On August 25, 2015, the participating provinces and territory in the Cooperative Capital Markets Regulatory System achieved an important milestone towards implementation of the system by publishing a revised consultation draft of the uniform provincial and territorial capital markets act (now known as the Capital Markets Act), along with the drafts of the initial regulations proposed for adoption by the participating provinces and territory under the draft uniform act. These materials have been published for a 120-day public comment period.
This article is part of Gowlings' Guide to the Proposed Initial Regulations and related materials. In this segment of our guide, we discuss the proposed initial regulations relating to the registration of non-resident investment fund managers under the draft uniform act. view other sections of the guide here.
The participating provinces and territories are proposing to provide exemptions from the investment fund registration requirement of the draft uniform act to non-resident managers of investment funds (a mutual fund or non-redeemable investment fund)(1). These are set out in section 8 of CMRA Regulation 31-501 Registration Requirements, Exemptions and Related Matters and are based on Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers. The adoption of the exemptions will represent a change in British Columbia (to bring it in line with Ontario).
Under section 8 of CMRA Regulation 31-501:
No Active Solicitation Exemption ― A registration exemption is available if the investment fund manager does not have a place of business in a participating province or territory and if neither the investment fund manager nor any fund it manages has, at any time after the launch date of the system, actively solicited residents in a participating province or territory to purchase securities of the fund. Active solicitation involves intentional actions taken to encourage a purchase of the securities of the investment fund, such as pro-active, targeted actions or communications that are initiated by an investment fund manager for the purpose of soliciting an investment(2). Actions that are undertaken by an investment fund manager at the request of, or in response to, an existing or prospective investor who initiates contact with the investment fund manager would not constitute active solicitation.
Permitted Client Exemption ― A registration exemption is available for investment fund managers without a head office or principal place of business in Canada where all of the securities of the investment funds managed by the investment fund manager are distributed in the participating provinces and territories under a prospectus exemption to permitted clients only. "Permitted clients" are a subset of "accredited investors" which include institutional investors and ultra high net worth individuals. In order to rely on the exemption, certain conditions must be satisfied, including the following notice requirements:
- notice of reliance on the exemption must be sent to the new chief regulator, which includes disclosure of assets under management attributable to investors in the participating provinces and territories, a submission to jurisdiction and the appointment of an agent for service;
- notice must be sent to the new chief regulator regarding disciplinary history, settlement agreements and ongoing investigations of the investment fund manager; and
- notice must be sent to permitted clients that the investment fund manager is not registered in a participating province or territory to act as an investment fund manager, together with certain other prescribed disclosure.
Rationale behind Multilateral Instrument 32-102
Multilateral Instrument 32-102 has been adopted by securities regulators in Ontario, Québec and Newfoundland and Labrador to exempt non-resident investment fund managers from the requirement to register in these jurisdictions in circumstances where there are no significant connecting factors to the local jurisdiction. According to Multilateral Instrument 32-102, the distribution of investment fund securities in the local jurisdiction is considered a significant connecting factor to that jurisdiction. As a result, if either the investment fund or the investment fund manager distributes securities in the jurisdiction, Multilateral Instrument 32-102 would determine that the registration requirement applies, subject to available exemptions in the instrument.
The regulatory approach under Multilateral Instrument 32-102 is closely aligned with the proposed approach to the registration of non-resident investment fund managers under the draft uniform act. The proposed definition of "investment fund manager" in the draft uniform act is broader than the definition of the term in the securities acts of the participating provinces and territories, since it also captures a person who (i) directs or manages the business, operations or affairs of an investment fund from outside a participating province or territory, and (ii) knows or reasonably ought to know that the fund has a security holder resident in the participating province or territory. The expanded definition of "investment fund manager" in the draft uniform act will require an investment fund manager operating outside the participating provinces and territories, if the fund it manages has a security holder resident in any participating province or territory, to be registered in the participating provinces and territories.
How does section 8 of CMRA Regulation 31-501 differ from Multilateral Instrument 32-102?
The revised definition of "investment fund manager" in the draft uniform act results in significant amendments being required in Multilateral Instrument 32-102 to reflect the two legislative formulations of the definition of "investment fund manager" (i.e., under the draft uniform act and the existing formulation for Québec and Newfoundland and Labrador). Given the nature of the amendments that would be necessary to amend Multilateral Instrument 32-102, it has been proposed that the content of Multilateral Instrument 32-102 should be carried forward under section 8 of CMRA Regulation 31-501 instead.
