## EXECUTIVE SUMMARY

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---

### Overview and Systemic Importance
- The note considers regulation, supervision and systemic risk monitoring of the investment fund (IF) sector in Ontario and Québec.
- Sector composition and scale:
  - Dominated by mutual funds, including equity and fixed income.
  - Privately offered funds represent a significant proportion of assets under management (AUM).
  - Exchange-traded funds (ETFs) are attracting strong inflows.
  - Canadian IFs invest a significant proportion of assets in fixed income securities of Canadian issuers.
  - Unitholders are predominantly domestic.
  - Sector is systemically relevant within Canada and of global significance in terms of AUM.
  - 90 percent of the AUM of the industry is managed by registered entities that have either the Ontario Securities Commission (OSC) or Québec Autorité des marchés financiers (AMF) as their principal regulator.
  - Number of funds grew from 5,615 in 2020 to 6,965 in 2023.
  - Net assets reached just over C$4tn.

### Progress Since 2019 FSAP and Institutional Context
- Implementations since 2019:
  - Canada has implemented many recommendations from the 2019 FSAP relevant to the IF sector.
  - Federal single securities regulator initiative discontinued; renewed efforts to promote harmonization via the Canadian Securities Administrators (CSA).
  - Convergence progress should be sufficient to overcome remaining obstacles to Ontario fully joining the passport system.
- Institutional recommendation:
  - Recommendation 1: The role of the CSA Secretariat should evolve incrementally to foster closer cooperation and consistency across the CSA, including ensuring adequate subject matter expertise and introducing Secretariat-led peer reviews to identify best practices across the CSA.

### Regulatory and Supervisory Framework: Key Observations
- OSC and AMF are enhancing the regulatory framework within the CSA, including on liquidity risk management and ETFs.
- Liquidity and tools:
  - Canada has detailed rules on liquidity of assets held by publicly offered funds, but availability of liquidity management tools (LMTs) is limited.
  - Scope to improve stress testing at industry practice and authority-led exercises.
- ETFs and market intermediaries:
  - As ETFs gain share, authorities should ensure robust arrangements for authorized participants (APs) and market makers (MMs).
- Oversight and safeguards:
  - IFs and managers face extensive obligations that could be strengthened via reforms to custody oversight and the role of the Independent Review Committee (IRC).
  - CSA should broaden supervisory program to cover custodians.

### Systemic Risk Monitoring and Data Gaps
- Cooperation exists within CSA and with other agencies, but improved data collection and more comprehensive mandates would strengthen monitoring.
- Specific data recommendations:
  - Expand OSC’s Investment Fund Survey (IFS) to cover IFs’ credit lines and principal counterparty exposures.
  - Collect sector-wide data on leverage and liquidity quarterly.
  - Amend AMF statutory mandate to include an explicit systemic risk objective.

### Recommendations on Regulation and Supervision of Investment Funds (summary)
- 1. Evolve role of CSA Secretariat; ensure subject matter expertise and introduce peer reviews (¶6). — CSA, CSA Secretariat — ST
- 2. Amend AMF legislation to incorporate explicit financial stability/systemic risk objective (¶16). — AMF, Ministère des Finances (Québec) — MT
- 3. CSA to evaluate oversight of custodians and broaden supervisory activities to cover ongoing compliance with custody rules (¶26). — CSA — MT
- 4. CSA to prioritize liquidity management project to align with FSB Recommendations and IOSCO guidance (¶35). — CSA — MT
- 5. CSA to establish project enabling authorities to carry out stress testing of IFs, identifying required data and adapting reporting (¶37). — CSA — MT
- 6. Authorities to assess merits of broadening IRC role beyond conflict-of-interest matters (¶48). — CSA — MT
- 7. OSC should become a full member of the passporting system for registration of firms (¶58). — OSC — MT
- 8. CSA to ensure more robust and transparent arrangements between ETF providers and APs/MMs via ETF regulatory review (¶73). — CSA — MT
- 9. OSC and AMF should increase use of enforcement actions involving monetary sanctions to deter misconduct (¶80). — AMF, OSC — MT
- 10. OSC should broaden scope and increase frequency of investment fund data collection (¶86). — OSC — MT
- Timing legend: I — Immediate (within 1 year), ST — Short term (within 1-2 years), MT — Medium term (within 3-5 years)

### Mission and Timing
- Author: Richard Stobo, Senior Financial Sector Expert, Monetary and Capital Markets Department, IMF.
- On-site work conducted during October 21-November 4, 2024.
- Information current as of October 2024.

