Canada: CSA Divided On Proposed Approach To Regulation Of Non-Resident Investment Fund Managers

Copyright 2012, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities Regulation, February 2012


  • Ontario, Quebec, New Brunswick and Newfoundland and Labrador continue to take a broad view of their jurisdiction over non-resident investment fund managers, but liberalize exemptions from registration requirement proposed in 2010
  • British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, Yukon, Northwest Territories and Nunavut decline to assert jurisdiction over non-resident investment fund managers unless they are carrying on significant activities in their provinces

The members of the Canadian Securities Administrators (CSA) announced in February 2012 two separate approaches for regulatory regimes for the registration in Canada of persons or companies that act outside Canada as managers of investment funds. These proposals represent the continued efforts of the CSA to determine how to deal with their stated intent reflected in National Instrument 31-103 (published in 2009) that would require registration in Canadian jurisdictions of such persons as investment fund managers (IFMs). These new proposals reflect further thinking from the proposals that the CSA as a whole published for comment in October 2010 (the 2010 Proposals), as described in our November 2010 Blakes Bulletin.

A group consisting of the securities regulators of Ontario, Quebec, New Brunswick and Newfoundland and Labrador have taken an "exemption-based approach" (the Exemption-Based Approach) in the publication of proposed Multilateral Instrument 32-102 entitled Registration Exemptions for Non-Resident Investment Fund Managers, which would broaden the exemptions available for some non-resident IFMs contained in the 2010 Proposals, but would still require their registration in these jurisdictions in many circumstances.

The remaining provinces and all of the territories have taken a different approach (the Jurisdiction-Based Approach) and concurrently published a proposed Multilateral Policy 31-202 Registration Requirement for Investment Fund Managers, which states that the requirement of a non-resident IFM to be registered in one or more of these jurisdictions will be determined by an analysis of whether the activities of the IFM in such jurisdiction are sufficient to attract the jurisdiction of the local regulators. The Jurisdiction-Based Approach appears to take a different view of the business triggers for registration of non-resident IFMs compared to the Exemption-Based Approach.

These rules and interpretations are applicable to non-resident IFMs, which include both non-Canadian IFMs that do not have a head office in Canada, or Canadian-based IFMs in jurisdictions other than the jurisdiction of its head office.


As outlined in our bulletin about the 2010 Proposals, the registration of IFMs, which are entities that "direct the business, operations or affairs of an investment fund", is a new requirement that became applicable to Canadian-based managers in September 2009. The CSA have provided an exemption until September 28, 2012 for IFMs that have head offices outside Canada.

The Exemption-Based Approach of Ontario, Quebec, New Brunswick and Newfoundland and Labrador

These provinces have proposed to continue the basic requirement that an IFM of an investment fund having a connection with Labrador would have to be registered with the regulators of these provinces unless it was able to satisfy one of the two following exemptions.

Permitted Client Exemption.

An IFM that does not have its head office or its principal place of business in Canada would not be required to register if (among other requirements):

  • the securities of an investment fund of which it is an IFM have been distributed in the jurisdiction in question only on a private placement basis to a "permitted client" (as defined in NI 31-103 and consisting substantially of institutional investors and very high net worth individuals);
  • the investment fund is not a reporting issuer in any jurisdiction of Canada;
  • the IFM has given notice in prescribed form to its permitted client;
  • the IFM files notices with the securities regulator of the province in question of its intention to rely upon this exemption; and
  • the IFM has submitted to the regulator an Attornment to Jurisdiction and Appointment of Agent for Service, and a form entitled "Notice of Regulatory Action" in which the manager is required to make certain representations of its regulatory status outside Canada.

This exemption is somewhat similar to the "De Minimis Exemption" proposed in 2010, except that the regulators have removed certain monetary threshold restrictions that would have limited the extent to which an IFM would be able to use this exemption.

No Securityholders or Solicitation Exemption.

An IFM would be exempt from the registration requirements of a jurisdiction if it does not have a place of business in the jurisdiction in question and was one or more of the following apply:

  • the investment fund has no securityholders resident in the jurisdiction; and
  • the investment fund or the IFM have not actively solicited residents in the jurisdiction in question to purchase securities of the investment fund.

