Modernization of Investment Funds – Final Amendments of Phase 2 Presentation to the Portfolio Managem ent Association of Canada’s Com pliance Officers’ Netw ork September 16, 2014 Kimberly J. Poster, Partner
Agenda Background Material Amendments Impacting Closed-End Funds Material Amendments Impacting Mutual Funds CSA Next Steps 2
Background CSA reviewed publicly offered investment funds to consider if their approach to different types of investment funds (i) addresses product and market developments and (ii) protects investors Part 1 dealt with codifying exemptive relief provided to retail mutual funds – completed Part 2 has 3 key components: o Core investment restrictions and operational requirements for non-redeemable investment funds o Disclosure requirements for securities lending activities by all investment funds o A more comprehensive alternative funds framework – future project 3
Background (continued) Amendments to National Instrument 81-102 Mutual Funds , National Instrument 81-106 Investment Fund Continuous Disclosure , National Instrument 81-101 Mutual Fund Prospectus Disclosure , and National Instrument 41- 101 General Prospectus Requirements in force September 22, 2014 4
Material Amendments Impacting Closed-End Funds – Investment Restrictions Restricts purchases to 10% of the outstanding equity securities of an issuer (section 2.2 of NI 81-102) New restriction on purchasing a security for the purpose of exercising control over an issuer Control restrictions come into force for existing funds on March 21, 2016 Restriction on purchasing real property, or interests in certain loan syndications/ participations (sections 2.3(2)(a) and (c) of NI 81-102) Applicable to existing funds as of March 21, 2016 5
Material Amendments Impacting Closed-End Funds – Investment Restrictions (continued) No purchase of non-guaranteed mortgages (section 2.3(2)(b) of NI 81-102) Mortgage restriction does not apply for funds that have received a prospectus receipt before September 22 AND have fundamental investment objectives to permit them to invest in mortgages (with caveats) 6
Material Amendments Impacting Closed-End Funds – Fund-on-Fund Non-redeemable fund may invest in another investment fund if the investment complies with 2.5(2) of NI 81-102 applicable to non-redeemable funds [ i.e. generally same rules as for conventional mutual funds except as noted below] Underlying fund must be subject to NI 81-102 or comply with provisions applicable to non-redeemable investment funds (s. 2.5(2)(a.1) of NI 81-102) Underlying fund must be a reporting issuer in at least one Canadian jurisdiction in which the top fund is a reporting issuer (s. 2.5(2)(c.1) of NI 81-102) 7
Material Amendments Impacting Closed-End Funds – Fund-on-Fund (continued) Exemptive relief might be required for existing funds that invest in foreign investment funds – case-by-case basis Apply to existing funds as of March 21, 2016 8
Material Amendments Impacting Closed-End Funds – Securities Lending Regime for securities lending, repurchase and reverse repurchase transactions extended to non-redeemable investment funds (ss. 2.12- 2.17 of NI 81-102) Aggregate market value of securities loaned or sold in repurchase transactions must not exceed 50% of NAV [ currently 50% of total assets] (ss. 2.12(1)12 and 2.13(1)11 of NI 81-102) Change in force September 21, 2015 9
Material Amendments Impacting Closed-End Funds – Conflicts of Interest, Fundamental Changes Conflict of interest provisions extended to non-redeemable investment funds (Part 4 of NI 81-102) Security holder and regulatory approval requirements extended to non-redeemable investment funds (Part 5 of NI 81-102) 10
Material Amendments Impacting Closed-End Funds – Conflicts of Interest, Fundamental Changes (continued) Prior security holder approval before implementing a change to the nature or structure of an investment fund (e.g. converting a non-redeemable investment fund to a mutual fund or a corporate issuer; exception for flow- through funds) AND fund can not bear the costs (s. 5.1(1)(h) and s. 5.1(2) of NI 81-102) New condition on pre-approved merger that fund allow redemptions at NAV prior to the merger (s. 5.6(1)(j) of NI 81-102) and merger must be effected at NAV (s. 5.6(1)(k) of NI 81-102) 11
Material Amendments Impacting Closed-End Funds – Other Operational Matters Terminate between 15-90 days after filing a press release disclosing intention to terminate (s. 5.8.1 of NI 81-102) Extend custodial requirements to all non-redeemable investment funds (Part 6 of NI 81-102) Issuances of securities can not cause dilution to existing security holders (s. 9.2(2) of NI 81-102) Restriction on issuing warrants, rights, or entering into a position in a specified derivative if the underlying interest is a security of the fund (Part 9.1 of NI 81-102) New requirements relating to redemptions (Part 10 of NI 81-102) 12
Material Amendments Impacting Closed-End Funds – Other Operational Matters (continued) Rules relating to sales communications extended to non- redeemable investment funds (Part 15 of NI 81-102), with certain modifications – existing materials printed before September 22, 2014 can be used until March 23, 2015 Non-redeemable funds that convert to mutual funds must present past performance data for the period when they existed as a non-redeemable fund 13
Material Amendments Impacting Closed-End Funds – Securities Lending Disclosure Notes to financial statements will have to reconcile the gross amount generated from securities lending to the revenue (s. 3.8(4) of NI 81-106), including: o Identity of person entitled to receive payments o Amount person is entitled to receive Prospectus to disclose the name of the securities lending agent and relationship of agent to manager Prospectus/ AIF to disclose a description of the essential terms of any securities lending agreement (item 19.11 of Form 41-101F2) Impacts private funds subject to NI 81-106 Compliance not required for financial years beginning before January 1, 2016 14
Material Amendments Impacting Mutual Funds (non exhaustive list) Mutual funds may not invest in a non-redeemable investment fund (s. 2.5(2) of NI 81-102) as of March 21, 2016 Aggregate market value of securities loaned or sold in repurchase transactions must not exceed 50% of NAV [ currently 50% of total assets] (ss. 2.12(1)12 and 2.13(1)11 of NI 81-102) as of September 21, 2015 Prior security holder approval before implementing a change to the nature or structure of an investment fund (e.g. converting a mutual fund to a non-redeemable investment fund or a corporate issuer) AND fund cannot bear the costs (s. 5.1(1)(h) and s. 5.1(2) of NI 81-102) 15
Material Amendments Impacting Mutual Funds (continued) Restriction on issuing warrants, rights, or entering into a position in a specified derivative if the underlying interest is a security of the fund (Part 9.1 of NI 81-102) Securities lending disclosure (Item 10.9.1 of Form 81-101F2) 16
CSA Next Steps Alternative funds proposals (amendments to National Instrument 81-104 Commodity Pools) Investment restrictions for non-redeemable investment funds (e.g. physical commodities, short selling, the use of derivatives, borrowing cash) Continued review of issuer concentration restriction and illiquid asset restriction Review of payment of organizational costs in connection with conversions to a mutual fund Potential new quantitative disclosure requirements for securities lending 17
Issuer Next Steps Review of current investment restrictions and operational requirements in fund documentation – keep an eye on transition periods Consider approval requirements for amendments under constating documents and material contracts Investment reallocation, if needed Consider if exemptive relief will be needed Review sales communications for compliance with NI 81- 102 Record information required for comparative financial statements with respect to securities lending activities 18
Questions or Comments? Kim berly Poster 416-865-7890 kimberly.poster@mcmillan.ca This presentation has been prepared for discussion purposes only. It should not be considered or construed as legal advice respecting any particular matter or issue. Persons requiring advice relating to matters discussed in this presentation should contact their professional advisors.
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