- Les Autorités canadiennes en valeurs mobilières (les ACVM) ont publié pour commentaires des modifications proposées (les modifications proposées) qui visent à réduire le fardeau réglementaire des fonds d’investissement.
- Les modifications proposées publiées dans l’Avis de consultation des ACVM Réduction du fardeau réglementaire des émetteurs qui sont des fonds d’investissement – phase 2, étape 1 visent à éliminer l’information redondante dans des documents de fonds d’investissement choisis, utiliser la technologie Web pour communiquer certains renseignements sur les fonds d’investissement, inscrire dans la réglementation les dispenses discrétionnaires couramment accordées et réduire au minimum le dépôt de documents pouvant contenir de l’information répétitive.
- Les modifications proposées font suite à l’examen par les ACVM du régime d’information actuel des fonds d’investissement, qui a permis de repérer les domaines devant faire l’objet d’une réforme.
Une traduction de ce billet sera disponible prochainement.
- The Canadian Securities Administrators (the CSA) have published for comment proposed amendments (the Proposed Amendments) intended to reduce the regulatory burden on investment funds.
- The Proposed Amendments published in CSA Notice and Request for Comment Reducing Regulatory Burden for Investment Fund Issuers – Phase 2, Stage 1 are intended to remove redundant information in selected investment fund disclosure documents, use web-based technology to provide certain information about investment funds, codify exemptive relief that is routinely granted and minimize filing requirements for certain duplicative documents.
- The Proposed Amendments follow the CSA’s review of the current investment fund disclosure regime which identified areas of focus for reform.
The Proposed Amendments
The CSA have organized the Proposed Amendments into eight separate workstreams:
- consolidate the simplified prospectus and the annual information form for conventional mutual funds, as these contain overlapping disclosure in many areas;
- require reporting investment funds to designate a publicly accessible qualifying website on which the investment fund intends to post regulatory disclosure; the website must be established and maintained either by the investment fund, its investment fund manager, or a related entity;
- codify exemptive relief granted in respect of notice-and-access applications and introduce in National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), a notice-and-access system for the solicitation of proxies;
- streamline regulatory processes by eliminating the filing of Personal Information Forms (PIFs) in connection with investment fund prospectus filings for individuals that are registered with securities regulators;
- codify frequently granted exemptive
relief in respect of conflict of interest prohibitions contained
under securities legislation, National Instrument 81-102
Investment Funds (NI 81-102) and National Instrument
31-103 Registration Requirements, Exemptions and Ongoing
Registrant Obligations (NI 31-103). The eight types of
proposed exemptions, subject to conditions (which include, in some
cases, oversight by an independent review committee), will permit:
- fund-on-fund investments by investment funds that are not reporting issuers,
- investment funds that are reporting issuers to purchase non-approved rating debt under a related underwriting,
- in specie subscriptions and redemptions involving related managed accounts and mutual funds,
- inter-fund trades of portfolio securities between related reporting investment funds, investment funds that are not reporting issuers and managed accounts at last sale price,
- investment funds that are not reporting issuers to invest in securities of a related issuer over an exchange,
- reporting investment funds and investment funds that are not reporting issuers to invest in debt securities of a related issuer in the secondary market,
- reporting investment funds and investment funds that are not reporting issuers to invest in long-term debt securities of a related issuer in primary market distributions, and
- reporting investment funds, investment funds that are not reporting issuers and managed accounts to trade debt securities with a related dealer;
- introduce amendments to NI 81-102 to broaden the pre-approval criteria for investment fund mergers;
- repeal the regulatory approval requirements for a change of manager, a change of control of a manager, or a change of custodian that occurs in connection with a change of manager; and
- introduce exemptions from the requirement to deliver a fund facts document for model portfolio products, portfolio rebalancing services and automatic switch programs, and would allow the use of a consolidated fund facts document under certain conditions.
Further details on each of the eight workstreams are set out below.
Implications, Transitional Matters and Comment Deadline
The Proposed Amendments are a positive development in the CSA’s efforts to reduce regulatory burden for investment funds. By removing redundant information in certain investment fund disclosure documents and codifying frequently granted exemptive relief, the Proposed Amendments could provide significant cost savings to investment funds and their managers.
