Category: Investment Funds

FAQ Corner: Are there other regulations for a portfolio manager to think about when determining whether the early warning reporting rules apply to the purchase of securities of a reporting issuer?

Answer: When considering an investment in a reporting issuer, we often get questions on whether the early warning reporting (EWR) requirements apply and whether a report is required under National Instrument 62-104 Take-Over Bids and Issuer Bids or National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103). Typically, a purchaser must promptly issue a news release and file an early warning report in the prescribed form within two business days of a purchase exceeding the thresholds. However, NI 62-103, in certain instances, may allow a portfolio manager to rely on the alternative monthly reporting (AMR) regime to report the beneficial ownership of, or control or direction over, voting or equity securities (or convertible securities) of the reporting issuer in question within 10 days of each month-end in which a report is required to be made. A separate insider report may also be required to be filed on SEDI under applicable securities regulations with respect to such investment in the reporting issuer unless an exemption is available. In addition to the early warning and insider reports, a portfolio manager should also consider other rules, including whether consent for a purchase of securities would be required under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). For example, NI 31-103 prohibits a registered adviser from causing an investment portfolio it manages (including an investment fund) to purchase a security of an issuer in which a responsible person (as defined in NI 31-103) is a partner, officer or director unless the written consent of the client (which means the unitholders of a fund if the client is a fund) is obtained before the purchase.

There are also other conflict of interest issues to consider in these instances. For example, where the purchase in question is by an investment fund, particularly of larger positions, portfolio managers should consider whether such transaction would be prohibited by conflict of interest rules such as those found in subsection.111(2) of the Securities Act (Ontario). This provision prohibits an investment fund from making an investment in any person or company in which the fund, alone or together with one or more related investment funds, is a substantial security holder (generally, beneficial ownership of voting securities to which are attached more than 20% of the voting rights attached to all of the issuer’s voting securities). The calculation to determine whether the issuer owns 20% or more of a reporting issuer is different for the purposes of s.111 of the OSA and or the purposes of the EWR and AMR regime in NI 62-103.

These rules require careful consideration and can be complex, including with respect to determining a person’s ownership percentage of securities of a reporting issuer. If you have any questions with respect to these requirements, please do not hesitate to contact us.

February 26, 2021

Regulators Make it Easier for MFDA Reps to Sell Liquid Alt Funds

On January 28, the Canadian Securities Administrators (CSA) issued temporary blanket relief, which is expected to be codified at a later date. This relief expands the list of courses that allow mutual fund dealing reps to sell liquid alt funds thereby increasing investor access to these products. Dealing representatives (and supervisors) in the Mutual Fund Dealers Association (MFDA) channel (and outside the MFDA channel in Québec) now have four additional courses that they can pass in order  to distribute these products – the courses are offered by the Canadian Securities Institute and the IFSE Institute.

January 29, 2021

FAQ Corner: Can a portfolio manager or investment fund that is subject to FATCA/CRS due diligence and reporting obligations rely on a dealer or third-party custodian to conduct these activities on its behalf?

Answer: The FATCA and CRS provisions of the Income Tax Act (Canada) (the “ITA”) and the guidance issued by the Canada Revenue Agency (CRA) in connection with those provisions addresses the application of the FATCA and CRS due diligence and reporting requirements in circumstances where there are multiple financial institutions involved in a particular financial account. Generally, where an account is maintained by two financial institutions, each of which would have FATCA and CRS due diligence and reporting requirements, the parties can enter into arrangements to allocate the FATCA and CRS obligations applicable to the account amongst them in order to alleviate duplicate reporting. So, the answer is … yes!

If units of a fund are held in client name, both the fund and the dealer involved in the distribution have FATCA and CRS obligations with respect to the account. In general, the CRA expects dealers to perform the due diligence and account classification and funds to report on the accounts, unless a fund has been advised by a dealer that the dealer will take responsibility for its own reporting. While the ITA and CRA guidance sets out some default arrangements, financial institutions can enter into written agreements to allocate the responsibilities based on their circumstances. It is advisable to retain records of such arrangements in order to demonstrate compliance with FATCA and CRS obligations.

