PHASE 2 FUND MODERNIZATION AMENDMENTS
FASKEN MARTINEAU DUMOULIN LLP
JULY 9, 2014
Opening remarks
Background
 March 2013
 first draft of proposals
 almost all provisions in NI 81-102 to apply to closed-end funds
(CEFs)
 June 2014
 amendments published in final form with no further comment
period
 changes dependent on alternative funds regime deferred
 some new provisions added
Opening remarks
Overview
 New requirements for CEFs in the following areas:
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Investment restrictions
Dilutive offerings / warrants
Fund mergers and conversions
Unitholder / CSA approvals
Sales communications
Some new requirements for mutual funds
New investment restrictions for closed-end
funds
Control restriction
 Section 2.2 of NI 81-102 - limit of 10% of the voting or equity
securities of any single issuer
 Derivatives exposure not included
 Special meaning of “purchase”
 Existing CEFs grandfathered until March 21, 2016
 Possible issues with investments in:
 Private companies
 Special purpose vehicles (private equity, securitization)
New investment restrictions for closed-end
funds
Real property, mortgages and loans
Section 2.3 of NI 81-102 – prohibitions against:
• Owning real property
• Holding mortgages (other than government guaranteed)
• Loans (other than passive loan participations)
 Transition:
• Existing CEFs grandfathered until March 21, 2016
• Mortgage-focused CEFs with a final receipt prior to September 22,
2014 not subject to mortgage prohibition
New investment restrictions for closed-end
funds
Fund-on-fund
 Section 2.5 of NI 81-102 – only permitted fund-on-fund
investments
 Bottom fund must be a reporting issuer somewhere in Canada
 Bottom fund must be subject to NI 81-102 (e.g. previously
issued securities under a prospectus) or voluntarily compliant
with NI 81-102
 “3 tiers” prohibited unless:
 Middle fund is a “clone fund”
 Bottom fund is a money market fund or IPU
 Existing CEFs grandfathered until March 21, 2016
New investment restrictions for closed-end
funds
Fund-on-fund issues
 Bottom funds that are not reporting issuers in Canada:
 Hedge funds and pooled funds
 U.S. mutual funds
 IPUs that use leverage or track a commodity
New investment restrictions for closed-end
funds
Securities lending, repurchase and reverse repurchase
 Must use custodian and/or subcustodian as lending agent
 Must hold prescribed collateral not less than 102% of
outstanding transaction on a daily marked-to-market basis
 Aggregate outstanding securities lending and repurchase
transactions cannot exceed 50% of NAV (could be problematic
for funds with conventional forward transactions)
 Existing CEFs grandfathered until September 21, 2015
Deferred investment restrictions pending
alternative funds regime
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Limit of 10% of NAV in any single issuer
Derivatives (including leverage through derivatives)
Short selling (including leverage through short selling)
Commodities
Illiquid investments (though note CSA commentary)
Performance fee restrictions also deferred
Will be revisited under alternative funds regime
Status of new regime for alternative funds
Alternative Funds Regime
 Concept introduced in March 2013 as alternative regulatory
framework involving fewer restrictions
 Proposed to be effected through revamped NI 81-104 Commodity Pools
 No substantive provisions have been proposed to date
 No time frame provided for publication of Alternative Funds
regime
Conflict of interest investment restrictions
for closed-end funds
“Dealer manager” restrictions
 Part 4 of NI 81-102
 CEFs of a manager with an affiliated dealer cannot not purchase
securities of an issuer during, or within 60 days after, any distribution in
which the dealer acts as underwriter or agent
 Exceptions for:
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Canadian or provincial government guaranteed debt
Other debt with a designated credit rating
Equity securities over an exchange
Situations where dealer sold less than 5% as a selling group member
New investment restrictions for closed-end
funds
Questions?
