On October 7, 2021, the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize regulation of the Canadian capital markets, issued a Notice of Publication outlining several regulatory amendments. These regulatory amendments (the Amendments) were organized into eight separate “Workstreams” and aimed squarely at reducing regulatory burden and compliance costs for investment funds in Canada (the Workstreams).
The ambitious efforts of the CSA are geared toward reducing undue regulatory burden on investment fund issuers and streamlining requirements imposed on such issuers and their managers, while balancing protection afforded to investors and the efficiency of capital markets.
The Amendments entail:
- More efficient leveraging of technology. Workstream #2 mandates that reporting issuer investment funds (Reporting Funds) post all regulatory disclosures on a single website.
- More efficient investor access to fund documents. In addition to the above-noted requirement to introduce “designated websites”, Workstream #3 codifies the notice-and-access system for communicating with investors of investment funds, thereby improving the voting process.
- Reduced redundancy. Workstreams #1, #4, and #7 reduce redundancy by consolidating, and in some cases eliminating, certain overlapping filing requirements.
- Increased certainty. Workstreams #3, #5, and #8 codify broad exemptions for certain matters that have traditionally required individual applications for exemptive relief.
- Reduced costs. All of the Workstreams are expected to reduce compliance costs overall.
Subject to any necessary ministerial approval, the Amendments related to Workstreams 1-2 will come into force nationwide on January 6, 2022, with broad exemptions from compliance (subject to exceptions) deferred until September 6, 2022. The Amendments related to Workstreams 3-8 will take effect January 5, 2022. Below, we briefly explore the eight separate Workstreams.
Workstream #1 – Consolidating Simplified Prospectuses and AIFs
Currently, conventional mutual funds in continuous distribution are required to file both an annual simplified prospectus (SP) and an annual information form (AIF). Under the new regime, and subject to certain exceptions for investment funds not in continuous distribution, such mutual funds will only be required to file a single streamlined document annually. This is expected to eliminate overlapping disclosure in those filings. The new filing will be in the new Form 81-101F1.
Workstream #2 – Mandating Designated Websites
Reporting Funds will be required to establish and maintain a publicly accessible “designated website” on which each investment fund must post the fund’s regulatory disclosures. This new requirement will be flexible, in that disclosure may appear on a standalone website or on the website of another fund managed by the same investment fund manager (provided that documents and information particular to specific funds are clearly identified and differentiated as such).
Workstream #3 – Codifying Notice-and-Access Exemptive Relief
Beginning in 2016, the CSA began granting case-by-case exemptive relief to permit use of notice-and-access for proxy solicitation by (or on behalf of) investment fund managers which permits streamlined delivery of proxy materials for meetings of investors.
The Amendments codify the notice-and-access system for investment funds, in line with the existing system for non-investment-fund reporting issuers. The requirement to prepare an information circular has been maintained. This change is expected to substantially eliminate uncertainty for funds that were previously required to seek exemptive relief, as well as to significantly reduce compliance costs by no longer requiring full proxy documents to be delivered to every securityholder.
Workstream #4 – Minimizing PIF Filings
Personal Information Forms (PIFs) will no longer be required filings for specified individuals under National Instrument 41-101 – General Prospectus Requirements, nor for investment fund issuers under National Instrument 81-101 – Mutual Fund Prospectus Disclosure. In order to maintain investor protection, information provided to the regulators must be kept up-to-date. As such, regulators must receive notification of certain changes, typically within 10-30 days of a change under National Instrument 33-109 – Registration Information.
Workstream #5 – Codifying COI Exemptive Relief
The CSA have granted frequent exemptive relief applications related to conflicts of interest (COI) matters. Certain recurrent types of exemptions have been codified, including:
- Fund-on-fund investments by non-reporting issuer investment funds (Non-Reporting Funds) will generally be permitted, subject to certain filing requirements. Such investments are already permitted for Reporting Funds.
- Inter-fund trades of portfolio securities between: (i) related Reporting Funds, (ii) Non-Reporting Funds; and (iii) managed accounts will generally be permitted at last sale price. Each investment fund (or portfolio manager on behalf of a managed account) will be required to keep records of each inter-fund transaction in accordance with National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
- As already permitted for Reporting Funds, the Amendments will generally allow Non-Reporting Funds to invest in securities of related issuers over an exchange, subject to conditions.
- Reporting Funds and Non-Reporting Funds will generally be permitted to invest in non-exchange traded debt securities of a related issuer in the secondary market, subject to conditions.
- Reporting Funds and Non-Reporting Funds will generally be permitted to invest in long-term debt securities under a related issuer’s primary market distribution, subject to conditions.
- Reporting Funds and Non-Reporting Funds and managed accounts will generally be permitted to trade debt securities with related dealers. Each fund/manager will be required to keep records of each transaction in accordance with NI 31-103.
Notably, the CSA has elected not to codify an exemption for in specie subscriptions and redemptions involving related managed accounts and mutual funds, citing a need to analyze the impacts of the change further.
Workstream #6 – Broadening Merger Pre-Approval Criteria
In the past, the CSA has approved certain investment fund mergers despite their failure to comply with certain codified pre-approval criteria, including a reasonable person not considering the continuing fund to be substantially similar in terms of investment objectives, valuation procedure, and/or fee structure, or the transaction not amounting to a “qualified exchange” or tax-deferred transaction under the Income Tax Act.
The Amendments provide that the CSA will specifically not require these certain criteria to be satisfied, provided there is clear disclosure of the criteria in an information circular, and explanations for why the criteria has not been met and a statement of the investment fund manager’s belief that the proposed merger is in the best interests of the fund.
Workstream #7 – Repealing Managerial Change Approval Requirements
Regulatory approval requirements currently exist in National Instrument 81-102 – Investment Funds for a change of manager, a change of control of a manager, or a change of custodian in connection with a managerial change. However, in light of intervening changes to NI 31-103 that have implemented registration requirements for investment fund managers, these will be repealed. The CSA will continue to be able to assess the suitability for investment fund managers pursuant to Form 33-109F5 filings. Existing investor approval and information circular disclosure requirements of a change of manager will remain as-is.
Workstream #8 – Codifying Fund Facts and ETF Facts Delivery Exemptive Relief
“Fund facts” and “exchange-traded mutual fund (ETF) facts” are summary disclosure documents, written in plain language, that help facilitate an investor’s decision to invest. The CSA has codified three common types of exemptive relief relating to delivery requirements for these documents:
A. for purchases of conventional mutual fund or ETF securities made in managed accounts or by permitted non-individual clients, post-sale delivery of the applicable document will no longer be required;
B. subsequent purchases of conventional mutual fund securities under model portfolio products and portfolio rebalancing services, and of ETF securities in pre-authorized purchase plans and portfolio rebalancing plans, will no longer require delivery of the applicable document; and
C. purchases made under automatic switch programs, entailing a redemption of a class or series of securities immediately followed by purchase of another class/series of the same fund, will no longer require delivery of the applicable document. However, this exemption will only apply when a switch occurs due to an investor meeting the minimum investment amount of the new class/series, and not when the switch occurs due to the investor no longer meeting the minimum amount for the old class/series.
In addition, the requirements of fund facts and ETF facts will become more similar in several respects. It is expected that these changes will significantly streamline the disclosure process.
The Amendments outlined by the CSA are expected to play a significant role in reducing regulatory burden for both Reporting Funds and Non-Reporting Funds, while also introducing new, generally less onerous requirements.
Should you have any questions on the implementation of any of the above or questions about ongoing obligations, do not hesitate to contact our investment funds team.
The author would like to thank Brayden Anstee, articling student, for his assistance in preparing this legal update.