Accounting Firms – Do they need to be registered as exempt market dealers
Published:
October 6, 2011
Author(s):
In 2009 Canadian securities regulators changed the rules relating to securities “registration” – these rules determine who is required to be registered under the securities laws to “trade” in securities. These changes became fully effective in the fall of 2010. Prior to the rule changes, the registration requirement was based on the type of transaction in question, and therefore parties involved in a private market transaction – the sale of shares in a privately-held company, or raising equity funds on behalf of a private company – could be fairly confident that these activities did not require registration.
The new rules require a firm (and individuals acting on its behalf) to register if they are engaged in, or hold themselves out as being engaged in, the business of trading securities. The securities law defines “trading” very broadly – it covers not just the simple act of selling or issuing a security, but it captures any activity in furtherance of that activity – so, for example, a seller of a security would be trading that security, and the seller’s advisor or agent could likewise be treated as trading the security. Therefore, except for limited exceptions, professional advisors to those parties who are buying or selling securities in private markets could be caught by the new registration regime and be required to register as “exempt market dealers”. If your firm acts as an advisor to clients buying or selling shares of a business, or if your firm provides assistance to businesses in raising capital, you should be aware of these new rules.
Securities regulators have not provided much guidance as to what constitutes being “in the business” of trading securities and there is no “bright line” which we can point to as clearly showing when registration is or is not required. We can, however, surmise that repetition or regularity is an important element of the equation – if a firm undertakes these activities on a regular basis, it is more likely to be considered to be “in the business”. Other factors to take into consideration are:
- Compensation – consider if the party is being specifically compensated for advice or assistance in connection with a trade
- Making a Market – consider if the party is intermediating a trade between the buyer and seller, i.e. acting as a broker
- Incidental Activities – consider if the trading activities are the primary focus of the services rendered or are merely incidental to a broader service offering
As noted above, there is no bright line test to determine if registration is required. We liken the determination to a continuum, where activities that clearly require registration are on one end and activities that clearly are outside the scope of registration are at the other. These are the easy cases; however, most firms will likely fall into the middle of the spectrum where it will be more difficult to determine if registration is required.
It should be noted that the registration requirement applies to those who are holding themselves out as engaging in the business of trading in securities – so, even in the absence of actual activity in this area, merely advertising these services could mean that a firm is required to register.
As the rules are currently formulated, we believe that there is real risk that accounting firms that either i) assist clients with the purchase and sale of businesses, if the sale is structured as a share sale, or ii) assist clients in raising funds by selling securities, could be considered to be in the business of trading in securities.
Recent amendments to the registration regime make it less likely that a pure advisory service (advising clients on the purchase or sale of shares of a business) will be caught by the registration rules – although we believe that activities related to a purchase and sale of a business, such as acting as an intermediary or broker on a transaction, may still potentially be caught by the registration requirement. Certain other services, such as assisting clients in raising equity capital, will still require close scrutiny to determine if registration is required.
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