On February 10, 2012, separate groups of the Canadian securities regulators announced two alternative approaches to the registration of investment fund managers. The proposals could complicate participation in the Canadian capital markets by investment fund managers, and will draw criticism of the continuing divergent approaches to regulation resulting from a non-harmonized provincial and territorial securities regime.
The national registration reform initiatives implemented in 2009 require that investment fund managers – persons or companies that direct the business, operations or affairs of an investment fund – be registered. Registered investment fund managers are required, among other things, to (i) identify both a chief compliance officer who satisfies proficiency requirements and an ultimate designated person; (ii) maintain prescribed books and records, and provide financial statements to Canadian securities regulators; and (iii) comply with specific capital and insurance requirements.
However, these requirements were not initially applicable to non-resident investment fund managers; therefore, within Canada, an investment fund manager is currently subject only to regulation in the province or territory in which its head office is located, and a foreign investment fund manager without a Canadian presence is not subject to Canadian regulation at all. The Canadian securities regulators have been reviewing issues related to non-resident investment fund managers, and the current proposals reflect some changes from a prior version published for comment in October 2010.
The Alternative Approaches
The Canadian securities regulators have now split into two distinct camps in their approach to investment fund manager registration and their choice of the "connecting factors" to a particular province or territory that would trigger a registration requirement.
The Eastern Provinces
In certain eastern provinces − Ontario, Quebec, New Brunswick and Newfoundland and Labrador − the securities regulators propose that connecting factors requiring registration of an investment fund manager will exist if
- the investment fund manager has a place of business in the province;
- the investment fund manager (or any of the funds that it manages) has distributed a fund’s securities in the province; or
- an investment fund managed by the investment fund manager has securityholders resident in the province who are receiving services (such as financial statement delivery and other reporting or payment functions) from the investment fund manager.
Registration Exemptions in the Eastern Provinces
Under proposed Multilateral Instrument 32-102, the securities regulators in these provinces will exempt an investment fund manager from the registration requirement if
- the investment funds that it manages have no securityholders resident in the province; or
- the investment fund manager (and any of the investment funds that it manages) has not actively solicited residents in the province to purchase fund securities.
According to the proposed Companion Policy, "active solicitation" includes direct communication with residents of the province, advertising in Canadian or foreign media (including on the Internet) that is intended to encourage residents of the province to purchase a fund’s securities (either directly from the fund or in the secondary/resale market) and third-party recommendations made to residents of the province if the third party is compensated by the investment fund or the investment fund manager. Active solicitation would not include image or general profile advertising or responding to unsolicited enquiries from prospective investors in the province.
A foreign investment fund manager would also be exempt from registration if all securities of the relevant investment funds were distributed in Canada on a prospectus-exempt basis to permitted clients (a subset of the class of "accredited investors" as defined in Canadian securities laws). This proposed exemption is similar to existing international dealer and international adviser registration exemptions, and would require the investment fund manager to
- file a "submission to jurisdiction form" in each jurisdiction where the fund securities are distributed, along with a form detailing specified regulatory actions involving the investment fund manager, its affiliates and related persons or companies (based on either board control or a 20% control test);
- alert fund securityholders in Canada to the fact that it is not registered in their province; and
- provide specified information about possible limitations on a securityholder’s ability to enforce legal rights against the investment fund manager.
Annual notices about the investment fund manager’s Canadian activities, including assets under management for Canadian holders, would have to be filed, along with periodic updates of any information contained in previously filed regulatory action disclosures.
Non-resident investment fund managers, domestic or foreign, would not have to comply with the proposed regime until December 31, 2012. However, there is no “grandfathering” provision, so an investment fund manager with existing fund securityholders resident in one of these provinces would have to either register as an investment fund manager or determine that it can rely on a registration exemption, even if it is not involved in any further fund offerings in Canada.
The eastern provinces’ notice and request for comment, with the text of the proposal, can be found here.
The Rest of Canada
In the other provinces and territories – British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, Northwest Territories, Nunavut and Yukon – the securities regulators have proposed a simpler and more practical approach. In proposed Multilateral Policy 31-202, these securities regulators state that an investment fund manager is subject to a registration requirement in a jurisdiction if
- it carries on investment fund activities in that jurisdiction;
- it directs or manages an investment fund from a physical place of business in that jurisdiction; or
- its head office is in that jurisdiction.
The policy also sets out a list of activities, such as marketing, oversight and administration or fund management functions, that an investment fund manager may perform in a jurisdiction and that may give rise to a registration requirement.
Notably, the securities regulators in these jurisdictions state that although no single function or activity is determinative in assessing whether registration is required, the presence of securityholders or solicitation of investment in a jurisdiction does not automatically trigger the requirement for an investment fund manager to be registered. Accordingly, most non-resident investment fund managers would not be expected to be subject to a registration requirement. However, if registration is required, there is no exemption like that available in the eastern provinces for foreign investment fund managers that deal only with permitted clients.
Under these proposals, a non-resident investment fund manager that becomes subject to a registration requirement would have to file an application for registration by September 28, 2012. If a non-resident investment fund manager is not required to register, no filings would be mandated.
These securities regulators’ notice and request for comment, with the text of the proposal, can be found here.
What Comes Next?
The two proposals have each been published for comment until April 10, 2012. Whether these divergent approaches to investment fund manager registration will be reconciled – preferably, in favour of the simpler physical presence and activities criteria in the approach proposed by most of the Canadian securities regulators – may depend on the feedback provided by market participants.
To discuss these issues, please contact the author(s).
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