Part 5 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) requires certain investment funds (such as mutual funds or non-redeemable investment funds that are reporting issuers) either to:
- send prescribed financial statements to the registered holders or beneficial owners of their securities (Securityholders); or
- request standing instructions from their Securityholders regarding these documents and then comply with those instructions.
NI 81-106 doesn’t specifically address the situation where a PM invests in the investment fund’s securities on behalf of fully managed accounts. We believe, however, that the regulators would accept delivery of the financial statements or a request for standing instructions to a PM in these circumstances as satisfying NI 81-106 because this approach is consistent with the PM’s role in this context. This is because the PM has been granted full discretion and authority to make investment decisions on behalf of the managed account holder and, therefore, will be analyzing financial and other information relating to existing and potential investments.
Of course, if units of the fund are registered in the PM’s name, then delivery of financial statements to the PM will comply with the letter of NI 81-106. But if the PM is also the fund manager, they should be mindful of the recent custody amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), which provides that a custodian generally is required for all client assets unless the securities are held only in the client’s name.
If an investment fund delivers financial statements or requests for standing instructions to PMs of fully managed client accounts, the fund manager should confirm that this approach is consistent with the documentation they have for the accounts (such as the subscription agreement). Good practices for PMs that accept delivery of fund financial statements for their fully managed accounts would be to:
- confirm that their investment management agreements (IMAs) with such clients address the PM’s receipt of information (such as financial statements) about the investments in the account; and
- keep records showing receipt of financial statements and other investment information provided by issuers.