INVESTMENT MANAGEMENT BULLETIN

Transcription

1 July 2012 INVESTMENT MANAGEMENT BULLETIN TWO DISTINCT REGULATORY APPROACHES FOR NON-RESIDENT INVESTMENT FUND MANAGERS FINALIZED IN CANADA EFFECTIVE SEPTEMBER 28, 2012 The Canadian securities regulatory authorities are moving forward with two quite different regulatory approaches to non-resident investment fund manager (IFM) registration in Canada, notwithstanding the earlier unanimous commentary, including from BLG, that the CSA should adopt a uniform approach. The two different regulatory approaches raise obvious challenges, particularly for international fund managers wishing to market securities of their funds across Canada. In this Bulletin, we describe the registration and exemption regime that will apply in three provinces and the policy approach that will apply in the rest of Canada. Each approach raises unique practical issues, with the registration and exemption approach being, in our view, the most problematic. One group of three provincial regulators Ontario, Québec and Newfoundland and Labrador consider that IFMs that manage investment funds whose securities are distributed in one or more of these provinces generally should register as IFMs in those provinces, regardless of where those IFMs are located and actually carry on the activity of managing investment funds. These regulators have finalized Multilateral Instrument Registration Exemptions for Non-Resident Investment Fund Managers (the Rule) and Companion Policy CP [available here] which provide limited exemptions from IFM registration, generally in circumstances where there are no significant connecting factors to the applicable province, including no active solicitation in the province or where only permitted clients invest in the funds. SCOPE AND TIMING The other group of regulators, which we refer to as the rest of Canada, has finalized Multilateral Policy Registration Requirement for Investment Fund Managers (the Policy) [available here] that contains guidance on when a non-resident IFM is required to register in those jurisdictions. The regulators in the rest of Canada do not take the position that distribution of securities of an investment fund in these jurisdictions necessarily means that the firm is carrying on the activities of an IFM in those jurisdictions. Rather, there are additional factors that must be considered before a firm must apply for registration as an IFM. The instruments will apply to international investment fund managers with investors in their funds located in one or more of the jurisdictions of Canada, and also to Canadian fund managers. The term non-resident refers to an investment fund manager that does not have a head/principal office or a place of business located in a particular province or territory. Both instruments are expected to be effective on September 28, 2012 (subject to government approvals in applicable jurisdictions). If an IFM concludes it must be registered in one or more jurisdictions, the firm must apply for such registration in the applicable jurisdiction(s) by December 31, If a firm wishes to avail itself of one of the exemptions provided for in the Rule, it should take steps right away to amend its practices with respect to distribution of its funds in Ontario, Québec and Newfoundland and Labrador, since the exemptions will be effective immediately on the Rule coming into force. The Rule and the Policy were first published for comment in February 2012 and were preceded by proposed amendments to National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI ) published for comment in October Please see Canadian Securities Regulators Publish Proposals for Registration of Non-Resident Investment Fund Managers Investment Management Bulletin March 2012 Borden Ladner Gervais LLP [available here].

