Nick Wright, BA JD MBA LLM (Tax)
Wright Business Law

Portfolio manager registration is one of the principal adviser registration categories under Ontario securities law. The obligation to register arises from section 25(3) of the Securities Act (Ontario) (the "Act"), which prohibits a person or company from engaging in, or holding itself out as engaging in, the business of advising others with respect to investing in, buying or selling securities unless the person or company is appropriately registered or an exemption is available.

National Instrument 31-103 'Registration Requirements, Exemptions and Ongoing Registrant Obligations' (“NI 31-103”) establishes the registration categories, exemptions and ongoing regulatory requirements applicable to registered advisers. Companion Policy 31-103CP provides important guidance on how securities regulators interpret the adviser registration requirement, including when a person is considered to be “in the business” of advising.

Portfolio manager registration is also one of the most frequently misunderstood registration categories. Many businesses assume that portfolio manager registration is relevant only to large institutional asset managers or firms managing publicly offered investment funds. Others assume that registration depends on whether a person describes itself as a “portfolio manager” or exercises complete discretionary authority over client assets. Neither assumption is correct.

Adviser registration is determined by substance rather than form. The analysis turns on the activities actually being performed, not the title used by the adviser or the terminology contained in an agreement. The central question under the Act is whether the person is carrying on the business of advising others with respect to investing in securities.

For private investment fund sponsors, family offices, exempt market participants and investment advisers, determining whether portfolio manager registration is required often involves a detailed review of the advisory services actually being provided.

This article outlines the principal considerations that determine whether portfolio manager registration is required under Ontario securities law.

Are You Advising in Securities?

The first step is determining whether the activities constitute advising with respect to securities. Section 25(3) of the Act applies where a person is in the business of advising others as to investing in, buying or selling securities. The concept of advising is interpreted broadly and extends well beyond recommending that a client purchase or sell a particular security.

Advising generally includes providing opinions or recommendations regarding investment decisions involving securities, including recommendations concerning individual investments, asset allocation, portfolio construction and ongoing investment strategy. Examples include:

• recommending the purchase or sale of securities;
• selecting investments for a client portfolio;
• determining asset allocation among different classes of securities;
• recommending when securities should be bought, sold or retained; and
• providing ongoing investment recommendations under an advisory mandate.

Whether advice is delivered during periodic meetings, through written reports or as part of an ongoing investment management relationship does not materially alter the analysis. Securities regulators generally examine the substance of the services being provided rather than the manner in which the advice is communicated.

The analysis is equally important in the context of private investment funds. A person who selects securities for an investment fund, recommends investment opportunities or determines how the fund’s assets should be invested may be engaging in registrable advisory activity even where the advice is provided only to a single investment fund rather than multiple investors.

At the same time, many professional services do not constitute advising simply because they relate to investments. For example, lawyers who prepare subscription agreements, accountants who prepare financial statements, custodians who safeguard assets and fund administrators who calculate net asset value are generally not advising others with respect to investing in securities merely because their services support investment activities. Likewise, purely administrative functions, including record keeping, trade settlement and fund administration, ordinarily do not amount to advising.

The distinction depends upon the nature of the service being provided. Providing factual information or performing administrative functions is fundamentally different from making investment recommendations or determining investment decisions. In practice, identifying whether a person is advising is only the first step. Even where advice is being provided, registration is generally required only if the person is carrying on the business of advising.

Are You in the Business of Advising?

Whether a person is carrying on the business of advising is the central question in most portfolio manager registration analyses. Neither the Act nor NI 31-103 establishes a bright-line test. Instead, Companion Policy 31-103CP explains that securities regulators consider the totality of the circumstances to determine whether advisory activities have become a business requiring registration.

Accordingly, registration generally cannot be avoided simply because advisory services are provided through a particular corporate structure, only to affiliated entities or under agreements that characterize the services using different terminology. Regulators examine the substance of the activities rather than the labels adopted by the parties.

Is Investment Advice Provided Regularly?

Companion Policy 31-103CP explains that the frequency or repetition of advisory activities is an important indicator of whether a person is carrying on the business of advising.

An isolated investment recommendation does not necessarily constitute a registrable advisory business. By contrast, providing investment advice on an ongoing or recurring basis is more likely to indicate that registration is required, particularly where investment recommendations form part of an established advisory relationship or continuing investment management mandate.

