On February 10, 2012, two separate groups of members of the Canadian Securities Administrators (the “CSA”) published two different proposals with respect to the registration of non-resident investment fund managers. These different proposals represent two different responses to comments received in respect of proposed amendments to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations concerning registration of non-resident investment fund managers (discussed in a previous Investment Funds@Gowlings).
Ontario, Quebec, New Brunswick and Newfoundland and Labrador
Securities regulators in Ontario, Quebec, New Brunswick and Newfoundland and Labrador published proposed Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (“MI 32-102”) for a 60 day comment period. MI 32-102 would require a non-resident investment fund manager to register if either the investment fund or the investment fund manager distributes or has distributed investment fund securities in the jurisdiction.
Registration would not be required if an investment fund manager does not have a place of business in the local jurisdiction and there are no security holders of the investment fund, or there has been no active solicitation of residents by the investment fund or the investment fund manager, in the local jurisdiction. Guidance on what constitutes “active solicitation” is included in the proposed Companion Policy. Actions 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 would not constitute active solicitation.
Also, investment fund manager registration would not be required if all securities of the investment fund distributed in the local jurisdiction were distributed pursuant to a prospectus exemption to permitted clients (e.g. institutional investors). This exemption would be subject to a number of conditions, including that the investment fund manager not have its head office or principal place of business in Canada, that it is established under the laws of a foreign jurisdiction and that the investment fund is not a reporting issuer in any jurisdiction of Canada.
In is interesting to note that in the notice accompanying MI 32-102, it is stated that “no alternatives to the Multilateral Instrument were considered.” This statement is surprising in light of what the other members of the CSA published that same day.
The Rest of the CSA
All of the other members of the CSA published proposed Multilateral Policy 31-202 Registration Requirement for Investment Fund Managers (the “MP”) for a 60 day comment period. This group of regulators takes the position that the need to register will depend on what activities are taking place in the jurisdiction, including those functions and activities listed in the MP as being functions and activities of an investment fund manager. The presence of security holders and the solicitation of investors in a jurisdiction does not automatically require an investment fund manager to register in the jurisdiction. These regulators state that since they interpret the investment fund manager registration requirement more narrowly, and specifically do not require registration based on the mere presence of security holders and solicitation of investors, they would not expect many registered investment fund managers to be non-resident.
Notwithstanding their professed “narrower” interpretation of the investment fund manager registration requirement, two of the functions and activities of an investment fund manager listed by the regulators in the MP appear to make the scope of the registration requirement broader than they suggest:
- establishing a distribution channel for the fund, and
- marketing the fund.
If “establishing a distribution channel” or “marketing” includes retaining or compensating one or more dealers in the jurisdiction to trade securities, that would seem to trigger registration wherever the fund is marketed or sold. That would be inconsistent with the stated position of these regulators that the mere presence of investors in the local jurisdiction, or engaging in solicitation of investors, should not determine whether investment fund manager registration applies. Although the regulators state that they would not expect any single function or activity to determine whether registration is required, the registration trigger is not as clear as they may think.