2 2 3 Investment Management Bulletin July 2012 The TWO APPROACHES Instrument Regulatory Approach ONTARIO, QUÉBEC AND NEWFOUNDLAND AND LABRADOR Multilateral Instrument Registration Exemptions for Non-Resident Investment Fund Managers (the Rule) and Companion Policy CP An enforceable Rule, with a Companion Policy Regulators take a broad interpretation of the requirement to register as an IFM under current securities legislation: IFM registration is required if the firm is acting as an IFM (i.e. directing or managing the business, operations and affairs of an investment fund), although there are exemptions. If the IFM has a place of business in the province, then, subject to reliance on an exemption, it must register in that province. Distributing (at some point in the past, present or future) securities of an investment fund to residents of one of these provinces is sufficient to cause the IFM to carry out IFM activities (i.e. acting as an IFM) in the province, even where the firm has no office in the province and its representatives have never even set foot in the province. IFM activities listed in the Companion Policy to the Rule are substantially the same as those listed in the Policy (outlined in the adjacent column). The exemptions are set out below. REST OF CANADA Multilateral Policy Registration Requirement for Investment Fund Managers (the Policy) A Policy setting out guidance Note that the New Brunswick regulator abandoned the Rule approach it took in February 2012, in favour of the approach adopted by the rest of Canada. Regulators take a narrow interpretation of the requirement to register as an IFM under current securities legislation. An IFM will only be required to register in one of these jurisdictions if it directs or manages the business, operations or affairs of an investment fund from within that jurisdiction. IFM registration will not be required solely because of the presence of fund investors in a jurisdiction and/or the solicitation of investors in a jurisdiction. No physical presence is required, but if IFM activities conducted in a jurisdiction result in a real and substantial connection to the jurisdiction, then registration as an IFM is required. Activities of an IFM include the following, with no single function or activity in a jurisdiction being determinative Establishing a distribution channel for its funds and marketing its funds Establishing and overseeing a fund s compliance and risk management programs and overseeing the day-to-day administration of a fund Retaining and liaising with the portfolio manager, custodian, dealers and other service providers and overseeing advisers compliance with investment objectives and overall performance of the fund Preparing a fund s offering documents, preparing and delivering securityholder reports Identifying, addressing and disclosing conflicts of interest Calculating net asset value and net asset value per share or unit and calculating, confirming and arranging payment of subscriptions and redemptions, and arranging for the payment of distributions. The Policy is a very short policy instrument without much explanation as to how to interpret the list of IFM activities. Exemptions from Registration The Rule contains two exemptions from IFM registration Grandfathering exemption: Exemption for an IFM without a place of business in a province if The IFM s fund(s) have no securityholders resident in the province or Neither of the IFM or the IFM s fund(s) actively solicits residents in the province to purchase securities of the fund(s) at any time after September 27, The concept of active solicitation is discussed in the Companion Policy to the Rule. It includes intentional actions taken by a fund or the IFM to encourage purchases of the fund s securities, such as pro-active, targeted actions or communications that are initiated by an IFM for the purpose of soliciting an investment. Helpfully, active solicitation does not include simply responding to unsolicited enquiries from prospective investors in the province. Permitted client exemption Exemption for a non-canadian IFM that only distributes its funds in a province to permitted clients as investors, where those permitted clients acquire(d) those securities pursuant to applicable prospectus exemptions in the applicable province, on the following conditions: The IFM does not have its head office or principal place of business in Canada The IFM is created under the laws of a foreign jurisdiction None of the IFM s funds is a reporting issuer in any jurisdiction of Canada Before first relying on the exemption (i.e. by September 28, 2012 if there are existing investors in its funds) in a province, the IFM files with the securities regulatory authority in the province a completed Form F1 Submission to Jurisdiction and Appointment of Agent for Service for International Investment Fund Manager The IFM files with the securities regulatory authority in the province (within 10 days of first relying on the exemption) a completed Form F2 Notice of Regulatory Action The IFM provides a new form of notice to its permitted clients regarding its non-resident status. In addition, to continue to rely on this exemption, the non-canadian IFM must make regular filings with the applicable regulator By December 1 in each year, that it relied on the exemption during the preceding 12 month period No exemptions are provided for.

3 4 5 Investment Management Bulletin July 2012 Exemptions from Registration (Cont d) Other Notice Requirements Deadlines ONTARIO, QUÉBEC AND NEWFOUNDLAND AND LABRADOR By December 1 in each year, the total assets under management attributable to residents of the applicable province Within 10 days of any change to previously filed Forms a revised completed Form F1 or a revised Form F2 In Ontario, regulatory participation fees and filings related to those fees must be paid and filed annually (by December 1 and December 31, respectively). Commencing March 31, 2013, a registered IFM whose head office or principal place of business is located outside of Canada must provide a new form of notice to its fund(s) investors (and any new investors thereafter) in the applicable province(s) regarding its non-resident status. If an IFM does not intend to rely on exemptions (see above) and it concludes that it is carrying out IFM activities in a province, it must apply for registration as an IFM by December 31, Registration deadline is not set out in either instrument, but rather results from so-called omnibus/blanket orders made by each applicable CSA member which extend transition periods set out in NI and described in CSA Staff Notice Omnibus/Blanket Orders Extending Certain Transitional Provisions Relating to the Investment Fund Manager Registration Requirement and the Obligation to Provide Dispute Resolution Services published in early July Other earlier deadlines apply if IFM is relying on one of the Rule exemptions. REST OF CANADA None required. Applicable notice provisions that apply generally to non-resident registrants provided for in NI do not apply to registered IFMs. If an IFM concludes that it is carrying out IFM activities in a jurisdiction (depending on the criteria set out in the Policy), it must apply for registration as an IFM by December 31, Registration deadline is not set out in either instrument, but rather results from so-called omnibus/blanket orders made by each applicable CSA member which extend transition periods set out in NI and described in CSA Staff Notice Omnibus/Blanket Orders Extending Certain Transitional Provisions Relating to the Investment Fund Manager Registration Requirement and the Obligation to Provide Dispute Resolution Services published in early July Expected Challenges Determining whether or not the IFM can rely on one of the exemptions. Reliance on the grandfathering exemption is predicated on no further solicitation activity in an applicable province after September 27, Reliance on the permitted client exemption depends on the IFM s ability to determine the nature of its securityholders (that is, are they all permitted clients?), as well as their residence (i.e. in which province do they reside?). It is not clear whether the exemption is available if a fund had non- permitted clients invested in the fund at some point in the past, even if it only has permitted clients as of September 28, IFMs must also be confident that these investors were issued securities pursuant to applicable prospectus exemptions. The conditions of this exemption are considerable, particularly for those IFMs whose funds have been distributing securities in a province for a period of time and which would not have been conscious of distributing only to permitted clients or obtaining any certification as to an investor s status. The concept of permitted client only came into effect with NI in September 28, The required forms in connection with reliance on the permitted client exemption are detailed and potentially onerous. They will require tracking of beneficial owners of fund securities, in each applicable province, and calculation of assets under management for securities held by such owners. It is not clear whether and how an IFM will be able to rely on the exemption if it inadvertently misses the filing deadlines. This will need to be discussed with the regulators. Determining if IFM activities are being conducted in one of the jurisdictions and whether those activities give rise to a real and substantial connection to the applicable jurisdiction. Given the brevity of the Policy, it may be difficult to complete this analysis in any clear-cut way. The July 2012 notice that was published with the Policy contains additional useful guidance and we recommend it be retained along side of the Policy for reference purposes. Although its always dangerous to predict the future or to make generalizations... Expected Outcomes? Most domestic IFMs distributing securities of their funds in one of the provinces will need to apply for registration. If domestic or international IFMs with existing non- permitted client fund investors resident in these provinces continue to solicit sales of these funds in the provinces, then registration will be required in one or more provinces. If domestic or international IFMs restrict their activities in these provinces to distribute securities only to permitted clients (and all existing investors fall within this category of investor), then initial and annual filings will be required in each applicable province. Some international IFMs will decide not to market or distribute funds in the provinces to avoid the excessive red tape. Many domestic IFMs (i.e. currently registered in their head office jurisdictions) distributing securities of their funds in one of the jurisdictions will not need to apply for registration (in the absence of a real physical presence). If international IFMs decide to continue to distribute securities of their funds in one or more of the jurisdictions, in the absence of a real physical presence, these firms will not be required to be registered.

