Chapter 12 - Registration.pdf

Registration 12 CONTENT AREAS Overview of Registration Individual Registration & Approval and Related Proficiency Requirements National Registration Database CIRO Registration He...

Registration 12 CONTENT AREAS Overview of Registration Individual Registration & Approval and Related Proficiency Requirements National Registration Database CIRO Registration Hearing Procedures Jurisdictional Registration Issues LEARNING OBJECTIVES 1 | Explain the importance of the registration function. 2 | Discuss the proficiency requirements for different categories of registration. 3 | Explain the registration process under the National Registration Database. 4 | Discuss the registration hearing procedures of the Canadian Investment Regulatory Organization. 5 | Describe the general requirements for dealing with clients in other jurisdictions. © CANADIAN SECURITIES INSTITUTE  CHAPTER 12      REGISTRATION 12 3 INTRODUCTION In the previous chapter, we explained dealer member’s requirements for handling complaints from clients. We discussed the different types of complaints and the fact that dealer members must have written policies and procedures in place to ensure that they are dealt with effectively before they go to litigation. One of the chief means of preventing or mitigating litigation issues is to ensure that registration of the dealer member and its representatives is carried out properly. Generally, a person or company whose business involves trading, underwriting, or advising with respect to securities is required to be registered with the provincial securities regulator in any province in which it has clients. The registration process is designed to protect the investing public by ensuring that only qualified and reputable individuals and dealer members are licensed. Investment dealers must also be dealer members of CIRO and must obtain its approval for each registrant. In this chapter, we learn about the administrative and procedural functions of registrations and the many compliance issues associated with them. Knowledge of registration requirements provides the chief compliance officer with a foundation on which to build an understanding of the types of issues that can arise out of compliance failure. OVERVIEW OF REGISTRATION 1 | Explain the importance of the registration function. The importance of the registration function of a dealer member is often overlooked or minimized, despite the fact that it plays a critical role in the dealer member’s operations. Likewise, a registrant’s approval is not always viewed by the individual with proper consideration. An approval granted by CIRO or a provincial securities commission is an asset that can be taken away, which emphasizes the importance of the registration function. By virtue of approval granted by CIRO, a registrant who is an Approved Person is also obliged to abide by CIRO rules and regulations. Therefore, registration should be viewed as a privilege, not a right. Generally, a person or company whose business involves trading, underwriting, or advising with respect to securities is required to be registered with the provincial securities regulator in any province in which it has clients. In other words, the residency of the end client drives jurisdictional registration requirements for a registrant. The registration process is designed to protect the investing public by ensuring that only qualified, proficient, and reputable individuals and entities are licensed. Investment dealers must also be dealer members of CIRO and obtain CIRO approval for each of their registrants. The chief compliance officer must have a basic understanding of the requirements and procedures for approval and registration. They should also be familiar with the applicable requirements for the various registration categories and the procedures for special situations, such as the reinstatement of registration and notice of cessation of employment. The administrative and procedural functions associated with registrations are commonly performed by registration staff, which may be a stand-alone department of the dealer member or part of the compliance department. Nevertheless, CCOs should understand the many compliance issues associated with registration. The most common issue relates to business activity that is conducted without appropriate registration. For example, RRs cannot conduct business in jurisdictions where they are not properly registered, unless there are exemptions available under the jurisdictions’ regulations. They may also not be qualified or permitted to trade in options unless they have achieved additional approval specifically for options. That approval, in turn, is based on additional proficiencies that the RR must obtain. Issues such as these require compliance policies, procedures, training, education, and monitoring. Because registration rules are rapidly evolving, it is necessary to continuously monitor changes and alter controls accordingly. © CANADIAN SECURITIES INSTITUTE 12 4 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 The failure to accurately complete or update registration applications can raise compliance concerns, particularly when information that could compromise an applicant’s registration goes undisclosed, such as a bankruptcy, criminal charges, or regulatory problems. Therefore, in addition to proficiency and experience, registrants have an ongoing obligation to their dealer member and the regulators to continually update certain types of relevant information. INDIVIDUAL REGISTRATION & APPROVAL AND RELATED PROFICIENCY REQUIREMENTS 2 | Discuss the proficiency requirements for different categories of registration. In 2009, the CSA adopted NI 31-103, Registration Requirements and Exemptions. In conjunction with this initiative, CIRO’s predecessor organizations, IIROC and the MFDA, implemented consistent registration changes. The goal of the initiative was to modernize, streamline, and harmonize registration requirements. The project narrowed the number of registration categories and moved to a more principle-based system under CIRO’s rules. These rules also provided greater flexibility to dealer members to establish compliance and supervisory regimes consistent with their business models (as well as size). Readers should familiarize themselves with the current version of NI 31-103 as well as applicable CIRO notices. THE FIT-AND-PROPER TEST FOR APPROVED PERSONS CIRO rules generally provide that an application for individual approval be approved unless the applicant is not qualified by reason of integrity, solvency, training, or experience, or if the approval is not in the public’s interest. As discussed