Q: what is the new esg guidance on risk for funds?
A: The new ESG guidance on risk for funds emphasizes the importance of disclosing material ESG-related risks to help investors make informed decisions. ESG-Related Funds should identify and disclose any material risk factors arising from their ESG investment objectives or strategies, such as concentration risk, underperformance risk due to ESG focus, and reliance on third-party ESG ratings. All investment funds, regardless of their ESG focus, should consider and disclose any material ESG-related risks, like climate change or corruption risks. This disclosure should be part of the fund's prospectus, enabling investors to understand the potential impact of these risks on the fund's performance. Additionally, funds are encouraged to integrate ESG-related risks into their risk management frameworks.
A mutual fund must
(a) determine its investment risk level, at least annually, in accordance with Appendix F Investment Risk Classification Methodology, and
(b) disclose its investment risk level in the fund facts document in accordance with Part I, Item 4 of Form 81-101F3 of National Instrument 81-101 Mutual Fund Prospectus Disclosure, or the ETF facts document in accordance with Part I, Item 4 of Form 41- 101F4 of National Instrument 41-101 General Prospectus Requirements, as applicable.
(1) Subject to subsection (2), to determine the investment risk level of a mutual fund,
(a) determine the mutual fund’s standard deviation in accordance with Item 2 and, as applicable, Item 3, 4 or 5,
(b) in the following table, locate the range of standard deviation within which the mutual fund’s standard deviation falls, and
(c) identify the investment risk level set opposite the applicable range.
| Standard Deviation Range | Investment Risk Level |
| 0 to less than 6 | Low |
| 6 to less than 11 | Low to medium |
| 11 to less than 16 | Medium |
| 16 to less than 20 | Medium to high |
| 20 or greater | High |
(2) Despite subsection (1), the investment risk level of a mutual fund may be increased if doing so is reasonable in the circumstances.
(3) A mutual fund must keep and maintain records that document:
(a) how the investment risk level of the mutual fund was determined, and
(b) if the investment risk level of the mutual fund was increased, why it was reasonable to do so in the circumstances.
Commentary:
(1) The investment risk level may be determined more frequently than annually. Generally, the investment risk level must be determined again whenever it is no longer reasonable in the circumstances.
(2) Generally, a change to the mutual fund’s investment risk level disclosed on the most recently filed fund facts document or ETF facts document, as applicable, would be a material change under securities legislation in accordance with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure.
(3) In deciding whether to exercise the discretion to increase a mutual fund’s investment risk level as permitted in subsection (2) above, consideration should be given as to whether the standard deviation calculation applied under the Investment Risk Classification Methodology may result in a risk level that is below the manager’s own expectations for the mutual fund. This can occur, for example, when a mutual fund employs investment strategies that produce an atypical or nonnormal distribution of performance results. In such circumstances mutual funds are encouraged to consider supplementing the Investment Risk Classification Methodology with other factors or risk metrics in order to determine whether it would be appropriate to make an upward adjustment of the mutual fund’s risk level to better reflect the features of the mutual fund.
(1) An alternative mutual fund or non-redeemable investment fund’s aggregate exposure to cash borrowing, short selling and specified derivatives transactions must not exceed 300% of the fund’s net asset value.
(2) For the purposes of subsection (1), an alternative mutual fund or non-redeemable investment fund’s aggregate exposure is the sum of the following:
(a) the aggregate value of the alternative mutual fund’s or non-redeemable investment fund’s outstanding indebtedness under any borrowing agreements to which subsection 2.6(2) applies;
(b) the aggregate market value of all securities sold short by the alternative mutual fund or non-redeemable investment fund as permitted by section 2.6.1;
(c) the aggregate notional amount of the alternative mutual fund’s or non-redeemable investment fund’s specified derivatives positions, minus the aggregate notional amount of the specified derivative positions that are hedging transactions.
(3) For the purposes of this section, the alternative mutual fund or non-redeemable investment fund must include in its calculation its proportionate share of the assets of any underlying investment fund for which a similar calculation is required.
(4) An alternative mutual fund or non-redeemable investment fund must determine its aggregate exposure in accordance with subsection (2) as of the close of business of each day on which it calculates a net asset value.
(5) If the alternative mutual fund’s or non-redeemable investment fund’s aggregate exposure as determined in accordance with subsection (2) exceeds 300% of its net asset value, the alternative mutual fund or non-redeemable investment fund must, as quickly as is commercially reasonable, take all necessary steps to reduce the aggregate exposure to 300% of its net asset value or less.
(1) The investment fund conflict of interest investment restrictions and the investment fund conflict of interest reporting requirements do not apply to a transaction referred to in paragraph 5.5(1)(b) if the approval of the securities regulatory authority or regulator has been given to the transaction.
(2) The investment fund conflict of interest investment restrictions and the investment fund conflict of interest reporting requirements do not apply to a transaction described in section 5.6.
“underlying market exposure” means, for a position of an investment fund in
(a) an option, the quantity of the underlying interest of the option position multiplied by the market value of one unit of the underlying interest, multiplied, in turn, by the delta of the option,
(b) a standardized future or forward contract, the quantity of the underlying interest of the position multiplied by the current market value of one unit of the underlying interest; or
(c) a swap, the underlying market exposure, as calculated under paragraph
(b), for the long position of the investment fund in the swap.
For financial years beginning before January 1, 2016, an investment fund is not required to comply with subsections 3.8(4) and (5).
Paragraph 2.6(f) of the Instrument prohibits an investment fund from lending either cash or a portfolio asset other than cash. The Canadian securities regulatory authorities are of the view that the purchase of an evidence of indebtedness, such as a bond or debenture, a loan participation or loan syndication as permitted by paragraph 2.3(1)(i) or (2)(c) of the Instrument, or the purchase of a preferred share that is treated as debt for accounting purposes, does not constitute the lending of cash or a portfolio asset.
(1) The prior approval of the securityholders of an investment fund, given as provided in section 5.2, is required before the occurrence of each of the following:
(a) the basis of the calculation of a fee or expense that is charged to the investment fund or directly to its securityholders by the investment fund or its manager in connection with the holding of securities of the investment fund is changed in a way that could result in an increase in charges to the investment fund or to its securityholders;
(a.1) a fee or expense, to be charged to the investment fund or directly to its securityholders by the investment fund or its manager in connection with the holding of securities of the investment fund that could result in an increase in charges to the investment fund or to its securityholders, is introduced;
(b) the manager of the investment fund is changed, unless the new manager is an affiliate of the current manager;
(c) the fundamental investment objectives of the investment fund are changed;
(d) [Repealed]
(e) the investment fund decreases the frequency of the calculation of its net asset value per security;
(f) the investment fund undertakes a reorganization with, or transfers its assets to, another issuer, if
(i) the investment fund ceases to continue after the reorganization or transfer of assets, and
(ii) the transaction results in the securityholders of the investment fund becoming securityholders in the other issuer;
(g) the investment fund undertakes a reorganization with, or acquires assets from, another issuer, if
(i) the investment fund continues after the reorganization or acquisition of assets,
(ii) the transaction results in the securityholders of the other issuer becoming securityholders in the investment fund, and
(iii) the transaction would be a material change to the investment fund;
(h) the investment fund implements any of the following:
(i) in the case of a non-redeemable investment fund, a restructuring into a mutual fund;
(ii) in the case of a mutual fund, a restructuring into a non-redeemable investment fund;
(iii) a restructuring into an issuer that is not an investment fund.
(2) An investment fund must not bear any of the costs or expenses associated with a restructuring referred to in paragraph (1)(h).
2.1 Investment Objective and Strategies
Disclose under the heading “Investment Objective and Strategies” a brief summary of the fundamental investment objective and strategies of the investment fund.
INSTRUCTION:
Disclosing the fundamental investment objective provides investors with a reference point for assessing the information contained in the MRFP. It must be a concise summary of the fundamental investment objective and strategies of the investment fund, and not merely copied from the prospectus.
2.2 Risk
Disclose under the heading “Risk” a discussion of how changes to the investment fund over the financial year affected the overall level of risk associated with an investment in the investment fund.
