On July 5, 2012, the Canadian provinces of Ontario, Quebec and Newfoundland and Labrador (the Local Jurisdictions) announced that, pending ministerial approval, Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (MI 32-102) will come into force on September 28, 2012.

What is the effect of MI 32-102?

As a result of MI 32-102, non-resident investment fund managers that manage one or more investment funds that have distributed securities to residents of a Local Jurisdiction will have to register as an investment fund manager in that Local Jurisdiction unless an exemption from registration is available. 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
  • a place of business in the Local Jurisdiction (domestic non-resident investment fund managers).

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 and therefore interests in private equity funds can 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 exemptions are available?

MI 32-102 contains two exemptions from the investment fund manager registration requirement.

No security holders or active solicitation

The investment fund manager registration requirement does not apply to a person or company acting as an investment fund manager to one or more investment funds if it does not have a place of business in the Local Jurisdiction and if one or more of the following apply:

  1. none of the investment funds have security holders in the Local Jurisdiction (even if the investment funds have distributed securities in the Local Jurisdiction in the past); or
  2. the person or company and the investment funds have not actively solicited residents in the Local Jurisdiction after September 27, 2012 (even if the investment funds have security holders in the Local Jurisdiction).

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 for the purpose of soliciting an investment. Actions that are undertaken 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 do not constitute active solicitation.

Thus, non-resident investment fund managers that do not actively solicit residents of a Local Jurisdiction after September 27, 2012, will not have to register in that Local Jurisdiction. Active solicitation prior to September 27, 2012, will not trigger the need to register.

Permitted clients

The investment fund manager registration requirement does not apply to an international investment fund manager if all securities of the investment fund distributed in the Local 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:

  1. the investment fund manager does not have its head office or its principal place of business in Canada;
  2. the investment fund manager is incorporated, formed or created under the laws of a foreign jurisdiction;
  3. the investment fund is not a reporting issuer in any jurisdiction of Canada;
  4. 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
  5. the investment fund manager has notified the permitted client in writing of all of the following:
    1. the investment fund manager is not registered in the jurisdiction to act as an investment fund manager;
    2. the foreign jurisdiction in which the head office or principal place of business of the investment fund manager is located;
    3. all or substantially all of the assets of the investment fund manager may be situated outside of Canada;
    4. there may be difficulty enforcing legal rights against the investment fund manager because of the above; and
    5. 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 and, in the case of non-resident investment fund managers that rely on the permitted client exemption in Ontario, pay annual fees based on Ontario revenues to the Ontario Securities Commission.

When do you need to register?

Non-resident investment fund managers that are required to register in a Local Jurisdiction will have to apply for registration by December 31, 2012.

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, it will have to 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.

Is registration required in the other Canadian provinces and territories?

On July 5, 2012, the Canadian provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia and New Brunswick and the territories of Yukon, Nunavut and the Northwest Territories (collectively, the Ten Jurisdictions) announced that Multilateral Instrument 31-202 Registration Requirement for Investment Fund Managers (MI 31-202) is expected to become effective in those jurisdictions on September 28, 2012.

Pursuant to MI 31-202, registration as an investment fund manager is only required in the Ten Jurisdictions if an investment fund manager conducts investment fund manager activities in a jurisdiction that results in the investment manager directing or managing the business, operations or affairs of an investment fund in that jurisdiction. Functions or activities tied to the presence of security holders, solicitation of investors or the distribution of securities in a jurisdiction are not activities that would give rise to investment fund manager registration in the Ten Jurisdictions, unless they are directed from within the jurisdiction and result in the person directing or managing the business, operations or affairs of an investment fund in the jurisdiction. Additionally, when determining whether registration is necessary in the Ten Jurisdictions, one need only consider the activities carried out by the investment manager in the jurisdiction, not the activities carried out by any other service provider of an investment fund.