Proposed Changes on Who Can Sell Commercial Paper in Canada

The Canadian Securities Administrators (the CSA) have published proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions And Ongoing Registrant Obligations (NI 31-103) on December 5, 2013 (the Proposed NI 31-103 Amendments), which included, among other things, a new short-term debt registration exemption under s. 8.22.1 of NI 31-103 (the Proposed registration exemption).

Currently, all CSA members except Ontario, have issued parallel exemptive relief orders (the blanket orders) where the dealer registration requirement does not apply to trades in short-term debt (e.g., commercial paper) by specified financial institutions. The Proposed registration exemption contains the same conditions as the blanket orders, including that the short-term debt instruments have a designated rating.

Proposed permited client requirement

The CSA, however, have added a new requirement limiting the use of the exemption to trades with permitted clients. Generally, “permitted clients” are wealthy individuals and entities, corporations, financial institutions and government entities; not retail investors.

The CSA stated that it has reviewed current exemptive relief orders and  determined that generally, the trading occurs with persons that meet the definition of a permitted client. The CSA also believes that permitted clients generally have sufficient investment knowledge or resources to obtain expert advice, and accordingly may not need or wish to have the same level of protection as other investors.

It should be noted that if the Proposed registration exemption cannot be satisfied, the trade can likely be conducted through a registered dealer. Most financial institutions have affiliations or relationships with registered dealers.

Although the CSA proposes to retain the condition relating to the securities traded under the Proposed registration exemption having prescribed credit ratings, the CSA may amend or remove this condition based on the outcome of work in this area by other CSA committees.  The CSA states that is plans to repeal the existing exemptive relief orders when the Proposed registration exemption comes into force.

In Ontario, there are alternate exemptions from the dealer registration requirement that are available for trading in short-term debt instruments, such as the exemptions in section 35.1 of the Securities Act (Ontario) and section 4.1 of Ontario Securities Commission Rule 45-501 Ontario Prospectus and Registration Exemptions.

 Comment period

The CSA has posed  a number of questions involving  the Proposed NI 31-103 Amendments and seeks feedback.  The comment  period ends on March 5, 2014.

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Disclaimer

This blog is not intended to create, and does not create an attorney-client relationship. You should not act or rely on information on this blog post without first seeking the advice of a lawyer.  This material is intended for general information purposes only and does not constitute legal advice.  For legal issues that arise, the reader should consult legal counsel.

Author:

Brian Koscak is a Partner at Cassels Brock & Blackwell LLP located in Toronto, Ontario and Chair of the Exempt Market Dealers Association of Canada. Brian is also a member of the Ontario Securities Commission’s Exempt Market Advisory Committee. Brian can be reached by phone at 416-860-2955, by e-mail at bkoscak@casselsbrock.com or on twitter @briankoscak. Brian also regularly writes about Canadian securities law matters on his personal blog at www.briankoscak.com.