Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, April 2008
- Canadian investment fund managers will be required to
register, with new financial and proficiency
- Non-Canadian investment fund managers are not subject to
registration unless they direct the affairs of a fund from
- Applications for registration must be filed within six
months of the date new National Instrument 31-103 comes into
The Canadian Securities Administrators (CSA) have republished for comment a revised draft of National Instrument 31-103 Registration Requirements (new NI 31-103), originally published in February 2007, that continues to propose to require investment fund managers to become registered with the CSA as such under a new category of registration. (For a summary of the original proposal, please see the February 2007 Blakes Bulletin on Securities Law Proposed Registration Reform Rule Released by Canadian Securities Regulators for Comment.)
Under local securities legislation, the term "investment fund manager" means the person or company that directs the business, operations or affairs of an investment fund. The category "investment fund manager" is defined in identical terms in section 2.6 of new NI 31-103. An "investment fund" is either a mutual fund or a non-redeemable investment fund; and a "mutual fund" and a "non-redeemable investment fund" have the meanings set out in local securities legislation. (Basically, a mutual fund is an entity that issues securities which are redeemable on demand at a redemption price equal to or based on the net asset value of those securities; a non-redeemable investment fund is an entity which issues securities which are not redeemable on demand at net asset value, where the entity is a passive investment vehicle that does not try to exercise control over the companies it invests in.)
Accordingly, entities responsible for the overall management of pooled funds and other similar non-public vehicles are likely to be required to obtain registration as investment fund managers. This is not entirely certain, however, because new NI 31-103 itself does not impose any registration requirement on investment fund managers. It simply says that if an investment fund manager is required to be registered under applicable securities legislation, it must register in the category of investment fund manager. Revisions to securities legislation to impose such a registration requirement have not yet been released, nor is the timing of such release or the probable implementation of such changes by the applicable provincial legislatures known. The CSA have indicated that it is likely that new NI 31-103 will come into force in advance of the legislative changes on which it is based.
It is also unclear whether pension plan sponsors and administrators would need to obtain registration, on the basis that the pension trusts or master trusts through which a pension plan makes its investments and for which they exercise overall responsibility could be seen to be investment funds within applicable definitions.
The Companion Policy to new NI 31-103 clarifies that an investment fund manager will only be expected to register in the jurisdiction from which management activities are conducted, not in every jurisdiction in which fund securities are distributed. Non-Canadian fund managers are therefore not required to become registered in any jurisdiction, so long as they do not direct the affairs of a fund from within Canada.
WHO ELSE WILL NOT BE REQUIRED TO BE REGISTERED
Private equity funds (assuming that they will or could invest for the purpose of exercising some degree of control over the companies they invest in, or would or could be involved in the management of those companies), income trusts, REITs and royalty trusts, among other types of funds, are not "investment funds" within the meaning of the applicable definitions, and so the entities responsible for the overall management of these types of funds would not be subject to this registration requirement. Investment funds organized as corporations might not have a separate "investment fund manager", on the basis that it is the board of directors of the corporate fund that has overall responsibility for the funds activities. In such circumstances, it is unclear whether such corporation would be required to register as its own investment fund manager, as we will need to await the legislation imposing the registration requirement to determine this. Managers of "private investment clubs" (those investment funds meeting the tests in section 8.7 of new NI 31- 103) are also not required to register as investment fund managers.
Under new NI 31-103, registered investment fund managers will need to appoint a chief compliance officer having the similar proficiency requirements as will apply to the chief compliance officer of an adviser. An ultimate designated person would also need to be appointed, to supervise and promote compliance. The CSA note in the Companion Policy that it may be necessary in some firms for the same person to act in both capacities, depending upon the size and structure of the firm.
Investment fund managers would need to have minimum excess working capital of C$100,000, twice that required of dealers and four times that required of advisers. They must also obtain a financial institution bond equal to that required of advisers that have access to clients cash or assets, on the assumption, it seems, that every investment fund manager necessarily has access to client funds, although the basis for this assumption is unclear.
