The ability of publicly offered mutual funds to invest
in other mutual funds will be broadened under proposed amendments that were
recently republished for comments by the Quebec Securities Commission, on
behalf of Canada’s securities regulators. If adopted, the amendments will
permit a mutual fund to invest an unlimited amount in traditional Canadian
mutual funds, if duplication of management fees, sales charges and redemption
fees is eliminated. Any traditional mutual fund may be an underlying fund if it
does not itself invest in other mutual funds (other than money market funds or
IPUs) or if it is an RSP clone fund. In a significant change from the July 2002
proposals, traditional mutual funds will now also be able to invest in IPUs of
Canadian or U.S. funds, without any limits.
Mutual funds will not be permitted to invest in
non-prospectized pooled funds, virtually all foreign mutual funds (other than
IPUs), most labour-sponsored venture capital corporations or commodity pools,
because the proposed amendments will continue to restrict mutual funds from
investing in mutual funds that are not subject to National Instruments 81-101
and 81-102 (other than IPUs). The amendments would replace the current
provision that permits mutual funds to invest not more than 10% of its net
assets in other mutual funds. The extent to which traditional mutual funds will
be permitted to invest in closed-end funds, such as listed structured trusts,
income trusts and REITs, will continue to be limited by the 10% control and concentration
tests.
Investments in Mutual Funds
The proposed amendments require both the investing
mutual fund and the underlying mutual fund to be qualified for distribution in
the same jurisdiction, and the underlying mutual fund must be subject to
NI81-101. Layering of investments among levels of funds will continue to be
prohibited. Under the amendments, a mutual fund may invest any amount in
qualifying traditional mutual funds, RSP clone funds, money market funds or
IPUs if:
- no management fees or incentive
fees are payable by the investing mutual fund that, to a reasonable
person, would duplicate a fee payable by the underlying mutual fund for
the same service;
- no sales fees or redemption
fees are payable by the investing mutual fund in relation to its purchases
or redemptions of the securities of the underlying mutual fund if the
underlying mutual fund is managed by the same manager or by its affiliate
or associate;
- no sales fees or redemption
fees are payable by the investing mutual fund in relation to its purchases
or redemptions of securities of the underlying fund that, to a reasonable
person, would duplicate a fee payable by an investor in the investing
mutual fund (other than brokerage fees incurred on the purchase of IPUs);
- the prospectus for any fund
that invests in other mutual funds discloses the process or criteria to
select those mutual funds, including the percentage of the fund’s net
assets dedicated to these investments; and
- in any case in which more than
10% of the securities of a mutual fund are held by another mutual fund,
the fund discloses that percentage, together with the risks associated
with a possible redemption request by that fund.
Mutual fund securities held by another mutual fund may
be voted by the manager of the latter fund unless both funds are managed by the
same manager or by its affiliate or associate. If both funds are so managed,
the manager, at its option, may arrange for securities of the underlying funds
to be voted by the securityholders of the investing fund.
Other Proposed Changes
The proposal to allow mutual funds to enter into swaps
has been withdrawn, pending further review.
The proposal to require securityholder approval before
changing or introducing fees or expenses charged directly to securityholders is
continued, but it will now only apply to fees or expenses charged by the mutual
fund or its manager and, in the case of a new fee or expense, only if it could
result in increased charges.
Service providers for principal distributors and
participating dealers will become subject to the existing deadlines for
transmitting orders for purchases and redemptions, and the requirement to give
disclosure to financial institutions of client trust fund accounts.
Regarding fund mergers, the proposed rules continue to
clarify that the prospectus for the continuing fund need only contain financial
information about the continuing fund.
Transition and Timing
Securities regulators intend to bring the amendments
into force in early August, 2003. To ensure that all mutual funds will comply
with the same rules, all previously granted exemptions, waivers or other
decisions permitting fund-on-fund investments will be revoked on the first
anniversary of the date the amendments come into force.
The deadline for submitting comments on the proposed
amendments is July 14, 2003. If you would like to discuss the proposed changes,
please call us at 416.865.7500, extension 8500. If you are calling long
distance, you may call us toll-free at 1.800.505.TORY (8679) from anywhere in
the United States or Canada. Copies of the proposed amendments to NI81-101 and
NI81-102 are available on the Quebec Securities Commission’s Web site at http://www.cvmq.com/Upload/bulletin/v34n23s03.pdf.
This client memo is a general discussion of certain legal and related developments
and should not be relied upon as legal advice. If you require legal advice, we
would be pleased to discuss with you the issues raised by this client memo in
the context of your particular circumstances.
