Canada: Proposed National Instrument 31-103: Impact On The Hedge Fund Industry

While the media and other observers have suggested that proposed National Instrument 31-103 Registration Requirements1 responds to perceived concerns about the Canadian hedge fund industry, proposed NI 31-103 is principally designed to put in place a revised, nationally harmonized and streamlined registration regime for firms and individuals. Recent hedge fund scandals may have provided the catalyst to speed up implementation of national registration rules by focussing the regulators’ attention. However, the genesis of a national registration system predated the Canadian securities regulators’ review of the hedge fund industry2. The reality is that Canadian hedge fund managers already are under the regulatory umbrella of the Canadian securities regulators because they must register as advisers (investment counsel/portfolio managers) if they provide portfolio management services to the funds. However, proposed NI 31-103 can be expected to put to bed current regulatory debates about registration requirements for hedge fund participants, including general partners of hedge funds organized as limited partnerships, and will impose other regulatory requirements on industry participants.

Proposed NI 31-103 will expand or clarify existing regulation of hedge fund managers, advisers and distributors by

  • Introducing a new category of registration for "investment fund managers"
  • Introducing a registration category of "exempt market dealer" across Canada
  • Introducing a new "business trigger" test for determining when registration is required
  • Increasing capital and insurance requirements across all categories of registration
  • Changing proficiency requirements for individual registrants
  • Enhancing compliance and supervisory expectations
  • Governing referral arrangements
  • Increasing financial reporting requirements

Registration of Investment Fund Managers – The new registration category of "investment fund manager" will apply to managers of all investment funds, including domestic and international managers, as well as funds that are reporting issuers and privately offered. The term "investment fund manager" is defined in Ontario securities regulation as "a person or company who has the power and exercises the responsibility to direct the affairs of an investment fund". It is unclear whether the CSA intend to capture, for example, general partners of hedge funds organized as limited partnerships and trustees of hedge funds organized as trusts. However, in our view, registration of these entities should not be required if they delegate management duties to a registered third party manager, and we intend to request that the CSA clarify this important point in the proposed companion policy to proposed NI 31-103.

Exempt Market Dealer Registration – At present, only the securities regulators in Ontario and Newfoundland and Labrador require dealers trading in securities pursuant to prospectus and registration requirements to register as "limited market dealers" (LMDs). Proposed NI 31-103 introduces a new registration category for dealers, "exempt market dealers", that will replace the LMD category and apply across Canada. Unlike the LMD category, a registered exempt market dealer will be subject to minimum capital and insurance and proficiency requirements for its dealing representatives, its ultimate designated person and its chief compliance officer. Existing registrants will not be grandfathered, although transitional provisions have not yet been published.

Registration Exemptions and the "Business Trigger" – Today’s securities legislation imposes a "business trigger"3 for determining whether an entity must register as an adviser. In contrast an entity is caught today by the dealer registration requirements simply by participating in a trade. Proposed NI 31-103 will introduce the business trigger test in all provinces and territories and across all registration categories. This will likely not impact on those currently servicing hedge funds and their managers, however it is expected to relieve a firm that is involved in mergers and acquisitions or private equity investment from registration where its focus is on investing in or assisting in the management of a business, as opposed to investing in securities of an issuer.

Increased Capital and Insurance Requirements – We expect that the new capital and insurance requirements of proposed NI 31-103 will have a significant impact on hedge fund industry participants. Minimum capital required for investment fund managers will be $100,000; for dealers $50,000; and for portfolio managers $25,000. Generally, the required capital will be adjusted upward to reflect total assets or assets under management, deductibles under required insurance policies and other risk-related factors. For firms registered in more than one category, these minimums will not be cumulative.

Minimum insurance requirements will also increase for firms with significant assets or assets under management to as high as $25,000,000 in some cases.

Changes to Proficiency Requirements – Dealing representatives of exempt market dealers will be required to have passed the Canadian Securities Exam and the Conduct and Practices Handbook Exam or the PDO Exam, or the equivalent U.S. courses and the New Entrants exam, or meet the requirements for an advising representative. Changes are also proposed for the required proficiency of advising representatives and associate advising representatives.

Conduct Rules – Proposed NI 31-103 emphasizes that compliance is not the sole responsibility of the ultimate designated person or the chief compliance officer or a designated individual in a firm but that compliance is a firm-wide responsibility. A registered firm will be required to establish and enforce a system of controls and supervision that ensures the firm’s compliance with all applicable requirements. This system of controls must be documented in the form of written policies and procedures. The registered firm will also be required to ensure that its compliance monitoring and supervision policies and procedures take into account conflicts of interest management issues.

Proposed NI 31-103 recognizes that many fund management duties, for example "back office" administration, are delegated to third party service providers. All registrant firms will be required to conduct appropriate due diligence on all such service providers and to regularly monitor their activities. Ultimate responsibility for the actions of the service providers will remain with the registrant.

Referral Arrangements – Proposed NI 31-103 codifies current CSA policies and suggested best practices regarding referral arrangements. All such arrangements will have to be in writing and clearly allocate responsibility for discharging regulatory duties, such as know-your-client and suitability requirements. Registrants will have to ensure that investors are fully informed of all such arrangements and payments made under them.

Financial Reporting – In addition to the filing of annual audited financial statements and required forms, proposed NI 31-103 will require additional reporting requirements for certain registrants. Investment fund managers will be required to file quarterly statements and forms (including a description of any net asset valuation adjustments made in the period). All registrants will be required to immediately report any shortfall in minimum regulatory capital.

Footnotes

1 Proposed National Instrument 31-103 Registration Requirements was released for comment on February 20, 2007. The comment period ends on June 20, 2007.

2 Canadian Securities Administrators’ Staff Notice 81-316 Hedge Funds released January 12, 2007.

3 That is, it is or it holds itself out as being in the business of advising others as to the buying and selling of securities.

* * * * * * * * * * * * * * * * * * *

For more information on proposed NI 31-103, please see BLG’s Investment Management Advisory Canadian Securities Regulators Release Comprehensive Registration Rule for Comment released by our Investment Management Group on February 20, 2007. This Investment Management Advisory is one of eight in the series: Keeping Reforms in Sight: Understanding the Registration Reform Proposals. BLG’s Investment Management Advisories are available on our website at www.blgcanada.com [click on Publications and then select Capital Markets to search current publications].

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions