financial instruments chart, derivaties

The Canadian Securities Administrators (CSA) has published amendments that establish a comprehensive framework for alternative mutual funds (currently known as commodity pools), the umbrella group of securities regulators announced Thursday.

Alternative funds employ strategies, such as short selling and derivatives trading, that are prohibited for traditional mutual 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,” says Louis Morisset, CSA chairman and president and CEO of the Autorité des marchés financiers, in a statement.

The amendments rename “commodity pools” as “alternative mutual funds” and streamline the regulatory regime governing these products by moving most of the regulatory framework for commodity pools (National Instrument 81-104) into NI 81-102 — Investment Funds.

The only part of the existing commodity pool rules that will continue set proficiency standards for mutual fund dealers that distribute these products.

“The decision to retain these proficiency standards is recognition that alternative mutual funds can be more complex than other types of mutual funds and that additional proficiency may be needed for mutual funds dealers selling these products,” the CSA states in a notice.

As part of the reforms, the regulators are also easing the investment restrictions on alternative funds to allow fund managers to use a wider range of investing strategies. “Alternative mutual funds will be permitted to use leverage, both directly and indirectly, through cash borrowing, short selling and specified derivatives transactions,” the notice states.

The amendments and related changes are expected to come into effect on Jan. 3, 2019, subject to government approval in each CSA jurisdiction.