Browse Analysis of Managed and Structured Products

18.4.4 Suspension Of Redemptions

Explore the circumstances under which Canadian mutual funds might suspend redemptions, including regulatory requirements and exceptional conditions.

Suspension of Redemptions

As with all rules, there are exceptions. Securities commissions require all Canadian mutual funds to make payment on redemptions within a specified time; however, redemption suspensions are permitted in rare cases. Almost all funds reserve the right to suspend or defer a shareholder’s privilege to redeem shares, if necessary. For example, a suspension might be invoked if normal trading is suspended on securities that represent more than 50% of securities owned by the fund. Obviously, if the fund cannot determine the NAVPS, it cannot determine the redemption price of a unit or share.

Key Takeaways

  • Regulatory Requirements: Canadian mutual funds are generally required to process redemptions within a specified timeframe.
  • Exceptions: Funds reserve the right to suspend or defer redemptions under specific, rare conditions for the sake of protecting shareholder interests and maintaining the integrity of the fund.
  • NAVPS Impact: Net Asset Value per Share (NAVPS) cannot be calculated if trading halts, and thus, the redemption prices also cannot be calculated.

Frequently Asked Questions (FAQs)

  1. What is NAVPS?

    NAVPS stands for Net Asset Value per Share. It represents the value per share of a mutual fund or an exchange-traded fund (ETF) on a specific date or time.

  2. When can a mutual fund suspend redemptions?

    A mutual fund may suspend redemptions in rare cases, especially when normal trading is suspended on the securities that make up a significant portion (usually more than 50%) of the fund’s portfolio.

  3. How do investors get informed about redemption suspensions?

    Mutual fund statements and regulatory filings will notify shareholders about suspensions. Additionally, investor relations departments can provide real-time updates.

Glossary

  • Redemption: The return of an investor’s units or shares to the mutual fund in exchange for their current value.
  • NAVPS (Net Asset Value per Share): A measurement that represents the value per share of a mutual fund or an ETF at a given point in time.
  • Securities Commissions: Regulatory authorities overseeing the securities industry, including mutual funds, to ensure investor protection and market integrity.

Figures & Charts

    graph TD
	   A[Normal Trading Operational] -- NAVPS Calculation --> D(NAVPS Known)
	   B[Trading Suspension] -- No NAVPS Calculation --> E(NAVPS Unknown)
	   D --> F[Redemptions Processed]
	   E --> G[Redemptions Suspended]

Understanding the suspension of redemptions is crucial for investors holding mutual funds, as it affects both the liquidity and the valuation of their investments. It’s important that investors stay informed about the conditions under which such suspensions can occur and how they impact investment decisions.


CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

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## Under what circumstances might a Canadian mutual fund invoke a suspension of redemptions? - [ ] When requested by a major shareholder - [ ] During periods of high market volatility - [x] If normal trading is suspended on securities representing more than 50% of the securities owned by the fund - [ ] When the fund manager decides to do so without reason > **Explanation:** A suspension might be invoked if normal trading is suspended on securities representing more than 50% of the securities owned by the fund, meaning the fund cannot determine the NAVPS or redemption price. ## What is the primary reason a mutual fund would suspend redemptions? - [ ] To increase the NAVPS - [ ] To attract new investors - [x] Because the fund cannot determine the NAVPS, and therefore the redemption price - [ ] To meet regulatory requirements > **Explanation:** The inability to determine the NAVPS (Net Asset Value per Share) is a primary reason for suspending redemptions, as it prevents the accurate calculation of the redemption price. ## Who requires Canadian mutual funds to make payment on redemptions within a specified time? - [ ] Fund managers - [x] Securities commissions - [ ] Transfer agents - [ ] Shareholders > **Explanation:** Securities commissions require Canadian mutual funds to make payment on redemptions within a specified time. ## How often are redemption suspensions typically allowed? - [ ] Frequently, as per the fund manager's discretion - [ ] Whenever the market is volatile - [x] Rarely, only in exceptional cases - [ ] Only during the annual general meeting > **Explanation:** Redemption suspensions are permitted rarely and only in exceptional cases, such as when normal trading is suspended on a significant portion of the fund's securities. ## What privilege might a fund reserve the right to suspend in exceptional cases? - [ ] Voting rights - [x] Shareholder's privilege to redeem shares - [ ] Dividend payments - [ ] Access to account information > **Explanation:** Funds reserve the right to suspend a shareholder's privilege to redeem shares, if necessary, in certain exceptional situations. ## Which of the following is a potential consequence of suspending normal trading on a significant portion of a mutual fund's securities? - [ ] Increased market confidence - [ ] Higher NAVPS - [x] Inability to determine the NAVPS - [ ] Immediate liquidation of assets > **Explanation:** When normal trading is suspended on a significant portion of a mutual fund's securities, it leads to the inability to determine the NAVPS, hindering the calculation of the redemption price. ## What does NAVPS stand for? - [ x] Net Asset Value per Share - [ ] Net Annual Value per Security - [ ] National Asset Valuation of Shares - [ ] Nominal Asset Value per Subscription > **Explanation:** NAVPS stands for Net Asset Value per Share, which is critical in determining the redemption price of mutual fund shares. ## In the context of mutual funds, what happens if the fund cannot determine the NAVPS? - [x] It cannot determine the redemption price of a unit or share - [ ] It increases the dividend payments - [ ] It initiates the liquidation process - [ ] It stops all operations permanently > **Explanation:** If the fund cannot determine the NAVPS, it cannot determine the redemption price of a unit or share, necessitating a suspension of redemptions. ## What is a fund's right related to shareholder redemptions during exceptional cases? - [ ] Right to increase management fees - [x] Right to suspend or defer a shareholder’s privilege to redeem shares - [ ] Right to dissolve the fund - [ ] Right to change the investment strategy without notice > **Explanation:** A fund reserves the right to suspend or defer a shareholder's privilege to redeem shares during exceptional cases where it cannot determine NAVPS or other similar issues. ## Why might a fund defer a shareholder’s privilege to redeem shares? - [ ] To increase share prices - [ ] To comply with internal policies - [x] To manage situations where the NAVPS cannot be accurately determined - [ ] To discourage short-term investors > **Explanation:** A fund might defer a shareholder’s privilege to redeem shares primarily to manage situations where the NAVPS cannot be accurately determined due to abnormal market conditions or the suspension of trading on significant holdings.

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Sunday, July 21, 2024