Opponents of national regulation have long pointed to harmonization as a good alternative, but a disagreement over the fund manager registration regime highlights how efforts at harmonization can falter.

When the Canadian Securities Administrators overhauled the registration system in 2009, one of the primary reasons for the reform was to streamline the various categories of registration and harmonize them across the country. Another key objective was to impose registration obligations (including capital, insurance and proficiency requirements) on investment fund managers.

However, progress toward both of those goals appears to be in doubt. Regulators have published two sets of proposals concerning fund manager registration requirements. Regulators in four provinces (Ontario, Quebec, New Brunswick and Newfoundland and Labrador) are proposing to take one approach, while the rest of the provinces and territories are contemplating a different model.

The fundamental difference between the two approaches is the question of when the requirement to register is triggered in a particular jurisdiction.

At issue are the registration obligations of so-called “non-resident” investment fund managers – both foreign managers and domestic firms operating in provinces other than the one in which their head offices are located.

In general, the regulators agree that firms should have to register only in the jurisdictions in which they have a “significant connection.” Where the regulators differ is over what constitutes that connection.

Under the model being proposed by the regulators in all provinces and territories except Ontario, Quebec, New Brunswick and Newfoundland, registration obligations are triggered only if the firm is deemed to be carrying out the activities of a fund manager – such as managing the business or operations of a fund – in that jurisdiction.

The proposal being advocated by the four remaining provinces focuses on whether a firm has investors in the province. This proposal would require firms to register if any of their funds’ holdings are based in the province or if they have ever solicited investors in the province – unless the fund qualifies for an exemption (such as all unitholders being institutional investors).

For the provinces that are proposing this second approach, the presence of investors automatically gives rise to fund-management activities – such as financial reporting, calculating net asset values and fulfilling redemption requests – and, in turn, investor-protection concerns, which should require registration.

Although there is a basic philosophical difference underlying the two proposed approaches, what’s more important – to the fund industry, at least – is the fact that the regulators are proposing different models in the first place. The comments submitted on the proposals indicate that industry players are not at all happy with the discord among the regulators.

For example, the Portfolio Managers Association of Canada‘s comment calls the duelling regulatory proposals “a backward step [that will] increase regulatory fragmentation and confusion in the investment fund and asset-management industry” and adds that if the proposals are adopted, the result would be that registration requirements would be imposed inconsistently from province to province, which would needlessly increase the regulatory burden on fund managers. This could, in turn, deter international firms from doing business in Canada, the PMAC comment adds, thereby limiting the investment opportunities of Canadians.

The Alternative Investment Management Association’s comment echoes this warning, indicating that under the model advocated by Ontario, Quebec, New Brunswick and Newfoundland, most foreign fund managers probably would opt not to register and would do business only with investors they could deal with via an exemption (which would exclude the vast majority of retail investors).

Moreover, AIMA’s comment says, the differing approaches “will generate substantial uncertainty and confusion in the Canadian capital markets.” It notes that this flies in the face of the arguments that several provinces had made in defence of provincial jurisdiction over securities regulation at the recent Supreme Court of Canada hearing on the subject. Adds the AIMA comment: “Differing regimes hurt Canada’s international reputation as a jurisdiction for business.”

A number of individual fund firms also have objected to the two-pronged approach. Invesco Canada Ltd.‘s comment says that, between harmonized national rules and the passport system, the investment fund industry essentially has enjoyed national regulation of its business. Invesco calls the regulators’ differing proposals “a historically significant departure” from this path: “We believe this is an extraordinarily negative development and urge the members of the CSA to re-engage in discussions on this topic.”

The PMAC also recommends that the CSA “reconsider these contradictory proposals and instead adopt one national approach.”

And, given the choice, the PMAC prefers the model being proposed by the group of nine provinces and territories because the business of the firm makes more sense as a trigger for registration than the presence of investors.

The comment period on the two proposals closed in mid-April. The obligation for fund managers to register is suspended until Sept. 28.

The head of the CSA, Bill Rice, who also is chairman and CEO of the Alberta Securities Commission, suggests that Alberta and its allies won’t be changing their approach. Although everyone agrees that a uniform national approach is preferable, Rice says, “It remains to be seen whether the comments submitted will persuade those jurisdictions in the minority to change their positions and adopt the position of the majority.”

For its part, the Ontario Securities Commission is reviewing the comment letters it has received on its proposal. And although the OSC won’t say whether it remains committed to its approach, it does indicate that it is sensitive to the need for harmonization.

Says Carolyn Shaw-Rimmington, manager, public affairs, with the OSC: “We will continue to be mindful of the importance of sound and responsible harmonization and co-ordination of this initiative.”

Whether the CSA manages to develop a single solution or not, this episode nevertheless highlights the fact that efforts at harmonization will never be a perfect substitute for true national regulation. IE

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