INSTRUCTIONS:
Ensure that the discussion is not merely a repeat of information contained in the prospectus of the investment fund, but rather a discussion that reflects any changes in risk level of the investment fund over the financial year.
Consider how the changes in the risks associated with an investment in the investment fund affect the suitability or investor risk tolerance stated in the prospectus or offering document. All investment funds should refer to Items 9 and 10 of Part B of Form 81-101F1 as if those sections applied to them.
2.3 Results of Operations
(1) Under the heading “Results of Operations” provide a summary of the results of operations of the investment fund for the financial year to which the MDFP pertains, including a discussion of
(a) any material changes in investments in specific portfolio assets and overall asset mix from the previous period;
(b) how the composition and changes to the composition of the investment portfolio relate to the investment fund’s fundamental investment objective and strategies or to changes in the economy, markets or unusual events;
(c) unusual trends in redemptions or sales and the effect of these on the investment fund;
(d) significant components and changes to the components of revenue and expenses;
(e) risks, events, trends and commitments that had a material effect on past performance; and
(f) unusual or infrequent events or transactions, economic changes and market conditions that affected performance.
(2) An investment fund that borrows money, other than immaterial operating overdrafts, must disclose,
(a) the minimum and maximum amount borrowed during the period;
(b) the percentage of net assets of the investment fund that the borrowing represented as of the end of the period;
(c) how the borrowed money was used; and
(d) the terms of the borrowing arrangements.
(3) An investment fund that uses leverage must disclose
(a) a brief explanation of the sources of leverage, including cash borrowing, short selling or use of specified derivatives, used during the reporting period,
(b) the lowest and highest levels of aggregate exposure to those sources of leverage in the period, and
(c) a brief explanation of the significance of the lowest and highest levels of aggregate exposure to those sources of leverage to the investment fund, including the impact of the use of specified derivatives for hedging purposes.
INSTRUCTIONS:
(1) Explain the nature of and reasons for changes in the investment fund’s performance. Do not only disclose the amount of change in a financial statement item from period to period. Avoid the use of boilerplate wording. Your discussion must be prepared in a manner that will assist a reasonable reader to understand the significant factors that have affected the investment fund’s performance.
(2) For the purposes of the disclosure required in Item 2.3 (3) (b), an investment fund must calculate its aggregate exposure to sources of leverage in accordance with section 2.9.1 of National Instrument 81-102 Investment Funds.
(3) In discussing the impact of the use of specified derivatives for hedging purposes on the investment fund’s calculation of its aggregate exposure to sources of leverage, the fund must discuss by how much the aggregate exposure was reduced by subtracting the notional value of the fund’s specified derivatives positions that are hedging transactions as is contemplated in paragraph 2.9.1 (2) (c) of National Instrument 81-102 Investment Funds.
2.4 Recent Developments
Under the heading “Recent Developments” discuss the developments affecting the investment fund, including
(a) known changes to the strategic position of the investment fund;
(b) known material trends, commitments, events or uncertainties that might reasonably be expected to affect the investment fund;
(c) changes to the manager or portfolio adviser, or change of control of the manager, of the investment fund;
(d) the effects of any actual or planned reorganizations, mergers or similar transactions;
(e) the estimated effects of changes in accounting policies adopted subsequent to year end; and
(f) changes to the composition or members of the independent review committee of the investment fund.
INSTRUCTIONS:
(1) Preparing the management discussion necessarily involves some degree of prediction or projection. The discussion must describe anticipated events, decisions, circumstances, opportunities and risks that management considers reasonably likely to materially impact performance. It must also describe management’s vision, strategy and targets.
(2) There is no requirement to provide forward-looking information. If any forward-looking information is provided, it must contain a statement that the information is forward-looking, a description of the factors that may cause actual results to differ materially from the forward-looking information, your material assumptions and appropriate risk disclosure and cautionary language. You must also discuss any forward-looking information disclosed for a prior period which, in light of intervening events and absent further explanations, may be misleading.
2.5 Related Party Transactions
Under the heading “Related Party Transactions” discuss any transactions involving related parties to the investment fund.
INSTRUCTIONS:
(1) In determining who is a related party, investment funds should look to the Handbook. In addition, related parties include the manager and portfolio adviser (or their affiliates) and a broker or dealer related to any of the investment fund, its manager or portfolio adviser.
(2) When discussing related party transactions, include the identity of the related party, the relationship to the investment fund, the purpose of the transaction, the measurement basis used to determine the recorded amount and any ongoing commitments to the related party.
(3) Related party transactions include portfolio transactions with related parties of the investment fund. When discussing these transactions, include the dollar amount of commission, spread or any other fee that the investment fund paid to any related party in connection with a portfolio transaction.
(4) If the investment fund has an independent review committee, state whether the investment fund has relied on the positive recommendation or approval of the independent review committee to proceed with the transaction, and provide details of any conditions or parameters surrounding the transaction imposed by the independent review committee in its positive recommendation or approval.
(1) Despite subsection 5.5(1), the approval of the securities regulatory authority or regulator is not required to implement a transaction referred to in paragraph 5.5(1)(b) if all of the following paragraphs apply:
(a) the investment fund is being reorganized with, or its assets are being transferred to, another investment fund to which this Instrument applies and that
(i) is managed by the manager, or an affiliate of the manager, of the investment fund,
(ii) a reasonable person would consider to have substantially similar fundamental investment objectives, valuation procedures and fee structure as the investment fund,
(iii) is not in default of any requirement of securities legislation, and
(iv) is a reporting issuer in the local jurisdiction and, if it is a mutual fund, also has a current prospectus in the local jurisdiction;
(b) the transaction is a “qualifying exchange” within the meaning of section 132.2 of the ITA or is a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA;
(c) the transaction contemplates the wind-up of the investment fund as soon as reasonably possible following the transaction;
(d) the portfolio assets of the investment fund to be acquired by the other investment fund as part of the transaction
(i) may be acquired by the other investment fund in compliance with this Instrument, and
(ii) are acceptable to the portfolio adviser of the other investment fund and consistent with the other investment fund’s fundamental investment objectives;
(e) the transaction is approved
(i) by the securityholders of the investment fund in accordance with paragraph 5.1(1)(f), unless subsection 5.3(2) applies, and
(ii) if required, by the securityholders of the other investment fund in accordance with paragraph 5.1(1)(g);
(f) the materials sent to securityholders of the investment fund in connection with the approval under paragraph 5.1(1)(f) include
(i) a circular that, in addition to other requirements prescribed by law, describes the proposed transaction, the investment fund into which the investment fund will be reorganized, the income tax considerations for the investment funds participating in the transaction and their securityholders, and, if the investment fund is a corporation and the transaction involves its shareholders becoming securityholders of an investment fund that is established as a trust, a description of the material differences between being a shareholder of a corporation and being a securityholder of a trust,
(ii) if the other investment fund is a mutual fund, the most recently filed fund facts document for the other investment fund, and
(iii) a statement that securityholders may, in respect of the reorganized investment fund,
(A) obtain all of the following documents at no cost by contacting the reorganized investment fund at an address or telephone number specified in the statement:
(I) if the reorganized investment fund is a mutual fund, the current prospectus;
(II) the most recently filed annual information form, if one has been filed;
(III) as applicable, the most recently filed fund facts document;
(IV) the most recently filed annual financial statements and interim financial reports;
(V) the most recently filed annual and interim management reports of fund performance, or
(B) access those documents at a website address specified in the statement;
(g) the investment fund has complied with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure in connection with the making of the decision to proceed with the transaction by the board of directors of the manager of the investment fund or of the investment fund;
(h) the investment funds participating in the transaction bear none of the costs and expenses associated with the transaction;
(i) if the investment fund is a mutual fund, securityholders of the investment fund continue to have the right to redeem securities of the investment fund up to the close of business on the business day immediately before the effective date of the transaction;
(j) if the investment fund is a non-redeemable investment fund, all of the following apply:
(i) the investment fund issues and files a news release that discloses the transaction;
(ii) securityholders of the investment fund may redeem securities of the investment fund at a date that is after the date of the news release referred to in subparagraph (i) and before the effective date of the transaction;
(iii) the securities submitted for redemption in accordance with subparagraph (ii) are redeemed at a price equal to their net asset value per security on the redemption date;
(k) the consideration offered to securityholders of the investment fund for the transaction has a value that is equal to the net asset value of the investment fund calculated on the date of the transaction.
