Legal Updates

Update
Reducing the Burden: CSA Implement Eight Initiatives to Reduce the Regulatory Burden for Investment Fund Issuers
Thursday, October 21, 2021The Canadian Securities Administrators (“CSA”) have been working to identify areas that would benefit from a reduction of any unnecessary regulatory burden and streamline those areas without negatively impacting investor protection or efficiency of the capital markets. In March 2017, the CSA focused their efforts on identifying opportunities to reduce the regulatory burden on investment fund issuers. Those efforts were carried out in two phases.
Under Phase 1, the CSA conducted a comprehensive review of the current investment fund disclosure regime, evaluated disclosure elements borrowed from the non-investment fund reporting issuer regime, gathered information on relevant regulatory reforms conducted by other regulators internationally and received feedback from stakeholders. On May 24, 2018, the CSA published CSA Staff Notice 81-329 Reducing Regulatory Burden for Investment Fund Issuers, which provided an overview of the CSA’s work and potential areas of focus.
Under Phase 2, the CSA investigated the areas of focus identified in Phase 1 and developed proposed amendments. On September 12, 2019, the CSA published the proposed amendments for comment. On October 7, 2021, the CSA announced that they were adopting the proposed amendments, which were organized by the CSA into eight initiatives and are summarized below.
- Consolidate the Simplified Prospectus and the Annual Information Form
- Mandate that each Reporting Issuer Investment Fund have a Designated Website
- Codify Exemptive Relief Granted in Respect of Notice-and-Access Applications
- Minimize Filings of Personal Information Forms
- Codify Exemptive Relief Granted in Respect of Conflict Applications
- Broaden Pre-Approval Criteria for Investment Fund Mergers
- Repeal Certain Regulatory Approval Requirements
- Codify Exemptive Relief Granted in Respect of the Fund Facts Delivery Requirements and Corresponding Exemptions from the ETF Facts Delivery Requirement
Initiative 1: Consolidate the Simplified Prospectus and the Annual Information Form
The existing regulations under National Instrument 81-101 Mutual Fund Prospectus Disclosure (“NI 81-101”) require that a simplified prospectus and an annual information form (“AIF”) be filed annually by conventional mutual funds in continuous distribution. The amendments will repeal the requirement for a mutual fund in continuous distribution to file an AIF. In place of an AIF, a new Form 81-101F1 Contents of Simplified Prospectus (“Form 81-101F1”) will replace the current Form 81-101F1 and the new Form 81-101F1 will incorporate requirements from Form 81-101F2 Contents of Annual Information Form (“Form 81-101F2”). The new Form 81-101F1 will also be streamlined to no longer require, on a case-by-case basis, difficult-to-produce requirements that are not meaningful to investors, and disclosure that is already available through other sources.
An investment fund that is not in continuous distribution, which is an investment fund that has not obtained a receipt for a prospectus during the last 12 months preceding its financial year-end, must file an AIF under section 9.2 of National Instrument 81-106 Investment Fund Continuous Disclosure (“NI 81-106”). The amendments will allow an investment fund to meet this obligation by filing a document prepared in accordance with (i) Form 81-101F1 if the investment fund last distributed securities using a prospectus prepared in accordance with Form 81-101F1, or (ii) Form 41-101F2 Information Required in an Investment Fund Prospectus (“Form 41-101F2”) under National Instrument 41-101 General Prospectus Requirements (“NI 41-101”), if the investment fund last distributed securities using a prospectus prepared in accordance with Form 41-101F2 or Form 81-101F2. The amendments will modify the requirements of these forms when used in such circumstances.
The amendments under Initiative 1 will come into force on January 6, 2022, and there will be a period of exemption from compliance with the amendments until September 6, 2022.
Initiative 2: Mandate that each Reporting Issuer Investment Fund have a Designated Website
The CSA will add Part 16.1 to NI 81-106 that will require reporting investment funds to designate a qualifying website on which they intend to post regulatory disclosure. Under section 16.1.2 of NI 81-106, a qualifying website must be (i) publicly accessible and (ii) 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. The designated person can be a third-party service provider or an affiliate or associate of the investment fund manager.