previously, CIRO has issued helpful guidance regarding its current and ongoing expectations that dealer members, in particular, are expected to follow. Given that registration is a privilege, rather than a right, the obligations of a CCO begin when the individual applies for approval. Strengthening of the industry is a function of those who hold approval; therefore, the registration process is critical. CIRO identifies the following three criteria for determining whether an individual is considered “fit and proper” for approval and registration: Integrity Which includes honesty and good faith (particularly in dealing with clients) and compliance with CIRO rules and securities laws Financial solvency Which is considered an indicator of the risk that the applicant will engage in self- interested activities at the expense of clients Competency Which includes prescribed proficiency and knowledge of CIRO rules and securities laws CIRO considers that the public interest mandate of securities regulators has two purposes: To provide protection to investors from unfair, improper, or fraudulent practices To foster fair and efficient capital markets and confidence in capital markets The fit-and-proper test is not only applicable at the initial registration of an individual. It is also highly relevant when a dealer member is recruiting existing registrants from other dealer members. As such, the firm should have robust recruiting policies with which to analyze prospective recruits and evaluate them under the three fit-and- proper criteria. Depending on what the dealer member is looking for, other information should also be considered, including such details as book size, business type, and complaint history. © CANADIAN SECURITIES INSTITUTE  CHAPTER 12      REGISTRATION 12 5 HIRING OF REGISTRANTS Ideally, the compliance department should have veto power on the hiring of registrants. At a minimum, the department should have influence regarding hiring decisions from the outset, starting with a review of resumes. Any gaps in employment should be satisfactorily explained. In some circumstances, it may be appropriate for the compliance department to recommend rejecting an applicant. EXAMPLE An applicant brings high revenue potential but has a history of client complaints and regulatory issues. Another applicant also has potential for high revenue but specializes in speculative securities. The compliance department should provide the business unit head with a review of the risk-to-reward balance attached to the hiring decision. The department might also recommend for or against hiring the applicant. In addition to reviewing resumes, some firms have developed due diligence questionnaires to help determine an applicant’s regulatory history, including any criminal or quasi-criminal convictions and outstanding client complaints. PROFICIENCY REQUIREMENTS One cornerstone of the registration process as a regulatory tool is the need to ensure that registrants are proficient. However, no matter how elaborate the course and examination requirements, provincial regulatory authorities and CIRO recognize that they can set only minimum requirements. It is the dealer member’s responsibility to make sure that all of their personnel, whether registered or non-registered, are competent. The dealer member can ensure competence by meeting the regulatory requirements, conducting an internal assessment, providing training, and engaging in ongoing supervision. The securities commissions and CIRO set basic proficiency requirements for registrants. They update the requirements as needs change, establish time limits during which course and experience proficiencies remain valid, and determine required periods of experience or supervision. Employees performing certain functions at dealer members must register under securities legislation in a category such as RR. They must also receive CIRO approval in a category that specifies their scope of responsibility, trading authority, and authority to advise. REGISTRATION CATEGORIES CIRO’s categories for approval and registration are distinguished by their functions. An Approved Person is an individual approved by CIRO to carry out a function for a dealer member. The category includes the following individuals: 1. Investment Representatives are approved to take unsolicited orders. 2. Registered Representatives are approved to give investment advice. 3. Portfolio managers and associate portfolio managers are approved to provide discretionary portfolio management for managed accounts. 4. Traders are approved to enter orders into the trading systems of specific exchanges. 5. Supervisors are approved to supervise the business activities of other Approved Persons. 6. Executives are approved to participate in the executive management of a dealer member. 7. Directors are approved to sit on the board of directors of a dealer member or occupy a similar position in a dealer member not organized as a corporation. 8. The Ultimate Designated Person is the chief executive officer of a dealer member or a person in a similar position. This position is approved to have overall responsibility for the dealer member’s compliance with laws and regulations, including CIRO rules, governing its securities-related activities. © CANADIAN SECURITIES INSTITUTE 12 6 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 9. Chief financial officers are approved to be responsible for ensuring that the dealer member complies with the financial adequacy requirements of CIRO rules. 10. Chief compliance officers are approved to be responsible for ensuring that the dealer member has systems and controls reasonably designed to ensure its compliance with laws and regulations, including CIRO rules, governing its business conduct. Prior to the adoption of NI 31-103, all officers and directors of a dealer member were required to complete the Partners, Directors and Officers (PDO) Qualifying Examination. However, many dealer members award officer titles in recognition of seniority and accomplishment to people who have no involvement in the actual management of the firm. Currently, only those officers and directors holding executive management functions (who are therefore considered to be the “mind and management” of the dealer member) must complete the PDO exam before applying to be approved in the executive category. This requirement does not apply to investment advisors who achieve the title of vice president or senior vice president. These titles, which are considered nominal, do not grant authority from an executive management perspective. PRODUCT APPROVAL Additional proficiency requirements and approvals apply to dealer members dealing in certain