---

### Definitions and Fund Categories
- Mutual fund: issuer whose primary purpose is to invest money provided by security holders and whose securities entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in part of the net assets.
- CSA considers an IF redeemable at NAV more frequently than once a year to be a mutual fund.
- NRIF (non-redeemable investment fund): issuer that is not a mutual fund whose primary purpose is to invest money provided by security holders but does not invest to exercise control or be actively involved in management of issuers, subject to stated exceptions.
- Common types:
  - Mutual fund: conventional mutual fund; exchange-traded fund; alternative mutual fund; money market fund.
  - NRIF: closed-end fund; flow-through limited partnership; scholarship plan; Development Capital Investment Fund.

### Public versus Private Offering and Regulatory Consequences
- Publicly offered IFs (prospectus qualified IFs):
  - Available to retail public after prospectus receipt; become reporting issuers and subject to continuous disclosure; ETFs and mutual funds included.
- Privately offered IFs (exempt funds):
  - Distributed under prospectus exemptions (including NI 45-106); commonly to accredited investors; hedge funds among them.

### Key Entities, Activities, and Oversight
- Roles and oversight highlights:
  - Investment fund manager: day-to-day operations — rules: each CSA jurisdiction.
  - Portfolio manager: investment advice — rules: each CSA jurisdiction.
  - Dealer (investment/mutual fund dealer): trading in securities — SRO: CIRO.
  - Other service providers: valuation agents; transfer agents; custodians; auditors.

### Key Developments since the 2019 FSAP
- Client Focused Reforms fully in effect December 2021.
- OSC launched IFS in 2021 to collect annual IF data.
- CSA focus on merger of two SROs into CIRO.
- Continued enhancement of supervisory approaches for high impact firms.
- Efforts to strengthen OBSI, including proposed binding authority consultation (November 2023).

### Systemic Risk Monitoring Framework and Practices
- CSA mission objectives: 1) protection of investors; 2) fair, efficient and transparent markets; 3) reduction of systemic risk.
- Systemic Risk Committee (SRC) created in 2009; reports to CSA Chief Executives at least once a year.
- Comprehensive Systemic Risk Assessment (CSRA) conducted every 1–2 years; complemented by annual Systemic Risk Survey and Annual Report on Capital Markets (published on CSA website from February 2024).
- SRC thematic analyses: repo market resilience; ETF market resilience; liquidity risk in mutual funds; risks from exempt-market funds; leverage used by non-bank dealers.
- Mandate difference: OSC has explicit systemic risk mandate in Ontario statutes; AMF lacks explicit systemic risk objective — leads to Recommendation 2.

### Regulation, Supervision, Custody, and Valuation Findings
- Harmonization: substantive rules largely harmonized through CSA NIs and policies; CSA maintains list of inter-jurisdictional differences.
- Custody regime and supervisory gap:
  - Non-reporting issuers: assets may be held by bank/trust company (or affiliates), or an investment dealer member of CIRO permitted to act as custodian.
  - Reporting issuers: eligible custodians limited to banks and trust companies (and affiliates).
  - Assets can be held outside Canada by a foreign custodian if appropriate.
  - Prescribed custodial agreement terms in NI 81-102 and NI 41-101.
  - Supervisory gap: CSA does not directly regulate custodians unless integrated regulator; large custodians holding majority of Canadian IF assets may not be directly supervised by CSA; custodians treated as service providers of IFM and not directly inspected in authorities’ ongoing compliance review programs.
  - Recommendation 3: CSA should evaluate oversight of custodians and broaden supervisory activities; optimal approach is CSA members (OSC and AMF) to take responsibility and collaborate with OSFI and provincial prudential authorities.

### NAV Calculation and Accounting Standards (Part 14 of NI 81-106)
- NAV calculation frequency:
  - If IF does not use specified derivatives or sell securities short: once a week minimum.
  - If IF uses specified derivatives or sells securities short: once every business day.
  - In practice, vast majority of non-closed-ended IFs calculate NAV daily.
- NAV based on fair value (market value in active market or fair and reasonable value when market is unavailable/unreliable); fair value techniques applied consistently and reviewed.
- Accounting and audit: harmonized in NI 52-107; registrants (other than foreign registrants) generally prepare annual and interim financial statements in accordance with Canadian GAAP applicable to publicly accountable entities; Form 31-103F1 and quarterly/annual financial information required.

