News

Canadian securities regulators have revised proposed registration rules to ensure bank tellers can continue to sell provincial and federal savings bonds, responding to an outcry from major banks and the Ontario Ministry of Finance.

The Canadian Securities Administrators, an umbrella group of provincial securities commissions, released a 500-page document Friday with proposed new rules to govern registration of 130,000 people and 2,000 companies operating in the securities industry.

The draft updates an earlier proposal, released a year ago, that attracted hundreds of comment letters complaining the new rules would heap unnecessary requirements on firms. The proposals were expected to pull thousands of new people into the regulatory tent who manage or sell securities and were not covered by current registration rules.

The revisions announced Friday will shorten that list.

Bank tellers, for example, have been expressly exempted when selling government debt securities, as are many professionals working for international brokerage firms providing investment banking services to corporate clients.

Ontario Securities Commission chairman David Wilson said the registration rules are the biggest project the CSA has ever tackled, consolidating 13 standards from all different provinces and territories. The rules propose to reduce the number of categories companies can be registered under from 68 currently to just eight. Individuals will register under five different categories, depending on their job descriptions, down from 39 currently.

Under the new rules, individuals will move from annually re-registering with securities commissions to a new system of lifetime registration.

“We do believe it's a material reduction in regulatory burden,” Mr. Wilson said Friday.

He said bank tellers selling savings bonds were never intended to be covered by the original draft, but the wording has been clarified to ensure that intention is clear.

The rules released Friday include a number of other revisions for those selling securities to wealthy or “accredited” investors.

Among the changes, the rules introduce a new category of “permitted clients” who are major institutions or super-wealthy individuals, considered to be a second tier above the existing “accredited” investor in investment sophistication.

Those permitted clients will now be able to waive investment suitability rules to reduce regulatory requirements for those who manage their funds or trading.

Moreover, the new rules change some of the requirements proposed last year for so-called “exempt market dealers,” which are firms – including many hedge funds – that typically deal only with wealthy, accredited investors.

Under the new draft, those firms will not have to meet some rules – such as minimum capital and insurance requirements – if they do not have access to client cash or assets. Education requirements for their employees have been reduced from the original proposal.

Securities lawyer Prema Thiele, who works at Borden Ladner Gervais LLP in Toronto, said most of the comment letters received on the first draft were focused on rules for those operating in the exempt market, where many people have not had to be registered previously.

She said regulators were expected to continue with their plan to introduce registration for most exempt market players, even if the rules have been eased in the second draft.

“Regulators say that's where a lot of problems have happened, in the exempt market, so it's not surprising to see the CSA come back and remain with that category, even if they've tinkered a bit,” she said.

Defunct hedge funds like Portus Alternative Asset Management Inc. and Norshield Asset Management (Canada) Inc., both of which collapsed in 2005 and have seen key managers accused of fraud, operated in the exempt market. The proposed rule amendments would still require registration of these sorts of firms and their employees because they have direct access to client funds.

However, Ms. Thiele said a major change in the new draft will see British Columbia and Manitoba opt out of the new standards for exempt market players. If people are currently exempt, and only deal with clients within their home province, those exemptions will remain in place.

Ms. Thiele said that major opt-out is “very disappointing” because it means investors in those provinces will have a lower level of protection. And, she said, it means the new registration project will not create truly national standards that are the same in every province.

“This is an incredible opportunity in the securities regulatory land in Canada to have uniformity,” she said. “It's such an enormous undertaking.... And to have this not be one standard across the country is unfortunate. I don't think it's acceptable or necessary in today's 2008 Canadian capital markets.”

Doug Hyndman, chairman of the British Columbia Securities Commission, said the province did its own studies and felt there was nothing to be gained by requiring registration for exempt market players.

“It was going to impose costs both on us an the regulated community without really solving any identifiable problem,” he said Friday.

Mr. Hyndman said B.C. instead will require exempt market players to give investors a risk acknowledgment form explaining they are not registered and cannot provide suitability advice, and outlining the risks of the investments.

He said registration wouldn't fix the sorts of frauds occurring in B.C., where people more often simply sell securities illegally without registration that is currently required. Further registration requirements would likely be equally ignored, he said.

The new standards are open for comment until May 29. Mr. Wilson said regulators hope to have the rule completed by the end of the year to take effect March 31, 2009.