Canadian regulators are providing guidance on how mutual fund managers should deal with the effects of the proposed elimination of the foreign property rule. In a new staff notice the Canadian Securities Administrators suggest that managers won’t have to obtain unitholder approval to get rid of their clone funds.

In the 2005 federal budget, Ottawa proposed to drop the 30% limit on foreign content in registered portfolios, retroactive to January. In response, many fund firms are planning to wind up funds that were constructed solely to subvert the restriction, known as RSP clone funds.

In response, the CSA has issued Staff Notice 81-314: Removal of Foreign Content Restrictions for Registered Plans – Eliminating Indirect Foreign Content Exposure
in Certain RSP Funds. The notice offers guidance on:

  • how managers of clone funds can deal with closing out their forward contracts, derivatives, or debt-like securities they use to mimic an underlying fund’s performance;
  • whether managers require unitholder approval to do; and
  • disclosure requirements and requirements to amend prospectuses and annual information forms.

The CSA says that it will not recommend any specific way of dealing with the issue, but if clone fund managers decide that winding up the derivatives doesn’t constitute a change to the fundamental investment objective of a RSP Fund which requires unitholder approval, “we will not look behind the decision if the only change is to discontinue the Indirect Foreign Exposure and replace it with a direct investment in the underlying funds or group of foreign securities.”

For RSP fund managers who conclude that closing out the derivatives is not a significant change requiring compliance with the timely disclosure requirements and an amended prospectus, “we will not look behind the decision if the only change is to discontinue the Indirect Foreign Exposure and replace it with a direct investment in the underlying funds or group of foreign securities”.

“In making this decision, RSP fund managers should be alert to the fact that the parameters of ‘a significant change’ are different from those of ‘a change to the fundamental investment objective’,” the CSA notes.

It adds that fund managers which conclude that closing out the Indirect Foreign Exposure is not a significant change, it encourages them, “to consider other forms of communication that would provide securityholders with access to information about this change, but that would not be prohibitively costly.” Examples include a message on the fund’s Web site or a notice in the next scheduled mailing.

If fund managers decide to remove references to the 30% foreign content limit in prospectuses of RSP funds as a result of the recent budget proposal, the CSA says it will generally not be necessary to make such changes until the next renewal of the prospectus.