A new instrument interpreting the registration requirement for foreign investment fund managers will become effective September 28, 2012. British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, New Brunswick, Northwest Territories, Yukon and Nunavut have adopted Multilateral Policy 31-202 (MP 31-202) to aid foreign investment fund managers in determining their registration responsibilities. Securities regulators in Ontario, Quebec, and Newfoundland and Labrador are implementing a different multilateral instrument with a different interpretation of this securities legislation. This bulletin will focus on MP 31-202.
Currently, securities legislation requires that investment fund managers be registered in order to operate in each jurisdiction. The definition of “investment fund manager” is a person that directs or manages the business, operations or affairs of an investment fund. This means that an investment fund manager is only required to register in a jurisdiction if that person directs or manages the business, operations or affairs of the investment fund in that jurisdiction.
This does not mean that the manager must operate from the applicable jurisdiction. The prevailing interpretation of “directing or managing the business, operations or affairs of an investment fund” by securities regulators is oversight and direction of the fund in a way that establishes a real and substantial connection to the jurisdiction. Thus, a manager based elsewhere could still be required to register in British Columbia, depending on the activities he or she oversees and directs there.
Understandably, there has been confusion surrounding the application of this registration requirement in circumstances where the manager is not located in the jurisdiction. MP 31-202 is meant to address the kind of oversight and direction that triggers the registration requirement. It sets out some of the functions and activities that an investment fund manager directs, manages or performs which makes them susceptible to the registration requirement.
These functions and activities are:
- 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 and redemptions, and arranging for the payment of dividends or other distributions, if required.
No single function or activity is determinative. Rather, when an investment fund manager without a physical place of business in a jurisdiction is deciding whether or not they need to register in that jurisdiction, they should consider what activities they will be engaged in. Since “directing and managing” is a broad concept, any single function or activity from the list above may not give rise to the registration requirement.
There is an important exception to the activities outlined above. Functions and activities tied to the presence of security holders, solicitation of investors or the distribution of securities in a jurisdiction are not activities that alone would give rise to investment fund manager registration, if they are directed from outside the jurisdiction. Solicitation, marketing and distributing securities, and related activities (such as delivering security holder reports, payments of redemptions or dividends, marketing of a fund, or distributing securities of a fund to residents in a jurisdiction) do not give rise to investment fund manager registration, at least in the view of those securities regulators in the MP 31-202 provinces and territories. They may, however, give rise to dealer registration.
MP 31-202 represents a simpler approach to navigating this registration requirement than the approach taken by Ontario, Quebec and Newfoundland and Labrador with their Multilateral Policy 32-102 (the Eastern Policy). The Eastern Policy requires registration upon the distribution of the fund’s securities in the jurisdiction, something that MP 31-202’s drafters were careful to avoid. Industry commentators generally favour MP 31-202, and were disappointed that the Canadian Securities Administrators issued two instruments that are incompatible. This lack of harmonization generated many concerns, such as worries about regulatory fragmentation and confusion rendering the Canadian marketplace unfriendly and prohibitive towards foreign investors.
MP 32-102 can be found on the Ontario Securities Commission website at: http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20120705_32-102_non-resident.htm.
If you have questions about registration requirements for foreign investment fund managers, contact any member of Clark Wilson LLP’s Corporate Finance & Securities Law Group.