The CSA will also add Part 11 to Companion Policy 81-106 Investment Fund Continuous Disclosure to provide guidance to investment funds and their investment fund managers on how a designated website should be maintained. The CSA also highlight that supervision of the designated website and its content must be considered in the existing compliance systems of the investment fund and its investment fund manager.
The amendments under Initiative 2 are structured to reduce any burden arising from the creation of the designated website by considering how investment funds’ websites are currently structured. For example, the amendments will allow a reporting investment fund to post regulatory disclosure on a stand-alone website or the website of another investment fund managed by the same investment fund manager or an affiliate or associate of the investment fund manager. However, in all cases, the website must clearly identify and differentiate between the documents and information specific to a particular investment fund.
The amendments under Initiative 2 will come into force on January 6, 2022, and there will be a period of exemption from compliance with the amendments until September 6, 2022.
Initiative 3: Codify Exemptive Relief Granted in Respect of Notice-and-Access Applications
Since 2016, the CSA have been granting exemptive relief from the requirement in paragraph 12.2(2)(a) of NI 81-106 to deliver an information circular in order to permit the use of notice-and-access solicitation of proxies by or on behalf of management of an investment fund. When granting such exemptive relief, the CSA would reference the notice-and-access system set out for non-investment fund reporting issuers in sections 9.1.1 to 9.1.4 of National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) and sections 2.7.1 to 2.7.8 of National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (“NI 54-101”), with necessary adaptations for investment funds. This placed investment funds who received relief in a similar position to non-investment fund reporting issuers with respect to proxy-related materials.
The amendments under Initiative 3 codify the frequently granted exemptive relief and extend its availability to non-management solicitation of proxies. This is consistent with the notice-and-access system for non-investment fund reporting issuers. However, the amendments will not change the requirement to prepare an information circular.
The amendments under Initiative 3 will come into force on January 5, 2022.
Initiative 4: Minimize Filings of Personal Information Forms
The amendments under Initiative 4 will eliminate the existing personal information form requirements for specified individuals in NI 41-101 and NI 81-101 for investment fund issuers. “Specified individuals” are individual registrants and permitted individuals who have already submitted Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (“Form 33-109F4”). This change will eliminate the provision of similar information to securities regulators in both a personal information form and a Form 33-109F4 to achieve regulatory oversight of such individuals.
The amendments will not decrease investor protection since information provided to securities regulators, whether upon application for registration or as an ongoing matter, is required to be kept updated.
The amendments under Initiative 4 will come into force on January 5, 2022.
Initiative 5: Codify Exemptive Relief Granted in Respect of Conflict Applications
In September 2019, the CSA proposed to codify eight types of exemptions for conflict of interest prohibitions contained under existing securities legislation. The amendments under Initiative 5 will codify the exemptions to the “investment 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 under Initiative 5 codify eight exemptions that are based on conditions the CSA have incorporated into numerous exemptive relief decisions. The conditions are designed to mitigate investor protection concerns and potential risks by promoting transparency, objective pricing, and, in some cases, oversight by an Independent Review Committee.
1. Permit Fund-on-Fund Investments by Investment Funds that are not Reporting Issuers
The amendments to NI 81-102 will provide an exemption that permits investment funds that are not reporting issuers to invest in other related investment funds. Currently, section 2.5 of NI 81-102 permits investment funds that are reporting issuers to invest in other investment funds that are reporting issuers, and subsection 2.5(7) of NI 81-102 exempts investment funds that are reporting issuers from the investment fund conflict of interest restrictions where the underlying fund is a related fund. For example, when the top fund, or a group of related funds, are substantial securityholders in the underlying fund.
The CSA have frequently granted exemptive relief from the investment fund conflict of interest restrictions and reporting requirements to allow investment funds that are not reporting issuers to invest in related funds. As such, the amendments will simply codify the CSA’s practice of granting exemptive relief. However, a non-reporting investment fund will have to prepare audited financial statements and interim financial statements for the fund’s most recently completed financial period. This change will permit Canadian investment funds that are not reporting issuers to invest in Canadian and non-Canadian funds.
