Canadian securities regulators have published for comment proposed amendments to Canada’s investment fund regulations which would permit the public offering of “alternative funds” – mutual funds that wish to use investment strategies or invest in asset classes that are not available to conventional mutual funds. The comment period on the proposed amendments ends on December 22, 2016.

Gowling WLG Focus

Canadian securities regulators have set out to modernize investment fund product regulation. The modernization effort has been carried out in phases since 2012, and the latest phase of proposed amendments, released on September 22, 2016, will bring alternative funds into the same regulatory regime as conventional mutual funds and closed-end funds while maintaining differences, particularly in regard to investment restrictions.

Alternative Funds

For publicly offered alternative funds, the proposed amendments would include the following investment restrictions:

  • borrowing may not exceed 50% of the fund’s net asset value (NAV), subject to certain conditions;
  • short-selling may not exceed 50% of the fund’s NAV and the short-sale of a single issuer may not exceed 10% of the fund’s NAV;
  • aggregate cash borrowing and short-selling may not exceed 50% of the fund’s NAV;
  • investment in a single issuer will be limited to 20% of the fund’s NAV; and
  • at all times, the aggregate leverage from cash borrowing, short-selling, and specified derivative transactions may not exceed three times the fund’s NAV.

Alternative funds would be permitted to continue to offer investment products to the exempt market on the terms and conditions governing these funds today. The new investment restrictions would only apply to alternative funds that are sold to the public.

Closed-End Funds

The proposed amendments would also subject closed-end funds to new investment restrictions, including that:

  • borrowing may not exceed 50% of the fund’s NAV, subject to certain conditions;
  • short-selling may not exceed 50% of the fund’s NAV and the short-sale of a single issuer may not exceed 10% of the fund’s NAV;
  • aggregate cash borrowing and short-selling may not exceed 50% of the fund’s NAV;
  • investment in a single issuer will be limited to 20% of the fund’s NAV;
  • at all times, the aggregate leverage from cash borrowing, short-selling, and specified derivative transactions may not exceed three times the fund’s NAV; and
  • there will be a prohibition on the acquisition of illiquid assets greater than 20% of the fund’s NAV at the time of purchase (with a hard cap of 25% NAV).

Mutual Funds

Under the proposed amendments, conventional mutual funds would be permitted to operate with more certainty and flexibility. Notable proposals include the following: 

  • direct investment in silver, platinum, and palladium will no longer be prohibited;
  • mutual funds will no longer be prohibited from indirect exposure to physical commodities through specified derivatives;
  • 10% of a mutual fund’s NAV may be invested in alternative funds or closed end funds; and
  • 100% of a mutual fund’s NAV may be invested in other mutual funds or exchange traded funds.

Transition

The proposed amendments are expected to come into force approximately three months after approval and new investment funds would be required to comply with the amendments in order to file a preliminary or final prospectus. There would be a transition period of six months after the proposed amendments come into force for existing investment funds.

Further Information

Gowling WLG would be pleased to discuss any questions and possible resolutions to specific legal concerns you may have in connection with the proposed amendments.