With respect to custodians, the CRA generally expects the financial institution with the most immediate relationship with the client to be best positioned to understand the client’s tax status (i.e. conduct the due diligence), however it is appreciated that custodians may be in a better position to provide reporting. The CRA expects a suitable arrangement to include one where the investment manager performs the due diligence and communicates the account classification to the custodial institution for reporting by the custodian to the CRA.

January 29, 2021

FAQ Corner: Does a pooled fund that invests in an underlying fund require a custodian for the securities of the underlying fund?

Answer: In June 2018, amendments to the custody requirements in NI 31-103 came into force (the “Custody Amendments”). The Custody Amendments include an exception from the requirement to retain a qualified custodian for securities that are recorded on the books of the security’s issuer, or the transfer agent of the security’s issuer, only in the name of the client or investment fund (the “Exception”). We are of the view that in many circumstances, a top fund can rely on the Exception such that a custodian is not required simply to hold the units of an underlying fund held by the top fund as long as the units are recorded on the books of the underlying fund in the name of the top fund. These units are typically maintained in book-based form. However, there is no exemption for the portfolio securities held by the underlying fund, which generally must be held by a qualified custodian that complies with the requirements of NI 31-103.

Prior to the Custody Amendments, it was common for fund-on-fund relief orders to include a representation that the assets of the top fund would be held by a custodian that meets the requirements of NI 81-102. Such a condition may generally be superseded by the Exception, provided that there is no other reason a custodian at the top fund level would be required.

January 29, 2021

Reviewing Fund Custodian Arrangements

Investment fund managers that have obtained approval from the Ontario Securities Commission to self-trustee pooled funds and/or exemptive relief for fund-on-fund structures may have selected fund custodians that meet the requirements of National Instrument 81-102 Investment Funds (NI 81-102) in order to comply with the terms of those regulatory orders. The custodian requirements in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that took effect in June 2018 are more flexible than those in NI 81-102 in that IIROC dealers that are permitted to hold investment fund assets are qualified custodians for investment funds. As well, there is an exception for securities recorded on the books of the security’s issuer in the name of the investment fund which may alleviate the need for a fund to retain a custodian for the units of an underlying fund held by the top fund. Investment fund managers with custody arrangements that were put in place to comply with the terms of an order issued prior to the NI 31-103 custody amendments coming into force may wish to consider reviewing their fund custody arrangements in light of the more flexible custodian requirements under NI 31-103. For more information, please contact Stacey Long or a member of our team.

January 29, 2021

Ontario’s Capital Markets Modernization Taskforce Releases Final Report

In our July 2020 Bulletin we reported on the Consultation Report of Ontario’s Capital Markets Modernization Taskforce. On January 22, the Taskforce released its Final Report after engaging with over 110 stakeholders and receiving over 130 stakeholder comment letters in response to the Consultation Report.

Background: The Taskforce was appointed by Ontario’s former Finance Minister to review the capital markets regulatory framework and make recommendations to modernize Ontario’s capital markets regulation. One of the Taskforce’s main objectives was to amplify growth and competitiveness in Ontario’s capital markets.

As we did in our July 2020 Bulletin when we last reported on the Consultation Report, in this month’s bulletin we have highlighted the proposals that we think will be of particular interest to readers who are following this initiative.

