IFSP eNews aims to provide timely information about regulatory news and issues to investment fund and structured product issuers and their advisors in the form of articles published on a timely, as-needed basis. IFSP eNews replaces the Investment Funds Practitioner (the Practitioner).
IFSP eNews is prepared by staff of the Investment Funds and Structured Products (IFSP) Branch, and the views that it expresses do not necessarily reflect the views of the Ontario Securities Commission or the Canadian Securities Administrators.
The information contained in IFSP eNews is based on particular factual circumstances. Outcomes may differ as facts change, or as regulatory approaches evolve.
IFSP Branch staff review IFSP eNews articles periodically to remove articles from the OSC website that are no longer relevant.
We welcome your feedback, including any suggestions. Please forward your comments to [email protected].
On October 12, 2021, the Ministry of Finance published a Consultation Draft of the Capital Markets Act. The draft consults on potential changes to securities legislation regarding statutory civil liability claims for misrepresentations in prospectuses for investors who purchase exchange-traded fund (ETF) units on an exchange. The consultation follows a recent court decision that raised questions about such claims.
Staff of the Investment Funds and Structured Products Branch encourage stakeholders to provide feedback on this consultation. Comments should be submitted to the Ministry using the methods set out in the Consultation Commentary. The deadline for comments is January 21, 2022.
Pei-Ching Huang, Senior Legal Counsel, Investment Funds and Structured Products Branch
Michael Tang, Senior Legal Counsel, Investment Funds and Structured Products Branch
The Canadian Securities Administrators has granted exemptive relief to the Canadian Imperial Bank of Commerce (the Filer) to facilitate the distribution of Canadian Depositary Receipts (CDRs). CDRs trade over a Canadian marketplace and track the performance of large, highly liquid public companies in the United States (each a U.S. Company).
Investors can purchase CDRs in their Canadian dollar brokerage accounts, with the U.S. dollar exposure of a share of a U.S. Company (a U.S. Share) hedged back to the Canadian dollar. CDRs are in continuous distribution and are subscribed for, and redeemed by, authorized participants in a similar way to exchange-traded funds.
Under the exemptive relief, CDRs are qualified for distribution by a base shelf prospectus and a prospectus supplement that is filed for each series of CDRs, with each series representing one U.S. Company. The costs associated with an investment in CDRs are disclosed in the Filer’s base shelf prospectus.
The Filer, as depositary, will hold the deposited U.S. Shares on behalf of investors. The terms of the deposit are governed by a deposit agreement, which is publicly available on the System for Electronic Document Analysis and Retrieval (SEDAR). After a U.S. Share is deposited, the Filer issues a depositary receipt representing an investor’s beneficial ownership in the pool of U.S. Shares. The receipt then trades over a Canadian marketplace in Canadian dollars.
The decision grants exemptive relief to the Filer from:
- the requirement to deliver to the purchaser of a CDR or its agent the latest prospectus or prospectus supplement (similar to exemptions provided to at-the-market distributions);
- certain prospectus form requirements relating to the statements regarding the delivery to purchasers of the prospectus or prospectus supplements and relating to the statement regarding purchasers’ statutory rights of withdrawal and remedies of rescission or damages;
- the requirement to distribute securities under a prospectus at a fixed price to permit the CDRs to be issued at the current market price;
- the requirement to file a pricing supplement in order to distribute securities under a base shelf prospectus by way of a continuous distribution; and
- other technical relief to facilitate the proposed CDR structure.
The exemptive relief is subject to a number of conditions, including that:
- CDRs not be used by U.S. Companies to raise capital; and
- the Filer maintain a website that discloses certain specified information relating to the CDRs.
Under the exemptive relief, a U.S. Company must be incorporated in the United States, be listed on the S&P 500 Index and have a market capitalization in excess of US$20 billion. The U.S. Shares must be listed on the NASDAQ or New York Stock Exchange, and the average daily trading volume of the U.S. Shares in the month before the date of the first prospectus supplement for that CDR must exceed US$100 million.
Nick Hawkins, Legal Counsel, Investment Funds and Structured Products Branch
Viraf Nania, Senior Accountant, Investment Funds and Structured Products Branch
Today, the Ontario Securities Commission (OSC) published OSC Staff Notice 81-732 Investment Fund Survey (OSC Staff Notice 81-732), which provides background information on the investment fund survey that was launched in April 2021. The survey is focused on a number of key areas, including leverage, liquidity, and asset class exposures. It will be conducted on an annual basis going forward, allowing the OSC to monitor the health of the investment fund industry in a proactive manner.
