Category: Investment Funds

FAQ Corner: What Procedures are Required Before My Firm Can Accept Referred Business from a Third-Party?

Answer: Canadian securities laws require that a registered firm manage material conflicts of interest in the best interests of its clients. The Canadian Securities Administrators have provided guidance that paid referral arrangements are an inherent conflict of interest which, in their experience, are almost always material. While much of the guidance then focuses on out-bound referral arrangements (a registered firm referring a client to a third-party in exchange for a referral fee), we believe the guidance can equally apply to an in-bound referral arrangement (a third-party, such as a wealth planner, referring a client to a registered PM). In order to manage this conflict of interest, in addition to compliant client disclosure, the registered firm should have procedures in place to verify that the proposed referral arrangement will serve its clients’ best interests. These procedures can include a due diligence review of the referrer’s reputation and level of service, and confirmation that the referrer: (i) is qualified to render its services and is not subject to any civil actions or regulatory or professional disciplinary matters, and (ii) does not hold itself out as providing services that it is not registered to provide. The registered firm must also of course determine that its services are suitable for the client. Importantly, the CSA have also provided that If a client pays more for the same, or substantially similar, products or services as a result of a referral arrangement, they will not consider the inherent conflict of interest to have been addressed in the best interest of the client.

June 30, 2021

New Brunswick Proposes Local Rule Impacting Funds in that Province

The Financial and Consumer Services Commission released proposed Local Rule 81-510 Self-Dealing on June 24 for a 60-day comment period. The stated purpose of the rule is to provide additional guidance regarding the meaning of certain terms used in Part 10 of the Securities Act (New Brunswick) which relates to self-dealing by mutual funds as well as insider trading. Part 10 of the Act already prohibits mutual funds formed in New Brunswick (or are reporting issuers in the Province) from taking certain actions without exemptive relief, such as the conflict of interest provisions which prohibit a mutual fund from, among other things, making an investment in any person in whom the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder. Many of the new proposed definitions will be familiar to market participants as they relate to prohibited transactions for certain mutual funds, including the meaning of “significant interest” and “substantial security holder”, as they are very similar to those already in use by other provinces, including Ontario. The intention of the proposed rule is for New Brunswick’s approach to the provisions to be more consistent with that taken in many other Canadian jurisdictions, thereby reducing any confusion in the market.

June 30, 2021

Hello, Goodbye – CSA Grants Interim Relief for DSC Sales

As a follow-up to our article, All Together Now – OSC Joins DSC Ban, in the May 2021 AUM Law Bulletin, we can report that on June 23 the Canadian Securities Administrators (CSA) issued CSA Notice 31-360 Blanket Orders/Class Orders in respect of Transitional Relief Related to the Deferred Sales Charge Option in respect of Client Focused Reforms Enhanced Conflicts of Interest and Client First Suitability Provisions of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the Notice).

The Notice states that each of the CSA jurisdictions have decided to grant relief by way of blanket orders (the Blanket Orders) to address the issue of overlapping periods between the implementation of the enhanced conflicts of interest and “client first” suitability requirements in the Client Focused Reforms (CFRs) and the implementation of the ban on deferred sales charges (DSCs). The enhanced conflicts of interest provisions of the CFRs come into effect on June 30, 2021 and the client first suitability provisions of the CFRs come into effect on December 31, 2021 whereas the DSC ban only comes into effect on June 1, 2022.

In respect of a trade in a security of an investment fund that results in the payment of an upfront sales commission and that is subject to a DSC, the Blanket Orders will provide registrants with an exemption from the enhanced conflicts requirements from June 30, 2021 to June 1, 2022 and with an exemption from the client first suitability requirement from December 31, 2021 to June 1, 2022. Without the Blanket Orders, a firm selling investment funds with DSCs until the ban on June 1, 2022 could be in contravention of the CFR requirements regarding conflicts of interest and suitability.

If you have any questions about the Notice or Blanket Orders, please contact your usual lawyer at AUM Law.