Improving Regulatory Structure: The Final Report sets out a number of recommendations which the Taskforce believes will lead to a more modern and efficient securities regulator including:

  • Replacing the Securities Act (Ontario) and Commodity Futures Act (Ontario) with the Capital Markets Act (CMA). The recommendation is to see the implementation of the CMA by the end of 2021. As for this timing … we’re betting on the Over.
  • Expanding the mandate of the OSC to include fostering capital formation and competition in the markets in order to encourage economic growth and help facilitate capital raising.
  • Enhancing collaboration between the Ontario Securities Commission (OSC) and Financial Services Regulatory Authority of Ontario (FSRA) to achieve efficiencies including examining the potential of back-office efficiency opportunities.
  • Introducing a single self-regulating organization (SRO) that covers all advisory firms, including investment dealers, mutual fund dealers, portfolio managers, exempt market dealers (EMDs) and scholarship plan dealers. In the short term the new SRO would regulate both investment and mutual fund dealers. In the long term this SRO would replace IIROC and MFDA and would also regulate exempt market dealers, portfolio managers and scholarship plan dealers and ultimately the OSC would delegate more registration responsibilities to the new SRO.
  • Speed up the SEDAR+ project to create a more modern, centralized and user-friendly electronic filing/document retrieval system with the first phase to be complete in 2021. We’d love to see this happen in 2021 but again, don’t see this as being likely considering the heavy regulatory agenda this year.

Improving Regulations and Enhancing Investors Protection: Based on the Taskforce’s findings, capital markets participants are in favour of reducing regulatory burden and streamlining regulatory requirements. The Final Report recommends streamlining regulatory requirements and enhancing investor protection including:

  • Lowering to 30 days the current four-month hold period for securities issued by a qualified reporting issuer using the accredited investor exemption and eliminating the hold requirement altogether after two years.
  • Providing the Director of Corporate Finance at the OSC with power to impose terms and conditions on issuers similar to the power the Director of Compliance and Registrant Regulation has regarding registrants.
  • Expanding civil liability for offering memorandum misrepresentation to extend to parties other than the issuer such as its board of directors, promoters, influential persons and experts.
  • Allowing the OSC to adapt prospectus liability to address regulatory gaps resulting from new and evolving financing structures.
  • For consistency with other jurisdictions, decreasing the ownership threshold for early-warning reporting disclosure from 10 to 5 per cent for non-passive investors.
  • Designating a dispute resolution services organization that would have the power to issue binding decisions.

The Rise of Private Markets, Exempt Market Activities and Ensuring a Level Playing Field: The Taskforce included recommendations that aim to increase capital raising opportunities for small intermediaries and increase the variety and quality of independent products available to retail investors, such as:

  • A dealer registration safe harbour for issuers that wish to distribute their own securities without an intermediary. We agree that this would be incredibly helpful to market participants.
  • A finder category of registration which would impose fewer obligations compared to those imposed on EMDs or investment dealers (such as lower capital requirements) and eliminate the need for a finder to have an ultimate designated person or chief compliance office in certain instances. We also think this is a good idea, provided there’s clarity regarding when one crosses into being a registrable finder.
  • The OSC and TMX to re-allow EMDs to act as “selling group members” in the distribution of securities made under a prospectus offering. This door was closed to EMDs a few years ago due to various policy concerns, so will be interesting to monitor this proposal.
  • Additional accredited investor categories to include individuals that have passed relevant proficiency requirements.
  • Improving access to the shelf system for independent product through guidance to address product shelf issues and the makeup of New Product Committees, title clarification for proprietary product to ensure a level playing field for all products gaining action to a distribution channel and that conflicts are addressed in the best interest of clients.

Fostering Innovation: The Taskforce made recommendations to help support stakeholders request for a more nimble and flexible regulator in order to foster innovation in the Ontario capital markets including:

  • Foster an Ontario Regulatory Sandbox to benefit entrepreneurs and in the longer-term, consider developing a Canadian Super Sandbox where the OSC and FSRA should design an approach that would offer rapid exemptive relief or use other available regulatory tools to permit companies with innovative business models operating across the financial services sector in Ontario to test new financial services and products.
  • Encourage access to retail investors in less liquid private equity and debt markets by introducing an appropriate retail investment fund structure (e.g. Interval Funds in the U.S.)