(1.1) Despite subsection 5.5(1), the approval of the securities regulatory authority or regulator is not required to implement a transaction referred to in paragraph 5.5(1)(b) if all the conditions in paragraph 5.3(2)(b) are satisfied and the independent review committee of the mutual fund involved in the transaction has approved the transaction in accordance with subsection 5.2(2) of NI 81-107.
(2) An investment fund that has continued after a transaction described in paragraph 5.5(1)(b) must, if the audit report accompanying its audited financial statements for its first completed financial year after the transaction contains a modified opinion in respect of the value of the portfolio assets acquired by the investment fund in the transaction, send a copy of those financial statements to each person or company that was a securityholder of an investment fund that was terminated as a result of the transaction and that is not a securityholder of the investment fund.
A manager in exercising its powers and discharging its duties related to the management of the investment fund must
(a) act honestly and in good faith, and in the best interests of the investment fund; and
(b) exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Commentary
1. This section introduces a required standard of care for managers in certain jurisdictions and is intended to create a uniform standard of care provision for managers of investment funds subject to this Instrument.
The early warning requirements do not apply in connection with the ownership or control of securities issued by a mutual fund to which National Instrument 81-102 Investment Funds applies.
“investment fund conflict of interest reporting requirements” means the provisions of securities legislation that are referred to in Appendix E;
(1) An investment fund that uses leverage must disclose the following information in its financial statements:
(a) a brief explanation of the sources of leverage, including cash borrowing, short selling or use of specified derivatives, used during the reporting period covered by the financial statements,
(b) the lowest and highest levels of the aggregate exposure to those sources of leverage in the period;
(c) a brief explanation of the significance to the investment fund of the lowest and highest levels of the aggregate exposure to those sources of leverage.
(2) For the purposes of subsection (1), an investment fund must calculate its aggregate exposure to the sources of leverage in accordance with section 2.9.1 of National Instrument 81-102 Investment Funds.
(1) The securities regulatory authority or regulator may grant an exemption from this Instrument, in whole or in part, subject to such conditions or restrictions as may be imposed in the exemption.
(2) Despite subsection (1), in Ontario only the regulator may grant such an exemption.
[Note: This unofficial consolidation does not include PART 8, which contains the original historical coming-into-force provision for this Instrument.]
“investment fund conflict of interest investment restrictions” means the provisions of securities legislation that are referred to in Appendix D;
This Instrument comes into force on February 1, 2000
(1) In this section
(a) “current market price of the security” means,
(i) if the security is an exchange-traded security or a foreign exchange-traded security,
(A) the closing sale price on the day of the transaction as reported on the exchange upon which the security is listed or the quotation trade reporting system upon which the security is quoted, or
(B) if there are no reported transactions for the day of the transaction, the average of the highest current bid and lowest current ask for the security as displayed on the exchange upon which the security is listed or the quotation trade reporting system upon which the security is quoted, or
(C) if the closing sale price on the day of the transaction is outside of the closing bid and closing ask, the average of the highest current bid and lowest current ask for the security as displayed on the exchange upon which the security is listed or the quotation trade reporting system upon which the security is quoted; or
(ii) for all other securities, the average of the highest current bid and lowest current ask determined on the basis of reasonable inquiry; and
(b) “market integrity requirements” means
(i) if the security is an exchange-traded security, the purchase or sale
(A) is printed on a marketplace that executes trades of the security; and
(B) complies with the market conduct and display requirements of the marketplace, its regulation services provider and securities regulatory authorities; or
(ii) if the security is a foreign exchange-traded security, the purchase or sale complies with the requirements that govern transparency and trading of foreign exchange-traded securities on the foreign exchange or foreign quotation and trade reporting system; or
(iii) for all other securities, the purchase or sale is through a dealer, if the purchase or sale is required to be reported by a registered dealer under applicable securities legislation.
(2) The portfolio manager of an investment fund may purchase a security of any issuer from, or sell a security of any issuer to, another investment fund managed by the same manager or an affiliate of the manager, if, at the time of the transaction
(a) the investment fund is purchasing from, or selling to, another investment fund to which this Instrument applies;
(b) the independent review committee has approved the transaction under subsection 5.2(2);
(c) the bid and ask price of the security is readily available;
(d) the investment fund receives no consideration and the only cost for the trade is the nominal cost incurred by the investment fund to print or otherwise display the trade;
(e) the transaction is executed at the current market price of the security;
(f) the transaction is subject to market integrity requirements; and
(g) the investment fund keeps written records, including
(i) a record of each purchase and sale of securities;
(ii) the parties to the trade; and
(iii) the terms of the purchase or sale for five years after the end of the fiscal year in which the trade occurred, the most recent two years in a reasonably accessible place.
(3) The provisions of National Instrument 21-101 Marketplace Operation, and Part 6 and Part 8 of National Instrument 23-101 Trading Rules, do not apply to a portfolio manager or portfolio adviser of an investment fund, or an investment fund, with respect to a purchase or sale of a security referred to in subsection (2) if the purchase or sale is made in accordance with that subsection.
(4) The inter-fund self-dealing investment prohibitions do not apply to a portfolio manager or portfolio adviser of an investment fund, or an investment fund, with respect to a purchase or sale of a security referred to in subsection (2) if the purchase or sale is made in accordance with that subsection.
(5) The dealer registration requirement does not apply to a portfolio manager of an investment fund, with respect to a purchase or sale of a security referred to in subsection (2) if the purchase or sale is made in accordance with that subsection.
(6) In subsection (5), “dealer registration requirement” has the meaning ascribed to that term in National Instrument 14-101 Definitions.
Commentary
1. The term “inter-fund self-dealing investment prohibitions” is defined in section 1.5 of this Instrument. It is intended to capture the prohibitions in the securities legislation and certain regulations of each securities regulatory authority regarding inter-fund trades.
2. This section is intended to exempt investment funds from the prohibitions in the securities legislation and certain regulations that preclude inter-fund trades. It is not intended to apply to securities issued by an investment fund that are purchased by another fund within the same fund family. The CSA are of the view that this section applies to inter-fund trades between fund families of the same manager provided the purchase or sale is made in accordance with subsection (2).
3. This section is also intended to provide a portfolio manager with a dealer registration exemption, where necessary, for inter-fund trades made in accordance with this section, but will not apply to any other activities of the portfolio manager. The exemption is based on compliance with this Instrument and the limitation of its application to prospectus-qualified investment funds. The CSA note that the Registration Reform project may re-examine this exemption.
4. This section sets out the minimum conditions for inter-fund trades to proceed without regulatory exemptive relief. An IRC may consider including in any approval any terms or conditions in prior exemptive relief orders, waivers or approvals obtained from the securities regulatory authorities.
5. This section does not specify the policies and procedures that a manager must have to effect inter-fund trades. However, the CSA expect the manager’s policies to include factors or criteria for
6. The CSA expect that the IRC may give its approval in the form of a standing instruction under section 5.4, to give the manager greater flexibility to take advantage of perceived market opportunity.
7. Paragraph (2)(c) requires that the market quotations for the transactions be transparent. The CSA expect that if the price information is publicly available from a marketplace, newspaper or through a data vendor, for example, this will be the price. If the price is not publicly available, the CSA expect the investment fund to obtain at least one quote from an independent, arm’s-length purchaser or seller, immediately before the purchase or sale.
8. The CSA consider the requirement in paragraph (2)(f) to be a way to facilitate price discovery and integrity. The CSA believe this is essential to well-functioning and efficient capital markets. Subparagraph (1)(b)(iii) is intended to capture, for corporate debt securities, the requirement, if applicable, to report the trade to CanPx, and for illiquid securities, the requirement, if applicable, to report the trade to the Canadian Unlisted Board (CUB).
