phase 2 fund modernization amendments f asken m artineau d u m oulin llp j uly 9, 2014

PHASE 2 FUND MODERNIZATION AMENDMENTS

FASKEN MARTINEAU DUMOULIN LLP

JULY 9, 2014

Opening remarks

Background March 2013

first draft of proposals almost all provisions in NI 81-102 to apply to closed-end funds

(CEFs) June 2014

amendments published in final form with no further comment period

changes dependent on alternative funds regime deferred some new provisions added

Opening remarks

Overview New requirements for CEFs in the following areas:

• Investment restrictions• Dilutive offerings / warrants• Fund mergers and conversions• Unitholder / CSA approvals• Sales communications• Some new requirements for mutual funds

New investment restrictions for closed-end funds

Control restriction Section 2.2 of NI 81-102 - limit of 10% of the voting or equity

securities of any single issuer Derivatives exposure not included Special meaning of “purchase” Existing CEFs grandfathered until March 21, 2016 Possible issues with investments in:

Private companies Special purpose vehicles (private equity, securitization)


Real property, mortgages and loansSection 2.3 of NI 81-102 – prohibitions against:

• Owning real property• Holding mortgages (other than government guaranteed)• Loans (other than passive loan participations)

Transition:• Existing CEFs grandfathered until March 21, 2016• Mortgage-focused CEFs with a final receipt prior to September 22,

2014 not subject to mortgage prohibition


Fund-on-fund Section 2.5 of NI 81-102 – only permitted fund-on-fund

investments Bottom fund must be a reporting issuer somewhere in Canada Bottom fund must be subject to NI 81-102 (e.g. previously

issued securities under a prospectus) or voluntarily compliant with NI 81-102

“3 tiers” prohibited unless: Middle fund is a “clone fund” Bottom fund is a money market fund or IPU

Existing CEFs grandfathered until March 21, 2016


Fund-on-fund issues Bottom funds that are not reporting issuers in Canada:

Hedge funds and pooled funds U.S. mutual funds

IPUs that use leverage or track a commodity


Securities lending, repurchase and reverse repurchase Must use custodian and/or subcustodian as lending agent Must hold prescribed collateral not less than 102% of

outstanding transaction on a daily marked-to-market basis Aggregate outstanding securities lending and repurchase

transactions cannot exceed 50% of NAV (could be problematic for funds with conventional forward transactions)

Existing CEFs grandfathered until September 21, 2015

Deferred investment restrictions pending alternative funds regime

• Limit of 10% of NAV in any single issuer• Derivatives (including leverage through derivatives)• Short selling (including leverage through short selling)• Commodities• Illiquid investments (though note CSA commentary)• Performance fee restrictions also deferred• Will be revisited under alternative funds regime

Status of new regime for alternative funds

Alternative Funds Regime Concept introduced in March 2013 as alternative regulatory

framework involving fewer restrictions Proposed to be effected through revamped NI 81-104 -

Commodity Pools No substantive provisions have been proposed to date No time frame provided for publication of Alternative Funds

regime

Conflict of interest investment restrictions for closed-end funds

“Dealer manager” restrictions Part 4 of NI 81-102 CEFs of a manager with an affiliated dealer cannot not purchase

securities of an issuer during, or within 60 days after, any distribution in which the dealer acts as underwriter or agent

Exceptions for: Canadian or provincial government guaranteed debt Other debt with a designated credit rating Equity securities over an exchange Situations where dealer sold less than 5% as a selling group member


Questions?

