Investment funds and their managers need to be aware of special rules in Canada that can require the manager to register as an investment fund manager if there are Canadian investors in a fund that it manages. This registration requirement can be triggered just by actively soliciting prospective new investors in Canada. Fortunately, a non-Canadian fund manager can usually take relatively simple steps to claim an exemption from these registration requirements – if those steps are taken in time.
Which Provinces Have Fund Manager Registration Requirements?
All Canadian provinces require investment fund managers to register if they manage funds in Canada, but only a few provinces require registration for non-Canadian managers of non-Canadian funds. Ontario and Québec are the major provinces where non-Canadian fund managers may be required to register. Newfoundland also has the same requirements, but it is rare that foreign funds seek investors there. The securities regulators in those provinces take the position that they have the authority to regulate the activities of an investment fund manager that manages any fund that has even a single investor located in their jurisdiction.
What Kinds of Issuers Are Considered Investment Funds in Canada?
In Canada, we divide investment funds into two types. The first type of investment fund is a mutual fund, which is easy to identify. An issuer is a mutual fund if its primary purpose is to invest money and the holder is entitled to redeem interests based on the fund’s net asset value. The second type of investment fund is called a non-redeemable investment fund, and it is harder to identify. An issuer that is not a mutual fund is a non-redeemable investment fund if its primary purpose is to invest money in other entities, unless it makes those investments for the purpose of exercising, or seeking to exercise, control over the other entities or being actively involved in their management.
Any issuer that calls itself a fund will most likely be considered an investment fund in Canada, although the question whether an issuer is an investment fund in Canada is not always straightforward. A REIT (real estate investment trust), for example, might be an investment fund in Canada if it holds real estate–related securities, but not if it actually holds real estate.
What Is the Harm in Actively Soliciting Ontario or Québec Investors?
The harm in actively soliciting investors in Ontario or Québec is that it can trigger the loss of a grandfathering exemption that the fund manager may not even know it is relying on. All non-Canadian fund managers are automatically exempt from registration under a grandfathering exemption so long as they do not actively solicit investors in Ontario or Québec after September 27, 2012. All non-Canadian fund managers are also automatically exempt from registration so long as they do not manage a fund that already has any investors in Ontario or Québec. Therefore, active solicitation could be a problem if it turns out that there are existing Ontario or Québec investors in one of the manager’s funds, because the manager could lose the grandfathering exemption without having any other exemption to fall back on.
What Is the Solution?
Non-Canadian fund managers typically won’t want to register as investment fund managers in Canada, but there is an easy way that their funds can actively solicit new investors and make sales in Ontario and Québec under an exemption from the manager registration requirement. The manager must take the following steps to avoid losing the ability to rely on the grandfathering exemption if there are any existing investors in Ontario or Québec, or before making initial sales to investors in those provinces:
Confirm that if there are existing investors in the fund in Ontario or Québec, they are all “permitted clients” under Canadian securities law requirements, and restrict all future sales in those provinces only to permitted clients;
File a form to appoint an agent for service of process and submit to jurisdiction in the province;
Advise Ontario and Québec investors that it is relying on an exemption from the investment fund manager registration requirements;
Provide an annual notice to the regulators, including disclosure of the dollar value of assets under management in those provinces: and
Pay an annual fee to the Ontario Securities Commission based on revenue derived from activities in the province of Ontario.
It is important to remember that all of the other Canadian securities law requirements that apply to offers and sales of securities in Canada must also be followed, including the need for an exemption from Canadian prospectus requirements (which may require the use of a Canadian “wrapper”), as well making sure that Canadian registered dealers are involved or some exemption from Canadian dealer registration requirements is available.
Canada and the United States have a lot in common, including the general principles behind their securities laws. But there are some differences you might find surprising. This newsletter will provide answers to some of the most commonly asked questions about Canada’s securities laws. While we hope you find it interesting, we also hope you understand that it is intended only to provide general information and should not be considered legal advice.