On September 12, 2019, the Canadian Securities Administrators (CSA) published for comment CSA Notice and Request for Comment Reducing Regulatory Burden for Investment Fund Issuers – Phase 2, Stage 1 (Notice). The Notice sets out a series of proposed amendments and changes (Proposals) to Canadian securities laws which represent the first stage of the CSA’s initiative to reduce the regulatory burden for investment fund issuers. The objectives of the Proposals are primarily to remove redundant information in disclosure documents, use web-based technology to provide certain information about investment funds and codify routine exemptive relief. The Notice has been published for a 90-day comment period ending December 11, 2019 and, subject to comments received and regulatory approvals, the Proposals are expected to come into force approximately three months after the final publication date. The Proposals are organized into eight workstreams.
Workstream One: Consolidate the Simplified Prospectus and the Annual Information Form
Mutual Funds in Continuous Distribution
In respect of mutual funds that are in continuous distribution, there is a Proposal to repeal the requirement to file an annual information form (AIF) and consolidate the AIF with the simplified prospectus (SP) under a revised Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1). This revised form will remove overlapping disclosure between the AIF and SP forms, repeal requirements that are not meaningful to investors, difficult to produce, and/or available in other regulatory documents.
Investment Funds Not in Continuous Distribution
In respect of investment funds that are not in continuous distribution, there is a Proposal to require an investment fund that has not obtained a receipt for a prospectus during the last 12 months preceding its financial year-end to file a prospectus prepared in accordance with Form 81-101F1 or Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2) to meet its obligation to file an AIF under NI 81-106 Investment Fund Continuous Disclosure (NI 81-106).
Workstream Two: Investment Fund Designated Website
There is a Proposal to add a requirement for reporting issuer investment funds (Public Funds) to designate a “qualifying website” on which the Public Fund intends to post regulatory disclosure. A “qualifying website” will have to meet two requirements:
- it must be publicly accessible, and
- it must be established and maintained either by the Public Fund, or by its investment fund manager, an affiliate or another related party (a Related Person).
The purpose of this Proposal is to improve the accessibility of disclosure for investors while accounting for the current manner in which Public Funds or Related Persons generally structure their websites. We note that most Public Fund managers in Canada already post regulatory disclosure and other information on their proprietary websites to discharge their obligations under Canadian securities laws. Accordingly, we expect that this requirement will not have a material impact on most Public Fund managers.
Workstream Three: Codify Exemptive Relief Granted in Respect of Notice-and-Access Applications
Under NI 81-106 and National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer, non-investment fund reporting issuers have been permitted to use a notice-and-access system for the solicitation of proxies, which is designed to improve the investor voting communication process by which proxies and voting instructions are solicited, since 2013. Notice-and-access permits delivery of proxy-related materials by sending a notice providing registered holders or beneficial owners with summary information about the proxy-related materials and instructions on how to access them.
In 2016, the CSA began granting exemptive relief to permit use of a similar notice-and-access system for solicitation of proxies by or on behalf of management of an investment fund and there is a Proposal to codify this exemptive relief and extend its availability to non-management solicitation of proxies.
Workstream Four: Minimize Filings of Personal Information Forms
There is a Proposal to eliminate the Personal Information Form filing requirements with the CSA, in relation to prospectus filings for investment fund issuers, for individuals who are already required to submit a Form 33-109F4 Registration of Individuals and Review of Permitted Individuals which contains similar information.
Workstream Five: Codify Exemptive Relief Granted in Respect of Conflicts Applications
There are Proposals to codify frequently granted exemptive relief in respect of the “investment fund conflict of interest restrictions” defined in National Instrument 81-102 Investment Funds (NI 81-102) and the “inter-fund self-dealing investment prohibitions” defined in National Instrument 81-107 Independent Review Committee for Investment Funds.
