Adoption of a T+2 Settlement Cycle for Conventional Mutual Funds - Proposed Amendments to National Instrument 81-102 Investment Funds
Adoption of a T+2 Settlement Cycle for Conventional Mutual Funds - Proposed Amendments to National Instrument 81-102 Investment Funds
Notice and Request for Comment
Adoption of a T+2 Settlement Cycle
for Conventional Mutual Funds
Proposed Amendments to
National Instrument 81-102 Investment Funds
April 27, 2017
Introduction
The Canadian Securities Administrators, other than the British Columbia Securities Commission{1}, (the CSA or we) are publishing for a 90-day comment period proposed amendments to National Instrument 81-102 Investment Funds (NI 81-102) and a consequential amendment to National Instrument 81-104 Commodity Pools (NI 81-104) to shorten the standard settlement cycle for conventional mutual funds{2} from three days after the date of a trade (T+3) to two days after the date of a trade (T+2) (the Proposed Amendments).
We are also providing guidance to conventional mutual funds regarding their expected adoption of a T+2 settlement cycle in light of the adoption of a T+2 settlement cycle in equity and long-term debt markets.
Substance and Purpose
On September 5, 2017, markets in the United States are expected to move to a T+2 settlement cycle. As it is in the public interest for Canadian market participants to match U.S. settlement cycles, the CSA is publishing, concurrently with this Notice, a Notice of Amendments that would harmonize settlement cycles to T+2 in Canada for equity and long-term debt markets and amend National Instrument 24-101 Institutional Trade Matching and Settlement (NI 24-101) (the NI 24-101 Amendments) to coincide with the adoption of a T+2 settlement cycle in the United States. Please see CSA Notice Amendments to National Instrument 24-101 Institutional Trade Matching and Settlement and Changes to Companion Policy 24-101 Institutional Trade Matching and Settlement.
A trade in a security of a conventional mutual fund is not subject to NI 24-101. However, the underlying equity and long-term debt securities owned by conventional mutual funds are subject to NI 24-101 and would settle at T+2.
Under NI 81-102, conventional mutual fund settlement must follow the requirements below (the Current Requirements):
• Cash received by a dealer or principal distributor for payment of a mutual fund security must be forwarded to the order receipt office of the mutual fund as soon as practicable and in any event no later than the third business day after the pricing date (subsection 9.4(1) of NI 81-102);
• Payment of the issue price of a security must be made on or before the third business day after the pricing date (subsection 9.4(2) of NI 81-102);
• In the event that payment is not received by the third business day after the pricing date of the security, the mutual fund must redeem the securities to which the purchase order pertains as if it had received an order for the redemption of the securities on the fourth business day after the pricing date or on the date the mutual fund first knows that the method of payment will not be honoured (subsection 9.4(4) of NI 81-102); and
• A mutual fund must pay the redemption proceeds for securities once a redemption order has been received within three business days after the date of calculation of the net asset value per security used in establishing the redemption price (subsection 10.4(1) of NI 81-102).
We note that this language is broad enough to permit conventional mutual funds to adopt a T+2 settlement cycle.
Guidance on the transition to a T+2 settlement cycle
Given that the standard settlement cycle for equity and long-term debt market trades in Canada is being shortened from T+3 to T+2, we are of the view that the requirement for a dealer or principal distributor to forward the cash or securities received for payment of the issue price of securities of a mutual fund to the mutual fund as soon as practicable would require conventional mutual funds to adopt a T+2 settlement cycle on the coming into force of the NI 24-101 Amendments, currently expected on September 5, 2017.
Additionally, with the Proposed Amendments, we wish to codify the expectation that conventional mutual funds will settle on T+2 to remove any possibility of confusion.
