Canada: Recent Developments in the Canadian Structured Products Market

Last Updated: June 22 2006
Most Read Contributor in Canada, November 2017

Launching a Closed-End Investment Fund

The past few years have seen a number of mutual fund managers enter into the structured product marketplace in Canada. The structured product marketplace is growing quickly; the TSX had 333 retail structured products listed at the end of March 2006 with a market value of more than $53 billion, compared to 93 listings and a value of $12.1 billion five years ago. Some key reasons why the structured product market is presently thriving are:

  • Structured products provide a mutual fund manager with access to a different distribution channel and a potentially different set of investors
  • Structured products can provide for a much more flexible investment mandate, including greater use of derivatives and leverage
  • Compared to mutual funds, structured products may be structured without concern for the detailed rules that apply to mutual funds.

Some of the most significant issues facing the structured product marketplace in Canada today are: regulatory scrutiny; governance; and continuous disclosure.

CSA Examining Principal Protected Notes

At a recent securities conference, David Wilson, Chair of the OSC, announced that the Canadian securities regulators plan to review the appropriateness of the prospectus exemption granted to principal protected notes. In particular, the regulators are concerned about the suitability of this exemption for complex structured products sold to retail investors. Many of the financial institutions that sell principal protected notes take the position that they are bank deposits and are therefore not a "security" under securities legislation. The CSA will likely closely examine this conclusion and may consider expanding the definition of a "security". At this point, no further details are available, but we are monitoring this regulatory initiative and will let you know of any important developments.

Governance of Structured Products

Proposed National Instrument 81-107 Independent Review Committee for Investment Funds is expected to be published in final form during the summer 2006. When effective, NI 81-107 will apply to most structured products and, based on current expected timing, will require fund managers to establish independent review committees for these funds by early 2007. Managers that offer both mutual funds and structured products will want to consider putting in place a governance regime that works for all of their investment funds.

Continuous Disclosure Requirements of NI 81-106 – Exemptive Relief Obtained

The continuous disclosure requirements of National Instrument 81-106 Investment Fund Continuous Disclosure apply to all investment funds that are reporting issuers. This includes most structured products. A timetable of the main disclosure and filing requirements for closed-end investment funds under NI 81-106 accompanies this Advisory.

CONTINUOUS DISCLOSURE RULES FOR CLOSED-END INVESTMENT FUNDS

NI 81-106

   

Deadlines for closed-end funds with year ends of:

 
 

June 30

September 10

December 31

Financial Statements and Management Report of Fund

Performance1

     

Prepare and file annual audited financial statements and management report of fund performance [Form 81-106F1, Part B] within 90 days of financial year-end2

By September 28

By December 29

By March 31 [March 30 in leap years]

Prepare and file semi-annual financial statements and management report of fund performance [Form 81-106F1, Part C] within 60 days of end of most recent semi-annual period

By March 1 [February 29 in leap years] for semi-annual period ending December 31

By May 30 for semi-annual period ending March 31

By August 29 for semi-annual period ending June 30

Summary of Investment Portfolio

     

Prepare quarterly and post to website, if any, but not file, within 60 days of quarter-end [other than for the financial year-end and interim period, when the summary is included in the annual and interim management reports of fund performance]

By May 30 [for financial quarter ending on March 31]

By November 29 [for the financial quarter ending on September 30]

By August 29 [for the financial quarter ending on June 30]

By March 1 [February 29 in leap years] [for the financial quarter ending on December 31]

By May 30 [for the financial quarter ending on March 31]

By November 29 [for the financial quarter ending on September 30]

Proxy Voting

     

Prepare policies and disclose in long-form prospectus and AIF; keep proxy voting record

Make proxy voting record available by August 31 [for annual period ending June 30]

Same as for June 30 year-ends

Same as for June 30 year-ends

Annual Information Form

     

Prepare and file NI 81-106 AIF [Form 81-101F2 with exceptions] within 90 days of financial yearend, if no current long-form prospectus; file all previously unfiled material incorporated by reference in AIF

By September 28

By December 29

By March 31 [March 30 in leap years]

1 Send financial statements and management reports of fund performance to all registered and beneficial securityholders by filing deadline OR send requests for standing instructions or annual mailing instructions within a reasonable time before first mailing (obtain from all registered and beneficial securityholders one-time "standing instructions" and send annual reminders thereafter OR obtain annually from all registered and beneficial securityholders delivery instructions). Annual instructions cannot be requested if standing instructions have already been obtained. Obtain beneficial holder information using procedures in National Instrument 54-101, unless information for beneficial holders is known.

