Going back to the Rules, you know that the receiving
registrant is not required to consider the status of the party
making the referral. On that basis, you might conclude that it
is the referring party’s problem. That conclusion is correct ― a
referred party that is engaging in activity that requires registration
is acting in contravention of applicable securities legislation. And,
yes, that is a problem.
So how is the referring party’s failure to be registered a
problem for the EMD receiving the referral? That answer depends
on the facts. The relevant facts in this case are the facts relating
to the receiving EMD’s role in the referral arrangement, such as:
• is the referral arrangement a long-term arrangement (i.e., for a
term of a year or more) in which the referring party’s activities
are expected to occur repeatedly over time?
• does the receiving EMD provide information to the referring
party relating to trading opportunities?
• is the compensation arrangement similar to the compensation
arrangement that would apply to the receiving EMD’s own
• did the receiving EMD identify the referring party and approach
them to participate in the referral arrangement?
The more the facts suggest that the referring party is functioning
like a dealing representative of the receiving EMD, the greater the
likelihood that a securities regulator will conclude that the referring
party is required to be registered.
Here’s how this situation might become a risk to the receiving
EMD. In those same circumstances, the securities regulator
might take the view that the receiving EMD is participating in a
scheme to avoid having the referring party registered as one of
its dealing representatives. Consider the explicit language of the
CSA in s. 13. 8 of 31-103CP where they state “Registrants cannot
use a referral arrangement to assign, contract out of or otherwise
avoid their regulatory obligations.” That could be a problem for
the receiving EMD.
The point is illustrated by looking at an extreme case. If
an EMD were to terminate a dealing representative and then
immediately enter into a referral arrangement with the same
individual to perform the same activities that required his or her
registration in the first place, a securities regulator would certainly
object to the conduct of the EMD. When it comes to dealing
with an unregistered referring party, somewhere between that
extreme case and the purest one-off referral lies the line at which
the concerns of the receiving EMD begin. Today, we don’t know
where that line is.
Is this a concern for me today?
While securities regulators continue to pursue those who
trade in securities without registration, there is no specific
indication that they are pursuing unregistered referring parties. A
comment in s. 13. 8 of 31-103CP suggests an awareness of the
issue, where the CSA note that a party to a referral arrangement
may need to be registered depending on the activities it carries
out. If current regulatory and judicial trends in analyzing the
registration requirement are applied against the facts arising in
referral arrangements, one can only conclude that at least some
unregistered referring parties will be found to require registration.
So it may not be a declared regulatory initiative, but it will happen.
It is a leap from there before you to get to any concern for
the receiving EMD. At present, the EMD’s concern may properly
be limited to referral arrangements which, like the extreme case
described above, could be cast as a construct used by the
receiving EMD to avoid taking responsibility for the actions of
an unregistered person operating under contract with the EMD.
But the concern may already extend beyond that, given that the
mandatory disclosure to the referred client includes “a statement
that all activity requiring registration will be provided by the
registrant receiving the referral.” Consider whether that statement
will be true, and consider the implications where the receiving
EMD has reason to question whether the activities of the referring
party require registration.
Regulatory attitudes are changing, and referral arrangements
represent one area in which we can expect to see developments.
EMDs and all other registrants need to be aware of the trends and
be ready to take action.
For now, this is just a warning to EMDs and other registrants
to be aware of the Rules and the issues when configuring a
referral arrangement with an unregistered referring party. And
to all unregistered referring parties, think about the registration
requirement and whether it applies to you.
The contents of this article do not constitute legal advice and is provided for
information purposes only. This article does not necessarily reflect the opinions of
Cassels Brock & Blackwell LLP or any of its lawyers or clients. The content of this
article is not intended to be used as a substitute for specific legal advice or opinions.
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1. An unregistered participant should also be interested in complying
with the rules, but NI 31-103 is only applicable to registrants.
2. This is a fundamental requirement of all Canadian securities legislation.
For example, section 25(1) of the Securities Act (Ontario) sets out the registration
requirement for dealers:
(1) Unless a person or company is exempt under Ontario securities law from
the requirement to comply with this subsection, the person or company
shall not engage in or hold himself, herself or itself out as engaging in
the business of trading in securities unless the person or company,
“Take a look at the referral arrangements
you have, or are considering. Do you have