On October 15, 2010 the Canadian Securities Administrators (CSA) published proposed amendments to National Instrument 31-103 - Registration Requirements and Exemptions (NI 31-103) related to the registration of (i) investment fund managers who carry out investment fund management activities from a location outside of Canada (International IFMs), and (ii) domestic Canadian investment fund managers with a head office in one Canadian province or territory and who carry out investment fund management activities in other provinces or territories (Domestic IFMs). While NI 31-103 currently provides temporary exemptions from registration for such investment fund managers, the proposed amendments are intended to be adopted prior to the expiration of the temporary exemptions on September 28, 2011, meaning that investment fund managers required to be registered must be registered by that date. The CSA are accepting comments on these proposals until January 13, 2011 and specifically invited comments from investment fund managers.
The proposals raise a number of critical issues, in particular, for International IFMs of non-Canadian investment funds which have admitted Canadian investors through direct offerings of fund securities into Canada or as a result of secondary transactions with Canadian-resident purchasers. The proposed exemptions described below are technical and highly fact-specific. The issues raised by the proposals will be particularly complex in the case of non-Canadian funds with a significant Canadian investor base and non-Canadian funds employing Canadian "feeder" or "blocker"-type vehicles for structuring purposes or Canadian investment vehicles principally established for non-Canadian investors but with a limited number of Canadian-resident investors.
The CSA notice "strongly encourage(s) non-resident investment fund managers to assess their circumstances in advance to determine whether they will need to be registered in any province or territory by September 28, 2011". Registration as an investment fund manager in any Canadian jurisdiction entails compliance with robust chief compliance officer proficiency, working capital, insurance, financial reporting and other ongoing requirements under Canadian securities laws.
An International IFM that carries out investment fund management activities from a location outside of Canada would be required to register as an investment fund manager in the relevant province or territory, if the investment fund it manages has securityholders that are local residents and the International IFM or the fund it manages, has "actively solicited" local residents to purchase securities of the fund. In proposed changes to the companion policy to NI 31-103, the CSA has indicated that they regard "intentional actions to encourage a purchase of [a] fund's securities" to be active solicitation. Examples they note include: (i) direct communication; (ii) advertising in Canadian publications or other Canadian media including the internet (but not international publications) if the advertising is intended to encourage the purchase of the fund's securities by residents of the jurisdiction; and (iii) purchase recommendations being made by a third party to residents of the jurisdiction, if that party is entitled to be compensated by the investment fund or the investment fund manager for the recommendation itself or for a subsequent purchase of fund securities.
A Domestic IFM that carries out investment fund management activities would be required to register in another province or territory in addition to the province or territory where its head office is located, if the fund has security holders that are local residents and the Domestic IFM, or the fund it manages, has "actively solicited" local residents to purchase securities of the funds.
Canadian securities laws define an "investment fund manager" as a person or entity that directs the business, operations or affairs of an investment fund. The investment fund manager registration requirement also turns on whether or not the funds managed by the manager are "investment funds" for the purposes of Canadian securities laws.
The International IFM Exemption
An International IFM would not need to register as an investment fund manager if all the following conditions are met:
- The securities of the investment fund it manages are distributed only to "permitted clients" (as defined in NI 31-103, and which generally means institutional and high net worth individual investors);
- It does not have a physical place of business in Canada;
- The investment fund it manages is incorporated, formed or created under the laws of a foreign jurisdiction. Significantly, this condition effectively disqualifies investment fund managers who manage from outside Canada funds that are created in Canada;
- The investment fund it manages is not a "reporting issuer" (i.e. a fund issuing securities under a Canadian prospectus) in any jurisdiction of Canada;
- It has submitted to the relevant securities regulatory authorities a form of submission to jurisdiction and appointment of agent for service; and Its presence in the Canadian market is below the following thresholds meant to represent a "significant presence" in Canada:
- The fair value of all of the assets attributable to Canadian securityholders of any investment fund for which it acts as investment manager is not more than 10% of the fair value of all the assets of such fund; and
- The fair value of all of the assets of all investment funds managed by it that are attributable to Canadian securityholders is less than C$50 million.
Where an investment fund manager that has no physical presence in a Canadian jurisdiction, was not incorporated, formed or created in such jurisdiction, and the fund it manages is not a reporting issuer and is not incorporated, formed or created in such jurisdiction the investment fund manager would be exempt from the investment fund manager registration requirement if neither the investment fund manager nor the investment fund it manages has "actively solicited" residents of such jurisdiction after September 28, 2011. It is important to note that while there is no "significant presence" threshold currently attached as a condition to reliance on this grandfathering exemption, both the Ontario Securities Commission and the Autorité des marchés financiers du Québec have specifically requested comments on whether such a condition should be applied.
Reliance on either exemption will require that the investment fund manager provide notice to investors informing them of its non-resident status, as well as the risk that investors may not be able to enforce legal rights in the province or territory.