In response to comments from Fasken Martineau on the recent amendments[1] (Amendments) to Part XXI of the Securities Act (Ontario) (Act), Ontario Securities Commission (OSC) staff have issued a notice[2] to address various issues with the Amendments.

The transition provisions in the Amendments require related mutual funds to reduce an investment that otherwise was legally made before July 24, 2014 if the position, when aggregated with the holdings of closed-end funds under common management, exceeds 20% of the voting securities of the issuer[3].  OSC staff have confirmed that this result was not intended, and that the transition provisions should be interpreted as permitting related mutual funds to continue holding a position after July 24, 2014 if the investment was permitted prior to July 24, 2014.

The Amendments also immediately prohibit any new fund-on-fund investment (including a distribution reinvestment) by an existing closed-end fund that owns more than 20% of an underlying fund, even though the related exemption from this prohibition for permitted fund-on-fund investments will not come into effect until March 21, 2016[4].  OSC staff have confirmed that this result was not intended, and existing closed-end funds should interpret the Amendments as not prohibiting new fund-on-fund investments until March 21, 2016.

Further, the Amendments now apply subsection 115(1) of the Act to closed-end funds, thereby prohibiting a closed-end fund from paying an affiliated dealer to execute a portfolio trade unless done pursuant to a contract that has been disclosed in the fund's prospectus.  Since existing closed-end funds will not have disclosed any such contracts in their previous prospectuses, they will be unable to access this carve-out.  OSC staff have advised that section 115 should be interpreted as applying only to closed-end funds that file a preliminary prospectus, prospectus or prospectus amendment on or after July 24, 2014. 

Technically, OSC staff do not have the ability to change the Amendments by issuing a notice. Nonetheless, industry participants can take comfort that there should be no objections from OSC staff if the Amendments are applied as described above.