The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Sweeping changes proposed to dealer, adviser and investment fund regulation in Canada

Jennifer Wainwright

Aird and Berlis LLP

Q3 2007


On February 20, 2007, the securities regulators in each of the provinces and territories in Canada published new draft legislation entitled National Instrument 31-103 Registration Requirements. The proposed legislation, which is intended to harmonise, streamline and modernise the regulation of securities dealers, advisers and investment funds in Canada, contains sweeping changes to the current regime. The new legislation will impact both Canadian and non-Canadian businesses who raise capital or deal in securities in Canada or provide securities advice to Canadians.

Registration of Investment Fund Managers

The proposed legislation introduces a new requirement for all persons or firms in the business of managing investment funds, to be registered. Managers will include entities that direct the business, operations and affairs of the fund. The definitions of “investment fund” and “investment fund manager”, have not yet been published. The requirement to register is triggered regardless of whether the investment fund is public or private, foreign or domestic and can include labour-sponsored investment funds, scholarship plans, pooled funds, hedge funds and limited partnerships. Subject to an exemption for “international investment fund managers” described below, non-Canadian fund managers who distribute their investment funds in Canada will require registration in this category.

Investment fund managers will be subject to substantial capital and insurance requirements, onerous proficiency requirements and an ongoing compliance regime.

New Dealer Registration Trigger


Registration will now be required for anyone in the business of dealing in securities. Acquiring a security as principal or agent and any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of acquiring a security as principal or agent, will constitute “dealing in a security”. The proposed legislation sets out the following factors to consider in assessing whether an activity is conducted as a business; undertaking the activity with repetition, regularity or continuity; being, or expecting to be, compensated for undertaking the activity; acting as intermediary in connection with the activity; inducing reliance by others in connection with the activity; producing, intending to produce or being capable of producing, profit and; holding oneself out as being in the business of such activity. The fact that the activity is not the sole or primary business or occupation and the fact that the firm or individual does not maintain a physical presence in connection with the activity, will not relieve the requirement to register.

The proposed legislation has introduced a new category of dealer registration called “exempt market dealer”. Exempt market dealers will be restricted to dealing in prospectus exempt securities and with persons to whom those securities are distributed. Entities currently registered as limited market dealers, will likely fall into this new category. However, unlike the current regime which does not impose fit and proper requirements on limited market dealers, exempt market dealers will be subject to substantial capital and insurance requirements, onerous proficiency requirements and an enhanced ongoing compliance regime.

New Proficiency, Capital and Insurance Requirements

The proposed legislation re-aligns and in some cases prescribes new proficiency requirements for representatives of exempt market dealers, advisers and investment fund managers. It also prescribes enhanced proficiency and prior experience requirements for the individual representatives of registrants responsible for day-to-day compliance matters.

The proposed legislation sets out minimum requirements for capital and insurance which most registrants must meet, including exempt market dealers and investment fund managers. The requirements of the proposed legislation will mean an increase in minimum working capital (between C$25,000 for dealers to C$100,000 for investment fund managers), insurance and frequency of filings and an enhanced capital calculation formula.

Impact on Non-Canadian Dealers, Advisers and Investment Fund Managers

Substantial changes have been made to the regulation of non-Canadian dealers and advisers participating in the Canadian capital markets. The international dealer and international adviser categories will be eliminated by the proposed legislation. Non-resident persons or firms that carry on dealing or advising activity in the Canadian capital markets, will either be entitled to rely on new exemptions from registration or will require full registration to carry on their activities in Canada. The exemptions require the firm to be registered in their home jurisdiction, making the exemptions unavailable for firms who do not require home jurisdiction registration.