Summary of the Proposed Amendments
The Proposed Amendments amend sections 9.4 and 10.4 of NI 81-102 so as to remove references to a T+3 settlement cycle and replace them with references to a T+2 settlement cycle. The Proposed Amendments also amend paragraph 9.4(4)(a) of NI 81-102 so as to require a mutual fund, in the case where payment of the issue price of the securities has not been received, to redeem the securities on the third business day after the pricing date, rather than on the fourth. Furthermore, a consequential amendment will be made to section 6.3 of NI 81-104 to harmonize it with the new proposed wording of section 10.4 of NI 81-102.
Transition
Subject to the rule approval process, we anticipate publishing final rules aimed at implementing the Proposed Amendments in the late Summer of 2017 (Publication Date). We anticipate the Proposed Amendments will be proclaimed into force expeditiously after the Publication Date (In Force Date). After the In Force Date, the T+3 settlement cycle for conventional mutual funds will be replaced by a T+2 settlement cycle.
Local Matters
Certain jurisdictions are publishing other information required by local securities legislation. In Ontario, this information is contained in Annex E of this Notice.
Annexes
This Notice includes the following Annexes:
• Annex A: Amending Instrument for National Instrument 81-102 Investment Funds
• Annex B: Amending Instrument for National Instrument 81-104 Commodity Pools
• Annex C: Blackline of Select Provisions of National Instrument 81-102 Investment Funds
• Annex D: Blackline of Select Provisions of National Instrument 81-104 Commodity Pools
• Annex E: Local Matters
Deadline for Comments
Please submit your comments to the Proposed Amendments, in writing, on or before July 26, 2017. If you are not sending your comments by email, please send a CD containing the submissions (in Microsoft Word format).
Where to Send Your Comments
Address your submission to the CSA as follows:
Alberta Securities CommissionFinancial and Consumer Affairs Authority of SaskatchewanManitoba Securities CommissionOntario Securities CommissionAutorité des marchés financiersFinancial and Consumer Services Commission (New Brunswick)Superintendent of Securities, Department of Justice and Public Safety, Prince Edward IslandNova Scotia Securities CommissionSecurities Commission of Newfoundland and LabradorSuperintendent of Securities, Northwest TerritoriesSuperintendent of Securities, YukonSuperintendent of Securities, Nunavut
Please send your comments only to the addresses listed below. Your comments will be forwarded to the other CSA member jurisdictions.
We would like your input on the proposed amendments. Please include a prominent reference to the subject matter of your comments. For example, please include a subject line similar to the following: "RE: Mutual Fund T+2 Settlement Amendments".
Comments Received will be Publicly Available
Please note that we cannot keep submissions confidential because securities legislation in certain provinces requires publication of a summary of written comments received during the comment period. In this context, you should be aware that some information which is personal to you, such as your email and address, may appear on certain CSA web sites. It is important that you state on whose behalf you are making the submission.
All comments will be posted on the Ontario Securities Commission web site at www.osc.gov.on.ca and on the Autorité des marchés financiers web site at www.lautorite.qc.ca.
Questions
Please refer your questions to any of the following CSA staff:
Where to find more information
We are publishing the proposed amendments with this Notice, as well as blackline version of select provisions of NI 81-102. The Proposed Amendments are also available on websites of CSA members, including:
www.albertasecurities.comwww.fcaa.gov.sk.cawww.mbsecurities.cawww.osc.gov.on.cawww.lautorite.qc.cawww.fcnb.canssc.novascotia.ca
{1} While the British Columbia Securities Commission is not an authority publishing the Proposed Amendments under this Notice, it anticipates that, subject to receiving the necessary approvals, it will, in the near future, publish for comment proposed amendments that will be consistent with the Proposed Amendments described in this Notice.
{2} A conventional mutual fund is a mutual fund that offers securities in continuous distribution under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
ANNEX A
PROPOSED AMENDMENTS TO NATIONAL INSTRUMENT 81-102 INVESTMENT FUNDS
1. National Instrument 81-102 Investment Funds is amended by this Instrument.
2. Section 9.4 is amended by
(a) replacing "third" wherever it occurs with "second", and
(b) in paragraph (4)(a), replacing "fourth" with "third".
