Securities regulators propose to reduce regulatory burden for investment fund issuers

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On September 12, 2019, the Canadian Securities Administrators (CSA) published for comment CSA Notice and Request for Comment – Reducing Regulatory Burden for Investment Fund Issuers – Phase 2, Stage 1 (Proposed Amendments), a sweeping set of reform proposals aimed at reducing the regulatory burden for investment fund issuers.

The Proposed Amendments come as part of a broader undertaking by the CSA to reduce regulatory red tape for both investment fund and non-investment fund reporting issuers. The Proposed Amendments follow from Phase 1 of the project, where the CSA undertook a comprehensive review of the existing investment fund disclosure regime, as well as consultation with industry stakeholders, which resulted in several areas of focus for the development of these proposals. The Proposed Amendments are the first stage of Phase 2 of the project, and the CSA has indicated that in subsequent stages of Phase 2, it will consider additional amendments in the areas of continuous disclosure, securityholder meetings and circulars, notice requirements, the prospectus regime and methods of investor communication.

The Proposed Amendments are primarily targeted at investment funds that are reporting issuers (Reporting Issuer Funds), but also contain relief for investment funds that are not reporting issuers (Private Funds) and transactions in managed accounts. In sum, the Proposed Amendments seek to eliminate certain duplicative filing requirements, leverage web-based technology to provide disclosure to investors, codify frequently granted exemptive relief and repeal certain requirements for regulatory approval.

The comment period will remain open for 90 days and closes on December 11, 2019.  

Workstreams

The CSA organized the Proposed Amendments into eight workstreams, which have been summarized here:

Workstream One: Consolidating the Simplified Prospectus and Annual Information Form

Currently, reporting issuer mutual funds in continuous distribution are required to file a Simplified Prospectus and Annual Information Form (AIF) annually. The CSA proposes to repeal the requirement to file an AIF and propose a revised form of Simplified Prospectus that consolidates the two forms, removes overlapping disclosure between the two forms and eliminates disclosure that is available in other regulatory documents. This will more closely align disclosure requirements for conventional mutual funds and exchange-traded funds, and has the potential to significantly reduce the time and cost associated with producing this disclosure by investment fund managers.

Workstream Two: Designated websites

The CSA proposes to require Reporting Issuer Funds to designate a website on which to post required regulatory disclosure with an aim of making regulatory disclosure more accessible for investors. A qualifying website must be publicly accessible and maintained by the fund, its investment fund manager (or an affiliate or associate thereof), or another fund in the same family of funds. Most investment fund managers of Reporting Issuer Funds already post regulatory disclosure to websites maintained for their Reporting Issuer Funds, and accordingly, we agree with the CSA that this requirement does not unduly impose an additional burden on Reporting Issuer Funds and their investment fund managers.

Workstream Three: Codifying notice-and-access relief

In 2013, the CSA adopted the notice-and-access system for non-investment fund reporting issuers, which permitted the delivery of proxy-related materials by short-form notice to registered and beneficial owners with a summary of the matters to be voted upon and instructions on how to access the full set of proxy materials. The CSA proposes to introduce a notice-and-access system for the solicitation of proxies for Reporting Issuer Funds. Since 2016, the CSA has routinely granted relief to Reporting Issuer Funds to utilize a notice-and-access system for the solicitation of proxies, and accordingly, these Proposed Amendments codify this relief and extend its availability to non-management solicitation of proxies.

Workstream Four: Minimizing filings of Personal Information Forms

The CSA proposes to remove the requirement to file a Personal Information Form for individual registrants and permitted individuals who have already filed a Form 33-109F4 Registration of Individuals and Review of Permitted Individuals, thereby removing duplicative disclosure and paperwork.

Workstream Five: Codifying exemptive relief granted in respect of conflicts of interest

The CSA proposes to codify eight different exemptions frequently granted in respect of conflict of interest prohibitions to permit:

  1. Fund-on-fund investments by Private Funds to allow them to invest in other related Private Funds and Reporting Issuer Funds, subject to the conditions that have become customary in the fund-on-fund relief granted by the CSA;
  2. Dealer managed Reporting Issuer Funds to invest in debt securities of reporting issuers that do not have an approved credit rating if the offering is underwritten by the fund’s dealer manager;
  3. In specie subscriptions and redemptions involving related managed accounts and mutual funds (both Reporting Issuer Funds and Private Funds), which are currently prohibited by restrictions on managed account transactions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103);
  4. Inter-fund trades of involving Private Funds and managed accounts at the last sale price, which is currently prohibited under NI 31-103;
  5. Private Funds to invest in securities of a related issuer over an exchange;
  6. Reporting Issuer Funds and Private Funds to invest in debt securities of a related issuer in the secondary market;
  7. Reporting Issuer Funds and Private Funds to invest in long-term debt securities of a related issuer in primary market distributions; and
  8. Reporting Issuer Funds, Private Funds and managed accounts to trade in debt securities with a related dealer.

