National Instrument 81-102 is the Canadian Securities Administrators rule that governs how publicly offered investment funds invest, borrow, safeguard assets, and communicate with investors. It applies to conventional mutual funds, alternative mutual funds, exchange-traded funds, and closed-end funds distributed under a prospectus, and it sets the concrete limits fund managers work inside: how concentrated a portfolio can be, how much leverage is allowed, who can hold the assets, and what a fund has to tell you before making major changes.
Which Funds NI 81-102 Applies To
The instrument covers any investment fund that distributes its securities under a prospectus or is a reporting issuer under provincial securities legislation. Three broad categories fall inside:
- Conventional mutual funds, where units can be redeemed on any business day at net asset value.
- Non-redeemable investment funds, commonly called closed-end funds, which trade on an exchange and do not offer daily redemptions.
- Alternative mutual funds, retail-accessible funds permitted to use strategies like leverage and short selling that conventional mutual funds cannot.
Exchange-traded funds are captured too, though ETFs that are not in continuous distribution follow modified requirements. Instead of the 60-day prospectus notice other mutual funds must give before starting short selling or derivatives activity, those ETFs issue a news release disclosing intent and start date. They also get exemptions from certain order-transmission rules, and their redemption pricing can differ from net asset value under conditions their prospectus spells out.
Private pools and hedge funds that do not offer securities to the public under a prospectus generally sit outside the instrument.
Concentration and Diversification Limits
The instrument forces diversification through hard caps. A mutual fund (other than an alternative mutual fund) cannot buy a security if the purchase would push more than 10% of net asset value into the securities of any single issuer. The same 10% ceiling applies to alternative mutual funds and non-redeemable funds, though the calculation mechanics differ slightly where derivatives are involved.
A separate control rule bars any investment fund from holding more than 10% of the voting shares or outstanding equity of a single issuer. Investment funds are meant to be passive investors, not corporate controllers.
Illiquid assets carry the same 10% threshold. A new purchase that would push illiquid holdings past 10% of net asset value is prohibited. If the fund drifts above 10% because of market movements rather than fresh buying, it has to take steps to bring the portfolio back into compliance.
Government-guaranteed securities have exceptions built in, but for corporate holdings the concentration limits are firm.
Borrowing and Leverage
Standard mutual funds face tight borrowing restrictions. They can borrow cash only to handle redemption requests or settle portfolio trades, the borrowing must be temporary, and total outstanding borrowing cannot exceed 5% of net asset value. Borrowing to enlarge the investment portfolio is explicitly prohibited.
Alternative mutual funds and non-redeemable investment funds have far more room. They may borrow up to 50% of net asset value, and the borrowed cash does not have to be tied to redemptions or trade settlement.
Aggregate leverage is also capped. For an alternative mutual fund or non-redeemable fund, total exposure from borrowing, short selling, and derivatives combined cannot exceed 300% of net asset value. That calculation adds outstanding debt, the market value of all securities sold short, and the notional amount of derivatives positions, minus hedging transactions. If the fund breaches 300% at the end of any business day, it must reduce exposure as quickly as commercially reasonable.
Short Selling and Derivatives
Standard mutual funds can sell short, but the aggregate market value of securities sold short cannot exceed 20% of net asset value. Alternative mutual funds have no standalone short-selling cap beyond the 300% aggregate exposure ceiling.
Derivatives use is governed by detailed cover requirements. A fund writing a call option must hold enough of the underlying security, or a right to acquire it, to deliver on exercise. A fund writing a put option must hold cash cover or offsetting positions sufficient to buy the underlying at the strike price. For forwards and futures, the fund maintains cash cover that, marked to market daily, equals or exceeds the underlying market exposure. The point is that funds using derivatives can meet their obligations without leaning on other portfolio assets.
Fund-of-Funds Investments
When one fund invests in another, layering restrictions protect investors from hidden fee stacking and opaque chains. A standard mutual fund can invest in another standard mutual fund also subject to NI 81-102, but no more than 10% of net asset value can sit in alternative mutual funds or non-redeemable investment funds combined. The underlying fund itself cannot hold more than 10% of its own assets in other investment funds, which prevents funds-in-funds-in-funds structures.
Fee duplication is where managers feel the friction. No management or incentive fees can be charged at the top level if they would duplicate a fee already paid by the underlying fund for the same service. If the underlying fund is managed by the same manager or an affiliate, no sales or redemption fees can be charged on the inter-fund transactions at all. Where the manager relationship is arm’s-length, sales and redemption fees still cannot duplicate fees already borne by top-level investors. Brokerage fees on exchange-listed fund securities are treated as normal trading costs and are the only carve-out.
Crypto Asset Exposure
Amendments effective July 2025 brought crypto assets formally into the framework. Only alternative mutual funds and non-redeemable investment funds can buy, sell, or hold crypto directly. Standard mutual funds are limited to indirect exposure: investing in an underlying alternative or non-redeemable fund that holds crypto, or investing in exchange-listed derivatives on a crypto underlying, up to 10% of net asset value at the time of purchase.
Regardless of fund type, only fungible crypto assets that trade on, or underlie a derivative listed on, an exchange recognized by a Canadian securities regulator are eligible. Obscure tokens are off the table.