### Liquidity Risk Management — Framework, Tools and Stress Testing
- Statutory obligation: IFMs must act honestly, in good faith and in best interests of the IF; CSA expectations to consider investor redemptions and fund liquidity.
- Relevant instruments: NI 81-102 (reporting issuers); NI 31-103 (registered IFMs) — policies and procedures for controls addressing liquidity risk.
- CSA Staff Notice 81-333 expects governance, liquidity framework, stress testing, liquidity risk disclosure and use of LMTs.
- Expressly covered LMTs for reporting issuer IFs: suspension of redemptions and redemptions in-kind.
- No current provision for swing pricing or other anti-dilution LMTs; gates/deferred redemptions not permitted.
- April 2020 relief allowed fixed income mutual funds to temporarily increase borrowing limits with conditions.
- International context: FSB Revised Policy Recommendations (December 2023) and IOSCO guidance urge broadening LMTs availability and anti-dilution mechanisms.
- Recommendation 4: CSA to prioritize liquidity management project to align with FSB and IOSCO and incorporate updated framework into registration and compliance reviews.
- Recommendation 5: CSA to put in place project enabling authorities to carry out stress testing of IFs, identifying required data and adapting reporting requirements.

### Pricing Errors
- IOSCO and CSA guidance: IFs must detect, prevent and correct pricing errors; material harm should be addressed promptly and investors fully compensated.
- Market practice: most firms use 50 bps as the threshold for a material error (Investment Funds Institute of Canada guidance).
- OSC review found most pricing errors identified and rectified timely (review covered submissions between April 1, [text redaction], and January 31, 2021).

### Leverage
- Mutual funds generally not permitted to create leverage through borrowing, derivatives or short sales.
- Alternative mutual funds and NRIFs subject to a 300 percent leverage limit for these transactions.
- Prospectus and continuous disclosure must address permitted use of leverage and disclose sources and levels of aggregate exposure.
- Non-reporting issuer IFs generally not subject to prospectus/continuous disclosure leverage requirements, though some leverage data captured via the IFS; Ontario and Québec non-reporting mutual funds must include leverage disclosure in financial statements.

### Operational and Conduct of Business Requirements; IRC
- Provincial standards of care: Ontario and Québec statutory duties described (act honestly, in best interests, exercise prudence/diligence/skill).
- NI 31-103 standards require internal systems, controls, monitoring, records and compliance systems; designation of Ultimate Designated Person (UDP) and Chief Compliance Officer (CCO) required.
- Since 2006, reporting issuer IFs must have an Independent Review Committee (IRC) with at least three independent members to review conflicts of interest and assess IFM policies.
- Stakeholder interest in expanding IRC role to oversight of third-party service providers and valuation policies.
- Recommendation 6: Authorities should assess merits of broadening IRC role beyond conflict-of-interest matters while ensuring no unintended delegation of manager accountability.

### Composition of Portfolios, Disclosure and ESG
- Investment restrictions:
  - NI 81-102 sets standard investment restrictions for reporting issuers; non-reporting issuer IFs have fewer restrictions.
  - Mutual funds must disclose top 10 positions (percentage of NAV), percentage represented by top 10 positions, and total number of positions in Fund Facts.
  - ETF Facts: four-page summary; dealers must deliver ETF Facts to investors no later than midnight on the second business day following purchase (since December 2018).
- ESG disclosures:
  - CSA guidance issued January 2022; revised March 2024 to reflect ESG-focused reviews and need to reduce potential greenwashing.

---

### Ontario Long-Term Asset Fund (OLTF) Proposal
- OSC consultation paper (October 2024) proposing OLTF to improve retail access to illiquid investments (venture capital, private debt/equity, infrastructure, natural resources).
- Framework to allow retail exposure via registered IFM and registered portfolio manager as a prospectus-qualified product.
- Suitability, KYC and KYP requirements would generally apply; consultation seeks feedback on DIY distribution via order-execution-only dealers.
- Liquidity design: redemption policy must match relative illiquidity of underlying portfolio and draw on broader CSA liquidity project outcomes.
- Registration and supervisory implications:
  - Harmonized CSA registration operations manual pursued; OSC not part of passport system — leads to Recommendation 7 that Ontario should become full passport member.
  - Compliance reviews cover custody arrangements; firms must describe proposed custody for IF assets.

