On June 19, 2014, the Canadian Securities Administrators (CSA) released, in final form, amendments that will apply a number of new requirements and restrictions to closed-end funds (Phase 2 amendments). These include:
- a prohibition against issuing any warrants (whether as part of an initial public offering, or subsequently to existing unitholders),
- a prohibition against investments in mortgages (other than government-guaranteed mortgages) and certain loans,
- restrictions on investing in underlying funds that are not subject to Canadian securities laws,
- limiting the circumstances in which redemptions of units can be suspended and requiring that unitholders be reminded annually of their redemption rights,
- a requirement to obtain unitholder approval for any type of reorganization (including conversion to a mutual fund structure), including that the fund not incur the costs associated with any such reorganization,
- new restrictions on sales communications (advertising) by investment funds, and
- a variety of conflict of interest rules previously exclusive to mutual funds.
Previously proposed investment restrictions relating to leverage, illiquid investments, short selling and derivatives have been deferred until the new regime for alternative investment funds is devised and proposed. (No such proposals were included with these latest amendments.) The CSA also have deferred the previous proposal to require that closed-end funds not pay their organizational costs.
The Phase 2 amendments also impact public mutual funds in a number of respects, including:
- a new prohibition against investing in closed-end funds,
- new sales communications requirements for mutual funds following conversion from a closed-end fund structure, and
- new securities lending disclosure
Faskens will be publishing a more detailed Bulletin shortly on the Phase 2 amendments.
Faskens also will be hosting a seminar in Toronto on Wednesday, July 9 from 4:00 p.m. to 6:00 p.m. to provide a detailed analysis of the impact of the Phase 2 amendments. Register to the Fund Modernization Seminar.