June 30, 2021

Start-Up Crowdfunding Exemptions are Revved up and Ready to Go

On June 23, the CSA announced the final publication of National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions (NI 45-110), along with CSA Staff Notice 45-329 Guidance for using the start-up crowdfunding registration and prospectus exemptions. As previously noted in our February 2020 bulletin, NI 45-110 sets up a national framework to permit securities crowdfunding for start-up and early stage issuers and will replace the blanket orders that had been issued in a number of jurisdictions. A dealer registration exemption will be available for funding portals that facilitate online distributions by issuers that use the prospectus exemption set out in the National Instrument. The prospectus exemption will allow an issuer to distribute eligible securities through an online portal, and both the dealer and prospectus exemptions require the portal (even if already registered as an investment dealer or EMD) and the issuer to satisfy numerous conditions.

NI 45-110 was first published for comment in February 2020, and the final rule has been responsive to comments indicating that the individual investment limits were too low by increasing the limit from $5,000 to $10,000 for a purchaser who has obtained suitability advice from a registered dealer, and also increased the limit on aggregate proceeds raised by the issuer group in the last 12 months from $1 million to $1.5 million. While the CSA noted that numerous commentators had asked for further increases for issuers, in their view it is more appropriate for issuers to utilize the offering memorandum exemption in order to crowdfund larger amounts. The annual working capital certification (renamed to the financial resources certification) has become a semi-annual certification, and the prospectus exemption will not be available for issuers whose only operations are to identify and evaluate assets or a business with a view to completing an investment in, merger with, amalgamation with or acquisition of a business, or purchasing the securities of one or more other issuers. Some local amendments will also be made; for example, in Ontario, OSC Rule 13-502 Fees will be amended to classify an unregistered portal relying on the new exemption as an ‘unregistered capital markets participant’ (the same category as unregistered investment fund managers) and pay fees as such. NI 45-110, the related guides, and consequential amendments to other rules is expected to come into force September 21, 2021.

June 30, 2021

Giving the Green Light to ESG Disclosure – CFA Institute Publishes Draft ESG Disclosure Standards for Investment Products

On May 19, CFA Institute published its Exposure Draft of ESG Disclosure Standards for Investment Products (the Exposure Draft). The draft is the second proposed version of standards (the Standards) on principles, requirements and recommendations in connection with the identification, comparison and presentation of investment products with environmental, social, and governance (ESG)-related features. The purpose of the Standards is to provide greater transparency and consistency in ESG-related disclosures, resulting in clearer communication regarding the ESG-related features of investment products. With the Exposure Draft, CFA Institute is seeking to elicit feedback from the public on the Standards.

CFA Institute noted that the recent substantial interest in investment products with ESG-related features has prompted a growing number of investment professionals and market participants to call for the development of a global standard to help investors understand which ESG-related investment products align with their needs and preferences. The Standards are meant to address that demand. CFA Institute stated that the Standards are suitable for all types of investment vehicles, all asset classes, all ESG strategies, and all markets.

The Exposure Draft notes that the CFA Institute Asset Manager Code, a voluntary principles-based code that outlines a firm’s ethical and professional responsibilities to clients, states that managers must, among other things, ensure that disclosures are truthful, accurate, complete, and understandable and are presented in a format that communicates the information effectively. The Standards support the Asset Manager Code. The Standards offer more detailed guidance about how to fulfill those requirements when aspects of an investment product’s strategy use ESG information or address ESG issues.

The Exposure Draft considers an ESG-related feature to be any aspect of an investment product’s strategy that uses ESG information or addresses ESG issues. The Standards are intended to be applied by investment managers regardless of how the investment products are named, labelled, or categorized. As well, the Exposure Draft proposes that investment managers have the flexibility to apply the Standard on a product-by-product basis rather than to all products, or at a firm level. The Exposure Draft contains disclosure requirements and recommendations that address certain elements of an investment product’s strategy including objectives, benchmarks, and sources and type of ESG information. The Exposure Draft also includes sample compliant presentations that include ESG information for certain types of investment products.