The CSA state that further proposals to reduce regulatory burden for investment fund issuers that require additional analysis will be developed in the medium to long term and will be published for comment as part of subsequent stages of Phase 2. The areas currently noted for consideration will include: continuous disclosure obligations; securityholder meetings and information circular requirements; prescribed notices and reporting requirements; prospectus regime provisions; and methods used to communicate with investors.
The CSA propose that the Proposed Amendments would come into force approximately three months after the final publication date. Comments will be accepted until December 11, 2019.
Workstream One: Consolidation of the simplified prospectus and annual information form
The Proposed Amendments would repeal the requirement in National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) for a mutual fund in continuous distribution to file an annual information form (AIF). Instead, the CSA propose to consolidate the current Form 81-101F2 Contents of Annual Information Form (Form 81-101F2) and Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) into a single revised Form 81-101F1 (the Revised Simplified Prospectus).
The consolidation of the simplified prospectus and AIF would remove overlapping disclosure between the two documents. For example, disclosure relating to the procedure for purchasing or switching securities of the mutual fund is currently in a mutual fund’s simplified prospectus and AIF. The Revised Simplified Prospectus will eliminate the repetitive disclosure.
The Revised Simplified Prospectus would also repeal disclosure requirements that the CSA have identified as not meaningful to investors and difficult to produce. For example, the current requirement to disclose in an AIF specified information regarding the percentage of securities held by (i) directors, senior officers and trustees of the mutual fund and the manager and (ii) members of the mutual fund’s independent review committee (IRC) will not be carried over to the Revised Simplified Prospectus.
In the CSA’s view, given that a fund facts document (the Fund Facts) is now delivered to mutual fund investors instead of a simplified prospectus, the proposed consolidation of the simplified prospectus and AIF would reduce the regulatory burden on investment fund managers without impacting the Fund Facts disclosure provided to investors.
Workstream Two: Investment fund designated website
The Proposed Amendments would add a new requirement to NI 81-106 pursuant to which reporting investment funds would need to designate a qualifying website on which the investment fund intends to post regulatory disclosure. A qualifying website would be one that is publicly accessible and established and maintained either by the investment fund, its manager, an affiliate or an associate of its manager or another investment fund that is a part of its investment fund family (a Related Person). If an investment fund posts its regulatory disclosure on the website of a Related Person, the CSA expect that the website identify and differentiate between the documents and information that are specific to various investment funds.
The proposed designated website requirement would formalize a commercial practice already adopted by most investment funds and managers. As such, the CSA do not expect the new website requirement to impose an undue regulatory burden. The CSA are also of the view that the new website requirement will create additional opportunities for regulatory disclosure that is currently found in printed documents to be moved to the designated qualifying website, which could potentially reduce costs for investment fund managers and investment funds.
Workstream Three: Codification of notice-and-access exemptive relief
The Proposed Amendments would introduce a notice-and-access system for the solicitation of proxies by investment fund issuers. This would permit the delivery of proxy-related materials by sending a notice providing registered holders or beneficial owners of an issuer’s securities with summary information about the proxy-related materials and instructions on how to access them.
In 2013 the CSA implemented notice-and-access for non-investment fund reporting issuers. In 2016, the CSA began granting exemptive relief to investment fund issuers to use notice-and-access. Such exemptive relief was drafted with reference to the notice-and-access system for non-investment fund reporting issuers in National Instrument 51-102 Continuous Disclosure Obligations and National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer, with adaptations for investment funds.
The Proposed Amendments would codify this frequently-granted exemptive relief and extend notice-and-access to non-management solicitation of proxies, thereby reducing proxy solicitation costs for managers. However, the requirement to prepare an information circular in Form 51-102F5 would not be affected.
Workstream Four: Minimize filings of personal information forms (PIFs)
Under the Proposed Amendments, individual registrants and permitted individuals who have already submitted a Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (Form F4) would not be required to file PIFs in connection with the filing of a prospectus or simplified prospectus for an investment fund. In the CSA’s view, minimizing the PIF filing requirements would reduce regulatory burden given that similar information is provided to securities regulators in both a PIF and a Form F4.
