Canada: Flash: Canadian Securities Regulators Update Registration Regime For Dealers, Advisers And Investment Fund Managers

On April 15th, the Canadian Securities Administrators ("CSA") announced that it has finalized amendments to the regulatory framework for firms and individuals who deal in securities, provide investment advice or manage investment funds.   The revisions are intended to update the CSA's recent comprehensive registration reform initiative on the basis of ongoing consultations with market participants and regulators and continued monitoring of the regime's operation since its implementation in September 2009.

The revised rules and new guidance clarify existing policy, codify current exemption orders and interim guidance, provide new filing timelines, refine or expand certain exemptions, and provide extended transition periods in respect of certain requirements.

Subject to obtaining the necessary ministerial approvals, the amended registration regime will come into force in all Canadian jurisdictions on July 11, 2011.

Trades through a Registered Dealer

The amendments clarify the scope of the exemption from the dealer registration requirement which permits unregistered firms to trade securities through or to a registered dealer.  This exemption is regularly relied upon by international investment management firms in order to place securities of their managed funds with Canadian institutional investors.

The amendments provide for additions to the Companion Policy to National Instrument 31-103 ("NI 31-103") that specify this exemption is not available where an unregistered firm has direct contact or interaction with potential Canadian purchasers prior to conducting trades through a registered Canadian dealer.  The guidance makes clear that if an international firm meets with potential Canadian investors to market its managed funds or solicit the purchase of securities, such activity would preclude reliance on this exemption from the dealer registration requirement even if the subsequent trade is executed through a registered Canadian dealer.  The impracticality of requiring a registered firm, which likely has little familiarity with the product in question, to conduct marketing activities on behalf of a foreign issuer seeking to distribute securities in Canada is likely to result in the greatly diminished use of this exemption for that purpose.

Regulation of Investment Fund Managers

The amendments clarify the circumstances in which certain investment fund managers and investment funds are required to register under securities legislation.  Investment funds governed by a board of trustees or directors that do not delegate the investment fund management function (defined under securities law as "directing the business, operations or affairs of an investment fund") to a separate entity will themselves be required to register, and the regulator may impose terms and conditions on such investment funds to address regulatory concerns relating to the legal structuring and practical issues involved in such arrangements.  This development will be among the relevant considerations for investment management firms structuring their in-house funds.

New guidance is also provided for investment fund complexes or groups in cases where multiple entities in a group could be considered to be engaging in some aspect of "investment management activities."  Absent exemptive relief, all such entities in a group will be required to register in the investment fund manager category of registration.  This will also be germane to the structuring of families of investment funds, to the extent such funds or their management entities are resident in Canada.  As the guidance is imprecise regarding the extent to which contractual delegation of investment fund management responsibilities will suffice to relieve such entities (e.g., the general partner of a limited partnership) of this requirement, careful structuring will be necessary to provide certainty as to which entities in a fund group will be subject to the investment fund manager registration requirement.

With respect to foreign-resident investment fund managers, the transition period providing a temporary exemption from registration has been extended one year to September 28, 2012 while the CSA consider separate amendments to the regulatory regime for international investment fund managers.  Proposed amendments to that regime were released for comment in October 2010 but have yet to be finalized.  If enacted in their current form, these amendments would "look through" investment funds to beneficial holders of such funds' securities, triggering the requirement for the investment fund manager to register, subject to certain strict thresholds on Canadian ownership, if their funds actively solicit Canadian investments.

Expanded Exemptions from Registration

The amendments to NI 31-103 also mark a measured expansion in the scope of two existing exemptions from registration.  The dealer registration exemption that permits a registered adviser to trade securities of its in-house funds to its managed accounts has been broadened to permit trades of an adviser's publicly traded (i.e., prospectus qualified) investment funds, as well as its exempt-market funds.

The international dealer exemption, which is relied upon by numerous underwriters and investment management firms to place securities in Canada, has also been expanded to provide a parallel exemption from adviser registration for dealers providing investment advice in connection with a trade conducted under the international dealer exemption.  This will be of particular consequence to investment firms that were unable to avail themselves of the international adviser exemption, either because they exceeded the consolidated gross revenue restriction prescribed by the exemption, or because they sought to advise registered Canadian dealers or advisers – an activity generally prohibited by the international adviser exemption.

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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