Canada: Canadian Securities Administrators Announce Amendments Under First Phase Of The Fund Modernization Project

Last Updated: March 21 2012
Article by Jessica S.R. Schnurr and Tracy L. Hooey

On February 9, 2012, the Canadian Securities Administrators (the "CSA"), announced that they are making amendments (the "Amendments") to the following rules and policy:

  • National Instrument 81-102 Mutual Funds (NI 81-102) and Companion Policy 81-102CP (81-102CP);
  • National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106);
  • National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101);
  • National Instrument 41-101 General Prospectus Requirements (NI 41-101).

The Amendments are scheduled to come into force on April 30, 2012.

These Amendments complete the first phase of the CSA's modernization project, the stated goal of which is to review the product regulation of publicly offered investment funds and to consider whether the current approach adequately addresses product and market developments in the Canadian investment fund industry. See Notice of Amendments (PDF).

Substance of the Amendments

The Amendments for this first phase of the modernization project were published for comment on June 25, 2010. The Amendments codify exemptive relief that is frequently granted to mutual funds and exchange-traded mutual funds ("ETFs") under NI 81-102 and other investment fund rules. The Amendments also include a number of minor drafting changes generally intended to clarify and update NI 81-102. Below is a summary of the Amendments.


The Amendments are intended to accommodate the different operations and distribution of ETFs within the NI 81-102 regime. The Amendments eliminate the need for ETFs to routinely seek exemptive relief from certain prescribed purchase and redemption processes and other operational requirements designed primarily for open-end conventional mutual funds sold through the mutual fund dealer network. Some of the amendments to ETFs include (i) permitting payment for purchases and redemptions of securities in combination of cash and securities; (ii) exempting ETFs from the rules for setting a record date for determining the right of securityholders to receive a distribution and (iii) exempting ETFs from the requirements for the transmission and receipt of purchase and redemption orders.

Short-Selling and Specified Derivatives

The Amendments add section 2.6.1 of NI 81-102 which permits mutual funds to short sell securities subject to a cap of 20% of their net asset value. This investment strategy was previously permitted through exemptive relief and is beneficial for mutual funds by giving them the potential to earn returns in declining markets. In connection with this change, the CSA is adding a custodial requirement relating to short sales, and are amending the relevant prospectus forms under NI 81-101 and NI 41-101 to require disclosure of the use of short-selling strategies and of the related risks.

Upon the coming into force of the Amendments, mutual funds intending to short-sell securities for the first time will first have to comply with the applicable 60 day notice and prospectus disclosure requirements prescribed under the Amendments. Mutual funds that currently short-sell securities in accordance with the terms of exemptive relief granted under NI 81-102 may continue their short-selling strategies in accordance with the new short-selling provision in section 2.6.1 of NI 81-102.

The Amendments also provide mutual funds with more flexibility in their use of specified derivatives by expanding what qualifies as cash cover for such purposes and by removing term limits on specified derivatives. The expanded range of cash cover now includes securities of money market funds and certain floating rate notes.

The Amendments also require that an investment fund that short sells securities calculate its net asset value on a daily basis.


The Amendments revise section 2.5 of NI 81-102 to now permit mutual funds to invest in underlying mutual funds that are reporting issuers in the local jurisdiction, as opposed to only those with a current offering prospectus. They also give mutual funds the ability to invest in a two-tier mutual fund provided this fund is a 'clone fund' whose objective is to track the performance of one underlying mutual fund. The CSA decided not to proceed with a proposed amendment to the definition of "index participation unit" in NI 81-102 which would have expanded it to include participation units traded on a stock exchange in the U.K.

Money Market Funds

The Amendments introduce new investment restrictions for money market funds under new section 2.18 of NI 81-102. That section includes new liquidity provisions requiring a money market fund to have at least 5% of its assets in cash or readily convertible to cash within one day and 15% of its assets in cash or readily convertible to cash within one week. It also includes a new dollar-weighted average term to maturity limit of 180 days that is to be calculated based on the actual term to maturity of all securities in a money market fund portfolio. This is in addition to the current requirement of maintaining a portfolio with a dollar-weighted average term to maturity limit not exceeding 90 days calculated on the basis that the term of a floating rate obligation is the period remaining to the date of the next rate setting.

The CSA is providing a 6-month transition period during which money market funds may gradually realign their portfolios as necessary to comply with the new provisions. As a result, the new money market fund provision will not come into force until October 30, 2012.

In a related amendment, NI 81-106 will be amended such that it will no longer permit an investment fund to aggregate certain types of short-term debt in the fund's statement of investment portfolio. This change is intended to increase the transparency of fund portfolio holdings so as to allow investors to better evaluate the risks associated with an investment fund's short-term holdings.

Mutual Fund Dealers

The Amendments exempt principal distributors and participating dealers that are members of the Mutual Fund Dealers Association of Canada ("MFDA"), as well as mutual fund dealers in Québec, from the requirements of sections 11.1 and 11.2 of NI 81-102, which includes the requirement to segregate client money relating to mutual fund transactions from sums relating to other types of investment transactions, as well as the requirement to allocate and pay out interest earned on such client money held in a trust account. Under MFDA rules however, these principal distributors and participating dealers will continue to hold client assets in a trust account and separate from their own assets. They will, subject to certain conditions, also have discretion as to whether to pay interest on client cash held in trust. The Amendments also exempt those same principal distributors and dealers from the requirement under section 12.1 of NI 81-102 to annually report their compliance with the applicable requirements of Parts 9, 10 and 11 of NI 81-102.

Additional Changes

The Amendments also introduce new requirements in section 15.3 of NI 81-102 intended to ensure that mutual fund ratings and rankings used in sales communications are objective and consistent. In addition, the Amendments require that upon calculating its net asset value, an investment fund must make this information available to the public at no cost.

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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