Securities Law & Instruments



Notice of Proposed National Instrument 35-101
and
Companion Policy 35-101CP Conditional Exemption From Registration
for United States Broker-Dealers and Agents

Substance and Purpose of Proposed National Instrument and Companion Policy

The substance and purpose of the proposed National Instrument are to provide United States ofAmerica (the "U.S.A.") broker-dealers and their agents with a conditional exemption from theapplicable registration and prospectus requirements under Canadian securities legislation in orderto facilitate certain cross-border trading in foreign securities between U.S.A. broker-dealers andtheir clients from the U.S.A. who are present in a Canadian jurisdiction (the "exemption").

The proposed National Instrument is based on an initiative that was developed by the NorthAmerican Securities Administrators Association ("NASAA") Cross-Border Trading Committeeand that was approved by the members of NASAA (the "NASAA Proposal"). The NASAAProposal was published in the Ontario Securities Commission Bulletin (1995), 18 OSCB 5252.NASAA is composed of regulators from the Canadian provinces and territories, the Americanstates, the District of Columbia, Mexico and Puerto Rico. NASAA's membership does notinclude the Securities & Exchange Commission of the U.S.A. (the "SEC").

The proposed National Instrument and Companion Policy implement, in part, therecommendation of the Canadian Securities Administrators (the "CSA") Task Force onOperational Efficiencies that Canadian securities regulatory authorities increase the coordinationof regulation, including the standardization of requirements.

The proposed National Instrument and Companion Policy are initiatives of the CSA. Theproposed National Instrument is expected to be adopted as a rule in each of British Columbia,Alberta, Ontario and Nova Scotia, and as a blanket order or ruling in all other jurisdictionsrepresented by the CSA. The proposed Companion Policy is expected to be adopted as a policyin all jurisdictions represented by the CSA.

Terms used in the proposed Companion Policy that are defined or interpreted in the proposedNational Instrument or a definition instrument in force in the jurisdiction should be read inaccordance with the National Instrument or the definition instrument, unless the contextotherwise requires.



Summary of Proposed National Instrument and Companion Policy

The proposed National Instrument provides certain U.S.A. broker-dealers and their agents withan exemption from the applicable registration and prospectus requirements under Canadiansecurities legislation. Under the exemption, a U.S.A. broker-dealer and its agents may engage intwo specific types of cross-border trading activities in foreign securities.

The first category of trading activity provided for under the exemption permits U.S.A. broker-dealers and their agents to trade solely in foreign securities with an individual ordinarily residentin the U.S.A. who is temporarily resident in the local jurisdiction and with whom the broker-dealer had a broker-dealer client relationship before the individual became temporarily residentin the local jurisdiction. The second category of trading activity provided for under theexemption permits U.S.A. broker-dealers and their agents to trade solely in foreign securitieswith an individual for the individual's tax-advantaged retirement savings plan, and with theindividual's tax-advantaged retirement savings plan, if the plan is located in the U.S.A., theindividual is the holder or contributor of the plan, and the individual was previously resident inthe U.S.A.

The proposed National Instrument also exempts a distribution of foreign securities by U.S.A.broker-dealers and their agents under the registration exemptions provided for in the proposedNational Instrument from the prospectus requirement and the underwriter registrationrequirement. As a result, issuers whose securities are traded only in the manner prescribed underthe proposed National Instrument are exempt from the prospectus requirements applicable underCanadian securities legislation. However, the distribution of foreign securities must comply withall applicable U.S.A. federal securities laws and state securities legislation in the U.S.A.

Under the proposed National Instrument, U.S.A. broker-dealers and their agents are, in thesecircumstances, exempt from the applicable registration and prospectus requirements underCanadian securities legislation subject to certain conditions. This approach is consistent with theproposed National Instrument's underlying policy that investors will be relying primarily uponthe regulation by the home jurisdiction's securities regulators and statutory liability imposedunder legislation in the U.S.A. for protection. Although the Canadian securities regulatoryauthorities will retain jurisdiction to investigate activity outside the scope of the proposedNational Instrument, as well as activities that violate the proposed National Instrument's generalanti-fraud requirement, it is contemplated that the licensing and surveillance of the broker-dealerand agents will be conducted primarily by securities regulators in the U.S.A.

For the purposes of monitoring the trading activities of U.S.A. broker-dealers and their agents inCanada on an ongoing basis, the proposed National Instrument sets forth a number ofrequirements relating to delivery of documents and other regulatory requirements.

Under the proposed National Instrument, U.S.A. broker-dealers are required to have theirprincipal place of business in the U.S.A. and maintain membership in the National Association ofSecurities Dealers (the "NASD"). In addition, the broker-dealer must deliver the followingmaterials to the securities regulatory authority immediately after the broker-dealer's first tradeunder the exemption: the most recent copy of the broker-dealer's Form BD; evidence ofmembership in the NASD; evidence that the broker-dealer is registered in the state of the U.S.A.from which the trade took place; and an executed submission to jurisdiction and appointment ofagent for service of process.

