Canadian securities regulators are proposing a series of rule amendments that, among other things, aim to close the regulatory gap between closed-end funds and traditional mutual funds.
The Canadian Securities Administrators (CSA) Wednesday published a set of proposed amendments to the basic mutual fund product rules, as part of its ongoing rule modernization project.
The CSA says the proposed changes “aim to enhance investor protection and market efficiency by providing a consistent regulatory framework in key areas, regardless of whether an investment fund is structured as a mutual fund or a non-redeemable investment fund.”
The new investor protection measures include introducing new operational requirements for non-redeemable funds (except for scholarship plans), such as rules regarding conflicts of interest, and securityholder and regulatory approval of fundamental changes. It also proposes enhancements to the disclosure requirements regarding securities lending, repurchases and reverse repurchases. And, it proposes a new framework for alternative funds that, it says, could provide flexibility for investment funds to use alternative investment strategies, while requiring more effective differentiation among the various types of investment funds.
In its notice, the CSA says that the proposals “will provide baseline protections for investors, regardless of whether they purchase an investment fund product structured as a mutual fund or a non-redeemable investment fund. They will also mitigate the potential for regulatory arbitrage within the current investment fund regulatory regime by levelling the playing field among non-redeemable investment funds, conventional mutual funds and exchange-traded mutual funds and providing a more consistent regulatory framework for comparable investment products.”
Many of the proposed changes are not expected to generate significant costs for fund managers, as they codify existing practices, the CSA says. However, the notice indicates that areas where there may be a cost burden include: the proposal to prohibit a non-redeemable investment fund or its securityholders from paying the organizational costs of a new fund, which may require managers to finance the organizational costs of new funds; the introduction of securityholder voting requirements; and, a proposed prohibition on warrant issuances that aims to protect existing investors from dilutive offerings.
“Overall, we think the potential benefits of the proposed amendments are proportionate to their costs,” it concludes, and that they strike the right balance between protecting investors and fostering fair and efficient capital markets.
“The proposed amendments will benefit investors and the capital markets by creating a more consistent, fair and functional regulatory regime across the spectrum of investment fund products,” it says. “Core operational requirements for non-redeemable investment funds and a more comprehensive regulatory framework for alternative funds will increase the efficiency for the investment fund industry by enabling them to offer products in a more timely fashion, as the requirements applicable to all publicly offered investment funds will be more clearly delineated for managers, investors and the market generally. We also think that the proposed amendments will level the playing field for all investment funds.”
The CSA says that the proposals represent the first stage in Phase 2 of its project to modernize investment fund product regulation. In Phase 1, the CSA made changes to codify frequently-granted exemptive relief, primarily for mutual funds. Its objective in Phase 2 is to identify and address any market efficiency, investor protection or fairness issues that arise out of the differing regulatory regimes for different types of publicly offered investment funds.
In the first stage of Phase 2, the CSA is focusing on implementing an operational rule for non-redeemable investment funds, which historically, haven’t had any operational requirements to follow. The CSA notes that while it recognizes that non-redeemable investment funds differ from mutual funds in certain key aspects, “we do not agree that the differences provide a sufficient policy basis to support the absence of any investment restrictions for publicly offered non-redeemable investment funds.”
In stage two of Phase 2, the CSA will review the investment restrictions applicable to mutual funds to assess if any changes should be made in light of market and product developments, it notes.
“Creating a more consistent regulatory framework for comparable investment products and giving investors access to alternative investment strategies are key elements in modernizing investment fund rules,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC).
The proposals are out for comment until June 25.