On July 5, 2012, the Canadian Securities Administrators published final versions of Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (MI 32-102) and Multilateral Policy 31-202 Registration Requirements for Investment Fund Managers (MP 31-202) relating to registration requirements and exemptions for investment fund managers who are not resident in Canada.
The final versions of MI 32-102 and MP 31-202 follow earlier proposals published in February 2012 and discussed in an Osler Update dated February 17, 2012.
The provinces of Ontario, Quebec and Newfoundland and Labrador (the Three Canadian Provinces) have adopted MI 32-102. All other provinces and territories (the Other Canadian Jurisdictions), including New Brunswick, which in February had supported MI 32-102, have adopted MP 31-202. Regrettably, and despite the urgings of many of the commenters on the February proposals, including Osler, Hoskin & Harcourt LLP, there will not be one harmonized approach in Canada to registration requirements and exemptions for non-Canadian resident investment fund managers.
Under the new requirements applicable in the Three Canadian Provinces:
Grandfathering Exemptions – A "grandfathering" exemption is available if the manager does not manage any investment funds which currently have investors resident in any of the Three Canadian Provinces, but this exemption will cease to be available if and when fund securities are sold to an investor in one of the Three Canadian Provinces. Another "grandfathering" exemption is available so long as neither the manager nor any fund it manages has, after September 27, 2012, "actively solicited" residents in any of the Three Canadian Provinces.
Actively Solicited – The securities regulators in the Three Canadian Provinces have stated that "active solicitation" refers to intentional actions taken by the investment fund or the investment fund manager to encourage a purchase of the fund's securities, such as pro-active, targeted actions or communications that are initiated by an investment fund manager for the purpose of soliciting an investment. Actions that are undertaken by an investment fund manager at the request of, or in response to, an existing or prospective investor who initiates contact with the investment fund manager would not constitute active solicitation.
Examples of active solicitation include: direct communication with residents of one of the Three Canadian Provinces to encourage their purchases of the investment fund's securities; advertising in Canadian or international publications or media (including the Internet), if the advertising is intended to encourage the purchase of the investment fund's securities by residents of one of the Three Canadian Provinces (either directly from the fund or in the secondary/resale market); or purchase recommendations being made by a third party to residents of one of the Three Canadian Provinces, if that party is entitled to be compensated by the investment fund or the investment fund manager, for the recommendation itself, or for a subsequent purchase of fund securities by residents of one of the Three Canadian Provinces in response to the recommendation.
According to the securities regulators, active solicitation would not include: advertising in Canadian or international publications or media (including the Internet) only to promote the image or general perception of an investment fund; responding to unsolicited enquiries from prospective investors in one of the Three Canadian Provinces; or the solicitation of a prospective investor that is only temporarily in one of the Three Canadian Provinces, such as in the case where a resident from another jurisdiction is vacationing in one of the Three Canadian Provinces.
Permitted Client Exemption - If no "grandfathering" exemption is available, the only alternative to registration as a non-Canadian resident investment fund manager will be to take the steps necessary to perfect the "permitted client" exemption, if available. As drafted, it appears that the "permitted client" exemption would only be available if the manager does not manage any investment fund which has ever distributed any securities in one of the Three Canadian Provinces to an investor who did not, at the time of the distribution, qualify as a "permitted client." So, in order to be able to rely upon the "permitted client" exemption, the manager would have to be able to confirm that all purchasers of its funds' securities in any of the Three Canadian Provinces, dating back to the inception of each fund, met the "permitted client" test. Since the "permitted client" definition is relatively new and the private placements could have legitimately been made to other investors as well, this aspect of the test may be problematic. We are hopeful that the securities commissions in the Three Canadian Provinces may provide some clarification on this matter. In addition, the investment fund manager will have to: (i) appoint an agent for service of process in each of the Three Canadian Provinces where investors in its funds are resident; (ii) file a notice with the applicable Canadian securities regulators indicating that it is relying on the "permitted client" exemption; (iii) file a prescribed form of notice with the applicable securities regulators regarding certain regulatory actions by non-Canadian regulators, which form must be updated on an ongoing basis within ten days of any change to the information contained in the form; (iv) provide prescribed cautionary disclosure to investors resident in the Three Canadian Provinces; and (v) notify the securities regulators annually that it has relied on the "permitted client" exemption during the preceding year, which notice must include disclosure of the total assets under management attributable to securities beneficially owned by residents of each of the Three Canadian Provinces. An investment fund manager relying on the "permitted client" exemption in the Province of Ontario will also have to pay an annual fee to the Ontario Securities Commission calculated on the basis of the amount of revenue it has derived during the year as a result of having Ontario-resident investors in its funds. In addition, although the Canadian regulators have not yet specifically so stated, it may be that an investment fund manager relying on the "permitted client" exemption will be required to submit monthly reports to the Canadian securities regulators regarding compliance with CSA Staff Notice 31-317 – Reporting Obligations Related to Terrorist Financing for Registrants, Exempt International Dealers and Exempt International Advisers, which obligations apply to "persons and entities authorized under provincial legislation to engage in the business of dealing in securities or any other financial instruments, or to provide portfolio management or investment advising services."
Permitted Client – The term "permitted client" includes, among other things: (i) a person or company, other than an individual or an investment fund, that has net assets of at least Cdn. $25 million as shown on its most recently prepared financial statements; (ii) an individual who beneficially owns financial assets (being cash, securities, contracts of insurance, deposits, or evidence of a deposit) having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds Cdn. $5 million; and (iii) a person or company acting on behalf of a managed account which is managed by that person or company, if it is registered or authorized to carry on business as an adviser or the equivalent under the securities legislation of any province or territory of Canada, or the securities legislation of any other country.
Three Month Transition Period – Non-Canadian resident investment fund managers will have until December 31, 2012 to either apply for registration as an investment fund manager or take the necessary steps to perfect the "permitted client" exemption from the registration requirements, if it is available.
In the Other Canadian Jurisdictions, an investment fund manager will only be required to register in a jurisdiction if it directs or manages the business, operations or affairs of the investment fund in that jurisdiction, in a way that establishes a substantial connection to that jurisdiction. The revised MI 31-202 clarifies the concept of a connection to a jurisdiction. Specifically, under MP 31-202, solicitation of investors or the distribution of securities in a jurisdiction will not give rise to an investment fund manager registration requirement, unless those activities are directed from within the jurisdiction and result in the person directing or managing the business operations or affairs of an investment fund in the jurisdiction.
Canadian resident investment fund managers also will need to consider the implications of these rules for them. An Osler Update on this topic will be distributed shortly.
If you have any questions about Multilateral Instrument 32-102 or Multilateral Policy 31-202, for guidance please contact any one of the authors or your trusted legal advisor at the firm.
Rob Lando is a cross-border corporate and securities lawyer with significant practice experience in the United States and Canada. Linda Currie's practice focuses on financial institution and securities regulatory and compliance matters relating to investment funds and asset management. John Black focuses on corporate finance and securities regulatory matters, investment funds, asset management and mergers and acquisitions. Mark DesLauriers practises in the area of corporate and securities law, with particular emphasis on cross-border corporate finance, public company law, and the regulation of securities dealers and advisers. Blair Wiley practises in the area of corporate and securities law, with particular emphasis on corporate finance, mergers and acquisitions, derivatives regulation and the regulation of securities dealers and marketplaces.
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