In our June 2017 Bulletin, we reported on new conditions imposed by the Ontario Securities Committee (the “OSC”) in recent fund-on-fund relief from the prohibited investment provisions applicable to investment funds in s.111 of the Securities Act (Ontario) (the “OSA”) granted by the OSC (“Fund-of-Fund Relief”). Fund-of-fund relief is obtained from the OSC in relation to provisions that prohibit certain investments by investment funds, including the prohibition against an investment fund owning 20% or more of another investment fund.
One of those “new” conditions was that “a Top Fund will not invest in an Underlying Fund, unless the Underlying Fund complies with the provisions of National Instrument 81-106 – Investment Fund Continuous Disclosure (“NI 81-106”) that apply to a “mutual fund in Ontario” as defined in the OSA”. The OSC in the recent July 2017 Investment Fund Practitioner confirmed this new condition and clarified that the effect of the condition included in the Fund-of-Fund Relief is that when a pooled fund relies on the relief to invest in an underlying pooled fund organized under the laws of a Canadian jurisdiction where NI 81-106 does not apply, the underlying pooled fund must prepare annual audited financial statements and interim financial reports and deliver them to top fund investors, upon request. In certain Canadian jurisdictions, NI 81-106 does not apply to a mutual fund that is not a reporting issuer and without the “new” condition, an underlying fund would not otherwise be required under securities regulations to prepare annual audited financial statements and interim financial reports and deliver them to its investors and/or top fund investors.
The OSC did not confirm whether such condition will be imposed where underlying pooled funds are organized outside of the laws of a Canadian jurisdiction going forward. However, the OSC did request that filers with an underlying pooled fund that is organized outside the laws of a Canadian jurisdiction consider providing submissions as to the appropriate review of financial statements and how best to provide relevant financial information to top fund unitholders.