Canada: The CSA Extend Elements Of Mutual Fund Regulation To Closed-End Funds

On June 19, 2014, the Canadian Securities Administrators (CSA) published the final instalment of the amendments (Amendments) to National Instrument 81-102 (NI 81-102) and the Companion Policy 81-102 CP (CP) (and consequential amendments to other instruments) bringing to an end stage one of Phase 2 of the CSA's Modernization of Investment Fund Product Regulation Project (Modernization Project). The key components of the Amendments, first published for comment on March 27, 2013 (2013 Proposals), introduce core operational requirements and fundamental investment restrictions for closed-end funds (CEFs). Subject to transition and grandfathering provisions noted below, the Amendments will come into force on September 22, 2014.


The Amendments will extend certain "core" operational requirements, specifically, the Conflict of Interest Provisions (Part 4 of NI 81-102), Securityholder and Regulatory Approval Requirements for Fundamental Changes (Part 5 of NI 81-102) and Custodianship Requirements (Part 6 of NI 81-102) to CEFs. These changes were broadly supported by the industry in its responses to the 2013 Proposals and, given that these requirements typically already appear in CEFs' constating documents, will have little effect on the day-to-day operations of most CEFs.

The principal remaining operational amendments, including those relating to Redemptions (Part 10 of NI 81-102), Co-mingling of Cash (Part 11 of NI 81-102), Record Date (Part 14 of NI 81-102) and Securityholder Records (Part 13 of NI 81-102), were also generally applied and adhered to by most CEFs in the market, and accordingly, their adoption should have no practical effect on the day-to-day operations of CEFs.



The CSA adopted an investment restriction to limit a CEF's investment in any one issuer to 10% of the issuer's outstanding voting or equity securities. This amendment is said to be consistent with the "fundamental characteristics of investment funds," which is that a fund should not become actively involved in the management of its investee issuers. This change should have little effect on most CEFs as this restriction already appears in the constating documents of most CEFs. 

Syndicated Loans

With the introduction of paragraph 2.3(2)(c) of NI 81-102, the Amendments will prohibit CEFs from acquiring certain loan syndications or participations. This restriction will only apply where the purchase would require the CEF to assume responsibilities in administering the loan in relation to the borrower. Here again the CSA are of the view that those types of activities would not be consistent with the fundamental characteristics of publicly offered investment funds. This view has been long held by advisers to the industry, and accordingly, the Amendment will have no practical effect on the management of most CEFs.

Investments in Mortgages

New paragraph 2.3(2)(b) of NI 81-102 will prohibit CEFs from investing in mortgages, other than guaranteed mortgages. The CSA suggest that investing in mortgages may be akin to engaging in a lending business, which is generally outside the scope of portfolio management typically engaged in by publicly offered investment funds. Therefore, entities that wish to invest in mortgages will generally not be regulated as investment funds. However, CEFs that filed a prospectus before September 22, 2014, will be grandfathered, and no conversion/transition out of the investment fund regulatory regime will be required. Whether these entities will be able to complete follow-on offerings without first converting to a corporate issuer is unclear as, in their commentary, the CSA suggest that they would take that opportunity to re-engage the CEF in a discussion as to whether the issuer operates in a manner consistent with the fundamental characteristics of an investment fund.

Fund of Funds

CEFs will be permitted to invest in other investment funds provided that the investee fund is subject to, or complies with the provisions of, NI 81-102 and is a reporting issuer in at least one Canadian jurisdiction in which the CEF is a reporting issuer. This section would preclude the investment by CEFs in private investment funds that by their nature do not operate in compliance with NI 81-102. However, this section would not preclude investment in private equity funds or other entities that are not subject to regulation as investment funds.

In addition, NI 81-102 has been amended to clarify that a mutual fund is not permitted to invest in a CEF. For mutual funds that currently invest in CEFs, the CSA will consider exemptive relief on a case-by-case basis.


Other than the investment restrictions noted above, the CSA have elected to defer consideration of investment restrictions for CEFs until the next stage of the Modernization Project, which will involve the redesign of National Instrument 81-104 to create a more comprehensive framework for what the regulators are referring to as "alternative funds" (Alternative Funds Framework). At this stage, the Alternative Funds Framework remains highly conceptual, and accordingly, it is unclear just how problematic its implementation will be for CEFs.

No timetable has been given for the development of the Alternative Funds Framework. Importantly, the CSA telegraphed that they would consider grandfathering with respect to new investment restrictions that are imposed under the Alternative Funds Framework.

The proposed investment restrictions on CEFs/alternative funds noted in the 2013 Proposals that have been deferred include: 

  • A concentration restriction that would permit a CEF to invest a larger percentage of its net asset value (NAV) in the securities of a single issuer than is permitted under NI 81-102
  • A limit that would cap the borrowing of cash at 50% of NAV of the CEF
  • A short-selling rule that would cap short exposure to any one issuer to 10% of NAV of the CEF and aggregate short exposure to 40% of NAV of the CEF, each calculated at the time of the short sale (and a related provision would exempt the CEF from a requirement to hold cash cover pursuant to NI 81-102)
  • A leverage limit (aggregating leverage employed by underlying funds) of 3:1 to be observed at all times


The CSA adopted changes to Part 9 of NI 81-102 that deal with the sale of securities subsequent to a CEF's initial public offering. These changes preclude the issuance of rights, warrants or other securities exercisable into securities of the fund. While this type of offering was being used less frequently, many managers, with the approval of their IRCs felt that there were circumstances where the benefits associated with improved liquidity and reduced management expense ratios outweighed the potential dilution that can result from these offerings. The CSA are of the view that the potential harm to securityholders by such dilution "generally" outweighs any benefit of such offerings. However, in their commentary on the industry responses to the 2013 Proposals, the CSA suggest that, in limited and exceptional circumstances, the CSA may consider applications for exemptive relief if a CEF can demonstrate market necessity and where steps are taken to mitigate any potential dilution and conflicts of interest for the CEF so that the benefits of the offering outweigh any costs of dilution.