products, such as options and futures. As part of its compliance system, a dealer member should address and monitor the following supervision requirements for these products through its policies and procedures: The dealer member must appoint supervisors to be responsible for specific products, such as options on futures trading. In some firms, these supervisory roles are undertaken by compliance personnel, in others, by business line supervisors. Open communication must exist between product and other supervisors and compliance personnel, and responsibilities must be clearly delineated in a firm’s policies and procedures. The dealer member must have systems and procedures in place to prevent trading by staff members who do not have proper product approval. Dealer members must know who is registered to deal in certain products to prevent the opening of accounts and entry of orders by people who are not approved. (This requirement also applies to jurisdictional or provincial licensing). EXAMPLE Teams must be monitored when they cover clients under a joint RR code, where some team members are approved to sell options or futures and others are not. Likewise, in situations where an options or futures representative is absent, monitoring ensures that options or futures orders are directed through properly approved personnel. If a joint RR code is used by several RRs, an audit trail of who took which order must be maintained to ensure that no orders were entered by an RR or IRs who was not approved to deal in the product involved. In terms of revenue splitting, a person who is not appropriately licensed for certain trades cannot be paid commissions from that type of trade. It is becoming more common, therefore, for dealer members to require employees who share codes to have common licensing. Another solution is to aggregate revenue at the team level and devise a payout structure that takes commissions into consideration. CONTINUING EDUCATION Continuing education (CE) is a requirement for ongoing licensing in the Canadian securities industry. As the industry becomes more complex, the CIRO CE program requires Approved Persons (e.g., RRs, IRs, traders, or supervisors) to meet CE requirements to enhance and further develop their baseline licensing proficiencies. The CIRO CE program consists of two parts: 10 hours of compliance training and 20 hours of professional development training. All Approved Persons are required to complete the compliance portion of the program. Retail RRs and supervisors of © CANADIAN SECURITIES INSTITUTE  CHAPTER 12      REGISTRATION 12 7 retail RRs are required to complete approved courses to satisfy both the compliance and professional development portions of the program. If Approved Persons have not completed the required courses at the end of the two-year CE cycle, penalties will be invoked. CIRO will impose a fine on the sponsoring dealer member and suspend the approval of the CE participant. Dealer members are permitted to design and deliver their own compliance and professional development courses, in accordance with CIRO’s accreditation process. Alternatively, employees can take CE courses from several sources, including the Canadian Securities Institute and other educational providers. Dealer members must keep evidence that their employees completed their CE requirements, and they must report on each employee’s completion to CIRO. Chief compliance officers should consider using the compliance CE requirement when developing training programs for registrants. It is not necessary to develop in-house training; there are many outside courses, seminars, and education providers. However, CCOs should be involved in selecting or approving courses. They should also provide input to internal training departments so that the work involved in meeting the compliance requirement also helps meet real educational needs. Generally, CE compliance courses should be relevant to the functions performed by the people taking them. Courses could cover, for example, new CIRO rules and rule changes or refresh knowledge of critical rules and compliance issues. Courses can also support corporate goals, such as developing an understanding of ethical values. Finally, they can meet other compliance-related training obligations, such as the anti-money laundering training required by PCMLTFA, which has independent requirements over and above the CE requirements. PROFICIENCY EXEMPTIONS Individuals can apply to CIRO for an exemption from the requirement to write or rewrite any required course. The exemptions are granted by CIRO (or registration sub-committee) in the province in which the applicant works. CIRO can exempt any person or class of persons from proficiency requirements, exempt any person from writing or rewriting any required course or examination, or exempt any person from the CE program requirements. An exemption granted by CIRO is effective in all provinces, but it may not cover provincial requirements. Separate exemption applications may have to be obtained directly from the provincial securities regulators or from CIRO, in jurisdictions where provincial registration has been delegated to CIRO. An exemption is appropriate when an applicant has obtained alternate qualifications or experience in a non- approved capacity that maintained the registrant’s skills and knowledge. To obtain an exemption, the applicant must demonstrate equivalency to the topics covered in the specified course, through industry experience or through other courses taken. Ideally, the exemption request will compare the course topics with the specific job functions or other course functions. Previous registrants who are no longer registered (possibly due to job changes) can also consider maintaining their proficiencies by voluntarily participating in ongoing CE obligations. In such cases, they may not require an exemption application or re-examination. Individuals should seek guidance from their compliance department when considering whether a specific course of action is necessary. SUPERVISORY FUNCTIONS All CIRO dealer members must appoint supervisors to perform specific functions. These appointments fall under CIRO’s supervisor category and are specific to their particular supervisory roles. For example, supervisors must be designated for opening new accounts and for supervising managed accounts. Separate supervisory categories generally relate to specific products or services. For example, a supervisor must be appointed to pre-approve advertising, sales literature, and correspondence, including research reports. © CANADIAN SECURITIES INSTITUTE 12 8 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 Dealer members are