This "Phase 2" of the CSA's
Modernization of Investment Fund Product Regulation
Project involves significant changes to the regulation of
non-redeemable investment funds. Key elements of the proposals
include (i) extending the application of investment
restrictions under NI 81-102 to non-redeemable investment
funds; (ii) imposing a 10% concentration restriction
(with fixed portfolio ETFs permitted to exceed this limit);
(iii) limiting investments in physical commodities and
specified derivatives with underlying interests in physical
commodities; (iv) imposing a cash borrowing limit of up to
30% of NAV (and permitting borrowing only from
"Canadian financial institutions" and limiting
borrowing activities to cash borrowing only); and (v)limiting
investments in mortgages to guaranteed mortgages only. In addition,
dilutive securities issuances would be prohibited with specific
prohibitions on the ability to issue warrants or similar
Non-redeemable investment funds would also be prohibited from
investing in other non-redeemable investment funds (fund-of-funds)
while a larger portion of fund assets would be permitted to be
invested in illiquid assets. The proposals would also impose a
framework for securities lending, repurchases and reverse
repurchases similar to that applicable to mutual funds and
introduce new requirements for the manager to bear the
organizational costs of launching a new fund, as well as prescribe
requirements governing conflicts of interest and circumstances
where regulatory and/or securityholder approval will be required
for certain fund or management changes. Changes are also proposed
to requirements for custodianship of assets, redemptions and
prescribed prospectus disclosure.
While the proposals relate principally to non-redeemable
investment funds, some of the proposed amendments would also impact
The proposals form part of Phase 2 of the CSA's investment
fund modernization project.
Phase 1 of the project, which codified exemptive relief
frequently granted in recognition of market and product
developments, came into force in 2012. The purpose of Phase 2 is to
"identify and address any market efficiency, investor
protection or fairness issues" arising as a result of the
different regulatory regimes that apply to different types of
Included in Phase 2 is the creation of a more comprehensive
alternative fund framework through amendments to National
Instrument 81-104 Commodity Pools, which would apply to mutual
funds and non-redeemable investment funds that use alternative
investment strategies not be permitted under NI 81-102. While
specific amendments to NI 81-104 are not proposed at this time, the
CSA have raised a number of questions on which feedback is
The CSA is accepting comments on their proposals until June
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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