international investment fund managers may need to register in Canada - revised registration requirements and exemptions for non-resident investment fund managers published for comment
On February 10, 2012, the Ontario Securities Commission, the Québec Autorité des marchés financiers, the New Brunswick Securities Commission, and the Newfoundland and Labrador Financial Services Regulation Division (collectively, the "Participating Jurisdictions") published a request for comments in relation to proposed Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (the "Proposed Instrument") and its Companion Policy 32-102CP (the "Companion Policy"). The Proposed Instrument represents revised registration requirements and exemptions which, once in effect, will be applicable to non-resident investment fund managers in each of the Participating Jurisdictions.
Persons or companies who direct or manage the business, operations or affairs of an investment fund are considered to be an "investment fund manager" for the purposes of the Proposed Instrument.
In the Proposed Instrument and the Companion Policy, a "non-resident investment fund manager" includes investment fund managers: (i) that do not have their head office or their principal place of business in a jurisdiction of Canada (international investment fund managers); or (ii) that do not have a place of business in the local jurisdiction (domestic non-resident investment fund managers).
The Proposed Instrument and Companion Policy are a direct result of proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103") and Companion Policy 31-103CP, published for comment on October 15, 2010 (the "October 2010 Proposal") by the Canadian Securities Administrators (the "CSA"). The October 2010 Proposal called for, inter alia, the registration of a non-resident investment fund manager in each CSA jurisdiction where the investment fund it manages has security holders who are resident in that jurisdiction and where the investment fund or its manager has "actively solicited" the purchase of securities of the fund by the persons resident in that jurisdiction. The October 2010 Proposal also contained certain exemptions from the requirement to register as an investment fund manager.
NI 31-103 contains a transitional exemption from the proposed non-resident investment fund manager registration requirements which is set to expire on September 28, 2012. The Proposed Instrument would extend this temporary exemption until December 31, 2012.
The Participating Jurisdictions are now seeking to implement a revised form of the October 2010 Proposal. It is unclear at this point whether the securities regulatory authorities in the other provinces and territories of Canada will adopt the Proposed Instrument and the Companion Policy.
registration requirements under the proposed instrument
The provisions of the Proposed Instrument would require a non-resident investment fund manager to register as an investment fund manager in a Participating Jurisdiction if the investment fund it manages has investors in the such jurisdiction who have been "actively solicited" by either the investment fund or the non-resident investment fund manager.
Registration as an investment fund manager in a Canadian jurisdiction requires the registered entity to meet specified minimum capital and insurance requirements and to appoint a qualified person to act as chief compliance officer. Registered investment fund managers also have ongoing regulatory filing and reporting requirements under NI 31-103.
After March 31, 2013, a registered investment fund manager that has a head office or principal place of business outside of Canada must ensure that all investors who have an address in any of the Participating Jurisdictions receive a written notice advising them:
(a) that the investment fund manager is not a resident of the Participating Jurisdiction;
(b) the foreign jurisdiction in which the investment fund manager's head office or principal place of business is located;
(c) that all or substantially all investment fund manager's assets may be situated outside of Canada;
(d) that, as a result of the above, there may be difficulty enforcing legal rights against the investment fund manager; and
(e) the name and address of the legal agent for service of the investment fund manager.
exemptions from investment fund manager registration requirements
no security holders or no active solicitation of investors
The Proposed Instrument exempts non-resident investment fund managers from the requirement to register in a Participating Jurisdiction in circumstances where the investment fund does not have a place of business in the Participating Jurisdiction and either or both of the following conditions is satisfied:
(i) there are no security holders of the investment fund resident in the Participating Jurisdiction;
(ii) there has been no "active solicitation" of residents in the Participating Jurisdiction to purchase securities of the Fund by either the investment fund or the non-resident investment fund manager.
The Companion Policy to the Proposed Instrument provides guidance as to what activities may qualify as "active solicitation." The Companion Policy notes that active solicitation refers to intentional actions taken by the investment fund or non-resident investment fund manager to encourage a purchase of the fund's securities, such as pro-active, targeted actions or communications that are initiated by a non-resident investment fund manager for the purposes of soliciting an investment. Examples of "active solicitation" set out in the Companion Policy include:
(i) direct communication with residents of a Participating Jurisdiction to encourage their purchase of the investment fund's securities;
(ii) 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 the Participating Jurisdiction (either directly from the fund or in the secondary/resale market); and
(iii) purchase recommendations being made by a third party to residents of a Participating Jurisdiction if that party is entitled to be compensated by the investment fund or the non-resident investment fund manager for the recommendation itself, or for a subsequent purchase of fund securities by residents of the Participating Jurisdiction in response to the recommendation.
The Companion Policy indicates that the following activities would not be considered to be active solicitation for the purposes of the Proposed Instrument:
(i) advertising in Canadian or international publications or media (including the internet) only to promote the image or general perception of an investment fund;
(ii) responding to unsolicited enquiries from prospective investors in a Participating Jurisdiction; and
(iii) the solicitation of a prospective investor that is only temporarily in a Participating Jurisdiction, such as in the case where a resident from another jurisdiction is vacationing in a Participating Jurisdiction.
