registrant is authorized to engage in under that category
and, giving consideration to the nature of the referral, the
activities that the registrant is not permitted to engage in,
» if the referral is made to a registrant, a statement that
all activity requiring registration will be provided by the
registrant receiving the referral, and
» any other information that a reasonable client would
consider important in evaluating the referral arrangement.
The Rules are straightforward and logical. Not surprisingly,
the primary thrust of the Rules is disclosure aimed at putting the
referred client in a position to assess the inherent conflict of interest.
What does the registrant have to do?
Beyond entering into a written agreement, recording fees,
making the disclosure described above and monitoring compliance
with the Rules, the obligations of an EMD in a referral arrangement
also depend on whether it is receiving or referring. The biggest
difference in this regard is the obligation of the EMD to consider what
the other party is doing.
(a) Where the registrant is making the referral
Section 13.09 of NI 31-103 provides that when the EMD is
the referring party, it must take reasonable steps to satisfy itself
that the receiving party has the appropriate qualifications to
provide the services and, if applicable, is registered to provide
those services. In considering the qualifications of the receiving
party, a referring EMD must assess whether the receiving party is
required to be registered under applicable securities legislation.
(b) Where the registrant is receiving the referral
There is no corresponding obligation when the registrant is
the receiving party. It is not the registrant’s responsibility under
the Rules to determine whether the party making the referral is
registered under securities legislation or required to be registered.
That might lead one to conclude that the Canadian Securities
Administrators (CSA) are content when the receiving party is
registered. That conclusion is logical because the receiving
registrant is going to do all of the things required of it by law, such
as know-your-client, suitability, etc. The safeguards created in the
registration system are available to the referred client when the
receiving party is a registrant.
While there is no positive obligation to consider the referring
party’s registration status, there may be an issue for an EMD
where the party making referrals to the EMD is not registered,
depending on the circumstances.
When does an unregistered referring party need to be
As in all cases, the requirement to be registered is driven by
the activities of the person in question. The logical progression
runs like this:
• start with the requirement that you can’t engage in the
business of trading in securities unless you are registered as
• consider how broadly the term “trading” is defined, particularly
the broad concept of “acts in furtherance of a trade”;
• consider how broadly these concepts have been applied by
the CSA and Canadian courts;
• consider the scope of the CSA’s commentary on the “business
trigger” in Part 1 “Definitions and Fundamental Concepts” in
the Companion Policy to NI 31-103 (31-103CP).
The first point expressed in 31-103CP under Division 3
“Referral Arrangements” is this:
“Regulators want to ensure that under any referral arrangements,
individuals and firms that engage in registerable activities are
The way the law stands, and the way the regulatory and judicial
interpretation and application of the law is heading, the scope
of activity that triggers registration is becoming quite broad. In
the specific context of referral arrangements, where we know the
activities of the referring party are, to some extent, proximate to
trading activity, there should be heightened concern that referring
parties may need to be registered.
Of course, not all referring parties are required to be registered
and each case will turn on its facts. But it stands to reason
that the broad reach of the registration requirement will catch
some unregistered referring parties. Participation in a referral
arrangement, even one conducted in full compliance with the
Rules, is not an exemption from registration for a referring party.
The mere fact that a registrant is receiving the referral does not
validate the activities of the referring party or alter the application
of the registration requirement.
How is that my problem?
Let’s consider a situation where the activities of a particular
referring party trigger a requirement to be registered and the party
is not registered. Assuming you are the receiving EMD, you might
ask “How is this my problem?”