Mortgage investment corporations (MICs) are a form of alternative lender that is one of the fastest-growing segments of the mortgage market.
Unlike their counterparts in every other jurisdiction of Canada, MICs have operated in British Columbia without the regulatory oversight of the local securities commission. While MICs are required to be registered provincially with the Financial Institutions Commission under the Mortgage Brokers Act, that legislation regulates the brokering and lending activities of MICs but does not regulate their capital raising and investment marketing activities.
You will have likely heard that is about to change. Effective February 15, the dealer registration exemption for mortgage investment entities, including MICs, which the BC Securities Commission (BCSC) introduced in 2010 and has renewed annually since, will be permanently revoked. People who rely on the exemption and have filed a “substantially complete” registration application with the BCSC by the February 15 lapse date will be able to continue their operations during a 12-month transition period until their registration application is approved or rejected.
Navigating the application process and preparing for the subsequent regulatory oversight is time-consuming and complex. Since BCSC’s announcement last August of the impending revocation, we have been working to get our clients ready for that February 15 deadline. Two tricky issues have emerged as key early considerations: which entity should seek registration, and whether that entity is entitled to the transition period.
Which entity will you register?
Most MICs operate within a structure that has two corporations: the MIC itself and a manager that performs the mortgage administration functions. The manager employs the people who operate the business.
The BCSC has said that it will consider applications from the manager, but not the MIC. However, registering the manager will subject that entity’s entire business, not just the capital-raising functions, to BCSC oversight – including annual audits, disclosures, compliance examinations and related liabilities. Not surprisingly, incorporating a new entity to pursue the registration has quickly become the preferred structure among our clients. This structure is also acceptable to the BCSC.
This path forward has revealed two complexities. First, the new entity (which I will refer to as Newco) is not currently relying on the existing exemption (and reliance on the exemption on February 15 is a condition of eligibility for the 12-month transition period). I discuss this further below.
Second, the individuals assuming the roles of Newco’s registered dealing representatives and chief compliance officer will, in most circumstances, be performing these functions while continuing their existing duties as salaried employees of the manager. This raises conflict-of-interest concerns for the BCSC. Specifically, the BCSC has said Newco will be obligated to demonstrate it has sufficient “control and direction” over its registered personnel. While the most effective way to achieve this is through the employer-employee relationship, splitting one employee’s time between two employers within the same organization is burdensome for firms and is best avoided (think in particular of an employer’s withholding and remittance obligations). What signs of control and direction will be acceptable to the BCSC is not yet clear and will vary according to the facts and circumstances of each applicant.
Are you entitled to the transition period?
As noted above, only the entity that is validly relying on the existing exemption as of February 15, 2019, and has submitted its registration application by that date, will be entitled to the 12-month transition period.
Valid reliance means that the applicant has a current information report on file with the BCSC and is meeting the other conditions required to be eligible for the exemption set forth by the commission. For most MICs, today that entity is either the MIC itself or, more commonly, the manager. What of Newco?
Absent an amendment to the current exemption or other supplementary pronouncement by the BCSC before February 15, MICs that intend to pursue a registration for Newco will need to take steps to ensure Newco is validly relying on the exemption before submitting their registration application. This will require MICs to not just cause Newco to file the necessary information report, but to actually transition the capital-raising functions within their organizations from the manager to Newco. At a minimum, this will require amendments to the MIC’s form of subscription agreement and any offering memorandum, and possibly the existing services agreement between the manager and the MIC (to delete the capital-raising functions from the services provided).•
Angela Austman is a securities partner at Lawson Lundell LLP. Information contained in this article is intended as general information only, not legal advice.