New operational requirements for closed-end funds

Warrant Offerings All warrant offerings are prohibited, regardless of strike price

Second Stage Offerings All future issuances of units must be at an issue price not less

than NAV per unit Some dilution due to offering expenses (including agents’

commission) is permitted CEF still permitted to pay offering expenses


Matters Requiring Securityholder Approval Fundamental changes – Part 5 of NI 81-102 Increase/introduction of a fee or expense The manager is changed (other than to an affiliate) Change of fundamental investment objectives Decrease to the frequency of calculating NAV


Transactional Matters Requiring Securityholder Approval Reorganization or transfer of assets to another “issuer” Reorganization or acquisition of assets of another issuer CEF restructures into a mutual fund mutual fund restructures into a CEF restructuring into an issuer that is not an investment fund


Implementation of Fundamental Change Investment fund cannot bear costs or expenses of a

restructuring Majority approval Separate class vote if a class is affected differently from other

classes No vote if a class is not affected and consistent with constating

documents 21 days written notice of meeting – must disclose the effect the

change would have on the MER for the last financial year


Exemptions from Securityholder Approval Requirement Not required for change/increase in fees or expenses if certain

conditions are satisfied Not required for a flow-through limited partnership rollover into a

mutual fund if certain conditions are satisfied including:• transaction is tax deferred• no redemption right/no market through which to sell securities• prospectus contains specified disclosure – what if existing flow-

through LP’s do not have requisite disclosure in their prospectus?• rollover happens within 30 months of IPO• mutual fund bears none of the costs and expenses• IRC approval is obtained• transaction is effected at NAV calculated on the date of the

transaction


Exemptions from Securityholder Approval Requirement (Cont’d)

Not required for restructuring of terminating fund if certain conditions are satisfied including:• IRC approval is obtained• similar fundamental investment objectives, valuation procedures and

fee structures; • prospectus contains specified disclosure• tax deferred or a qualifying transaction under tax laws• the terminating fund (i) files and issues a news release, (ii)

securityholders may redeem securities after the news release and before the effective date, and (iii) securities are redeemed at NAV

• transaction is effected at NAV calculated on the date of the transaction


Approval of Securities Regulators Approval of securities regulators is required prior to a

reorganization or transfer of assets if securityholders will become securityholders of another issuer

Pre-approval not required if certain conditions are met, including:• most of the conditions that need to be satisfied to be exempt from

securityholder approval• transaction must be approved by

• securityholders of the terminating fund (unless an exemption from securityholder approval applies) and

• securityholders of the continuing fund if required

• Materials sent to securityholders of the terminating fund must describe, among other things, differences between organizational structures (e.g., trust versus corporation)


Approval of Securities Regulators (Cont’d) For a flow-through limited partnership – exempt if the transaction

is exempt from securityholder approval and IRC approval for the mutual fund is obtained

NI 81-102 prescribes information that is to be contained in the application for approval


Termination of a Non-Redeemable Investment Fund A CEF must first issue and file a news release that discloses

termination• Cannot terminate earlier than 15 days or more than 90 days later

Does not apply to a CEF merging into another issuer

Change of Auditor Auditor must not be changed unless

IRC approval is obtained Prospectus discloses that approval of securityholders will not be

obtained and that a written notice will be sent at least 60 days before the effective date

Notice is sent 60 days before the effective date


Implications to Investment Funds Technical problem for existing funds regarding prospectus

disclosure requirements • No grandfathering - floodgate of exemptive relief applications?

Canadian Securities Administrators seeking to enhance investor protection• Regulatory arbitrage justification – underlying theme of maintenance of

assets under management• Public policy concerns may still exist – long-term investors may bear

brunt of increasing costs if a CEF cannot raise capital (no rights or warrant offering and no offering at below NAV), and its manager will not pay the costs of a restructuring

• Merits of powers of attorney attaching to securities?


Sale of manager’s business Must be approved by CSA Changes of manager (sale of management contracts) also

requires unitholder approval OSC treats change of control as “change of manager” if post-

closing consolidation anticipated = unitholder approval


Redemption rights Suspension of redemptions subject to same restrictions as mutual

funds New 15 business day limit for paying redemption proceeds New requirement to give annual notice of redemption rights and

procedures (starting January 1, 2015)


Sales communications Part 15 of NI 81-102 – detailed rules regulating past performance

disclosure, warnings & disclaimers, ratings & rankings, and material changes impacting performance Standardized calculation of past performance No disclosure of past performance in the first year Misleading comparisons Mandatory prescribed warnings & disclaimers

Existing CEFs grandfathered until March 23, 2015


Questions?