The broker-dealer is prohibited from advertising or soliciting new accounts in any Canadianjurisdiction. In addition, the broker-dealer must provide books and records upon request andinform the securities regulatory authority immediately of any criminal proceeding brought againstthe broker-dealer or its agents in a jurisdiction or foreign jurisdiction, or of any finding orsanction imposed on the broker-dealer or its agents as a result of any self-regulatory or regulatoryaction involving fraud, theft, deceit, misrepresentation or similar conduct in a jurisdiction orforeign jurisdiction. Lastly, in the course of dealings with its clients, the broker-dealer is under aduty to act fairly, honestly and in good faith and disclose in writing to each client that the broker-dealer and its agents are not subject to the full regulatory requirements applicable under Canadiansecurities legislation.

Agents who are representing U.S.A. broker-dealers that comply with the above conditions arealso subject to a number of requirements under the exemption. An agent is required to deliver tothe securities regulatory authority immediately after the agent's first trade under the exemption:the most recent copy of the agent's Form U-4; evidence that the agent is registered in the state inthe U.S.A. from which the trade took place; and, an executed submission to jurisdiction andappointment of agent for service of process. Similar to broker-dealers, the agent is required toinform the securities regulatory authority immediately of any criminal proceeding brought againstthe agent in a jurisdiction or foreign jurisdiction, or of any finding or sanction imposed on theagent as a result of any self-regulatory or regulatory action involving fraud, theft, deceit,misrepresentation or similar conduct in a jurisdiction or foreign jurisdiction. In addition, theagent must act fairly, honestly and in good faith in the course of his or her dealings with theagent's clients.

Each of the Canadian securities regulatory authorities retains the authority to revoke theexemption, subject to applicable statutory provisions governing hearings and reviews, as itapplies to a broker-dealer or agent if it considers the broker-dealer's or agent's conduct to becontrary to the public interest.

The proposed Companion Policy includes a statement that was approved by the NASAAmembers indicating that the Canadian securities regulatory authorities, in connection withdelivery of the required material under the exemption, will not make any inquiries concerningany possible failure to register in relation to past trading activities of the type provided under theexemption up until a date which is 120 days after the effective date of the implementation of theproposed National Instrument. In addition, the Canadian securities regulatory authorities will notmake inquiries concerning any possible failure to register in relation to any other tradingactivities that may have been conducted in any Canadian jurisdiction prior to September 1, 1996.This statement does not preclude the Canadian securities regulatory authorities from makinginquiries if it comes to their attention that a U.S.A. broker-dealer or agent may have beenengaged in improper trading activities in their jurisdiction beyond failing to register. A numberof state securities regulators in the U.S.A. have agreed not to make inquiries of any Canadiandealer or salesperson on a reciprocal basis.

The proposed Companion Policy also provides guidance regarding the scope of trading activitiespermitted under the proposed National Instrument as well as the conditions of the exemptiverelief.

Background

Reciprocity

The NASAA Proposal, which is intended to be reciprocal in nature, provides for certainregulatory accommodations in relation to cross-border trading activities by certain U.S.A. broker-dealers and their agents, as well as certain Canadian dealers and those individuals registered toact on their behalf ("salespersons"). The proposed National Instrument will implement theNASAA Proposal on a uniform basis in all Canadian jurisdictions. Regulatory accommodationsof a largely reciprocal nature are to be provided by the state securities authorities in the U.S.A. toCanadian self regulatory organization ("SRO") member dealers and their salespersons on a state-by-state basis. To date, the following state securities authorities in the U.S.A. have implementedthe NASAA Proposal in their jurisdiction by establishing a simplified category of registration forCanadian SRO member dealers and their salespersons, or by providing them with an exclusion(from the definition of "broker-dealer" and "agent" under state law) or an exemption from thestate registration requirements: Colorado, Iowa, Kansas, Florida, Maine, Michigan, NorthDakota, Oregon, Rhode Island, Utah, Washington and Wisconsin. Seventeen other statesecurities authorities in the U.S.A. are in the process of implementing the NASAA Proposal intheir jurisdictions according to information received by the Chair of the NASAA Committee.

The Application of U.S.A. Federal Securities Laws

The NASAA Proposal relates to state requirements and does not affect the application of U.S.A.federal securities laws such as the Securities Act of 1933 (the "1933 Act"), the Exchange Act of1934 (the "1934 Act"), and the Investment Company Act of 1940 (the "Investment CompanyAct"). In order for reciprocal relief to be available to Canadian SRO member dealers and theirsalespersons under the NASAA Proposal, no-action or other relief regarding U.S.A. federalsecurities laws would be required from the SEC. The CSA, the Investment Dealers Associationof Canada (the "IDA") and the Investment Funds Institute of Canada ("IFIC") have beendiscussing these issues with the SEC staff.

SEC Rule 15a-6 under the 1934 Act exempts from the federal broker-dealer registrationrequirement non-U.S.A. broker-dealers that engage in unsolicited transactions(1) and certaindirect/solicited transactions(2) with U.S.A. persons. The IDA has written to SEC Staff requestingtheir concurrence that SRO member dealers will be permitted to offer services of the typecontemplated in the NASAA Proposal under Rule 15a-6. At this time, there are some indicationsthat this relief may not be granted.