### ETF Sector Developments and Risks (key statistics and findings)
- Key statistics:
  - Total ETFs listed in Canada: 1,189 (over 900 on the Toronto Stock Exchange (TSX)).
  - Assets of ETFs: C$478.5 billion at the end of September 2024 according to IFIC statistics (a rise of 25 percent over the year).
  - Actively managed ETFs: 176 as of December 2022, growing to 223 as of December 2023 (27 percent increase).
  - Index-tracking ETFs: 451 as of December 2022, growing to 555 in December 2023 (23 percent increase).
  - Alternative mutual funds in ETF form: 54 in December 2022 rising to 89 in December 2023.
  - Mutual funds with an ETF series: 141 as of December 2022, growing to 185 in December 2023.
- ETF mechanics and risks:
  - ETFs rely on APs to create/redeem at NAV and MMs to provide continuous quotes/liquidity.
  - APs and MMs are investment dealers required to be registered and CIRO members; MMs must meet listing-exchange market making requirements.
  - Based on OSC’s IFS, as of December 2023, approximately 9 percent of ETFs had   or more APs. However, 60 ETFs (6 percent) had 1 AP, 23 ETFs had 2 APs and 6 ETFs had 3 APs.
- Regulatory coordination:
  - Multiple supervisors: OSC/AMF supervise IFMs; CIRO oversees APs/MMs; TSX verifies listing and disclosure compliance.
  - CSA ETF review aligned with IOSCO Good Practices (May 2023).
- Crypto funds:
  - First Bitcoin ETF approved in Canada in February 2021.
  - CSA finalizing rules (including custody rules) for crypto funds aiming to issue in early 2025.
- Recommendation 8: CSA to use ETF regulatory review to ensure more robust and transparent arrangements between ETF providers and APs/MMs.

### Enforcement Framework and Sanctions Data
- Enforcement practices:
  - CSA jurisdictions have similar investigation and remedial powers; coordinate via CSA Enforcement Committee.
  - OSC and AMF use prioritization and multi-level review processes for cases.
- Sanctions counts (AMF and OSC, 2019–2023):
  - AMF sanctions by year:
    - 2019: 0
    - 2020: 1 — Entity type: Fund Manager, Director/Officer of Fund; Breach: Fraud/registrant misconduct; Sanction type: Administrative penalty, director/officer ban, disgorgement
    - 2021: 0
    - 2022: 3 — Entity type: Portfolio Manager, Fund Manager; Breach: Registrant Misconduct/Non-conformity; Sanction type: Administrative penalty
    - 2023: 4 — Entity type: Portfolio Manager, Fund Manager; Breach: Registrant Misconduct/Non-conformity; Sanction type: Administrative penalty, director/officer ban, mandatory training
  - OSC sanctions by year:
    - 2019: 3 — Entity type: Fund Manager, Portfolio Manager; Breach: Registrant Misconduct; Sanction type: Administrative penalty, Costs of investigation
    - 2020: 1 — Entity type: Portfolio Manager; Breach: Fraud; Sanction type: Registration ban
    - 2021: 0
    - 2022: 3 — Entity type: Fund Manager; Breach: Registrant Misconduct; Sanction type: Administrative penalty, Costs of investigation, Disgorgement
    - 2023: 3 — Entity type: Investment Fund; Breach: Fraud; Sanction type: Administrative penalty, Costs of investigation, Disgorgement
- Monetary totals (2019–23):
  - AMF total monetary sanctions: C$2.4 million.
  - OSC total monetary sanctions: C$4.5 million.
- Recommendation 9: OSC and AMF should make greater use of monetary sanctions to deter misconduct; doing so may require senior management engagement to challenge whether breaches are escalated to enforcement rather than handled as compliance reviews.

### Reporting, Data Collection, and OSC Investment Fund Survey (IFS)
- Reporting requirements:
  - Reporting issuer IFs file annual financial statements and MRFPs, including portfolio breakdowns and top 25 positions.
  - CSA guidance recommends disclosure of significant liquidity challenges and responses.
- OSC’s IFS:
  - Introduced in 2021; standardized reporting on leverage, liquidity and asset class exposures.
  - Frequency increased from every two years to yearly; scope expanded to reporting and non-reporting issuer IFs.
  - OSC shares IFS data with other CSA members and the Bank of Canada; aggregated summaries published on OSC website.
- Key IFS items:
  - Leverage metrics: short positions by geography, asset class and derivatives; borrowing/lending broken down by cash borrowing, securities borrowing, securities lending.
  - Liquidity metrics: portfolio liquidity breakdown as percentage of net assets (8–30 days, 31–90 days, 91–180 days, etc.).
- Recommendation 10: OSC should broaden scope and increase frequency of IF data collection:
  - Collect liquidity and leverage data quarterly.
  - Collect data on credit lines (including whether shared and extent drawn down).
  - Add principal counterparty exposure data.
  - Option: change IFS or ensure alternative mechanism replicates key IFS features and data sharing.