Changes for mutual funds

No investing in closed-end funds Fund-on-fund rules changed to prohibit mutual funds from

investing in closed-end funds Completely new, notwithstanding CSA statement Funds created by September 22, 2014 are grandfathered until March 21,

2016 Discretionary relief for 10%, similar to leveraged ETFs?


New calculation of securities lending / repurchase limit Maximum aggregate outstanding securities loans and repurchase

transactions cannot exceed 50% of net asset value (not total assets)

Update prospectus disclosure


Past performance of previous closed-end fund Sales communications for mutual funds that previously were

closed-end funds now must include past performance starting from the date the closed-end fund became a reporting issuer

May change past ratings and rankings Information must be updated with service providers by September

22, 2014 Update fund facts with next regular filing


New securities lending disclosure (financial statements) Notes to financial statements must include:

• Reconciliation of gross revenues (including from investing collateral) and net income retained by the fund after compensating lending agent

• Parties who received compensation and amount each party received• Aggregate compensation as a percentage of gross securities lending

revenue• Applies to financial years starting on or after January 1, 2016

• Also applies to CEFs


New securities lending disclosure (AIF) Starting September 22, 2014, AIF disclosure of:

• Name and municipality of each lending agent• Whether lending agent is an affiliate or associate of the manager• Brief description of agreement with each lending agent including:o Required collateral for transactionso Indemnities and termination provisions

oAlso applies to CEFs


Questions?

Speaker biographies

JOHN KRUK is a partner with more than twenty years of experience helping clients develop innovative fund structures, unique derivative instruments and new distribution models. He assists clients with all aspects of structuring, marketing, operating and restructuring a broad range of investment products and services including mutual funds, closed-end funds, mortgage investment corporations, other structured products, segregated funds and private asset management services, and advises on compliance issues relating to those products and services. John also has played central roles in the acquisition, reorganization of disposition of investment management and distribution businesses through public and private transactions. He is recognized by Lexpert as a leading lawyer in Investment Funds & Asset Management and endorsed by Practical Law Company as an expert in investment funds, as well as recognized by both Best Lawyers and by the Financial Post as a leading lawyer in mutual funds.

Speaker biographies

JOHN SABETTI practises in Fasken Martineau's Securities and Mergers & Acquisitions Group with a primary focus on Investment Funds. John has acted for both issuers and investment dealers in respect of the initial public offerings of a significant number of structured product issuers, including closed-end funds, flow-through vehicles, mortgage investment corporations and real estate investment vehicles, that have raised in excess of $4 billion in gross proceeds. In addition, he has structured and implemented a multitude of investment fund merger and reorganization transactions, as well as conversions of closed-end funds into mutual funds. John joined Fasken Martineau as an articling student in 1998, became an associate in 2000 and a partner in 2005. John is recognized as a leading lawyer for Capital Markets by IFLR1000 for 2014.

Speaker biographies

• DANIEL FUKE is an associate in Fasken Martineau’s Corporate/Securities Group whose practice focuses on advising clients in the investment funds industry. He has advised investment fund managers, portfolio managers and investment dealers in the formation and initial public offerings of closed-end investment funds and flow-through limited partnerships, the formation of mutual funds and pooled funds and mergers and acquisitions of investment funds and investment fund managers. Daniel’s practice also involves advising clients on public and private mergers and acquisitions, capital markets transactions, including public and private equity and debt offerings, and corporate governance matters.

phase 2 fund modernization amendments f asken m artineau d u m oulin llp j uly 9, 2014

Documents

fund investmentsbottom

fund issuesbottom funds

middle fund

canadabottom fund

permitted fund

end funds cefsjune

alternative funds regimelimit

hedge funds