As a result of this exemption, a non-resident investment fund manager would only need to register in a Participating Jurisdiction where there are investors in the Participating Jurisdiction or where either the manager or the fund have engaged in active solicitation of investors. If the fund has investors who are resident in a Participating Jurisdiction and there was no active solicitation in that jurisdication, then the non-resident investment fund manager would not be required to register in such circumstances.
permitted client exemption
Under the October 2010 Proposal, international investment fund managers were exempt from the registration requirement if the investment funds they managed were distributed in Canada under an exemption from the prospectus requirement to a "permitted client" provided that certain threshold limitations on fund assets held by Canadian investors were not exceeded. The Proposed Instrument would remove the threshold condition to the permitted client exemption.
The Proposed Instrument exempts from registration persons or companies acting as an investment fund manager of an investment fund where all the securities of the investment fund distributed in the Participating Jurisdiction were distributed under an exemption from the prospectus requirement to "permitted clients."
The definition of "permitted client" is based on the definition set out in section 1.1 of the NI 31-103, although the definition in the Proposed Instrument contains some notable differences with respect to the treatment of certain charities registered under the Income Tax Act (Canada).
It is important to note that if an investment fund has any investors who are resident in the Participating Jurisdictions who do not qualify as a permitted client, the non-resident investment fund manager will not be entitled to rely on this exemption from the investment fund manager registration requirement.
In order to rely on the permitted client exemption:
(a) the investment fund manager must have its head office or principal place of business outside of Canada;
(b) the investment fund manager must be incorporated, formed or created under the laws of a foreign jurisdiction;
(c) the investment fund must not be a reporting issuer in any province or territory of Canada;
(d) the investment fund manager must submit to the securities regulatory authority of the Participating Jurisdiction a completed Form 32-102F2 – Submission to Jurisdiction and Appointment of Agent for Service for International Investment Fund Manager; and
(e) the investment fund manager must notify the permitted client in writing of all of the following:
(i) the investment fund manager is not registered in the Participating Jurisdiction to act as an investment fund manager;
(ii) the foreign jurisdiction in which the head office or principal place of business of the investment fund manager is located;
(iii) that all or substantially all of the assets of the investment fund manager may be situated outside of Canada;
(iv) that there may be difficulty enforcing legal rights against the investment fund manager because of the above; and
(v) the name and address of the agent for service of process of the investment fund manager in the Participating Jurisdiction.
Foreign investment fund managers who rely on the permitted client exemption from registration in the course of a year must, by December 1 of each year, notify the securities regulatory authority in the Participating Jurisdiction of the following:
(a) the fact that it relied on the permitted client exemption from registration; and
(b) for all investment funds for which it acts as an investment fund manager, the total assets under management expressed in Canadian dollars, attributable to securities beneficially owned by residents of the Participating Jurisdiction as at the most recently completed month end.
Foreign investment fund managers must also notify the securities regulatory authority in the Participating Jurisdiction of any change to the information previously submitted to the regulatory authority within 10 days of the date of the change.
The stated purpose behind the proposed annual reporting requirements is to provide regulatory authorities with information to aid in the monitoring of activities that give rise to investor protection concerns. However, international investment fund managers may find it difficult to comply with the annual requirement to report assets under management attributable to residents of the Participating Jurisdictions as the information for the most recent month end (November 30) may not be available to the investment fund manager by the December 1 annual reporting deadline.
Non-resident investment fund managers who are required to register as investment fund managers in the Participating Jurisdictions as a result of the Proposed Instrument must register or apply for registration in the applicable Participating Jurisdictions by December 31, 2012.
opportunity for comment and next steps
The public comment period for the Proposed Instrument and Companion Policy expires on April 10, 2012. Non-resident investment fund managers who will be impacted by these changes are encouraged to take the opportunity to provide comments and suggestions within the comment period.
The text for the Proposed Instrument and Companion Policy is located at http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20120210_32-102_exempt-non-resident.htm.
It is expected that the registration regime (including the available exemptions) for non-resident investment fund managers will take effect in the Participating Jurisdictions by the end of 2012. Non-resident investment fund managers are advised to prepare by:
(i) Conducting an internal review of their past and current marketing activities in Canada (e.g. have either the investment fund manager or the fund engaged in active solicitation of investors?) and determine if there are fund investors who are resident in a Participating Jurisdiction in order to identify the jurisdictions in which registration could potentially be required and whether any exemptions may be available from such registration requirement;
(ii) Reviewing their proposed marketing plans for 2012 and beyond to determine what effect the Proposed Instrument and the Companion Policy, if brought into effect as currently constituted, would have on their operations and determine whether the proposed exemptions from the registration requirements would be of any benefit; and
(iii) Considering the requirements and ongoing obligations if registration as an investment fund manager is required in one or more of the Participating Jurisdictions.
Non-resident investment fund managers are encouraged to consult with legal counsel to determine the full impact of the Proposed Instrument and Companion Policy on their business and operations in the Participating Jurisdictions or if they would like further details or assistance in submitting comments on the proposals.
by Michael Burns and Hartley Lefton
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a cautionary note
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2012