### International Cooperation
- OSC and AMF cooperate via IOSCO and MoUs; CEOs serve on IOSCO Board and participate in committees.
- OSC and AMF are signatories to IOSCO’s MMoU and EMMoU; use MoUs for cross-border information and joint reviews.
- Securities regulators are signatories to over 50 international cooperation agreements related to IF management activities.

### Appendix I — Rules on Investment Fund Investments (key limits)
- Concentration restrictions:
  - No more than 10 percent of NAV can be held in securities of one issuer (exceptions apply); cap increases to 20 percent for alternative mutual funds and NRIFs.
  - For concentration restrictions, each long position in a specified derivative held for non-hedging is considered to directly hold the underlying interest.
- Control restrictions:
  - IFs may hold no more than 10 percent of votes attaching to outstanding voting securities or 10 percent of outstanding equity securities of an issuer, subject to exceptions.
- Prohibited and limited investments:
  - Prohibited: real property, mortgages excluding guaranteed mortgages (with stated exception), physical commodities, most precious metal certificates, certain loan syndication interests, and specified derivatives that do not comply.
  - IF cannot have more than 10 percent of NAV in a permitted precious metal, precious metal certificate or specified derivative with physical commodity underlying interest (alternative mutual fund exceptions apply).
  - Precious metal fund may hold up to 100 percent of NAV in permitted precious metals or permitted derivatives.
- Illiquid assets:
  - Illiquid asset definition provided.
  - An IF must not purchase more than 10 percent of NAV in illiquid assets and must not hold more than 15 percent of NAV in illiquid assets for 90 days or more.
  - A NRIF must not hold more than 20 percent of NAV in illiquid assets and must not hold more than 25 percent of NAV in illiquid assets for 90 days or more.

*Source: EXECUTIVE SUMMARY and selected sections of the IMF technical note on the regulation, supervision and systemic risk monitoring of the investment fund sector in Ontario and Québec.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Overview and Systemic Importance
- This technical note considers the regulation, supervision and systemic risk monitoring of the investment fund (IF) sector in the Canadian provinces of Ontario and Québec.
- The IF sector in Canada is dominated by mutual funds, including those investing in equity and fixed income, while privately offered funds represent a significant proportion of assets under management (AUM).
- Exchange-traded funds (ETFs) are attracting strong inflows.
- Canadian IFs invest a significant proportion of their assets in fixed income securities of Canadian issuers.
- Unitholders are predominantly domestic.
- The sector is systemically relevant within Canada and of global significance in terms of AUM.
- Taken together, 90 percent of the AUM of the industry is managed by registered entities that have either the Ontario Securities Commission (OSC) or Québec Autorité des marchés financiers (AMF) as their principal regulator.
- The number of funds grew from 5,615 in 2020 to 6,965 in 2023.
- Net assets reached just over C$4tn.

### Progress Since 2019 FSAP and Institutional Context
- Canada has implemented many of the recommendations from the 2019 Financial Sector Assessment Program (FSAP), including several of those of most direct relevance to the IF sector.
- The initiative to create a single securities regulator at the federal level was discontinued, leading to renewed efforts to promote harmonization and consistency among the provincial and territorial authorities via the umbrella organization, Canadian Securities Administrators (CSA).
- The substantive progress already made with respect to convergence of the regulatory framework should be sufficient to overcome any remaining obstacles to Ontario fully joining the passport system.
- Recommendation 1: The role of the CSA Secretariat should evolve incrementally to foster closer cooperation and consistency across the CSA. This should include ensuring adequate subject matter expertise within the Secretariat and introducing Secretariat-led peer reviews of implementation of commonly agreed rules. These reviews should aim at identifying best practices across the CSA.

### Regulatory and Supervisory Framework: Key Observations
- The OSC and the AMF are working to enhance the regulatory framework within the CSA, including on liquidity risk management and ETFs.
- Canada has detailed and prudent rules on liquidity of assets held by publicly offered funds, but the availability of liquidity management tools is limited.
- There is scope to make progress on stress testing, both at the level of industry practice and authority-led exercises.
- As ETFs take an ever-greater share of the Canadian IF sector, the authorities’ ongoing review of the ETF regulatory framework should be used to ensure robust arrangements are in place with respect to authorized participants (APs) and market makers (MMs).
- IFs and their managers are subject to an extensive set of regulatory obligations and safeguards that could be strengthened through reforms to oversight of custody and the role of the Independent Review Committee (IRC).
- Custody of IF assets is a cornerstone of the International Organization of Securities Commissions (IOSCO) standards in this area, and the CSA should broaden its supervisory program to cover this important activity.
- Further enhancements to the framework could be identified by reviewing and potentially expanding the role of the IRC beyond conflicts of interest.

