Update on an Alternative Funds Framework for Investment Funds

As part of their ongoing efforts to modernize investment fund product regulation, the Canadian Securities Administrators (CSA) recently published an update on the status of the creation of an Alternative Funds Proposal.

The Alternative Funds Proposal is the CSA’s proposal calling for a more comprehensive regulatory framework for publicly offered investment funds that wish to invest in assets or use investment strategies not permitted under National Instrument 81-102 Investment Funds. The Alternative Funds Proposal would be adopted in conjunction with certain investment restrictions for non-redeemable investment funds in respect of physical commodities, short selling, the use of derivatives and borrowing cash (the Interrelated Investment Restrictions).

The CSA had previously sought comments on the Alternative Funds Proposal in March 2013. In this update, the CSA discusses the key themes that emerged from their request for comments, some of which are summarised below.

The Attributes of an Alternative Investment Fund

Many commenters sought more information about the criteria which would be used to differentiate alternative funds from other publicly offered investment funds. Some commenters expressed the view that granting exemptive relief to investment funds that wish to use alternative strategies or invest in alternative asset classes on a limited basis should be considered instead of requiring such funds to comply with an alternative fund framework.

Naming Convention

Commenters seemed generally opposed to a naming convention. They worry that requiring the use of the expression “alternative fund” may result in such funds being unnecessarily labeled as high risk or more volatile than other investments funds. They also seemed to be of the view that labeling funds as “alternative” would not be sufficient for retail investors to understand the level of risk and complexity of such funds.

Investment Restrictions

Many commenters suggested that alternative investments funds should not be subject to investment restrictions or limits (leverage, short selling, etc.). They believe such restrictions would impede the development of new types of alternative investment funds or alternative investment strategies.

Next Steps

The CSA will continue to consider the feedback provided on the Alternative Funds Proposal and the Interrelated Investment Restrictions and will also continue to speak directly to stakeholders. Consultations are expected to be completed by mid-2015, after which the CSA expect to publish for comment proposed rule amendments aimed at implementing the Alternative Funds Proposal by the end of the year.