In September 2009, national Instrument 31-103 registration requirements reformulated the provincial licensing regime governing intermediaries in the Canadian capital markets.

NI 31-103 introduced a new registration category for promoter/managers of mutual funds: investment fund manager.

But the new category is not limited to managers of public mutual funds. The term “non-redeemable investment fund” — as a subcategory of the term “investment fund” — extends the IFM category to all persons who “direct the business, operations or affairs of any issuer whose primary purpose is to invest money provided by its security holders.” (Venture-capital and similar inves-tors are excluded.) The companion policy to NI 31-103 warns general partners of limited partnerships falling within the definition of “investment fund” to consider registering as IFMs.

Many limited partnerships raising funds in the exempt market fit the “non-redeemable investment fund” description. Their general partners thus fall squarely within the definition of an IFM. Yet a recent check of the Ontario Securities Commission’s registration database suggests that general partners are not obtaining registration as IFMs, nor are they seeking exemptions from registration. The general partner of at least one publicly traded limited partnership describes itself in SEDAR filings as a “non-redeemable investment fund,” yet its general partner is not registered as an IFM.

The CP to NI 31-103 references the CP to NI 81-106, Investment Fund Continuous Disclosure, as a guide to IFM registration. NI 81-102 and NI 51-101, Continuous Disclosure Obligations, together cover continuous disclosure for all reporting issuers. Their CPs describe “investment funds” as having: professional management of invested money, investment policies and ownership of a portfolio of securities.

Real estate, business income and royalty trusts are not “investment funds” because they “entitle investors to net cash flows from an underlying business or income producing property.” But these refinements are not in the statutory definition of “non-redeemable investment fund” that legally triggers IFM registration.

One could infer from the Canadian Secur-ities Administrators’ statements that IFM registration is not expected where the limited partnership is passive and static (e.g., derivatives-based) because they don’t actively trade like conventional investment funds. However, these polices predate IFM registration and are concerned with ensuring effective continuous disclosure. Labelling income trusts as investment funds would have moved them from the more appropriate regime for active businesses under NI 51-101 to the regime for managed money under NI 81-106. It is thus not clear that we can rely on NI 31-103’s CP reference to NI 81-106’s CP to conclude that the CSA considered the implications of its guidance for an unrelated issue.

There may be a regulatory will to exclude them as IFMs. But as a hard legal conclusion, this guidance by inference does not carry the comfort level usually required by market participants before they risk non-compliance with a registration requirement.

There are compelling policy reasons to exclude general partners of passive exempt-market limited partnerships from registration as IFMs. Under NI 31-103, the general partner, typically with limited responsibilities, would be subject to the same level of compliance as the manager of a retail mutual fund — required to maintain capital of $100,000 and obtain fidelity insurance in five areas at $200,000 each. The individual acting for the general partner must register as the “ultimate designated person” and chief compliance officer.

This calls for a high level of expertise in the securities industry that may have little relevance to the duties of the general partner. In addition to the records the limited partnership agreement requires, the general partner must also keep prescribed records designed for fund managers.

But as an exempt-market issuer, the limited partnership itself would be subject to little oversight. Further, the general partners of venture-capital limited partnerships that actively manage an underlying business would not have to meet any of the IFM integrity, solvency or proficiency requirements. The general partner could be expected to transfer the costs of regulation to the limited partnership. The regulatory burden of IFM registration assumed by the general partner seems disproportionate to regulation of the vehicle itself and the risks generally expected to be assumed by exempt-market limited partners. The absence of exempt-market general partners from the IFM lists may reflect a triumph of common sense over law. But such victories are usually short-lived. This is an area that urgently needs formal clarification. IE

Julia Dublin is a partner with Aylesworth LLP.