Canada: Canadian Securities Administrators Propose New Requirements For Closed-End Funds And Alternative Fund Framework

Last Updated: April 13 2013
Article by Kimberly Poster, Jason A. Chertin and Stephen Genttner

Phase 2 of the modernization of investment fund product regulation project

The Canadian Securities Administrators (CSA) published for comment proposed changes to the regulatory regime governing investment funds on March 27, 2013. The proposed changes are primarily focused on amendments to National Instrument 81-102 (NI 81-102) that are aimed at bringing non-redeemable investment funds (or closed-end funds) into the regulatory framework that governs open-end mutual funds and introduces core operational requirements and investment restrictions on closed-end funds. The CSA also seek feedback on an "alternative fund framework" that would see the overhaul of National Instrument 81-104 (NI 81-104), which currently governs commodity pools, as a regulatory regime for both open-end mutual funds and closed-end funds that focus on alternative asset classes or use alternative investment strategies not permitted by NI 81-102 as proposed to be amended.

The publication of these proposed changes marks the "first stage" of Phase 2 of the CSA's modernization of investment fund product regulation project (Modernization Project) that has been underway since 2010. Phase 1 of the Modernization Project, which came into force in 2012, focused on, among other things, publicly offered mutual funds and the codification of frequently-granted exemptive relief. With Phase 2, the CSA seek to address perceived market efficiency, investor protection and fairness issues that arise out of the different regulatory regimes that apply to various investment products with a view to streamlining the regulation of publicly-offered investment funds.

The proposed amendments also impact open-end mutual funds.

The following is a summary of some of the significant changes proposed by the CSA.

Key proposals affecting closed-end funds

IPO offering expenses – no longer borne by the fund?

One proposal intended to level the playing field with other types of investment funds is a proposed prohibition on closed-end funds bearing the organizational expenses of an initial public offering (IPO). This change would require fund managers to bear the costs of launching a new product, which would be a change from the prevailing market practice of having the fund pay the organizational costs from the proceeds of its IPO. In its commentary, the CSA recognize that this change would impact managers that cannot independently finance organizational costs and that smaller managers may be unable to launch new products. While the shifting of financial risk is intended to align the interests of managers and investors, and possibly lead to cost efficiencies when launching new funds, in recognition of the impact on fund managers, the CSA are specifically seeking comments on the cost-benefit considerations associated with this proposal and whether specific components of IPO costs might be appropriately allocated between the manager and the fund.

Core investment restrictions

The CSA proposal sets out several investment restrictions that would apply to closed-end funds, which are derived from those applicable to open-end mutual funds, including restrictions:

  • prohibiting a closed-end fund from investing more than 10% of its net asset value in a single issuer (although "fixed portfolio exchange-traded funds" would be permitted to exceed this limit with respect to fixed portfolios of publicly traded equity securities);

  • prohibiting a closed-end fund from investing more than 10% of its net asset value in physical commodities (and specified derivatives with underlying interests in physical commodities);

  • limiting a closed-end fund's investment in illiquid assets (as defined in NI 81-102) to 10% of its net asset value at the time of investment, and 15% thereafter;

  • prohibiting a closed-end fund from borrowing cash in excess of 30% of its net asset value, limiting the sources of cash borrowing to "Canadian financial institutions", and prohibiting a closed-end fund from obtaining leverage through specified derivatives or short selling; and

  • with respect to "fund-of-fund" structures, prohibiting investment in other non-redeemable investment funds and extending existing restrictions in NI 81-102 (applicable to mutual funds) to closed-end funds where a fund-of-fund structure involves underlying mutual funds.

Operational requirements

Several of the proposed changes involve the extension of NI 81-102 operational requirements (applicable to mutual funds) to non-redeemable funds with certain modification or alternative requirements. These include the extension of:

  • the conflicts of interest provisions in Part 4 of NI 81-102;

  • the custodial requirements in Part 6 of NI 81-102 which would be similar to the custodial requirements currently applicable to most closed-end funds under National Instrument 41-101;

  • the provisions governing performance fees in Part 7 of NI 81-102 (i.e., requiring performance to be measured against a benchmark or publicly-available index reflecting the market sector in which a fund invests);

  • the provisions of NI 81-102 relating to securities lending, repurchase and reverse repurchase transactions and limiting the aggregate market value of securities loaned or sold to no more than 50% of a fund's net asset value;

  • the securityholder and regulatory approval requirements of Part 5 of NI 81-102 with respect to changes that impact a fund or its management; and

  • the rules governing sales communications in section 15 of NI 81-102, including the calculation of performance data (though allowing the presentation of past performance data for funds that convert to mutual funds from closed-end funds).


The CSA seek to require closed-end funds to provide a reminder notice to investors with respect to the procedures for exercising annual redemption rights, to pay redemption proceeds not more than 15 business days following the redemption date, and to not redeem securities at a redemption price exceeding the net asset value on the redemption date. The proposals would permit closed-end funds to suspend redemptions in accordance with the requirements of NI 81-102 that apply to open-end mutual funds. The CSA currently take the view that funds redeemable on demand at net asset value no more than once a year are considered to be non-redeemable investment funds. Of note, the CSA are seeking comment as to whether they should reconsider their position.