Regular portfolio reviews, periodic investment recommendations and continuous monitoring of investment portfolios may each support the conclusion that advising is being conducted as a business rather than on an occasional basis.

Is Compensation Being Received?

Companion Policy 31-103CP also identifies compensation connected with advisory activities as a significant factor. Compensation need not consist of a separate advisory fee. Securities regulators may consider management fees, performance-based compensation or any other economic benefit received in connection with providing investment advice.

Receiving compensation does not automatically require registration, nor does the absence of direct compensation necessarily eliminate the registration requirement. Rather, compensation is one factor indicating that advisory activities are being conducted commercially.

Does the Person Hold Itself Out as an Adviser?

Another important consideration is whether the person holds itself out as providing investment advice.Companion Policy 31-103CP explains that securities regulators consider how a business represents itself to the marketplace. Advertising investment management services, maintaining a website describing advisory expertise, marketing discretionary investment management services or otherwise representing that investment advice is available may indicate that the person is carrying on the business of advising.

This assessment extends beyond formal advertising. Client presentations, pitch materials, engagement letters, business proposals and other communications describing advisory services may also be relevant.

Is Advising an Important Part of the Business?

Securities regulators also examine the significance of advisory activities within the overall business. Where investment advice forms a substantial component of the services provided, adviser registration concerns become considerably more significant than where investment discussions are merely incidental to another professional service.

For example, a law firm may advise on the securities law implications of a proposed investment without recommending whether the investment should be made. Similarly, an accounting firm may analyze the tax consequences of an investment without providing investment advice.

Conversely, where selecting securities, constructing portfolios or developing investment strategies constitutes the core service being offered, the business is much more likely to fall within the adviser registration regime.

Is the Activity Commercial in Nature?

Companion Policy 31-103CP also directs regulators to consider the overall commercial context. Activities conducted with an expectation of profit, offered as part of an ongoing business and intended to generate recurring revenue are more likely to constitute carrying on the business of advising than isolated or incidental discussions regarding investments.

No single factor is determinative. Securities regulators assess the totality of the circumstances to determine whether the advisory activities, viewed collectively, amount to carrying on the business of advising for the purposes of the Act.

This functional analysis explains why two businesses performing similar activities may reach different regulatory conclusions depending upon the frequency of the advice, the compensation arrangements, the manner in which the services are marketed and the role investment advice plays within the overall business.

Does Discretionary Investment Authority Matter?

Discretionary investment authority is one of the strongest indicators that portfolio manager registration may be required. Where a client authorizes another person to make investment decisions on its behalf without obtaining prior approval for each transaction, that person is generally performing the type of advisory function commonly associated with a registered portfolio manager.

Discretionary authority is typically granted under an investment management agreement or managed account arrangement. The client establishes the investment objectives, mandate and investment restrictions, while the portfolio manager determines which securities to purchase, sell or hold within those parameters. Discretionary authority commonly includes the authority to:

• select investments;
• determine portfolio composition;
• execute trades without obtaining transaction-by-transaction instructions; and
• rebalance portfolios in accordance with the client’s investment objectives.

Although discretionary authority is a strong indicator that portfolio manager registration may be required, it is not a legal prerequisite to adviser registration. The Act is concerned with whether a person is carrying on the business of advising. A person who provides ongoing investment recommendations may therefore require registration even where the client retains ultimate authority to approve each investment decision.

This distinction is particularly important for investment consultants, family offices and private investment fund sponsors. Although an investment committee or board may retain formal approval authority, the individual or entity responsible for developing the investment strategy, identifying investment opportunities and making investment recommendations may nevertheless be engaged in registrable advisory activity.

As throughout the adviser registration analysis, securities regulators examine the substance of the relationship rather than the contractual allocation of responsibilities.

Is There a Territorial Connection?

Even where a person is carrying on the business of advising, Ontario registration requirements generally depend upon there being a sufficient connection to Ontario. Determining whether that connection exists requires a fact-specific analysis. Relevant considerations may include:

• whether advisory services are provided to Ontario clients;
• whether the adviser maintains an office or representatives in Ontario;
• where investment decisions are made;
• where advisory activities are conducted; and
• the overall connection between the advisory business and Ontario’s capital markets.

