- Regulators to adopt two different models to regulation of non-resident IFMs
- Assuming all necessary approvals, both models will come into force on September 28, 2012
- The registration requirement deadlines for non-resident IFMs have been extended from September 28, 2012, to December 31, 2012
On July 5, 2012, the Canadian Securities Administrators (CSA) announced the final versions of their two different approaches to the requirement on the registration obligations of non-resident investment fund managers (IFMs) – both foreign managers and domestic managers operating in provinces and territories other than where their head office is located. The CSA have been unable to agree on a common approach, so regulators in Ontario, Quebec, and Newfoundland and Labrador are implementing an exemption-based approach, and the regulators in the remaining provinces and territories (who gained New Brunswick as a convert) are implementing a policy-based approach. Both instruments largely resemble the proposals published in February 2012 and described in our Blakes Bulletin on Securities – Canadian Securities Administrators Announce Details of Proposed Regulation of Off-Shore Investment Fund Managers, subject to amendments that are summarized below. In addition, all CSA members issued parallel extension orders so that IFMs affected by these changes will not need to apply for registration until December 31, 2012.
In October 2010, as described in our Blakes Bulletin on Securities – CSA Divided on Proposed Approach to Regulation of Non-Resident Investment Fund Managers, the CSA published for comment proposals (the 2010 Proposals) to set out the terms and conditions pursuant to which non-resident IFMs must be registered.
In February 2012, a revised set of proposals was published. Regulators in Ontario, Quebec, New Brunswick, and Newfoundland and Labrador (the Exemption Group) published for comment Multilateral Instrument 32-102 – Registration Exemptions for Non-Resident Investment Fund Managers (MI 32-102). These provinces proposed that an IFM that did not have its head office or its principal place of business in Canada but that managed an investment fund having a connection with such provinces (which included having any fund security holders resident in such provinces) would have to be registered with regulators of these provinces unless it was able to satisfy one of the following two exemptions: (i) a permitted client exemption for IFMs; or (ii) either (a) the investment fund had no security holders resident in the jurisdiction, or (b) the investment fund or the IFM did not actively solicit residents in the jurisdiction in question to purchase securities in the investment fund.
The remaining Canadian securities regulators (British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, Yukon, Northwest Territories and Nunavut) (the Policy Group) concurrently published for comment Multilateral Policy 31-202 – Registration Requirements for Investment Fund Managers (MP 31-202). MP 31-202 set out a more lenient test to determine whether a non-resident IFM will be required to register in their jurisdiction. The Policy Group proposed that registration of an IFM in these jurisdictions would only be required if the IFM directed or managed the business, operations or affairs of an investment fund, had a head office or carried on material activities, from a physical place of business in the jurisdiction.
JULY 5, 2012 ANNOUNCEMENT
On July 5, 2012, the two groups of regulators published the final instruments, divided as before (except for New Brunswick's change). The CSA were unable to address the primary complaint of commenters who had urged the CSA to reach a compromise and issue a uniform approach on the non-resident IFM registration requirement. The Exemption Group stated that while they were "aware of the policy position being taken by a number of the other jurisdictions, we were not aware of any appropriate alternatives." The Policy Group acknowledged that they are interpreting the same rules in a widely differing manner. They stated that the CSA jurisdictions tried to reach a consensus on the interpretation of the IFM registration requirement, but were unable to agree, and stated "we think that our approach is the correct legal interpretation of the investment fund manager registration requirement."
MI 32-102 – Exemption Group
The provinces forming the Exemption Group continue to be firmly of the view that if an IFM is managing an investment fund that has distributed securities to residents of that province, the IFM is therefore acting as an IFM in that province and must register, unless an exemption is available.
A number of changes were made by the Exemption Group to MI 32-102 after February 2012, the most important of which was to reintroduce a grandfathering provision that ensures that solicitation of sales of securities of an investment fund before September 28, 2012, will not require registration. Grandfathering had originally been proposed in October 2010 but was absent from the February 2012 revision.
Therefore, in the three Exemption Group provinces, there are now two main exemptions from the registration requirement available for non-resident IFMs.
First, an exemption is available for IFMs that do not have a place of business in the local jurisdiction if either (i) none of the investment funds of the IFM have security holders resident in the local jurisdiction, or (ii) the IFM or its investment funds have not actively solicited residents in the local jurisdiction at any time after September 27, 2012. This is a complete registration exemption and requires no further action by the IFM.
