Category: Investment Funds
On June 25, the Canadian Securities Administrators (CSA) published a consultation paper (Consultation Paper) seeking feedback on whether the current framework for self-regulatory organizations (SROs) should be reformed. As our readers know, the existing system requires investment dealers to be members of the Investment Industry Regulatory Organization of Canada (IIROC) and requires most mutual fund dealers (except those in Québec) to be members of the Mutual Fund Dealers Association of Canada (MFDA). CSA members directly regulate and oversee exempt market dealers (EMDs), investment fund managers (IFMs), portfolio managers (PMs), and scholarship plan dealers (SPDs).
The Consultation Paper is the latest in a series of publications considering whether the existing SRO system should be reformed. In February, we discussed the MFDA’s proposal that the CSA take over direct oversight of markets while giving up direct oversight of EMDs, SPDs and certain PMs to a new self-regulatory organization (NewCo) that would take on direct responsibility for the registration, business conduct, prudential oversight, policymaking and enforcement functions of the registrants mentioned above, plus those currently overseen by IIROC and the MFDA. More recently, IIROC proposed that IIROC and MFDA be brought together as divisions of a consolidated SRO.
At this stage, the CSA is not recommending any particular regulatory model or reforms. Instead, the Consultation Paper describes the existing SRO framework, summarizes the results of the CSA’s recent consultations with stakeholders, and seeks feedback on the issues raised by those consultations. According to the Consultation Paper, many stakeholders commended the SROs’ specialized expertise and the benefits of their national scope. However, they also raised some concerns about the existing system, including the following:
- Product-based regulation: Some stakeholders think that there is an unlevel playing field and potential for regulatory arbitrage because similar products and services are subject to different rules, or differing interpretations of similar rules, depending on which organization’s rules apply.
- Duplicative operating costs: There also are concerns that the lack of common oversight standards and differing interpretations of similar rules have led to duplicative operating costs for dealers who operate under both the IIROC and MFDA platforms.
- Structural inflexibility: Some stakeholders think that the existing framework makes it harder for dealers to accommodate evolving investor preferences (e.g. to access a wider range of products from a single registrant), creates succession planning challenges for mutual fund dealers and their representatives (because of the limited product shelf they can offer their clients), and/or limits investment dealers’ ability to grow their businesses due to difficulties in attracting mutual fund dealing representatives because of the additional proficiency requirements.
- Investor confusion: Investors and their advocates stated that layers of regulation have contributed to investor confusion because investors can’t access a broad range of products from one representative and/or are unsure whom to turn to if an issue arises.
- Public confidence in SRO system: Some stakeholders see this project as an opportunity to enhance the SROs’ governance structures to focus on their public interest mandates and strengthen complaint resolution mechanisms.
Although the Consultation is likely to be of particular interest to IIROC and MFDA members, this initiative has the potential to reshape in fundamental ways the regulatory environment for all registrants, including firms and individuals currently subject to direct regulation and oversight by the CSA. The deadline to submit comments is October 23. If you would like to discuss the Consultation and its potential impact on your business, please contact your usual lawyer at AUM Law.
June 30, 2020
On May 20, the Canadian Securities Administrators (CSA) issued substantially harmonized blanket orders giving investment funds and other issuers temporary relief from certain regulatory and filing obligations. The conditions of relief are similar to the blanket orders issued in late March, except that the relief applies only to issuers with filing deadlines as noted below:
- Investment fund issuers: The OSC’s blanket order for investment funds (Funds Blanket Order) provides a 60-day extension for certain filing, delivery and prospectus renewal requirements normally required to be made between June 2 and September 30, 2020. If an investment fund wishes to rely on the Funds Blanket Order, it must, as soon as reasonably practicable and in advance the relevant delivery, filing or renewal deadline: (a) 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 (b) post a statement on its public website or public website of its investment fund manager indicating that it is relying upon the Funds Blanket Order and listing each requirement for which it is relying on upon that order.
- Non-investment fund issuers have a 45-day extension for certain filing, delivery and base shelf prospectus renewal obligations normally due or required to be made between June 2 and August 31, 2020.
- Issuers can’t further extend pre-June 2 deadlines: An issuer cannot rely on the blanket relief to further extend a deadline occurring before on or before June 1.
On May 29, the CSA issued substantially harmonized blanket orders giving registrants and certain unregistered capital markets participants relief from certain financial statement and information delivery deadlines. The blanket orders provide a 60-day extension for periodic filings normally required to be made between June 2, 2020 and September 30, 2020 by registrants and, in Ontario, unregistered capital markets participants that rely upon certain registration exemptions such as unregistered investment fund managers (IFMs) and unregistered exempt international firms. The extension applies automatically, without any terms and conditions. Registrants and unregistered capital markets participants that have already used the prior relief to extend their deadline for any financial statement or information delivery requirements occurring on or before June 1, 2020, cannot use this relief to further extend that deadline.
Please contact us if you have any questions about the blanket orders described above. We can help you assess your options and, if necessary, engage with regulators on your behalf.
May 29, 2020
Last November, we wrote about the Ontario Securities Commission (OSC) report Reducing Regulatory Burden in Ontario’s Capital Markets. On May 27, the OSC published a progress report (Report) on these initiatives. Of the 107 initiatives described in the original report, 27% have been completed, 36% are on track, and 37% of them are delayed (nine of them due to COVID-19). We think the following updates will be of particular interest to our readers:
Registrant Regulation: The good news is that 23 of the 30 registrant-related initiatives are complete (14) or in progress and on-track (9). All the initiatives relating to compliance reviews are complete. Delayed initiatives include:
- Developing a rule to exempt international dealers, advisers and sub-advisers from registration under the Commodity Futures Act (Ontario) (CFA); and
- Evaluating options to reduce duplication in certain regulatory processes for firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC).