### Systemic Risk Monitoring and Data Gaps
- Cooperation on systemic risk continues within the CSA, and between the CSA and other financial sector agencies, but improved data collection and more comprehensive regulatory mandates would provide a firmer basis for this work.
- The OSC’s Investment Fund Survey should be expanded to cover IFs’ credit lines and principal counterparty exposures.
- Sector-wide data on leverage and liquidity should be collected quarterly.
- The AMF’s statutory mandate should be amended to include an explicit systemic risk objective.

### Recommendations on Regulation and Supervision of Investment Funds (Table 1)
- 1. The role of the CSA Secretariat should evolve incrementally to foster closer cooperation and consistency across the CSA. This should include ensuring adequate subject matter expertise within the Secretariat and introducing Secretariat-led peer reviews of implementation of commonly agreed rules. These reviews should aim at identifying best practices across the CSA (¶6). — CSA, CSA Secretariat — ST
- 2. The legislation governing the AMF should be amended to incorporate an explicit objective for the AMF related to financial stability and reduction of systemic risk (¶16). — AMF, Ministère des Finances (Québec) — MT
- 3. The CSA should evaluate the current oversight of custodians and broaden its supervisory activities accordingly to cover ongoing compliance with custody rules (¶26). — CSA — MT
- 4. The CSA should take forward its liquidity management project as a priority with the aim of aligning the Canadian framework for liquidity risk management with the recent FSB Recommendations and IOSCO guidance (¶35). — CSA — MT
- 5. The CSA should put in place a project aimed at enabling the authorities to carry out stress testing of IFs, including identifying the required data and adapting regulatory reporting requirements accordingly (¶37). — CSA — MT
- 6. The authorities should assess the merits of broadening the role of the IRC beyond conflict-of-interest matters as a means of further safeguarding the interests of underlying investors (¶48). — CSA — MT
- 7. The OSC should become a full member of the passporting system for registration of firms (¶58). — OSC — MT
- 8. The CSA should use its ongoing review of the regulatory framework for ETFs with a view to ensuring more robust and transparent arrangements between ETF providers and authorized participants and market makers (¶73). — CSA — MT
- 9. The OSC and the AMF should make greater use of enforcement action involving monetary sanctions as a means of deterring misconduct (¶80). — AMF, OSC — MT
- 10. The OSC should continue its work to broaden the scope and increase the frequency of its investment fund data collection (¶86). — OSC — MT

(Timing legend: I — Immediate (within 1 year), ST — Short term (within 1-2 years), MT — Medium term (within 3-5 years))

### Mission and Timing
- The author of this technical note is Richard Stobo, Senior Financial Sector Expert in the Monetary and Capital Markets Department of the IMF.
- The on-site work supporting the findings and conclusions was conducted during the period October 21-November 4, 2024.
- The information in this note is current as of October 2024.

*Source: EXECUTIVE SUMMARY, technical note on the regulation, supervision and systemic risk monitoring of the investment fund sector in Ontario and Québec.*

### 8.      Canad an s        s   g s a   n d f n s an “ nv s   n  f nd” as    ng either: a mutual

### 8.      Canad an s        s   g s a   n d f n s an “ nv s   n  f nd” as    ng either: a mutual

### Definitions and fund categories
- Mutual fund: an issuer whose primary purpose is to invest money provided by its security holders and whose securities entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in part of the net assets.
- The CSA considers an IF that is redeemable at net asset value more frequently than once a year to be a mutual fund.
- NRIF (non-redeemable investment fund): an issuer that is not a mutual fund whose primary purpose is to invest money provided by its security holders but does not invest:
  - for the purpose of exercising or seeking to exercise control of an issuer, other than an issuer that is a mutual fund or a non-redeemable investment fund; or
  - for the purpose of being actively involved in the management of any issuer in which it invests, other than an issuer that is a mutual fund or a non-redeemable investment fund.

- Common types by category (as set out in Table 2):
  - Mutual fund
    - Conventional mutual fund: A mutual fund that is not an exchange-traded fund, an alternative mutual fund, or a money market fund.
    - Exchange-traded fund: A mutual fund that is exchange-traded.
    - Alternative mutual fund: A mutual fund, other than a precious metal fund, that has adopted fundamental investment objectives that permit it to invest in physical commodities/derivatives, borrow cash or engage in short selling in a manner not permitted by NI 81-102.
    - Money market fund: A mutual fund that generally invests in short-term, high-liquid, low-risk investments for the purposes of offering investors high liquidity with low levels of risk and is subject to section 2.18 (Money Market Fund) of NI 81-102.
  - NRIF
    - Closed-end fund: A fund that raises capital by issuing a fixed number of units, and which are not redeemable on demand. Typically, units of this type of fund are bought and sold on an exchange.
    - Flow-through limited partnership: A fund that invests in a portfolio of flow-through shares of certain issuers in order to generally achieve capital appreciation and tax benefits for its investors.
    - Scholarship plan: A type of fund whose primary purpose is to help save for post-secondary education.
    - Development Capital Investment Fund: A type of fund whose main mission is to participate in the development of Québec companies through individuals residing in Québec.
- Source for table definitions: Canadian Securities Administrators.

