(October 17, 2003) Mutual funds composed of other mutual funds — an increasingly popular product for advisors and investors looking for customized asset allocation — will now have more flexibility in how they allocate assets. The Canadian Securities Regulators has approved amendments to National Instrument 81-102.

Until now, mutual funds could invest no more than 10% of their assets in another mutual fund. The various mutual fund portfolio programs that have sprung up were forced to apply for exemptions to go beyond that investment limit. Even so, underlying investments could only be made within fixed percentages, as set out in fund’s prospectus.

A bulletin from the Gowling Lafleur Henderson notes that the exemption process was “costly, time-consuming and resulted in orders with numerous conditions and restrictions.”

Under the new rules, a mutual fund can invest more than 10% of its assets in other mutual funds, providing the underlying mutual funds are registered, with no percentage limits. The 10% rule applies to the underlying funds, but they may hold unlimited units of money market and index participation — or exchange-traded — funds. Funds of funds can also hold RSP funds to qualify as Canadian content.

The new rules stipulate that the investment in other funds be transparent to investors, and prohibit duplication of management fees. That prohibition depends on the “reasonable person” rule, that is, whether a reasonable person would think that fees are being duplicated.

“It’s a big change that will make a lot of products more flexible,” says Paul Dempsey, an associate at Gowlings and former manager of investment funds at the Ontario Securities Commission.

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    • In all, the new rules mean fund managers don’t have to apply for exemptions and can freely change the weights of the underlying funds without have to submit to a unitholder vote. They can also park excess cash into money market funds or index participation units to manage cash balances and redemption requests.

    Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

    (10/17/03)