required to maintain an internal record of the names of all supervisors, including the scope and period of their responsibility. The records must also identify the supervisor of any Approved Person at any given time. These records must be preserved by the firm for seven years, of which the first year must be on-site. DUAL REGISTRATION FOR SECURITIES AND LIFE INSURANCE All Canadian jurisdictions allow salespersons to be dually registered as an RR and a life insurance representative if they meet the requirements of both the securities and insurance acts in their registration jurisdictions. However, their insurance licensing must be through an outside insurance company or broker. CIRO dealer members are not permitted to have insurance licences or act as insurance brokers. Typically, CIRO dealer members use an affiliated corporation for this purpose. Dual registration raises issues that require clear policies and supervision, including alternative investment vehicles, off-book transactions, and related or outside activities, particularly financial planning. ALTERNATIVE INVESTMENT VEHICLES The insurance industry offers alternative investment vehicles in the form of segregated funds that are, in law, insurance contracts, and are sold under an insurance licence. These products fall within the bounds of securities regulation and compete with securities such as mutual funds. Clients may not understand the technicalities of who is selling what and under which regulations, even when they are informed. To ensure that the needs of clients are paramount, dealer members should be able to clearly understand the features of the funds being sold by dually licensed RRs, including performance and compensation. Some clients want segregated funds to appear on the monthly statements they receive from their securities firm. However, securities shown on CIRO dealer member statements, other than those held in safekeeping, are held in nominee name. A segregated fund held in nominee name may result in the insurance feature of the product being voided. The dealer member must ensure that the requirements of the insurance contract are met. Some insurance companies also offer other investment products, such as guaranteed investment certificates (GIC), through licensed insurance agents. OFF-BOOK TRANSACTIONS CIRO dealer members are not permitted to sell securities outside the dealer member, regardless of whether they are exempt from provincial securities registration requirements. All securities-related business conducted by the dealer member and its investment advisors must be undertaken on the books and records of the dealer member. The firm must therefore have systems and procedures to monitor outside activities, such as insurance sales, to ensure that they do not include any off-book sales of securities. The type of insurance-related transaction determines whether it must be done through a dealer member. Some mixed insurance and investment products allow the policyholder to make choices relating to the investment portion. For example, the specific choices and transactions in GICs or funds are part of the policy, and the transactions do not have to be done through a dealer member. OUTSIDE ACTIVITIES Approved Persons may engage in outside employment and outside activities, provided that conflicts of interest or potential client confusion are adequately addressed and that the activity does not bring the securities industry into disrepute. An additional consideration is the amount of time that the outside activities consume. Investment advisors typically have contractual obligations to the dealer member to provide their full time and attention to their employment at the dealer member. Outside activities that require an inordinate amount of time, in addition to potentially causing conflicts of interest or client confusion, may detract from the ability of investment advisors to properly serve their clients. The compliance department should require the disclosure and prior approval of all © CANADIAN SECURITIES INSTITUTE  CHAPTER 12      REGISTRATION 12 9 outside employment and business interests, including investments, and should identify and address these risks in advance. Unrelated outside activities that might affect an advisor’s service to his or her clients should generally be discouraged. In addition to providing approval, dealer members are required to periodically supervise outside activities, in particular from a conflict-of-interest perspective. For example, an offering of insurance-related products is an outside activity that would require the prior approval and periodic supervision of the dealer member. Some dealer members require the periodic completion of a questionnaire intended to disclose outside interests. For example, a registrant asked to serve as a director of a client’s private corporation could face difficult conflict- of-interest issues that might not be immediately apparent. The compliance department should be able to provide guidance in such situations. FINANCIAL PLANNING CIRO views financial planning as an essential component of investment advice and does not permit it to be conducted outside the dealer member. For CIRO dealer members, payment for financial planning services must be made through the dealer member. Systems and procedures should also ensure that the financial planning activities of their registered persons are properly supervised. TRADE NAMES Approved Persons may choose to use team names or trade names, with the dealer member’s written consent, provided that they meet CIRO standards. One stipulation in the CIRO rules is that the trade name must be less prominent and always accompanied by the name of the dealer member. Before providing written consent, a dealer member’s procedures should include the following items: Registration of the trade name with the appropriate ministries or agencies in the province or territory in which the trade name will be used Confirmation as to who will provide the “written notification of the requisite approvals” Confirmation that the name is not deceptive, or likely to mislead or confuse the public Notification to registration staff, so that the trade name is filed through the National Registration Database (NRD) Notification to the appropriate securities commissions NATIONAL REGISTRATION DATABASE 3 | Explain the registration process under the National Registration Database. The NRD is a web-based system that permits dealer members and advisors to file registration forms electronically. The NRD enables a single electronic submission for individual registrants to satisfy all jurisdictions in Canada. From a regulatory point of view, the NRD creates a single official