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OSC staff clarify Ontario Budget changes to investment restrictions for mutual funds and closed-end funds

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Investment Products & Wealth Management Bulletin

In response to comments from Fasken Martineau on the recent amendments[1] (Amendments) to Part XXI of the Securities Act (Ontario) (Act), Ontario Securities Commission (OSC) staff have issued a notice[2] to address various issues with the Amendments.

The transition provisions in the Amendments require related mutual funds to reduce an investment that otherwise was legally made before July 24, 2014 if the position, when aggregated with the holdings of closed-end funds under common management, exceeds 20% of the voting securities of the issuer[3].  OSC staff have confirmed that this result was not intended, and that the transition provisions should be interpreted as permitting related mutual funds to continue holding a position after July 24, 2014 if the investment was permitted prior to July 24, 2014.

The Amendments also immediately prohibit any new fund-on-fund investment (including a distribution reinvestment) by an existing closed-end fund that owns more than 20% of an underlying fund, even though the related exemption from this prohibition for permitted fund-on-fund investments will not come into effect until March 21, 2016[4].  OSC staff have confirmed that this result was not intended, and existing closed-end funds should interpret the Amendments as not prohibiting new fund-on-fund investments until March 21, 2016.

Further, the Amendments now apply subsection 115(1) of the Act to closed-end funds, thereby prohibiting a closed-end fund from paying an affiliated dealer to execute a portfolio trade unless done pursuant to a contract that has been disclosed in the fund's prospectus.  Since existing closed-end funds will not have disclosed any such contracts in their previous prospectuses, they will be unable to access this carve-out.  OSC staff have advised that section 115 should be interpreted as applying only to closed-end funds that file a preliminary prospectus, prospectus or prospectus amendment on or after July 24, 2014. 

Technically, OSC staff do not have the ability to change the Amendments by issuing a notice. Nonetheless, industry participants can take comfort that there should be no objections from OSC staff if the Amendments are applied as described above.

Additional material

For ease of reference, Fasken Martineau has prepared a consolidated version of Part XXI of the Act which incorporates the Amendments and can be accessed through the links below.

Part XXI Amended

Part XXI Amended (Blackline)

[1] Bill 14 An Act to implement Budget measures and to enact and amend various Acts, Royal Assent on July 24, 2014.

[2] OSC Staff Notice 81-725 Recent Amendments to Part XXI Insider Trading and Self-Dealing of the Securities Act (Ontario) - Transition Issues.

[3] See pre-existing subsection 111(3) of the Act which still requires a mutual fund in Ontario to divest any investment described in section 111 (as amended) made between September 15, 1979 and July 24, 2014.

[4] The exemption for fund-on-fund investing by closed-end funds is contained in subsection 2.5(7) of National Instrument 81-102 Mutual Funds.  However, section 2.5 will not apply to existing closed-end funds until March 21, 2016.

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