OSC Staff Notice 81-732 explains the role of the investment fund survey in data collection and analysis by the OSC. The data collected through the investment fund survey allows for evidence-based regulation and will assist in the development of a risk-identification framework to help the OSC deliver on its mandate. This data will also allow the OSC to coordinate our monitoring activities with other regulatory bodies that have a shared interest in promoting financial stability.
Investment fund managers are encouraged to review OSC Staff Notice 81-732 for more information on the use of this data, and to complete the investment fund survey by July 30, 2021.
Abid Zaman, Senior Accountant, Investment Funds and Structured Products Branch
John Bulmer, Senior Economist, Regulatory Strategy and Research Branch
On June 30, 2021, the Sustainable Finance Task Force (STF) of the International Organization of Securities Commissions (IOSCO) published a consultation report titled Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management (the Consultation Report).
The Ontario Securities Commission (OSC), along with the Securities and Futures Commission of Hong Kong, is a co-lead of the workstream of the STF that produced the Consultation Report.
The Consultation Report sets out proposed recommendations for securities regulators and policymakers, as applicable, that aim to improve sustainability-related practices, policies, procedures and disclosure in asset management.
The proposed recommendations cover the following areas:
- asset manager practices, policies, procedures and disclosure
- product-level disclosure
- supervision and enforcement
- financial and investor education.
Staff of the Investment Funds and Structured Products Branch of the OSC encourage stakeholders to provide feedback on the Consultation Report by submitting comments to IOSCO using the methods set out in the Consultation Report. The deadline for comments is August 15, 2021.
Ritu Kalra, Senior Accountant, Investment Funds and Structured Products Branch
Bryana Lee, Legal Counsel, Investment Funds and Structured Products Branch
The Canadian Securities Administrators has granted exemptive relief to a group of investment funds and a registered adviser to permit domestic and cross-border (U.S.) inter-fund trading. The relief is expected to help investment funds execute transactions more efficiently and streamline their compliance procedures without compromising investor protection.
This exemptive relief decision gives investment funds more flexibility on how to comply with the market integrity requirements in section 6.1 of National Instrument 81-107 Independent Review Committee for Investment Funds as compared to prior decisions granting similar relief.
The conditions of this exemptive relief decision permit compliance with the market integrity requirements by using one of the following to execute an inter-fund trade: (a) a third-party Investment Industry Regulatory Organization of Canada (IIROC) registered dealer; or (b) provided certain conditions are met, a third-party broker or dealer based and registered in the U.S. Additionally, in certain circumstances, inter-fund trades in Canada-U.S. inter-listed securities executed by a third-party U.S. broker or dealer may be printed on a marketplace in Canada or in accordance with applicable U.S. market transparency obligations.
This relief exempts a group of funds from subsection 4.2(1) of National Instrument 81-102 Investment Funds and a registered adviser from subparagraphs 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Dimitri Bollegala, Legal Counsel, Investment Funds and Structured Products Branch [email protected]
Susan Thomas, Senior Legal Counsel, Investment Funds and Structured Products Branch [email protected]
The Canadian Securities Administrators (CSA) has granted exemptive relief to the Longevity Pension Fund (the Fund) from subsection 10.3(1) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the Fund to calculate the redemption price of a security of a decumulation class of the Fund at a price that may be less than the net asset value (NAV) per security of that class.
The Fund is a novel mutual fund with “income for life” characteristics that was pre-filed with the CSA. The Fund is designed for investors who are at, or approaching, retirement and aims to offer longevity risk protection for investors that anticipate a lengthy lifespan and are concerned about having sufficient income in the later years of their life. It aims to pay increasing distributions as investors age and as other retirement assets diminish. The lifetime payments on the units of a decumulation class are funded through investment returns generated by the Fund’s portfolio, redemptions due to both mortality and voluntary redemptions, and returns of capital. Investors who survive longer than the average person in their age cohort earn a “longevity benefit”, which is reflected in ongoing annual increases to the lifetime income payments.
The decision grants exemptive relief from subsection 10.3(1) of NI 81-102 to permit the Fund to use a redemption mechanism that provides a redemption price to unitholders of a decumulation class upon their death or voluntary redemption of the lesser of:
- the original purchase price per unit less the aggregate of all cash distributions paid in respect of such units, and
- the NAV per unit.
This redemption mechanism is an essential feature of the Fund and fundamental to how returns are, in part, generated for each decumulation class.
The decision requires the Fund to disclose in a text box on the cover page of its simplified prospectus and fund facts document for each decumulation class the calculation method of the redemption price and a reminder that the redemption price may be less than the class’s NAV per unit.
