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Bulletin #0396-P

Policy
National Instrument 31-103 Registration Requirements

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Contact: Ken Woodard
BULLETIN #0396 – P
Director, Communications and Membership Services
September 15, 2009
Phone: 416-943-4602
E-mail: kwoodard@mfda.ca

MFDA Bulletin

Policy

For Distribution to Relevant Parties within your Firm

National Instrument 31-103 Registration Requirements

On July 17, 2009, the Canadian Securities Administrators (“CSA”) published National
Instrument 31-103 Registration Requirements (“NI 31-103”), which will come into force on
September 28, 2009.1

The purpose of this Bulletin is to advise Members of the provisions in NI 31-103 that will result
in changes to MFDA Rules or Member practices.

Proficiency Requirements in General

NI 31-103 requires individuals to pass exams, not courses, to fulfill educational requirements for
registration. MFDA Rules currently refer to courses that were previously required under
securities legislation. Conforming changes will be made to MFDA Rules to ensure consistency
with NI 31-103. MFDA will not require new registrants to satisfy the course requirements
pending the Rule amendments.

Additions will also be made to the MFDA Rules to reflect proficiency requirements to sell labour
sponsored investment funds and commodity pools in order to provide a complete reference of
individual proficiency requirements for Members in the MFDA Rulebook.

1 In Ontario, NI 31-103 will come into force on the later of: (i) September 28, 2009; or (ii) when certain amendments
to the Budget Measures Act, 2009 are proclaimed in force.


Ultimate Designated Person (“UDP”)

The UDP is a new individual category of registration in NI 31-103. The UDP must be the chief
executive officer of the Member, its sole proprietor or equivalent. There are no proficiency
requirements for the UDP. The UDP is responsible for promoting a culture of compliance and
overseeing the effectiveness of the Member’s compliance system. The Member’s Chief
Compliance Officer (“CCO”) reports to the UDP. The CCO and UDP may be the same person if
the individual meets the requirements for both categories. MFDA Rules currently do not require
a UDP and, accordingly, MFDA will be making conforming Rule amendments to reflect the new
UDP requirement. Members have 3 months from September 28, 2009 to designate and apply for
registration for their UDP. Members will also have to notify the MFDA upon successful
registration of their UDP which can be done by contacting the MFDA Membership Services
Department.

Branch Managers

The individual “Branch Manager” category of registration has not been retained in NI 31-103. NI
31-103 requires dealers to establish a system of controls and supervision to provide reasonable
assurance that the dealer, and individuals acting on its behalf, comply with securities legislation
and manage risks associated with its business. There are no specific requirements for the
designation of a supervisor at branch locations. We are also aware that IIROC is eliminating its
“Branch Manager” category of registration and replacing it with a “Supervisor” category given
IIROC Members may conduct non-retail or non-advisory business where the branch supervision
structure may not be appropriate.

MFDA Members only conduct retail operations. Accordingly, MFDA will be maintaining its
Branch Manager requirements in its Rules. Members will be required to maintain information
regarding their branch locations and designated Branch Managers on the Members’ Only section
of the MFDA website. The MFDA will load branch information from NRD into the Members’
Only site before the NRD freeze on September 25, 2009. Members are asked to review the
information on the Members’ Only site after the NRD freeze to ensure it accurately reflects their
information. Any changes to branch information will then have to be reported to the MFDA
within 5 business days by contacting the MFDA Membership Services Department until the
Members Only site is able to accept such submissions electronically. Any questions with respect
to the reporting of branch information should be directed to the MFDA Membership Services
Department.

Client Mobility

MFDA By-laws and Rules require individuals to be registered and in compliance with securities
legislation. The new client mobility provisions contained in NI 31-103 will not be added to the
MFDA Rulebook. However, Members should be aware of and comply with the new client
mobility requirements in NI 31-103.