record for each registrant and provides easy access to registrant information across the country. PROCEDURES FOR INDIVIDUAL REGISTRATION Filings by registrants through NRD are referred to as submissions. The three categories of individual submissions are initial applications, amendments, and notices. © CANADIAN SECURITIES INSTITUTE 12 10 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 INITIAL APPLICATION The initial application requires disclosure in a number of areas, including the general background of the person seeking registration, as well as previous disciplinary history. Among other things, the applicant must also disclose the following facts: Any action against the applicant regarding government registration to deal in securities, or to deal with the public in any capacity requiring registration Any disciplinary action regarding an approval by any securities commission or other similar professional body Any past criminal convictions or current charges or indictments Any bankruptcies or proposals to creditors Any civil judgment or garnishment EXAMPLE The following summary of a decision by an IDA Panel illustrates the serious consequences of providing inaccurate responses on a registration application. The applicant had been previously disciplined, and ultimately terminated, by a dealer member for falsely putting a client’s signature to a document relating to a transfer of funds. She was advised by her employer in writing that she had failed to comply with internal control guidelines. The former employer also informed the IDA in a letter of the reasons for the employee’s termination. When applying for subsequent registration, the applicant was asked whether she had “ever resigned or been terminated following allegations, made by a client, sponsoring firm, self-regulatory organization, securities regulatory authority, or any other regulatory authority that (she) violated investment-related statutes, regulations, rules, or standards of conduct”. She sought advice about how to respond to the question in light of her previous termination and ultimately answered “no”. Her employment was subsequently terminated, and the SRO took disciplinary action. The SRO Panel dismissed the action on the basis that the respondent had an honest belief that she had answered the question correctly. Significant weight was also given to the fact that she had sought advice about how to respond. However, she had already lost her job. The case illustrates why supervisors and compliance staff must supervise the completion of the registration forms and respond carefully to issues and questions that arise. Although the decision on how to answer the question may have been based on a narrow, technical reading of the question, consideration by the firm about the intent of the question (and perhaps discussion with SRO staff) might have prevented the incident from escalating. IDA Panel decision (IDA Bulletin: 3533 4/24/2006, Re: Tiffany Yen Siam Mu) AMENDMENTS Amendment submissions are made when a person wants to change or surrender a category of registration. If the person is surrendering all categories in all jurisdictions in which he or she is registered, a notice of cessation of employment should be used instead of an amendment. NOTICES Notices of change must be submitted when there is a change to an individual’s registration information including: Individual Name Change Residential Address Change Personal Information Change © CANADIAN SECURITIES INSTITUTE  CHAPTER 12      REGISTRATION 12 11 Citizenship Information Change Proficiency Information Change Current Employment Change Criminal Disclosure Change Civil Disclosure Change Financial Disclosure Change FORM COMPLETION AND FILING REQUIREMENTS A deficient application results in delayed approval. CIRO publishes a list of frequently asked questions (with answers) about the NRD on its website. The list provides tips about form completion and filing requirements. Registration staff should review these tips. CESSATION OF APPROVED PERSON STATUS As stated above, a firm must provide notice of a registrant’s cessation of employment. This notice can sometimes alert regulators and prospective employers to regulatory infractions, or as to whether the registrant is receiving a severance package. The notice must be filed within 15 business days of the cessation date, regardless of unresolved issues relating to the cessation of employment; otherwise, a late filing fee will be imposed. If necessary, the form can indicate that additional information may be provided. The form must explain the circumstances related to the cessation of employment and state whether it was for improper conduct or a possible violation of CIRO rules. The regulator may use this information to determine whether there are any concerns about the individual’s conduct that may be relevant to the applicant’s ongoing fitness for registration. Applicants transferring between CIRO dealer members will be automatically approved and registered if the reinstatement form is filed with the NRD within 90 days following termination from the previous firm. However, the applicant transferring between dealer members must not have been dismissed or asked to resign as a result of an alleged breach of securities laws, CIRO rules, or the Criminal Code. EXTENDED LEAVE The following procedures apply when an Approved Person takes extended leave (i.e., beyond normal vacation time): Notification to CIRO CIRO must be notified within 10 business days when an Approved Person goes on maternity leave, long-term disability, or any other leave of absence. A Notice of Change of Current Employment must be filed through the NRD. The number of working hours must be changed to “0” and the type of leave identified. Continuing Education Persons on leave remain responsible for registration requirements, such as CE Requirements requirements. Dealer members are penalized for anyone on leave who fails to meet his or her CE requirements by the end of a cycle. However, they may apply for a hardship consideration to CIRO, either for a temporary extension or for an indefinite period. Dealer members should apply for this consideration well before the end of the CE cycle. REGISTRATION AFTER AN ABSENCE In the securities industry, products, regulations, and procedures frequently change. Applicants who are absent from the industry for a substantial period will likely not be up to date on current knowledge. Therefore, CIRO requires that first-time applicants must have successfully completed the Canadian Securities Course (CSC) within the past three years and any other courses, including the Conduct and Practices Handbook Course (CPH), within the past © CANADIAN