3. Section 10.4 is amended by replacing "three" wherever it occurs with "two".
4. This Instrument comes into force •.
ANNEX B
PROPOSED AMENDMENTS TO NATIONAL INSTRUMENT 81-104 COMMODITY POOLS
1. National Instrument 81-104 Commodity Pools is amended by this Instrument.
2. Section 6.3 is amended by replacing "three" with "two".
3. This Instrument comes into force •.
ANNEX C
Blackline of Select Provisions of National Instrument 81-102 Investment Funds
This blackline shows the proposed changes in Annex A to this Instrument.
9.4 Delivery of Funds and Settlement
(1) A principal distributor, a participating dealer, or a person or company providing services to the principal distributor or participating dealer must forward any cash or securities received for payment of the issue price of securities of a mutual fund to an order receipt office of the mutual fund so that the cash or securities arrive at the order receipt office as soon as practicable and in any event no later than the third second business day after the pricing date.
(2) Payment of the issue price of securities of a mutual fund must be made to the mutual fund on or before the third second business day after the pricing date for the securities by using any or a combination of the following methods of payment:
(a) by paying cash in a currency in which the net asset value per security of the mutual fund is calculated;
(b) by making good delivery of securities if
(i) the mutual fund would at the time of payment be permitted to purchase those securities,
(ii) the securities are acceptable to the portfolio adviser of the mutual fund and consistent with the mutual fund's investment objectives, and
(iii) the value of the securities is at least equal to the issue price of the securities of the mutual fund for which they are payment, valued as if the securities were portfolio assets of the mutual fund.
(3) [Repealed]
(4) If payment of the issue price of the securities of a mutual fund to which a purchase order pertains is not made on or before the third second business day after the pricing date or if the mutual fund has been paid the issue price by a cheque or method of payment that is subsequently not honoured,
(a) the mutual fund must redeem the securities to which the purchase order pertains as if it had received an order for the redemption of the securities on the
fourththird business day after the pricing date or on the day on which the mutual fund first knows that the method of payment will not be honoured; and(b) the amount of the redemption proceeds derived from the redemption must be applied to reduce the amount owing to the mutual fund on the purchase of the securities and any banking costs incurred by the mutual fund in connection with the dishonoured cheque.
(5) If the amount of the redemption proceeds referred to in subsection (4) exceeds the aggregate of issue price of the securities and any banking costs incurred by the mutual fund in connection with the dishonoured cheque, the difference must belong to the mutual fund.
(6) If the amount of the redemption proceeds referred to in subsection (4) is less than the issue price of the securities and any banking costs incurred by the mutual fund in connection with the dishonoured cheque,
(a) if the mutual fund has a principal distributor, the principal distributor must pay, immediately upon notification by the mutual fund, to the mutual fund the amount of the deficiency; or
(b) if the mutual fund does not have a principal distributor, the participating dealer that delivered the relevant purchase order to the mutual fund must pay immediately, upon notification by the mutual fund, to the mutual fund the amount of the deficiency ...
10.4 Payment of Redemption Proceeds
(1) Subject to subsection 10.1(1) and to compliance with any requirements established by the mutual fund under paragraph 10.1(2)(b), a mutual fund must pay the redemption proceeds for securities that are the subject of a redemption order
(a) within
threetwo business days after the date of calculation of the net asset value per security used in establishing the redemption price; or(b) if payment of the redemption proceeds was not made at the time referred to in paragraph (a) because a requirement established under paragraph 10.1(2)(b) or a requirement of subsection 10.1(1) had not been satisfied, within
threetwo business days of(i) the satisfaction of the relevant requirement, or
(ii) the decision by the mutual fund to waive the requirement, if the requirement was a requirement established under paragraph 10.1(2)(b).
