In September 2009, new securities regulations came into force across all Canadian jurisdictions that imposed a registration obligation on any person or entity in the business of trading in securities distributed under a prospectus exemption. This new Exempt Market Dealer ("EMD") category was designed to provide to securities regulators increased oversight and regulation of market participants in the exempt market. Previously, only Ontario and Newfoundland and Labrador imposed a Limited Market Dealer registration obligation, but that category did not impose as significant obligations as the new EMD category.

According to a staff notice issued by the Canadian Securities Administrators ("CSA") in September 2011, a number of firms registered in the EMD category have been carrying out brokerage activities, including trading securities on foreign and Canadian markets, for Accredited Investors. The category of "Accredited Investor" includes many types of institutional investors and persons or entities who meet certain prescribed income or asset levels, and who are able to purchase securities distributed by an issuer or otherwise without the need for a prospectus. The CSA indicate in their notice that they do not believe that the EMD category was intended for firms that conduct brokerage activities.

Of particular concern for U.S.‐based EMD registrants, the CSA highlight that the firms which primarily are acting contrary to the intended scope of the category are broker‐dealer firms registered in the United States that are members of the Financial Industry Regulatory Authority (FINRA). The CSA note they have also received applications from firms seeking registration in the EMD category to allow these kinds of activities.

The CSA are of the view that these activities raise serious policy issues that both regulators and the industry need to consider. The CSA state that they did not envision that EMDs would be involved in brokerage activities, including trading securities on an exchange or entering into arrangements similar to introducing‐carrying broker activities. In this regard, the CSA intend to examine the issues in a wider consultation and review process.

In Canada, firms providing brokerage activities have historically been categorized and registered as investment dealers, which are subject to oversight and regulation by the Investment Industry Regulatory Organization of Canada (IIROC). Under the current situation, where EMDs are providing services similar to those provided by IIROC members, the CSA are concerned that these similar activities result in different regulatory oversight schemes for the same activity depending on whether the registrant is an EMD or a registered investment dealer.

In view of these regulatory concerns but taking into account arguably permissive language in the applicable regulations, the CSA indicate willingness during the consultation period to register broker‐dealers in a restricted dealer category with terms and conditions. Among the conditions that should be expected to be imposed would be that firms are limited to acting only for "Permitted Clients", and the registration would be limited in time to align with the expected consultation process. Under applicable Canadian securities laws, a "Permitted Client" is a category of investor which, at the typical client level, imposes higher asset threshold levels than the Accredited Investor category and does not include a 'significant income' category.

In closing, the CSA indicate that their goal is to ensure appropriate regulatory requirements apply to all firms that engage in brokerage activities in Canada, and state that it is likely that the result of the consultation process will be a change in the rules that apply to entities engaged in brokerage activities.

We would be pleased to assess the activities of firms registered as EMDs and provide our views as to whether the activities are permitted by the applicable regulations. We are also pleased to assist firms in making registration applications and seeking exemptive relief as may be appropriate.

About Fraser Milner Casgrain LLP (FMC)

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