Workstream Five: Codification of exemptive relief granted in respect of certain conflicts applications
In particular, the CSA’s proposals are aimed at codifying exemptions to the “investment fund conflict of interest restrictions” set out in Appendix D to NI 81-102 (the Investment Fund Conflict of Interest Restrictions) and the “inter-fund self-dealing investment prohibitions” set out in Appendix B to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) (the Inter-Fund Self-Dealing Investment Prohibitions). Such restrictions and prohibitions prevent a registered adviser to an investment fund from knowingly causing the investment fund’s portfolio to (a) purchase securities of issuers in which certain persons connected to the registered adviser are partners, officers or directors without disclosure to, and the consent of, the investment fund, and (b) purchase or sell a security from or to the investment portfolio of certain persons connected to the registered adviser. The following are key exemptions contained in the Proposed Amendments from the Investment Fund Conflict of Interest Restrictions and Inter-Fund Self-Dealing Investment Prohibitions.
1. Fund-on-fund investments by investment funds that are not reporting issuers
Currently, investment funds that are reporting issuers are permitted to invest in other investment funds that are reporting issuers and provides an exemption from the Investment Fund Conflict of Interest Restrictions where the underlying fund may be a related fund.
The Proposed Amendments would add a new exemption permitting investment funds that are not reporting issuers to invest in other related investment funds. While the new exemption largely mirrors that currently provided in NI 81-102 for reporting issuer investment funds, the CSA propose to add certain conditions to the exemption for investment funds that are not reporting issuers. For example, fund-on-fund investments would only be permitted in underlying funds that (i) comply with the investment restrictions concerning illiquid assets in NI 81-102 and (ii) have the same redemption and valuation dates. Additionally, the CSA propose to require top funds in a fund-on-fund structure to provide each investor with a disclosure document outlining certain prescribed information relating to the fund-on-fund structure.
2. Inter-fund trades of portfolio securities between related investment funds, investment funds that are not reporting issuers and managed accounts at last sale price
Inter-fund trades between related investment funds, including investment funds that are not reporting issuers, and managed accounts are considered to be prohibited cross-trades under the Inter-Fund Self-Dealing Investment Prohibitions. However, given the main benefit of minimized brokerage and trading costs for the related investment funds and managed accounts, the CSA have frequently granted exemptive relief to permit such inter-fund trades on grounds analogous to the inter-fund self-dealing conditions currently contained in NI 81-107. The CSA have also frequently granted exemptive relief to permit inter-fund trades of exchange-traded securities to occur at the “last sale price” as defined under the Universal Market Integrity Rules (UMIR) of the Investment Industry Regulatory Organization of Canada in lieu of closing sale price, as currently required under NI 81-107. Such exemptive relief facilitates a more accurate price that is closer to the market price at the time the trade decision is made.
The Proposed Amendments would codify the frequently granted exemptive relief and expand the current inter-fund trading exemption in NI 81-107 to apply in connection with trades involving investment funds that are not reporting issuers and managed accounts and permit inter-fund trades (for managed accounts and all investment funds) at the “last sale price” as defined under the UMIR rather than closing sale price. The proposed expansion of the inter-fund trading exemption would therefore reduce brokerage and trading costs of investment funds that are not reporting issuers and managed accounts and provide managers with greater flexibility in pricing inter-fund trades.
3. Investments by reporting issuer investment funds in non-approved rating debt under related underwritings
NI 81-102 currently provides an exemption from the prohibition on investments by dealer managed investment funds in certain related underwritings (Prohibited Investments). The current exemption permits dealer managed investment funds to invest in certain offerings by reporting and non-reporting issuers that are underwritten by the fund’s dealer manager subject to certain conditions, including debt securities having a designated rating and other securities being distributed by way of prospectus.
The CSA propose to expand the exemption to permit dealer managed investment funds to also invest in offerings of debt securities of reporting issuers that do not have a designated rating. The CSA recognize that, given the limited supply of debt securities, a dealer managed investment fund may be unduly restricted in the pursuit of its investment objectives where its dealer manager is an underwriter in the debt market.
Additionally, the CSA propose to expand the exemption from Prohibited Investments to permit dealer managed investment funds to invest in other securities of reporting issuers underwritten by the fund’s dealer manager that are distributed under an exemption from the prospectus requirement.