National Instrument 11-101 Principal Regulator System has been rescinded and replaced with NI
31-103. Sections 2.2 and 8.30 of NI 31-103 allow an Approved Person and a Member,
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respectively, to maintain “eligible clients” (as defined in the instrument) in each jurisdiction
without requiring registration in the jurisdiction subject to conditions. An Approved Person is
allowed up to 5 eligible clients and a Member is allowed up to a total of 10 eligible clients in
each jurisdiction. In order to rely on the exemption, Members and Approved Persons must not
act beyond the scope of their registration in their principal jurisdiction (for example, acting as an
adviser for discretionary managed accounts) and must be in compliance with their regulatory
obligations to clients (for example, KYC, suitability and client reporting obligations). Before
acting for the eligible client, the Member must advise the client in writing that it is exempt from
registration in the relevant jurisdiction and is not subject to requirements applicable under local
securities legislation. The Member must also submit a completed form 31-103F3 Use of Mobility
Exemption
to the local jurisdiction as soon as possible after relying on the exemption.

Members are expected to institute controls and procedures to comply with the conditions in NI
31-103 and to prevent the opening of new accounts in jurisdictions where the conditions of the
exemption cannot be satisfied or where the exemption is not relied on. Where a Member does not
rely on the exemption or if the exemption conditions cannot be met (for example where the
Member or Approved Person has exceeded the eligible client limits), the Member must:

• Freeze accounts in the relevant jurisdiction where the Member is not registered from
further purchase or switch transactions (except for transactions made pursuant to an
automatic contractual plan); and either

• Immediately advise the client in writing that:
o The Member is not registered in the jurisdiction;
o The Member is not able to process further purchase or switch transactions for the
account; and
o The client must transfer his or her account to another dealer; or

• Immediately apply for registration in the relevant jurisdiction.

Referral Arrangements

MFDA Rule 2.4.2 currently limits who a Member can enter into a referral arrangement with.
Further, any referral for securities related business, the sale of investment products or financial
services must be conducted through the Member. MFDA Rules currently allow Approved
Persons to enter into referral arrangements on their own accord provided the referrals do not
involve securities related business, the sale of investment products or financial services and such
activity is in compliance with MFDA Rule 1.2.1(d) relating to dual occupations.

NI 31-103 does not impose limits as to who a registrant can enter into referral arrangements
with. However, NI 31-103 requires all referral arrangements of Approved Persons to be
conducted through their Member firm. NI 31-103 also provides more detail regarding the
disclosure required to be provided to clients than is outlined in Rule 2.4.2. MFDA Rules will be
amended to harmonize with the requirements of NI 31-103.

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Members will have 6 months from September 28, 2009 to comply with the new requirements for
referral arrangements. This includes referral arrangements entered into prior to NI 31-103
coming into effect.

Investment Fund Managers (“IFMs”)


IFM is a new registration category and will only apply to a limited number of MFDA Members.
Those Members who are operating as an IFM will have 12 months from September 28, 2009 to
apply for registration as an IFM in their principal jurisdiction and 24 months to apply for IFM
registration in the other jurisdictions in which they operate. MFDA Members with IFM
registration will also have to separately submit financial filings and subordinated loan
agreements to the MFDA and provincial securities regulatory authority in their principal
jurisdiction in compliance with the different filing requirements of each regulator.

Trade Confirmations for Automatic Plans

For automatic payment plans, MFDA Rule 5.4.2 requires a trade confirmation to be sent for the
initial trade only. Under NI 31-103, trade confirmations for automatic plans are required to be
sent semi-annually. MFDA Rule 5.4.2 will be amended to conform to NI 31-103.

Account Statements

Frequency

NI 31-103 requires dealers to deliver account statements to clients at least once every 3 months
for both client name and nominee name accounts. This requirement will result in an increase to
the frequency of account statement delivery by Members operating in client name as such
Members currently send account statements annually as required by MFDA Rule 5.3.1. MFDA
Members who hold only a mutual fund dealer license will have 24 months from September 28,
2009 to comply with the quarterly statement requirement. Currently, there is no transition period
for MFDA Members who hold an EMD license. EMDs are required to send quarterly account
statements at the September 28, 2009 effective date. MFDA is aware that, at least in Ontario and
Newfoundland, consideration is being given for a transition period for client account statements
for EMDs. Should there be further developments regarding such a transition period, MFDA will
issue a bulletin to Members.