### Public versus private offering and regulatory consequences
- Publicly offered IFs (prospectus qualified IFs):
  - Available to the retail public after a prospectus receipt has been issued by a Canadian securities regulator.
  - Become reporting issuers and are subject to various continuous disclosure requirements under securities laws.
  - ETFs and mutual funds fall under this category.
- Privately offered IFs (exempt funds):
  - Distributed pursuant to prospectus exemptions (including those in NI 45-106 – Prospectus Exemptions), commonly including an exemption for sales to accredited investors.
  - Hedge funds are among those that fall under this category.

### Key entities, activities, and oversight (summary of Table 3)
- Investment fund manager: Managing the day-to-day operations of an IF. Rules and Guidance: Each CSA jurisdiction. SRO: N/A.
- Portfolio manager: Providing investment advice from Canada or to an IF domiciled in Canada. Rules and Guidance: Each CSA jurisdiction. SRO: N/A.
- Dealer (investment dealer or mutual fund dealer): Engaging in the business of trading in securities (including executing orders to purchase, sell or redeem securities of an IF). Rules and Guidance: Each CSA jurisdiction and CIRO. SRO: CIRO.
- Dealer (exempt market dealer or scholarship plan dealer): Engaging in the business of trading in securities distributed pursuant to an exemption from the prospectus requirement or securities of scholarship plans. Rules and Guidance: Each CSA jurisdiction. SRO: N/A.
- Other service providers to IFs include:
  - valuation agents;
  - transfer agents;
  - custodians that safeguard assets; and
  - auditors.
- Source for oversight table: Canadian Securities Administrators.

### Key developments since the 2019 FSAP
- Implementations and initiatives:
  - Client Focused Reforms (CFRs) fully in effect in December 2021, introducing significant enhancements to conduct obligations for registered entities.
  - OSC launched the Investment Fund Survey (IFS) in 2021 to collect annual data on IFs managed by IFMs registered in Ontario.
  - CSA focus on merger of two SROs into the Canadian Investment Regulatory Organization (CIRO).
  - Continued enhancement of supervisory approaches for high impact firms.
  - Ongoing efforts to strengthen the Ombudsman for Banking Services and Investments (OBSI), including a proposed binding authority framework published for consultation in November 2023, contemplating authority to make awards that are binding.
- Footnote on merged SROs: The Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.

### Systemic risk monitoring framework and practices
- CSA mission objectives (three main objectives):
  1) protection of investors;
  2) fair, efficient and transparent markets; and
  3) the reduction of systemic risk.
- Systemic Risk Committee (SRC):
  - Created in 2009 to identify, analyze, monitor, and mitigate systemic risk.
  - Reports to the CSA Chief Executives at least once a year and as otherwise required (examples: Russia invasion of Ukraine in March 2022 and the United States (U.S.) regional banking crisis in March 2023).
  - Works with other CSA committees to follow up on identified systemic risks and data gaps.
- Comprehensive Systemic Risk Assessment (CSRA):
  - Conducted every 1–2 years.
  - Consists of categorization, prioritization, analysis and identification of main vulnerabilities.
  - Complemented by the annual Systemic Risk Survey targeting portfolio managers and investment dealers; a high-level summary is published on the CSA website.
  - The SRC produces an Annual Report on Capital Markets; with effect from February 2024, this report is published on the CSA website.
- SRC practices:
  - Uses thematic analyses and a range of metrics and indices.
  - Examples of recent thematic topics: resilience of the repo market, resilience of the exchange-traded fund market, liquidity risk associated with mutual funds, risks posed by exempt-market funds, and leverage used by non-bank dealers.
- Mandate differences and recommendation:
  - OSC: Under the Securities Act (Ontario) and the Commodity Futures Act (Ontario), has a mandate to contribute to the stability of the financial system and the reduction of systemic risk.
  - AMF: Mandated by the Government of Québec to regulate the financial sector while ensuring investor protection and market efficiency; in practice, it considers systemic risk but lacks an explicit systemic risk objective in its legislation.
  - Recommendation 2: "The legislation governing the AMF (Loi sur l’encadrement du secteur financier) should be amended to incorporate an explicit objective for the AMF related to financial stability and reduction of systemic risk."
- HoA and SRSC:
  - Heads of Agencies (HoA) serves as coordinating mechanism for major federal and provincial financial regulators.
  - HoA functions include sharing information, informing policy priorities, coordinating crises preparation and management, and supporting mitigation of systemic risk.
  - Systemic Risk Surveillance Committee (SRSC) created in late 2019 to formalize financial system monitoring; composition broader than HoA and reports to HoA.
  - SRSC contributes to the Bank of Canada’s Financial Stability Report and forms sub-groups as needed (example: 2022 subgroup on fixed-income mutual fund liquidity mismatches; recent focus on fund managers’ stress-testing practices and hedge fund leverage and cash-futures basis trade).