The Exposure Draft follows work done by CFA Institute’s ESG Working Group composed of industry professionals that explored concepts for a standard that would provide a consistent set of information and enough transparency to help investors understand and compare investment products with ESG-related features. The ESG Working Group released a Consultation Paper on the Development of the CFA Institute ESG Disclosure Standard for Investment Products (the Consultation Paper) in August 2020. Responses to the Consultation Paper confirmed the need for a set of standards and led to the Exposure Draft.

Comments on the Exposure Draft are due July 14, 2021 and can be submitted by any individual, group or organization. CFA Institute has also provided a list of questions for public comment on the Exposure Draft, guidelines for submitting feedback, and a draft response form. Comments received on the Exposure Draft will be considered for the final version of the Standards that are expected to be issued in November 2021.

If you have any questions about the Exposure Draft, please contact your usual lawyer at AUM Law.

June 30, 2021

A Summer for Consideration – CSA Proposes Amendments to Continuous Disclosure Obligations and Semi-Annual Reporting for Venture Issuers

On May 20, the CSA proposed amendments to NI 51-102 Continuous Disclosure Obligations in order to streamline and clarify continuous disclosure requirements for reporting issuers other than investment funds. The proposed amendments would include consolidating the MD&A form with the AIF form and financial statements into new annual and interim disclosure statements. The proposed amendments would eliminate some disclosure requirements found to be duplicative or redundant, such as the current MD&A requirement to disclosure summary information for the last 8 quarters, as that information can be located in previous filings. A few new requirements are proposed to be added to address perceived gaps in disclosure as well. The final amendments are expected to be effective December 15, 2023 and various transition provisions have been proposed. The CSA expects the amendments will streamline reporting and increase reporting efficiency for reporting issuers while increasing the quality of the disclosure for investors. Of particular interest, at the same time the CSA has proposed a framework for future consideration that would allow venture issuers (on a voluntary basis) to report semi-annually instead of quarterly, if they are not SEC issuers and provide alternative disclosure for interim periods where financial statements and MD&A are not being filed. The comment period on the proposals close on September 17, and we expect that market participants will want to review the extensive changes closely.

May 31, 2021

IIROC Seeks Expert Views on Its Proposed IIROC Expert Investor Issues Panel

IIROC is currently seeking input into a proposed framework for its new Expert Investor Issues Panel, including with respect to the panel’s creation, structure, and operation. The panel is intended to enhance IIROC’s current robust investor outreach efforts and help it accomplish its goal of investor protection. The framework includes provisions addressing membership composition, meetings, and responsibilities. Of note, the notice includes an appendix with an interesting comparative study of similar panels of other public interest regulators. Comments will be accepted on the proposal until June 30.

May 31, 2021

CSA Proposed Amendments to Designated Benchmarks and Benchmark Administrators

Certain of the securities regulatory authorities are proposing changes to Multilateral Instrument 25-102 Designated Benchmarks and Benchmark Administrators to provide for a securities regulatory regime for commodity benchmarks and administrators. MI 25-102, which was published in final form on April 29, for the first time designates and regulates benchmarks and their administrators. Under the rule, Refinitiv Benchmark Services (UK) Limited is the only designated administrator and only CDOR is designated as a benchmark. The proposed amendments would provide for the designation and regulation of commodity benchmarks, including those dually designated as designated critical benchmarks and designated commodity benchmarks, and benchmarks dually designated as designated regulated-data benchmarks and designated commodity benchmarks, as well as their administrators. For example, a “designated commodity benchmark” would be defined as a benchmark that is determined by reference to or an assessment of an underlying interest that is a commodity, but does not include a benchmark that has, as an underlying interest, a currency or a commodity that is intangible. Depending on the designation, administrators would have to comply with a number of requirements, similar to those under the existing rules but modified as needed for the commodity markets. The changes are intended to protect the Canadian commodity markets and also establish an EU equivalent regime to allow EU institutional market participants to use any Canadian designated benchmark under their equivalency provisions. The amendments are generally based on the principles for Oil Price Reporting Agencies published by IOSCO which is used in the EU regulations. There is no current intention to designate any commodity benchmarks or administrators, but the CSA members believe it is important to establish a regime because such benchmarks are subject to vulnerabilities, particularly with respect to the voluntary reporting of input data and low liquidity in physically-settled contracts.

