The Canadian Securities Administrators have proposed a new uniform Canadian registration exemption for investment sub-advisers, as part of a package of proposed amendments to Canadian registration rules. The proposed exemption will add a chaperone requirement that does not exist under the current sub-adviser exemptions in Ontario and Quebec. In addition, no adviser registration exemptions (such as sub-adviser or international adviser) could be relied upon by anyone registered as an adviser in any jurisdiction of Canada.
When registration reforms were introduced in 2009, one of the missing elements was a uniform national sub-adviser registration exemption for foreign advisers to a registered Canadian portfolio manager. This can arise when a Canadian portfolio manager seeks specialized investment expertise from a foreign adviser.
Ontario has long had an automatic exemption for sub-advisers under section 7.3 of OSC Rule 35-502 Non-Resident Advisers. Quebec has the similar exemption under Decision No. 2009 PDG-0191. In 2009, other provinces stated they were prepared to grant similar sub-adviser exemptions but only upon application.
THE NEW SUB-ADVISER REGISTRATION EXEMPTION ADDS CHAPERONING
In the amendments now proposed as new section 8.26.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), an international sub-adviser to a registered Canadian portfolio manager (the registrant) will be exempted across Canada from adviser registration on substantially the same terms that now apply in Ontario and Quebec, but with the added new requirement that the sub-adviser has no direct contact with the registrant's clients unless the registrant is present either in person or by telephone or other real-time communications technology, in which there is an opportunity for a live discussion between all parties.
This chaperoning also applies to written communications. The proposed Companion Policy indicates that a sub-adviser copying the registrant in written communications sent to the registrant's client (whether through email or another medium) would not meet this condition. This suggests that sub-advisers may not send reports directly to the registrant's clients. Instead, any such communications must be forwarded through the registrant to its clients. This may pose some difficulties if an international sub-adviser is required by law to send forms directly to the clients, such as Form ADV, unless those can be forwarded via the Canadian registrant.
ONLY FOR INTERNATIONAL SUB-ADVISERS
The new exemption is called an "international sub-adviser" exemption, and only applies to sub-advisers whose head office or principal place of business is in a foreign jurisdiction, i.e., outside Canada. The sub-adviser must actually engage in the business of an adviser in that foreign jurisdiction and must be registered or operate under an exemption from registration under the securities legislation of that foreign jurisdiction that permits it to carry on the activities in that jurisdiction that registration as an adviser would permit it to carry on in Canada. These are the same conditions as for the existing international adviser registration exemption.
WRITTEN AGREEMENTS REQUIRED
The other conditions to the sub-adviser exemption are substantially the same as they are currently in Ontario and Quebec:
- The obligations and duties of the sub-adviser must be set out in a written agreement with the Canadian registrant. The terms of that agreement are not prescribed.
The Canadian registrant must enter into a written agreement with its clients, on whose behalf investment advice is or portfolio management services are to be provided, agreeing to be responsible for any loss that arises out of the failure of the international sub-adviser:
- to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interest of the registrant and each client, or
- to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
REGISTERED ADVISERS CAN'T RELY ON THE SUB-ADVISER EXEMPTION (NOR ANY OTHER)
- If a Canadian registered adviser is also acting itself as a sub-adviser, such registered adviser would be relying only upon its full adviser registration, so proposed new Section 13.17 of NI 31-13 would provide exemptions for registered advisers, but only in respect of that sub-advising activity, from certain obligations of registered advisers, such as conflict-of-interest disclosure, complaints, disclosure about fair allocation of investment opportunities and account statements.
- This exemption is needed because a proposed new general obligation that adviser registration exemptions (such as sub-adviser or international adviser) will not be available to a person if that person is registered in any jurisdiction of Canada that permits them to act as an adviser in respect of the activities for which the exemption would otherwise provide.
HOW TO PREPARE
Current sub-advisers should review their existing Canadian arrangements to determine how they would be affected when the proposed amendments come into effect. The proposed effective date for these changes is not identified in the request for comments. In particular, sub-advisers should consider the new chaperoning requirement and how it will work in practice. If this gives rise to practical operational concerns, the comment period is open until March 5, 2014.