Investment Funds: Unlike the registrant regulation-related initiatives, a majority (16) of the 24 investment funds-related initiatives have been delayed, while five have been completed and four are in progress and on-track. The delayed items include changes to the investment funds prospectus regime and some of the continuous disclosure initiatives. Most of the completed items relate to discrete projects such as:
- Finalizing an exemptive relief precedent to allow an investment fund to have more than one custodian;
- Codifying relief to allow any body corporate that is an investment fund manager (IFM) to act as a trustee of any pooled fund organized as a mutual fund trust in Ontario that it manages; and
- Adopting an internal process at the OSC to ensure the use of sunset clauses in exemptive relief decisions only where appropriate.
Derivatives Participants: Of the eighteen initiatives concerning derivatives participants, only two are complete, while eight are in progress and on-track, and eight are delayed. Among other things, the OSC expects to:
- Complete its review of how proficiency requirements apply to registered advising representatives (ARs) advising in recognized options and determine whether to provide clarification (Fall 2020); and
- Complete its review of the existing registration regime to determine whether regulatory gaps can be addressed by measures less burdensome than an over-the-counter (OTC) derivatives registration rule (Spring 2020).
AUM Law will continue monitoring the progress of the OSC’s burden reduction initiatives and keep you informed.
May 29, 2020
On May 12, the Financial Services Regulatory Authority of Ontario (FSRA) issued guidance (Guidance) for mortgage administrators (Administrators) and mortgage brokers (Brokers) regarding their disclosure and other obligations in respect of mortgage-based investments during significant market disruptions, such as the COVID-19 pandemic.
The first notice, Mortgage Administrators – Responses to Market Disruptions (Administrator Notice), sets out FSRA’s interpretation of Administrators’ obligations under Mortgage Brokerages, Lenders and Administrators Act 2006 (MBLAA) to protect investors/lenders in mortgages/mortgage investments during significant market disruptions. For example:
- Notify investors/lenders:The Administrator must promptly notify investors/lenders of a borrower defaulting under the mortgage or any significant change to circumstances affecting a mortgage. If an investor/lender is a mortgage investment corporation (MIC) or other mortgage investment entity (MIE), the Administrator must notify that entity. The Administrator Notice includes examples of events that trigger this disclosure requirement, such as potential forbearance, a material delay in the development of a project being funded by the mortgage, or a change in the ability of investors or lenders to redeem prior to the mortgage investment’s maturity. The Administrator Notice also describes good practices that an Administrator should follow to keep current on the financial status of the mortgages and underlying properties in the portfolio and to communicate effectively with investors/lenders.
- Adhere to administration agreements:During the COVID-19 pandemic, more borrowers are requesting modifications to their mortgage terms. Administrators should review their administration agreements to confirm the scope of any discretion that they have to modify mortgage terms and they must adhere to those terms. They also should carefully document any exercise of such discretion. If the agreement does not authorize them to modify mortgage terms, an administrator faced with a request from the borrower to modify terms must review the requirements under the MBLAA and related regulations regarding the notice to be provided to the investors / lenders and obtain approval for the modifications.
The second notice, Mortgage Brokerage Disclosure and Suitability Assessments for Non-Qualified Syndicated Mortgage Investments (SMIs) – Responses to Market Disruptions (Broker Notice), discusses Brokers’ obligations to:
- Disclose material risks arising from the current market disruption to investors in non-qualified syndicated mortgage investments (NQSMIs); and
- Consider the current market disruption when assessing the suitability of an NQSMI to an investor.
The Broker Notice includes a non-exhaustive list of risks associated with a market disruption that FSRA considers material. These are similar to the “significant changes in circumstances” outlined in the Administrator Notice. The Broker Notice also emphasizes that Brokers must consider whether any property appraisals prepared for syndicated mortgage investments (SMIs) before the market disruption reflect the property’s market or current value and make investors/lenders aware of the risks of relying on any appraisal that either predates the market disruption or does not consider the market disruption’s impact on the property valuation. Also, if the appraisal contains any limitation statements, the Broker must bring those statements to the attention of the investor/lender. The Broker Guidance also states that Brokers must take into account the potential impacts of a market disruption on an SMI, its probable future performance, and the investor/lender’s unique circumstances when they assess the suitability of an SMI for an investor-lender.
Although not directly applicable to exempt market dealers (EMDs), the Guidance also may be useful to firms conducting suitability assessments with respect to MIE securities. Likewise, firms that operate MIEs might want to consider the Guidance when assessing whether to update the descriptions in their offering documents regardig risk factors, descriptions of the MIE’s mortgage portfolio, and/or changes to redemption rights.
AUM Law can help you assess the impact of the Guidance on your business, advise you on your disclosure obligations and help you prepare the required disclosures, as well as update your policies and procedures to incorporate these publications. Please do not hesitate to contact us for assistance.
May 29, 2020
On April 17, the Canadian Securities Administrators (CSA) issued blanket orders permitting mutual funds that invest a portion of their assets in fixed income securities to engage in additional short-term borrowing between April 17 and July 31, 2020. Ordinarily, mutual funds that engage in short-term borrowing to accommodate redemption requests are subject to a limit on that borrowing of 5% of the fund’s net asset value at the time of the borrowing. That limit is being temporarily increased to 10%, provided that certain conditions are met, such as having strict controls around the additional borrowing, disclosing the use of any additional borrowing to investors, ensuring that the additional borrowing is in the best interests of all investors. If you are managing a mutual fund that you think would benefit from these blanket orders, AUM Law can advise you on the criteria for exemptive relief and related matters.
April 30, 2020
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
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
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