The New Requirement
The new National Instrument 31-103 Registration Requirements and Exemptions ("NI 31-103") expected to take effect across Canada on September 28, 2009 is intended to harmonize Canadian registration requirements for firms and individuals who sell securities (and exchange contracts in some jurisdictions), offer investment advice, or manage investment funds. Specifically, it prescribes the registration requirements and exemptions for firms and individuals engaged in activities such as:
- an investment dealer;
- an investment advisor; or
- an investment fund manager.
Firms currently engaged in prospectus-exempt trades as market intermediaries or in managing investment funds will have 12 months (until September 28, 2010) to become registered as an "Exempt Market Dealer" ("EMD") or "Investment Fund Manager" ("IFM"), respectively, unless they qualify for an applicable exemption. There is no such transition period for new firms. Firms commencing activity as a market intermediary or investment fund manager after September 28, 2009 are required to register themselves before commencing such activities unless they are otherwise exempt. However, individuals and firms will still be able to rely on the dealer registration exemptions currently available in National Instrument 45-106 until March 28, 2010, when such exemptions are removed from NI 45-106.
Effective March 28, 2010, there will be an exemption in Alberta, British Columbia, Manitoba, Yukon, NWT and Nunavut to the EMD registration requirement for prospectus-exempt trades to accredited investors, friends, family and business associates, under the $150,000 minimum investment, and trades pursuant to an offering memorandum. To qualify for the exemption, certain conditions must be met, such as having a signed Risk Acknowledgement form and filing an Information Report with the applicable Securities Commission within 10 days after the trade. There is no such exemption in Ontario, where the EMD registration requirement merely replaces the Limited Market Dealer registration requirement.
Unless subject to an exemption, a firm that issues or trades in its own securities may be required to register as a dealer if it frequently trades in securities, performs activities similar to a registrant, actively solicits investors, or acts as an intermediary by investing client money in securities. However, a firm with an active non-securities business does not generally require registration if it does not carry on such activities.
Unfortunately, there is no similar regional exemption for the IFM registration requirement. All firms and individuals in Canada that manage the business and affairs of any "investment fund" must register as an IFM. An "investment fund" is an entity that invests funds received from its securityholders. However, REITs and business income trusts are not considered "investment funds" because they issue securities that entitle the holder to net cash flows generated by the underlying real estate or business owned by the trust. In some circumstances, venture capital and private equity funds may also fall outside the definition of "investment fund" if the fund takes active involvement in managing the business and affairs of the subject investee business or property. Accordingly, the question of whether a limited partnership, trust, mortgage investment corporation (or "MIC") or other such entity is an investment fund whose manager will be subject to registration is presently a matter for determination on a case specific basis.
What This Means
Under NI 31-103, registered firms and individuals will be subject to oversight and regulation by the applicable Securities Commission in the firm's jurisdiction. Such firms must meet minimum requirements for working capital and insurance/bonding, and regularly provide certain other periodic financial information (depending on the category of registration) including: audited annual financial statements, unaudited interim financial statements, reports on working capital, and reports on changes in net asset value calculations, as the case may be. Registered firms must have registered individual representatives, an ultimate designated person and a chief compliance officer, all of whom must meet certain prescribed qualifications of experience and credentials.
The question of whether a firm must be registered as a dealer or advisor is an analysis of the "business triggers" test – whether the firm's business activities trigger registration, whereas the question of whether a firm must be registered as an investment fund manager is an analysis of whether the firm manages an "investment fund" as discussed above. Consequently, the requirement for registration does not always fit into a bright-line test but is often more dependent on the circumstances, especially in the new category of "investment fund manager."