Category: Investment Funds

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

Regulatory Penalties in British Columbia Not Discharged Through Bankruptcy

The Supreme Court of British Columbia has confirmed that monetary penalties and disgorgement orders from regulatory proceedings are exempt from a bankruptcy discharge. In 2015, the British Columbia Securities Commission ordered Thalbinder Singh Poonian and Shailu Poonian to pay more than $19 million in penalties and disgorgement after the commission found that the pair had engaged in market manipulation. In 2018, the Poonians sought a discharge from bankruptcy absolving them of their debts. The British Columbia Supreme Court denied their application for an absolute or suspended discharge from bankruptcy under the Bankruptcy and Insolvency Act.

The ruling sends a strong message that securities law violators may have difficulty using bankruptcy laws to release themselves of the financial consequences of their wrongdoing.

April 30, 2021

Lawsuit Against Ontario Securities Commission Can Proceed

On March 18, 2021, the Court of Appeal for Ontario ruled that a malicious prosecution lawsuit against the Ontario Securities Commission and three of its employees can proceed. One of the appellants in the case, Mr. Sam Qin, and various entities he controlled, were involved in the development and management of solar energy projects in Ontario and elsewhere. Mr. Qin attempted to raise capital for his projects using a program sponsored by the Ontario government. Neither Mr. Qin, nor any of his companies, were registered to sell securities and no prospectus was filed in connection with Mr. Qin’s efforts to raise funding. After certain proceedings, the OSC dismissed the allegations, finding that the appellants were not mainly engaged in the sale of securities and were not required to register under the Securities Act (Ontario).

In their statement of claim, the appellants argued that the allegations were false, made without reasonable and probable cause, and made for a collateral and improper purpose.

April 30, 2021

Expansion of Ontario Securities Commission’s Mandate

In January 2021, the Capital Markets Modernization Taskforce published its final report after completing its review of the status of Ontario’s capital markets. In its most recent provincial budget, the Government of Ontario indicated that it will proceed with certain of the recommendations made in the report, including to expand the Ontario Securities Commission’s mandate to include fostering capital formation and competition in the markets. The OSC’s current mandate is to provide protection to investors from unfair, improper, or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.

April 30, 2021

Updates on Amendments re Syndicated Mortgages

As reported in our December 2020 bulletin, on December 7, the Ontario Securities Commission (OSC) released the final amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions (Amendments). The Amendments form part of the changes across Canada which, in Ontario, will have as one of their effects the transfer from the Financial Services Regulatory Authority of Ontario (FSRA) to the OSC of regulatory oversight over the distribution of non-qualified syndicated mortgages (NQSMIs) to persons that are not permitted clients.

On February 25, 2021, the Canadian Securities Administrators (CSA) published CSA Staff Notice 45-328 Update on Amendments relating to Syndicated Mortgages. In that notice, the CSA confirmed that the Amendments and the amendments in the local jurisdictions to the syndicated mortgage rules, took effect in all jurisdictions on March 1, 2021, except in Ontario and Quebec where the amendments are expected to take effect on July 1, 2021.

Accordingly, if a firm trading syndicated mortgages is operating only in Ontario or Quebec, they have until July 1, 2021 to comply with the Amendments. Firms operating in all other Canadian jurisdictions needed to comply with the Amendments by March 1, 2021.

Furthermore, on March 10, 2021, FSRA released final approach guidance (the “SMI Guidance”) for supervising mortgage brokerages and administrators that engage in NQSMIs. FSRA consulted on the proposed guidance in August-September 2020. The SMI Guidance will apply to: (a) mortgage brokerages dealing and/or trading in NQSMs with permitted clients on or after July 1, 2021; (b) mortgage brokerages acting on behalf of the borrower in NQSMIs with investors/lenders that are non-permitted clients; (c) mortgage brokerages that dealt and/or traded in legacy NQSMIs (conducted prior to July 1, 2021); and (d) mortgage administrators administering NQSMIs. The SMI Guidance highlights the division of regulatory oversight of NQSMIs, risk profile factors for mortgage brokerages, administrators and NQSMIs, information required for the quarterly data report for NQSMIs with permitted clients and data collection for legacy NQSMIs. Firms in Ontario dealing and/or trading in NQSMIs or mortgage administrators administering NQSMIs will want to review the final guidance in detail. Please don’t hesitate to contact your usual lawyer at AUM Law.

April 30, 2021

Some Provincial Regulators Say Modernization Task Reforms Could Hurt Harmonization

In response to the recently released report by Ontario’s capital markets modernization taskforce containing 70 plus recommendations (summarized in our January bulletin), the Canadian Securities Administrators (CSA), excluding the Ontario Securities Commission (OSC), recently issued an open letter expressing concern about a number of the taskforce recommendations. In particular, the CSA letter raises concern that certain recommendations could negatively affect harmonization efforts across Canada, that a “harmful imbalance” could result from the recommended expansion of the OSC’s authority in certain areas, and have (again) called for the OSC to join the CSA’s passport regime.

February 26, 2021

CSA to Release Recommendations on SRO Framework

In response to the recently released report by Ontario’s capital markets modernization taskforce containing 70 plus recommendations (summarized in our January bulletin), the Canadian Securities Administrators (CSA), excluding the Ontario Securities Commission (OSC), recently issued an open letter expressing concern about a number of the taskforce recommendations. In particular, the CSA letter raises concern that certain recommendations could negatively affect harmonization efforts across Canada, that a “harmful imbalance” could result from the recommended expansion of the OSC’s authority in certain areas, and have (again) called for the OSC to join the CSA’s passport regime.

February 26, 2021