Lexpert US Guides

32 | LEXPERT • June 2014 | www.lexpert.ca not by the manager. Current market practice is that subsequent direct contact between the manager and investor is permitted, although pro- posed amendments at the time of writing would prevent such direct contact "in furtherance of a trade" in the securities. It is not clear if these proposed amendments would restrict any direct contact be- tween the manager and the investor a er the sale of investment fund securities was completed. Registration as an Advisor Registration as an advisor is required if a fi rm engages in the business of advising with respect to buying or selling securities. " e determina- tion under this "business trigger" considers a broad range of factors, discussed above in respect of dealers, as applied to advising. " e activ- ity of advising is considered to occur in both the jurisdiction where the advice is given and where it is received, such that a non-Canadian investment advisor is not required to register in Canada when manag- ing the portfolio of a non-Canadian resident investment fund, even if such fund has Canadian investors. A fi rm that provides investment advice in respect of a managed ac- count for a Canadian client or manages a Canadian resident invest- ment fund will be required to register unless an exemption is avail- able. An international advisor exemption is available to an advisor registered as such in a foreign jurisdiction, provided the advice given to the Canadian client relates to non-Canadian securities and subject to certain fi ling and notice requirements that are similar to those re- quired for the international dealer exemption. In addition, no more than 10 percent of the fi rm's consolidated revenue can be derived from Canadian advising and portfolio management activities. Registration as an Investment Fund Manager Registration as an investment fund manager is required where a man- ager is directing the business, operations or aff airs of an "investment fund," as defi ned under Canadian securities law. A hedge fund would typically fall into this defi nition, whereas certain other types of funds, such as those actively involved in the management of their invest- ments, such as private-equity and venture-capital funds, would typi- cally fall outside this defi nition. " is determination should generally be made on a case-by-case basis. Canadian jurisdictions apply diff erent tests to determine if a man- ager is directing the operations and aff airs of an investment fund in the jurisdiction. In Ontario, Québec and Newfoundland and Labrador, a manager is deemed to be acting as an investment fund manager if any of its funds have issued securities in the jurisdiction. In the other Canadian jurisdictions, registration as an investment fund manager is required only if the manager carries on investment management ac- tivities in the jurisdiction, which would generally require a place of business in the jurisdiction. In Ontario, Québec and Newfoundland and Labrador, a grandfathering exemption is available to any fund manager who has clients but has ceased soliciting new investments in the jurisdiction. Another exemption provides relief from the require- ment to register to a non-Canadian manager where all of the Cana- dian security holders of the fund are restricted to "permitted clients." " e permitted client exemption mandates certain reporting and no- tice requirements to the regulator in the jurisdiction where the inves- tor is resident, and to the investor similar to that of advisors and deal- ers that avail themselves of the international advisor or international dealer exemptions. Registration Requirements for Individuals To the extent that an individual trades, advises or underwrites on be- half of a registered dealer or advisor, and/or acts as the "ultimate des- "THE manager of a PE, VC, infrastructure or real estate fund is not usually required to register ... while the manager of a hedge fund will usually trigger this registration requirement." Registration as a Dealer Registration as a dealer is required if a fi rm engages in the business of trading in securities. " is is interpreted broadly, as "trading" in- cludes any activities in furtherance of a trade, such as selling securi- ties to investors. " e determination of whether a fi rm is engaging in the business of trading, which is referred to as the "business trigger," considers a range of factors such as (a) frequency of trading, (b) mar- keting activities as trading in securities, (c) compensation for trading securities, (d) intermediating or soliciting trades, and (e) profi ts from trading activity. For a non-Canadian fi rm, this determination is made on the fi rm's global trading activity, such that actively promoting its funds to potential investors and regularly raising capital globally would be considered the business of trading in securities in Can- ada, if it also markets its funds or eff ects or solicits even a single trade in any province. When considering the above-noted factors, the manager of a typical private-equity, venture capital, infrastructure or real estate fund is not usually required to register on the basis that it is not "in the business" of trading in securities. In contrast, the manager of a typical hedge fund will usually trigger this registration requirement. Most of the managers required to register will do so in the category of "exempt market dealer." Registration as an "exempt market deal- er" limits the registrant's authority to trading only in securities of- fered pursuant to an exemption from the prospectus requirement, but imposes less onerous compliance obligations than registration as an investment dealer. Firms that are required to register may avail themselves of an ex- emption from registration: relying on the "international dealer exemp- tion," if its requirements can be met, or marketing and selling to inves- tors through a registered dealer or placement agent. Relying on the international dealer exemption is available to fi rms appropriately registered in their home jurisdiction, and permits limit- ed trading activity of the securities of non-Canadian issuers (such as a non-Canadian investment fund) solely to "permitted clients" (a more sophisticated form of accredited investor, such as Canadian fi nancial institutions, pension funds, and individuals with "fi nancial assets" in excess of C$5 million). A number of conditions must be met to rely on this exemption, including submitting to the laws of the off ering jurisdiction, informing potential investors of the diffi culty of pursu- ing legal proceedings against the manager, and fi ling an annual notice with each applicable provincial securities regulator. Alternatively, the manager may cultivate a relationship with a reg- istered dealer to market and trade its securities to potential investors, including investors other than "permitted clients." A notable limita- tion is that all active solicitation of potential investors, including ini- tial marketing eff orts, must be conducted by the registered dealer and « FUND REGULATION

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