The cross-border sale of mutual fund units, which constitute an important investment componentof registered retirement savings plan or registered retirement income fund accounts in Canada,also raises an issue of reciprocal market access under the NASAA Proposal because of theapplication of the Investment Company Act to non-U.S.A. investment companies.(3) These issuesare described further below.

Section 7(d) of the Investment Company Act prohibits a foreign fund from making a publicoffering of its securities in the U.S.A. without obtaining a SEC order permitting it to registerunder the Investment Company Act. Section 7(d) has operated to significantly limit the entry offoreign funds into the U.S.A. market.(4) As a result, the application of the Investment CompanyAct will operate as a bar to the reciprocal operation of the NASAA Proposal with regard to thesale of mutual funds to Canadian investors unless relief from its requirements is obtained.

Section 7(d) of the Investment Company Act does not expressly prohibit private offerings orlimit the number of shareholders that a foreign fund may have. Section 3(c)(1) of the InvestmentCompany Act addresses offerings by private investment companies. It excepts from thedefinition of "investment company" an entity that has no more than 100 beneficial owners of itssecurities and that does not presently propose to make a public offering of its securities in theU.S.A. The SEC's Division of Investment Management, in interpreting sections 7(d) and 3(c)(1),has stated that an unregistered foreign fund can make a private offering in the U.S.A.concurrently with a public offering abroad and not violate section 7(d), provided the fund has nomore than 100 beneficial owners resident in the U.S.A.(5) In many circumstances, the cross-border sale of mutual funds under the NASAA Proposal to Canadian investors will not qualifyfor the private offering exemption because the number of investors resident in the U.S.A. willlikely exceed the 100 investor limit and will not be sold exclusively to qualified purchasers.(6)

The securities registration provisions of the 1933 Act may also apply to trades effected byCanadian dealers under the NASAA Proposal if such trades are not restricted to secondarymarket transactions but include public offerings of securities.(7) This restriction would apply tocross-border trades in mutual funds by Canadian dealers under the NASAA Proposal.

The SRO Structure in Canada

The regulatory relief contemplated in the NASAA Proposal is restricted to dealers who aremembers of an SRO in their home jurisdiction. In the U.S.A., a broker-dealer generally may notcommence securities activities until it becomes a member of an SRO, namely the NationalAssociation of Securities Dealers. Currently, in Canada, not all dealers are required to be amember of an SRO. As such, these dealers will not be eligible to qualify for the relief availableunder the NASAA Proposal. The CSA believes that the movement towards a new regime thatrequires all dealers to be a member of an SRO will address any imbalances arising from thestructural differences that exist between Canada and the U.S.A. in the area of self-regulation.

The CSA recognizes the importance of providing Canadian dealers and their salespersons withcross-border access of a reciprocal nature contemplated by the NASAA Proposal. Comment isspecifically requested on the lack of full reciprocity by the securities regulators in the U.S.A. onthe substance of the proposed National Instrument.

Foreign Securities

The NASAA Proposal was not limited to trading in foreign securities. Foreign securities isdefined in the proposed National Instrument to include securities of Canadian issuers that areinterlisted on an exchange or quoted on a market in the U.S.A. The NASAA Proposal also doesnot provide relief from the registration of securities distributed under federal law. The proposedNational Instrument provides such relief but only for distributions of foreign securities that areotherwise made in compliance with securities law in the U.S.A.

The restriction of the relief provided in the proposed National Instrument is necessary to ensurethat there is regulatory oversight over the distribution of securities into Canada to the limitedclass of persons for which the relief is permitted. Comment is specifically requested on therestriction of the relief under the proposed National Instrument to trades in foreign securities andthe definition of foreign securities.

Authority for the Proposed National Instrument

In those jurisdictions in which the National Instrument is to be implemented as a rule, order orruling, the securities legislation in each of those jurisdictions provides the securities regulatoryauthority with the authority in respect of the subject matter of the proposed National Instrument.

In Ontario, the following provisions of the Securities Act (Ontario) (the "OSA") provide theOntario Securities Commission (the "Ontario Commission") with the authority to make theproposed National Instrument. Paragraph 143(1)8 of the OSA authorizes the OntarioCommission to make rules providing for exemptions from the registration requirements underthe OSA or for the removal of exemptions from those requirements. Paragraph 143(1)13 of theOSA authorizes the Ontario Commission to make rules providing for regulating trading insecurities to prevent trading that is fraudulent, manipulative, deceptive or unfairly detrimental toinvestors. Paragraph 143(1)20 of the OSA authorizes the Ontario Commission to make rulesproviding for exemptions from the prospectus requirements under the OSA and for the removalof exemptions from those requirements.

Unpublished Materials

In proposing the National Instrument, the CSA have not relied on any significant unpublishedstudy, report or other written materials.

Alternatives Considered

In developing the proposed National Instrument, the Canadian securities regulatory authoritiesconsidered whether the NASAA Proposal should be implemented in Canada by way of anexemption or a simplified category of registration. Given the restricted nature of the permittedtrading activities afforded to U.S.A. broker-dealers and their agents under the proposed NationalInstrument, and the underlying policy that investors will be relying primarily upon the regulatorystandards of the broker-dealer's or agent's home jurisdiction for protection, it was decided toimplement the NASAA Proposal by way of exemptions from the applicable registration andprospectus requirements under Canadian securities legislation. In order to monitor these tradingactivities in the Canadian jurisdictions on an ongoing basis, and to ensure that investorprotections are not compromised, the exemption has been made conditional upon the satisfactionof a number of filing and other regulatory requirements.

