CANADA: CSA update on Alternative Investment Funds for Canada

Tuesday February 24 2015

The Canada Securities Administrators have provided an update on proposals to introduce an alternative funds regime in Canada.

In March 2013, the Canadian Securities Administrators sought comments on the development of a proposal 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 will have a broad impact on publicly offered investment funds that utilize alternative strategies or invest in alternative asset classes. As part of the consultation, the CSA did not publish proposed rule amendments. Instead, a series of questions were asked that focused on the broad parameters for such a regulatory framework, such as naming conventions, proficiency standards for dealing representatives, and investment restrictions. The CSA also proposed a number of areas where alternative investment funds could be permitted to use investment strategies or invest in asset classes not specifically permitted by NI 81-102 for mutual funds and nonredeemable investment funds, subject to certain upper limits, to be implemented through amendments to National Instrument 81-104 Commodity Pools.

The CSA received a large volume of feedback, specifically concerning the following:

• The Attributes of an Alternative Investment Fund – specifically, the means of determining whether a fund would be an alternative investment fund. In particular, commenters sought more information about the criteria that would be used to differentiate a mutual fund and a non-redeemable investment fund from an alternative investment fund. Related comments expressed the view that the CSA should consider granting exemptive relief to mutual funds and non-redeemable investment funds that wish to use alternative strategies or invest in alternative asset classes in a limited manner, instead of requiring such funds to comply with the Alternative Funds Proposal.
• Naming Convention
• Borrowing – whether alternative investment funds should be permitted to borrow cash, and what limits on borrowing should be set. Additionally, whether different rules on borrowing should apply to mutual funds under the Alternative Funds Proposal versus those structured as non-redeemable investment funds.
• Use and Measurement of Leverage – the CSA asked for feedback on a proposed total leverage ratio of 3:1 and whether different limits should apply to mutual funds under the Alternative Funds Proposal versus non-redeemable investment funds.
• Short Selling – the CSA proposed to allow short-selling by alternative investment funds beyond the limits currently permitted under NI 81-102, similar to what has been granted to certain commodity pools through exemptive relief.
• Other Investment Restrictions – the CSA proposed maintaining a number of the exemptions from sections of Part 2 of NI 81-102 found currently in NI 81-104. It also proposed other investment restrictions for alternative investment funds such as fund-on-fund investing or concentration restrictions that may be the same or less restrictive than is currently applicable under NI 81-104. The CSA also asked for feedback on what other investment restrictions should apply as part of the alternative funds framework.

The CSA is continuing discussions with stakeholders and expects this process to be complete by mid-2015, after which it expects to publish for comment proposed rule amendments aimed at implementing the Alternative Funds Proposal. The CSA anticipates publication will take place at the end of the year.

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