Canada: CSA Amendments To Alternative Mutual Funds Framework

Last Updated: November 5 2018
Article by Geoffrey Cher, Ronald Schwass and Nick Gray


On October 4, 2018, the Canadian Securities Administrators (the "CSA") adopted amendments (collectively, the "Amendments") to a number of national instruments governing the operation and offering of retail investment funds in Canada. Subject to ministerial approval requirements (which are not a guaranteed certainty these days), the Amendments will come into force on January 3, 2019.

The Amendments represent an important development for the investment fund industry, both for fund sponsors seeking new avenues to grow assets under management and for investment advisors struggling to provide investment options to their clients that are uncorrelated with traditional fixed income and equity markets.

The Amendments follow over five years of consultations by the CSA with investment fund industry stakeholders seeking to assess whether the existing regulatory framework sufficiently addressed product and market developments while ensuring sufficient levels of investor protection.The Amendments are the final instalment of the CSA's Modernization of Investment Fund Product Regulation Project, which updates investment fund rules implemented in the early 2000s.

Summary of Changes

1. "Alternative Mutual Fund" replaces the term "Commodity Pool" and any investment fund previously regulated as a commodity pool by National Instrument 81-104 – Commodity Pools ("NI 81-104") must comply with the Amendments which are largely housed as changes to National Instrument 81-102 - Investment Funds ("NI 81-102").

2. There has been considerable change in the investment restrictions applicable to mutual funds, alternative mutual funds and non-redeemable investment funds under the Amendments. In general, the investment restrictions for mutual funds have been liberalized, the investment restrictions for alternative mutual funds have been documented and the investment restrictions for non-redeemable investment funds have been narrowed. (See below under "Key Impacts").

3. Alternative mutual funds will continue to need to limit their distribution through mutual fund dealers that can meet the heightened proficiency requirements set forth in NI 81-104 currently applicable only to commodity pools. This requirement could materially narrow the investment advisors that can access these products for their clients.

4. The Amendments bring alternative mutual funds fully within the offering and continuous disclosure regime applicable to mutual funds. Certain additional information must be included in offering and continuous disclosure obligations to highlight that a particular fund is either an alternative mutual fund or a non-redeemable investment fund.

Key Impacts

1. Mutual Funds - With the liberalization of rules for mutual funds, retail investors and their advisors will shortly have some important new tools to diversify fixed income and equity portfolios better sheltering investors from historical volatility in traditional asset classes. The changes for mutual funds under the Amendments include codification of existing relief and expansion of the use of certain investment techniques. For example, mutual funds will be permitted to invest up to 10% of their net assets in an alternative mutual fund or a non-redeemable investment fund, which is also governed by NI 81-102.

2. Alternative Mutual Funds - Even greater latitude to engage in certain portfolio techniques and asset classes will exist for alternative mutual funds to those that will apply to mutual funds. For example, alternative mutual funds may invest up to 20% of their net assets in securities of a single issuer (versus 10% for a mutual fund). In addition, alternative mutual funds may invest up to 100% of net assets in another investment fund subject to NI 81-102. Pursuant to section 2.6(2) NI 81-102, alternative mutual funds may borrow cash up to a limit of 50% of their net assets for investment purposes. Subject to certain limits, alternative mutual funds may sell short securities with a market value of 50% of net assets, which is an increase from 20% of net assets that mutual funds, including commodity pools, may currently undertake. An alternative mutual fund may have aggregate exposure to cash borrowing, short selling and specified derivatives of 300% of the net assets of the fund. In particular, section 2.9.1 of NI 81-102 provides:

"For the purposes of subsection (1) [the cap], an alternative mutual fund or non-redeemable investment fund's aggregate gross indebtedness is the sum of the following, divided by the fund's net asset value:

  • (a) The aggregate value of the alternative mutual fund's or non-redeemable investment fund's outstanding indebtedness under any borrowing agreements for which subsection 2.6(2) applies;
  • (b) The aggregate market value of all securities sold short by the alternative mutual fund or non-redeemable investment fund as permitted by section 2.6.1; and
  • (c) The aggregate notional value of the alternative mutual fund's or non-redeemable investment fund's specified derivatives positions, minus the aggregate notional amount of the specified derivative positions that are hedging transactions."

This aggregate limit received significant commentary from the investment fund industry and it is helpful that the CSA agreed to introduce the aggregate notional value for specified derivative positions that are for hedging transactions. Notably, the very broad definition of "hedging" for the purposes of NI 81-102 has remained intact. This will have an important impact in permitting a number of fixed income and equity arbitrage strategies to be available to retail investors. Finally, alternative mutual funds may not invest more than 10% of net assets in "illiquid assets"—the current level applicable to mutual funds.

3. Non-redeemable investment funds - The CSA have extended virtually all of the investment restrictions applicable to alternative mutual funds to non-redeemable investment funds rather than permitting non-redeemable investment fund products to flourish by allowing fund sponsors and investment banking professionals to develop new asset classes and investment techniques unfettered by regulation of investment techniques as was urged by many in the industry. Most importantly, the aggregate cap on borrowing, short selling and specified derivatives will mean that product innovation will need to occur through exempt investment fund and public non-investment fund offerings, only some of which will be available to retail investors. This is arguably the most disappointing development arising from the Amendments.

Next Steps

At least six fund sponsors have made filings of a preliminary prospectus for one or more alternative mutual funds. A number of other fund sponsors are rumoured to be launching offerings shortly. If an alternative mutual fund offering is seeking to file a final prospectus prior to January 3, 2019, an exemptive relief application (and related filing fee) must be made. CSA Staff have advised that fund sponsors can expect exemptive relief to be granted by the CSA if the form of the requested relief is identical to the Amendments.

Another closely scrutinized area is the transitional provisions under the Amendments. Since the Amendments purport to limit the operations of certain non-redeemable investment funds already in existence, the intent and scope of section 1.2(5) of NI 81-102 will be critical in the coming months. It provides:

"Despite paragraph 1(a.1), the following provisions do not apply to a non-redeemable investment fund that was established before October 4, 2018, unless the fund has filed a prospectus for which a receipt was issued after that date:

  • (a) Sections 2.1 and 2.4;
  • (b) Paragraphs 2.6(1)(a), (b) and (c), and subsection 2.6(2), and
  • (c) Sections 2.6.1 [short sales], 2.6.2 [total borrowing and short sales] and 2.9.1 [total borrowing, short selling and specified derivatives]."

Currently, successful non-redeemable investment funds that are able to access the marketplace will offer additional securities by way of a long form prospectus, short form prospectus or pricing supplement to a shelf prospectus. It is not clear why the transitional rules prohibit future offerings by well-established non-redeemable investment funds utilizing certain of these funding arrangements.


After five years of CSA consultation with stakeholders in the investment funds industry, retail investors will finally have some investment products broadly available that will assist them in protecting their savings from future fixed income and equity market downturns. It is hoped that the CSA will be open to "tweaks" to the Amendments as the investment fund industry proves over time that it is able to provide well-constructed, well-disclosed alternative mutual fund products. For example, if investment fund portfolios operate under the current regulatory regime (as amended by the Amendments) and provide excellent risk/reward results in uneven markets, it is hoped that investment restrictions for either or both alternative mutual funds and non-redeemable investment funds could be further liberalized.

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.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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