The CSA now propose to codify eight types of exemptions that will permit:
- fund-on-fund investments by investment funds that are not reporting issuers (Pooled Funds) in order to permit investments in both Pooled Funds and Public Funds;
- Public Funds to purchase non-approved rating debt under a related underwriting and to extend the exemption to other securities of reporting issuers offered pursuant to a prospectus exemption;
- in specie subscriptions and redemptions involving related managed accounts and mutual funds which were previously prohibited trades in portfolio securities under the investment portfolio conflict of interest restrictions in NI 31-103;
- inter-fund trades of portfolio securities between related Public Funds, Pooled Funds and managed accounts to be transacted at the last sale price as defined under the Universal Market Integrity Rules published by the Investment Industry Regulatory Organization of Canada as such transactions have historically been prohibited trades for registered advisers under NI 31-103 and for which an exemption has not been available on a last sale price basis;
- Pooled Funds to invest in securities of a related issuer over an exchange;
- Public Funds and Pooled Funds to invest in non-exchange traded debt securities of a related issuer in the secondary market, as such transactions can not rely on the existing exemption for the exchange-traded debt securities;
- Public Funds and Pooled Funds to invest in long-term debt securities of a related issuer in primary market distributions, and
- Public Funds, Pooled Funds and managed accounts to trade debt securities with a related dealer.
Workstream Six: Broaden Pre-Approval Criteria for Investment Fund Mergers
The Notice includes a Proposal to broaden the pre-approval criteria for investment fund mergers contained in NI 81-102. The Proposals will apply to investment fund mergers that do not qualify as a pre-approver merger:
- because a reasonable person may not consider the continuing fund to have substantially similar fundamental investment objectives, valuation procedures and fee structure; or
- because the transaction is not a qualifying exchange or tax-deferred transaction.
The existing pre-approval criteria into NI 81-102 will be broadened based on conditions and representations found in past discretionary merger approval decisions, including requiring clear disclosure in an information circular that explains to investors why a proposed merger remains in securityholders’ best interests despite the proposed merger not meeting the pre-approval criteria.
Workstream Seven: Repeal Regulatory Approval Requirements for Change of Manager, Change of Control of a Manager, and Change of Custodian that Occurs in Connection with a Change of Manager
The Notice includes a Proposal to repeal the regulatory approval requirements in NI 81-102 for a change of manager, a change of control of a manager, or a change of custodian that occurs in connection with a change of manager; however, a change of manager will continue to be subject to securityholder approval and the requirement to prepare an information circular.
Workstream Eight: Codify Exemptive Relief Granted in Respect of Fund Facts Delivery Applications
Fund Facts are a summary disclosure document that provides key information about a mutual fund to investors in a standardized format which are required to be delivered to investors prior to making an investment decision in the mutual fund (the Pre-Sale Delivery Requirement).
There is currently an exemption from the Pre-Sale Delivery Requirement for purchases of mutual fund securities made in managed accounts or by permitted clients that are not individuals; however, the Fund Facts are required to be delivered or sent to the purchaser within two days of buying the mutual fund (the Post-Sale Delivery Requirement). There is a Proposal to include an exemption from the Post-Sale Delivery Requirement for conventional mutual fund purchases made in managed accounts or by permitted clients that are not individuals.
In addition, there are additional Proposals to codify exemptions from the Pre-Sale Delivery Requirement in respect of subsequent purchases of conventional mutual fund securities under model portfolio products and portfolio rebalancing services, and purchases of conventional mutual fund securities made under automatic switch programs offered by investment fund managers.
A Welcome Step Towards Burden Reduction
The Proposals represent a balanced approach to burden reduction for investment fund issuers which attempt to ensure that the proposed regulatory changes are consistent with the CSA’s mandate to protect investors and foster fair, efficient and vibrant capital markets. Consolidating the SP and AIF requirement for conventional mutual funds will be a welcome change to investment fund managers and will make the annual renewal process more consistent with that of exchange-traded investment funds. Further, codification of exemptive relief will help create a level playing field for industry participants and avoid the need to incur unnecessary costs when such relief is routinely granted with minimal objection. We expect that many investment fund participants will be eagerly waiting the implementation of these Proposals and take the opportunity to comment during the 90-day comment period.