The CSA introduced section 9.3(2) of NI 81-102 to address dilution arising in connection with the issuance of securities by CEFs following their initial public offering by imposing minimum requirements on the issue price of such securities. While it appears to propose two tests that would need to be met in connection with the pricing of follow-on offerings, the CP suggests that market practice (which requires that the issue price be set so as to avoid dilution based on the prevailing NAV at the time the price is set) will satisfy the concerns underpinning this Amendment.


The Amendments will require that the manager bear the cost of the conversion of a CEF to an open-end fund in all circumstances, even if that change is disclosed in a CEF's prospectus. The Amendments will also require securityholder approval for a conversion, even if the conversion has been disclosed in the CEF's prospectus on the theory that securityholders should have a vote on fundamental changes no matter how they are effected. The CSA also note that requiring a securityholder vote on a conversion will mitigate the potential for regulatory arbitrage associated with converting a CEF to a mutual fund within a short period of time following its launch.


The securities lending and repurchase transaction provisions applicable to public mutual funds will be extended to CEFs beginning on September 21, 2015. Consequently, in order to lend out portfolio securities or enter into repo transactions, a CEF will be required from that date to (1) retain its custodian or a sub-custodian to act as its securities lending or repo agent pursuant to a written agreement covering prescribed matters, (2) ensure that permitted collateral or cash in the prescribed amounts to eliminate counterparty credit risk is received in respect of each transaction, (3) not reinvest or reuse collateral or cash received from counterparties other than in permitted short-term investments or transactions, (4) ensure that a written agreement governing each transaction implements the requirements set out in the applicable sections of NI 81-102, (5) establish controls and policies (including in respect of permitted counterparties) and maintain records in accordance with Section 2.16 of NI 81-102, and (6) issue a press release and provide the required notice to investors of the commencement of the relevant securities lending or repo activities if prescribed disclosure has not been included in all prior prospectuses of the fund.

In addition, the total amount of securities that may be loaned out or sold by a CEF under all outstanding securities loans and repo transactions may not exceed 50% of the NAV of the CEF. Funds with forward agreements will be particularly affected since these funds typically hold a basket of Canadian securities that is available for lending to offset the cost of the forward transaction typically with minimal increased credit exposure for investors. The limitation on securities lending will impact the cost of these arrangements beginning on September 21, 2015, when all of the Amendments related to securities lending and repo transactions come into force. Given the fact that securities loans are fully collateralized, this 50% cap on lending is a conservative approach. Interestingly, due to the fact that the Amendments now provide that the 50% cap applies based on the NAV of the fund as opposed to the "total assets" of the fund, it would be possible where the CEF's NAV increases significantly as compared to the value of the Canadian share basket, to lend out 100% of the shares comprising the share basket.

Furthermore, in addition to disclosure currently required regarding the value of securities loaned out and collateral held by an investment fund, the Amendments provide that additional disclosure is required to be given regarding persons entitled to receive payments in connection with securities lending transactions and the amounts of these payments.


The matter of who must bear offering expenses, which was not described in CSA Staff Notice 81-322 that introduced Phase 2 of the Modernization Project in May 2011, has been deferred and its scope significantly scaled back from the blanket application reflected in the 2013 Proposals. Motivated by concerns relating to "regulatory arbitrage," the CSA suggest that, concurrently with publishing the Alternative Funds Framework, they may address the matter of offering expenses in connection with CEFs that convert to mutual funds after a "short period."


While the CSA have elected to defer the discussion of limits on illiquid assets, including the definition of illiquid assets, the CSA have added commentary in the CP that reflects their concern with respect to these types of assets. The CP recommends the establishment of a risk management policy that considers appropriate limits on illiquid assets that includes procedures by which the CEF will measure, monitor and manage liquidity. Given that the CSA are of the view that illiquid assets are more difficult to value, CEFs that hold significant quantities of illiquid assets should expect comments and questions relating to these issues going forward.


The Modernization Project is a fundamental rethink by the CSA of the regulation of publicly offered investment funds. Pursuant to the Modernization Project, the CSA are considering whether the current regulatory approach sufficiently addresses product and market developments in the Canadian investment fund industry and continues to adequately protect investors.

Phase 1 of the Modernization Project focused primarily on publicly offered mutual funds and was completed when amendments to NI 81-102 came into force in April and October 2012. Specifically, the Phase 1 amendments (1) codified certain types of exemptive relief frequently granted in recognition of market and product developments, such as allowing mutual funds to engage in short selling subject to certain standard restrictions, (2) expanded the types of "cash cover" that mutual funds could hold in compliance with anti-leverage investment restrictions, and (3) introduced new provisions to address the unique features of ETFs. The Phase 1 amendments are described in our February 2012 Blakes Bulletin: CSA to Complete Phase 1 of Modernization Project and Amend Investment Fund Rules.

In May 2011, the CSA published CSA Staff Notice 81-322 Status Report on the Implementation of the Modernization of Investment Fund Product Regulation Project and Request for Comment on Phase 2 Proposals (CSA Staff Notice 81-322), which, among other things, provided greater details on the scope and timing of Phase 2 of the Modernization Project. The main objective of the Phase 2 proposals was to address the issues that arise out of the different regulatory regimes that apply to different types of publicly offered investment funds.

On March 27, 2013, the CSA published for comment proposed amendments to securities rules governing investment funds. The 2013 Proposals comprised stage one of Phase 2 of the Modernization Project.

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
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