The Canadian securities regulatory authorities are moving forward with two quite different regulatory approaches to non-resident investment fund manager (IFM) registration in Canada, notwithstanding the earlier unanimous commentary, including from BLG, that the CSA should adopt a uniform approach. The two different regulatory approaches raise obvious challenges, particularly for international fund managers wishing to market securities of their funds across Canada. In this Bulletin, we describe the registration and exemption regime that will apply in three provinces and the policy approach that will apply in the rest of Canada. Each approach raises unique practical issues, with the registration and exemption approach being, in our view, the most problematic.
One group of three provincial regulators – Ontario, Québec and Newfoundland and Labrador – consider that IFMs that manage investment funds whose securities are distributed in one or more of these provinces generally should register as IFMs in those provinces, regardless of where those IFMs are located and actually carry on the activity of managing investment funds. These regulators have finalized Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (the Rule) and Companion Policy 32-102CP [available here] which provide limited exemptions from IFM registration, generally in circumstances where there are no significant connecting factors to the applicable province, including no active solicitation in the province or where only “permitted clients” invest in the funds.
The other group of regulators, which we refer to as the “rest of Canada”, has finalized Multilateral Policy 31-202 Registration Requirement for Investment Fund Managers (the Policy) [available here] that contains guidance on when a non-resident IFM is required to register in those jurisdictions. The regulators in the rest of Canada do not take the position that distribution of securities of an investment fund in these jurisdictions necessarily means that the firm is carrying on the activities of an IFM in those jurisdictions. Rather, there are additional factors that must be considered before a firm must apply for registration as an IFM.
SCOPE AND TIMING
The instruments will apply to international investment fund managers with investors in their funds located in one or more of the jurisdictions of Canada, and also to Canadian fund managers. The term “non-resident” refers to an investment fund manager that does not have a head/principal office or a place of business located in a particular province or territory.
Both instruments are expected to be effective on September 28, 2012 (subject to government approvals in applicable jurisdictions). If an IFM concludes it must be registered in one or more jurisdictions, the firm must apply for such registration in the applicable jurisdiction(s) by December 31, 2012. If a firm wishes to avail itself of one of the exemptions provided for in the Rule, it should take steps right away to amend its practices with respect to distribution of its funds in Ontario, Québec and Newfoundland and Labrador, since the exemptions will be effective immediately on the Rule coming into force.
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IMPLICATIONS OF REGISTRATION as INVESTMENT FUND MANAGERS
Firms that are required to become registered as an IFM in a Canadian jurisdiction under one or both of the Rule and the Policy (assuming they are not already registered in this capacity in Canada) will be subject to proficiency and conduct requirements, such as Canadian-based proficiency requirements that would apply to the IFM’s chief compliance officer, and would be subject to, among other things:
- Capital ($100,000 minimum) and insurance requirements
- Regulatory financial reporting obligations (annual and quarterly financial statements)
- Conflicts of interest management
- Record keeping obligations
- Compliance system requirements, including having written policies and proceduresS
- pecified reporting to securityholders (trade confirmations and account statements).
IFM registration may also require extra-provincial corporate filings. Increased costs of IFM registration, including the regulatory filing fees, may be borne by the IFMs, depending on their ability to charge these costs to their funds.
A POST-SCRIPT ON THE OSC’S POSITION ON NON-RESIDENT ADVISERS UNDER THE COMMODITY FUTURES ACT
At the same time as finalizing the Rule, the Ontario Securities Commission published OSC Staff Notice 35-704 (Commodity Futures Act) Non-Resident Advisers [available here]. In a somewhat ironic twist (given the OSC’s position regarding IFM registration), OSC staff confirm that a firm not based in Ontario which advises non-Ontario investment funds that invest in commodity futures contracts or options, is not considered to be acting in Ontario as an adviser under the Commodity Futures Act simply because securities of the non-Ontario fund are distributed in Ontario. OSC staff confirm that for adviser registration purposes (for securities and commodities), the “flow-through” theory of advice is no longer operative.
The implications of both the Rule and the Policy should be considered as soon as possible, with the deadlines fast approaching, particularly for compliance with one of the exemptions available in Ontario, Québec and Newfoundland and Labrador. Sufficient time should be set aside for gathering together and, if necessary, filing the material required to rely on the exemptions by the September 28, 2012 and December 1, 2012 deadlines. If registration is considered necessary, application materials must be filed by the December 31, 2012 deadline.