Canada: Investment Funds @ Gowlings November 2, 2010

Last Updated: November 22 2010

Edited by Paul A. Dempsey


  • Investment Fund Manager Registration
  • Closed-End Fund Conversions
  • Point of Sale Disclosure for Mutual Funds - Stage 1

Investment Fund Manager Registration

On October 15, 2010 the Canadian Securities Administrators (the "CSA") published a request for comment (the "CSA Notice") on proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions ("NI 31-103") and its related companion policy relating to the registration of international and certain domestic investment fund managers. Currently, NI 31-103 provides temporary relief from investment fund manager registration such that an investment fund manager is only required to be registered in the Canadian jurisdiction in which its head office is located (if any).

The CSA Notice describes the effect of the proposed amendments as follows. An investment fund manager who carries on investment fund management activities from a location outside of Canada would need to register in the province or territory in which the relevant investment fund has security holders and in which the manager or the fund has actively solicited local residents to purchase securities of the fund after September 28, 2011. Similarly, a Canadian investment fund manager would also be required to register in provinces and territories other than where its head office is located if the fund has security holders in that jurisdiction and local residents were actively solicited in that jurisdiction after September 28, 2011.

Proposed amendments to the Companion Policy for NI 31 -103 provide some guidance on the meaning of "actively solicited". Generally, it refers to "intentional actions encourage a purchase of the fund's securities." Since the solicitation test applies after September 28, 2011, some non-resident investment fund managers may have a "grandfathering" exemption (i.e. if they do not solicit investors after September 28, 2011).

The CSA Notice also describes a proposed exemption for international investment fund managers that would be subject to the following conditions:

  • the manager does not have a physical place of business in Canada,
  • the fund is established under the laws of a foreign jurisdiction,
  • the fund is not a reporting issuer,
  • all securities of the fund distributed in Canada were distributed by way of prospectus exemption to a "permitted client" (e.g. insititutional investor),
  • the manager submits to the regulatory authority of Canadian regulators, and
  • the manager provides prescribed disclosure to the permitted client.

This exemption would not be available if the fair value of assets of the fund attributable to securities beneficially owned by Canadian residents exceeds 10% of the value or the fund. The exemption also would not be available if the fair value of assets attributable to securities of all investment funds managed by the manager that are beneficially owned by Canadian residents exceeds $50 million. The Ontario Securities Commission (the "OSC") and the Autorité des marches financiers have issued an additional request for comment as to whether these threshold limitations should also be applied to "grandfathered" investment fund managers (i.e. those who do not solicit investors after September 28, 2011).

The comment period ends on January 13, 2011.

Closed-End Fund Conversions

On October 29, 2010 the OSC published Staff Notice 81-711 Closed-End Investment Fund Conversions to Open-End Mutual Funds setting out the views of OSC staff on such conversions. The issues addressed in the notice relate to disclosure, notice to investors, provision of redemption rights prior to conversion, compliance with National Instrument 81-102 Mutual Funds, consistent investment objectives and strategies, use of past performance data and the assumption of all merger costs by the fund manager.

Point of Sale Disclosure for Mutual Funds - Stage 1

On October 8, 2010 the CSA published amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure and its forms and related companion policy. The amendments represent the first step in the implementation of the CSA's point of sale disclosure framework. That framework resulted from work done by Canadian securities and insurance regulators to provide investors with more meaningful information about mutual funds and segregated funds. The focus of the amendments is the new summary disclosure document called "Fund Facts". This document is intended to highlight key information that is important to investors, in easy to understand language no more than two-pages (double –sided) in length.

The amendments require that a Fund Facts document be produced by a mutual fund and filed with regulators concurrently with the mutual fund's simplified prospectus and annual information form. It also requires that a Fund Facts document be made available to investors and be posted on the website of the fund family or fund manager. Although the amendments do not require delivery of the Fund Facts document to investors, the CSA encourages the use and distribution of the document as "a key part of the sales process in helping to inform investors about mutual funds they are considering for investment." A Fund Facts document is incorporated by reference into its related simplified prospectus so existing statutory rights of investors with respect to misrepresentation also will apply to misrepresentations in the Fund Facts document.

The CSA propose two other stages to the implementation of the point of sale disclosure framework as described in CSA Staff Notice 81-319. Stage 2 will involve publication of a proposal that delivery of the Fund Facts document would satisfy the prospectus delivery requirement. Stage 3 would follow consideration of issues related to Stage 2 and would address proposed requirements to implement point of sale delivery for mutual funds and other types of investment funds as well.

The amendments are expected to come into force on January 1, 2011. However, the requirement to file a Funds Fact document with a prospectus (including preliminary and pro forma) or a prospectus amendment filing takes effect on April 8, 2011. All mutual funds are required to file a Fund Facts document on or before July 8, 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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