Related Instruments

The proposed National Instrument and Companion Policy are related. The proposed CompanionPolicy is also related to section 127 of the OSA.

Anticipated Costs and Benefits

It is anticipated that Canadian SRO member dealers and their salespersons will benefit from theregulatory accommodations, and the corresponding reduction in costs, provided by the securitiesauthorities in the U.S.A. by permitting them to engage in certain cross-border trading activitieswith individuals from Canada. It is also anticipated that the proposed National Instrument willprovide similar cost benefits to U.S.A. broker-dealers and their agents by permitting them toengage in certain cross-border trading activities with individuals from the U.S.A. under theexemption. The costs of compliance with the requirements of the Proposed National Instrumentwill not be significant.

Comments

Interested parties are invited to make written submissions with respect to the proposed NationalInstrument and Companion Policy. Submissions received by January 19, 1998 will beconsidered.

Submissions should be made to all of the Canadian Securities Administrators listed below in careof the Ontario Commission in duplicate, as indicated below:British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Securities Registry, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territory
c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

 

Submissions should also be addressed to the Commission des valeurs mobilièrs du Québec asfollows:

Jacques Labelle
General Secretary
Commission des valeurs mobilières du Québec
Tour de la Bourse
C.P. 246, 17th FloorMontreal, Quebec H4Z 1G3

A diskette containing the submissions (in DOS or Windows format, preferably Wordperfect)should also be submitted. As securities legislation in certain provinces requires that a summaryof written comments received during the comment period be published, confidentiality ofsubmissions cannot be maintained.>

Questions may be referred to any of the following:

Robert Hudson
Special Advisor, Registration
British Columbia Securities Commission
(604) 660-4800

David Sheridan
Legal Counsel
Alberta Securities Commission
(403) 297-2630

Marcel de la Gorgendière
Chairman
Saskatchewan Securities Commission
(306) 787-5645

David Cheop
Counsel
Manitoba Securities Commission
(204) 945-2561

Randee Pavalow
Policy Co-ordinator/Advisor
Ontario Securities Commission
(416) 593-8257

Joëlle Saint-Arnault
Comm. des Valeurs Mobilières du Québec
Legal Advisor
(514) 873-5009 ext. 237

Elaine Anne MacGregor
Deputy Director, Capital Markets
Nova Scotia Securities Commission
(902) 424-7768

 



Proposed National Instrument and Companion Policy

The text of the proposed National Instrument and Companion Policy follow, together withfootnotes that are not part of the National Instrument or Companion Policy, as applicable, buthave been included to provide background and explanation.

Dated: October 17, 1997.

COMPANION POLICY 35-101CP

CONDITIONAL EXEMPTION FROM REGISTRATION FOR

UNITED STATES BROKER-DEALERS AND AGENTS

PART 1 INTRODUCTION

1.1 Introduction - Cross-border trading activities between Canada and the United States ofAmerica often take place because of the movement of residents between the two countries. Inorder to facilitate certain cross-border trading activities that may arise between United Statesbroker-dealers and their existing clients who are now located in Canada, the Canadian securitiesregulatory authorities have adopted National Instrument 35-101 Conditional Exemption FromRegistration for United States Broker-Dealers and Agents (the "Instrument") which providescertain broker-dealers, and their agents, resident in the United States with a conditionalexemption from the applicable registration requirements and the prospectus requirement. Thisapproach is consistent with the Instrument's underlying policy that investors will be relyingprimarily upon the regulation by securities regulators and statutory liability imposed bylegislation in the broker-dealer's or agent's home jurisdiction for protection.

PART 2 GENERAL PRINCIPLES

2.1 General - The Instrument provides that a United States broker-dealer and its agents mayengage in two specific types of cross-border trading activities in foreign securities with anindividual who was previously resident in the United States, and is now located in Canada,regardless of nationality. In Quebec, the term foreign securities includes futures.

2.2 Temporarily Absent - The first category of activity provided for under clause 2.1(1)(a) andsection 3.1 of the Instrument permits brokers-dealers and their agents to deal in foreign securitieswith an individual ordinarily resident in the United States who is temporarily resident in aCanadian jurisdiction and with whom the broker-dealer had a broker-dealer client relationshipbefore the individual became temporarily resident in the Canadian jurisdiction. This aspect ofthe National Instrument is intended to allow persons from the United States who are on atemporary work assignment in Canada, or who may be in Canada on vacation or for otherreasons, to trade with their home broker-dealer and agent in the United States. The concept of"temporarily" as it appears in the National Instruments is based upon SEC Rule 15a-6 whichexempts certain non-United States broker-dealers from registering under the 1934 Act.