9. Paragraph (2)(g) sets out the minimum expectations regarding the records an investment fund must keep of its inter-fund trades made in reliance on this section. The records should be detailed, and sufficient to establish a proper audit trail of the transactions.
(1) An independent review committee must prepare, for each financial year of the investment fund and no later than the date the investment fund files its annual financial statements, a report to securityholders of the investment fund that describes the independent review committee and its activities for the financial year and includes
(a) the name of each member of the independent review committee at the date of the report, with
(i) the member’s length of service on the independent review committee;
(ii) the name of any other fund family on whose independent review committee the member serves; and
(iii) if applicable, a description of any relationship that may cause a reasonable person to question the member’s independence and the basis upon which the independent review committee determined that the member is independent;
(b) the percentage of securities of each class or series of voting or equity securities beneficially owned, directly or indirectly, in aggregate, by all the members of the independent review committee of the investment fund
(i) in the investment fund if the aggregate level of ownership exceeds 10 percent;
(ii) in the manager; or
(iii) in any person or company that provides services to the investment fund or the manager;
(c) the identity of the Chair of the independent review committee;
(d) any changes in the composition or membership of the independent review committee during the period;
(e) the aggregate compensation paid to the independent review committee and any indemnities paid to members of the independent review committee by the investment fund during the period;
(f) a description of the process and criteria used by the independent review committee to determine the appropriate level of compensation of its members and any instance when, in setting the compensation and expenses of its members, the independent review committee did not follow the recommendation of the manager, including
(i) a summary of the manager’s recommendation; and
(ii) the independent review committee’s reasons for not following the recommendation;
(g) if known, a description of each instance when the manager acted in a conflict of interest matter referred to the independent review committee for which the independent review committee did not give a positive recommendation, including
(i) a summary of the recommendation; and
(ii) if known, the manager’s reasons for proceeding without following the recommendation of the independent review committee and the result of proceeding;
(h) if known, a description of each instance when the manager acted in a conflict of interest matter but did not meet a condition imposed by the independent review committee in its recommendation or approval, including
(i) the nature of the condition;
(ii) if known, the manager’s reasons for not meeting the condition; and
(iii) whether the independent review committee is of the view that the manager has taken, or proposes to take, appropriate action to deal with the matter; and
(i) a brief summary of any recommendations and approvals the manager relied upon during the period.
(2) The report required under subsection (1) must as soon as practicable
(a) be sent by the investment fund, without charge, to a securityholder of the investment fund, upon the securityholder’s request;
(b) be made available and prominently displayed by the manager on the investment fund’s, investment fund family’s or manager’s website, if it has a website;
(c) be filed by the investment fund with the securities regulatory authority or regulator; and (d) be delivered by the independent review committee to the manager.
Commentary
1. The report to be filed with the securities regulatory authorities should be filed on the SEDAR group profile number of the investment fund as a continuous disclosure document. The CSA expect that the investment fund will pay any reasonable costs associated with the filing of the report.
2. It is expected the report will be displayed in an easily visible location on the home page of the website of the investment fund, the investment fund family or the manager, as applicable. The CSA expect the report to remain on the website at least until the posting of the next report.
3. The disclosure required in subparagraph (1)(a)(iii) is expected to be provided only in instances where a member could reasonably be perceived to not be ‘independent’ under this Instrument.
(1) For the purposes of Item 2, if there has been a reorganization or transfer of assets of the mutual fund pursuant to paragraph 5.1(1)(f) or (g) or subparagraph 5.1(1)(h)(i) of the Instrument, the standard deviation must be calculated using the monthly “return on investment” of the continuing mutual fund.
(2) Despite subsection (1), if there has been a change to the fundamental investment objectives of the mutual fund pursuant to paragraph 5.1(1)(c) of the Instrument, for the purposes of Item 2, the standard deviation must be calculated using the monthly return on investment of the mutual fund starting from the date of that change.
This Instrument does not apply to reports to securityholders
(a) printed before February 1, 2000; or
(b) that include only financial statements that relate to financial periods that ended before February 1, 2000.
(1) Securities issued by an unincorporated investment fund must be described by a term that is not and does not include the word “shares”.
(2) A communication by an investment fund or asset allocation service, its promoter, manager, portfolio adviser, principal distributor, participating dealer or a person providing services to the investment fund or asset allocation service must not describe the investment fund as an alternative mutual fund or as a vehicle for investors to participate in the speculative trading of, or leveraged investment in, derivatives, unless the investment fund is an alternative mutual fund.
(1) An investment fund may make or hold an investment in the security of an issuer related to it, its manager, or an entity related to the manager, if
(a) at the time that the investment is made,
(i) the independent review committee has approved the investment under subsection 5.2(2); and
(ii) the purchase is made on an exchange on which the securities of the issuer are listed and traded; and
(b) no later than the time the investment fund files its annual financial statements, the manager of the investment fund files with the securities regulatory authority or regulator the particulars of the investment.
(2) The investment fund conflict of interest investment restrictions do not apply to an investment fund with respect to an investment referred to in subsection (1) if the investment is made in accordance with that subsection.
(3) In subsection (2), “investment fund conflict of interest investment restrictions” has the meaning ascribed to that term in National Instrument 81-102 Investment Funds.
Commentary
1. This section is intended to relieve investment funds in Quebec, and mutual funds elsewhere in Canada, from the prohibitions in the securities legislation of each securities regulatory authority that preclude investments in securities of related issuers.
2. This section sets out the minimum conditions for purchases to proceed without regulatory exemptive relief. An IRC may consider including in any approval any terms or conditions in prior exemptive relief orders, waivers or approvals obtained from the securities regulatory authorities. The CSA expect that the IRC may give its approval in the form of a standing instruction as described in section 5.4 to allow the manager greater flexibility in its decisions.
3. This section contemplates that the manager will comply with the applicable reporting requirements under securities legislation for each purchase. The filing referred to in paragraph (1)(b) should be filed on the SEDAR group profile number of the investment fund, as a continuous disclosure document.
4. If an IRC gives its approval for the investment fund to purchase securities of an issuer described in this section, and then subsequently withdraws its approval for additional purchases, the CSA will not consider the continued holding of the securities to be subject to subsection 1.2(b) of the Instrument. However, we will expect the manager to consider whether continuing to hold those securities is a conflict of interest matter that subsection 1.2(a) of the Instrument would require the manager to refer to the IRC.
This National Instrument (the Instrument) contains both rules and accompanying commentary on those rules. The Canadian Securities Administrators (the CSA or we), have made these rules under authority granted by the securities legislation of their jurisdiction.
The commentary may explain the implications of a rule, offer examples or indicate different ways to comply with a rule. It may expand on a particular subject without being exhaustive. The commentary is not legally binding, but it does reflect the views of the CSA. Commentary always appears in italic type and, outside of this introduction, is titled “Commentary”.
This Appendix contains rules and accompanying commentary on those rules.
Each member jurisdiction of the CSA has made these rules under authority granted to it under the securities legislation of its jurisdiction.
The commentary explains the implications of a rule and offers examples or indicates different ways to comply with a rule. It may expand on a particular subject without being exhaustive.
The commentary is not legally binding, but it does reflect the views of the CSA.
Commentary always appears in italics and is titled “Commentary.”
An eligible institutional investor, or an affiliate or associate of an eligible institutional investor, may, for the purposes of the applicable provisions and securities legislation related to the applicable definitions, treat securities owned or controlled by an investment fund over which the eligible institutional investor, affiliate or associate exercises or shares control, or securities into which those securities are convertible, exercisable or exchangeable, separately from other securities owned or controlled by the eligible institutional investor or affiliate or associate if
(a) the investment fund is not a private mutual fund;
(b) a portfolio adviser manages the investment fund on behalf of the eligible institutional investor under a written agreement;
(c) the portfolio adviser has been identified as managing the investment fund in a document provided to an investor;
(d) none of the eligible institutional investor, its affiliates or associates, or a director, officer, partner, employee or agent of the eligible institutional investor or its affiliates or associates, makes, advises on, participates in the formulation of, or exercises influence over, decisions made by the portfolio adviser on the acquisition, disposition, holding or voting of securities, except for the purposes of
(i) preparing research reports,
(ii) monitoring or ensuring compliance with regulatory requirements, or
(iii) setting, monitoring or ensuring compliance with general investment policies, guidelines, objectives or restrictions;
(e) the eligible institutional investor or affiliate or associate has reasonable grounds for believing that the portfolio adviser complies with the applicable provisions and securities legislation related to the applicable definitions in connection with securities owned or controlled by the investment fund;
(f) the portfolio adviser neither controls nor is controlled by the eligible institutional investor or an affiliate or associate of the eligible institutional investor; and
(g) the eligible institutional investor or affiliate or associate complies with section 5.3.