Prohibition on warrant offerings

The proposal would prohibit an investment fund from issuing warrants, rights or other specified derivatives in which the underlying interest is a security of the fund. The CSA take the position that such issuances could dilute the value of securities of a fund held by investors who do not exercise the warrants. The CSA have expressed the view that warrant offerings may "appear to be coercive, with securityholders obligated to make an additional investment or face the risk of dilution".

Fund conversions and mergers

The CSA propose to mandate securityholder approval for the implementation of changes to the nature of an investment fund, specifically with respect to the conversion of a closed-end fund to a mutual fund, as well as the conversion of an investment fund to an issuer that is not an investment fund. Closed-end funds with automatic conversion features would be exempt from the securityholder approval requirement if the fund has been structured since inception to convert to a mutual fund and certain conditions are met, including prospectus and sales communication disclosure of the conversion and prior notice to securityholders. In addition, exemptions may be available with respect to mergers and rollovers involving funds that have a limited life and that do not list or trade on a secondary market (e.g., flow-through limited partnerships) if certain disclosure and other requirements are met. Additional conditions are being proposed to allow mergers to be effected without securityholder and regulatory approval when a closed-end fund offers to redeem its securities at net asset value before the merger and the merger is effected at net asset value.

Under the proposals, a closed-end fund would be prohibited from bearing the costs and expenses associated with a merger or conversion.

Alternative fund framework

The CSA have not published specific amendments but are seeking comment on possible changes to NI 81-104 to create a framework for investment funds that focus on alternative asset classes or use alternative investment strategies. NI 81-104 currently exempts commodity pools (mutual funds that have adopted fundamental investment objectives that permit them to use or invest in specified derivatives or physical commodities in a manner that is not permitted by NI 81-102) from certain investment and operational restrictions of NI 81-102. The CSA also propose to replace the term "commodity pool" with "alternative fund". Although the structure of such an alternative fund framework remains unclear, the CSA seek feedback on several aspects of proposed amendments of NI 81-104, including:

  • permitting flexibility for an alternative fund with respect to the concentration restrictions of NI 81-102;

  • allowing investments by alternative funds in physical commodities and specified derivatives;

  • permitting fund-of-fund structures where the underlying funds are reporting issuers in the same jurisdiction as the alternative fund;

  • permitting cash borrowing by alternative funds of up to 50% of the fund's net asset value;

  • permitting short sales where short exposure to any one issuer is capped at 10% of an alternative fund's net asset value and aggregate short exposure is capped at 40% of the fund's net asset value;

  • exempting an alternative fund from the cash cover requirements of NI 81-102;

  • applying the current exemptions in NI 81-104 relating to the creation of leverage through specified derivatives to alternative funds;

  • repealing an existing exemption contained in NI 81-104 relating to counterparty credit exposure, the repeal of which would restrict an alternative fund from having a mark-to-market exposure under its specified derivatives positions with any one counterparty that is not an acceptable clearing corporation exceeding 10% of the fund's net asset value for a period of 30 days or more; and

  • the introduction of a total leverage limit for alternative funds of 3:1, based on the leverage calculation method currently specified in Form 41-101F2.

The alternative fund proposals also include disclosure requirements, such as mandating the use of the words "alternative fund" in the fund name, prescribing certain disclosure (bold and in a text box) on prospectus face pages and in marketing communications, and requiring enhanced continuous disclosure with respect to the use of leverage. The CSA are also considering increasing the seed capital requirements applicable to the launch of a new fund. Finally, they are considering the proficiency requirements that should apply to sales representatives selling alternative fund securities.

Timing and next steps

The CSA note that certain aspects of the proposals, particularly operational requirements such as those related to conflicts of interest, custodianship and securityholder and regulatory approval provisions, would be finalized in advance of other aspects such as proposed investment restrictions (which will be considered in conjunction with the implementation of the alternative fund framework and will likely come into force at a later date). Once finalized and brought into force, the following transition periods are proposed by the CSA:

  • an 18-month transition period for existing closed-end funds to comply with the new investment restrictions, while new closed-end funds would have to comply immediately upon inception;

  • an 18-month transition period for compliance with the performance fee provisions of Part 7 of NI 81-102; and

  • a six-month transition period for existing closed-end funds to comply with the sales communications provisions of Part 15 of NI 81-102.

In "stage two" of Phase 2 of the Modernization Project, the CSA will review the investment restrictions applicable to mutual funds to determine whether changes may be required in light of market and product developments.

The deadline for submitting comments to the CSA is June 25, 2013. Please contact a member of our Investment Funds & Asset Management Group listed below if you have any questions or seek assistance with the preparation of a comment letter.

This is the first of a series of bulletins and updates dealing with the CSA Modernization of Investment Fund Product Regulation Project.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2013 McMillan LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Kimberly Poster
Jason A. Chertin
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions