For years, as president of the Investment Funds Institute of Canada, I actively promoted increasing the foreign-property limit for tax-deferred retirement plans such as RRSPs, only dreaming the federal government would make my day and eliminate it altogether.

Now that the politics surrounding the budget are over and the legislation doing away with the foreign-property rule has passed, mutual fund companies can go about the business of stripping away RRSP-clone funds, leaving investors with the less costly underlying funds the clones were mirroring in the first place. Many investors, myself included, are receiving notices that their RRSP-clone funds are being wrapped up.

Members of the Canadian Securities Administrators have regulations in place to ensure investors get a say in the future direction of a mutual fund in certain cases, such as when a fund company wants to change a fund’s objectives or merge with another fund. This is how it should be — in most cases.

The CSA has now granted the industry “exemptive relief” on two fronts. The first eliminates the requirement that fund managers of RRSP-clone funds provide 60 days’ notice to wrap up those funds. The second is that managers of qualifying funds do not have to obtain prior approval from investors to merge RRSP-clone funds with their corresponding underlying funds. These existing requirements were considered redundant and imposed additional costs on investors the CSA believed could be avoided, particularly as the budget provision that eliminated the need for the clone
funds was highly publicized.

The exemptive relief is subject to certain conditions, including issuing a timely press release and informing dealers who have clients in these RRSP-clone funds. Investors are also to be told the details of the termination or merger in certain investor information, such as a trade confirmation or account statements sent after the merger or termination. (If a fund’s declaration of trust requires notice or an investor meeting in the case of a fund termination or merger, it must still provide that notice or hold a meeting, as the case may be.)

As of March 31, 2005, there were 260 RRSP-clone funds in Canada, with assets of
$22.4 billion. These clone funds provided investors with the opportunity to diversify geographically and get in on what could have been lost opportunities had these mirror funds not been created.

These two forms of relief are, well, a relief to the industry — and they should be to investors, as well.

Investors now directly own the funds they had previously owned indirectly through the clone funds. The underlying funds they will now automatically own are less expensive to operate than their clone counterparts. MERs of underlying funds are, on average, about 30 basis points lower than those of clone funds. (The 30 bps paid for the built-in forward contract that enabled the clone fund to operate.) As well, investors and their clients no longer have to worry about going above the 30% foreign-content limit and incurring fines.

On the corporate side, there are now fewer prospectuses to compose and send out to investors. As well, costly meetings will not be required. IFIC conducted an informal poll among its members in April and found the average cost for investor meetings ranged from $5,000 to almost $2 million for multi-fund meetings. On a per-investor basis, the costs ranged from $2 to $18.

A more consistent measurement came from managers who had held investor meetings in the past five years. Most said only about 3% of investors actually showed up for the meetings, yet the managers received approvals of 90% or more for motions.

IFIC has already suggested to the Ontario Securities Commission that there may be more efficient ways of obtaining investor approval, without the necessity of expensive meetings. IE

Tom Hockin is president and CEO of the Toronto-based Investment Funds Institute of Canada.