Cross-border advisory arrangements often require particular attention. An adviser located outside Ontario may nevertheless be required to register where advisory services are provided to Ontario clients or where the advisory activities otherwise have a sufficient connection to Ontario. Likewise, Ontario-based advisers serving clients in other jurisdictions should consider the registration requirements that may apply in each applicable jurisdiction. The territorial analysis should therefore be undertaken together with the substantive adviser registration analysis.

Common Misconceptions About Portfolio Manager Registration

Questions regarding portfolio manager registration frequently arise because businesses focus on legal form or organizational structure rather than the activities actually being performed.

“I’m Only Managing One Private Investment Fund.”

The number of clients is not determinative. Providing investment advice exclusively to a single investment fund may still constitute carrying on the business of advising where the advisory activities satisfy the business trigger described in Companion Policy 31-103CP. The relevant question is the nature of the advisory activities, not the number of advisory clients.

“I’m the General Partner.”

General partners commonly perform governance, administrative and oversight functions. Those responsibilities do not necessarily include registrable advisory activities. Conversely, acting as the general partner of a limited partnership does not eliminate adviser registration requirements where the general partner also performs the investment management function. The legal characterization of the entity does not replace the functional analysis required under the Act.

“The Investment Committee Makes the Decisions.”

Some organizations assume that adviser registration is unnecessary because investments are formally approved by an investment committee. That assumption is often incorrect.

If an individual or entity develops the investment strategy, identifies investment opportunities, performs the investment analysis and effectively determines which investments will be presented for approval, securities regulators may conclude that the person is carrying on the business of advising.

The existence of an investment committee is only one factor within the broader factual analysis.

“Our Agreement Says We Are Not Providing Investment Advice.”

Contractual language does not determine whether registration is required. Securities regulators examine what the parties actually do rather than how the relationship is described in an agreement. Where investment recommendations form part of the services being provided, drafting the agreement using different terminology will generally not alter the regulatory analysis.

Portfolio Manager and Investment Fund Manager Registration

Portfolio manager registration and investment fund manager registration address different regulatory functions. A portfolio manager manages investments by selecting securities, constructing portfolios and providing investment advice. An investment fund manager directs the business, operations and affairs of the investment fund itself. That role generally includes responsibility for governance, compliance, administration, service providers and the overall operation of the fund.

Many private fund sponsors perform both functions. For example, the same organization may establish and operate an investment fund while also making all investment decisions for the fund’s portfolio.

Where a business performs both operational management and investment management functions, each registration category should be analyzed independently. Registration in one category does not eliminate the need to consider whether registration is also required in another.

Do Any Registration Exemptions Apply?

Although the adviser registration requirement is broadly framed, securities legislation provides several exemptions that may apply in appropriate circumstances.

Many of the adviser registration exemptions are found in Part 8 of NI 31-103, including exemptions for certain international advisers and international sub-advisers. These exemptions are highly technical and fact dependent. Their availability depends upon the activities being undertaken, the nature of the clients, the jurisdictions involved and the specific conditions prescribed by the applicable exemption.

Businesses should therefore avoid assuming that an exemption applies simply because they operate outside Canada, advise sophisticated investors or provide services to a limited number of clients. Each exemption should be analyzed independently against its statutory requirements.

Key Questions to Ask

Businesses evaluating whether portfolio manager registration may be required should consider the following questions:

• Am I providing advice regarding investments in securities?
• Am I carrying on the business of advising within the meaning of the Act?
• Do I exercise discretionary investment authority?
• Is there a sufficient connection to Ontario?
• Does a specific registration exemption under NI 31-103 or the Act apply?

Conclusion

Portfolio manager registration depends on a functional analysis of the activities actually being performed. Titles, organizational structures and contractual descriptions are relevant only to the extent that they reflect the underlying reality.

Where a person is carrying on the business of advising others with respect to investing in securities, section 25(3) of the Securities Act (Ontario) generally requires registration unless an exemption is available. Whether that threshold has been met is determined by considering the totality of the circumstances, including the business trigger factors described in Companion Policy 31-103CP.

Because adviser registration is highly fact dependent, businesses should carefully evaluate their activities before commencing advisory services or implementing new investment management arrangements. Early analysis can identify registration obligations, determine whether an exemption is available and reduce the risk of non-compliance with Ontario securities law.

Book a Consultation

If you are forming, or operating a private investment fund, Exempt Market Dealer, Investment Fund Manager or Portfolio Manager in Canada, contact us to schedule an initial consultation with Nick Wright.