2. Permit Investment Funds that are Reporting Issuers to Purchase Non-Approved Rating Debt Under a Related Underwriting
Currently subsection 4.1(4) of NI 81-102 provides an exemption that allows dealer managed investment funds to invest in certain offerings that are underwritten by the fund’s dealer manager or an associate of the dealer manager if certain conditions are met. Subsection 4.1(4) will be amended to permit a dealer managed investment fund to invest in (i) offerings of debt securities of reporting issuers that do not have an approved rating, if the offerings are underwritten by a fund’s dealer manager, and (ii) offerings of reporting issuers underwritten by the fund’s dealer manager that are made under an exemption from the prospectus requirement. To rely on the new exemptions created by the amendments, a dealer managed investment fund must have independent oversight provided by the fund’s Independent Review Committee. For debt securities, the fund must comply with a further pricing condition in subparagraph 4.1(4)(b)(ii) of NI 81-102 for purchases of debt securities that do not trade on an exchange and are made within 60 days following the distribution.
3. Permit In Specie Subscriptions and Redemptions Involving Related Managed Accounts and Mutual Funds
The CSA will not proceed with the proposed amendments for in specie transactions involving a reporting mutual fund, a mutual fund that is not a reporting issuer, or managed accounts.
4. Permit Inter-Fund Trades and Portfolio Securities Between Related Reporting Investment Funds, Investment Funds that are not Reporting Issuers and Managed Accounts at Last Sale Price
The amendments will expand the existing exemption from the inter-fund self-dealing investment prohibitions in subsection 6.1(2) of NI 81-107 to apply to inter-fund trades involving related investment funds that are not reporting issuers and/or managed accounts. The amendments will 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. Collectively, the amendments will permit inter-fund trades in debt securities between an investment fund that is a reporting issuer and a related investment fund that is not a reporting issuer to comply with the inter-fund trading exemption in subsection 4.3(2) of NI 81-102.
The CSA have chosen not to include a requirement for investment funds that are party to an inter-fund trade to keep records of the interfund transaction for five years after the end of the financial year. Instead, each investment fund, or portfolio manager of a managed account, will have to keep records of each interfund transaction in accordance with the record-keeping requirements applicable to registered firms in section 11.5 and 11.6 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
5. Permit Investment Funds that are Not Reporting Issuers to Invest in Securities of a Related Issuer Over an Exchange
Section 6.2 of NI 81-107 will be amended to permit investment funds that are not reporting issuers to invest in securities of related issuers if certain conditions are met.
6. 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 will enact section 6.3 of NI 81-107, which will permit investment funds to invest in non-exchange traded debt securities of a related issuer in the secondary market if certain conditions are met.
7. Permit 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
The amendments will enact section 6.4 of NI 81-107, which will provide an exemption from the investment fund conflict of interest investment restrictions to permit investment funds to purchase non-exchange traded long-term debt securities of a related issuer under a primary distribution by that issuer.
8. Permit Reporting Investment Funds, Investment Funds that are not Reporting Issuers and Managed Accounts to Trade Debt Securities with a Related Dealer
The amendments will enact section 6.5 of NI 81-107, which will provide exemptions from the inter-fund self-dealing investment prohibitions and the self-dealing restrictions set out in section 4.2 of NI 81-102 to permit investment funds and managed accounts to trade debt securities with a related dealer.
The CSA have chosen not to include a requirement for investment funds that are party to a principal trade in debt securities to keep records of the interfund transaction for five years after the end of the financial year. Instead, each investment fund, or portfolio manager of a managed account, will have to keep records of each interfund transaction in accordance with the record-keeping requirements applicable to clients of registered firms in Part 11 of NI 31-103.
Regarding the amendments under Initiative 5, the CSA have stated that those filers that have previously obtained exemptive relief in respect of transactions that are being codified by the amendments can continue to rely on the exemption by the CSA or on the codified exemptions when the amendments come into force.
The amendments under Initiative 5 will come into force on January 5, 2022.