(1) Subsection 5.1(2) does not apply to an investment fund that requests standing instructions from a securityholder in accordance with this section and sends the documents listed in subsection 5.1(2) according to those instructions.
(2) An investment fund relying on subsection 5.2(1) must send, to each securityholder, a document that
(a) explains the choices a securityholder has to receive the documents listed in subsection 5.1(2);
(b) solicits instructions from the securityholder about delivery of those documents; and
(c) explains that the instructions provided by the securityholder will continue to be followed by the investment fund until they are changed by the securityholder.
(3) If a person or company becomes a securityholder of an investment fund, the investment fund must solicit instructions in accordance with subsection (2) from the securityholder as soon as reasonably practicable after the investment fund accepts a purchase order from the securityholder.
(4) An investment fund must rely on instructions given under this section until a securityholder changes them.
(5) At least once a year, an investment fund must send each securityholder a reminder that
(a) the securityholder is entitled to receive the documents listed in subsection 5.1(2);
(b) the investment fund is relying on delivery instructions provided by the securityholder;
(c) explains how a securityholder can change the instructions it has given; and
(d) the securityholder can obtain the documents on the SEDAR website and on the investment fund’s website, if applicable, and by contacting the investment fund.
(1) Despite sections 2.6 and 2.6.1, an investment fund must not borrow cash or sell securities short if, immediately after entering into a cash borrowing or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by the investment fund would exceed 50% of the investment fund’s net asset value.
(2) Despite sections 2.6 and 2.6.1, if the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by the investment fund exceeds 50% of the investment fund’s net asset value, the investment fund must, as quickly as is commercially reasonable, take all necessary steps to reduce the aggregate value of cash borrowed combined with the aggregate market value of securities sold short to 50% or less of the investment fund’s net asset value.
(1) For the purposes of Item 4(2), the mutual fund must select a reference index that reasonably approximates or, for a newly established mutual fund, is expected to reasonably approximate, the standard deviation of the mutual fund.
(2) When using a reference index, a mutual fund must
(a) monitor the reasonableness of the reference index on an annual basis or more frequently if necessary, and
(b) disclose in the mutual fund’s prospectus in Part B, Item 9.1 of Form 81-101F1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure or Part B, Item 12.2 of Form 41- 101F2 of National Instrument 41-101 General Prospectus Requirements, as applicable,
(i) a brief description of the reference index, and
(ii) if the reference index has changed since the last disclosure under this item, details of when and why the change was made.
Instructions:
(1) A reference index must be made up of one permitted index or, where necessary, to more reasonably approximate the standard deviation of a mutual fund, a composite of several permitted indices.
(2) In selecting and monitoring the reasonableness of a reference index, a mutual fund must consider a number of factors, including whether the reference index
(a) contains a high proportion of the securities represented, or expected to be represented, in the mutual fund’s portfolio,
(b) has returns, or is expected to have returns, highly correlated to the returns of the mutual fund,
(c) has risk and return characteristics that are, or are expected to be, similar to the mutual fund,
(d) has its returns computed (total return, net of withholding taxes, etc.) on the same basis as the mutual fund’s returns,
(e) is consistent with the investment objectives and investment strategies in which the mutual fund is investing,
(f) has investable constituents and has security allocations that represent investable position sizes, for the mutual fund, and
(g) is denominated in, or converted into, the same currency as the mutual fund’s reported net asset value.
(3) In addition to the factors listed in Instruction (2), the mutual fund may consider other factors, if relevant to the specific characteristics of the mutual fund.
Commentary:
A mutual fund must consider each of the factors in (2), and may consider other factors, as appropriate, in selecting and monitoring the reasonableness of a reference index. However, a reference index that reasonably approximates, or is expected to reasonably approximate, the standard deviation of a mutual fund may not necessarily meet all of the factors in (2).
(1) Despite any other provision of this Instrument, an investment fund may enter into a securities lending transaction as lender if the following conditions are satisfied for the transaction:
1. The transaction is administered and supervised in the manner required by sections 2.15 and 2.16.
2. The transaction is made under a written agreement that implements the requirements of this section.
3. Securities are loaned by the investment fund in exchange for collateral.
4. The securities transferred, either by the investment fund or to the investment fund as collateral, as part of the transaction are immediately available for good delivery under applicable legislation.
5. The collateral to be delivered to the investment fund at the beginning of the transaction
(a) is received by the investment fund either before or at the same time as it delivers the loaned securities; and
(b) has a market value equal to at least 102 percent of the market value of the loaned securities.
6. The collateral to be delivered to the investment fund is one or more of
(a) cash;
(b) qualified securities;
(c) securities that are immediately convertible into, or exchangeable for, securities of the same issuer, class or type, and the same term, if applicable, as the securities that are being loaned by the investment fund, and in at least the same number as those loaned by the investment fund; or
(d) irrevocable letters of credit issued by a Canadian financial institution that is not the counterparty, or an affiliate of the counterparty, of the investment fund in the transaction, if evidences of indebtedness of the Canadian financial institution that are rated as short term debt by a designated rating organization or its DRO affiliate have a designated rating.
7. The collateral and loaned securities are marked to market on each business day, and the amount of collateral in the possession of the investment fund is adjusted on each business day to ensure that the market value of collateral maintained by the investment fund in connection with the transaction is at least 102 percent of the market value of the loaned securities.
8. If an event of default by a borrower occurs, the investment fund, in addition to any other remedy available under the agreement or applicable law, has the right under the agreement to retain and dispose of the collateral to the extent necessary to satisfy its claims under the agreement.
9. The borrower is required to pay promptly to the investment fund amounts equal to and as compensation for all dividends and interest paid, and all distributions made, on the loaned securities during the term of the transaction.
10. The transaction is a “securities lending arrangement” under section 260 of the ITA.
11. The investment fund is entitled to terminate the transaction at any time and recall the loaned securities within the normal and customary settlement period for securities lending transactions in the market in which the securities are lent.
12. Immediately after the investment fund enters into the transaction, the aggregate market value of all securities loaned by the investment fund in securities lending transactions and not yet returned to it or sold by the investment fund in repurchase transactions under section 2.13 and not yet repurchased does not exceed 50% of the net asset value of the investment fund.
(2) An investment fund may hold all cash delivered to it as the collateral in a securities lending transaction or may use the cash to purchase
(a) qualified securities having a remaining term to maturity no longer than 90 days;
(b) securities under a reverse repurchase agreement permitted by section 2.14; or
(c) a combination of the securities referred to in paragraphs (a) and (b).
(3) An investment fund, during the term of a securities lending transaction, must hold all, and must not invest or dispose of any, non-cash collateral delivered to it as collateral in the transaction.
(1) The notes to the financial statements of an investment fund must disclose the following:
1. the basis for determining current value and cost of portfolio assets and, if a method of determining cost other than by reference to the average cost of the portfolio assets is used, the method used.
1.1 for financial years beginning on or after January 1, 2014, the basis for classifying the investment fund’s outstanding securities, or each class or series of outstanding securities, as either equity instruments or financial liabilities.
2. if the investment fund has outstanding more than one class or series of securities ranking equally against its net assets, but differing in other respects,
(a) the number of authorized securities of each class or series;
(b) the number of securities of each class or series that have been issued and are outstanding;
(c) the differences between the classes or series, including differences in sales charges, and management fees;
(d) the method used to allocate income and expenses, and realized and unrealized capital gains and losses, to each class;
(e) the fee arrangements for any class-level expenses paid to affiliates; and
(f) transactions involving the issue or redemption of securities of the investment fund undertaken in the period for each class of securities to which the financial statements pertain.