While the Proposed Amendments would expand the categories of investments in which dealer managed investment funds would be permitted to invest under related underwritings to include non-designated rating debt securities and private placement of other securities of reporting issuers, dealer managed investment funds would not be permitted to invest under related underwritings in a non-reporting issuers’ (i) designated-rating debt securities and (ii) other securities issued by way of private placement. This result likely reflects the CSA’s view that the Proposed Amendments provide adequate transparency so long as the issuer of securities in the related underwriting is a reporting issuer.
4. Investment by investment funds that are not reporting issuers in securities of a related issuer over an exchange
Currently, NI 81-107 permits investment funds that are reporting issuers to invest in securities of related issuers if certain conditions are met (principally, approval by the investment fund’s IRC and the purchase being made over an exchange). Such investments may be a good investment for the investment fund based on its particular investment objectives. Accordingly, the CSA have frequently granted exemptive relief from the Investment Fund Conflict of Interest Restrictions to permit fund families that include investment funds that are not reporting issuers to invest in securities of related issuers on similar conditions.
The Proposed Amendments would expand this exemption to permit investments by investment funds that are not reporting issuers in securities of related issuers if the manager of the investment fund appoints an IRC to approve the investment and the investment otherwise satisfies the existing conditions in NI 81-107.
5. Trades in debt securities of related issuers and with a related dealer
The Proposed Amendments would add new sections to NI 81-107 to permit:
- investment funds to invest in non-exchange traded debt securities of a related issuer in the secondary market if certain conditions are met;
- investment funds to purchase non-exchange traded long-term debt securities of a related issuer in primary market distributions; and
- investment funds and managed accounts to trade in debt securities with a related dealer.
Given the relative lack of supply of debt securities in the market and the potential that an investment fund may be unduly restricted in pursuing its fixed-income investment objectives if it cannot purchase debt securities of a related issuer, the Proposed Amendments would permit all investment funds to invest in related issuers’ non-exchange traded debt securities with a designated rating in the secondary market. Such investments would be subject to IRC oversight (including for investment funds that are not reporting issuers) and objective and transparent pricing.
Similar to the foregoing proposed exemption, the Proposed Amendments would also permit all investment funds to invest in related issuers’ non-exchange traded long-term debt securities with a designated rating in primary market distributions. Such investments would be subject to IRC oversight (including for investment funds that are not reporting issuers), objective and transparent pricing, and additional conditions to mitigate the potential risk of the related issuer using the funds as a captive finance company. Specifically, the CSA propose additional conditions that:
- the debt security is not asset-backed commercial paper;
- the size of the primary market distribution is at least C$100 million;
- at least two independent, arm’s length purchasers collectively purchase at least 20% of the distribution;
- the investment fund would not have more than 5% of its net assets invested in long-term debt securities of the related issuer; and
- the investment fund, together with other investment funds managed by the same manager, hold no more than 20% of the long-term debt securities issued in the distribution.
Given the debt security supply concerns noted above, the CSA also propose to permit all investment funds and managed accounts to trade debt securities with a dealer related to the portfolio manager or portfolio adviser of the investment fund or managed account. Such trades would be subject to IRC oversight (including for investment funds that are not reporting issuers), objective and transparent pricing, and recordkeeping requirements. Trades between a managed account and a related dealer would also require client authorization contained in the investment management agreement relating to the managed account.
Workstream Six: Broadening of pre-approval criteria for investment fund mergers contained in section 5.6 of NI 81-102
The CSA have approved numerous investment fund mergers where managers have demonstrated that the proposed mergers are beneficial to investors despite not meeting the pre-approval criteria and where the information circular sent to investors explains why the proposed merger remains in the securityholders’ best interests.
The Proposed Amendments would apply to an investment fund merger that does not qualify for pre-approval for either of the following reasons:
- a reasonable person may not consider the continuing fund to have substantially similar fundamental investment objectives, valuation procedures and fee structure; or
- the transaction is not a “qualifying exchange” or “tax-deferred transaction” under the Income Tax Act (Canada).
The CSA propose to add a disclosure alternative in either of these circumstances. In the former, the information circular sent to securityholders would be required to disclose the differences between the terminating fund and the continuing fund and explain the manager’s view that the transaction is in the securityholders’ best interests despite such differences. In the latter case, the information circular would be required to disclose why the proposed merger is structured as it is and explain the manager’s view that the transaction is in the securityholders’ best interests despite the tax treatment of the proposed merger.
