INTERNATIONAL ADVISERS. What You Need To Know Under the New Rules

Transcription

1 INTERNATIONAL ADVISERS What You Need To Know Under the New Rules On July 17, 2009, the Canadian Securities Administrators (the CSA) published in final form their reforms to the registration regime in National Instrument Registration Requirements and Exemptions (NI ), along with certain consequential amendments to other securities laws (collectively, the new rules). Subject to ministerial approval requirements, NI will come into force on September 28, 2009 (the effective date). New Rules for Non-Canadian Advisers Non-Canadian advisers currently access the market in Ontario in the following ways: registration as an international adviser, registration as a non-canadian adviser, reliance on a sub-adviser exemption, or reliance on a very limited exemption that permits the unsolicited advising of not more than five clients in Canada. In Alberta, non- Canadian advisers most often have registered as a portfolio manager & investment counsel (foreign) category. In Quebec, non-canadian advisers have relied upon the adviser registration exemption for advisory activities conducted solely with a specified sub-class of accredited investors (Quebec-resident institutional investors). In other Canadian jurisdictions, non-canadian advisers often have registered as portfolio managers with terms and conditions restricting their activities, similar to the restrictions imposed on registered international advisers in Ontario. The most significant features of NI for non-canadian advisers are: discontinuation of the international adviser registration category in Ontario; discontinuation of the portfolio manager & investment counsel (foreign) registration category in Alberta; discontinuation of the adviser registration exemption in Quebec for advisory activities conducted solely with Quebec-resident institutional investors; introduction of a national international adviser exemption that permits a non- Canadian adviser registered or operating under an exemption for registration under the securities legislation of its home jurisdiction to advise permitted clients in Canada on foreign securities, subject to certain conditions;

2 Page 2 the requirement to register as a portfolio manager where the international adviser exemption and certain other limited adviser registration exemptions cannot be relied upon; and the addition of an exemption from the dealer registration requirement for an international adviser when distributing units of its in-house pooled funds only into their clients managed accounts. Did you know? For a discussion of the exemption from the dealer registration requirement, please ask for our Portfolio Manager Commentary. If you are already registered in the category of international adviser, you may continue to operate for one year to permit you to transition into a new category of registration or limit your activities to those for which there is an exemption. On September 28, 2010, all international adviser registrations will be revoked. The revenue limit from Canadian activities for international advisers relying on the new international adviser exemption has been reduced to 10% from 25%. If you qualify for the international adviser exemption and intend to rely on the exemption from the dealer registration requirement to distribute securities of your in-house pooled funds into your clients managed accounts, you must give notice to the regulator within 7 days of first use of this exemption. These and other changes in the regulation of international advisers under NI are discussed below in this issue. We can help you navigate your way. International Adviser Exemption (i) Qualification for the International Adviser Exemption To qualify for the international adviser exemption, an entity must: have its head office or principal place of business in a foreign jurisdiction; be registered, or operating under an exemption from registration, under the securities legislation of the foreign jurisdiction in which its head office or principal place of business is located in a category of registration that permits it to carry on

3 Page 3 portfolio management activities in that foreign jurisdiction, which, if carried on in Canada, would require registration in Canada as a portfolio manager; and engage in the business of a portfolio manager in the foreign jurisdiction in which its head office or principal place of business is located. (ii) Pre-Conditions for International Adviser Exemption To rely on the international adviser exemption and prior to conducting business, the non-canadian adviser must: submit to the relevant regulator a completed Form F2 Submission to Jurisdiction and Appointment of Agent for Service (Form F2); and notify the client of all of the following: (1) the international adviser is not registered in Canada, (2) the international adviser s jurisdiction of residence, (3) the name and address of the agent for service of process appointed by the international adviser in the local jurisdiction, and (4) there may be difficulty enforcing legal rights against the international adviser because it is resident outside Canada and all or substantially all of its assets may be situated outside of Canada. (iii) Permitted Clients for International Adviser Exemption The list of permitted clients for the purposes of the international adviser exemption includes the following categories of clients: 1. most Canadian institutional investors; 2. a person or company, other than an individual or an investment fund, with net assets of at least C$25,000,000 as shown on its most recent financial statements; 3. an investment fund if the fund is managed by a person or company registered as an investment fund manager or advised by a person or company authorized to act as an adviser in Canada; 4. an individual with net financial assets before taxes in excess of C$5,000,000; 5. a person or company that distributes its own securities in Canada only to other permitted clients.

4 Page 4 The list of permitted clients for the purposes of the international adviser exemption does not include dealers and advisers registered in Canada. (iv) Restrictions on Advising in Canadian Securities The international adviser exemption may only be used to provide advice on foreign securities. The adviser is not allowed to advise in Canada on securities of Canadian issuers, unless providing that advice is incidental to its provision of advice on a foreign security. The term foreign security means a security issued by an issuer incorporated, formed or created under the laws of a foreign jurisdiction and a security issued by a government of a foreign jurisdiction. The restriction prohibiting advice relating to securities of Canadian-domiciled issuers includes those that are inter-listed on Canadian and U.S. or international exchanges, or even those that are listed exclusively on exchanges or marketplaces outside of Canada. The CSA does not provide any guidance in relation to the intended scope of activity that is incidental to providing advice on foreign securities under the international adviser exemption. The incidental restriction on Canadian securities raises issues with respect to index instruments and complex financial products for which the level of Canadian content may be difficult to monitor over time. It also raises issues with respect to Canadian investment funds that invest primarily in foreign securities. (v) Revenue Limits from Canadian Activities There is an additional restriction for an international adviser relying upon the international adviser exemption. Not more than 10% (the current restriction for the international adviser category is 25%) of the aggregate consolidated gross revenue of the international adviser, its affiliates and affiliated partnerships for any fiscal year may be derived from portfolio management activities in Canada. Aggregated consolidated gross revenue does not include the gross revenue of an affiliate of the international adviser if the affiliate is registered in a jurisdiction in Canada. This is a significant reduction; non-canadian advisers will have to assess whether they can meet this lower threshold under the international adviser exemption. If this threshold is too low, the non-canadian adviser may be required to register as a portfolio manager. (vi) Holding Client Assets Non-resident firms that hold client assets are subject to restrictions to ensure assets are held appropriately.