SECURITIES INSTITUTE 12 12 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 two years. Beyond these time limits, new applicants must rewrite any required exams. For those people who have left a CIRO dealer member, all courses remain valid for three years following the date of termination in all approval categories for which those courses are required. After that date, they must rewrite any required exams. Individuals can extend the validity periods of their CSC and CPH by voluntarily participating in CIRO’s CE program and successfully completing certain CE-eligible courses. A list of the courses qualifying for voluntary participation credit can be found on the CIRO website. CIRO may grant an applicant a discretionary exemption from rewriting an expired course if the applicant can demonstrate that recent experience or other education is equivalent to material covered in the expired course. REPORTING CHANGES TO REGISTRATION INFORMATION The regulators approve registrations based on the information filed through the NRD. Changes may affect the continued acceptability of registrants, and timely notice of these changes must be made to CIRO or a securities administrator. Dealer members should have policies and procedures in place to ensure that changes to registration information are promptly reported to the compliance or registration department. Registrants must report changes within two days of the change. Regular reminders should be sent to registrants in this regard to ensure that firms meet their filing obligations. The CCO should periodically canvass registered employees regarding changes to registration information. Table 12.1 describes some of the items that appear on a standard registration form (Form 33-109F4), which is submitted via the NRD. Notices of changes to current and previous residential address, citizenship, reportable activities, or previous employment must be submitted, filed, or delivered within 30 days. All other changes to registration information must be submitted within 15 days of the change. Table 12.1 | Examples of Changes to Registration Information (Based on Form 33-109F4) Items 1 – 3 and 7 Change in name, home address, or “address for service in province of filing” This is a legal term referring to the address at which the applicant undertakes to accept delivery of any formal notice sent to the applicant by regulatory authorities (may be the applicant’s home or office address). In both items 2 and 3, the applicant and employer must complete a Transfer/Change or Surrender of Categories application and submit it through NRD. Item 6 Change in firm Change in registration Item 13 Change in securities registration This may be a change in registration with a securities regulator or SRO outside of Canada (such as the National Association of Securities Dealers), or changes involving non-securities licensing. Item 4 Change in personal description This may refer to a change in citizenship, for example. Item 13 Registration refusal, suspension, cancellation, or disciplinary measure (i.e., violation of regulations) These changes also extend to actions taken against an employee or agent by non-securities regulators (such as insurance regulators) and must be reported on NRD and ComSet. © CANADIAN SECURITIES INSTITUTE  CHAPTER 12      REGISTRATION 12 13 Table 12.1 | Examples of Changes to Registration Information (Based on Form 33-109F4) Item 14 Law offences Offences under the law must be reported on ComSet and the NRD. Item 15 Civil proceedings Civil proceedings (such as a lawsuit against an Approved Person, for example) must be reported on ComSet and the NRD. Item 16.1 Bankruptcy of an Approved Person This change must be reported on the NRD. Item 16.4 Judgment or garnishment Item 10 Reportable activities These activities may include self-employment, officer and director positions, positions of influence such as leader of a religious organization, and other securities-related business or employment activities, regardless of whether the employee receives compensation for the activity. The CCO should ensure that the dealer member is aware of all outside activities, and that policies and procedures are in place to mitigate risks of conflict or potential for confusion. It is important to note that a disclosure through ComSet does not satisfy reporting requirements for a registration change through the NRD. Filings through the NRD go to all jurisdictions in which the individual is registered, whereas ComSet reports go only to CIRO; therefore, they do not satisfy the provincial notice requirements. CIRO REGISTRATION HEARING PROCEDURES 4 | Discuss the registration hearing procedures of the Canadian Investment Regulatory Organization. CIRO has the authority to approve individuals employed by or otherwise acting on behalf of dealer members, to grant exemptions from CIRO’s proficiency requirements, to impose terms and conditions on approvals and membership in CIRO, to suspend and revoke approvals, and rights of review available to parties to such decisions. CIRO has the power to decide on an application’s approval or transfer. CIRO also has the power to delegate the powers of registration approval and refusal to a sub-committee, subject to conditions that it deems just and appropriate. CIRO can refuse an approval or transfer for the following reasons: The applicant does not meet CIRO requirements. The council believes that the applicant will not comply with CIRO rules and rulings. The applicant is not qualified for approval by reason of integrity, solvency, or experience. Approval is otherwise not in the public’s interest. The applicant or CIRO may challenge an approval decision and apply for a review within 30 business days after the release of the decision. This review is often referred to as an opportunity to be heard. If the applicant does not request a review within that time, the council’s decision becomes final. Appeals are heard by a hearing panel, whose decisions cannot be appealed. © CANADIAN SECURITIES INSTITUTE 12 14 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 On appeal, the hearing panel can make any of the following decisions: Affirming the decision Rejecting the decision Removing or varying any terms and conditions imposed on approval Limiting the ability to reapply for approval for an appropriate period of time Any decision that could have been made JURISDICTIONAL REGISTRATION ISSUES 5 | Describe the general requirements for dealing with clients in other jurisdictions. Unless exempt, dealer members and individual registrants can conduct securities business only in provinces in which they are registered. Even taking an unsolicited order from a client living in another