Second, an alternative, somewhat more onerous, exemption is available for non-Canadian IFMs if (i) all of the securities of their investment funds distributed in a local jurisdiction are distributed on a private placement basis only to permitted clients (substantially as defined in National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations), and (ii) so long as the IFMs follows certain initial and ongoing filing and disclosure requirements to both clients and the relevant jurisdictions. Non-resident IFMs relying on this exemption in Ontario will be required to pay annual fees to the Ontario Securities Commission. Ontario intends to publish future amendments to its fees rule to clarify that other non-resident IFMs that do not rely upon this exemption will not be required to pay annual fees.
The Exemption Group clarified that the exemption available to an IFM will only be available to the IFM if all of the investment funds managed by it meet the requirements of the exemption. Similarly, with respect to the "permitted client" exemption, the regulators clarified that an IFM may manage one or more investment funds. However, the "permitted client" exemption will only apply if all the securities of the investment funds distributed in the local jurisdiction were distributed under the "permitted client" exemption.
Provided all necessary government approvals are received, MI 32-102 will come into force on September 28, 2012, although the transition amendments mentioned earlier mean that non-resident IFMs who cannot rely upon these exemptions will have until December 31, 2012, to register.
MP 31-202 – Policy Group
In the Policy Group, the regulators reaffirmed and clarified their commitment to the interpretive principle that IFM registration is only required in their jurisdictions for an IFM that directs or manages the business, operations or affairs of an investment fund from a physical place of business in a jurisdiction or its head office in a jurisdiction.
The regulators clarified that functions or activities tied to the "mere" presence of security holders, solicitation of investors or the distribution of securities in a jurisdiction will not give rise to investment fund manager registration, unless they are directed from within the jurisdiction and therefore result in the person directing or managing the business operations or affairs of an investment fund in the jurisdiction.
The regulators' commentary drew a distinction from distributing and marketing activities that may require dealer registration. They stated that delivery of reports and payments of a fund from outside the jurisdiction to residents in the jurisdiction would not ordinarily attract IFM registration. The commentary also noted that retaining a portfolio manager or other service provider in a jurisdiction would not itself result in the IFM directing or managing the business of the fund in the jurisdiction where that manager or provider is located. This assumes that the service provider does not itself direct or manage the business operations or affairs of the fund; if so, it must register.
Implications for Non-Resident IFMs
Non-Canadian IFMs. As a preliminary step, non-Canadian IFMs should conduct an examination of the residence of the investors in their funds to determine in which Canadian jurisdictions they reside.
If they have investors resident in any of the Policy Group jurisdictions, they should review the policy statements of the Policy Group to ensure that they are not directing or managing the business operations or affairs of any of their investment funds within one or more of the Policy Group jurisdictions. If so, IFM registration would be required.
If their fund has or had security holders resident in any of the Exemption Group jurisdictions, then so long as they do not solicit investors after September 27, 2012, registration would not be required. If they do intend to solicit further investors, and if all past distributions were restricted to only "permitted clients" and future distributions will also be so restricted, then a non-Canadian IFM should prepare to take advantage of the registration exemption by complying with the necessary filings and notices and paying Ontario's fees. Finally, if they intend to solicit, and either past or future distributions were made beyond the class of "permitted clients" to include "accredited investors," then the permitted client exemption is not available, and IFM registration would be required.
Canadian IFMs. Canadian IFMs will similarly have to ensure that they are registered in any of the Policy Group jurisdictions in which they are actually carrying out investment fund management activities. If they are not doing so, then registration there would not be required.
In respect of the Exemption Group provinces, the main effect of the final proposals will be the requirement for a Canadian IFM that is conducting its management activities from outside the Exemption Group (meaning that it should have been registered already) to now become registered in provinces in the Exemption Group in which it has security holders and in which it continues to solicit new investors, unless it is able to satisfy the permitted client exemption.
DISPUTE RESOLUTION ANNOUNCEMENT
The CSA also made an announcement on July 5, 2012, that fund managers will have until either September 28, 2014, or, if sooner, the coming into effect of any amendments, to comply with the requirements regarding the dispute resolution provisions in NI 31-103.
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.