Developments for Canadian Investment Funds and Managers to Be Aware of in 2013

| Dawn Scott

Several regulatory developments and initiatives that began in 2012 should be noted by investment funds and their managers in 2013. To keep you informed, we have compiled a high-level overview of some of these developments.

International Financial Reporting Standards

Investment funds in Canada are required to adopt IFRS for fiscal years commencing on or after January 1, 2014. Adopting these standards will, among other things, result in changes to the presentation of financial instruments and require comparative information to be provided for the 2013 fiscal year.

Potential Best Interest Standard for Dealers and Advisers

Like regulators in other jurisdictions, the Canadian securities administrators (CSA) are re-evaluating the relationship between dealers and advisers and their clients by considering whether an explicit statutory best interest standard should apply. As a first step in this re-evaluation, CSA published CSA Consultation Paper 33-403, The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice Is Provided to Retail Clients (available here).

The consultation paper poses more than 50 questions on which CSA seeks feedback. Comments are due on or before February 22, 2013.

Over-the-Counter Derivatives Regulation

The CSA continue to develop proposals for over-the-counter (OTC) derivative regulation in response to the global financial crisis.

Since late 2010, the CSA have published six consultation papers1 and plans to publish three more for comment this year. The regulatory framework will be implemented through provincial rules. The first model rules, on Product Determination and Trade Repositories and Derivatives Data Reporting (available here), have now been published for comment.

The comment period expires on February 4, 2013.

Private Placements

The Ontario Securities Commission (OSC) has published Consultation Paper 45-710, Considerations for New Capital Raising Prospectus Exemptions (available here). It proposes to require much more extensive information in the reports filed for private placements in order to provide the OSC with more information about the exempt market. The consultation paper outlines concepts for new prospectus exemptions in Ontario that would permit crowdfunding and provide for an offering memorandum exemption and for exemptions depending on an investor’s investment knowledge or an investor’s receiving advise from a registrant; however, as proposed, the exemptions would either not be available to investment funds or be of limited use by them.

The comment period expires on March 8, 2013. The OSC is holding public consultation sessions in January and February 2013 (details here) to obtain stakeholder feedback.

Mutual Fund Fees

The CSA have published Discussion Paper and Request for Comment81-407, Mutual Fund Fees (available here), which examines the mutual fund fee structure in Canada and identifies issues to be considered in determining whether regulatory changes are required.

The comment period expires on April 12, 2013.


Independent Dispute Resolution Services for Registrants

The CSA have extended the transition period for making available independent dispute resolution or mediation services. The transition period is extended to the earlier of September 28, 2014, and the effective date of amendments to section 13.16 of National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).

In November 2012, the CSA proposed amendments to section 13.16 of NI 31-103 (available here) that will require all registered dealers and advisers outside Quebec to use the Ombudsman for Banking Services and Investments (OBSI) as the service provider for the dispute resolution or mediation services required to be provided for complaints. Complaints would be limited to those that involve no more than $350,000 and are raised within six years of the date when the client knew or reasonably ought to have known of the trading or adviser activity that the complaint relates to.

The comment period expires on February 15, 2013.

Calculation of Excess Working Capital

The OSC is developing an online submission process for the electronic completion and submission of Form 31-103F1, Calculation of Excess Working Capital, including financial statements and other information relevant to the financial condition of a firm.

The OSC has also commenced a targeted desk review of the accuracy of Form 31-103F1 filings, focusing on the line-by-line calculation of the form, in order to assess a registrant’s compliance with the capital requirements of NI 31-103.

Electronic Trading

National Instrument 23-103, Electronic Trading (NI 23-103) (available here), effective March 1, 2013, sets out requirements that apply to marketplace participants, marketplaces and the use of automated order systems in order to address the risks of electronic trading. The CSA have published an FAQ about NI 23-103 (available here).

Closed-End Funds

The CSA are working on amendments to National Instrument 81-102, Mutual Funds, that would implement restrictions and operational requirements for publicly offered non-redeemable investment funds, consistent with similar requirements for mutual funds (more information available here).

Point-of-Sale Disclosure

The CSA are currently considering comments on proposed amendments to National Instrument 81-101, Mutual Funds Prospectus Disclosure, that would implement stage 2 of the CSA’s point of sale initiative, allowing for the delivery of a fund facts to satisfy the legislative requirement to deliver a prospectus within two days of buying a mutual fund.


Prohibited Investments for Canadian Tax Plans

On December 21, 2012, the Department of Finance (Canada) released for comment draft income tax legislation (Tax Proposals) that included anticipated proposed amendments to the prohibited investment and advantage rules for registered plans. These amendments, which are largely relieving in nature, will exclude certain "excluded property" from being a prohibited investment for a trust governed by a TFSA, RRSP or RRIF, including most mutual fund securities in the mutual fund’s first two and last two years of existence. For classes of mutual fund corporations, the safe harbour will apply only to the first two years of the corporation’s existence. In addition, for all other periods, mutual fund securities will generally be excluded property if, at the relevant time, at least 90% of the fair market value of all equity of the mutual fund is owned by persons dealing at arm’s length with the holder of the TFSA, or the annuitant under the RRSP or RRIF, as the case may be, and the investment meets the other widely held criteria set forth in the Tax Proposals. Once enacted, the Tax Proposals will be deemed to have come into force on March 23, 2011.


Under U.S. tax legislation enacted in 2010 and regulations that were recently finalized, generally referred to as the "Foreign Account Tax Compliance Act" (FATCA), Canadian financial institutions and investment funds will be required to comply with certain reporting requirements in order to avoid being subject to a 30% U.S. withholding tax on certain payments of U.S. source income made after December 31, 2013.

The Department of Finance (Canada) has confirmed that negotiations of an intergovernmental agreement (IGA) between Canada and the United States to improve cross-border information exchange in support of FATCA are close to completion. It is expected that the IGA will result in changes to Canadian laws and regulations that will require Canadian financial institutions and investment funds to implement FATCA-compliant procedures.

* * *

We will continue tracking these developments over the coming year.


1 Consultation Paper 91-401: Over-the-Counter Derivatives Regulation in Canada

  Consultation Paper 91-402: Derivatives: Trade Repositories

  Consultation Paper 91-403: Derivatives: Surveillance and Enforcement

  Consultation Paper 91-404: Derivatives: Segregation and Portability in OTC Derivatives Clearing

  Consultation Paper 91-405: Derivatives: End-User Exemption

  Consultation Paper 91-406: Derivatives: OTC Central Counterparty Clearing

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2021 by Torys LLP.
All rights reserved.