New operational requirements for closedend funds
Warrant Offerings
 All warrant offerings are prohibited, regardless of strike price
Second Stage Offerings
 All future issuances of units must be at an issue price not less
than NAV per unit
 Some dilution due to offering expenses (including agents’
commission) is permitted
 CEF still permitted to pay offering expenses
New operational requirements for closedend funds
Matters Requiring Securityholder Approval
 Fundamental changes – Part 5 of NI 81-102
 Increase/introduction of a fee or expense
 The manager is changed (other than to an affiliate)
 Change of fundamental investment objectives
 Decrease to the frequency of calculating NAV
New operational requirements for closedend funds
Transactional Matters Requiring Securityholder Approval
 Reorganization or transfer of assets to another “issuer”
 Reorganization or acquisition of assets of another issuer
 CEF restructures into a mutual fund
 mutual fund restructures into a CEF
 restructuring into an issuer that is not an investment fund
New operational requirements for closedend funds
Implementation of Fundamental Change
 Investment fund cannot bear costs or expenses of a
restructuring
 Majority approval
 Separate class vote if a class is affected differently from other
classes
 No vote if a class is not affected and consistent with constating
documents
 21 days written notice of meeting – must disclose the effect the
change would have on the MER for the last financial year
New operational requirements for closedend funds
Exemptions from Securityholder Approval Requirement
 Not required for change/increase in fees or expenses if certain
conditions are satisfied
 Not required for a flow-through limited partnership rollover into
a mutual fund if certain conditions are satisfied including:
• transaction is tax deferred
• no redemption right/no market through which to sell securities
• prospectus contains specified disclosure – what if existing flowthrough LP’s do not have requisite disclosure in their prospectus?
• rollover happens within 30 months of IPO
• mutual fund bears none of the costs and expenses
• IRC approval is obtained
• transaction is effected at NAV calculated on the date of the
transaction
New operational requirements for closedend funds
Exemptions from Securityholder Approval Requirement
(Cont’d)
 Not required for restructuring of terminating fund if certain
conditions are satisfied including:
• IRC approval is obtained
• similar fundamental investment objectives, valuation procedures and
fee structures;
• prospectus contains specified disclosure
• tax deferred or a qualifying transaction under tax laws
• the terminating fund (i) files and issues a news release, (ii)
securityholders may redeem securities after the news release and
before the effective date, and (iii) securities are redeemed at NAV
• transaction is effected at NAV calculated on the date of the transaction
New operational requirements for closedend funds
Approval of Securities Regulators
 Approval of securities regulators is required prior to a
reorganization or transfer of assets if securityholders will become
securityholders of another issuer
 Pre-approval not required if certain conditions are met, including:
• most of the conditions that need to be satisfied to be exempt from
securityholder approval
• transaction must be approved by
• securityholders of the terminating fund (unless an exemption from
securityholder approval applies) and
• securityholders of the continuing fund if required
• Materials sent to securityholders of the terminating fund must describe,
among other things, differences between organizational structures (e.g.,
trust versus corporation)
New operational requirements for closedend funds
Approval of Securities Regulators (Cont’d)
 For a flow-through limited partnership – exempt if the transaction
is exempt from securityholder approval and IRC approval for the
mutual fund is obtained
 NI 81-102 prescribes information that is to be contained in the
application for approval
New operational requirements for closedend funds
Termination of a Non-Redeemable Investment Fund
 A CEF must first issue and file a news release that discloses
termination
• Cannot terminate earlier than 15 days or more than 90 days later
 Does not apply to a CEF merging into another issuer
Change of Auditor
 Auditor must not be changed unless
 IRC approval is obtained
 Prospectus discloses that approval of securityholders will not be
obtained and that a written notice will be sent at least 60 days before
the effective date
 Notice is sent 60 days before the effective date
New operational requirements for closedend funds
Implications to Investment Funds
 Technical problem for existing funds regarding prospectus
disclosure requirements
• No grandfathering - floodgate of exemptive relief applications?
 Canadian Securities Administrators seeking to enhance investor
protection
• Regulatory arbitrage justification – underlying theme of maintenance of
assets under management
• Public policy concerns may still exist – long-term investors may bear
brunt of increasing costs if a CEF cannot raise capital (no rights or
warrant offering and no offering at below NAV), and its manager will not
pay the costs of a restructuring
• Merits of powers of attorney attaching to securities?