3. to the extent the amount is ascertainable, the portion of the total client brokerage commissions, as defined in National Instrument 23-102 – Use of Client Brokerage Commissions, paid or payable to dealers by the investment fund for the provision of goods or services by the dealers or third parties, other than order execution.
4. the total cost of distribution of the investment fund’s securities recorded in the statement of changes in financial position.
5. the net asset value per security as at the date of the financial statements compared to the total equity per security or net assets attributable to securityholders per security as shown on the statement of financial position, and an explanation of each of the differences between these amounts.
(2) If not disclosed elsewhere in the financial statements, an investment fund that borrows money must, in a note to the financial statements, disclose the minimum and maximum amount borrowed during the period to which the financial statements or management report of fund performance pertain.
(3) For financial years beginning on or after January 1, 2014, the notes to the financial statements must disclose
(a) in the case of annual financial statements, an unreserved statement of compliance with IFRS; and
(b) in the case of interim financial reports, an unreserved statement of compliance with International Accounting Standard 34 Interim Financial Reporting.
(1) Before a manager may proceed with a proposed action under section 5.1 other than those set out in subsection 5.2(1),
(a) the independent review committee must provide a recommendation to the manager as to whether, in the committee’s opinion after reasonable inquiry, the proposed action achieves a fair and reasonable result for the investment fund; and
(b) the manager must consider the recommendation of the independent review committee.
(2) If the manager decides to proceed with an action in a conflict of interest matter that, in the opinion of the independent review committee after reasonable inquiry, does not achieve a fair and reasonable result for the investment fund under paragraph (1)(a), the manager must notify in writing the independent review committee before proceeding with the proposed action.
(3) Upon receiving the notification described in subsection (2), the independent review committee may require the manager to notify securityholders of the investment fund of the manager’s decision.
(4) A notification to securityholders under subsection (3) must
(a) sufficiently describe the proposed action of the manager, the recommendation of the independent review committee and the manager’s reasons for proceeding;
(b) state the date of the proposed implementation of the action; and
(c) be sent by the manager to each securityholder of the investment fund at least thirty days before the effective date of the proposed action.
(5) The investment fund must, as soon as practicable, file the notification referred to in subsection (4) with the securities regulatory authority or regulator upon the notice being sent to securityholders.
Commentary
1. This section captures all conflict of interest matters a manager encounters other than those listed in subsection 5.2(1). This includes conflict of interest matters prohibited or restricted by securities legislation not specified in subsection 5.2(1), and a manager’s business and commercial decisions made on behalf of the investment fund that may be motivated, or be perceived to be motivated, by the manager’s own interests rather than the best interests of the investment fund. Examples include:
The CSA expect that, in seeking guidance in identifying conflict of interest matters caught by this Instrument, among the factors the manager will look to for guidance to identify conflict of interest matters will be industry best practices. However, the CSA also acknowledge that each manager will need to consider the nature of its investment fund operations in determining a conflict of interest matter.
2. The CSA expect the IRC’s recommendation to state a positive or negative response as to whether they view the proposed action as achieving a fair and reasonable result for the investment fund.
3. For a proposed action in a conflict of interest matter under this section that is prohibited or restricted by securities legislation (but not specified in subsection 5.2(1)), a manager will still need to seek exemptive relief from the securities regulatory authorities.
4. Subsection (2) recognizes that, in exceptional circumstances, the manager may decide to proceed with a proposed course of action despite a negative recommendation from the IRC. In such instances, subsection (2) requires the manager to notify the IRC before proceeding with the action. If the IRC determines that the proposed action is sufficiently important to warrant notice to securityholders in the investment fund, the IRC has the authority to require the manager to give such notification before proceeding with the action.
The CSA anticipate that the situation of a manager proceeding with a conflict of interest matter, despite a negative recommendation by the IRC, will occur infrequently.
5. The notification referred to in subsection (5) should be filed on the SEDAR group profile number of the investment fund as a continuous disclosure document.
This Instrument comes into force on June 1, 2005.
This Part applies to an investment fund that is a reporting issuer.
(1) Paragraphs 2.3(1)(b) and (c) do not apply to a mutual fund that has adopted fundamental investment objectives to permit it to invest in mortgages in accordance with National Policy Statement No. 29 if
(a) a National Instrument replacing National Policy Statement No. 29 has not come into force;
(b) the mutual fund was established, and has a prospectus for which a receipt was issued, before the date that this Instrument came into force; and
(c) the mutual fund complies with National Policy Statement No. 29.
(2) If a non-redeemable investment fund has adopted fundamental investment objectives to permit it to invest in mortgages, paragraph 2.3(2)(b) does not apply to the non-redeemable investment fund if the non-redeemable investment fund was established, and has a prospectus for which a receipt was issued, on or before September 22, 2014.
If an investment fund sends to its securityholders any disclosure document other than those required by this Instrument, the investment fund must file a copy of the document on the same date as, or as soon as practicable after, the date on which the document is sent to its securityholders.
(1) The Canadian securities regulatory authorities in a number of jurisdictions have provided waivers and orders from NP39 and securities legislation to permit “fund of funds” to exist and carry on investment activities not otherwise permitted by NP39 or securities legislation. Some of those waivers and orders contained “sunset” provisions that provided that they expired when legislation or a policy or rule of the Canadian securities regulatory authorities came into force that effectively provided for a new “fund of funds” regime. For greater certainty, the Canadian securities regulatory authorities note that the coming into force of the Instrument will not trigger the “sunset” of those waivers and orders.
(2) For greater certainty, note that the coming into force of the Instrument did not trigger the “sunset” of those waivers and orders. However, the coming into force of section 19.3of the instrument will effectively cause those waivers and orders to expire one year after its coming into force.
(1) A manager may not proceed with a proposed action under section 5.1 without the approval of the independent review committee if the action is
(a) an inter-fund trade as described in subsection 6.1(2) of this Instrument or a transaction as described in subsection 4.2(1) of National Instrument 81-102 Investment Funds;
(b) a transaction in securities of an issuer as described in subsection 6.2(1) of this Instrument;
(c) an investment in a class of securities of an issuer underwritten by an entity related to the manager as described in subsection 4.1(1) of National Instrument 81-102 Investment Funds; or
(d) a transaction in which an investment fund intends to borrow cash from a person or company that is an associate or affiliate of the investment fund manager.
(2) An independent review committee must not approve an action unless it has determined, after reasonable inquiry, that the action
(a) is proposed by the manager free from any influence by an entity related to the manager and without taking into account any consideration relevant to an entity related to the manager;
(b) represents the business judgment of the manager uninfluenced by considerations other than the best interests of the investment fund;
(c) is in compliance with the manager’s written policies and procedures relating to the action; and
(d) achieves a fair and reasonable result for the investment fund.
Commentary
1. For the transactions described in subsection (1), provided the manager receives the IRC’s approval under this section, and satisfies the additional conditions imposed under the applicable sections of Part 6 of this Instrument or Part 2 and Part 4 of NI 81-102, the manager will be permitted to proceed with the action without obtaining regulatory exemptive relief.
The IRC may give its approval for certain actions or categories of actions in the form of a standing instruction as described in section 5.4. If no standing instruction is in effect, the manager is required to seek the IRC’s approval prior to proceeding with any action set out in subsection (1). An IRC may consider as guidance any conditions in prior exemptive relief orders, waivers or approvals obtained from the securities regulatory authorities when contemplating the appropriate terms and conditions in its approval.
2. If the IRC does not approve a proposed action described in subsection (1), the manager is not permitted to proceed without obtaining exemptive relief from the securities regulatory authorities. The CSA consider it in the best interests of the investment fund, and ultimately investors, for the IRC to be able to stop any proposed action which does not meet the test in subsection (2).
3. The CSA would usually expect that, before the IRC approves a proposed action described in subsection (1), it will have requested from the manager or others a report or certification to assist in its determination that the test in subsection (2) has been met.
4. The CSA expect that the manager will discuss with the IRC any instance where the IRC does not approve a proposed action, so that an alternative action satisfactory to both the manager and the IRC can be found, if possible.
