The Canadian Securities Administrators are proposing amendments that would permit actively managed funds of funds. The amendments affect NI 81-102 and Companion Policy 81-102CP, Mutual Funds and to NI 81-101, Mutual Fund Prospectus Disclosure, Form 81-101 F1, Contents of Simplified Prospectus, and Form 81-101F2, Contents of Annual Information Form.

Current restrictions for mutual funds that invest in other mutual funds will be changed to allow actively managed fund of fund structures. For many years, mutual funds have applied for exemptive relief to permit fund of funds structures. Under the current regulatory regime, investors in the securities of a top fund are treated as if they themselves purchased the securities of the bottom fund. The CSA have re-considered the current approach of the existing decisions.

The proposed amendments are based on the principle that a mutual fund is one of many potential investments that a portfolio adviser may make with the assets of a top fund.

The portfolio adviser of the top fund should be able to determine how much to invest in one or more bottom funds in order to meet the investment objective of the top fund. This means that the bottom funds should be subject to the same rules as the top fund.

The CSA propose that the portfolio manager of a top fund be permitted to actively manage the top fund’s investments in bottom funds. The proposal provides that a top fund would only be able to invest in a bottom fund if that bottom fund was qualified for sale in the same jurisdiction as the top fund under a simplified prospectus and annual information form. It is also proposed that a mutual fund cannot invest in exchange traded funds.

The CSA believe that multiple layering of mutual fund investments must be limited. Without limits on layering it could be impossible for a potential investor in a top fund to determine at what level the actual investment decisions are being made.

The proposal does not impose restrictions on the size of purchases or redemptions by a top fund in a bottom fund.

Consistent with the principle that an investment in a bottom fund should be treated as an investment like any other it is proposed that the voting rights and disclosure materials of bottom funds no longer need to be passed through to investors in the top fund. However, the manager of a top fund would be prohibited from voting the securities of the other mutual fund when the fund is managed by the same manager or an affiliate of the manager of the top fund.

It is proposed that all fees and expenses rebated by the bottom fund must be paid to the top fund. This restriction is intended to eliminate the conflicts of interest that could result if rebates are paid directly to the manager.

The proposed amendments would require a top fund to disclose in its simplified prospectus and in its annual information form relevant information about the fund of funds structure, including the process or criteria used to select the other mutual funds and the prohibition of duplication of management fees.

The amendments provide for a transition period of one year for a mutual fund that has obtained a prior exemption. The request for comment expires on October 17.

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