(1.1) Despite subsection (1), an exchange-traded mutual fund that is not in continuous distribution must pay the redemption proceeds for securities that are the subject of a redemption order no later than 15 business days after the valuation date on which the redemption price was established.
(1.2) A non-redeemable investment fund must pay the redemption proceeds for securities that are the subject of a redemption order no later than 15 business days after the valuation date on which the redemption price was established.
(2) The redemption proceeds for a redeemed security, less any applicable investor fees, must be paid to or to the order of the securityholder of the security.
(3) An investment fund must pay the redemption proceeds for a redeemed security by using any or a combination of the following methods of payment:
(a) by paying cash in the currency in which the net asset value per security of the redeemed security was calculated;
(b) with the prior written consent of the securityholder for a redemption other than an exchange of a manager-prescribed number of units, by making good delivery to the securityholder of portfolio assets, the value of which is equal to the amount at which those portfolio assets were valued in calculating the net asset value per security used to establish the redemption price.
(4) [Repealed]
(5) If the redemption proceeds for a redeemed security are paid in currency, an investment fund is deemed to have made payment
(a) when the investment fund, its manager or principal distributor mails a cheque or transmits funds in the required amount to or to the order of the securityholder of the securities; or
(b) if the securityholder has requested that redemption proceeds be delivered in a currency other than that permitted in subsection (3), when the investment fund delivers the redemption proceeds to the manager or principal distributor of the investment fund for conversion into that currency and delivery forthwith to the securityholder.
ANNEX D
Blackline of Select Provisions of National Instrument 81-104 Commodity Pools
This blackline shows the proposed changes in Annex B to this Instrument.
6.3 Payment of Redemption Proceeds
The references in subsection 10.4(1) of National Instrument 81-102 to " three two business days" shall be read as references to "15 days" in relation to commodity pools."
ANNEX E
Local Matters
The Ontario Securities Commission (the Commission) is publishing this Annex to supplement the CSA Notice.
Alternatives considered to the Proposed Amendments
The alternative to the Proposed Amendments would be not to proceed with making the Proposed Amendments to require conventional mutual funds to adopt a T+2 settlement cycle. Not proceeding with the Proposed Amendments would generally be inconsistent with the desire to facilitate the move to a T+2 settlement cycle, the industry support for the adoption of a T+2 settlement cycle, and any amendments made to NI 24-101 concerning ETF, equity and long-term debt markets that facilitate the adoption of a T+2 settlement cycle in those markets. Without the adoption of the Proposed Amendments, the industry led shift from a T+3 settlement cycle to a T+2 settlement cycle could result in some conventional mutual funds remaining on a T+3 settlement cycle. This situation would create investor confusion regarding the settlement cycle of securities of a particular conventional mutual fund.
Anticipated costs and benefits
As noted above, not proceeding with the Proposed Amendments would generally be inconsistent with the desire to facilitate the adoption of a T+2 settlement cycle. As the adoption of a T+2 settlement cycle is an industry led initiative, the costs of the adoption of a T+2 settlement cycle will, for the most part, be incurred regardless of the adoption of the Proposed Amendments. The Proposed Amendments will cause conventional funds to trade on the same settlement cycle as equity and long-term debt, and ETFs. The Proposed Amendments will require all conventional mutual funds to adopt a T+2 settlement cycle, thus avoiding investor confusion regarding the settlement cycle of securities of a particular conventional mutual fund.
Unpublished materials
In developing the Proposed Amendments, we have not relied on any significant unpublished study, report, or other written material.
Authority of the Proposed Amendments
The Proposed Amendments are being made under paragraph 143(1)31 of the Securities Act (Ontario). It authorizes the Commission to make rules regulating investment funds and the distribution and trading of the securities of investment funds including prescribing procedures applicable to investment funds, registrants and any other person or company in respect of sales and redemption of investment fund securities and payments for sales and redemptions.