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 Such a condition may generally be superseded by the Exception, provided that there is no other reason a custodian at the top fund level would be required.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