province may constitute trading in that province. Such activity can bring about action by the securities administrator in that province, including the cancellation or denied renewal of a registrant’s approval. Most provinces allow non-residents to become registered, although Quebec may place restrictions on the clients that a registrant can deal with. However, registration of a firm, even on a non-resident basis, carries other requirements, including obtaining an address for service (often a lawyer’s office) and applying for registration or permission of all officers of the firm, regardless of whether they deal with residents of the province. Two of the most important exemptions are those covering dealings with accredited investors and with clients who move to a province in which the dealer member or the advisor is not registered. National Instrument 31-103 consolidated and significantly harmonized the registration exemptions available under provincial securities legislation. Some of these exemptions relate to the nature of the trade involved; others involve the client. One exemption involves trades with permitted clients, consisting of defined institutions and persons meeting certain asset or income requirements. The mobility exemption under NI 31-103 permits dealer members and advisors to continue to deal with a client who moves to a Canadian jurisdiction in which they are not registered. Individual advisors are limited to five clients. When using the exemption, the dealer member must file a notice with the securities regulatory authority in the relevant jurisdiction. DEALING WITH U.S. RESIDENTS Both federal and state law governs dealing with clients in the United States. Generally, Canadian dealer members and individual registrants are prohibited under the Securities Exchange Act of 1934 from dealing with clients in the United States unless they are registered with a U.S.-registered dealer. Exceptions include Canadian self-directed tax advantaged retirement plans, persons temporarily present in the United States, and exemptions dealing with institutions and registered dealers. Regulatory differences, particularly in capital requirements, make it virtually impossible to hold simultaneous registration in the United States and Canada. Firms that want to deal directly with U.S. clients usually establish a subsidiary to become registered in the United States. An advisor must be registered in the state in which the U.S. client resides, but they can be registered with both the Canadian firm and a U.S. affiliate. The Canadian advisor must pass the Series 7 exam (or Canada-limited versions, Series 37 or 38) and the Series 63 exam administered by the NASD, unless an exemption is granted. © CANADIAN SECURITIES INSTITUTE  CHAPTER 12      REGISTRATION 12 15 Regulators in the U.S. generally permit a Canadian dealer member to act as the carrying broker, provided that it only does business with institutions. In most cases, retail customer accounts must be carried by a U.S. dealer, unless the subsidiary has its own full clearing, custodial, and other back-office services in the United States. EXEMPTIONS TO DEALING WITH U.S. CLIENTS Special exemption provisions in the United States apply to holders of registered plan accounts, such as registered retirement savings plans (RRSP), who take up residence in the United States. Similar exemptions are often available to temporary residents. The Securities Exchange Act of 1934 exempts a foreign dealer from registration when dealing with a person temporarily residing in the United States, with whom the dealer had a bona fide pre-existing relationship before the person entered the United States. Temporary residence generally means residence for less than 183 days per year. This exemption is often referred to as the snowbird exemption. The specific section of the act pertaining to this exemption is Rule 15a-6(a)(4)(iii). Dealer members and salespersons dealing with U.S. residents who have Canadian self-directed tax advantaged retirement plans (such as RRSPs) are exempt from broker-dealer registration. The exemption is subject to the following conditions: The account must be managed by the client, who selects or controls the securities in the account. Dealer members and salespersons cannot advertise these accounts in the United States. However, dealer members can give clients holding such accounts access to a website where they can trade and obtain information about their accounts. They may also provide general information about these accounts. When a new account is opened, and at least annually thereafter, the dealer member must disclose to the clients holding these accounts that the accounts are not regulated under the securities laws of the United States. The dealer member must also disclose the fact that it is not subject to the broker-dealer regulations of the United States. The dealer member or salesperson must have a bona fide, pre-existing relationship with the client before the person enters the United States. Dealer members and salespersons are not permitted to solicit such accounts from U.S. residents. However, a Canadian salesperson who is changing firms can solicit the transfer of a client’s account if the salesperson had an existing relationship with that client. Furthermore, U.S. residents who have Canadian self-directed tax advantaged retirement plans (such as RRSPs) are permitted to transfer their accounts between Canadian dealer members on an unsolicited basis. The dealer member and salesperson must comply with the anti-fraud provisions of U.S. securities laws. The U.S. Securities and Exchange Commission permits U.S. residents who have Canadian self-directed tax advantaged retirement plans (such as RRSPs) to trade securities of foreign issuers in those accounts. Canadian issuers and mutual funds are included, even though those securities are not registered to trade in the United States. This exemption is limited to foreign issuers. Unregistered U.S. issues may not be sold to such accounts in reliance on SEC Rule 237. This exemption is subject to the following two conditions: All written offering materials (including advertisements and newsletters) for securities that are delivered to a U.S. resident who has a Canadian self-directed tax advantaged retirement plan must prominently disclose the fact that the securities are not registered with the SEC. The materials must also disclose that the securities are being offered or sold in the United States under an exemption from registration. Dealer members or salespersons who are relying on Rule 237 must not disclaim the applicability of Canadian law or jurisdiction in any proceeding involving eligible securities. Canadian