Other Recommendations: The summary above highlights only a handful of the Taskforce’s 70 plus recommendations. The Final Report also included other proposals such as:

  • A fully electronic or digital delivery in relation to documents mandated under securities law requirements within six months.
  • Name change of the Ontario Securities Commission to the Ontario Capital Markets Authority.
  • Reducing the minimum consultation period for rule-making from 90 days to 60 days.
  • Providing the OSC with additional tools for continuous disclosure and exemption compliance.
  • Modernizing Ontario’s short selling regulatory regime to include protections allowed for in other jurisdictions (e.g., U.S. and U.K.)
  • Introducing an exemption from the disclosure of conflicts of interest in connection with private
    placements to institutional investors. An issue that’s been kicking around for years.

What’s Next? The next steps for the Final Report are now up to recently appointed Minister of Finance. The Minister may choose to act on some, none or all of the recommendations. As we have previously mentioned, we think that initiatives that can be implemented by Ontario authorities on their own could start moving forward if no legislative or rule changes are required. Other proposals (such as SRO reform) will require coordinated, cooperative and determined actions by multiple parties across the country and therefore likely to take much more time to achieve, if they are achievable at all.

AUM Law will continue to monitor the status of the recommendations and update you on significant developments. If you are interested in discussing any of the recommendations, please do not hesitate to contact Sandy Psarras, Chris von Boetticher or another member of our team.

January 29, 2021

Activist Short Selling

On December 3, the Canadian Securities Administrators (CSA) published Consultation Paper 25-403 Activist Short Selling “to facilitate discussion” about this activity in Canada. As described by the CSA, activist short selling involves an individual or entity that takes a short position in a security and then publicly shares information that is expected to negatively impact a company’s stock price. If the value of the security declines, the short seller realizes a profit. The consultation paper summarizes stakeholder concerns about activist short selling, outlines the Canadian and international regulatory frameworks for this activity and sets out CSA Staff’s findings regarding the nature and extent of this activity in Canada. Included in the CSA’s findings is that across all 116 Canadian short seller campaigns it looked at between 2010 and September 2020, approximately 40 per cent involved allegations of some type of fraud at the issuer, the most common being a stock promotion scheme. The comments period ends on March 3, 2021.

December 11, 2020

OSC Publishes Final Amendments Regarding Syndicated Mortgages

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 are a part of the proposed 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. The final version of the Amendments contain no substantive changes from the earlier version released on August 6 other than coming into effect on July 1, 2021, a few months later than the originally scheduled effective date of March 1, 2021. A firm that intends to engage in trades of NQSMIs to persons other than permitted clients on or after July 1, 2021 will be required to 1) either meet the prospectus requirements (or rely on an available exemption) and 2) either be registered as an exempt market dealer (EMD) or engage the services of a third-party EMD (or rely on an available exemption).

December 11, 2020

FAIR Funding

In some welcome news for investor advocates, the OSC recently announced that it will provide $3.75 million to FAIR Canada (FAIR), a national charitable organization dedicated to advancing the interests of individual investors. This funding will be provided to FAIR in annual instalments of $750,000 over five years to fund its day-to-day operating expenses.

December 11, 2020

OSC to Leave Fees Alone for Now

On November 12, the Ontario Securities Commission (OSC) published OSC Notice 13-708 whereby it informed market participants that after reviewing current fee levels and projected cash flows, it has determined that no changes to OSC Rule 13-502 (Fees) and OSC Rule 13-503 (Commodity Futures Act Fees) (together, the Fee Rules) are required at this time, even as it anticipates an impact on its revenues due to the Covid-19 pandemic. An OSC analysis leads it to believe that maintaining current fee levels and leveraging its cash position will ensure that it can continue to deliver on its priorities. Fees will be reviewed after markets stabilize and the outcomes of the Capital Markets Modernization Taskforce (Taskforce) are known. The final report containing the Taskforce’s recommendations is expected before the end of the year and it will then be up to the provincial government to determine which recommendations to adopt. The OSC typically reviews its fee levels every three years, and recently completed its review for its next fiscal year, which starts in April 2021.

