On September 12, 2019 the Canadian Securities Administrators ("CSA") published a Notice and Request for Comment on their efforts to Reduce Regulatory Burdens for Investment Fund Issuers (the "Proposed Amendments" and "Proposed Changes"). The Notice represents the second phase of their efforts as the first phase published on May 24, 2018, provided an overview of the CSA's work to date and indicated that the Proposed Amendments and Proposed Changes were forthcoming.
The objectives of the Proposed Amendments are to remove redundant information in selected disclosure documents, use web-based technology to provide certain information about investment funds, codify exemptive relief that is routinely granted, and minimize the filing of documents that may contain duplicative information.
Summary of proposed amendments and proposed changes
1. Consolidation of the simplified prospectus ("SP") and the annual information form ("AIF")
This initiative proposes to repeal the requirement of a mutual fund in continuous distribution to file an AIF. Instead the CSA propose to consolidate Form 81-101F2 - Contents of Annual Information Form ("Form 81-101F2") and Form 81-101F1 - Contents of Simplified Prospectus ("Form 81-101F1").
Presently, a simplified prospectus and an AIF must each be filed annually by conventional mutual funds in continuous distribution. The CSA's proposed revised Form 81-101F1 will consolidate the requirements of Form 81-101F2 by removing overlapping disclosure between the two forms, repealing requirements that are not meaningful to investors and are difficult to produce, and repealing requirements for disclosure that are available in other regulatory documents. For example, disclosures as set out in subsection (3) - (6) of Item 11.1 (Principal Holders of Securities) of Form 81-101F2 have not been carried over into the proposed Form 81-101F1 as such information may not be of sufficient benefit to justify the time and cost to produce and Item 9.2 (Dealer Compensation from Management) amongst others have been repealed as such disclosure of the nature are already made available to investors. 1
If approved, the amendment will require conventional mutual funds in continuous distribution to file only the SP each year.
2. Introducing the investment fund designated website
The CSA proposes to add new sections to National Instrument 81-106 - Investment Fund Continuous Disclosure ("NI 81-106") requiring reporting investment funds to designate a qualifying website on which the investment fund intends to post regulatory disclosure. It is proposed that a qualifying website will have to meet two requirements, namely that (i) it is publicly accessible, and (ii) it is established and maintained either by the investment fund, or by its investment fund manager, an affiliate or an associate of its investment fund manager, or another investment fund that is a part of its investment fund family.
The proposed requirement is intended to improve the accessibility of disclosure for investors while taking into account the current way investment funds generally structure their websites. The CSA believes the proposed requirement allows regulatory disclosure that is currently found in printed documents to be moved to the designated qualifying website, potentially reducing burden and costs for investment fund managers and investment funds.
3. Codification of exemptive relief granted in respect of notice-and-access applications
The CSA propose to introduce in NI 81-106 and National Instrument 54-101 - Communication with Beneficial Owners of Securities of a Reporting Issuer ("NI 54-101") a notice-and-access system for the solicitation of proxies. The proposal follows previous CSA implementation of a notice-and-access system for non-investment fund reporting issuers.
4. Minimizing filings of personal information forms ("PIF")
The CSA propose to eliminate the PIF requirements for specified individuals in National Instrument 41-101 - General Prospectus Requirements ("NI 41-101") and National Instrument 81-101 - Mutual Fund Prospectus Disclosure ("NI 81-101") for investment fund issuers. Specified individuals are individual registrants and permitted individuals who have already submitted a Form 33-109F4 - Registration of Individuals and Review of Permitted Individuals ("Form 33-109F4"). This proposal would eliminate the requirement for similar information to be provided to securities regulators in both a PIF and a Form 33-109F4.
5. Codification of exemptive relief granted in respect of conflicts applications
The CSA are proposing amendments to National Instrument 81-102 - Investment Funds ("NI 81-102") and National Instrument 81-107 - Independent Review Committee for Investment Funds ("NI 81-107") to codify frequently granted exemptive relief in respect of conflict of interest prohibitions contained under securities legislation, NI 81-102 and National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103").
The CSA propose to codify eight conditional exemptions that 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.
6. Broadening pre-approval criteria for investment fund mergers
The CSA propose to introduce amendments to NI 81-102 to broaden the pre-approval criteria for investment fund mergers. The Proposed Amendments codify a type of regulatory approval that is frequently granted when a proposed merger does not satisfy all of the pre-approval criteria NI 81-102. The Proposed Amendments will apply to an investment fund merger that does not qualify under either:
- subparagraph 5.6(1)(a)(ii) of NI 81-102 because a reasonable person may not consider the continuing fund to have substantially similar fundamental investment objectives, valuation procedures and fee structure; or
- paragraph 5.6(1)(b) of NI 81-102 because the transaction is not a qualifying exchange or tax-deferred transaction.
7. Repeal of regulatory approval requirements relating to change of manager
The CSA propose to repeal the regulatory approval requirements under NI 81-102 regarding 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.
These requirements are already captured by the registration requirements for investment fund managers under NI 31-103. The registration process already provides the CSE an opportunity to assess that new investment fund manages have sufficient integrity, proficiency and solvency to adequately carry out their functions. Once registered, firms and individuals must report changes in the information they provided which allows the CSA to continue assessing their suitability.
8. Codification of exemptive relief granted in respect of fund facts delivery applications
Managed Accounts and Permitted Clients
The CSA propose to introduce an exemption from the fund facts delivery requirement for conventional mutual fund purchases made in managed accounts or by permitted clients that are not individuals. The fund facts document (the "Fund Facts") is a summary disclosure document that provides key information about a mutual fund to investors in a simple, accessible and comparable format, before investors make their investment decision.
Portfolio Rebalancing Plans
The CSA propose to codify exemptive relief from the Fund Facts delivery requirement for subsequent purchases of conventional mutual fund securities under model portfolio products and portfolio rebalancing services.
Automatic Switch Programs
The CSA propose to codify exemptive relief from the Fund Facts delivery requirement for purchases of conventional mutual fund securities made under automatic switch programs, which are offered by investment fund managers.
Proposed Amendments to Conform Form 81-101F3 - Contents of Fund Facts Document ("Form 81-101F3") with Form 41-101F4 - Information Required in an ETF Facts Document ("Form 41-101F4")
The CSA proposes amendments to Form 81-101F3 to conform with certain disclosure requirements in Form 41-101F4. The Proposed Amendments set out the disclosure requirements for a newly established mutual fund, a mutual fund that has not yet completed a calendar year, and a mutual fund that has not yet completed 12 consecutive months under the sub-headings "Top 10 investments", "Investment mix", and "How has the fund performed?" in the Fund Facts.
The Proposed Amendments and Proposed Changes are relevant to fund issuers, investment fund managers and portfolio advisors since they propose to reduce the regulatory demands for investment fund issuers and management of their respective portfolios. They will therefore alleviate some of the burdensome requirements currently expected of fund issuers.
1. Section 14.17 (Report on charges and other compensation) of NI 31-103.
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