Regulators issue amendments for final alternative mutual funds framework

The Canadian Securities Administrators (CSA) has published amendments to establish a comprehensive framework for alternative mutual funds, as well as streamline the regulation of non-redeemable investment funds.

“These amendments mark a new phase in the CSA's efforts to modernize the regulation of publicly offered investment funds, while maintaining appropriate investor protection measures," said Louis Morisset, CSA chair and president and CEO of the Autorité des marchés financiers.

Under the amendments, “commodity pools” will be renamed as “alternative mutual funds,” which include mutual funds whose investment objectives permit them to:

• invest in physical commodities or specified derivatives; or
• borrow cash or engage in short-selling in a manner not typically permitted for other mutual funds.

In addition, to streamline the regulatory regime governing the products, the bulk of the regulatory framework in National Instrument 81-104 Commodity Pools will be moved into National Instrument 81-102 Investment Funds. With the changes, prospectus requirements for alternative mutual funds will also be simplified as they will fall within the prospectus disclosure regime applicable to other mutual funds.

The amendments also set out updated investment restrictions to facilitate greater flexibility with investing strategies for alternative mutual funds. These include but are not limited to:

• higher concentrations of assets in securities of a single issuer;
• more options for investment in physical commodities (such as silver, platinum, and palladium);
• relaxed restrictions on fund-of-fund investing;
• a higher cap on cash borrowing (form 5% to 50% of an alternative mutual fund’s NAV);
• higher limits on the total market value of securities alternative mutual funds can short-sell (from 20% to 50% of the fund’s NAV)
• higher limits on the securities from a single issuer a fund can short (from 5% of NAV to 10% of NAV); and
• permission to use leverage, both direct and indirect, through cash borrowing, short selling, and specified derivatives transactions.

The amendments also include changes to codify certain routine exemptive relief granted to mutual funds.

The new amendments are laid out in full in a new notice posted on CSA members’ websites. The amendments and related changes are anticipated to take effect on January 3, 2019, subject to Ministerial approvals.

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