Canada: CSA Release Proposals Under Phase 2 Of Fund Modernization Project – Implications For Closed End Funds And Alternative Funds

Last Updated: June 12 2013
Article by Pierre-Yves Châtillon, Tracy L. Hooey and Daniel Fuke


In the course of their ongoing review of publicly offered investment funds, the Canadian Securities Administrators (CSA) published on March 27, 2013 a Notice and Request for Comments on amendments to National Instrument 81-102 Mutual Funds (NI 81-102) and consequential amendments to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and its Form 41 102F2 (the 81-102 Proposals).  These amendments introduce core operational requirements for publicly offered non-redeemable "closed-end" investment funds (CEFs) (other than scholarship funds) and related disclosure changes.  Comments on the 81-102 Proposals are due on or before June 25, 2013.

This review is part of the Fund Modernization Project, a mandate of the CSA to consider whether product and market developments in the Canadian investment fund industry are being adequately addressed by the current regulatory regime.

Phase 1 of the Fund Modernization Project is completed and addressed primarily publicly offered mutual funds by amending NI 81-102 and National Instrument 81-106 Investment Funds Continuous Disclosure (NI 81 106).

The CSA have now initiated Phase 2 of the Fund Modernization Project which attempts to harmonize regulatory regimes governing various forms of investment funds and addresses issues of market efficiency and uneven investor protection and fairness among these products.

This Notice and Request for Comments focusses on CEFs.  It proposes core operational requirements similar to those applicable to publicly offered mutual funds including in particular investment restrictions, conflict of interest requirements and securityholder approval for fundamental changes.

The CSA's proposal is based on the premise that the structural differences between conventional mutual funds and CEFs are not significant enough to justify from a policy standpoint the absence of investment restrictions for publicly offered CEFs.

In order that CEFs may continue to operate in a manner that offers a wide range of investment choices to investors, the CSA propose that CEFs either (i) comply with the new NI 81-102 requirements (this would accommodate funds with more passive investment strategies), or (ii) in order to accommodate CEFs with more complex or alternative investment strategies, comply instead with an expanded National Instrument 81-104 Commodity Pools (NI 81-104) for "Alternative Funds", as that term is introduced in the Notice.  Draft amendments to NI 81-104 were not proposed in the Notice.

Nature of Changes Applying to CEFs

Pursuant to the 81-102 Proposals, the CSA have proposed making CEFs (other than Alternative Funds) subject to NI 81-102.  For the most part, NI 81-102 would apply equally to mutual funds and CEFs, but the CSA recognize that the inherent differences between the two types of investment funds warrants distinct regulation in certain circumstances.  Below we have described certain of the significant changes to CEFs that would result if the 81-102 Proposals were adopted. 

  • Investments in Physical Commodities - CEFs would be restricted in making direct or indirect investments in physical commodities to 10% of NAV at the time of purchase.
  • Leverage and Fund of Fund Structures - The 81-102 Proposals would allow CEFs to borrow up to 30% of their NAV (greater than the 5% of NAV limitation to which mutual funds are subject).  However, CEFs would only be permitted to borrow from certain Canadian financial institutions. As a result, CEFs would be prohibited from investing in other CEFs but could, however, invest in mutual funds subject to the same conditions currently prescribed for mutual funds.
  • Conflicts of Interest - CEFs would be subject to the rules relating to conflicts of interest that currently apply to mutual funds, including restrictions on investing in securities of related issuers and restrictions on purchasing securities from related parties.
  • Organizational Costs - Investment fund managers would be prohibited from passing on the organizational costs of a CEF to the fund itself.  The CSA have proposed, however, that underwriting or agency fees in connection with a CEF's initial public offering would not be considered organizational costs for this purpose.
  • Securityholder and Regulatory Approvals - CEFs would be required to obtain securityholder approval in respect of certain material events, including an increase in fees and a change in fundamental investment objectives, similar to the current rules applicable to mutual funds.  The 81-102 Proposals would also require securityholder approval in respect of a conversion from a mutual fund to a CEF or vice versa, as well as in respect of an investment fund changing to an issuer that is not an investment fund.  Conventional flow-through limited partnerships and CEFs that are formed with the intention of converting to a mutual fund upon the occurrence of a specified event would be exempt from the requirement to obtain securityholder approval. In addition, the rules applicable to mutual funds in respect of securities regulatory authority approval for certain material events would extend to CEFs. 
  • Incentive Fees - Incentive fees of CEFs would be required to be based on the total cumulative return of the fund as compared to a specific benchmark or index.
  • Issuance/Redemptions at NAV - The issuance and redemption of CEF securities could be effected at a price no greater than or less than NAV, respectively, in order to prevent dilution to securityholders.  This requirement would mean that CEFs could no longer undertake rights or warrant offerings. 
  • Sales Communications - The 81-102 Proposals would make CEFs subject to the rules applicable to mutual funds in respect of sales communications, including requirements in respect of disclaimer, fee and performance history disclosure.  CEFs would continue to be subject to the restrictions on sales communications during the prospectus waiting period set out in NI 41-101.

