The Ontario Securities Commission has published its views on the regulatory issues that may arise when closed-end funds are converted into mutual funds.

In a staff notice released Friday, the OSC says that differences in the structure, and features, of closed-end funds and mutual funds, and in the regulatory regimes that govern them, give rise to a number of regulatory issues when a conversion occurs.

The notice points to issues such as whether there is adequate transparency and disclosure about key aspects of the conversion process, and whether funds are providing sufficient written notice prior to the conversion.

The notice says investors should be given the opportunity to redeem their funds before redemptions are suspended around the time of the conversion.

According to the notice, OSC staff generally expect that a closed-end fund with a built-in conversion feature will comply with mutual fund disclosure rules from inception, particularly if the conversion may happen within a foreseeable period of time from the initial distribution of the closed-end fund.

The notice says staff have recently seen a number of closed-end funds that intend to convert to a mutual fund, often within less than two years of their initial offering; often to provide greater liquidity.

For funds without a built-in conversion feature, OSC staff expect the issuer to consider if there will be a fundamental change to the investment objectives, strategies, fees, management and operations of the fund following its conversion. If so, unitholders should be given the opportunity to vote on these fundamental changes, the notice says.

When conversions are structured as a merger between the closed-end fund and a mutual fund, OSC staff expect that the fund manager will absorb the costs of the merger, the notice says.

“Where it is the fund manager’s decision to merge the funds and the manager benefits from the merger… OSC staff generally take the view that it is inappropriate for any merger costs to be charged either to the terminating closed-end fund or to the continuing mutual fund,” it notes.

When contemplating a conversion, or the inclusion of a built-in conversion feature, OSC staff expect issuers to consider how they intend to illustrate past performance.

“If the issuer requests exemptive relief to permit the mutual fund to show the past performance of the closed-end fund in sales communications, OSC staff will consider whether the past performance is relevant and useful for investors and will be appropriately presented and qualified, as necessary,” it says.

IE