Canada: First Phase Of CSA’s Investment Fund "Modernization Project" Comes Into Force April 30

On April 30, 2012, amendments (the Amendments) will be made to the following National Instruments as part of the Canadian Securities Administrators (CSA) project to modernize the product regulation of publicly offered investment funds (the Modernization Project):

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

The Modernization Project is a two-phase project whose mandate is to review the product regulation of publicly offered investment funds. The Amendments constitute the first phase of the Modernization Project. The Amendments codify exemptive relief that has been frequently granted by the CSA over the years and update existing rules to reflect global standards with respect to the regulation of publicly offered mutual funds.

The second phase of the Modernization Project will involve new restrictions and operational requirements for non-redeemable investment funds (such as closed-end funds) that are similar to existing requirements for mutual funds under NI 81-102. The proposed rule implementing the second phase of the Modernization Project has not yet been released.

Set out below are highlights of the Amendments:

Exchange-traded funds

Exchange-traded funds will no longer have to seek routine exemptive relief from certain purchase and redemption processes and other operational requirements that were designed primarily for open-end conventional mutual funds.

Short selling and specified derivatives

Publicly offered mutual funds will be allowed to short sell securities in accordance with certain terms and conditions that mirror those contained in recent short selling relief decisions.

If an existing publicly offered mutual fund wishes to commence short selling for the first time then it will have to (i) update its prospectus to add disclosure regarding the use of short selling strategies and related risks and (ii) provide its securityholders with 60 days' advance written notice of its intention to commence short selling.

A publicly offered mutual fund that has received prior exemptive relief to short sell will not have to provide notice to securityholders. If necessary, it must amend the current disclosure in its prospectus so as to comply with any new short selling disclosure requirements at the earlier of the next renewal or next amendment of the prospectus.

However, if a publicly offered mutual fund intends to rely on any short selling term or condition in the Amendments that is less conservative than the equivalent term and condition in the fund's prior exemptive relief, then its manager must determine whether reliance on the updated term or condition triggers the requirement for a prospectus or fund facts amendment to be filed prior to the fund short selling pursuant to such less conservative new term or condition.

The Amendments also include a requirement for publicly offered investment funds that short sell securities to calculate their net asset value every business day.

Publicly offered mutual funds will also have more flexibility in their use of specified derivatives as a result of an expansion of what qualifies as cash cover and the removal of term limits on specified derivatives.

Fund of fund

Publicly offered mutual funds will be permitted to invest in (i) underlying mutual funds that are reporting issuers in the local jurisdiction, as opposed to only those with a current offering prospectus, and (ii) a two-tier mutual fund, provided the mutual fund being invested in is a "clone fund" whose objective is to track the performance of one underlying mutual fund.

Money market funds

A publicly offered money market fund will be required 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. Also added is a 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 publicly offered money market fund portfolio.

In order to provide a transition period during which money market funds may gradually realign their portfolios to comply with the provisions in the previous paragraph, these provisions will not come into force until October 30, 2012.

Statement of investment portfolio

When an investment fund (whether public or private) is preparing its statement of investment portfolio as part of its financial disclosure obligations it will no longer be able to aggregate certain types of short-term debt.

Mutual fund dealers

Principal distributors and participating dealers that are members of the Mutual Fund Dealers Association (MFDA) will be exempted from certain requirements related to the segregation of client money relating to mutual fund transactions in order to eliminate unnecessary duplication between securities law requirements and MFDA Rules. MFDA members will remain subject to the relevant MFDA rules on segregation of client property.

Sales communications

Publicly offered mutual funds will have to comply with new requirements designed to ensure that mutual fund ratings and rankings used in sales communications are objective, consistent and not misleading.

Continuous disclosure

A publicly offered investment fund will be required to make its net asset value and net asset value per security readily available to the public at no cost. The Amendments do not specify any particular mechanism that must be used in order to disseminate this information.

Norton Rose Group

Norton Rose Group is a leading international legal practice. We offer a full business law service to many of the world's pre-eminent financial institutions and corporations from offices in Europe, Asia, Australia, Canada, Africa, the Middle East, Latin America and Central Asia.

Knowing how our clients' businesses work and understanding what drives their industries is fundamental to us. Our lawyers share industry knowledge and sector expertise across borders, enabling us to support our clients anywhere in the world. We are strong in financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and pharmaceuticals and life sciences.

We have more than 2900 lawyers operating from 43 offices in Abu Dhabi, Almaty, Amsterdam, Athens, Bahrain, Bangkok, Beijing, Bogotá, Brisbane, Brussels, Calgary, Canberra, Cape Town, Caracas, Casablanca, Dubai, Durban, Frankfurt, Hamburg, Hong Kong, Johannesburg, London, Melbourne, Milan, Montréal, Moscow, Munich, Ottawa, Paris, Perth, Piraeus, Prague, Québec, Rome, Shanghai, Singapore, Sydney, Tokyo, Toronto and Warsaw; and from associate offices in Dar es Salaam, Ho Chi Minh City and Jakarta.

Norton Rose Group comprises Norton Rose LLP, Norton Rose Australia, Norton Rose Canada LLP, Norton Rose South Africa (incorporated as Deneys Reitz Inc), and their respective affiliates.

On January 1, 2012, Macleod Dixon joined Norton Rose Group adding strength and depth in Canada, Latin America and around the world. For more information please visit

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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