In mid-May, the Canadian Securities Administrators (CSA) released CSA Staff Notice 25-305 Application for Approval of the New Investor Protection Fund. The release of the application is the next step following the recommendations in CSA Position Paper 25-404 to amalgamate the two existing contingency funds, The Canadian Investor Protection Fund and the MFDA Investor Protection Corporation into a single compensation fund (New IPF) for customers of investment dealers and mutual fund dealers who are members of the new self-regulatory organization (SRO). The New IPF will be amalgamated under the Canada Not-for-profit Corporations Act and will be independent from the new SRO. The New IPF’s objective will be to either return assets to customers upon an insolvency of an SRO member, or if the assets are not available, provide compensation for their value as at the date of the insolvency.
The New IPF is also to be established by December 31, 2022. The Chair of the Board of the New IPF, along with industry and independent board members, was announced along with the publication of the CSA Staff Notice. The CEO of the New IPF remains to be announced.
The application for approval of the New IPF includes a draft by-law, coverage policy, claims procedures and draft appeal committee guidelines, as well as a draft approval order and draft Memorandum of Understanding among the CSA members regarding oversight of the New IPF. Members of the New IPF would be the persons who compose the board from time to time, and membership is consistent with the current structure of each existing compensation fund.
The application and draft approval order sets out the proposed governance structure for the New IPF, including the composition of the board, proposed to be a mix of Industry Directors, Public Directors (as such terms are defined) and the CEO. It is proposed that the number of Public Directors must exceed the number of Industry Directors by at least one. Various committees of the board are also proposed, each of which must be constituted by a majority of Public Directors, including the chair. With respect to conflicts, the New IPF’s mandate indicates it must identify and avoid “real, potential or perceived conflicts of interest between its own interests, or the interests of its directors, officers, or employees and the New IPF Mandate”.
The funding and investment of the assets in the New IPF is also addressed. The New IPF will be required to publish its methodologies of establishing assessments for contributions from each category of SRO members. It will also conduct a risk analysis associated with each category in order to determine whether a single assessment methodology is appropriate. Until the review is completed, it is contemplated that the funds available to satisfy potential claims for coverage by investment dealers (or dually registered investment fund dealers and mutual fund dealers) and mutual fund dealers will remain separate and be subject to separate assessments. There will be a moratorium on changes to the current assessment methodologies that would result in a material increase to the assessments levied on each category. The money in each fund must be invested in accordance with the relevant policies applicable to that fund and require safety of principal and a reasonable income while assuring sufficient liquidity for potential claims.
The draft coverage policy describes eligible customers, the losses and property covered, limits on coverage and how claims can be made.
Similar to the proposal for the new SRO, a separate regime is contemplated for mutual fund dealers in the province of Québec given their existing regulatory framework and the fact that such dealers are not currently registered with the MFDA. It is proposed that the New IPF will not provide coverage for mutual fund dealer customer accounts in Québec and SRO members will not be subject to assessments to contribute to the mutual fund dealer fund of the New IPF in respect of those accounts, but instead will continue to contribute to the existing Québec financial services compensation fund. The Autorité des marchés financiers (AMF) has published for comments its proposed transition plan for mutual fund dealers, described in more detail below.
Comments on the application and related documents are due by June 27.
May 31, 2022