CSA Seeks Comments on Initiative to Reduce Regulatory Burden for Investment Fund Issuers

In September 2019, the Canadian Securities Administrators (CSA) published CSA Notice and Request for Comment Reducing Regulatory Burden for Investment Fund Issuers – Phase 2, Stage 1, which outlines a number of proposed amendments and proposed changes to the disclosure regime and operational matters for investment fund issuers (the Proposed Amendments). Comments on the Proposed Amendments are due by December 11, 2019.

HIGHLIGHTS OF THE PROPOSED AMENDMENTS

The Proposed Amendments are organized into eight separate workstreams:

Workstream 1: Consolidate the Simplified Prospectus and the Annual Information Form

For mutual funds in continuous distribution, the Proposed Amendments eliminate the requirement to file an annual information form by consolidating such disclosure requirements into the existing form requirements for a simplified prospectus in Form 81-101F1 Contents of Simplified Prospectus. By consolidating these documents, the Proposed Amendments aim to remove overlapping disclosure and repeal disclosure requirements that investors do not find meaningful and are challenging to produce.

Investment funds not in continuous distribution will be required to file a simplified prospectus or a document prepared in accordance with Form 41-101F2 Information Required in an Investment Fund Prospectus. However, such funds will be exempt from certain of the disclosure requirements outlined in the applicable rules.

Workstream 2: Investment Fund Designated Website

To make disclosure more accessible for investors and provide flexibility in meeting disclosure obligations, the Proposed Amendments introduce a requirement for reporting investment funds to maintain a designated website for posting regulatory disclosure. According to the Proposed Amendments, the designated website must be (1) publicly accessible and (2) established and maintained by the investment fund, its investment fund manager, an affiliate or an associate of its investment fund manager, or another investment fund that is part of its investment fund family. Most large to medium-sized investment funds and investment fund managers already maintain a website, and therefore, the incremental costs associated with this new requirement are likely be minimal for them. However, such costs may be more significant for smaller investment funds and investment fund managers.

Workstream 3: Codify Exemptive Relief Granted in Respect of Notice-and-Access Applications

The Proposed Amendments introduce a “notice-and-access” system for the solicitation of proxies for investment fund reporting issuers that is similar to the existing system for non-investment fund reporting issuers and consistent with exemptive relief that has been frequently granted to investment funds since 2016, in addition to extending its application to non-management solicitations. The notice-and-access system will enable investment fund reporting issuers to deliver proxy-related materials by sending registered holders or beneficial owners a notice document that includes prescribed summary information pertaining to the proxy-related materials and instructions on how to obtain such materials.

Workstream 4: Minimize Filings of Personal Information Forms (PIFs)

The Proposed Amendments eliminate the requirement to file a PIF for permitted individuals and individual registrants that have previously submitted a Form 33-109F4 Registration of Individuals and Review of Permitted Individuals. Regulatory oversight of such individuals would not be affected as information obtained by regulators through the registration process is required to be kept current.

Workstream 5: Codify Exemptive Relief Granted in Respect of Conflicts Applications

The Proposed Amendments codify exemptive relief granted with respect to certain conflict of interest prohibitions. In particular, the Proposed Amendments permit the following, subject to certain conditions:

  • Fund-on-fund investments by investment funds that are not reporting issuers
  • Investment funds that are reporting issuers to purchase non-approved rating debt under a related underwriting
  • In specie subscriptions and redemptions involving related managed accounts and mutual funds
  • Inter-fund trades of portfolio securities between related reporting investment funds, investment funds that are not reporting issuers and managed accounts at last sale price
  • Investment funds that are not reporting issuers to invest in securities of a related issuer over an exchange
  • Investment funds to invest in debt securities of a related issuer in the secondary market
  • Investment funds to invest in long-term debt securities of a related issuer in primary market distributions
  • Investment funds and managed accounts to trade debt securities with a related dealer

In seeking exemptive relief, investment funds have generally demonstrated that despite the potential for a conflict of interest, such transactions are beneficial to investors. Codifying this exemptive relief is an attempt to reduce costs for investment funds seeking to undertake such transactions and will centralize the various exemptions regarding conflict of interest matters.

Workstream 6: Broaden Pre-Approval Criteria for Investment Fund Mergers

The Proposed Amendments expand the existing pre-approval criteria with respect to investment fund mergers to codify exemptive relief that is routinely granted where a proposed merger fails to satisfy the pre-approval criteria in section 5.6 of National Instrument 81-102 Investment Funds (NI 81-102). In particular, exemptive relief has been granted to approve mergers that do not qualify under section 5.6 of NI 81-102 because:

  • A reasonable person may not consider the continuing fund to have substantially similar fundamental investment objectives, valuation procedures and fee structure, or
  • The transaction is not a qualifying exchange or tax-deferred transaction under the Income Tax Act (Canada)

Under the Proposed Amendments, mergers that fail to satisfy such pre-approval criteria may rely on a disclosure alternative instead of seeking exemptive relief. To rely on the disclosure alternative, (1) the merger must comply with all of the other applicable pre-approval criteria, (2) securityholder approval must be obtained by the fund manager, and (3) certain prescribed disclosure explaining why the proposed merger is in securityholders’ best interests must be included in an information circular.

Workstream 7: Repeal Regulatory Approval Requirements for Change of Manager, Change of Control of a Manager, and Change of Custodian that Occurs in Connection with a Change of Manager

The Proposed Amendments repeal the requirements in section 5.5 of NI 81-102 to obtain regulatory approval for a change of manager, change of control of a manager or change of custodian that occurs in connection with a change of manager. These requirements are intended to assess the proficiency and integrity of a proposed manager or custodian and ensure securityholders are provided with adequate disclosure regarding the change. However, this objective has since been satisfied by the implementation of a registration process as set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

It should be noted that securityholder approval and preparation of an information circular will still be required for a change of manager. Furthermore, the proposal to repeal the existing approval requirements is subject to comments on whether any additional or alternative measures are warranted in order to ensure adequate investor protection.

Workstream 8: Codify Exemptive Relief Granted in Respect of Fund facts Delivery Applications

The Proposed Amendments codify exemptive relief from certain fund facts delivery requirements under securities legislation. In particular, the Proposed Amendments introduce fund facts delivery exemptions for purchases of conventional mutual fund securities:

  • Made by permitted clients (that are not individuals)
  • In managed accounts, or
  • Under automatic switch programs

In addition, a fund facts delivery exemption will also be available for subsequent purchases of conventional mutual fund securities for model portfolio products or made in respect of portfolio balancing services as subsequent purchases under such plans do not reflect new investment decisions. It should also be noted that the Proposed Amendments permit a single consolidated fund facts document to be filed for each class or series in an automatic switch program.

For further information, please contact:

Stacy McLean                        416-863-4325

Christopher Yeretsian            416-863-2410

Tairroyn Childs                       416-863-5251

or any other member of our Investment Products & Asset Management or Capital Markets groups.

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We would be pleased to provide additional details or advice about specific situations if desired.

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