The Canadian Securities Administrators today announced the adoption of final amendments that will implement certain aspects of Phase 2 of the Modernization of Investment Fund Product Regulation Project. The mandate of Phase 2 involved generally addressing the regulatory gap between non-redeemable investment funds and mutual funds by focusing on imposing certain core operational requirements on publicly offered non-redeemable investment funds that are generally analogous to the requirements applicable to mutual funds.
The final amendments to be adopted as of September 22, 2014 stem from proposed amendments published last year, and will involve the imposition of core investment restrictions for non-redeemable investment funds while also enhancing disclosure requirements regarding securities lending activities by investment funds. The following is a summary of some of the final amendments that are set to come into force, which we will review in further detail in subsequent posts.
Notably, the final amendments do not extend to the creation of a more comprehensive alternative funds framework (planned to be effected through an overhaul of National Instrument 81-104 Commodity Pools). As previously announced by the CSA, the “alternative funds proposals” have been deferred to allow for further review, along with related restrictions that have been proposed with respect to investments in physical commodities, short selling, the use of derivatives and borrowing cash.
The final amendments that have been approved include investment restrictions relating to investment concentration and control, investments in real property, loan syndications and mortgages, the use of fund-of-fund structures and extending the framework in respect of securities lending, repurchase and reverse repurchase transactions currently found in NI 81-102 Mutual Funds to closed-end funds.
Other elements of NI 81-102 that will be extended to closed-end funds include requirements relating to conflicts of interest, securityholder and regulatory approval of fundamental changes, which include additional approval requirements that expand upon those currently found in NI 81-102. Restrictions will also be imposed in respect of further issuances of securities and upon funds that issue warrants and rights.
The amendments also introduce new disclosure requirements intended to better highlight the costs and returns of an investment fund's securities lending activities, including in respect of revenue sharing arrangements between a fund and its securities lending agent. To that end, the amendments will require disclosure, in the notes to financial statements, of a reconciliation of the gross amount generated from the securities lending transactions of the investment fund to the revenue from securities lending disclosed in the statement of comprehensive income disclosed under s. 3.2 of NI 81-106 Investment Fund Continuous Disclosure.
Proposed amendments were first published by the CSA in March 2013. In response to comments received, the CSA have made changes to the final version of the amendments, including by relaxing some of the originally proposed investment restrictions and introducing the securities lending disclosure requirements described above.
While the amendments generally come into force on September 22, 2014, existing funds that are reporting issuers will have until September 2015 to comply with the relevant amendments concerning securities lending. The transition period for various of the other changes extend into 2016.