Category: Investment Funds

CSA and OSC Extend Certain Deadlines for Registrants and Investment Funds and Postpone Certain Initiatives

In light of the COVID-19 pandemic, the Canadian Securities Administrators (CSA), including the Ontario Securities Commission (OSC), have been providing blanket exemptive relief and taking other steps to relieve burdens for market participants. The situation is fluid and additional actions are being taken as new challenges arise, so the summary below can only be a snapshot as of the publication date of this bulletin.

Compliance Reviews: In its March 16 news release, the OSC stated that its on-site compliance reviews have been postponed until further notice. Its normal course compliance activities are continuing as planned but the OSC has signalled its willingness to be flexible on deadlines for information.

CSA Extends Certain Filing Deadlines: On March 23, the OSC and other CSA members published blanket orders providing temporary relief from certain filing requirements. We have summarized below key provisions in the OSC blanket orders concerning registered firms and investment funds.

Fee Filings and Payments

  • Who: Registered firms and unregistered capital markets participants that are required to pay capital markets participation fees to the OSC.
  • What: If the firm paid its 2019 capital markets participation fee based on an estimate of its 2019 specified Ontario revenues, it ordinarily would have to re-calculate those revenues and the relevant participation fee based on its final 2019 financial information. If the recalculated fee exceeded the estimated fee paid at the end of 2019, the firm ordinarily would have to pay the balance owing and file an updated Form 13-502F4 Capital Markets Participation Fee Calculation or Form 13-503F1 (Commodity Futures Act) Participation Fee Calculation by March 30, 2020.
  • Extension: The deadline has been extended for 45 days from the original deadline.

Financial Statements / Calculations of Excess Working Capital

  • CSA members have issued substantially harmonized blanket orders providing registered dealers, advisers and investment fund managers (IFMs) with a 45-day extension from the original deadline for certain financial statements if the deadline originally fell between March 23 and June 1. The extension applies automatically, without any terms and conditions.
    • Dealers: annual financial statements, completed Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1), and interim financial information;
    • Advisers: annual financial statements and completed Form 31-103F1; and
    • IFMs: annual financial statements, completed Form 31-103F1, completed Form 31-103F4 Net Asset Value Adjustments (Form 31-103F4), and interim financial information.
  • IIROC and MFDA Firms: Firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC) or the Mutual Fund Dealers Association of Canada (MFDA) have been granted similar relief in respect of the regulatory financial questionnaires coming due.

Investment Fund Filing, Delivery and Prospectus Renewal Requirements (Funds Blanket Order)

  • Filing and Delivery Deadlines Extended 45 days: CSA members have issued substantially harmonized blanket orders providing investment funds with a 45-day extension on various filing and delivery deadlines for materials such as annual financial statements and auditor reports, interim financial statements, annual custodian compliance reports, annual mutual fund compliance reports, annual information forms, independent review committee (IRC) reports to securityholders, and annual and interim management reports of fund performance.
  • Prospectus Renewals: An investment fund distributing securities under a prospectus with a lapse date that occurs between March 23 and June 1, 2020 may add 45 days to that lapse date.
  • Fund Must Notify Regulator and Public: If an investment fund wishes to rely upon the Funds Blanket Order, it must, as soon as reasonably practicable and in advance the relevant delivery, filing or renewal deadline:
    • Notify its regulator by email that it is relying upon the Funds Blanket Order and each requirement for which it is relying upon that order; and
    • Post a statement on its public website or public website of its investment fund manager that it is relying upon the Funds Blanket Order and each requirement for which it is relying on upon that order.

Requests for Comment: The CSA indicated in their March 18 news release that all CSA proposals currently out for comment will have their comment periods extended by 45 days.

Risk Assessment Questionnaire (RAQ): In its March 16 news release, the OSC indicated that the RAQ is postponed until further notice.

Other Exemptive Relief: CSA members have also granted temporary relief to other categories of market participants (e.g. such as reporting issuers) and signalled regulatory flexibility regarding certain other requirements (such as the operation of annual general meetings).

Please contact us if you have any questions about the blanket orders described above, other requirements and temporary exemptions, and/or other operational changes adopted by CSA members that may affect your business. We can help you assess your options and, if necessary, engage with regulators on your behalf.

March 31, 2020

Is This the Very Model of a Modern SRO?

On February 3, the Mutual Fund Dealers Association (MFDA) released A Proposal for a Modern SRO (Special Report) and an accompanying Guiding Framework. The MFDA recommends that the Canadian Securities Administrators (CSA) take over direct regulation of markets while giving up direct oversight of exempt market dealers (EMDs), scholarship plan dealers (SPDs), and certain portfolio managers to a new self-regulatory organization (NewCo). NewCo would take on direct responsibility for registration, business conduct, prudential oversight, policymaking and enforcement functions in relation to the registrants mentioned above, plus those currently overseen by the MFDA and the Investment Industry Regulatory Organization of Canada (IIROC).