2 Must send first annual management report of fund performance to all registered and beneficial securityholders by the filing deadline, with an explanation of the new disclosure requirements.

STRUCTURED PRODUCTS – SELECTED REPRESENTATIVE TRANSACTIONS FOR 2004, 2005 AND 2006 (1ST QUARTER)

Date

Issuer

Amount Raised

BLG Client

Type of Transaction

March 2006

Copernican World Banks Income and Growth

$50 million

Issuer and its manager, Copernican Capital Corp.

Closed-end investment fund, IPO

March 2006

Oil Sands Sector Fund

$400 million

Issuer and its manager, Markland Street Asset Management Inc.

Closed-end investment fund, IPO

Feb. 2006

Acuity Diversified Total Return Trust

$65 million

Issue and its manager, Acuity Funds Ltd.

Closed-end investment fund, IPO

Feb. 2006

Diversified Preferred Share Trust

$180 million

Issuer and its administrator, Sentry Select Capital Corp.

Closed-end investment fund IPO

Oct. 2005

Acuity Multi-Cap Total Return Trust

$119 million

Issuer and its manager, Acuity Funds Ltd

Closed-end investment fund, IPO

Sept. 2005

Sentry Select FIDDAC U.S. Mortgage Trust

$65 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

Sept. 2005

Sentry Select Diversified Income Trust

$244 million

Issuer and its manager, Sentry Select Corp.

Closed-end investment fund, IPO

July 2005

Sentry Select Commodities Income Trust

$176 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

July 2005

International Financial Income and Growth Trust

$25 million

Issuer and its manager, AIC Limited

Closed-end investment fund, IPO

April 2005

Sentry Select MBS Adjustable Rate Income Fund II

$323 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

Feb. 2005

Acuity Focused Total Return Trust

$740 million

Issuer and its manager, Acuity Funds Ltd

Closed-end investment fund, IPO

Feb. 2005

Premier Value Income Trust

$229 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

Feb. 2005

Global Banks Premium Income Trust

$52 million

Issuer and its manager, AIC Limited

Closed-end investment fund, IPO

Dec. 2004

MSP Maxxum Trust

$108 million

Issuer and its manager, Mackenzie Financial Corporation

Closed-end investment fund, IPO

Dec. 2004

MBS Adjustable Rate Income Fund

$122 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

Nov. 2004

Flaherty & Crumrine Investment Grade Fixed Income Fund

$450 million

U.S. Portfolio Manager

Closed-end investment fund, IPO

Sept. 2004

Multi Select Income Trust

$144 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

July 2004

Sentry Select Diversified Income Trust

$155 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

May 2004

Acuity All Cap & Income Trust

$75 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

May 2004

Alliance Split Income Trust

$50 million

Issuer and its manager Sentry Select Capital Crop.

Closed-end investment fund, IPO

May 2004

AIC Global Financial Split Corp.

$40 million

Issuer and its manager, AIC Limited

Closed-end investment fund, IPO

May 2004

Diversified Income Trust II

$47.5 million

Issuer and its manager, Acuity Funds

Closed-end investment fund, IPO

April 2004

Flaherty & Crumrine Investment Grade Preferred Fund

$300 million

U.S. Portfolio Manager

Closed-end investment fund, IPO

March 2004

Pro-Vest Growth & Income Fund

$228.1 million

Issuer and its manager, Sentry Select Capital Corp.

Closed-end investment fund, IPO

Jan. 2004

Acuity Growth & Income Fund

$136 million

Issuer and its manager, Acuity Funds Ltd.

Closed-end investment fund, IPO

In February 2006 BLG applied on behalf of a number of limited partnerships and income trusts that are involved in the funding of mutual fund deferred sales charge commissions ("DSC Funding Vehicles") for relief from a number of the disclosure and filing requirements of NI 81-106. The CSA granted the requested relief in early April 2006. As a result and subject to certain conditions, each of these DSC Funding Vehicles is exempt from the requirements to:

  • include a statement of changes in net assets and a statement of investment portfolio in its annual and interim financial statements
  • file and deliver annual and interim management reports of fund performance
  • prepare and post on its website quarterly portfolio disclosure
  • file an annual information form
  • establish and disclose proxy voting policies and maintain and make available its proxy voting record.

BLG’s Experience in the Structured Product Marketplace

Our Investment Management Group has been involved in many leading edge transactions in the structured products market in Canada. The accompanying list of selected transactions is representative of the types of transactions in which BLG has participated over the last couple of years. By being creative, persuasive and flexible, we have provided innovative business solutions and have helped our clients achieve their business objectives. We are monitoring regulatory developments in this area and will make information available to you on a regular basis.

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.

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