5. The CSA consider that the ability of the manager to seek the removal of a member or members of the IRC under paragraph 3.10(2)(d) sufficiently addresses any concern that a manager may have about an IRC’s ongoing refusal to approve matters.
(1) Subsection 4.4(1) of the Instrument contains provisions that require that any agreement or declaration of trust under which a person or company acts as manager of an investment fund provide that the manager is responsible for any loss that arises out of the failure of it, and of any person or company retained by it or the investment fund to discharge any of the manager’s responsibilities to the investment fund, to satisfy the standard of care referred to in that section. Subsection 4.4(5) of the instrument provides that Subsection 4.4 does not apply to any losses to an investment fund or securityholder arising out of an action or inaction by acustodian or sub-custodian or by a director of an investment fund. A separate liability regime is imposed, on custodians or sub-custodians by section6.6of the instrument. Directors are subject to the liability regime imposed by the relevant corporate legislation.of the instrument. Directors are subject to the liability regime imposed by the relevant corporate legislation.
In this Instrument, “inter-fund self-dealing investment prohibitions” means the provisions listed in Appendix B that prohibit
(a) a portfolio manager from knowingly causing any investment portfolio managed by it to purchase or sell, or
(b) an investment fund from purchasing or selling, the securities of an issuer from or to the account of a responsible person, an associate of a responsible person or the portfolio manager.
The Ontario Securities Commission (“OSC”), considering that to do so would not be prejudicial to the public interest, orders that effective on May 20, 2020, Ontario Instrument 81-505 entitled “Extension of Certain Filing, Delivery and Prospectus Renewal Requirements of Investment Funds with Deadlines during the period from June 2 to September 30, 2020” is made such that:
i. certain filing and delivery obligations of investment funds under securities legislation, where the obligations are required to be met during the period from June 2, 2020 to September 30, 2020, are extended for a period of 60 days, and
ii. certain investment funds distributing securities under a prospectus with a lapse date during the period from June 2, 2020 to September 30, 2020, have the lapse date extended for a period of 60 days.
The order does not provide a further extension of any deadline previously extended under Ontario Instrument 81-503 Extension of Certain Filing, Delivery and Prospectus Renewal Requirements of Investment Funds dated March 23, 2020.
May 20, 2020
Grant Vingoe, Acting Chair
Timothy Moseley, Vice-Chair
Authority under which the order is made:
Act and section: Securities Act, subsection 143.11(2)
Ontario Securities Commission
Ontario Instrument 81-505
Extension of Certain Filing, Delivery and Prospectus Renewal Requirements of Investment Funds with Deadlines during the period from June 2 to September 30, 2020
Definitions
Terms defined in the Securities Act (Ontario) (“OSA”), Multilateral Instrument 11-102 Passport System (“MI 11-102”), National Instrument 14-101 Definitions, National Instrument 41-101 General Prospectus Requirements (“NI 41-101”), National Instrument 81-102 Investment Funds (“NI 81-102”) National Instrument 81-106 Investment Fund Continuous Disclosure (“NI 81-106”) and National Instrument 81-107 Independent Review Committee for Investment Funds (“NI 81-107”) have the same meaning as in this order.
Exemptive Relief
As a result of the coronavirus disease 2019 (“COVID-19”) outbreak, which was declared a pandemic by the World Health Organization on March 11, 2020 and has led to a “Declaration of Emergency” under the Emergency Management and Civil Protection Act by the Lieutenant Governor of Ontario on March 17, 2020, the Ontario Securities Commission (the “Commission” or “OSC”) acknowledges that this pandemic may present challenges for market participants in the meeting of certain obligations under Ontario securities law.
Specifically, the outbreak of COVID-19 may present challenges to an investment fund’s ability to meet the filing and delivery requirements (the “Filing and Delivery Requirements”) under Ontario securities law listed in Exhibit A and the prospectus renewal requirements (the “Prospectus Renewal Requirements”) under Ontario securities law listed in Exhibit B.
Under subsection 143.11(2) of the OSA if the Commission considers that it would not be prejudicial to the public interest to do so, the Commission may, on application by an interested person or company or on its own initiative, make an order exempting a class of persons or companies, trades, intended trades, securities or derivatives from any requirement of Ontario securities law on such terms or conditions as may be set out in the order, effective for a period of no longer than 18 months after the day on which it comes into force unless extended pursuant to paragraph (b) of subsection 143.11(3) of the OSA.
Order
Consequently, this order provides for the temporary exemptions listed below.
Any investment fund required to make a filing and/or delivery in accordance with the Filing and Delivery Requirements during the period from June 2, 2020 to September 30, 2020 has an additional 60 days from the deadline otherwise applicable under Ontario securities law to make the filing or to send or deliver the document, subject to the terms and conditions listed below.
Any investment fund distributing securities under a prospectus with a lapse date that occurs during the period from June 2, 2020 to September 30, 2020 may add an additional 60 days to that lapse date in fulfilling the Prospectus Renewal Requirements, subject to the terms and conditions listed below.
Terms and conditions
Any investment fund relying on this order must, as soon as reasonably practicable and in advance of its filing or delivery deadline, notify the Director of the Investment Funds and Structured Products Branch by email at IFSPDirector@osc.gov.on.ca stating that the investment fund is relying on this order and each applicable requirement for which it is relying on this order.
An investment fund relying on this order must, as soon as reasonably practicable and in advance of its filing or delivery deadline, post a statement on its public website, or the public website of its investment fund manager, stating that the investment fund is relying on this order and each applicable requirement for which it is relying on this order.
Reference made in a notice pursuant to section 9 of this order, or a public website statement pursuant to section 10 of this order, to an equivalent exemption granted by a securities regulatory authority or regulator in another jurisdiction of Canada that is the investment fund’s principal regulator, as defined in MI 11-102, will be deemed to constitute a reference to the relevant exemption in this order.
This order will come into effect on May 20, 2020 and expires on November 30, 2020.
Exhibit A – Filing and Delivery Requirements
(a) section 14.6(3) of NI 41-101 and section 6.7(3) of 81-102, which require a custodian to deliver to the securities regulatory authority, custodian compliance reports within 30 days after the filing of the annual financial statements of an investment fund,
(b) section 12.1 of NI 81-102, which requires a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, that does not have a principal distributor, to complete and file a compliance report, within 140 days after the financial year end of the mutual fund,
(c) section 2.2 of NI 81-106, which requires that annual financial statements and an auditor’s report be filed on or before the 90th day after the investment fund’s most recently completed financial year,
(d) section 2.4 of NI 81-106, which requires that interim financial statements be filed on or before the 60th day after the end of the most recent interim period of the investment fund,
(e) section 2.11 of NI 81-106, which requires a mutual fund that is not a reporting issuer to provide notice to the regulator of reliance on the section 2.11 exemption to file its financial statements,
(f) section 4.2 of NI 81-106, which requires an investment fund, other than an investment fund that is a scholarship plan, to file an annual management report of fund performance for each financial year and an interim management report of fund performance for each interim period at the same time that it files its annual financial statements or its interim financial statements for that financial period,
(g) section 4.3 of NI 81-106, which requires a scholarship plan to file an annual management report of fund performance at the same time as it files its annual financial statements,
(h) section 5.1(2) of NI 81-106, which requires an investment fund to deliver to a securityholder its annual financial statements, interim financial statements, and the related management report on fund performance concurrently with the filing deadline set out in Part 2 of NI 81-106,
(i) section 5.2(5) of NI 81-106, which requires an investment fund acting in accordance with section 5.2 of NI 81-106, to send annually to each securityholder a request form that they may use to instruct the investment fund as to which of the documents the securityholder wishes to receive,
(j) section 5.3(3) of NI 81-106, which requires an investment fund to send annually to each securityholder a request form the securityholder may use to instruct the investment fund as to which document listed in subsection 5.1(2) of NI 81-106 the securityholder wishes to receive,
(k) section 5.4 of NI 81-106, which requires an investment fund to send a copy of the document listed in subsection 5.1(2) of NI 81-106 requested by securityholder by the later of the filing deadline of the requested document and ten calendar days after the request,
(l) section 8.2(c) of NI 81-106, which requires a labour sponsored or venture capital fund to concurrently file, where applicable, an independent valuation with the filing of its annual financial statements,
(m) section 9.3 of NI 81-106, which requires an investment fund to file an annual information form on or before 90 days after the most recently completed financial year, and
(n) section 4.4 of NI 81-107, which requires an independent review committee to prepare, for each financial year of an investment fund and no later than the date the investment fund files its annual financial statements, a report to securityholders of the investment fund that describes the independent review committee and its activities for the financial year.