Content

NI 31-103 requires account statements to disclose information regarding client positions for
client name and nominee name accounts. MFDA Rule 5.3.3(b) does not require, but does not
prohibit, disclosure of client positions for client name accounts. Given the new requirements of
NI 31-103, MFDA Rule 5.3.3 will be amended to require disclosure of client positions regardless
of whether the assets are held in nominee name or client name.

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Outsourcing Account Statements and Trade Confirmations

Under NI 31-103, dealers are responsible for sending account statements and trade confirmations
to clients. MFDA Rules 5.3.1(c) and (d) and 5.4.1 allow for instances where a dealer may rely on
another party to send account statements or trade confirmations on its behalf. Based on
discussions with the CSA, the MFDA understands that Rules 5.3.1(c) and (d) and 5.4.1 do not
require amendment to comply with NI 31-103, as such instances would be considered
“outsourcing arrangements”. The NI 31-103 Companion Policy notes that Members are
responsible and accountable for all functions that they outsource to a service provider.
Outsourcing arrangements should be subject to a binding agreement, in writing, stating that due-
diligence should be conducted prior to engaging third party service providers and that the firm,
its auditors and regulators should have the same access to the work product of such service
providers as they would if the firm performed the activities itself.

Exempt Market Dealers (“EMDs”)

This is a new category of registration for entities in the business of dealing in exempt securities.
The introduction of the EMD category of registration does not impact the scope of the MFDA’s
regulatory oversight as Members and Approved Persons selling exempt securities are currently
required to conduct such activity through the MFDA Member. MFDA Rule 1.1.1 requires all
securities related business to be carried on for the account and through the facilities of the
Member. Securities related business includes trading and advising in exempt securities. While
the EMD category may be new, Members and Approved Persons are still not permitted to sell
exempt securities through any other entity or refer clients to another party to purchase exempt
securities.

Dealer Registration

MFDA Members who wish to continue selling exempt securities after September 28, 2009 will
be required to obtain EMD registration in all applicable provinces and territories. In Ontario and
Newfoundland, Members with LMD registration will not have to apply for an EMD license as
LMD registration will convert automatically to EMD registration. In the other provinces and
territories, Members will have to apply for EMD registration. In the provinces and territories
other than Ontario and Newfoundland, Members who have been actively selling exempt
securities prior to September 28, 2009 will have 12 months to apply for the EMD license. Those
Members who have not been actively selling exempt securities prior to September 28, 2009 and
new MFDA Members after September 28, 2009 will have to apply for and obtain an EMD
license prior to selling exempt securities.

Non-Prospectus Qualified Mutual Funds

Mutual fund dealers are licensed to sell “mutual funds” as defined under the various provincial
Securities Acts. “Mutual funds” are not limited to those that are prospectus qualified. Certain
non-prospectus qualified investment funds may also meet the definition of a “mutual fund” and
therefore would not require additional EMD registration to distribute.

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New EMD Proficiency Requirements

Salespersons of an EMD must pass either:

• the Canadian Securities Course Exam;
• the Exempt Market Products Exam; or
• satisfy the requirements of an advising representative for a portfolio manager.

CCOs of an EMD selling exempt securities must pass the PDO exam and either:

• the Canadian Securities Course Exam;
• the Exempt Market Products Exam; or
• satisfy the requirements of a CCO for a portfolio manager.

It is important to note that the previous Mutual Fund Officers, Partners and Directors
course and the new Mutual Fund Dealers Compliance Exam do not satisfy the proficiency
requirements of a CCO of an EMD.

EMD Proficiency Transition Period

In Ontario and Newfoundland, the CCO and salespersons of a Member with an existing LMD
license have 12 months from September 28, 2009 to obtain the above proficiency. In the other
provinces and territories, if the firm is active in selling exempt securities, the CCO and
salespersons have 12 months to obtain the above proficiency. If the Member is not active in
selling exempt securities prior to September 28, 2009 or obtains membership in the MFDA after
September 28, 2009, the Member must obtain an EMD license and individuals must satisfy the
above proficiency prior to selling exempt securities.

DOCs#185606
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