Canada’s securities regulators are proposing sweeping changes to mutual fund rules, as part of an overall project to modernize investment product regulation.

On Friday, the Canadian Securities Administrators published for comment proposed amendments to the mutual fund rules, primarily to codify the exemptive relief from regulatory requirements that has frequently been granted to funds and fund managers over the years; and, to create new requirements for money market funds.

The CSA indicates that it is currently reviewing the product regulation of conventional mutual funds and other investment funds with a view to modernizing it to reflect the changes that have taken place in the marketplace, and in product regulation, over the past few years. While the first phase of the project focuses on codifying existing practices and decisions, in the second phase of the project the regulators will look at more fundamental changes to the rules.

In particular, the CSA says that it, “will consider whether there are any market efficiency, fairness or investor protection issues that arise out of the differing regulatory regimes that apply to different types of investment funds and other competing retail investment products.”

The possible results could include: no changes to current investment fund product regulation; new base level product regulation for all investment funds; or less prescriptive product regulation for conventional mutual funds and exchange-traded mutual funds.

For now, the CSA is proposing to enshrine the exemptions that have been granted to various firms in the securities rules. For example, it proposes to amend the rules to allow funds to short sell up to 20% of the assets of the fund, and up to 5% of the assets in a single issuer.

The proposed changes also impact dealers. For example, it is proposing to exempt dealers that belong to the Mutual Fund Dealers Association of Canada from comingling restrictions, enabling them to hold all client assets in one trust account. It would also exempt MFDA members from filing certain compliance reports.

New requirements for money market funds

Additionally, the proposed changes would impose new requirements on money market funds in the wake of the financial crisis, which saw money market funds affected by their holdings of frozen non-bank asset-backed commercial paper.

As a result of that experience, the CSA is proposing, various amendments, including: a restriction on money market funds using specified derivatives or selling securities short; new liquidity requirements; and a revised dollar-weighted average term to maturity limit, among other things.

“These amendments are intended to simplify processes and reduce regulatory costs incurred by both new and existing mutual funds,” said Jean St-Gelais, chair of the CSA and president and CEO of the Autorité des marchés financiers.

“This is an important first step in the CSA’s approach to modernize existing mutual fund product regulation.”

The comment period on the initial amendments is open until September 24.

IE