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
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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