2.3 Tax Accounts - The second category of activity provided for under clause 2.1(1)(b) andsection 3.1 of the Instrument permits broker-dealers and their agents to deal in foreign securitieswith an individual who was previously resident in the United States and who is resident in aCanadian jurisdiction for trades with the individual's tax advantaged plan, and with theindividual's tax-advantaged retirement savings plan, if the plan is located in the United States andthe individual is either a holder of, or contributor to, the plan. Under laws of the United States ofAmerica, tax-advantaged retirement savings plans must be located in the United States ofAmerica and result in adverse tax consequences for United States individuals if collapsed. Forthese reasons, individuals are permitted by the Instrument to continue this type of trading activitywith a broker-dealer and its agent in the United States of America whether or not there was a pre-existing relationship with the broker-dealer or agent while the individual was in the United Statesof America.

2.4 Prospectus and Underwriter Exemption - Part 4 of the Instrument exempts a distributionof foreign securities by United States broker-dealers and their agents under the registrationexemptions provided for in the Instrument from the prospectus requirement and the underwriterregistration requirement. However, the distribution of foreign securities must comply withapplicable U.S. federal securities law and state law requirements in the United States of America,which include securities registration and prospectus delivery.

PART 3 OPERATION OF EXEMPTIVE RELIEF

3.1 Affiliates - Section 2.1 of the Instrument requires that the broker-dealer have "no office orphysical presence in any jurisdiction". A broker-dealer that has a Canadian affiliate in anyjurisdiction is still able to take advantage of the exemptions provided for under the Instrument.The affiliate, however, is not able to take advantage of the exemptions.

3.2 Limitation of Exemptions - Any activity beyond the scope of the exemptions will constituteunregistered activity and will be subject to the applicable enforcement provisions provided forunder Canadian securities legislation.

3.3 Retention of Authority - Under Canadian securities legislation, each of the Canadiansecurities regulatory authorities retains the authority to revoke the exemptions as they apply to abroker-dealer or agent if the broker-dealer's or agent's conduct is considered to be contrary to thepublic interest.

3.4 Receipt of Documentation - The Canadian securities regulatory authorities willacknowledge receipt of material sent by broker-dealers and agents under the Instrument.

3.5 Fees - No fees will be imposed on broker-dealers or agents by the Canadian securitiesregulatory authorities under the exemptions provided for under the Instrument.

PART 4 INQUIRIES REGARDING PAST ACTIVITIES

4.1 Restricted Activities - A Canadian securities regulatory authority will not make inquiriesabout any possible failure by broker-dealers or their agents to register that rely on the exemptionfrom registration for their

(a) trading activities and related incidental advising activities that may have been conducted withan individual from the United States of America that take place before the date which is 120 daysafter the coming into effect of the Instrument in the jurisdiction in which the Canadian securitiesregulatory authority is situate, if the individual

(i) was temporarily resident in the jurisdiction and the broker-dealer or agent had a broker-dealerclient relationship with the individual before the individual became temporarily resident in thejurisdiction, or

(ii) if the trades were for or with a tax-advantaged retirement savings plan located in the UnitedStates of America and the individual was either the holder of, or contributor to, the plan; and

(b) any other trading and related incidental advising activities that may have been conducted inthe jurisdiction before September 1, 1996.

4.2 Other Activities - A Canadian securities regulatory authority may make inquiries if it comesto its attention that a broker-dealer or its agent may have been engaged in improper activities inthe jurisdiction in which the Canadian securities regulatory authority is situate beyond failing toregister.



NATIONAL INSTRUMENT 35-101

CONDITIONAL EXEMPTION FROM REGISTRATION FOR

UNITED STATES BROKER-DEALERS AND AGENTS(8)

PART 1 DEFINITIONS(9)

1.1 Definitions - In this Instrument

"adviser registration requirement" means the requirement in securities legislation(10) that prohibitsa person or company from acting as an adviser unless the person or company is registered in theappropriate category of registration under securities legislation;(11)

"agent" means a partner, officer, director or salesperson of a broker-dealer who is acting onbehalf of a broker-dealer in effecting trades of securities;

"broker-dealer" means a "broker" or "dealer", as those terms are defined in the 1934 Act(12), thathas its principal place of business in the United States of America;

"foreign security" means a security

(a) that is listed for trading or quoted on an exchange or market outside of Canada; or

(b) of an issuer that is not incorporated, continued or organized under the laws of Canada or ajurisdiction;(13)

"Form BD" means the uniform application for broker-dealer registration issued by the NASD, asamended from time to time;

"Form U-4" means the uniform application for individual securities industry registration ortransfer issued by the NASD, as amended from time to time;

"NASD" means the National Association of Securities Dealers in the United States of America;

"prospectus requirement" means the requirement in securities legislation that prohibits a personor company from distributing a security unless a preliminary prospectus and prospectus for thesecurity have been filed and receipts obtained for them;(14)

"trading registration requirement" means the requirement in securities legislation that prohibits aperson or company from trading in a security unless the person or company is registered in theappropriate category of registration under securities legislation;(15)

"underwriter registration requirement" means the requirement in securities legislation thatprohibits a person or company from acting as an underwriter unless the person or company isregistered in the appropriate category of registration under securities legislation;(16) and

"U.S. federal securities law" means the federal statutes of the United States of Americaconcerning the regulation of securities markets and trading in securities and the regulations,rules, forms and schedules under those statutes.

