Investment fund operations – the rules
The Securities Act (Alberta) (and its equivalent in other jurisdictions of Canada) sets out certain core requirements applicable to investment funds, such as those that require a prospectus and registration, and to prohibit misleading disclosure. The more detailed rules governing the operation of investment funds are contained in a number of harmonized national instruments, some of the most relevant being summarized below.
Registration
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations – This rule sets out the registration requirements for dealers, advisers and investment fund managers, and provides certain ongoing obligations of registrants that may apply in the investment funds context, including obligations relating to proficiency and disclosures. See here for more details. This rule includes many provisions that also apply to private funds.
Offering by prospectus
National Instrument 41-101 General Prospectus Requirements – This rule and several of its accompanying forms set out requirements related to prospectuses (and, where applicable, ETF Facts documents) for investment funds to which NI 81-101 (see below) does not apply, including exchange-traded mutual funds, non-redeemable investment funds, and scholarship plans. See here for more details. See also National Policy No. 15 Conditions Precedent to Acceptance of Scholarship or Educational Plan Prospectuses.
National Instrument 81-101 Mutual Fund Prospectus Disclosure – This rule and its several accompanying prescribed forms set out the requirements related to prospectuses and Fund Facts documents for mutual funds. See here for more details.
Offering by prospectus exemption
As explained under the Investment funds overview and Issuing an investment fund – the prospectus requirement sections, it is also possible to issue securities of an investment fund under one or more exemptions from the prospectus requirement. The most common prospectus exemptions are found in National Instrument 45-106 Prospectus Exemptions.
Ongoing obligations of investment funds
Many of the rules referred to below apply principally to public investment funds (i.e., investment funds issued under prospectus); however, some provisions of these rules also apply to private funds, and the application may vary from jurisdiction to jurisdiction.
National Instrument 81-102 Investment Funds (NI 81-102) – This instrument sets out operating rules and parameters for investments funds, including the following:
- restrictions on the assets an investment fund may invest in
- concentration and control restrictions
- restrictions related to short selling, borrowing, lending and the use of derivatives
- rules relating to the establishment of a new mutual fund
- rules related to conflicts of interest, fundamental changes, custody of assets, fees, contractual plans, sales and redemptions, handling of cash, compliance and recordkeeping, sales communications, and risk classification
Note that the restrictions applicable to an investment fund under NI 81-102 vary depending on the type of fund. For example, the rules applicable to alternative mutual funds and non-redeemable investment funds are less restrictive, while those applying to money market funds are more stringent.
While most of NI 81-102 applies only to public investment funds, certain aspects of NI 81-102 also apply to private investment funds (i.e., investment funds that are not reporting issuers). See also National Policy No. 29 Mutual Funds Investing In Mortgages.
National Instrument 81-105 Mutual Fund Sales Practices – This instrument sets out rules related to payments, incentives and compensation between mutual funds and those who sell mutual funds to investors, as well as rules relating to internal dealer incentive practices, marketing and educational practices, portfolio transactions, other sales practices, and related disclosures.
National Instrument 81-106 Investment Fund Continuous Disclosure – This rule sets out continuous disclosure obligations for investment funds, including requirements related to financial statements, management reports of fund performance, portfolio disclosure, annual information forms, proxy voting disclosure, material change reporting, proxy solicitation and information circulars, change of auditor, calculation of net asset value (NAV) and management expense ratio, as well as additional filing requirements and requirements related to a fund’s designated website. The companion policy to NI 81-106 also includes CSA commentary to help determine if something is an investment fund (see here for more details).
National Instrument 81-107 Independent Review Committee For Investment Funds (NI 81-107) – This rule requires the establishment of an independent review committee (IRC). The rule includes provisions related to the investment fund manager’s standard of care, the composition, role, and functioning of the IRC, and matters to be referred to the IRC. Certain portions of NI 81-107 apply even to private investment funds (i.e., investment funds that are not reporting issuers).
In addition to these national instruments, there are numerous orders and staff notices that relate to investment funds (see here).