Exempt Market Participant Information Sessions – April 2008

1. Exempt Market Participant Information Sessions – April 2008 Shaun Fluker - Faculty of Law, University of Calgary Karen Andreychuk - Legal Counsel, Market Regulation

2. Overview of Session • Context • Summary of 2007 comments • Revisions to 2007 proposal • There will be time for questions at the end of each section of the presentation

3. Section One Context

4. CSA Registration Reform Project • CSA Registration Reform Project initiated in 2004 • Update, harmonize and coordinate rules • National Instrument 31-103 Registration Requirements • Exempt-market dealers • 2007 legislative amendments

5. Ongoing Dialogue • October 2006 information session (Calgary) • 2007 comment period ended June 30 • May 2007 CSA information sessions (Calgary) • April 2008 ASC information sessions (Calgary and Edmonton) • NI 45-106F1 filings • Websites (albertasecurities.com; rrp-info.ca; exempt-issuers.com) • Canadian Bar Association (Alberta)

6. What is Registration? • Alberta securities legislation requires persons to have a license to trade in securities • Registrants subject to background and character checks and must comply with proficiency and conduct rules • Registration is a primary regulatory tool used by ASC to protect investors and promote investor confidence in the capital market • All trades in Alberta are subject to Alberta securities legislation

7. The Exempt Market • Prospectus-exempt securities • Exception to the legislated rule • Significant increase in capital raised between 2003 and 2006 • ‘Need to know’ rationale • Dual exemptions

8. Retail Dual Exemptions • Offering Memorandum (NI 45-106, s. 2.9) • “eligible investor” or less than $10,000 • Net income of $75,000/$125,000 • Accredited Investor (NI 45-106, s. 2.3) • Net income of $200,000/$300,000 • Close friends/business associates (NI 45-106, s. 2.5)

9. Ontario Universal Registration • 1985 OSC white paper recommends registration with full requirements for market intermediaries in exempt market • Questioning the ‘need to know’ rationale • 1987 Limited Market Dealer registration • Conduct rules (KYC, suitability, recordkeeping) • 2005 LMD survey in Ontario

10. Section One - Summary • CSA Registration Reform Project • Ongoing dialogue • Issue is how to regulate • Questions?

11. Section Two 2007 Written Comments

12. 2007 comment letters • Letters and summary of comments posted on www.rrp-info.ca (follow links Registration Reform Project and National Registration Rule) • 121 of 270 letters substantively comment on exempt-market dealer registration • 116/121 letters oppose one or more of the proposed registration requirements • Many letters provide more than one rationale for opposition

13. Overview of Commentary

14. Buyer Beware • Product sale between manufacturer and customer • No financial advice or services • Individual freedom – risk taking • Investors are customers not clients • Car sales analogy • 56 letters

15. Status Quo • If it ain’t broke, don’t fix it • NI 45-106 • Ontario LMD model • Commentators in this category often overlap in Buyer Beware • 42 letters

16. Privacy • KYC obligations invade individual privacy • Customers unwilling to divulge information • Commentators in this category often overlap in Buyer Beware and Status Quo • 38 letters

17. Adverse Impact • Increased transaction costs will impair junior issuer capital raising and/or real estate development • 38 letters

18. Market Failure • Regulation must address harm caused by inefficient markets • ASC hasn’t met its onus to demonstrate harm • EMD proposal penalizes many for the sake of few • Costs outweigh benefits • 28 letters

19. Regulatory Capture • ASC catering to demands of IDA or MFDA to increase their membership and/or eliminate competition • Composition of RRP steering committee • 23 letters

20. Barrier to Entry • EMD proposal precludes individuals from pursuing right to earn a living • Forces existing exempt-market participants out of business • 22 letters

21. Duplicative • Unnecessary overlap with Real Estate Council of Alberta • 3 letters

22. Comments on Requirements • Proficiency: Canadian Securities Exam covers content not relevant to my industry (or product). Consider industry experience or equivalent education in lieu of. Consider requirements particular to industry (general) • Minimum Capital and Insurance: No purpose where firm does not have custody of client assets. Too onerous. Excessive barrier to entry.

23. Comments on Requirements • Financial Reporting/records: No purpose where firm does not take custody of client assets. Not relevant or too onerous. Already required by NI 45-106. • Know-Your-Client and Suitability: Not relevant to single product sales. Investors are not clients. Investors sophisticated to take full responsibility for risks. Investors unwilling to disclose information.

24. Section Two - Summary • Investors are clients • Exempt market is not analogous to car market • NI 45-106 exemptions are exceptions from the legislated rule that a person be registered to trade • Questions?

25. Section Three Changes to the 2007 Proposal

26. 2008 Comment Period • Revised proposed NI 31-103 published for comment February 29, 2008 at www.albertasecurities.com • Comment period ends May 29, 2008 • Submit written comments by May 29, 2008 to CSA: John Stevenson, Secretary Ontario Securities Commission 20 Queen Street West 19th Floor, Box 55 Toronto, ON M5H 3S8 Fax (416) 593-2318 Email: jstevenson@osc.gov.on.ca

27. Overview of Changes from 2007 • Proficiency • Solvency • Conduct rules • Transition periods

28. Proficiency • Canadian Securities Exam only • Prescribes entry level knowledge of capital markets • Provides regulators with a measurable benchmark of registrants’ past experience

29. Solvency • Exempt market dealers that do not handle, hold, or have access to any client assets: • No minimum capital or insurance requirement • No audit • Must file internally generated certified financial statements (no GAAP requirements) • Exempt market dealers that handle client assets • Unchanged from 2007 proposal

30. Conduct Rules • Dealing with a Permitted Client: • No suitability obligation • No relationship disclosure obligation • No complaint handling obligation • Exempt market dealers that do not handle any client assets • No account opening or account activity requirement • Exemptions from some relationship disclosure requirements

31. Other Requirements • Registration requirements unchanged from 2007 include: • Background and character checks • Recordkeeping • Managing conflicts and referrals • Compliance and supervision

32. Timeline for Implementation • May 29, 2008 – Comment period ends • Summer-Fall 2008 – CSA Registration Reform Working Group reviews comments and finalizes Rule • Spring 2009 – Implementation

33. Transition Periods • Transitions section new in 2008 • Firm registration: 6-month transition • Individual Registration: 6-month transition • Individual Proficiency: 12-month transition

34. Section Three – Conclusion • Questions?