Section 8 of CMRA Regulation 31-501 adopts Multilateral Instrument 32-102, largely, in its current form as of March 2, 2015. The noteworthy changes that have been proposed include:
(a) Eliminating the "no security holder" exemption
Multilateral Instrument 32-102 provides an exemption from the requirement to register as an investment fund manager in circumstances where there are no security holders of the investment fund in the local jurisdiction. This exemption is no longer necessary under the proposed definition of "investment fund manager" in the draft uniform act, since a non-resident investment fund manager would not be caught by the registration trigger if the fund it manages does not have a security holder resident in a participating province or territory.
(b) Revising the date of active solicitation
Under Multilateral Instrument 32-102, if there is no active solicitation in the local jurisdiction after September 27, 2012, registration of the investment fund manager is not required. In contrast, section 8 of CMRA Regulation 31-501 exempts a non-resident investment fund manager from registration if residents in a participating province or territory have not, at any time after the launch date of the system, been actively solicited to purchase securities of the fund. This change would give non-British Columbia based investment fund managers of funds with British Columbia security holders the same opportunity as Ontario investment fund managers had when Multilateral Instrument 32-102 was implemented to cease activities that would require registration (i.e., by complying with the exemption).
(c) Reporting of assets under management
As noted above, in order to rely on the permitted client exemption under section 8 of CMRA Regulation 31-501, the non-resident investment fund manager must satisfy certain notice requirements, including a requirement to notify the new chief regulator of the assets under management attributable to investors of the fund it manages. Unlike Multilateral Instrument 32-102, which requires this figure to be broken down per local jurisdiction, the relevant amount for purposes of section 8 of CMRA Regulation 31-501 is the aggregate amount of assets under management attributable across all participating provinces and territories. This change should lessen the reporting burden on market participants.
(d) General conditions to the availability of exemptions
The participating provinces and territories propose to limit the use of the exemptions in section 8 of CMRA Regulation 31-501 by not allowing a person that is already registered in the participating provinces and territories to conduct the activities covered by the exemptions to rely on these exemptions.
What are the implications for British Columbia?
British Columbia adopted the framework proposed under Multilateral Policy 31-202 Registration Requirement for Investment Fund Managers with respect to the registration of non-resident investment fund managers. Multilateral Policy 31-202 takes the position that the need to register will depend on what activities are taking place in the jurisdiction. In contrast to Multilateral Instrument 32-102, the presence of security holders and the solicitation of investors in a jurisdiction does not automatically require an investment fund manager to register in the jurisdiction. Therefore, in British Columbia today, registration is only required if investment fund management activities take place within the jurisdiction. This narrower interpretation of the investment fund manager registration requirement under Multilateral Policy 31-202 is in contrast with the expanded definition of "investment fund manager" in the draft uniform act. As a result, Multilateral Policy 31-202 is proposed not to be carried forward.
If you would like to discuss these regulations and how they will apply to your business, or if you wish to be added to our email distribution list for related publications, please contact Tal Cyngiser* or any of the following lawyers:
*Tal Cyngiser, an Associate in our Toronto office, was seconded to the Canadian Securities Transition Office (CSTO) for over a year, working extensively with the participating provinces and their securities commissions on the drafts of the initial regulations.
To view our full guide, click here.
(1) A mutual fund includes an issuer (a) whose primary purpose is to invest money provided by its security holders and (b) whose interests entitle the holder to receive on demand, or within a specified period after demand, an amount computed with reference to the value of a proportionate interest in the whole or part of the net assets of the issuer.
A non-redeemable investment fund includes an issuer (a) whose primary purpose is to invest money provided by its security holders, (b) that does not invest for the purpose of exercising or seeking to exercise control of an issuer, or for the purpose of being actively involved in the management of any issuer in which it invests (other than an issuer that is a mutual fund or a non-redeemable investment fund), and (c) that is not a mutual fund.
(2) Examples of active solicitation would include:
- direct communication with residents of a participating province or territory to encourage their purchases of the investment fund's securities;
- 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 a participating province or territory (either directly from the fund or in the secondary/resale market); and
- purchase recommendations being made by a third party to residents of a participating province or territory, if that party is entitled to be compensated by the investment fund or the investment fund manager, for the recommendation itself, or for a subsequent purchase of fund securities by residents of a participating province or territory in response to the recommendation.