Initiative 6: Broaden Pre-Approval Criteria for Investment Fund Mergers
The amendments will broaden the pre-approval criteria for investment fund mergers contained in section 5.6 of NI-102. Despite broadening the pre-approval criteria, the amendments will continue to require the proposed merger comply with all other pre-approval criteria under section 5.6, as applicable. The amendments will revise subparagraph 5.6(1)(a)(ii) of NI 81-102 such that subparagraph 5.6(1)(a)(ii) can be satisfied where (i) the investment fund manager reasonably believes that the transaction is in the best interests of the investment fund despite a reasonable person not considering the continuing investment fund to have substantially similar fundamental investment objections and valuation procedures, and (ii) 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. Further, the amendments provide that paragraph 5.6(1)(b) of NI 81-102 can also be satisfied where (i) the investment fund manager reasonably believes that the transaction is in the best interest of the investment fund despite the tax treatment of the transaction, and (ii) the information circular (a) discloses that the transaction is not a “qualifying exchange” or a tax-deferred transaction, (b) discloses the reason why the transaction is not structured so that the pre-approval criterion applies, and (c) 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 under Initiative 6 will come into force on January 5, 2022.
Initiative 7: Repeal Certain Regulatory Approval Requirements
The amendments will 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 in manager. However, a change of manager will continue to be subject to securityholder approval and the requirement to prepare an information circular. The amendments will also add certain specific disclosure requirements that will apply to the information circular when there is a change of manager so that investment funds can meet their disclosure obligations.
The amendments under Initiative 7 will come into force on January 5, 2022.
Initiative 8: Codify Exemptive Relief Granted in Respect of the Fund Facts Delivery Requirements and Corresponding Exemptions from the ETF Facts Delivery Requirement
Managed Accounts and Permitted Clients
The amendment to section 3.2.04 of NI 81-101 will provide an exemption from the fund facts document delivery requirement for purchasers of conventional mutual fund securities made in managed accounts or by permitted clients that are not individuals. Additionally, the amendments will provide an exemption from the ETF facts documents delivery requirement for purchases of exchange-traded mutual fund securities made in managed accounts or by permitted clients who are not individuals.
Portfolio Rebalancing Plans
The amendments to section 3.2.03 of NI 81-101 will codify exemptive relief from the fund facts document delivery requirement for subsequent purchases of conventional mutual fund securities under model portfolio products and portfolio rebalancing services. The amendments will expand the current pre-authorized purchase plans set out in section 3.2.03 of NI 81-101 to add “portfolio rebalancing plans”, which are defined to include both model portfolio products and portfolio rebalancing services. Further, the amendments will also provide an exemption from the ETF facts documents delivery requirement for subsequent purchases of ETF securities in pre-authorized plans and portfolio rebalancing.
Automatic Switch Programs
The amendments to section 3.2.05 of NI 81-101 will codify exemptive relief from the fund facts document delivery requirement for purchases of conventional mutual fund securities made under automatic switch programs offered by investment fund managers. The amendments will also codify exemptive relief from the form requirements in Form 81-101F3 Contents of Fund Facts Document (“Form 81-101F3”) to allow a single consolidated fund facts document to be filed for all the classes or series of securities of a mutual fund offered in an automatic switch program. The exemption applies to purchases of a class or series of securities of a mutual fund as a result of the purchaser meeting the minimum investment amount of a class or series of securities of the mutual fund due to additional purchases, redemptions or positive market movement. The amendments will also provide an exemption from the ETF facts documents delivery requirement for purchases of ETF securities made under automatic switch programs.
Amendments to Conform Form 81-101F3 Contents of Fund Facts Document with Form 41-101F4 Information Required in an ETF Facts Document
The amendments to Form 81-101F3 will conform the document with certain disclosure requirements in Form 41-101F4 Information Required in an ETF Facts Document. The amendments to Form 81-101F3 will set out the fund facts document disclosure requirements under the sub-headings “Top 10 investments”, “Investment mix” and “How has the fund performed?” for (i) a newly established mutual fund, (ii) a mutual fund that has not yet completed a calendar year and (iii) a mutual fund that has not yet completed 12 consecutive months.
The amendments under Initiative 8 will come into force on January 5, 2022.
If you have any questions with respect to the matters discussed above, please contact Ron Schwass by email at rschwass@wildlaw.ca or any other member of our Asset Management & Investment Funds practice group. The author of this update gratefully acknowledges the assistance of articling student Kassidy Doherty in the preparation of this update.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.
If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.