As we discussed recently, Canadian registration rules were amended in July with the stated intention of improving the day-to-day operation of the rules for both industry and regulators. Of interest to investment fund managers, the amendments revised the guidance in the Companion Policy to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations regarding how the investment fund manager registration requirement applies to various fund structures. Specifically, section 7.3 of the Companion Policy now states as follows:
Investment fund complexes or groups with more than one investment fund manager
Some investment fund complexes or groups may have more than one entity within the fund complex that can be considered as directing the business, operations or affairs of an investment fund. For example, structures where investment funds are organized as limited partnerships may have multiple entities within the fund complex that could require investment fund manager registration. Although the investment fund manager functions are often delegated to one entity within the fund complex, there may be more than one entity in the group subject to investment fund manager registration, absent an exemption from registration.
We will consider exemption applications on a case-by-case basis to allow only one investment fund manager within the fund complex to be registered. We will typically consider the following factors when reviewing such applications:
- there is a management agreement in place delegating all or substantially all of the investment fund management function from the investment fund manager seeking the relief to an affiliate (or to an entity whose mind and management is the same) that is registered as an investment fund manager
- the majority of the investment fund management functions are performed by the registered affiliate (or entity whose mind and management is the same)
- the investment fund manager seeking the relief and the registered affiliate have directors and officers in common
The language in the Companion Policy is of concern, as it appears to suggest that exemptive relief may be required in order to delegate investment fund management responsibilities within a family of funds in all cases. OSC Staff have subsequently confirmed, however, that the guidance is not directed at boards of directors of corporate issuers or trustees of trusts. According to the OSC, regulators take the view that boards and trustees can in fact delegate investment fund management responsibilities, provided the delegation is structured properly.
Apparently, concern remains in respect of general partners of limited partnerships, as the regulators are concerned that general partners may not be able to delegate in the same manner as a board of directors or trustees. On this point, the CSA take the position that the delegation must be "to an affiliate (or to an entity whose mind and management is the same) that is registered as an investment fund manager." Accordingly, the CSA are expecting limited partnerships and their general partners to seek exemptive relief to make the IFM delegation.