Similar proposals have been published by the OSC to OSC Rule 25-501 (Commodity Futures Act) Designated Benchmarks and Benchmarks Administrators. Comments on both proposals are due July 28.

May 31, 2021

Investment Fund Managers (IFM) Form Deadlines

For clients who are registered as investment fund managers, a friendly reminder that your initial investment funds survey responses are due on May 31. Additionally, your completed fund data spreadsheet will be due on July 30. Please contact us if you have any questions on how to complete this survey.

May 31, 2021

All Together Now – OSC Joins DSC Ban

On May 7 the Ontario Securities Commission (OSC) announced that it will join in on the ban on deferred sales charge (DSC) sales of mutual funds, which the rest of the Canadian Securities Administrators (CSA) announced in February 2020. The ban is expected to be effective June 1, 2022 and will be achieved through a prohibition on the payment by fund organizations of upfront sales commissions to dealers. Like The Beatles in their Yellow Submarine, the CSA will be all together now in their ban of DSCs. The CSA’s multilateral ban, not including the OSC, was discussed in our February 2020 Bulletin.

The OSC reported that it received support for a harmonized DSC ban from industry stakeholders who commented on the OSC’s Proposed Rule 81-502 Restrictions on the Use of the Deferred Sale Charge Option for Mutual Funds, published in February 2020 (the Proposed Rule). The Proposed Rule would not have banned DSCs, but rather imposed restrictions on the use of DSCs. Among other things, the restrictions would have limited redemption schedules to three years and dealers would have been prohibited from selling funds with a DSC option to clients who were either aged 60 or over or had an investment horizon shorter than the DSC schedule.

The OSC received 34 comment letters on the Proposed Rule. Approximately 70% of commenters advocated for a complete ban of DSCs and urged the OSC to harmonize the rules with the CSA. Commenters expressed concern that the Proposed Rule would create a two-tiered regulatory approach, which would create compliance issues, be costly and burdensome to implement and monitor, and cause market inefficiency. Commenters also expressed concern that even with the restrictions under the Proposed Rule, there would still be negative investor outcomes with the DSC option. The OSC also noted that mutual funds with the DSC option have been in net redemptions since 2016 and had a total net outflow of $3.34 billion in Canada during 2020. During the same time, there was a total net inflow of $23 billion into mutual funds with no-load options. The OSC also noted that with advances in industry innovation, Ontario investors have access to affordable investment options, including no-load funds and exchange-traded funds that are available to investors of all account sizes. Approximately 25% of the commenters expressed support for the Proposed Rule and provided suggestions on the proposed restrictions.

One of the arguments in favour of DSCs is that they help smaller investors access financial advice that they would not otherwise be able to receive. DSCs help pay for upfront commissions paid by fund mangers to advisers. The argument is that, with the upfront commission, the adviser can afford to deliver appropriate advice and guidance to investors over several years. This would be the case even for clients with smaller accounts, where the adviser might otherwise not be able to afford to service that client.

With the announcement on May 7, the OSC also published OSC Staff Notice 81-731 Next Steps on Deferred Sales Charges. The OSC will now bring forward final amendments to National Instrument 81-105 Mutual Fund Sales Practices that will prohibit fund organizations from paying upfront sales commissions to dealers. The prohibition on the payment by fund organizations of upfront commission to dealers will result in the discontinuation of all forms of the DSC option, including low-load options. The redemption schedules for mutual fund investments purchased under a DSC option before June 1, 2022 will be allowed to run their course until their scheduled expiry.