The exemptions permit prescribed activities to be performed for the benefit of certain clients, which generally include, Canadian banks and financial institutions, Canadian governments and agencies, pension funds and trust companies. For dealers, the prescribed activities may also be performed for the benefit of certain Canadian registrants, Canadian and non-Canadian registrant advisers acting on behalf of fully-managed accounts and investment funds that are advised by Canadian registrants.
Under the proposed legislation, a dealer that has no establishment or representatives resident in Canada and is registered as a dealer in its home jurisdiction, is exempt from registration in Canada, where it:
- Carries on those activities other than sales of securities, that are reasonably necessary to facilitate non-Canadian distributions of securities;
- deals in non-prospectus debt securities with permitted client in the course of a primarily non-Canadian distribution;
- deals in the re-sale of non-listed debt of a non-Canadian issuer with permitted clients;
- deals in non-listed securities of non-Canadian issuers with permitted clients, except where a Canadian prospectus has been filed or;
- deals with an investment dealer, where the international dealer is acting for the issuer of the securities, in each case for another permitted client, or for a person that is not a resident of Canada.

To rely on the foregoing exemption, international dealers must appoint an agent for service in Canada, make a submission to jurisdiction filing with the regulators and provide prescribed disclosure to its Canadian clients.

A portfolio manager that has no establishment or representatives resident in Canada, is registered as a portfolio manager in its home jurisdiction and engages in the business of a portfolio manager in its home jurisdiction, is exempt from registration in Canada, where it acts for a permitted client;
- provided that it appoints an agent for service in Canada,
- makes a submission to jurisdiction filing with the regulators,
- does not solicit new clients in Canada,
- provides prescribed disclosure to its Canadian clients,
- generally does not advise clients in Canada with respect to securities of Canadian issuers and;
- derives not more than 10% of its aggregate consolidated gross revenue for any fiscal year from portfolio management activities in Canada.

In addition, persons or firms not ordinarily resident in Canada acting as sub-advisers to registered advisers, or, in certain circumstances, for dealers acting as portfolio managers, are not required to be registered if;
- there is a written agreement between the adviser and the registrant;
- the registrant contractually agrees with its clients to be responsible for any loss that arises out of certain actions of the adviser;
- the person acting as adviser, if a resident of Canada, is registered as adviser in Canada;
- the person acting as adviser has no direct contact with the registrant’s clients unless the registrant is present and;
- in the Province of Manitoba, the person acting as adviser is not registered in Canada.

The proposed legislation does not contain residency requirements as a pre-condition to registration. However, the Investment Dealer Association of Canada, does have residency requirements.

A portfolio manager that has no establishment or representatives resident in Canada and engages in the business of a portfolio manager in its home jurisdiction, does not require registration to act as adviser to an investment fund if:

- the securities of the fund are primarily offered outside Canada;
- the securities of the fund are only distributed in Canada through a registrant;
- the securities of the fund are distributed in Canada on a private placement basis;
- it appoints an agent for service in Canada and;
- it makes prescribed disclosure to its Canadian clients.

An investment fund manager, that has no establishment or representatives resident in Canada and engages in the business of a portfolio manage, in its home jurisdiction, is not required to be registered in Canada in order to manage an investment fund, whose securities are primarily offered outside of Canada, only distributed in Canada through a registrant and distributed in Canada on a private placement basis.

Non-Canadian investment fund managers, do not require registration in their home jurisdiction to rely on these exemptions, nor must they restrict their investors to the permitted clients described above. However, non-Canadian investment fund managers who do not fall squarely within the exemptions set out above, will be required to register in Canada to carry on their business activities in Canada.

Expected Implementation

The proposed legislation is in draft form and is subject to a public comment period, expiring on 20 June, 2007. In order to implement aspects of the proposed legislation, amendments to the current legislation in the Province of Ontario will need to be introduced and enacted by the provincial legislature. In addition, transition procedures have not yet been published. The date of enactment is not known, although the regulators are reported to be aiming for implementation by the end of 2007.

There is considerable uncertainty regarding a number of features of the proposed legislation - in particular, the definitions of “investment fund” and “investment fund manager” and transition procedures. There are generally no grandfathering provisions. This and the many other issues raised but not resolved by the proposed legislation, will likely be the subject of considerable discussion and debate, during the comment period.

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