The decision also permits the fund facts document of each decumulation class to include certain charts intended to assist investors in understanding the unique investment objective of the Fund and assessing the appropriateness of the Fund for their needs.
Chantal Mainville, Senior Legal Counsel, Investment Funds and Structured Products Branch
Today, the Ontario Securities Commission published local final amendments to National Instrument 81-105 that prohibit the payment by fund organizations of upfront sales commissions to dealers, which will result in the discontinuation of all forms of the deferred sales charge (DSC) option. Provided all necessary ministerial approvals are obtained, the amendments will become effective on June 1, 2022, harmonizing the ban with the Canadian Securities Administrators.
As part of our ongoing commitment to transparency, we are providing additional information about the prospectus pre-file process available to investment fund issuers.
The prospectus pre-file process provides issuers with greater flexibility and more certainty in planning their prospectus offerings. It also supports innovation in the capital markets by providing a mechanism for issuers to develop new products and seek staff’s feedback without publicly disclosing details of those new products before the products are ready for launch.
The regulatory review process for investment fund prospectuses typically begins when an issuer publicly files its preliminary prospectus. However, investment fund managers in Ontario are permitted to use the pre-file process to submit prospectuses and exemptive relief applications on a confidential basis prior to publicly filing the preliminary prospectus or application. While the pre-file process may be used in connection with the filing of any prospectus or application, it is primarily used for prospectuses relating to complex or novel products, and applications involving complex or novel products and scenarios. The Ontario Securities Commission reviews pre-filings in coordination with other CSA jurisdictions.
Fees charged in connection with a prospectus pre-filing are applied to those due upon the filing of the preliminary prospectus.
We understand that investment fund issuers are motivated to be the first to launch a novel type of product in the market and, as such, are interested in understanding pre-file process timelines.
Review timelines for pre-filings vary, depending on several factors. These include: the initial filing date, the completeness and quality of the materials submitted, the complexity or novelty of the issues raised in the filing, the responsiveness of the issuer to staff’s comments, and discussions with staff from other CSA jurisdictions. All else being equal, filings are reviewed on a first-in, first-out basis, and staff work to ensure that all concurrent filings are dealt with fairly based on these factors, whether filed by way of a pre-filing or preliminary prospectus. During the pre-file review process, staff provide regular touchpoints to advise the issuer of their progress.
Once all issues identified during staff’s review of an issuer’s pre-filing have been resolved and the preliminary prospectus has been publicly filed, staff may be in a position to issue a ‘no comment’ comment letter and clear the issuer to file its final prospectus after a review of the preliminary prospectus to ensure that there have been no substantive changes made to the prospectus between the conclusion of the pre-file review and the filing of the preliminary prospectus. The review of the preliminary prospectus in such a scenario will be streamlined if clear blacklines are provided to reflect that no substantive changes have been made, as there is no minimum time required between the issuance of the receipt for a preliminary prospectus and the issuance of the receipt for a final prospectus. We note that issuers have the option of filing the preliminary prospectus before the pre-file review is completed.
Recently, staff dealt with several concurrent prospectus pre-filings and filings in connection with the launch of exchange-traded mutual funds that hold substantially all of their assets in bitcoin. To provide additional transparency to that process, the following are the timelines associated with three of those filings:
Name of Fund
Name of Investment Fund Manager
Date of Pre-Filing
Date of Preliminary Prospectus Filing
Date of Issuance of Receipt for Final Prospectus
Purpose Bitcoin ETF
Purpose Investments Inc.
September 22, 2020
February 10, 2021
February 11, 2021
Evolve Funds Group Inc.
November 30, 2020
January 29, 2021
February 16, 2021
CI Galaxy Bitcoin ETF
CI Investments Inc.
February 18, 2021
March 5, 2021
In the future, staff may share the timelines of complex and novel prospectus pre-filings and filings after they have been completed in order to provide added transparency to market participants.
If there are any questions about this issue, please contact Nick Hawkins, Legal Counsel, Investment Funds and Structured Products Branch at [email protected]
As part of our ongoing commitment to strengthening communications with stakeholders, we are informing you about a change that may impact you or your business.
Please note that we, the CSA jurisdictions, intend to update the form of the preliminary and final receipts for investment fund prospectuses moving forward to remove references to the individual series within an investment fund that represent, for example, different fee structures of the fund.
Due to the significant number of funds and series in investment fund prospectuses, we have decided to change the existing practice as the receipts have become unwieldy and often difficult to read. The receipt will continue to make reference to the prospectus being receipted where the series information for each fund is identified for the investor.
