As discussed in our post of February 10, the Canadian Securities Administrators (CSA) recently published two sets of proposals relating to the registration of non-resident investment fund managers (IFMs). The provinces of Ontario, Quebec, New Brunswick and Newfoundland and Labrador, referred to here as the "Exemption Jurisdictions" have proposed one approach, while the other six provinces and three territories referred to here as the "Policy Jurisdictions", have taken another. The key differences between the two approaches are highlighted below.
The securities regulators in both the Exemption Jurisdictions and the Policy Jurisdictions make it clear that if an IFM is directing or managing the business, operations or affairs of an investment fund from a place of business in a Canadian jurisdiction, the IFM would need to be registered there. The difference in the proposals is the effect of offering securities or having investors in the jurisdiction.
The Exemption Jurisdictions
In their request for comments, the securities regulators of the Exemption Jurisdictions state the view that the distribution of investment fund securities in an Exemption Jurisdiction is a significant connecting factor to the jurisdiction and the investment fund registration requirement is triggered by a non-resident IFM if either the investment fund or the IFM distributes or has in the past distributed investment fund securities in the jurisdiction. They are proposing a new rule with two exceptions to the registration requirement.
The "no security holders or active solicitation" exception
First, securities regulators of the Exemption Jurisdictions are proposing that the IFM registration requirement would not apply to a person or company acting as an IFM of an investment fund that does not have a place of business in the Exemption Jurisdiction and if one or both of the following apply:
- the investment fund has no security holders resident in the Exemption Jurisdiction;
- the investment fund or the IFM has not actively solicited residents in the Exemption Jurisdiction to purchase securities of the investment fund.
The "permitted client exception"
Second, securities regulators of the Exemption Jurisdictions are proposing an exception to the registration requirement for non-resident IFMs where the investment fund's securities distributed in the Exemption Jurisdiction are distributed on a prospectus exempt basis to "permitted clients" only. Certain other conditions, most of which are similar to those applicable under the international adviser or international dealer exemption, must also be met to rely on this exception (including the appointment of an agent for service, the filing of a notice of submission to jurisdiction, prior notice to permitted clients, etc.).
However, there are two additional filing or information requirements applicable to the permitted client exception. First, the non-resident IFM would have to report to the local securities regulator by December 1 of each year the total assets under management attributable to securities beneficially owned by residents of the Exemption Jurisdiction. Second, the non-resident IFM would be required to file with the local securities regulator a Notice of Regulatory Action (on Form 32-102F2) within 10 days of the date that it begins to rely on the permitted client exception. Notice of any change to such Form would be required to be reported within 10 days of the change. This is a potentially onerous filing and ongoing reporting obligation that is not required under either the international adviser or international dealer exemption.
The proposed rule in the Exemption Jurisdictions does not exempt non-resident IFMs of investment funds from registration where the securities were placed in the local jurisdiction in the past only. The lack of a "grandfathering" provision is potentially very significant for investment funds which are no longer offering securities in Canada but have existing investors in any Exemption Jurisdiction.
The Policy Jurisdictions
The securities regulators in the Policy Jurisdictions are proposing to adopt a policy to the effect that merely having investors resident in the Policy Jurisdiction and solicitation of investors do not automatically subject the IFM to the registration requirement. Under this proposal, an IFM would only be required to register in the Policy Jurisdiction if it directs or manages the business, operations or affairs of the investment fund in that jurisdiction. According to the proposal, consideration should be given to what activities are taking place in these jurisdictions. The Policy Jurisdictions are not proposing to adopt any specific exemptions.
As noted in our earlier post, if IFM registration is required in the Exemption Jurisdictions the deadline to submit an application for registration would be extended to December 31, 2012. In the Policy Jurisdictions, the deadline for application would be September 28, 2012. The securities regulators are accepting comments on the proposals until April 10, 2012.
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