On February 25, 2011 the Canadian Securities Administrators (the "CSA") published Staff Notice 31-323 Guidance Relating to the Registration Obligations of Mortgage Investment Entities. This notice relates to exemptions issued by the CSA in August 2010 with respect to investment fund manager and adviser registration requirements in respect of mortgage investment entities ("MIEs").
CSA Staff Notice 31-323 is intended to clarify the registration requirements with respect to MIEs. MIEs are defined by the CSA as persons or companies whose purpose is to directly or indirectly invest substantially all of its assets in debts owing to it that are secured by mortgages, hypothecs or in any other manner on real property and whose other assets are limited to cash, deposits with financial institutions, debt securities referenced in section 8.21 of NI 31-103, real property (held on a temporary basis as a result of enforcing rights as a secured lender), and instruments intended to hedge specific risks relating to debts secured on real property.
CSA staff state that mortgage syndications will not "typically" be subject to the investment fund manager ("IFM") registration requirements. However, IFM registration may be required for an MIE managing a portfolio of mortgages (a "Pooled MIE") which would include "mortgage investment corporations" as defined in the Income Tax Act (Canada).
Staff Notice 31-323 sets out certain criteria to be applied to determine whether IFM registration is necessary. A Pooled MIE will be considered an investment fund if "its primary activity is managing an investment portfolio that includes mortgages" and the following factors are considered relevant to determining that a Pooled MIE is an investment fund:
- the Pooled MIE does not take an active role in originating the mortgages that become part of the investment portfolio, and
- the Pooled MIE buys or sells mortgages in accordance with a stated portfolio investment strategy.
The staff notice states that a Pooled MIE will not be considered an investment fund if "its primary activity is mortgage lending, that is, by operating a business that creates and manages mortgages" and the following factors are considered relevant to determining that a Pooled MIE is not an investment fund:
- the Pooled MIE originates the mortgages in the name of the Pooled MIE directly or through an agent retained by the Pooled MIE and acting on its behalf;
- the Pooled MIE funds the mortgages;
- the Pooled MIE enters into the mortgage agreements as the mortgagee, and
- the Pooled MIE administers the mortgages, either directly or through an agent acting on its behalf.
However, CSA staff go on to make the following statement:
"The investment fund manager registration requirement will not typically apply in respect of a Pooled MIE that is not an investment fund." [emphasis added]
It is not clear what situation CSA Staff is concerned about. It leads one to question the commitment of CSA Staff to applying the criteria set out in the notice.
Staff Notice 31-323 specifies that the above analysis does not apply to Pooled MIEs whose principal jurisdiction is Alberta. Instead, in Alberta the issue is framed as whether the Pooled MIE is an "investment fund" as defined in the Securities Act (Alberta). Reference is made to section 7.3 of Companion Policy 31-103CP Registration Requirements and Exemptions and section 1.2 of Companion Policy 81-106CP Investment Fund Continuous Disclosurefor guidance. Is it not clear why the Alberta Securities Commission chose not to participate in the guidance offered by all other jurisdictions.
Comments in Staff Notice 31-323 with respect to adviser registration are not very helpful as they essentially amount to a recitation of the adviser registration requirements of securities law. The staff notice highlights the following issues for consideration:
- Is a person or company advising the Pooled MIE about investing in or buying or selling mortgages or other securities?
- If the answer to #1 is Yes, is that person or company "in the business" of advising?
The staff notice indicates that even if both questions are answered in the affirmative, it may be possible to get a discretionary exemption from the portfolio manager proficiency requirements subject to terms and conditions. Perhaps this reflects staff uncertainty about the need for adviser registration in the context of MIEs and a desire to simply deal with the issue through discretionary exemptions.
Staff Notice 31-323 also refers to dealer registration requirements but does not provide anything other than reference to regulatory requirements.
The Staff Notice also includes a statement that the Ontario Securities Commission intends to monitor these issues further and "may review its position if investor protection concerns are identified."
One is left with the impression that Staff Notice 31-323 is not the final word on registration issues related to MIEs.
On March 4, 2011, the staff of the Ontario Securities Commission published OSC Staff Notice 81-714 – Compliance with Form 41-101F2 – Information Required In An Investment Fund Prospectus. The notice addresses certain disclosure issues related to prospectuses required to comply with Form 41-101F2. Staff concerns relate to the use of plain language, brevity, the ordering of information and the use of headings. Staff address cover page and summary disclosure, investment objective disclosure and prospectuses for multiple investment funds.