Workstream Seven: Repeal of regulatory approval requirements for change of manager, change of control of a manager and change of custodian that occurs in connection with a change of manager
The purpose of the regulatory approval requirements for a change of manager, a change of control of a manager and change of a custodian that occurs in connection with a change of manager is to allow the CSA to assess the integrity and proficiency of the proposed replacement and ensure that securityholders have received adequate disclosure regarding the change.
Given that NI 31-103 requires the registration and ongoing reporting of investment fund managers, the CSA believe that the registration process provides an adequate opportunity for the assessment of managers that satisfies the objectives behind the regulatory approval requirement for a change of manager, change of control of a manager and change of custodian in connection therewith.
However, a change of manager would still be subject to securityholder approval and the requirement to prepare an information circular. As well, the CSA have noted that they are seeking comments on whether the regulatory approval process for a change of manager and a change of control of a manager should be streamlined instead of repealed.
Workstream Eight: Codification of certain exemptive relief with respect to the requirement for a dealer to deliver to the purchaser of mutual fund securities the most recently filed Fund Facts for the applicable securities before the dealer accepts a purchase instruction (the Fund Facts Delivery Requirement)
By codifying certain exemption to the Fund Facts Delivery Requirements, the Proposed Amendments would facilitate asset allocation (or model portfolio) services and automatic switch programs.
1. Portfolio rebalancing plans
Model portfolio products are commonly offered by mutual fund managers with each model portfolio comprised of a number of mutual funds with target asset allocation levels for each fund in the portfolio. The manager will periodically rebalance the funds in the portfolio back to the target asset allocation levels. Rebalancing services that function in the same manner are also offered by dealers with respect to a portfolio of mutual funds. Each subsequent purchase of mutual fund securities in model portfolio products and portfolio rebalancing services triggers the Fund Facts Delivery Requirement despite the fact that investors with such services make investment decisions at the outset and subsequent rebalancing purchases do not reflect new investment decisions.
In connection with the final amendments to implement the Fund Facts Delivery Requirement (the POS Amendments), the CSA determined that exemptive relief should only be granted to model portfolio products with rebalancing features on a case-by-case basis. Since the POS Amendments were published in 2014, the CSA have routinely granted exemptive relief from the Fund Facts Delivery Requirement for subsequent purchases made pursuant to rebalancing in the context of model portfolio products and portfolio rebalancing services.
The CSA therefore propose to amend the existing exemption from the Fund Facts Delivery Requirement for pre-authorized purchase plans to include “portfolio rebalancing plans”, which are defined to include both model portfolio products and portfolio rebalancing services.
2. Automatic switch programs
Mutual funds may offer automatic switch programs in which investors purchase a class or series of securities of a mutual fund and, on predetermined dates, automatic switches are made to a different class or series of the same fund based on the balance in the investor’s account or group of accounts meeting the minimum investment amount of the other class or series. Generally, investors are automatically switched to a class or series with lower management fees as their minimum investment increases. Each automatic switch entails a redemption and purchase that triggers the Fund Facts Delivery Requirement. However, given the automatic nature of the switches, it is difficult for managers to deliver the Fund Facts prior to the automatic switch.
Consistent with routine exemptive relief, the Proposed Amendments would introduce an exemption from the Fund Facts Delivery Requirement for purchases made under automatic switch programs and the Fund Facts form requirement in order to allow a single consolidated Fund Facts to be filed for all the classes or series of securities of a mutual fund offered in an automatic switch program.
3. Managed accounts and permitted clients
In the POS Amendments, the CSA provided an exemption from the Fund Facts Delivery Requirement for purchases of mutual fund securities made in managed accounts or by permitted clients that are not individuals (i.e. certain sophisticated entities and institutional investors). For these purchases, the Fund Facts are required to be delivered or sent to the purchaser within two business days of the purchase. In response to feedback from portfolio managers that delivery of the Fund Facts is unnecessary for these purchases, the CSA propose to introduce an exemption from the requirement to deliver Fund Facts for purchases of mutual fund securities made in managed accounts or by non-individual permitted clients.
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.