Workstream Six: Broadening the scope of pre-approved Reporting Issuer Fund mergers

The CSA proposes to broaden the scope of Reporting Issuer Fund mergers that do not require regulatory approval from the CSA. Currently, a Reporting Issuer Fund merger will require regulatory approval if (i) a reasonable person may not consider the continuing fund to have substantially similar fundamental investment objectives, valuation procedures or fee structure to the terminating fund; or (ii) the transaction is not a qualifying exchange or tax-deferred transaction. The Proposed Amendments provide that approval of the CSA will not be required if the information circular prepared by management in connection with the merger clearly discloses, in the case of (i), the differences in the investment objectives, valuation procedures or fee structure, and in the case of (ii), that the transaction is not a qualifying exchange or tax-deferred transaction, and in both cases, why the transaction is in the best interests of securityholders. Securityholder approval of such transactions will continued to be required.

Workstream Seven: Repealing certain regulatory approval requirements for fundamental changes 

The CSA proposes to repeal the regulatory approval requirements for a change of investment fund manager, a change of control of an investment fund manager and a change of custodian occurring in connection with a change of manager for Reporting Issuer Funds. This is largely on the basis that the CSA is given the opportunity to assess the integrity and proficiency of the proposed new manager when it becomes registered through the registration regime prescribed by NI 31-103. Securityholder approval for a change of manager will continue to be required.

Workstream Eight: Codifying exemptive relief granted in respect of Fund Facts delivery

The CSA proposes to provide an exemption from the post-sale requirement to deliver a Fund Facts document for conventional reporting issuer mutual fund purchases in managed accounts or by permitted clients that are not individuals. Note that an exemption from the pre-sale delivery requirement already exists for purchases of reporting issuer mutual fund securities made in managed accounts or by permitted clients that are not individuals.

There is currently a Fund Facts delivery requirement for subsequent purchases of conventional reporting issuer mutual fund securities for model portfolio products and portfolio rebalancing services. The CSA proposes to codify the exemptive relief that has been issued to relieve these programs from this requirement. This proposal acknowledges that an investor buying these products or services makes an investment decision at the point of subscribing for the product or service, and subsequent purchases of mutual fund securities do not reflect new investment decisions requiring the delivery of Fund Facts documents. On a similar basis, the CSA has also proposed an exemption from the requirement to deliver a Fund Facts document in connection with a switch between classes or series triggered under an automatic switch program.

Additionally, the CSA proposes amendments to the Fund Facts form to permit a single consolidated Fund Facts to be filed for all of the classes or series of securities of a reporting issuer mutual fund offered in an automatic switch program, which may provide for significant cost savings in the preparation, printing and delivery of Fund Facts.

Finally, the CSA proposes to amend the Fund Facts form to provide for more prescriptive disclosure, where a fund is unable to disclose performance data because it is new, has not yet completed a calendar year or has not yet completed 12 consecutive months. This will more closely align the Fund Facts and ETF Facts disclosure requirements, and will reduce variances in the disclosure between funds offered by different investment fund managers, and between mutual fund and ETF products. 

Dentons’ insight

These regulatory reductions are a welcome attempt to assist investment fund managers in reducing the time and cost associated with producing and delivering regulatory disclosure, and obtaining regulatory exemptions and approvals where such exemptions and approvals have been routinely granted. In the preliminary work completed in Phase 1 of the project by the CSA, and in their consultation with industry, the CSA has been able to focus its burden reduction mandate on areas that have the potential to increase the ease and efficiency of doing business in the investment management industry, while continuing to mandate (and enhance) full and fair disclosure for investors and appropriate protections against conflicts of interest. We expect the industry to urge the CSA to continue down the path of burden reduction that has been promised in future stages of the project, and encourage industry participants to make use of the comment period to provide further feedback.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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