Exhibit B – Prospectus Renewal Requirements
Section 62 of the OSA which requires an investment fund to file and obtain a receipt for a new prospectus, in accordance with certain timelines, in order to continue distribution of the investment fund’s securities for a further 12 months after the lapse date.
Investment funds’ auditors are expected to comply with the Handbook with respect to their involvement with the annual and interim management reports of fund performance required by the Instrument as these reports contain financial information extracted from the financial statements.
Despite Item 2(2), if a series or class of securities of the mutual fund has an attribute that results in a different investment risk level for the series or class than the investment risk level of the mutual fund, the return on investment for that series or class of securities must be used to calculate the standard deviation of that series or class of securities.
Commentary: Generally, all series or classes of securities of a mutual fund will have the same investment risk level as determined under Items 1 and 2. However, a particular series or class of securities of a mutual fund may have a different investment risk level than the other series or classes of securities of the same mutual fund if that series or class of securities has an attribute that differs from the others. For example, a series or class of securities that employs currency hedging or that is offered in the currency of the United States of America (if the mutual fund is otherwise offered in the currency of Canada) has an attribute that could result in a different investment risk level than that of the mutual fund.
The amount of fund expenses waived or paid by the manager or portfolio adviser of the investment fund disclosed in the statement of comprehensive income excludes amounts waived or paid due to an expense cap that would require securityholder approval to change.
This Part applies to an investment fund that is a reporting issuer.
(1) If a portfolio adviser of an investment fund receives advice from a non-resident sub-adviser concerning the use of options or standardized futures by the investment fund, the investment fund must not invest in or use options or standardized futures unless
(a) the obligations and duties of the non-resident sub-adviser are set out in a written agreement with the portfolio adviser; and
(b) the portfolio adviser contractually agrees with the investment fund to be responsible for any loss that arises out of the failure of the non-resident sub-adviser
(i) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the investment fund, and
(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
(2) An investment fund must not relieve a portfolio adviser of the investment fund from liability for loss for which the portfolio adviser has assumed responsibility under paragraph (1)(b) that arises out of the failure of the relevant non-resident sub-adviser
(a) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the investment fund, or
(b) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
(3) Despite subsection 4.4(3), an investment fund may indemnify a portfolio adviser against legal fees, judgments and amounts paid in settlement, actually and reasonably incurred by that person or company in connection with services provided by a non-resident sub-adviser for which the portfolio adviser has assumed responsibility under paragraph (1)(b), only if
(a) those fees, judgments and amounts were not incurred as a result of a breach of the standard of care described in subsection (1) or (2); and
(b) the investment fund has reasonable grounds to believe that the action or inaction that caused the payment of the fees, judgments and amounts paid in settlement was in the best interests of the investment fund.
(4) An investment fund must not incur the cost of any portion of liability insurance that insures a person or company for a liability except to the extent that the person or company may be indemnified for that liability under this section.
(1) Every investment fund manager,
(a) shall exercise the powers and discharge the duties of their office honestly, in good faith and in the best interests of the investment fund; and
(b) shall exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
Date: May 14, 2010
Purpose
This notice sets out the views of staff of the Ontario Securities Commission (OSC Staff) on circumstances that may cause OSC Staff to view a proposed transaction or relevant series of transactions for which regulatory approval in respect of a mutual fund has been sought under Part 5 of National Instrument 81-102 Mutual Funds (NI 81-102) as requiring securityholder approval.
Change in Control of a Manager vs. Change of Manager
A change in control of the manager of a mutual fund requires the prior approval by the securities regulatory authorities under subsection 5.5(2) of NI 81-102. A change in the manager of a mutual fund requires prior approval by the securities regulatory authorities under paragraph 5.5(1)(a) of NI 81-102 and, unless the new manager is an affiliate of the current manager, prior securityholder approval pursuant to paragraph 5.1(b) of NI 81-102.
OSC Staff have seen an increasing number of applications for approval of a change in control of the manager of a mutual fund that, upon further examination of the substance of the proposed transaction or relevant series of transactions and its impact on the securityholders of the mutual fund, appear to OSC Staff to make it appropriate for approval by the securities regulatory authorities to be provided on the basis that there is a change in the manager of the mutual fund requiring securityholder approval.
In our review of applications for regulatory approval for a change in control of the manager of the mutual fund, OSC Staff will consider the intended final outcome for the securityholders of the mutual fund. We may ask the applicant for submissions in order to ascertain whether the result for securityholders of the proposed transaction or relevant series of transactions is effectively a change of the manager, rather than a change in control of the manager. When examining the substance of a proposed transaction or relevant series of transactions, OSC Staff will raise questions where it appears the transaction or series of transactions has been structured to effect a change of manager of the mutual fund without securityholder approval.
Generally, this issue will arise if a proposed transaction or relevant series of transactions is structured in one of the following ways:
(i) the manager of a mutual fund amalgamates with another investment fund manager; or
(ii) if, immediately following a change in control of the manager of the mutual fund, a change of manager will occur where the new manager will be the entity that acquired control of the original manager or an affiliate of such entity; or
(iii) when it is contemplated that within a foreseeable period of time following a change in control of the manager of the mutual fund, a change of manager of the mutual fund will occur where the new manager will be the entity that acquired control of the original manager or an affiliate of such entity.
Further Information
Issuers and their counsel are encouraged to contact OSC Staff at an early stage in the planning of any transaction that may give
rise to any questions concerning the issue discussed in this Notice.
Questions
If you have any questions, please refer them to:
Rhonda Goldberg
Deputy Director, Investment Funds Branch
Ontario Securities Commission
Tel: (416) 593–3682
Email: rgoldberg@osc.gov.on.ca
Irene Lee
Legal Counsel, Investment Funds Branch
Ontario Securities Commission
Tel: (416) 593-3668
Email: ilee@osc.gov.on.ca
Carina Kwan
Legal Counsel, Investment Funds Branch
Ontario Securities Commission
Tel: (416) 593–8052
Email: ckwan@osc.gov.on.ca
There may be matters under subsection 5.1(1) of the Instrument that may also be a conflict of interest matter as defined in NI 81-107. The Canadian securities regulatory authorities expect any matter under subsection 5.1(1) of the instrument subject to review by the independent review committee to be referred by the manager to the independent review committee before seeking the approval of securityholders of the investment fund. The Canadian securities regulatory authorities further expect the manager to include a description of the independent review committee’s determination in the written notice to securityholders referred to in subsection 5.4(2) of the instrument.
(1) In addition to the requirements of this Part, an investment fund that is a scholarship plan must disclose, as of the end of its most recently completed financial year, a separate statement or schedule to the financial statements that provides
(a) a summary of education savings plans and units outstanding by year of eligibility, including
(i) disclosure of the number of units by year of eligibility for the opening units, units purchased, units forfeited and the ending units,
(ii) disclosure of the principal amounts and the accumulated income per year of eligibility, and their total balances, and
(iii) a reconciliation of the total balances of the principal amounts and the accumulated income in the statement or schedule to the statement of financial position of the scholarship plan;
(b) the total number of units outstanding; and
(c) a statement of scholarship awards paid to beneficiaries, and a reconciliation of the amount of scholarship awards paid with the statement of comprehensive income.
(2) Despite sections 3.1 and 3.2, an investment fund that is a scholarship plan may omit the “total equity per security or net assets attributable to securityholders per security” and “increase or decrease in total equity from operations per security, or in net assets attributable to securityholders from operations, excluding distributions, per security” line items from its financial statements.
This Part applies to an investment fund that is a reporting issuer.