Registered investment fund managers will need to file audited annual financial statements and a Form 31-103F1 Calculation of Excess Working Capital annually with the CSA, like advisers; must file unaudited quarterly financial statements and a Form 31-103F1 after the end of the first three quarters of a fiscal year with the CSA, like dealers; and on an annual and quarterly basis file a statement of net asset value adjustments, describing the cause, dollar amount, and effect on net asset value per security of any adjustments to the net asset value of any investment fund made during the year or quarter. The term "net asset value adjustment" is not defined or discussed in new NI 31-103.
ADDITIONAL REQUIRED REGISTRATIONS
If an investment fund manager engages in the business of trading in or advising with respect to securities, it must obtain registration as a dealer or adviser, in addition to registration as an investment fund manager. Based on the commentary in section 2.8.1 of the Companion Policy, an investment fund manager whose marketing and wholesaling activities are incidental to its activities as a fund manager would not have to register as a dealer. In order for such activities to be incidental, the fund must be sold exclusively through registered dealers. If the fund is distributed directly by the investment fund manager, then even activities such as promoting the funds to registered dealers would constitute an activity that would require the investment fund manager to obtain a dealer registration.
TIMING AND TRANSITION MATTERS
An entity that is acting as an investment fund manager on the date new NI 31-103 comes into force has six months to apply for registration as an investment fund manager. Assuming such application is made, it can continue to act as an investment fund manager without registration until such time as registration is granted or refused under such application.
Working Capital Requirements
For that initial six-month period, if the entity acting as an investment fund manager at the date new NI 31-103 comes into force is then registered as a dealer or adviser, the minimum required working capital is set at C$50,000. This means that an adviser that is an investment fund manager may need to immediately increase its working capital from C$25,000 (which is the minimum otherwise applicable to advisers) to C$50,000 once new NI 31-103 comes into force, even though the investment fund manager registration requirement will not yet then apply to it. At the expiration of the six-month period, the minimum working capital is C$100,000.
Dealers that are investment fund managers will generally be unaffected for the first six months, since the minimum working capital for most dealers is C$50,000 in any event. A limited market dealer that automatically becomes an exempt market dealer once new NI 31-103 comes into force and which does not hold, or have access to, any client assets is not subject to any minimum capital requirements under new NI 31-103, unless such exempt dealer is also an investment fund manager, in which event it would need to ensure that it had minimum working capital of C$50,000 on the date new NI 31-103 comes into force. After six months, all dealers that are investment fund managers must have minimum working capital of C$100,000.
Investment fund managers that are not registrants would have no minimum capital requirements on the date new NI 31-103 comes into force, but must have at least C$100,000 of working capital within six months thereafter.
For the first six months after new NI 31-103 comes into force, if the entity acting as an investment fund manager at that date is then registered as a dealer or adviser, the insurance requirements applicable to investment fund managers are stated not to apply. Such requirements only apply to registered investment fund managers, and so the utility of this exemption is limited. Presumably, if registration is obtained within the first six months, it can be obtained on the basis of the investment fund manager having no insurance beyond what is required of it as a dealer or adviser, with the additional insurance requirement coming into effect at the end of the six-month transition period.
The proposed draft of new NI 31-103 includes many other very significant changes to registration requirements for dealers and advisers in Canada. These changes are summarized in the following Blakes Bulletins on Securities Regulation that are being published concurrently with this bulletin and available on Blakes Web site, in our PublicationsCorporate Finance and Securities Regulation section: New Changes Proposed for International Dealers and Advisers and Securities Commissions Republish Proposed Dealer Registration Reform.
OPEN FOR COMMENTS
The proposed draft of new NI 31-103 is open for comment until May 29, 2008. Although no implementation date has been proposed yet, it is understood that the CSA is targeting the instrument to come into force at the end of 2008.
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.