Custody rules for crypto are stricter than for traditional securities. Custodians and sub-custodians must keep crypto in offline storage, moving it online only to execute transactions. They must also obtain an annual reasonable-assurance report from a public accountant covering the design and effectiveness of their crypto custody controls. The report must cover a 12-month period and be obtained within 90 days of the period’s end. A custodian cannot start holding crypto for a fund unless it already has a report covering a period ending no more than 15 months earlier.
Custodianship and Asset Safekeeping
Every fund must appoint a qualified custodian to hold portfolio assets separately from the assets of the fund manager. If the management company runs into trouble, that separation keeps investor capital out of reach of the manager’s creditors.
For assets held in Canada, qualified custodians are limited to banks listed in Schedule I, II, or III of the Bank Act (Canada), trust companies incorporated and licensed federally or provincially in Canada with equity of at least $10,000,000, or affiliates of those banks and trust companies that either meet the same $10,000,000 equity threshold or have their custodial obligations guaranteed by the parent.
Sub-custodians holding assets outside Canada face a higher bar. They must be regulated as a banking institution or trust company under the laws of their home country and must have equity of at least $100,000,000, or have a parent entity meeting that threshold that guarantees their obligations.
A written custodian agreement has to state that assets will be held in a way that clearly identifies them as belonging to the fund, and the custodian is responsible for regular reports on the status and location of all holdings.
Fundamental Changes That Require an Investor Vote
Some changes to a fund cannot be made by the manager alone. Part 5 of the instrument lists the actions that require securityholder approval by majority vote at a properly convened meeting:
- Changing how an existing fee is calculated, or introducing a new fee, if either could result in higher charges to the fund or its investors.
- Replacing the fund manager with an entity that is not an affiliate of the current manager.
- Altering the fund’s fundamental investment objectives.
- Decreasing how often the fund calculates its net asset value per security.
- Merging the fund into another issuer where securityholders would end up holding securities of the new entity, or acquiring another issuer’s assets in a way that constitutes a material change.
- Restructuring a mutual fund into a closed-end fund or vice versa, or restructuring into an entity that is not an investment fund at all.
Where holders of different classes or series would be affected differently, each class or series votes separately. Unless the fund’s constating documents require a higher threshold, approval takes a simple majority of votes cast.
Terminations follow their own timing rules. A mutual fund winding down must give securityholders at least 60 days’ notice before termination, and the manager has 30 days after termination to notify the securities regulatory authority. Non-redeemable investment funds file and issue a news release disclosing the termination and then complete the wind-up no earlier than 15 days and no later than 90 days after that filing.
Independent Review Committees
NI 81-102 funds don’t govern themselves in isolation. A companion rule, National Instrument 81-107, requires every investment fund to establish an independent review committee of at least three members, none of whom can have a material relationship with the fund manager or the fund. A material relationship means any connection that could reasonably be perceived to interfere with the member’s judgment on conflict-of-interest matters.
The committee reviews conflict-of-interest situations the manager refers to it, particularly transactions between the fund and entities related to the manager. It adopts a written charter, annually assesses whether the manager’s conflict-of-interest policies are adequate, reviews any standing instructions given to the manager, and evaluates its own effectiveness. It publishes an annual report to securityholders describing its activities.
Amendments effective April 22, 2026 add transparency requirements. Fund managers will have to prepare an annual report listing any related-party transaction reports filed during the year, including the title, date, and a brief description of each transaction. A new conflict reporting form, Form 81-107A, requires detailed disclosure of related-issuer purchases, covering the price per security and the name of any related person receiving a fee or commission.
Sales Communications and Prospectus Disclosure
Part 15 governs what funds can say in marketing materials. Any document or communication used to promote a fund must comply with rules designed to prevent misleading or exaggerated performance claims. Advertising cannot cherry-pick favorable time periods without showing longer-term results, and materials must include prescribed warnings.
The prospectus remains the primary legal disclosure document. It must contain all material facts about the fund’s objectives, risks, fees, and costs, be updated annually, and be filed with securities regulators. All management fees, incentive fees, and expenses have to be disclosed clearly enough for investors to know exactly what they are paying, and any fee change that could increase charges requires the securityholder approval described above.
Enforcement
NI 81-102 itself does not specify penalty amounts. Enforcement falls to provincial securities regulators under their own legislation. In Ontario, the Capital Markets Tribunal can order an administrative penalty of up to $5 million for each failure to comply with securities law, and can suspend or restrict a firm’s registration. Other provinces have similar enforcement powers, though maximum penalty amounts vary. For fund managers, that means a breach of concentration limits, borrowing caps, or disclosure rules can bring substantial financial penalties, registration consequences, or both.
A Note for U.S. Investors
NI 81-102 is a Canadian securities rule. It does not address U.S. tax treatment, but Canadian mutual funds and ETFs governed by the instrument are classified as Passive Foreign Investment Companies for U.S. tax purposes, which triggers separate IRS reporting obligations (including Form 8621) for U.S. persons who own them. Cross-border investors should consult a tax professional; the PFIC rules sit outside the instrument and are not softened by it.