PART 2 BROKER-DEALER EXEMPTION

2.1 Broker-dealer Exemption

(1) Subject to the requirements of this Part, the trading registration requirement does not apply toa broker-dealer that has no office or other physical presence in any jurisdiction for trading inforeign securities with or for

(a) an individual ordinarily resident in the United States of America who is temporarily residentin the local jurisdiction and with whom the broker-dealer had a broker-dealer client relationshipbefore the individual became temporarily resident in the local jurisdiction; or

(b) an individual if the trade is for the individual's tax-advantaged retirement savings plan or withthe individual's tax-advantaged retirement savings plan, and

(i) the plan is located in the United States of America,

(ii) the individual is the holder of or contributor to the plan, and

(iii) the individual was previously resident in the United States of America.

(2) The adviser registration requirement does not apply to advising activities of the broker-dealerif those activities are solely incidental to trades effected by the broker-dealer under subsection(1).

2.2 Solicitations - The broker-dealer shall not advertise for or solicit new accounts in anyjurisdiction.

2.3 Membership in NASD - The broker-dealer shall maintain membership in the NASD.

2.4 Documentation - The broker-dealer shall deliver to the securities regulatory authorityimmediately after the broker-dealer's first trade under subsection 2.1(1)

(a) the most recent copy of the broker-dealer's Form BD;

(b) evidence that the broker-dealer is a member of the NASD and is registered in the state of theUnited States of America from which the trade took place; and

(c) an executed Submission to Jurisdiction and Appointment of Agent for Service of Process inthe form of Appendix A.

2.5 Books and Records

(1) The broker-dealer shall provide to the securities regulatory authority, on demand, completecopies of the papers, documents, books, records and correspondence that it is required by theNASD to maintain for the cross-border trading activities under subsection 2.1(1), subject to theapplicable laws of the foreign jurisdiction in which the books, papers, documents, records andcorrespondence are located concerning the production of such books, papers, documents, recordsand correspondence.

(2) If the laws of the foreign jurisdiction in which the books, papers, documents, records orcorrespondence referred to in subsection (1) are located prohibit the production of the books,papers, documents, records or correspondence without the consent of the relevant client, thebroker-dealer shall use its best efforts to obtain the client's consent.

2.6 Disclosure of Information - The broker-dealer shall inform the securities regulatoryauthority immediately of any criminal proceeding brought against the broker-dealer or its agentsin a jurisdiction or foreign jurisdiction, or of any finding or sanction imposed on the broker-dealer or its agents as a result of any self-regulatory or regulatory action involving fraud, theft,deceit, misrepresentation or similar conduct in a jurisdiction or foreign jurisdiction.(17)

2.7 Disclosure to Clients

(1) The broker-dealer shall disclose in writing to each client in the local jurisdiction that thebroker-dealer and its agents are not subject to the full regulatory requirements applicable undersecurities legislation.

(2) The broker-dealer shall make the disclosure required by subsection (1) immediately after itconducts its first trade on behalf of the client.

2.8 Duties to Clients - The broker-dealer shall, in the course of its dealings with clients, actfairly, honestly and in good faith.

2.9 Termination Notice - The broker-dealer shall immediately notify the securities regulatoryauthority if the broker-dealer will no longer engage in trading or advising activities under section2.1, after which the broker-dealer shall not engage in such activities without complying with Part2 as if the first trade after such notice were the first trade referred to in section 2.4.

PART 3 AGENTS EXEMPTION3.1 Agents Exemption - Subject to the requirements of this Part, the adviser registrationrequirement and the trading registration requirement do not apply to an agent engaging in tradesor advising activities that are carried out in compliance with the requirements of section 2.1 andsuch activities are on behalf of a broker-dealer under section 2.1.

3.2 Documentation - The agent shall deliver to the securities regulatory authority immediatelyafter the agent's first trade under section 3.1

(a) the most recent copy of the agent's Form U-4;

(b) evidence that the agent is registered in the state in the United States of America from whichthe trade took place; and

(c) an executed Submission to Jurisdiction and Appointment of Agent for Service of Process inthe form in Appendix B.

3.3 Disclosure of Information - The agent shall inform the securities regulatory authorityimmediately of any criminal proceeding brought against the agent in a jurisdiction or foreignjurisdiction, or of any finding or sanction imposed on the agent as a result of any self-regulatoryor regulatory action involving fraud, theft, deceit, misrepresentation or similar conduct in ajurisdiction or foreign jurisdiction.

3.4 Duties to Clients - The agent shall, in the course of its dealings with the broker-dealer'sclients, act fairly, honestly and in good faith.

3.5 Termination Notice - The agent shall immediately notify the securities regulatory authorityif the agent will no longer engage in trading or advising activities under section 3.1, after whichthe agent shall not engage in such activities without complying with Part 3 as if the first tradeafter such notice were the first trade referred to in section 3.2.

PART 4 EXEMPTION FROM PROSPECTUS AND UNDERWRITERREQUIREMENTS(18)

4.1 Exemption from Prospectus and Underwriter Requirements - The prospectusrequirement and underwriter registration requirement do not apply to a distribution of foreignsecurities

(a) by a broker-dealer or agent for a trade for which the adviser registration requirement and thetrading registration requirement do not apply under section 2.1 or 3.1; and

(b) made in compliance with all applicable

(i) U.S. federal securities laws, and

(ii) state securities legislation in the United States of America.