We will continue to list classes or series on the receipt that represent different pools of assets, as each such class or series represents a separate issuer.
If you have any specific questions about your investment fund prospectus receipt, please contact the reviewer dealing with the filing.
As part of our ongoing commitment to strengthening communications with stakeholders, we are informing you about a recent exemptive relief decision that may impact you or your business.
The Canadian Securities Administrators (CSA) has granted exemptive relief to a group of investment funds from the fund multi-layering restriction in paragraph 2.5(2)(b) of National Instrument 81-102 Investment Funds (NI 81-102) to permit novel three-tier and four-tier fund structures. The relief is expected to help these funds realize economies of scale and increase the efficiency of portfolio trades, which will reduce costs to the benefit of fund investors.
In the case of a three-tier fund, the top fund in the structure will invest in one or more funds that may themselves each invest in excess of 10% of net assets in one or more underlying funds.
In the case of a four-tier fund, the top fund in the structure will be either a currency neutral fund or wrap fund that will invest all its assets in a single three-tier fund.
There are a number of key conditions associated with this relief that are aimed at ensuring that investor protection concerns are adequately addressed, including that:
- All funds at all tiers of the multi-tier structure are under common management and common portfolio management.
- The funds in the underlying tiers of the multi-tier structure are not alternative mutual funds and do not rely on any discretionary relief permitting leverage exposure beyond the limits prescribed under NI 81-102.
- There is no duplication of management fees or administrative fees between each tier of a multi-tier structure. The prospectus of a multi-tier structure will disclose the total annual management fees and administrative fees to enable investors to understand the total cost of the product.
- The investment fund manager maintains investor protection policies and procedures that address liquidity and redemption risk due to cross-ownership of funds within a multi-tier structure, and each fund in a multi-tier structure is managed as a stand-alone investment for the purposes of these policies and procedures.
- Each multi-tier structure is implemented in a manner that seeks the fair treatment of investors in all funds that are involved in the multi-tier structure by allocating portfolio transaction costs fairly among all of such funds.
- The investment objective of each currency neutral fund or wrap fund, as stated in its prospectus, will state the name of the corresponding three-tier fund whose performance it is tracking, and the investment strategies of each three-tier fund, as stated in its prospectus, will describe the multi-tier investment strategy.
- Portfolio holdings disclosure in the Fund Facts and financial statements of each multi-tier structure will look through to the portfolio holdings of the bottom tier funds in the structure.
Other investment funds interested in obtaining similar relief should apply for discretionary relief under NI 81-102.
If there are any questions about this exemptive relief decision, please contact Chantal Mainville, Senior Legal Counsel, Investment Funds and Structured Products Branch at [email protected].
As part of the OSC’s commitment to reducing regulatory burden, we are clarifying the OSC’s views regarding the rehypothecation of portfolio assets (which was item #F-13 in the Reducing Regulatory Burden in Ontario’s Capital Markets report published in November 2019).
Information regarding the rehypothecation of portfolio assets had previously been provided in the April 2015 and March 2018 editions of the Investment Funds Practitioner.
A decision document that was issued in August 2019 included a paragraph clarifying and summarizing the OSC’s updated views regarding the rehypothecation of portfolio assets. This paragraph states that:
- notwithstanding statements previously made in the Investment Funds Practitioner, there is no prohibition on rehypothecating portfolio assets in section 6.8 of National Instrument 81-102 Investment Funds (NI 81-102), including subsections 6.8(3), 6.8(3.1) and 6.8(4), and
- the use of the term “beneficial owner” in subsection 6.8(4) of NI 81-102 does not preclude the rehypothecation of portfolio assets held by a counterparty or lender.
Background regarding the August 2019 decision:
Approximately a year ago, a fund manager applied for multiple types of exemptive relief in connection with the launch of new alternative mutual funds, including exemptive relief to permit the funds to allow a lender to rehypothecate portfolio assets deposited as part of a cash borrowing transaction. Based on the information from the April 2015 edition of the Investment Funds Practitioner, the filer concluded that relief would be required from subsection 6.8(3.1) of NI 81-102 to permit the rehypothecation. Following discussions with staff, the filer withdrew the request for the relief from subsection 6.8(3.1), and the decision was issued without this relief.
If there are any questions about this matter, please contact Christopher Bent, Senior Legal Counsel, Investment Funds and Structured Products Branch at [email protected].
Investment Funds Practitioner Archive
IFSP Branch staff review Practitioner articles periodically to remove articles from the Investment Funds Practitioner Archive that are no longer relevant. View the list of removed articles.
Past articles from the Practitioner that are still relevant are available in a consolidated format.