Alternative Funds

As discussed above, the CSA are considering amendments to NI 81-104 to include both mutual funds and CEFs that focus on asset classes or use investment strategies not permitted by the proposed amendments to NI 81-102.  The CSA did not include proposed amendments to NI 81-104 in the Notice but rather only a summary of key elements of a proposed regulatory framework, regarding which they have sought feedback.  Some of the key elements the CSA are considering are listed below.

  • the replacement of the term "commodity pool" with "Alternative Fund", which would include both mutual funds and CEFs;
  • Alternative Funds would be permitted greater concentration limits than funds subject to NI 81-102, but the CSA are seeking feedback on what limit would be appropriate;
  • whether Alternative Funds should be permitted to borrow cash up to a limit of 50% of NAV at the time of borrowing;
  • whether Alternative Funds should be permitted to sell securities short beyond the limits in NI 81-102, including permitting short sales of securities of a single issuer to 10% of NAV at the time of the short sale and permitting the aggregate market value of all securities sold short by an Alternative Fund to be up to 40% of NAV at the time of purchase, as well as an exemption from the cost cover requirements of NI 81-102;
  • restricting Alternative Funds from providing returns of more than two times the existing daily positive or inverse return of an underlying interest;
  • whether the exemption in NI 81-104 from the requirement to comply with the counterparty exposure limits should be repealed for Alternative Funds;
  • limiting total leverage for Alternative Funds (whether through borrowing, short selling, derivatives transactions and investing in underlying funds) at all times to 3:1, as well as considering other methods of measuring leverage;
  • prohibiting the payment by an Alternative Fund of its organizational costs;
  • whether further proficiency requirements should apply to dealing representatives who sell Alternative Fund securities; and
  • the introduction of specific requirements relating to naming, prospectus disclosure, sales communications, continuous disclosure (including text box disclosure on the prospectus cover page and in sales communications), drawdown reporting and maximum and average daily leverage levels.


The comment period regarding the 81-102 Proposals and the proposed re-design of NI 81-104 will close June 25, 2013.  The CSA anticipates finalizing certain aspects of the 81-102 Proposals in advance of others, including the proposed conflict of interest provisions, securityholder and regulatory approval requirements and custodianship requirements.  The proposed investment restrictions are inter-related with the re-design of NI 81-104 and accordingly are expected to be considered in conjunction therewith.

The CSA is also asking for feedback on what a reasonable time frame would be to enable CEFs to transition to the new regime of NI 81-102 or the alternative regime of NI 81-104.  

Action by Managers of Non-Redeemable Investment Funds

At this point, CEF  managers may wish to assess how the published proposed changes to NI 81-102 will impact their funds' structure and investment strategies and in particular:

  1. whether or not the fund's investment strategies, such as those involving investing in physical commodities or specified derivatives on physical commodities, fund of fund structures with other CEFs or the use of leverage through specified derivatives, can be achieved in compliance with the proposed NI 81-102; if not, the manager will have to consider, when changes to NI 81-104 are published, if the fund's investment strategies may fit into the proposed Alternative Fund regime;
  2. the fund manager will have to review its fund's constating documents to determine what formalities (including notices to security holders, formalities for security holder approval, preparation of disclosure documents for meetings) have to be met for the fund's structure to comply with the new requirements.  In this regard, managers will need to take into account the new securityholder approval requirements mandated by amended NI 81-102 and NI 81-104, once they come into force,  in addition to those of the fund's constating documents.

A link to the CSA Notice and Request for Comments is provided below:

The proposed changes will have a significant impact on how CEFs are operated.  The investment fund industry and investors in general are strongly invited to share their views on the issues the proposed changes to these products raise in the Canadian market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

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