On October 7, 2021, the Canadian Securities Administrators (the
CSA) published amendments (the Amendments) implementing eight
initiatives aimed at reducing regulatory burden for investment
funds. The Amendments make up the first stage of phase two of the
CSA's effort to ease regulatory burdens on investment fund
issuers. Please see our bulletin on the CSA's initial request
for comment on the Amendments here.
The Amendments outlined in workstreams three to eight, as described below, will come into force on January 5, 2022, and the remaining Amendments, as described in workstreams one and two below, will come into force on January 6, 2022. The CSA has also provided an exemption from compliance with the requirements under workstreams one and two for the period before September 6, 2022.
HIGHLIGHTS OF THE AMENDMENTS
The Amendments are organized into eight separate workstreams. The following is a summary of each workstream.
Workstream One: Consolidate the Simplified Prospectus and the Annual Information Form
Perhaps the most anticipated change as a result of the
Amendments is the consolidation of the simplified prospectus (SP)
and the annual information form (AIF) for investment fund issuers.
Currently, conventional mutual funds in continuous distribution
must file both an SP and an AIF on an annual basis. The Amendments
repeal the requirement for a mutual fund in continuous distribution
to file an AIF by repealing Form 81-101F1 Contents of
Simplified Prospectus (Form 81-101F1) and replacing it with a
new, streamlined Form 81-101F1 that includes certain of the unique
requirements of Form 81-101F2 Contents of Annual Information
Form (Form 81-101F2) and removes some requirements from the
former 81-101F1 that are either difficult to produce and not
meaningful to investors or are available in other regulatory
As a result of the Amendments, mutual funds in continuous distribution will only be required to file an SP on an annual basis. This change will significantly reduce the regulatory burden for conventional mutual funds and make the renewal process for conventional mutual funds more consistent with exchange traded funds (ETFs), which typically file a prospectus in accordance with Form 41-101F2 Information Required in an Investment Fund Prospectus.
Investment funds not in continuous distribution and that have not obtained a receipt for a prospectus during the last 12 months preceding their financial year-end are now permitted to meet their existing obligation to file an AIF by filing a document prepared in accordance with the prospectus form last used by the investment fund to distribute securities or Form 81-101F2, in each case subject to certain modifications.
Workstream Two: Mandate that each Reporting Issuer Investment Fund have a Designated Website
The Amendments add a requirement for reporting investment funds to designate a qualifying website that is publicly accessible, and is established and maintained by the investment fund or on behalf of the investment fund by the investment fund manager or a person designated by the investment fund manager. This requirement should be fairly simple to comply with since most public investment fund managers have established websites on which they post disclosure and other information on each of their funds to meet certain existing obligations under securities laws.
Workstream Three: Codify Exemptive Relief Granted in Respect of Notice-and-Access Applications
The Amendments codify frequently granted exemptive relief to permit the use of notice-and-access procedures for the solicitation of proxies by or on behalf of management of an investment fund, rather than printing and mailing management information circulars to all security holders. The Amendments also extend this relief to non-management solicitation of proxies, consistent with the notice-and-access system set out for non-investment fund reporting issuers. Investment funds will still be required to prepare an information circular.
Workstream Four: Minimize Filings of Personal Information Forms (PIFs)
The Amendments eliminate the PIF requirements for individual registrants and permitted individuals who have already submitted a Form 33-109F4 Registration of Individuals and Review of Permitted Individuals. Information provided to the regulators must be kept up to date in accordance with National Instrument 33-109 Registration Information (NI 33-109), which ensures that investor protection is not affected by the Amendments.
Workstream Five: Codify Exemptive Relief Granted in Respect of Conflicts Applications
The Amendments codify frequently granted exemptive relief in
respect of conflict of interest restrictions in National Instrument
81-102 Investment Funds (NI 81-102) and the inter-fund
self-dealing investment prohibitions in National Instrument 81-107
Independent Review Committee for Investment Funds (NI
81-107). The Amendments are ultimately aimed at easing the burden
on investment fund issuers by avoiding the need to apply for
exemptive relief, while including customary conditions designed to
mitigate investor protection concerns and potential risks
associated with the related conflict of interest
To the extent investment fund issuers have previously obtained exemptive relief in respect of the transactions being codified in the Amendments, these issuers can continue to rely on those decisions or can rely on the exemptions in the Amendments. However, the CSA notes that any future requests to amend, update or revoke and replace such prior decisions will include conditions in the new decision that reflect the Amendments for the applicable transaction.
The following is a summary of the exemptions:
Permit Fund-on-Fund Investments by Investment Funds that are not Reporting Issuers
The Amendments allow for an exemption to permit investment funds that are not reporting issuers to invest in other related investment funds (the underlying funds). The benefits of allowing this type of transaction include more efficient and cost-effective diversification of a fund's portfolio. The Amendments include conditions to this exemption, including that the investment fund's securities are distributed solely under an exemption from the prospectus requirement, the underlying fund has the same redemption and valuation dates as the investment fund, any purchase of the underlying fund's securities is made at a price that equals the net asset value per security of the other fund calculated in accordance with section 14.2 of National Instrument 81-106 Investment Fund Continuous Disclosure and before an investor purchases securities of the investment fund, the investor is provided a document that includes certain required disclosure, amongst other conditions.
The Amendments add an additional requirement that an underlying fund that is not a reporting issuer prepare audited annual financial statements and interim financial statements for the fund's most recently completed period. This Amendment will also permit Canadian investment funds that are not reporting issuers to invest in both Canadian and non-Canadian funds.
