In September, the Canadian Securities Administrators (CSA) proposed amendments to National Instrument 81-102: Investment Funds
, inviting feedback on revisions that loosen restrictions on alternative offerings. Specifically, the amendments would permit hedge fund managers to offer alternative funds to Canadian retail investors via a long-form prospectus offering.
In the consultation, the CSA asserts that “not proceeding with the Proposed Amendments would stifle innovation in the marketplace to the detriment of both investors and the investment funds industry.” However, investor advocacy group Kenmar Associates has commented on the proposal with reservations over how alternatives could negatively impact retail investors.
“Think LSIF's. Non-bank ABCP, leveraged ETF's , structured products, etc.,” the group said in its comments. “Main Street needs simple low-cost solutions, not ones so complex [that] they are not understood.”
The group’s comments state numerous concerns that it felt put investors at risk. Citing previous guidance from IIROC and continuing cases wherein leveraged and inverse-traded ETFs are sold to unqualified investors, it said that untrained dealing representatives could easily sell the alternative offerings to unqualified investors. Also cited were deficiencies in risk profiling reported by PlanPlus in 2015 and the inadequacy of the suitability standard in ensuring investor protection.
The group also raised a concern that dealers might have trouble reconciling current Know Your Client and Know Your Product guidelines into a uniform set of criteria when offering an alternative mutual fund. “Given [alternatives’] unique risk profile, the basic risk tolerance scale included on most KYC forms is unlikely to be adequate,” the group said. “In addition, although [alternatives] are being grouped together as an asset class for the purposes of the proposal, their investment objectives, strategies and underlying investment portfolios are very diverse.”
Noting that alternative funds would be regulated under current mutual fund sales practices, Kenmar Associates stressed the importance of enhanced enforcement to protect investors. They suggested measures such as replacing the term “alternative fund” with “non-conventional mutual fund” to better communicate its heightened complexity; restricting permissions for alternative funds to borrow from entities other than those qualified as investment fund asset custodians in Canada; and describing the actual risks and strategies of alternatives to inform investor decisions rather than using volatility.
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