On February 10, 2012, the Ontario Securities Commission, the Québec Autorité des marchés financiers, the New Brunswick Securities Commission, and the Newfoundland and Labrador Financial Services Regulation Division (collectively, the "Participating Jurisdictions") published a request for comments in relation to proposed Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (the "Proposed Instrument") and its Companion Policy 32-102CP (the "Companion Policy"). The Proposed Instrument represents revised registration requirements and exemptions which, once in effect, will be applicable to non-resident investment fund managers in each of the Participating Jurisdictions.
Persons or companies who direct or manage the business, operations or affairs of an investment fund are considered to be an "investment fund manager" for the purposes of the Proposed Instrument.
In the Proposed Instrument and the Companion Policy, a "non-resident investment fund manager" includes investment fund managers: (i) that do not have their head office or their principal place of business in a jurisdiction of Canada (international investment fund managers); or (ii) that do not have a place of business in the local jurisdiction (domestic non-resident investment fund managers).
The Proposed Instrument and Companion Policy are a direct result of proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103") and Companion Policy 31-103CP, published for comment on October 15, 2010 (the "October 2010 Proposal") by the Canadian Securities Administrators (the "CSA"). The October 2010 Proposal called for, inter alia, the registration of a non-resident investment fund manager in each CSA jurisdiction where the investment fund it manages has security holders who are resident in that jurisdiction and where the investment fund or its manager has "actively solicited" the purchase of securities of the fund by the persons resident in that jurisdiction. The October 2010 Proposal also contained certain exemptions from the requirement to register as an investment fund manager.
NI 31-103 contains a transitional exemption from the proposed non-resident investment fund manager registration requirements which is set to expire on September 28, 2012. The Proposed Instrument would extend this temporary exemption until December 31, 2012.
The Participating Jurisdictions are now seeking to implement a revised form of the October 2010 Proposal. It is unclear at this point whether the securities regulatory authorities in the other provinces and territories of Canada will adopt the Proposed Instrument and the Companion Policy.
Registration requirements under the proposed instrument
The provisions of the Proposed Instrument would require a non-resident investment fund manager to register as an investment fund manager in a Participating Jurisdiction if the investment fund it manages has investors in the such jurisdiction who have been "actively solicited" by either the investment fund or the non-resident investment fund manager.
Registration as an investment fund manager in a Canadian jurisdiction requires the registered entity to meet specified minimum capital and insurance requirements and to appoint a qualified person to act as chief compliance officer. Registered investment fund managers also have ongoing regulatory filing and reporting requirements under NI 31-103.
After March 31, 2013, a registered investment fund manager that has a head office or principal place of business outside of Canada must ensure that all investors who have an address in any of the Participating Jurisdictions receive a written notice advising them:
Exemptions from investment fund manager registration requirements
No security holders or no active solicitation of investors
The Proposed Instrument exempts non-resident investment fund managers from the requirement to register in a Participating Jurisdiction in circumstances where the investment fund does not have a place of business in the Participating Jurisdiction and either or both of the following conditions is satisfied:
The Companion Policy to the Proposed Instrument provides guidance as to what activities may qualify as "active solicitation." The Companion Policy notes that active solicitation refers to intentional actions taken by the investment fund or non-resident investment fund manager to encourage a purchase of the fund's securities, such as pro-active, targeted actions or communications that are initiated by a non-resident investment fund manager for the purposes of soliciting an investment. Examples of "active solicitation" set out in the Companion Policy include:
The Companion Policy indicates that the following activities would not be considered to be active solicitation for the purposes of the Proposed Instrument:
As a result of this exemption, a non-resident investment fund manager would only need to register in a Participating Jurisdiction where there are investors in the Participating Jurisdiction or where either the manager or the fund have engaged in active solicitation of investors. If the fund has investors who are resident in a Participating Jurisdiction and there was no active solicitation in that jurisdication, then the non-resident investment fund manager would not be required to register in such circumstances.
Permitted client exemption
Under the October 2010 Proposal, international investment fund managers were exempt from the registration requirement if the investment funds they managed were distributed in Canada under an exemption from the prospectus requirement to a "permitted client" provided that certain threshold limitations on fund assets held by Canadian investors were not exceeded. The Proposed Instrument would remove the threshold condition to the permitted client exemption.
The Proposed Instrument exempts from registration persons or companies acting as an investment fund manager of an investment fund where all the securities of the investment fund distributed in the Participating Jurisdiction were distributed under an exemption from the prospectus requirement to "permitted clients."
The definition of "permitted client" is based on the definition set out in section 1.1 of the NI 31-103, although the definition in the Proposed Instrument contains some notable differences with respect to the treatment of certain charities registered under the Income Tax Act (Canada).
It is important to note that if an investment fund has any investors who are resident in the Participating Jurisdictions who do not qualify as a permitted client, the non-resident investment fund manager will not be entitled to rely on this exemption from the investment fund manager registration requirement.
In order to rely on the permitted client exemption:
Foreign investment fund managers who rely on the permitted client exemption from registration in the course of a year must, by December 1 of each year, notify the securities regulatory authority in the Participating Jurisdiction of the following:
Foreign investment fund managers must also notify the securities regulatory authority in the Participating Jurisdiction of any change to the information previously submitted to the regulatory authority within 10 days of the date of the change.
The stated purpose behind the proposed annual reporting requirements is to provide regulatory authorities with information to aid in the monitoring of activities that give rise to investor protection concerns. However, international investment fund managers may find it difficult to comply with the annual requirement to report assets under management attributable to residents of the Participating Jurisdictions as the information for the most recent month end (November 30) may not be available to the investment fund manager by the December 1 annual reporting deadline.
Non-resident investment fund managers who are required to register as investment fund managers in the Participating Jurisdictions as a result of the Proposed Instrument must register or apply for registration in the applicable Participating Jurisdictions by December 31, 2012.
Opportunity for comment and next steps
The public comment period for the Proposed Instrument and Companion Policy expires on April 10, 2012. Non-resident investment fund managers who will be impacted by these changes are encouraged to take the opportunity to provide comments and suggestions within the comment period.
The text for the Proposed Instrument and Companion Policy is located at http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20120210_32-102_exempt-non-resident.htm.
It is expected that the registration regime (including the available exemptions) for non-resident investment fund managers will take effect in the Participating Jurisdictions by the end of 2012. Non-resident investment fund managers are advised to prepare by:
Non-resident investment fund managers are encouraged to consult with legal counsel to determine the full impact of the Proposed Instrument and Companion Policy on their business and operations in the Participating Jurisdictions or if they would like further details or assistance in submitting comments on the proposals.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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