Permit Investment Funds that are not Reporting Issuers to Purchase Non-Approved Rating Debt Under a Related Underwriting
The Amendments allow a dealer managed investment fund to invest in offerings of debt securities of reporting issuers that do not have an approved rating, if the offerings are underwritten by the fund's dealer manager, and offerings of reporting issuers underwritten by the fund's dealer manager that are made under an exemption from the prospectus requirement. To rely on these exemptions, a dealer managed investment fund will need to have independent oversight provided by the fund's IRC and for debt securities, comply with a further pricing condition for purchases of debt securities that do not trade on an exchange and which are made during the 60-day period following the distribution.
Permit 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
The Amendments expand the existing exemption from the inter-fund self-dealing investment prohibitions in subsection 6.1(2) of NI 81-107 so that it applies to inter-fund trades involving related investment funds that are not reporting issuers and managed accounts. The exemption would continue to apply to trades between related investment funds that are reporting issuers. The Amendments include updates to the conditions in section 6.1 of NI 81-107 that permit all inter-fund trades of exchange-traded securities to occur at last sale price. The Amendments include a requirement for each investment fund, or a portfolio manager on behalf of a managed account, to keep records of each inter-fund transaction in accordance with the record-keeping requirements applicable to registered firms set out in sections 11.5 and 11.6 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
Permit Investment Funds that are Not Reporting Issuers to Invest in Securities of a Related Issuer Over an Exchange
The Amendments allow investment funds that are not reporting issuers to invest in securities of related issuers if certain conditions are met. The exemption would continue to apply to investment funds that are reporting issuers.
Permit Reporting Investment Funds and Investment Funds that are not Reporting Issuers to Invest in Debt Securities of a Related Issuer in the Secondary Market
The Amendments allow investment funds to invest in non-exchange traded debt securities of a related issuer in the secondary market if certain conditions are met.
Permit In Specie Subscriptions and Redemptions Involving Related Managed Accounts and Mutual Funds
The CSA is not proceeding with proposed amendments relating to permitting in specie subscriptions and redemptions involving related managed accounts and mutual funds. Relief related to this topic will continue to be considered on a case by case basis.
Workstream Six: Broaden Pre-Approval Criteria for Investment Fund Mergers
The Amendments broaden the pre-approval criteria for investment fund mergers contained in section 5.6 of NI 81-102. In the past, the CSA has approved a number of investment fund mergers that do not comply with certain aspects of the current pre-approval criteria, namely:
- subparagraph 5.6(1)(a)(ii) of NI 81-102, because a reasonable person may not consider the continuing investment fund to have substantially similar fundamental investment objectives and valuation procedures, and a substantially similar fee structure;
- paragraph 5.6(1)(b) of NI 81-102, because the transaction is not a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (ITA) or tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA.
The Amendments provide that subparagraph 5.6(1)(a)(ii) of NI 81-102 can also be satisfied where:
- the investment fund manager reasonably believes that the transaction is in the best interests of the investment fund despite the differences; and
- the information circular discloses the differences and explains why the investment fund manager is of the belief that the transaction is in the best interests of the investment fund despite the differences.
In addition, the Amendments provide that paragraph 5.6(1)(b) of NI 81-102 can also be satisfied where:
- the investment fund manager reasonably believes that the transaction is in the best interests of the investment fund despite the tax treatment of the transaction; and
- the information circular
- discloses that the transaction is not a "qualifying exchange" within the meaning of section 132.2 of the ITA or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA,
- discloses the reason why the transaction is not structured so that the pre-approval criterion applies, and
- explains why the investment fund manager is of the belief that the transaction is in the best interests of the investment fund despite the tax treatment of the transaction.
The Amendments take into account conditions and representation that the CSA has included in past discretionary merger approvals. These changes emphasize the importance of disclosure clearly explaining to securityholders why the merger is in the best interests of the investment fund despite not meeting the current pre-approval criteria.
Workstream Seven: Repeal Regulatory Approval Requirements for a Change of Manager, a Change of Control of a Manager, and a Change of Custodian that Occurs in Connection with a Change of Manager
The Amendments repeal the regulatory approval requirements in
section 5.5 of NI 81-102 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. The purpose of the regulatory
approvals was to allow the CSA to assess the suitability of any new
manager. Currently, the registration requirements for investment
fund managers under NI 31-103 and the requirement to keep such
registration information up to date under NI 33-109 fulfill this
purpose and allow the CSA to continually assess the suitability of
investment fund managers, rendering the regulatory approval
requirements under NI 81-102 duplicative.
An investment fund undergoing a change of manager will still be subject to the requirements to seek securityholder approval and prepare an information circular. The Amendments contain certain disclosure requirements to be included in an information circular prepared in connection with a change of manager, including, but not limited to, the inclusion of a description of the change and effects of the change on the investment fund and securityholders, the effect the change would have on the management expense ratio of the investment fund and material information regarding the business, management and operations of the new manager.
Workstream Eight: Codify Exemptive Relief Granted in Respect of the Fund Facts Delivery Requirements and Corresponding Exemptions from the ETF Facts Delivery Requirement
The Amendments provide exemptions to the fund facts and ETF facts delivery requirements in certain circumstances. Fund facts and ETF facts no longer need to be delivered for purchases of conventional mutual fund securities or ETF securities, as applicable, where such purchases are made in managed accounts or by permitted clients that are not individuals, are subsequent purchases under model portfolio products and portfolio rebalancing services or are made under automatic switch programs. The Amendments also conform Form 81-101F3 Contents of a Fund Facts Document with certain disclosure requirements in Form 41-101F4 Information Required in an ETF Facts Document.
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