Divergent paths – Securities regulatory authorities in nine Canadian jurisdictions propose to adopt different rules for registration of non-resident investment fund managers 

publication 

March 2012

Securities and Public Markets Bulletin

In a recent client bulletin, we noted that on February 10, 2012, the securities authorities of Ontario, Québec, New Brunswick and Newfoundland and Labrador (collectively the "Instrument Jurisdictions") published a request for comments in relation to proposed Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers and Companion Policy 32-102CP (collectively, "MI 32-102"). On the same date, the securities authorities of the nine remaining Canadian jurisdictions (British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, Northwest Territories, Yukon and Nunavut, collectively the "Policy Jurisdictions") also published a request for comments in relation to Proposed Multilateral Policy 31-202 Registration Requirement for Investment Fund Managers (the "Proposed Policy").

The Proposed Policy addresses requirements for registration by "non-resident investment fund managers" in the Policy Jurisdictions. It contains notable differences from prior proposals of the same nature and would establish a distinct registration regime in the Policy Jurisdictions in comparison to the Instrument Jurisdictions. The definitions of "investment fund manager" and "non-resident investment fund manager" in the Proposed Policy are identical to those used in MI 32-102.

The Proposed Policy reflects the fact that the Policy Jurisdictions and the Instrument Jurisdictions have taken different views on the circumstances under which non-resident investment fund managers could be required to register in their respective jurisdictions.

If the Proposed Policy is adopted in its current form, an investment fund manager would only be required to register in one or more of the Policy Jurisdictions if it: (a) carries on the functions and activities of an investment fund manager in that Policy Jurisdiction, or (b) has a head office in the Policy Jurisdiction or directs or manages the business, operations or affairs of an investment fund from a physical place of business in the Policy Jurisdiction.

In deciding whether an entity "carries on the functions and activities of an investment fund manager", the Proposed Policy lists the following functions and activities that an investment fund manager may direct, manage or perform:

  • establishing a distribution channel for the fund;
  • marketing the fund;
  • establishing and overseeing the fund's compliance and risk management programs;
  • overseeing the day to day administration of the fund;
  • retaining and liaising with the fund portfolio manager, the custodian, the dealers and other service providers;
  • overseeing advisers' compliance with investment objectives and overall performance of the fund;
  • preparing the fund's prospectus or other offering documents;
  • preparation and delivery of unit holder reports;
  • identifying, addressing and disclosing conflicts of interest;
  • calculating the net asset value (NAV) and the NAV per share or unit; and
  • calculating, confirming and arranging payment of subscriptions, redemptions and arranging for the payment of dividends or other distributions, if required.  

The Proposed Policy notes that no single function or activity alone is determinative of whether registration as an investment fund manager is required and the analysis may include consideration of functions and activities beyond those explicitly noted.

Given the nature of the registration requirement in the Proposed Policy, there is no "permitted client" exemption from the registration requirement as is the case in MI 32-102.

The Proposed Policy differs from MI 32-102 by focusing solely on the activities of the non-resident investment fund manager which take place in the Policy Jurisdiction. Unlike MI 32-102, the presence of security holders who qualify as accredited investors (but not as permitted clients) in a Policy Jurisdiction coupled with the solicitation of investors in a Policy Jurisdiction does not automatically trigger a registration requirement on the part of a non-resident investment fund manager. Finally, the Proposed Policy does not require non-resident investment fund managers with a place of business outside Canada to notify security holders in a Policy Jurisdiction of its non-resident status and the difficulty that security holders may have in enforcing legal rights against the investment fund manager.

If the Proposed Policy is adopted in its current form, most non-resident investment fund managers (including, for greater certainty, foreign domiciled investment fund managers) would likely not be required to register as an investment fund manager in any Policy Jurisdiction (although such registration may still be required in one or more of the Instrument Jurisdictions).

Click here to view the full text of the Proposed Policy.

The public comment period for the Proposed Policy expires on April 10, 2012 (the same date on which the public comment period for MI 32-102 expires). Non-resident investment fund managers who will be affected by these changes in the Policy Jurisdictions are encouraged to take the opportunity to provide comments and suggestions within the comment period.

by Michael Burns and Hartley Lefton

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