AUM Law will monitor these developments and keep you informed as to any changes to the Fee Rules.

December 11, 2020

OSC Research Study Offers Suggestions to Help Investment Industry Get Trusted Contact Person Information from Clients

Earlier this year, the Canadian Securities Administrators proposed amendments that will require registrants to take reasonable steps to obtain the name and contact information of a TCP from their clients, as well as the client’s written consent to contact the TCP in specified circumstances, such as when concerns arise about financial exploitation or mental capacity. We previously reported on this topic in our March bulletin.

On November 9, the Ontario Securities Commission (OSC) published OSC Staff Notice 11-790, Protecting Aging Investors through Behavioural Insights. The research report identifies techniques dealers and advisors can use to increase the likelihood that older clients will provide TCP information designed to protect older investors. Interestingly, the report found that a form designed using behavioural techniques resulted in a 23% increase in the likelihood that an investor would appoint a TCP.

The OSC encourages registrants to review the report and consider integrating the tactics suggested in the report into their current practices. If you would like to discuss the report or would like assistance in preparing TCP forms, please contact us.

December 11, 2020

OSC Proposes Elimination of Routine Exemptive Relief Applications for International Firms

Welcome news for International Firms! Currently, certain international firms doing business in Ontario in reliance on statutory registration exemptions must also manually apply for discretionary relief from certain registration requirements in the Commodity Futures Act (Ontario). These applications may also include a request to be exempt from certain options proficiency requirements in OSC Rule 91-502 Trades in Recognized Options. Per recent proposed OSC Rule 32-506 (under the Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers the OSC is doing its part to remove this additional layer of regulatory burden. The comment period closes on March 1, 2021 and we’d be happy to have a call with you if you have any questions or comments relating to this proposal or the regime governing international firms generally.

December 11, 2020

Two Western Provinces Consult on Innovative Prospectus Exemption

The Alberta Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan are proposing an interesting new prospectus exemption as a three-year pilot project as set out in CSA Multilateral Notice and Request for Comment 45-327 Proposed Exemption for Self-Certified Investors. Unlike the current financial tests for accredited investors, the new proposed exemption would be available to individual investors in Alberta and Saskatchewan purchasing securities of an issuer located in those provinces who provide a prescribed form of certification. Investors would need to attest that they have a CFA designation, a CPA designation (in Canada), are admitted to the practice of law in Canada (focusing on M&A or financings) or hold an MBA with a focus on finance or a degree in finance. Non-individual investors would also be able to use the exemption based on similar criteria. A number of conditions to the exemption are proposed, including an extensive prescribed risk disclosure as part of the self-certification, and limits on investments to $10,000 in the last twelve months per issuer, with an aggregate cap of $30,000 in the last 12 months for all issuers. Given the importance of the exempt markets and ongoing burden reduction initiatives, we will be watching the outcome of the consultation closely.

December 11, 2020

OSC and IIROC Looking for Hot Tips on Abusive Trading

On October 1, the Ontario Securities Commission (OSC) and Investment Industry Regulatory Organization of Canada (IIROC) published joint whistleblower guidance (Guidance) encouraging the public to submit tips on potential abusive trading, including illegal insider trading, market manipulation or abusive short selling. According to the Guidance, IIROC and the OSC believe that certain market participants are engaged in abusive short selling and they are particularly interested in tips relating to short selling into or ahead of private and public offerings of Ontario securities. The Guidance also stresses that anyone, not just trading firms or their employees, may be eligible for a whistleblowing award of up to $5 million under the OSC program, if they have first-hand or other specific and credible evidence of securities law misconduct. The OSC’s Whistleblower Program is outlined here and IIROC’s program is outlined here.

October 30, 2020