Unlike most countries, each province and territory in Canada has established its own securities commission. As a result, carrying out the business of an investment fund manager in different Canadian provinces and territories requires compliance with several regulatory schemes administered by different securities commissions.
Although there is general harmonization among the various jurisdictions, they sometimes have divergent views on certain matters. Such was the case with recent proposals relating to proposed registration requirements for “non-resident investment fund managers.” National Instrument 31-103 Registration Requirement, Exemptions and Ongoing Registrant Obligations (NI 31-103) currently provides a temporary registration exemption for non-resident investment fund managers until September 28, 2012.
What are the proposals?
On February 10, 2012, Ontario, Quebec, New Brunswick and Newfoundland and Labrador (the Four Jurisdictions) published for comment proposed Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (Proposed MI 32-102). On the same date, British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, Yukon, Nunavut and the Northwest Territories (the Nine Jurisdictions) published for comment Multilateral Instrument 31-202 Registration Requirement for Investment Fund Managers (Proposed MI 32-202). The comment period for both proposed multilateral instruments expires on April 10, 2012.
What is an investment fund manager?
Investment fund managers are persons or companies that direct the business, operations or affairs of an investment fund. Note that private equity funds are not considered to be investment funds—interests in private equity funds can therefore be offered to Canadian investors without triggering any investment manager or investment advisor registration requirements.
In Canada, a “private equity fund” is a fund that (i) does not permit its investors to voluntarily redeem their investment and (ii) invests for the purpose of:
- exercising or seeking to exercise control of an issuer; or
- being actively involved in the management of any issuer in which it invests.
What is a non-resident investment fund manager?
The term “non-resident investment fund manager” includes investment fund managers:
- that do not have their head office or their principal place of business in a jurisdiction of Canada (international investment fund managers); and
- that do not have a place of business in a local Canadian jurisdiction (domestic non-resident investment fund managers).
Under what circumstances must you register in the Four Jurisdictions?
Proposed MI 32-102 provides that, subject to the availability of an exemption, investment fund managers are required to register in each of the Four Jurisdictions with which they have a significant “connecting factor.” A non-resident investment fund manager is considered to have a significant connecting factor to a jurisdiction if either the investment fund manager or the investment fund that it manages distributes or has distributed securities in the jurisdiction.
If implemented, Proposed MI 32-102 will provide a temporary registration exemption in the Four Jurisdictions until December 31, 2012.
What exemptions will be available in the Four Jurisdictions?
Proposed MI 32-102 contains two exemptions from the investment fund manager registration requirement.
No security holders or active solicitation
It is proposed that for each of the Four Jurisdictions the investment fund manager registration requirement will not apply to an investment fund manager if it does not have a place of business in the jurisdiction and if one or more of the following apply:
- the investment fund has no security holders resident in the jurisdiction; or
- the investment fund or the investment fund manager has not actively solicited residents in the jurisdiction to purchase securities of the investment fund.
Active solicitation refers to intentional actions taken by the investment fund or the investment fund manager to encourage a purchase of the investment fund's securities, such as pro-active, targeted actions or communications that are initiated by an investment fund manager to solicit an investment. Actions taken by an investment fund manager at the request of, or in response to, an existing or prospective investor who initiates contact with the investment fund manager would not constitute active solicitation.
Note that Proposed MI 32-102 as currently drafted does not contain a grandfathering provision with respect to active solicitation. If an investment fund or investment fund manager has actively solicited current investors in Ontario prior to Proposed MI 32-102 coming into force then it will not be able to rely on this exemption.
It is also proposed that the investment fund manager registration requirement will not apply to an investment fund manager if all securities of the investment fund distributed in the jurisdiction were privately placed to “permitted clients,” such as pension funds, governments, investment funds that are managed or advised by persons registered in a Canadian jurisdiction, companies with net assets of at least $25 million and individuals who beneficially own at least $5 million of financial assets (net of any related liabilities).
The “permitted client” exemption is only available if all of the following apply:
- the investment fund manager does not have its head office or its principal place of business in Canada;
- the investment fund manager is incorporated, formed or created under the laws of a foreign jurisdiction;
- the investment fund is not a reporting issuer in any jurisdiction of Canada;
- the investment fund manager has submitted to the relevant securities commission a completed “Submission to Jurisdiction and Appointment of Agent for Service for International Investment Fund Manager” form; and
the investment fund manager has notified the permitted client in writing of all of the following: the investment fund manager is not registered in the jurisdiction to act as an investment fund manager;
- the foreign jurisdiction in which the head office or principal place of business of the investment fund manager is located;
- all or substantially all of the assets of the investment fund manager may be situated outside of Canada;
- there may be difficulty enforcing legal rights against the investment fund manager because of the above; and
- the name and address of the agent for service of process of the investment fund manager in the jurisdiction.
In addition, an investment fund manager relying on the permitted client exemption must make certain initial and annual filings with the relevant securities commission.
As with active solicitation, Proposed MI 32-102 as currently drafted does not contain a grandfathering provision for the permitted client exemption. However, investment fund managers will not need to provide the notice outlined above to existing permitted clients who have invested in the fund prior to Proposed MI 32-102 coming into force. Rather, the investment fund manager will be required to provide this notice prior to any new permitted client making an investment after the coming into force of Proposed MI 32-102.
Under what circumstances must you register in the Nine Jurisdictions?
Proposed MI 31-202 provides that registration is only necessary in one of the Nine Jurisdictions if an investment fund manager carries on the activities of an investment fund manager in that jurisdiction. The presence of security holders and the solicitation of investors in one of the Nine Jurisdictions does not automatically require a non-resident investment fund manager to register in that jurisdiction. As a result, the Nine Jurisdictions advised that they do not believe that many non-resident investment fund managers will have to register in the Nine Jurisdictions. As currently drafted, Proposed MI 31-202 does not contain any exemptions from registration.
Proposed MI 31-202 does not provide a temporary registration exemption for non-resident investment fund managers beyond that already contained in NI 31-103. However, the Nine Jurisdictions have indicated that they will issue parallel orders so non-resident investment fund managers only need to apply for registration by September 28, 2012; they will not need to be registered by that date.
What does registration entail?
If a non-resident investment fund manager is required to register in a Canadian jurisdiction, then it must meet certain criteria and, once registered, must comply with various regulatory requirements, including capital, insurance, financial reporting and proficiency requirements. Registered investment fund managers will also be subject to ongoing obligations to establish and maintain internal controls and risk management systems.