Canada: Canadian Securities Administrators Propose Amendments to Registration Rules for Canadian and Non-Canadian Investment Fund Managers

Non-Canadian investment fund managers may become subject to Canadian registration if they manage investment funds that have Canadian investors

On October 15, 2010, the Canadian Securities Administrators (CSA) published for comment proposed amendments to National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103). The proposed amendments are part of the CSA's ongoing review of the registration requirements applicable to registered individuals and firms. The majority of this review, completed on September 28, 2009 when NI 31-103 came into effect, updated the registration requirements for dealers and advisers and introduced a registration requirement for investment fund managers. At that time, Canadian investment fund managers were given until September 28, 2010 to apply for registration in their principal jurisdiction and received temporary exemptions from registration in other jurisdictions until September 28, 2011. In addition, Non-Canadian investment fund managers received temporary exemptions from registration until September 28, 2011.

With the introduction of NI 31-103, the CSA indicated that it would publish a proposal for comment which would set out the circumstances in which "non-resident" investment fund managers would be required to register. The proposed amendments set out these circumstances (which are triggered, subject to certain exemptions, by the residency of investors in Canada) and apply to Non-Canadian investment fund managers (those who carry out their management activities from outside of Canada) and Canadian investment fund managers (those who have a head office in one jurisdiction of Canada and carry on management activities in other jurisdictions).

In general we do not anticipate that the requirement to register in additional jurisdictions in Canada, if applicable, will be unduly burdensome to Canadian investment fund managers already registered in one Canadian jurisdiction – the new requirement will principally increase their regulatory filing fees and compliance costs. However, the requirement for a Non-Canadian investment fund manager to register with the Canadian regulators if an investment fund it manages has Canadian resident investors will introduce a new and potentially significant regulatory burden. Even those Non-Canadian investment fund managers that are eligible to rely upon an exemption from the registration requirement will be required to appoint agents for service of process in Canada, and comply with other conditions. The CSA is requesting comments on the proposed amendments.

Summary of the Proposed Amendments

Exemption Available to Non-Canadian Investment Fund Managers

An "investment fund manager" is a person or company that directs the business, operations or affairs of an investment fund and a "Non-Canadian investment fund manager" is a non-resident person or company that manages an investment fund domiciled or sold in Canada. An investment fund's investment fund manager may or may not be the same entity as the investment fund's portfolio manager.

When NI 31-103 introduced a registration requirement for investment fund managers, it did not specify the circumstances in which a permanent exemption from the registration requirement would be granted to a Non-Canadian investment fund manager. The CSA is proposing to amend NI 31-103 to exempt certain Non-Canadian investment fund managers from the registration requirement as follows:

  • an investment fund manager will be exempt from the registration requirement in respect of an investment fund it manages where:
    • all of the securities of the investment fund distributed in Canada were distributed to "permitted clients" under an exemption from the prospectus requirement;
    • the investment fund manager does not have a physical place of business in Canada;
    • the investment fund is formed under the laws of a foreign jurisdiction;
    • the investment fund is not a reporting issuer in any Canadian jurisdiction; and
    • the investment fund manager has submitted a Form 31-103F2 (Submission to Jurisdiction and appointment of Agent for Service).
  • an investment fund manager may not rely on the above exemption unless, as at the end of its most recently completed financial year, for any investment fund for which it acts as investment fund manager, the fair value of the assets of the fund attributable to securities owned by residents of Canada is not more than 10% of the fair value of all of the assets of the fund and, for all investment funds for which it acts as investment fund manager, the fair value of the assets of the funds attributable to securities owned by residents of Canada is not more than $50 million;
  • an investment fund manager relying on the above exemption must provide notice to each permitted client specifying the following:
    • that it is not registered in the local jurisdiction as an investment fund manager;
    • the foreign jurisdiction in which the head office or principal place of business of the investment fund manager is located;
    • the name and address of the agent for service of process in the local jurisdiction; and
    • that all or substantially all of the assets of the investment fund manager may be situated outside of Canada and that there may be difficulty enforcing legal rights against the investment fund manager as a result.
  • an investment fund manager relying on the above exemption must provide annual notice that it has relied on this exemption to the regulator in each jurisdiction in which the exemption has been relied upon.

Exemption Available to Canadian and Non-Canadian Investment Fund Managers

The CSA is proposing to amend NI 31-103 to exempt certain investment fund managers that are not resident in the local jurisdiction in Canada from the registration requirements as follows:

  • an investment fund manager will be exempt from the registration requirement in respect of an investment fund it manages where:
    • the activities of the investment fund manager are not conducted from a physical place of business in the local jurisdiction;
    • neither the investment fund manager nor the investment fund under management is formed under the laws of the local jurisdiction;
    • the investment fund is not a reporting issuer in the local jurisdiction; and
    • other than a solicitation in respect of a reinvestment plan, neither the investment fund manager nor the investment fund has actively solicited residents of the local jurisdiction to purchase securities of the fund after September 28, 2011.

It is noted that the securities administrators in Ontario and Quebec are also requesting comments as to whether the 10% and $50 million thresholds described above, and that are currently proposed to apply only to the exemption available to Non-Canadian investment fund managers, should also be applicable to this exemption.

Notice Requirements of Registered Non-Resident Investment Fund Managers

The CSA is proposing a new notice requirement for registered non-resident investment fund managers under which a registered investment fund manager whose head office is not located in the local jurisdiction in Canada or whose head office is in Canada but who has no physical place of business in the local jurisdiction must, for all investment funds under management, provide or cause to be provided to investors who are resident in the local jurisdiction a written statement disclosing:

  • that the investment fund manager is not resident in the local jurisdiction;
  • the jurisdiction in which the investment fund manager is resident;
  • the name and address of the agent for service of process in the local jurisdiction; and
  • the nature of risk to investors that legal rights might not be enforceable in the local jurisdiction.

Guidance on Fundamental Concepts

For purposes of interpreting the exemption provided to investment fund managers which is based on not actively soliciting residents of the local jurisdiction to purchase securities of the investment fund under management after September 28, 2011, the CSA is proposing to update the Companion Policy to NI 31-103 to provide guidance on the meaning of "active solicitation" as follows:

  • active solicitation refers to intentional actions taken by the investment fund or the investment fund manager to encourage a purchase of the fund's securities and includes:
    • direct communication with residents of the jurisdiction to encourage their purchases of the fund's securities;
    • advertising in Canadian publications or other Canadian media (including the internet) which is intended to encourage the purchase of the fund's securities by residents of the jurisdiction; and
    • third party purchase recommendations to residents of the jurisdiction where the third party is entitled to be compensated by the investment fund manager or the investment fund for the recommendation itself or for a subsequent purchase of the fund's securities in response to the recommendation.
  • active solicitation does not include advertising in international publications or other inter­national media (including the internet)where the advertising does not specifically encourage purchases of securities of the fund by residents of the jurisdiction.

Next Steps

The CSA has requested that comments on the above proposals be submitted by Thursday, January 13, 2011.

John focuses on corporate finance and securities regulatory matters, investment funds, asset management and mergers and acquisitions. Linda's practice focuses on financial institution and securities regulatory and compliance matters relating to investment funds and asset management. Rob is a cross-border corporate and securities lawyer with significant practice experience in the United States and Canada. Michael's practice focuses on mergers and acquisitions, corporate finance and general corporate matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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