must spell out the nature of the account.

Among the numerous details the CSA wants in such a document, it must explain how suitability is determined as well as provide a statement that no investment is guaranteed to be successful.

The document should also list the responsibilities of the client, such as notifying the advisor if there are any major changes in his or her life, which could affect the suitability of a given investment.

Absent from the new rules was any resolution on the question of incorporated salespersons, but OSC suggests there could be a policy proposal by the end of the comment period.

The CSA hopes to finalize NI 31-103 by the end of 2007, but because it would require legislative amendments across all jurisdictions, it is practically impossible to set a timeline on when it would come into force nationwide.

The new rules would be only the tip of the iceberg on registration reform, however, as the SROs are still working on their own overhaul, and NI 31-103 does not include the National Registration Database, which could be up and running by mid-2008.

The text of the proposed national instrument is available on the OSC website. Please click here to read it.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(02/20/07)

Steven Lamb