Amendments To NI 81-106

Amendments to National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) are expected to come into force on September 8, 2008. The amendments primarily modify how an investment fund that is a reporting issuer is required to calculate net asset value and address the implications of Section 3855 Financial Instruments – Recognition and Measurement of the CICA Handbook.

The amendments to NI 81-106 replace the current requirement that investment funds calculate their net asset value in accordance with Canadian GAAP. Once the amendments come into force, an investment fund must calculate net asset value using the "fair value" of its assets and liabilities. For the purposes of financial statements, investment funds will still be required to calculate their net assets in accordance with Canadian GAAP.

The following terminology is used in the amendments:

  • Net assets - Determined in accordance with Canadian GAAP and used for purposes of financial statements only.
  • Net asset value - Determined using fair value and used for all purposes other than financial statements, including purchases and redemptions.
  • Fair value - Market value based on reported prices and quotations in an active market, or where market value is not available or the investment fund's manager believes it is unreliable, a value that is fair and reasonable in all the relevant circumstances. The CSA provide guidance on the meaning and determination of "fair value" in the companion policy to NI 81-106;

Managers of investment funds that are reporting issuers will be required to:

  • establish and maintain board approved written policies for determining fair value of the investment funds' assets and liabilities;
  • consider whether the valuation process is a "conflict of interest matter" as defined in National Instrument 81-107 Independent Review Committee for Investment Funds;
  • consistently follow their valuation policies and procedures;
  • maintain records of the determination of fair value and the reasons that support that determination;
  • include in the notes to the investment funds' financial statements the net asset value per security calculated using the fair value of the fund's assets and liabilities, the net assets per security calculated in accordance with Canadian GAAP and an explanation of the differences between these amounts; and
  • include in the investment funds' annual information form a description of how the manager's valuation principles and practices differ from Canadian GAAP.

Managers should also review their funds' constating documents to determine whether amendments are required to permit the calculation of net assets for the purposes of financial statements and the calculation of net asset value for all other purposes, including purchases and redemptions.

OSC Review Of Valuation Practices And Calculation Of Net Asset Value

The Ontario Securities Commission described staff's observations of and suggestions for appropriate valuation practices and expense allocations in its July 2008 OSC Staff Notice 11-763 A Focused Review of the Securities Valuation and Expense Allocation Practices of Fund Managers. The Notice covers additional ground from the NI 81-106 amendments and describes staff's expectations as to the content and application of policies and procedures with regard to:

  • valuation of portfolio securities
  • establishing price variance thresholds and other monitoring procedures
  • calculation of NAV
  • identification, rectification and accounting treatment for NAV errors
  • oversight of valuation service providers
  • operational expense allocation
  • allocation of operating expenses
  • disclosure of allocation methodology in offering documents

Overall, the OSC noted that the various practices in this area that they observed were good, with no mention of common, general or systemic deficiencies or broad areas requiring improvement.

Other Matters

Additional changes and clarifications to investment funds' continuous disclosure obligations, many of which were noted in earlier CSA FAQs, will also come into force September 8. These changes and clarifications relate to various matters, including: financial statement disclosure of certain fund on fund investments, proxy voting disclosure, soft dollar disclosure and website disclosure.

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