NATIONAL INSTRUMENT 35-101

CONDITIONAL EXEMPTION FROM REGISTRATION FOR

UNITED STATES BROKER-DEALERS AND AGENTS

APPENDIX A

FORM OF SUBMISSION TO JURISDICTION AND

APPOINTMENT OF AGENT

FOR SERVICE OF PROCESS BY BROKER-DEALER

Instructions: Prepare a version of this form for each of the jurisdictions in which thebroker-dealer seeks the conditional exemption from registration in National Instrument 35-101 (the "exemption"). Insert the name of the jurisdiction at each "".

1. Name of applicant (the "Applicant");

2. Jurisdiction of incorporation of the Applicant;

3. Name of agent for service of process (the "Agent");

4. Address for service of process on the Agent in ;

5. The Applicant designates and appoints the Agent at the address stated above as its agent uponwhom may be served a notice, pleading, subpoena, summons or other process in any action,investigation or administrative, criminal, quasi-criminal or other proceeding (a "Proceeding")arising out of or relating to or concerning the Applicant's activities in under the exemption, andirrevocably waives any right to raise as defence in any such proceeding any alleged lack ofjurisdiction to bring such Proceeding.

6. The Applicant irrevocably and unconditionally submits to the non-exclusive jurisdiction of thejudicial, quasi-judicial and administrative tribunals of and any administrative proceeding in ,in any Proceeding arising out of or related to or concerning the Applicant's activities in underthe exemption.

7. Until six years after the Applicant ceases to use the exemption, the Applicant shall file:

a. a new Submission to Jurisdiction and Appointment of Agent for Service of Process in thisform at least 30 days before termination for any reason of this Submission to Jurisdiction andAppointment of Agent for Service of Process; and

b. An amended Submission to Jurisdiction and Appointment of Agent for Service of Process atleast 30 days before any change in the name or above address of the Agent.

8. This submission to Jurisdiction and Appointment of Agent for Service of Process is governedby and construed in accordance with the laws of .

Dated:

(Signature of Applicant or

authorized signatory)

(Name and Title of Authorized

Signatory)

Acceptance

The undersigned accepts the appointment as agent for service of process on (Insertname of Applicant) under the terms and conditions of the foregoing Submission to Jurisdictionand Appointment of Agent for Service of Process.

Dated:

(Signature of Applicant or

authorized signatory)

(Name and Title of Authorized

Signatory)



NATIONAL INSTRUMENT 35-101

CONDITIONAL EXEMPTION FROM REGISTRATION FOR

UNITED STATES BROKER-DEALERS AND AGENTS

APPENDIX B

FORM OF SUBMISSION TO JURISDICTION

AND APPOINTMENT OF AGENT

FOR SERVICE OF PROCESS BY AGENTS OF

. THE BROKER-DEALER

Instructions: Prepare a version of this form for each of the jurisdictions in which agents ofthe broker-dealer seek the conditional exemption from registration in National Instrument35-101 (the "exemption"). Insert the name of the jurisdiction at each "".

1. Name of the broker-dealer (the "Broker-Dealer");

2. Jurisdiction of incorporation of the Broker-Dealer;

3. Name(s) and address(es) of person(s) filing this form (the "Filing Person");

4. Name of agent for service of process (the "Agent");

5. Address for service of process on the Agent in ;

6. Each Filing Person designates and appoints the Agent at the address of the Agent stated aboveas its agent upon whom may be served a notice, pleading, subpoena, summons or other process inany action, investigation or administrative, criminal, quasi-criminal or other proceeding (a"Proceeding") arising out of or relating to or concerning the Filing Person's activities in underthe exemption, and irrevocably waives any right to raise as a defence in any such proceeding anyalleged lack of jurisdiction to bring such Proceeding.

7. Each Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdictionof the judicial, quasi-judicial and administrative tribunals of and any administrative proceedingin , in any Proceeding arising out of or related to or concerning the Filing Person's activities inunder the exemption.

8. Until the earlier of

 

      1. the termination of a Filing Person's position as an agent of the Broker-Dealerand six years after the Broker-Dealer ceases to use the exemption, the FilingPerson shall file:

a. a new Submission to Jurisdiction and Appointment of Agent for Service of Process in thisform at least 30 days prior to termination for any reason of this Submission to Jurisdiction andAppointment of Agent for Service of Process; and

b. an amended Submission to Jurisdiction and Appointment of Agent for Service of Process atleast 30 days before any change in the name or above address of the Agent.

9. This Submission to Jurisdiction and Appointment of Agent for Service of Process is governedby and construed in accordance with the laws of .

Dated:

(Signature of Filing Person)

Dated:

(Signature of Filing Person)

Dated:

(Signature of Filing Person)

Dated:

(Signature of Filing Person)

Acceptance

The undersigned accepts the appointment as agent for service of process on (Insertname(s) of Filing Person(s)) pursuant to the terms and conditions of the foregoing Submissionto Jurisdiction and Appointment of Agent for Service of Process.