May 31, 2021

Alberta and Saskatchewan Adopt the Self-Certified Investor Prospectus Exemption

On March 31, 2021, the Alberta Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan adopted, on an interim, three-year basis, a new prospectus exemption entitled the Self-Certified Investor Prospectus Exemption, as outlined in Multilateral CSA Notice of Implementation Alberta and Saskatchewan Orders 45-538 Self-Certified Investor Prospectus Exemption. The new exemption allows individual investors in Alberta and Saskatchewan who do not qualify as an accredited investor to invest alongside accredited investors, provided that they meet other criteria to demonstrate their financial and investment knowledge. There are a number of conditions to the exemption, including an extensive prescribed risk disclosure as part of the self-certification, and limits on investments to $10,000 in the last 12 months per issuer, with an aggregate cap of $30,000 in the last 12 months for all issuers. The investment limits do not apply for ‘Listed Issuer Investments’, or those issuers listed on certain exchanges in Canada, provided the investor receives suitability advice respecting the investment from a registrant. Guidance is provided on the distribution of securities by private issuers to self-certified investors and special purpose vehicles comprised in part of self-certified investors.

April 30, 2021

CSA Multilateral Notice and Request for Comment re Proposed Order 45-539 Small Business Financing

The Alberta Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan have proposed a new prospectus exemption to assist small businesses in Alberta and Saskatchewan to raise up to $5 million from investors in those provinces, based on a simple offering document (which would be considered an offering memorandum under securities legislation).

There are many proposed conditions to the use of the exemption, which vary depending on whether or not financial statements are provided to an investor. For example, if the statements are not provided, the maximum an issuer group could raise from investors that would not qualify to invest under other specified prospectus exemptions over a 12 month period would be $1.5 million, subject to a lifetime limit of $5 million. The maximum any one investor could invest would be $2,500, or a higher limit of $10,000 if they qualify as a “minimum income investor” (which would have lower thresholds than those required of an “accredited investor”). The individual investor thresholds are slightly higher if financial statements are provided.

It is proposed that the financial statements provided under the exemption would not need to be audited (review engagement only) and could be prepared based on Canadian GAAP applicable to private enterprises (with some modifications). It is noted that corporate or other legislation might still require certain issuers to provide audited statements. The financial statements would have to continue to be provided to investors but only until such time as the proceeds from the offering are expended, and continuous distribution offerings would not be permitted. The exemption is intended to address financing challenges for small businesses that do not yet attract venture capital investors, and the exemption would not be available to issuers that are reporting issuers or investment funds. Other conditions to the exemption include requiring investors to sign a prescribed risk acknowledgement, the filing of a report of exempt distribution and the filing of the offering document on SEDAR.

Interestingly, an issuer would be given the choice of creating their own offering document with the specified information included, or to use a pre-designed form of offering document with a drop down menu that could be completed electronically in a Q&A format. Comments on the proposal are due on May 7 (May 24 with respect to the technical amendments relating to SEDAR filing requirements).

April 30, 2021

ASC Notice and Request for Comment re Blanket Order 31-536 Alberta Small Business Finder’s Exemption

The Alberta Securities Commission is continuing to explore unique exemptions to revitalize Alberta’s capital markets and assist small businesses to raise capital efficiently while balancing investor protection.

The proposed new blanket order would provide an exemption from the dealer registration requirement in Alberta for individual finders who utilize pre-existing personal contacts. It would replace the current Northwestern Exemption which has been revoked everywhere except Alberta. The targeted exemption is intended to assist early stage businesses raising modest amounts of capital without the participation of a registered dealer. There are a number of requirements for the use of the exemption, including that the issuer must have its head office in Alberta, and that the issuer can not have raised more than $5 million under all exemptions from the prospectus requirements. The registration exemption for finders would only be available if the issuer uses certain specified prospectus exemptions, such as the private issuer exemption where the purchaser is an accredited investor or not a member of the “public”, the offering memorandum exemption and the accredited investor exemption.

Finders would not be permitted to solicit prospective purchasers other than people with whom they have a “substantial pre-existing relationship”, and as a result advertising would also be prohibited. In addition, the finder would not be allowed to rely on the dealer exemption if they have previously provided certain financial services to the purchaser of securities, such as financial planning, provision of insurance products or mortgage services. Investors would be required to sign a specified risk acknowledgement form, and an information form with respect to the finder would need to be filed with the ASC within 10 days of the distribution. Comments on the new proposal are due by May 7.

April 30, 2021