Easily overlooked in the drama of last Friday’s Ontario election call was that the Budget bill which brought down the Liberal government included proposed amendments to extend the conflict of interest investment restrictions in Part XXI of the Securities Act to public closed-end funds. Last year’s proposed amendments to NI 81-102 and NI 81-104 (Phase 2 of the Fund Modernization project) did not mention these possible changes. While the first CSA status report on Phase 2 (May 26, 2011) sought input on which restrictions should apply to closed-end funds, the CSA have not specifically discussed the merits of and issues with applying Part XXI to closed-end funds.

Had the Budget bill been passed, these changes would have created a number of implementation issues including:

  • Increased likelihood of prohibited “substantial securityholder” investments resulting from aggregation of all holdings of mutual funds and closed-end funds under common management.
  • Prohibition of fund-on-fund structures by closed-end funds since the Budget bill did not simultaneously create a fund-on-fund exception equivalent to section 2.5 of NI 81-102.

Hopefully, the OSC will seek public consultation on these changes before its next attempt to implement them.