CSA offers guidance on foreign property rule

(March 18, 2005) The Canadian Securities Administrators is speaking out on the federal government’s proposal to eliminate the 30% foreign content limit in registered plans.

The CSA issued a staff notice Friday on RSP or clone funds, following requests from the industry asking the regulator to clarify a number of issues stemming from Ottawa’s move, announced in last month’s federal budget.

“We recognize that the legislative process will take time before it is complete and that fund managers are monitoring this process closely,” the CSA says.

“If they decide that to close out the indirect foreign exposure is in the best interests of the fund, they would also have to determine whether [it] would constitute a change to the fundamental investment objectives of the fund [which would require unitholder approval] or a significant change [which would require the filing of an amended prospectus].”

For managers who conclude that closing out the indirect foreign exposure in an RSP fund would not change the fundamental investment objectives or constitute a significant change, the CSA says “it would not look beyond this 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 objectives,'” the regulator adds.

The CSA recommends that managers who choose to close out the foreign exposure should communicate the change to unitholders. “Examples include a message on the fund’s website or a notice in the next scheduled mailing.”

And the regulator says it does not believe that removing the reference to the 30% foreign content limit in the prospectus requires an immediate change. “It will generally not be necessary to make such changes until the next renewal.”

The CSA is encouraging RSP fund managers to contact the regulator to seek specific guidance.

The budget passed through parliament last week, though it has not received royal assent. Several fund companies have already reduced MERs on clone versions of foreign funds so that the fees match those of the underlying funds.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com