On February 12, 2015, the Canadian Securities Administrators
("CSA") published an update on the
proposal for a comprehensive regulatory framework for publicly
offered alternative investment funds ("Alternative
Funds Proposal"). The Alternative Funds Proposal is
the final phase of the CSA's ongoing effort to modernize
regulation of investment fund products ("Modernization
Phase 1 of the Modernization Project, which is now complete,
focused on mutual fund regulation. The first stage of Phase 2, also
in force, created certain investment restrictions and operational
requirements for non-redeemable investment funds
("CEFs"). As part of Phase 2, the CSA
first published the Alternative Funds Proposal in March 2013, but
later announced that the CSA would defer its review. In the second
stage of Phase 2, the CSA will review the Alternative Funds
Proposal as well as certain interrelated investment restrictions
that would also be applicable to CEFs, including restrictions on
investments in physical commodities, short-selling, the use of
derivatives and borrowing cash.
Public Commentary on Alternative Funds Proposal
The CSA did not publish a draft rule for the Alternative Funds
Proposal but rather posed certain questions for public comment.
Several themes arose from a significant number of public comments
received by the CSA.
Commentators wanted clarity on what differentiates a mutual fund
and a CEF from an alternative investment fund. Some commentators
proposed exemptive relief for mutual funds and CEFs that use
alternative strategies rather than requiring compliance with the
Alternative Funds Proposal.
Many commentators rejected the need for a naming convention for
alternative investment funds while others objected to the use of
"alternative fund" in the fund name as it could suggest
greater risk or complexity where it might not be warranted.
Commentators raised concerns regarding the creation of borrowing
limits for alternative funds as well as the proposed limitation on
borrowing solely from Canadian financial institutions for CEFs. In
the initial Alternative Funds Proposal, the CSA proposed a total
leverage ratio of 3:1 and sought feedback on whether there should
be a different limit applicable to alternative funds structured as
mutual funds as opposed to CEFs.
Some commentators also questioned whether leverage was a clear
indicator of risk and suggested that any restriction on leverage
should be considered in the context of the entirety of an
investment portfolio. Commentators also proposed that hedging
should not be included in a fund's use of leverage.
Some commentators suggested that the cash cover requirements
applicable to mutual funds under National Instrument 81-102
Investment Funds ("NI 81-102") would
discourage the use of short-selling. It is still an open question
whether short-selling will be considered as part of total
The CSA has proposed maintaining the exemptions from certain
investment restrictions in NI 81-102 that are currently available
for commodity pools under National Instrument 81-104 Commodity
Pools and proposed other investment restrictions for alternative
funds. Some commentators generally oppose investment restrictions
arguing that they would slow innovation and limit investor
The CSA stated that commentators were mixed on the proficiency
standards with some suggesting that higher proficiency requirements
would negatively impact distribution channels, significantly
limiting the availability of retail alternative funds to retail
investors. Others suggested that proficiency standards were needed
to ensure that those selling the products properly understood
It seems that the Alternative Funds Proposal is still at an
early stage and the CSA expects to complete their public
consultations by mid-2015. As we follow its development, it will be
interesting to see the extent to which the Alternative Funds
Proposal will draw from the experience in the United States with
so-called "liquid alternatives" under Investment Company
Act of 1940. Subsequent proposed amendments are expected to be
published for comment by the end of 2015.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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).