The Special Report is just one perspective on whether and how to reform self-regulatory structures for capital market participants. The CSA plans to publish its own consultation paper on the self-regulatory structure later this year. We will monitor developments in this area and keep you informed.

February 28, 2020

OSC Goes Its Own Way as CSA Finalizes Rule on Embedded Commissions

On February 20, the Canadian Securities Administrators except the Ontario Securities Commission (Participating Jurisdictions) published a notice (Multilateral Notice) announcing amendments to National Instrument 81-105 Mutual Fund Sales Practices and related instruments to prohibit deferred sales charges (DSCs) for investment funds (Amendments). The OSC, like somebody who someone in Fleetwood Mac was dating unhappily, has decided to go its own way and restrict rather than ban DSCs outright. We’ve set out below the key features of the Participating Jurisdictions’ ban, and the OSC’s proposed restrictions, on DSCs.

A.  Participating Jurisdictions

  • In the Participating Jurisdictions, the Amendments will prohibit fund organizations from paying upfront sales commissions to dealers, which will result in the discontinuation of all DSC options.
  • The Amendments will take effect on June 1, 2022 (Effective Date). The redemption schedules for mutual fund investments purchased under a DSC option before the Effective Date will be allowed to run their course until their scheduled expiry.
  • As we discussed in our October 2019 bulletin, the conflict of interest provisions in the client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) come into effect on December 31, 2020. Regulators in the Participating Jurisdictions will exempt dealers from these new requirements as they apply to DSC options until the Effective Date. Instead, dealers will be required to comply with the conflict of interest provisions that are currently in effect under NI 31-103 in relation to DSC options.
  • Regulators in the Participating Jurisdictions view the discontinuance of the DSC option as a material change. So, for prospectuses that contemplate a DSC option, are receipted before the Effective Date, and lapse after the Effective Date, disclosure can be handled in one of two ways.
    • Option 1: Amend the simplified prospectus and fund facts documents as of the Effective Date to remove references to the DSC option.
    • Option 2: Include disclosure in simplified prospectus and fund facts documents indicating that the DSC option will not be available in the Participating Jurisdictions after the Effective Date.

B.  Proposed OSC Rule 81-502 – Restrictions on the Use of the Deferred Sale Charge Option for Mutual Funds

  • Proposed OSC Rule 81-502 is intended to address the “lock-in” effect associated with the DSC option and reduce the potential for miss-selling while continuing to allow dealers to offer the DSC option to clients with smaller accounts. Restrictions will be imposed at the investment fund manager (IFM) and dealer levels.
  • IFM-level restrictions: OSC Rule 81-502 will limit the redemption schedule to three years. Clients will be permitted to redeem up to 10% of their investment annually without redemption fees (on a cumulative basis). IFMs will have to create a separate DSC series so that investors who purchase funds on a no-load or front-end charge basis do not incur any costs related to financing the upfront commissions typically associated with the DSC option.
  • Dealer-level restrictions: Dealers won’t be able to sell funds with a DSC option to clients who are either aged 60 or over or have an investment horizon that is shorter than the DSC schedule. In addition, DSC option funds can only be sold to clients with accounts not exceeding $50,000, and clients will not be able to use borrowed money to buy mutual funds with a DSC option. Upfront commissions will be permitted only for new contributions to client accounts and no such commissions will be payable on reinvested distributions. Finally, no redemption fees will be payable in connection with investor redemptions in specified circumstances (g. involuntary loss of full-time employment, permanent disability, critical illness, or death).
  • Effective date: OSC Rule 81-502 is expected come into effect when the DSC ban comes into effect in the Participating Jurisdictions.
  • Conflict of interest: The OSC considers it a conflict of interest for registrants to accept upfront commissions associated with the sale of securities under a DSC option. Therefore, it expects registrants to address that conflict consistent with their obligations under NI 31-103, in its current state, and as amended by the CFRs, when those amendments take effect at the end of this year.
  • Deadline for comments: Comments are due on proposed OSC Rule 81-502 by May 21, 2020.

In light of the forthcoming ban on DSC options in most jurisdictions and the narrowly defined scope for them contemplated in OSC Rule 81-502, we imagine that fund organizations and dealers are assessing whether it will be worth it to continue DSC option funds in Ontario once the ban in the Participating Jurisdictions takes effect. If you would like to discuss how the Amendments and OSC Rule 81-502 might affect your business, please contact us.

February 28, 2020