The Canadian securities regulators have adopted new rules that significantly broaden the ability of publicly offered mutual funds to invest in other mutual funds. The amendments to National Instrument 81-102 will permit a mutual fund to actively invest an unlimited amount in traditional Canadian mutual funds, if duplication of management fees, incentive fees, sales charges and redemption fees is eliminated. In a major change from the original proposals, any traditional mutual fund may be an underlying fund if it does not itself invest more than 10% of its assets in other mutual funds (other than money market funds or index participation units (IPUs) or RSP clone funds). 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 privately placed open-ended funds that are not subject to NI81-101 or NI81-102, other than IPUs. This includes pooled funds, virtually all foreign mutual funds (other than IPUs or where investment in the foreign fund is the only means of investing in the foreign jurisdiction), most labour-sponsored venture capital corporations, and commodity pools. 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 amendments to NI81-102 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 (other than IPUs) to be subject to both NI81-101 and NI81-102. Layering of investments among levels of funds is limited because a traditional bottom fund may invest no more than 10% of its net assets in other mutual funds. 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); and
• 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 investing fund’s net assets dedicated to these types of investments.
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. If more than 10% of the assets of a mutual fund subject to NI81-101 are held by a securityholder, including another mutual fund, then the prospectus of the underlying fund must disclose the risks of redemption by the securityholder. Disclosure is also required of how the manager of a fund exercised any voting rights with respect to other funds.
Approval of Fees and Expenses
Securityholder approval will now be required before changing or introducing fees or expenses charged by the mutual fund or its manager directly to securityholders, unless fees are negotiated separately with each individual securityholder. In the case of a new fee or expense, approval is necessary only if it could result in increased charges to the mutual fund or its securityholders.
Service providers to principal distributors and participating dealers will be subject to the existing deadlines for transmitting orders for purchases and redemptions as well as to existing disclosure and operational requirements for client trust fund accounts. The amendments clarify that in the context of fund mergers, the prospectus for the continuing fund need only contain financial information about the continuing fund.
Transition and Timing
The amendments are not subject to a further comment period and are expected to come into effect on December 31, 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 December 31, 2004. However, the securities regulators will consider applications for exemptive relief for fund-on-fund structures which do not comply with the new rules.
Copies of the amendments to NI81-101 and NI81-102 are available on the OSC’s Web site at
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.