The Office of the Superintendent of Financial Institutions has posted guidance (the Guideline) on the question of whether a fund established as a limited partnership by a corporation meets the definition of “pooled fund” or “mutual fund” for purposes of Section 9 of Schedule III to the Pension Benefits Standards Regulations (Schedule III).
Section 9 of Schedule III prohibits a plan administrator from directly or indirectly lending moneys of the plan equal to more than 10% of the total book value of the plan’s assets to, or investing moneys equal to more than 10% of the total book value of the plan’s assets in any one person, two or more associated persons or two or more affiliated persons. This rule is known as the “10% rule”. The purpose of the 10% rule is to prevent a pension plan from investing too much of the plan’s assets in any one enterprise.
There are a number of exceptions to the 10% rule. One exception is for investments in “a segregated or mutual or pooled fund that complies with the requirements applicable to a plan that are set out in this Schedule”.
The Guideline addresses the question of whether a limited partnership could meet the definition of a “mutual fund” or “pooled fund” for purposes of the exception to the 10% rule.
The terms “pooled fund” and “mutual fund” are defined in Section 2(1) of the Pension Benefits Standards Regulations. The definition is as follows:
“mutual fund” or “pooled fund” mean a fund established by a corporation that is duly authorized to operate a fund in which moneys from two or more depositors are accepted for investment and where shares allocated to each depositor serve to establish the proportionate interest at any time of each depositor in the assets of the fund.
Notably, when Ontario adopted Schedule III and certain related provisions of the Pension Benefits Standards Regulations in 2000, it did not specifically incorporate by reference these definitions into the Ontario Pension Benefits Regulations. However, it is reasonable to assume that the definitions prescribed in the Pension Benefits Standards Regulations would be used in interpreting Schedule III for Ontario-registered plans even though they weren’t officially incorporated into the Ontario Regulations.
According to the Guideline, whether a partnership meets the definitions of a “mutual fund” or “pooled fund” depends on the specific features of the partnership. The Guideline does, however, give an example of partnership structure that would, in OSFI’s view, meet the definition. The requirements are as follows:
the fund is a limited partnership that was established by a corporation, such as its general partner;
more than two investors, all of whom are independent from the general partner, have contributed capital to the fund and have acquired units of, or other limited partnership interests in the fund;
the units or other limited partnership interests held by an investor in the fund are allocated to each investor and serve to establish the proportionate interest at any time of each investor in the assets of the fund;
the units or other limited partnership interests of the fund can be sold or redeemed in a timely manner; and
the primary purpose of the fund is to invest the moneys of the fund’s investors.
In our experience, the most common forms of limited partnership structures would meet these requirements. However, it is clear that these requirements are not intended to be exhaustive and there could be other structures which would meet the definitions.
While it is helpful that OSFI has clarified the question of whether limited partnerships qualify as pooled or mutual funds, plan administrators cannot forget the second part of the exception – only pooled or mutual funds which comply “with the requirements applicable to a plan that are set out in this Schedule” (i.e., all of the applicable requirements in Schedule III) would qualify. The second part of the test is not straightforward and may be more difficult to meet. If a plan administrator is considering investing more than 10% of its assets in a limited partnership, it should seek legal advice as to the requirements which the manager of the limited partnership would need to meet in order to satisfy the second part of the test.