Dated:

(Signature of Applicant or

authorized signatory)

(Name and Title of Authorized

Signatory)


Footnotes

1. Rule 15a-6(a)(1).

2. Rule 15a-6(a)(3) and Rule 15a-6(a)(4).

3. In Canada, the equivalent of a U.S. investment company is generally referred to as an"investment fund".

4. Section 7(d) authorizes the Commission to issue such an order permitting the foreigninvestment company only if the Commission finds that it is both legally and practically feasibleto enforce the provisions of the Investment Company Act against the foreign investmentcompany, and that the issuance of the order is consistent with the public interest and theprotection of investors. Section 7(d) is intended to subject foreign investment companies thataccess the U.S. market to the same type and degree of regulation that applies to U.S. investmentcompanies. This standard effectively requires a foreign investment company that is afterorganized in a country with substantially different investment company regulation to structureitself and operate as a United States company. Accordingly it has proven difficult for mostforeign investment companies to become registered under Section 7(d). Protecting Investors: AHalf Century of Investment Company Regulation. United States Securities and ExchangeCommission, 1992, 189-9.

5. Touche Remnant & Co. (Aug. 27, 1984). More recently, the SEC clarified that it would notrecommend enforcement action if a non-U.S. fund that is not registered under the InvestmentCompany Act permitted more than 1 U.S. residents to remain beneficial owners of the fund'ssecurities, if, in addition to the satisfaction of a number of other conditions, the 1 U.S. investorlimit was exceeded solely because non-U.S. holders (i.e. beneficial owners who purchased theirsecurities while residing outside the United States) have relocated to the United States.Investment Funds Institute of Canada (Mar. 4, 1996).

6. The National Securities Improvement Act of 1996 has introduced reforms to privatecompany offerings, including the creation of an additional exception for funds sold exclusively to"qualified purchasers". The SEC has proposed rules to implement this exception: SEC ReleaseNo. IC-2245 (Dec. 18, 1996). "Qualified purchasers" are defined as (i) any natural person whoowns not less than $5 million in investments; (ii) a family-owned company that owns not lessthan $5 million in investments; (iii) certain trusts; and (iv) any other person that owns and investson a discretionary basis not less than $25 million in investments.

7. In addition, the issuer may become subject to the securities registration requirement andperiodic reporting obligations under the Exchange Act if, as a result of the increased tradingactivity permitted under the NASAA Proposal, the issuer has a greater number of shareholdersresident in the United States: section 12(g) of the 1934 Act. However, the issuer may still avoidthe registration requirement and period reporting requirements if it furnishes to the SEC reportsand other information it makes available in its home market: Rule 12(g)3-2(b) under the 1934Act.

8. This proposed National Instrument is new and results from negotiations within the NorthAmerican Securities Administrators Association ("NASAA") for reciprocal treatment of dealersconducting minimal ongoing business in a particular state or jurisdiction (the "NASAAProposal"). The proposed National Instrument is expected to be adopted as a rule in BritishColumbia, Alberta, Ontario and Nova Scotia and as a blanket order or ruling in the otherjurisdictions represented by the CSA.

9. A national definition rule has been adopted as National Instrument 14-101 Definitions. Itcontains definitions of terms used in more than one national instrument. National Instrument 14-101 Definitions also provides that terms defined in the statute relating to securities of a localjurisdiction, the meaning of which is not restricted to a specific portion of the statute, have themeanings given to them in the statue relating to securities in the local jurisdiction. NationalInstrument 14-11 Definitions also provides that a provision in a national instrument thatspecifically refers by name to a jurisdiction, other than the local jurisdiction, shall not have effectin the local jurisdiction, unless otherwise stated in the provision.

10. The term "securities legislation" is defined in National Instrument 14-11 Definitions asmeaning the particular statute and legislative instruments of the local jurisdiction set out inappendix to that instrument and generally includes the statue, regulation, and in some cases rules,rulings and orders relating to securities in the local jurisdiction. The term "local jurisdiction" isdefined in National Instrument 14-11 Definitions as meaning, in a national instrument adoptedor made by a Canadian securities regulatory authority, the jurisdiction in which the Canadiansecurities regulatory authority is situate.

11. This term may be moved to National Instrument 14-101 Definitions as it is used in more thanone national instrument.

12. The term "1934 Act" is defined in National Instrument 14-101 Definitions. The definition is"means the Securities Exchange Act of 1934 of the United States of America".

13. The term "jurisdiction" is defined in National Instrument 14-101 Definitions. The definition is"a province or territory of Canada, except when used in the term foreign jurisdiction".

14. This term may be moved to National Instrument 14-101 Definitions as it is used in more thanone national instrument.

15. This term may be moved to National Instrument 14-101 Definitions as it is used in more thanone national instrument.

16. This term may be moved to National Instrument 14-101 Definitions as it is used in more thanone national instrument.

17. The term "foreign jurisdiction" is defined in National Instrument 14-101 Definitions. Thedefinition is "a country or political subdivision of a country, other than Canada".

18. The NASAA Proposal relates to state requirements and does not affect the application of theU.S. federal requirements. The CSA members are discussing reciprocity with the SEC.