New operational requirements for closedend funds
Sale of manager’s business
 Must be approved by CSA
 Changes of manager (sale of management contracts) also
requires unitholder approval
 OSC treats change of control as “change of manager” if postclosing consolidation anticipated = unitholder approval
New operational requirements for closedend funds
Redemption rights
 Suspension of redemptions subject to same restrictions as mutual
funds
 New 15 business day limit for paying redemption proceeds
 New requirement to give annual notice of redemption rights and
procedures (starting January 1, 2015)
New operational requirements for closedend funds
Sales communications
 Part 15 of NI 81-102 – detailed rules regulating past performance
disclosure, warnings & disclaimers, ratings & rankings, and material
changes impacting performance
 Standardized calculation of past performance
 No disclosure of past performance in the first year
 Misleading comparisons
 Mandatory prescribed warnings & disclaimers
 Existing CEFs grandfathered until March 23, 2015
New operational requirements for closedend funds
Questions?
Changes for mutual funds
No investing in closed-end funds
 Fund-on-fund rules changed to prohibit mutual funds from
investing in closed-end funds
 Completely new, notwithstanding CSA statement
 Funds created by September 22, 2014 are grandfathered until March 21,
2016
 Discretionary relief for 10%, similar to leveraged ETFs?
Changes for mutual funds
New calculation of securities lending / repurchase limit
 Maximum aggregate outstanding securities loans and repurchase
transactions cannot exceed 50% of net asset value (not total
assets)
 Update prospectus disclosure
Changes for mutual funds
Past performance of previous closed-end fund
 Sales communications for mutual funds that previously were
closed-end funds now must include past performance starting
from the date the closed-end fund became a reporting issuer
 May change past ratings and rankings
 Information must be updated with service providers by
September 22, 2014
 Update fund facts with next regular filing
Changes for mutual funds
New securities lending disclosure (financial statements)
 Notes to financial statements must include:
• Reconciliation of gross revenues (including from investing collateral)
and net income retained by the fund after compensating lending agent
• Parties who received compensation and amount each party received
• Aggregate compensation as a percentage of gross securities lending
revenue
• Applies to financial years starting on or after January 1, 2016
• Also applies to CEFs
Changes for mutual funds
New securities lending disclosure (AIF)
 Starting September 22, 2014, AIF disclosure of:
• Name and municipality of each lending agent
• Whether lending agent is an affiliate or associate of the manager
• Brief description of agreement with each lending agent including:
o Required collateral for transactions
o Indemnities and termination provisions
o Also applies to CEFs
Changes for mutual funds
Questions?
Speaker biographies
JOHN KRUK is a partner with more than twenty years of
experience helping clients develop innovative fund structures,
unique derivative instruments and new distribution models. He
assists clients with all aspects of structuring, marketing, operating
and restructuring a broad range of investment products and
services including mutual funds, closed-end funds, mortgage
investment corporations, other structured products, segregated
funds and private asset management services, and advises on
compliance issues relating to those products and services. John
also has played central roles in the acquisition, reorganization of
disposition of investment management and distribution businesses
through public and private transactions. He is recognized by
Lexpert as a leading lawyer in Investment Funds & Asset
Management and endorsed by Practical Law Company as an
expert in investment funds, as well as recognized by both Best
Lawyers and by the Financial Post as a leading lawyer in mutual
funds.
Speaker biographies
JOHN SABETTI practises in Fasken Martineau's Securities and
Mergers & Acquisitions Group with a primary focus on Investment
Funds. John has acted for both issuers and investment dealers in
respect of the initial public offerings of a significant number of
structured product issuers, including closed-end funds, flowthrough vehicles, mortgage investment corporations and real
estate investment vehicles, that have raised in excess of $4 billion
in gross proceeds. In addition, he has structured and implemented
a multitude of investment fund merger and reorganization
transactions, as well as conversions of closed-end funds into
mutual funds. John joined Fasken Martineau as an articling student
in 1998, became an associate in 2000 and a partner in 2005. John
is recognized as a leading lawyer for Capital Markets by IFLR1000
for 2014.
Speaker biographies
• DANIEL FUKE is an associate in Fasken Martineau’s
Corporate/Securities Group whose practice focuses on advising
clients in the investment funds industry. He has advised
investment fund managers, portfolio managers and investment
dealers in the formation and initial public offerings of closed-end
investment funds and flow-through limited partnerships, the
formation of mutual funds and pooled funds and mergers and
acquisitions of investment funds and investment fund managers.
Daniel’s practice also involves advising clients on public and
private mergers and acquisitions, capital markets transactions,
including public and private equity and debt offerings, and
corporate governance matters.