mutual funds cannot generally be offered to Canadians temporarily residing in the United States. This restriction does not apply to Canadian self-directed tax advantaged retirement plans (such as RRSPs) because © CANADIAN SECURITIES INSTITUTE 12 16 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 such offers are part of a continuing public offering. Other Canadian securities can be offered to Canadians who are temporarily residing in the United States in ordinary secondary market transactions. STATE REGULATION The SEC exemption deals only with federal U.S. securities laws. Each U.S. state has its own securities laws requiring registration of dealers and individuals dealing with state residents. Without state registration (or an exemption), dealings with individuals temporarily present in a U.S. state are not permitted (despite federal exemptions), even for Canadian self-directed tax advantaged retirement plans. U.S. State regulators have taken different approaches to exemptions in the case of temporary residents and self- directed tax advantaged retirement plans. Some grant blanket exemptions; others require limited registration. Others still require that the firm and its Canadian salespersons make filings to obtain conditional exemptions. Generally, the U.S. states are grouped under the following three models: Self-Executing Under this exemption, provided that the Canadian dealer member meets certain Exemption requirements, the following entities are exempt: the Canadian dealer member, its salespersons, the securities being sold to Canadians temporarily residing in the U.S. state, and Canadian self-directed tax advantaged retirement plans. Exemption by Notice Under this exemption, provided that they file a request for exemption (i.e., self- Filing Procedure executing exemption), the following entities are exempt: the Canadian dealer member, its salespersons, the securities being sold to Canadians temporarily residing in the U.S. state, and Canadian self-directed tax advantaged retirement plans. Special Registration This is a special registration procedure for the Canadian broker-dealer, its salespersons, Procedure Model the securities being sold to Canadians temporarily residing in the U.S. state, and Canadian self-directed tax advantaged retirement plans. DEALING WITH INTERNATIONAL (NON-U.S.) CLIENTS CIRO requires that dealer members comply with the securities laws, including registration requirements, of all jurisdictions in which they conduct business. Many countries other than Canada and the United States have registration requirements. However, some countries permit residents to deal with offshore firms, particularly on an unsolicited basis. Dealer members must be familiar with the registration requirements of the countries in which they intend to conduct business. These requirements should be determined prior to business being solicited in other countries, especially if solicitation efforts are being conducted in that country. In addition to registration requirements that may exist in foreign jurisdictions, dealer members should evaluate whether the foreign jurisdiction in question is subject to any money laundering concerns or any outright sanctions imposed by the United Nations. These issues may preclude or significantly dissuade the firm from dealing with residents of these countries. Because a website may be considered a form of solicitation, dealer members should include a prominent disclaimer stating where it is registered, and that the website is not intended to solicit clients from other jurisdictions. A CCO should make sure that the account opening supervisors and administration staff are aware of issues, policies, and procedures related to registration outside of the dealer member’s (or advisor’s) home jurisdiction. They should also make sure that exception systems identify which account applications or changes of address may present a violation of registration requirements. © CANADIAN SECURITIES INSTITUTE  CHAPTER 12      REGISTRATION 12 17 SUMMARY In this chapter, we discussed the administrative and procedural functions of registrations and the many associated compliance issues. First, we discussed the three criteria CIRO uses to determine whether an applicant is fit and proper for approval as a CIRO registrant: integrity, financial solvency, and competency. The securities commissions and CIRO also set basic proficiency requirements for registrants in the various categories, of which there are nine. Furthermore, we discussed that additional proficiency requirements and approvals apply to dealer members dealing in certain products, such as options and futures. Specific rules also apply to persons working in supervisory positions. An important point concerning registration is that, although salespersons can be dually registered as an RR and a life insurance representative, CIRO dealer members are not permitted to have insurance licences or act as insurance brokers. For this reason, dual registration raises issues that require clear policies and supervision, including alternative investment vehicles, off-book transactions, and related business activities, particularly financial planning. We also discussed procedures related to the NRD, which is a web-based system that permits dealer members and advisors to file registration forms electronically in a manner that satisfies all jurisdictions in Canada. From a regulatory point of view, the NRD creates a single official record for each registrant and provides easy access to registrant information across the country. A dealer member must report a registrant’s cessation of employment, and reason for such. Similarly, specific procedures apply when an Approved Person takes an extended leave, returns after an absence, or experiences a change that may affect continued licensing. Finally, we discussed jurisdictional registration issues, given that non-exempt dealer members and individual registrants can conduct securities business only in provinces in which they are registered. Similarly, subject to special exemption provisions, Canadian dealer members and individual registrants are prohibited from dealing with clients in the United States unless they are registered with a US-registered dealer. In the next chapter, we explore trade desk supervision, another area of regulation affecting CCOs in carrying out their compliance responsibilities. In that chapter, we discuss the areas of regulation that originate from the two fundamental policy objectives: protecting investors from unfair, improper, and fraudulent practices; and fostering fair and efficient capital markets and confidence in their integrity. © CANADIAN SECURITIES INSTITUTE