Ontario Securities Commission staff today released their views on the regulatory issues surrounding the conversion of closed-end funds into mutual funds. Specifically, OSC staff identified a number of issues.
According to OSC staff, the conversion process must be transparent to investors. Closed-end funds with a built-in conversion feature should make disclosure regarding the conversion prominent in the fund's initial prospectus. Closed-end funds without a built-in conversion feature should include disclosure regarding the possible conversion and the contemplated process in the initial prospectus. If the conversion is not contemplated at the time of the initial prospectus, OSC staff expect that the decision to convert will trigger the material change reporting requirements. Investors should be provided with sufficient written notice (60 days is suggested in instances where securityholder approval is not sought) before the conversion of the fund. Further, OSC staff expect that investors will be provided with a redemption right prior to the typical suspension of redemptions.
Post-conversion compliance with NI 81-102
Closed-end funds with a built-in conversion feature are expected to comply with NI 81-102 Mutual Funds from inception (or seek exemptive relief at the time of filing the initial prospectus), while those that contemplate conversion after the fact are expected to consider if any modifications are needed to the features or investment strategies of the fund to ensure compliance with NI 81-102 upon conversion. Where fundamental changes to such things as the fund's investment objectives or strategies are anticipated, securityholders of the fund should be given the opportunity to vote on these changes. If an issuer requests exemptive relief to permit a mutual fund to show pre-conversion performance (which is not permitted by s. 15.6 of NI-81-102), the OSC will consider whether such past performance is relevant and useful and will be appropriately presented and qualified as necessary.
OSC staff expect that fund managers will absorb the merger costs where conversions are structured as a merger between the closed-end fund and a mutual fund.
For more information, see OSC Staff Notice 81-711.