5 Page 5 General Advice Exemption NI adds a new exemption from the adviser registration requirement for advice that does not purport to be tailored to the needs of the person or company receiving the advice. If a person or company relying on the general advice exemption has a direct or indirect financial or other interest in the recommended securities, the person or company must disclose the interest concurrently with providing the advice. For a discussion of the general-advice exemption and its requirements, please ask for our Portfolio Managers Commentary. Sub-Adviser Exemption The proposal to expand the Ontario-only sub-adviser exemption across Canada in earlier versions of NI has not been continued in the final version of NI , but the sub-adviser exemption is being retained in Ontario for a period of two years while the CSA reviews the exemption. In the interim, the CSA are willing to provide discretionary exemptions from the requirements to register as an adviser for firms that act as sub-advisers to registrants. Dealer Registration Exemption Pooled Funds In addition to the adviser exemptions, there is an important dealer registration exemption available to an international adviser in connection with the distribution of securities of a non-prospectus qualified investment fund (pooled fund). An international adviser is not required to be registered as a dealer where: o the international adviser acts as the pooled fund s adviser and investment fund manager; and o the distribution of securities of the pooled fund is to a managed account of a client of the international adviser. An international adviser operating under this exemption may require registration as an investment fund manager. For a discussion of Investment Fund Manager registration and its requirements, please ask for our Investment Fund Manager Commentary. Limiting the distribution of the pooled fund securities to the managed accounts of the international adviser s clients distinguishes what is essentially an extension of the relationship between the international adviser and client, on the one hand, from a type of distribution activity which would require a dealer registration, on the other hand. If an

6 Page 6 international adviser offers securities of its pooled fund to investors other than managed account clients, the international adviser will trigger a requirement to become registered as a dealer, likely in the category of exempt market dealer. For a discussion of Exempt Market Dealer registration and its requirements, please ask for our Exempt Market Dealer Commentary. Registration as Portfolio Manager Under Nl , a non-resident adviser could register as a "portfolio manager" to advise any category of Canadian clients with respect to any type of securities. A nonresident adviser that wishes to register as a portfolio manager will be required to satisfy a number of Canadian requirements. If a non-canadian adviser wishes to become registered as a portfolio manager with the capacity to advise without restriction, such non-canadian adviser must apply by filing a Form F6 Firm Registration and provide additional information demonstrating compliance with the portfolio manager registration requirements in NI This will be treated as a new application. For a discussion of Portfolio Manager registration and its requirements, please ask for our Portfolio Manager Commentary. Participation Fees A person or company relying on the international dealer exemption will be required to pay fees applicable to an unregistered exempt international firm under OSC Rule Fees and submit a prescribed form to the Ontario Securities Commission on an annual basis. Annual fees may be applicable in other jurisdictions. Annual Notice Except in Ontario, a person or company relying on the international dealer exemption must notify the regulator 12 months after it first submits a Form F2 and each year thereafter if it continues to rely on the exemption. In Ontario, complying with the filing requirements and the payment of participation fees will provide notice to the regulator that the international adviser is continuing to rely on the exemption.

7 Page 7 Transition Firms registered as international advisers in Ontario and as portfolio managers & investment counsel (foreign) in Alberta (registered firms) will automatically be converted to the category of Portfolio Manager. The registration of registered firms will be revoked 12 months after the effective date. o 12 months (September 28, 2010) for registered firms wishing to continue to operate under the international adviser exemption to submit a completed Form F2. o 12 months (September 28, 2010) for registered firms wishing to continue to operate under the international adviser exemption to provide clients with the disclosure described under the heading Pre-Conditions for International Adviser Exemption. o 12 months (September 28, 2010) for registered firms wishing to become portfolio managers to apply for registration. In other Canadian jurisdictions, non-canadian advisers who were registered as portfolio managers with terms and conditions restricting their activities may apply to be registered as portfolio managers with similar terms and conditions. These firms should assess whether they can rely on the international adviser exemption and surrender their registrations, or apply for registration as a portfolio manager. Other Registration Reforms NI and the new rules include other significant changes to registration requirements for dealers, advisers and investment fund managers in Canada. * * * * * The Registration & Compliance Alliance has the legal, regulatory, financial and operational experience and expertise to assist you with all aspects of registration and compliance under NI Getting the right people for the job will produce the best results. We will be issuing further bulletins on other aspects of NI in the weeks to come.

8 Page 8 For further details, or if you have any questions concerning NI , please contact: Peter Dunne Leader, Registration & Compliance Practice Cassels Brock & Blackwell LLP David Gilkes Vice President Sutton Boyce Gilkes Regulatory Consulting Group Inc pdunne@casselsbrock.com dgilkes@sbgregulatory.com * * * * * This bulletin is published by the Registration & Compliance Alliance to keep our clients and friends informed of new and important legal, regulatory and compliance issues. It is not intended to provide legal advice as individual situations will differ and should be discussed with counsel Cassels Brock & Blackwell LLP. Cassels Brock and the CB logo are registered trade-marks of Cassels Brock & Blackwell LLP. The SBG logo is a trade-mark of Sutton Boyce Gilkes Regulatory Consulting Group Inc. All rights reserved.