4 6 Investment Management Bulletin July 2012 IMPLICATIONS OF REGISTRATION as INVESTMENT FUND MANAGERS Firms that are required to become registered as an IFM in a Canadian jurisdiction under one or both of the Rule and the Policy (assuming they are not already registered in this capacity in Canada) will be subject to proficiency and conduct requirements, such as Canadian-based proficiency requirements that would apply to the IFM s chief compliance officer, and would be subject to, among other things: Capital ($100,000 minimum) and insurance requirements Regulatory financial reporting obligations (annual and quarterly financial statements) Conflicts of interest management Record keeping obligations Compliance system requirements, including having written policies and procedures Specified reporting to securityholders (trade confirmations and account statements). IFM registration may also require extra-provincial corporate filings. Increased costs of IFM registration, including the regulatory filing fees, may be borne by the IFMs, depending on their ability to charge these costs to their funds. A POST-SCRIPT ON THE OSC S POSITION ON NON-RESIDENT ADVISERS UNDER THE COMMODITY FUTURES ACT At the same time as finalizing the Rule, the Ontario Securities Commission published OSC Staff Notice (Commodity Futures Act) Non-Resident Advisers [available here]. In a somewhat ironic twist (given the OSC s position regarding IFM registration), OSC staff confirm that a firm not based in Ontario which advises non-ontario investment funds that invest in commodity futures contracts or options, is not considered to be acting in Ontario as an adviser under the Commodity Futures Act simply because securities of the non-ontario fund are distributed in Ontario. OSC staff confirm that for adviser registration purposes (for securities and commodities), the flow-through theory of advice is no longer operative. The implications of both the Rule and the Policy should be considered as soon as possible, with the deadlines fast approaching, particularly for compliance with one of the exemptions available in Ontario, Québec and Newfoundland and Labrador. Sufficient time should be set aside for gathering together and, if necessary, filing the material required to rely on the exemptions by the September 28, 2012 and December 1, 2012 deadlines. If registration is considered necessary, application materials must be filed by the December 31, 2012 deadline.

5 7 Please contact any of the individuals listed below, your usual lawyer in BLG s Investment Management group or the leaders of BLG s Investment Management group noted below if you have any questions about either the Rule or the Policy and how these instruments may affect you or if you would like our assistance in complying with one of the exemptions or making a registration application to the applicable regulators. Toronto Prema K. R. Thiele Rebecca A. Cowdery Laurie J. Cook Marsha P. Gerhart pthiele@ rcowdery@ lcook@ mgerhart@ Matthew P. Williams mwilliams@ Vancouver Calgary Montreal Jason J. Brooks Jonathan Doll Christian Faribault Éric Lapierre jbrooks@ jdoll@ cfaribault@ elapierre@ INVESTMENT MANAGEMENT GROUP National Leader John E. Hall Toronto jhall@ Regional Leaders Brad J. Pierce Calgary bpierce@ Fred Enns Montreal fenns@ Tim McCunn Ottawa tmccunn@ Lynn M. McGrade Toronto lmcgrade@ Jason J. Brooks Vancouver jbrooks@

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