Examples of what would be considered to be "active solicitation" are provided in a companion policy to the proposed instrument, and include intentional actions taken by the investment fund or the IFM to encourage a purchase of the fund's securities, such as proactive, targeted actions or communications. This would include direct communication with residents in the jurisdiction to encourage their purchases, advertising in Canadian publications or the Canadian media, or purchase recommendations made by a third party, such as a dealer, to residents of the jurisdiction if that party is entitled to compensation by the investment fund or the IFM. The proposed grandfathering of past solicitation has been removed from the new Exemption-Based Approach, so past solicitations would appear to be caught.

Jurisdictional Assumptions Behind this Approach.

The provinces using the Exemption-Based Approach go beyond the approach to jurisdiction taken by the British Columbia and Alberta et al. described below, in that Ontario and Quebec et al. believe that their jurisdiction is triggered if either:

  • a security of an investment fund of an IFM is outstanding in their jurisdiction; or
  • solicitation of the sale of a security of an investment fund of the IFM has ever taken place in their jurisdiction.

The consequences of this in Ontario would appear to be that an IFM subject to Ontario's jurisdiction, as interpreted, but relying upon the Exemption-Based Approach to avoid registration, would nevertheless be caught by Ontario's fee requirements as an "unregistered investment fund manager", and be subject to payment of a fee to Ontario, even if the fund managed by the IFM had no securities outstanding in the province.

Jurisdiction-Based Approach of British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, Yukon, Northwest Territories and Nunavut

The securities regulators of these jurisdictions have focused in their release on defining their jurisdiction over non-resident IFMs on the basis of whether the IFM carries on the activities of an IFM in the jurisdiction. These regulators state that they "agree that there has to be activity in the jurisdiction to establish a sufficient connection between the entity and jurisdiction to require registration as an investment fund manager. Further, the activity has to relate to the functions of an investment fund manager."

These regulators are proposing a two-pronged test to determine whether a given IFM will be required to register in one of their jurisdictions. First, the IFM would be required to register if it directs or manages the business, operations or affairs of an investment fund from a physical place of business in the jurisdiction or if its head office is in the jurisdiction. Second, even if the direction or management of the investment fund is not carried out physically in the jurisdiction, registration would still be required if the IFM "carries on the activities of an investment fund manager in that jurisdiction". The regulators cite examples of some of the functions and activities of an IFM, including the establishment of a distribution channel for the fund, the marketing of the fund, the establishment and oversight of the fund's compliance and risk management programs and the oversight of the day-to-day administration of the fund. It would appear that staff of the IFM carrying out these activities would have to be present in the jurisdiction, even temporarily, to be considered to be carrying out the activities of the IFM in that jurisdiction.

These regulators do not provide any exemptions from the requirement to be registered, unlike the provinces using the Exemption-Based Approach. It would appear that the major implication of this is that IFMs that have distributed securities into a province on the terms of the "Permitted Client Exemption" described above might be able to avail themselves of an exemption from the registration requirements in Ontario, Quebec, New Brunswick and Newfoundland and Labrador, but would not have that exemption available to them in the jurisdiction-based provinces.

Implications for Investment Fund Managers

Canadian IFMs. IFMs based in Canada that direct or manage the business, operations and affairs of an investment fund, or carry on key IFM functions, in a jurisdiction other than the province of its head office would be required to be registered in each such jurisdiction. Also, if a fund of an IFM has any securities of a fund outstanding in Ontario, Quebec, New Brunswick or Newfoundland and Labrador, it would be required to register in the relevant provinces unless it can satisfy the “Permitted Client Exemption” or unless the IFM has never solicited in that province.

International IFMs. Non-Canadian IFMs will need to assess the nature of their activities in any province or territory of Canada and establish whether, prima facie, its actions bring itself under the jurisdiction of such province or territory.

Unless the IFM’s fund has no securityholders, or has never solicited investors, in Ontario, Quebec, New Brunswick or Newfoundland and Labrador, it must be registered as an IFM in the applicable provinces unless it can avail itself of the “Permitted Client Exemption”. If the IFM’s fund has no securityholder or has never solicited investors in such provinces, then it would not have to register as long as any other activities have not triggered the jurisdiction of such provinces, as interpreted under these proposals.

The position of the IFM in the other provinces and territories is substantially similar, except that these provinces and territories specifically state that IFMs are not required to register based solely on the presence of securityholders and solicitation of investors in their jurisdictions. Therefore, the requirement to register in those jurisdictions will be entirely based on the principles of interpretation set out by them in their proposals.

Going Forward

Each proposal is open for comment under April 10, 2012.

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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