On September 12, 2019, the Canadian Securities Administrators (the "CSA") published a Notice of Consultation: Reducing Regulatory Burden for Investment Fund Issuers - Phase 2, Stage 1 (the "Publication") (PDF), for a 90-day comment period, which proposes draft amendments aimed at reducing the regulatory burden for investment fund issuers (the "Draft Amendments"), including the following:
- consolidate the simplified prospectus and the annual information form;
- allow investment funds to use the notice-and-access system;
- codify exemptive relief granted in respect of conflicts applications, such as fund-on-fund investments, in specie transactions and inter-fund trades;
- broaden pre-approval criteria for investment fund mergers;
- repeal regulatory approval requirements for a change of manager; and
- codify exemptive relief granted in respect of fund facts delivery applications for managed accounts and permitted clients, portfolio rebalancing plans and automatic switch programs.
Over the last few years, the CSA have sought to reduce the regulatory burden for investment fund issuers. During Phase 1 of this initiative, potential areas of focus for development of proposals were identified. The Draft Amendments are part of the first stage of Phase 2. The objectives of the Draft Amendments are to: (i) remove redundant information in disclosure documents; (ii) use web-based technology to provide information; (iii) codify exemptions routinely granted; and (iv) minimize the filing of documents that contain duplicative information.
The Draft Amendments are organized into eight workstreams. This bulletin provides a brief summary of each of these eight workstream.
Workstream 1: Consolidate the Simplified Prospectus and the Annual Information Form
The CSA propose that a mutual fund in continuous distribution would no longer need to file an annual information form ("AIF") when filing a simplified prospectus ("SP"). Currently, both documents must be filed with regulators annually. The CSA propose to consolidate the requirements of an AIF and those of the SP into a revised Form 81-101F1. The proposed revised version repeals requirements that are not meaningful to investors and difficult to produce and those that are available in other regulatory documents.
Workstream 2: Investment Fund Designated Website
The CSA propose to require reporting investment funds to designate a qualifying website on which the investment funds intend to post regulatory disclosure. This website will need to be publicly accessible and established and maintained either by the investment fund, by its investment fund manager ("IFM"), an affiliate or an associate of its IFM, or by another investment fund that is part of its investment fund family. As most investment funds already post regulatory disclosure on a website, the CSA are of the view that the Draft Amendments only formalize a widespread commercial practice
Workstream 3: Codify Exemptive Relief Granted in Respect of Notice-and-Access Applications
Existing regulations set out a notice-and-access system for non-investment fund reporting issuers relating to the solicitation of proxies by or on behalf of an issuer's management. Since the CSA have frequently granted exemptions from the requirement to deliver an Information Circular and instead use the notice-and-access system for solicitation of proxies by or on behalf of management of an investment fund, they are now proposing to codify such relief to place investment funds in a similar position as non-investment fund reporting issuers, with respect to proxy-related materials. The CSA also propose to extend this availability of such relief to non-management solicitation of proxies.
Workstream 4: Minimize Filings of Personal Information Forms ("PIFs")
The CSA propose to eliminate the PIF requirements for specified individuals for investment funds. These specified individuals are individual registrants and permitted individuals who have already submitted a Form 33-109F4.
Workstream 5: Codify Exemptive Relief Granted in Respect of Conflicts Applications
The CSA propose to codify eight types of frequently granted exemptions in respect of conflict of interest prohibitions contained under securities legislation:
- 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 long-term 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 and investment funds that are not reporting issuers and managed accounts to trade debt securities with a related dealer.
According to the CSA, IFMs have demonstrated that the above transactions are beneficial to investors despite evidencing a potential conflict of interest. The Draft Amendments reflect the conditions the CSA have incorporated into discretionary exemptive relief decision.
Workstream 6: Broaden Pre-Approval Criteria for Investment Fund Mergers
The CSA propose to broaden the pre-approval criteria for investment fund mergers. The below two criteria would no longer need to be met so long as the IFM obtains securityholder approval and provides prescribed disclosure in an Information Circular: (i) a reasonable person may not consider the continuing fund to have substantially similar fundamental investment objectives, valuation procedures and fee structure; and (ii) the transaction is not a qualifying exchange or tax-deferred transaction. IFMs have demonstrated in the past that the investment fund mergers can be beneficial to investors despite not meeting the above criteria.
Workstream 7: 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 purpose of the pre-approval requirements relating to a change of manager, a change of control of a manager and a change of custodian was to provide the CSA with an opportunity to assess the integrity of a proposed new person as well as to ensure that adequate disclosure is given to securityholder regarding such a change. These pre-approval requirements are no longer necessary, since registration requirements were implemented for IFMs which allow the CSA to perform the same assessment.
Workstream 8: Codify 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 requirements of conventional mutual fund purchases made in managed accounts or by permitted clients that are not individuals. Currently, portfolio managers are exempt from the pre-sale delivery requirements for such purchases. Thus, the fund facts are required to be delivered or sent to the purchaser within two days of buying the mutual fund. Portfolio managers convinced the CSA that post-sale delivery of the fund facts is not necessary for such purchases.
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. Exemptions have previously been frequently granted from such requirements since, among others, subsequent purchases do not reflect new investment decisions.
Automatic Switch Programs: the CSA propose to codify exemptive relief from the fund fact delivery requirement for purchases of conventional mutual fund securities made under automatic switch programs. Because the switches in these programs, as the name indicates it, are automatic, the CSA recognize that it is often very difficult or impractical for an IFM to deliver the fund fact prior to an automatic switch. The CSA also propose 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.
In addition, the CSA propose to conform the contents of fund facts document with the contents of the exchange-traded fund facts document, specifically the disclosure requirements intended to 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.
The CSA gathered specific questions for comment relating to the Draft Amendments in Appendix A of the Publication. The CSA invite the public to submit comment letters in writing on or before December 11, 2019.
Should you have any questions on the foregoing or be interested in submitting your comments to the CSA but need assistance, feel free to contact any member of our Investment Management team.