### Regulation, supervision, custody, and valuation-related findings
- Harmonization:
  - The vast majority of securities laws and regulations in Canada are highly harmonized through CSA cooperation; substantive areas are largely harmonized in NIs and policies.
  - The CSA maintains a list summarizing substantive inter-jurisdictional differences in NIs and MIs.
- Registered firms and individuals:
  - Obligations include establishing policies and procedures to demonstrate compliance with Canadian securities laws, proficiency and industry experience requirements, minimum working capital and insurance coverage requirements.
- Interpretive guidance:
  - OSC and AMF have the power to interpret their authority and issue guidance; most CSA rules are accompanied by companion policies.
- Custody of IF assets:
  - Requirements differ between reporting issuer and non-reporting issuer IFs:
    - Non-reporting issuers: assets may be held by a bank or trust company (or affiliates), or an investment dealer that is a member of CIRO and permitted by CIRO rules to act as custodian.
    - Reporting issuers: eligible entities limited to banks and trust companies (and their affiliates).
    - Assets can be held outside Canada by a foreign custodian if appropriate to facilitate portfolio transactions.
    - Prescribed custodial agreement terms are set out in NI 81-102 and NI 41-101, including segregation arrangements and sub-custodian appointment requirements.
  - Supervisory gap:
    - The CSA does not regulate custodians directly unless the securities regulator is also an integrated regulator like the AMF or through CIRO oversight.
    - For institutions holding a large majority of Canadian IF assets in custody, there is no direct supervisory oversight by the CSA.
    - Custodians are treated as service providers of the IFM and are not directly inspected in the authorities’ ongoing compliance review or inspection programs.
    - Banks and trust companies permitted to act as custodians are overseen by OSFI and provincial prudential authorities (e.g., AMF and FSRA), but these supervisors do not supervise compliance with CSA NIs generally or custody rules specifically.
    - The OSC (and AMF in cases where it is not the supervisor of the custodian) rely on oversight of the IFM and on auditors’ reports to assess custodian services.
  - IOSCO context:
    - IOSCO included segregation and protection of client assets in Principle 25 and adopted Standards for the Custody of Collective Investment Schemes’ (CIS) Assets in 2015.
    - Obligations include segregation of assets, verification of ownership and appropriate independence of the custodian.
  - Recommendation 3: "The CSA should evaluate the current oversight of custodians and broaden its supervisory activities to cover ongoing compliance with custody rules. The optimal approach would be for the CSA members themselves (OSC and AMF for the purposes of this technical note (TN) to take responsibility for this new approach to supervision rather than seeking to rely on OSFI or other agencies. The CSA already has a good understanding of the custody rules and can leverage its direct oversight of IFMs and IFs in integrating custody activities into its ongoing compliance reviews. Additionally, collaboration with OSFI and provincial prudential authorities (e.g. FSRA in Ontario), where relevant, will be essential to enhancing information exchange and avoiding regulatory duplication."

*Source: Canadian Securities Administrators; excerpts as provided in the supplied IMF technical note content.*

### 27.      Part 14 of NI 81-106 sets out requirements relating to the calculation of net asset

### Part 14 of NI 81-106 and Related Canadian IF Regulatory Framework (Extract)

### Net Asset Value (NAV) Calculation
- NAV must be calculated at least as frequently as:
  - if the IF does not use specified derivatives or sell securities short, once a week;
  - if the IF uses specified derivatives or sells securities short, once every business day.
- In practice, the vast majority of IFs that are not closed-ended calculate their NAV daily.
- NAV must be calculated using the fair value of the IF’s assets and liabilities.
- Fair value is defined as either:
  - the market value based on reported prices and quotations in an active market; or
  - if the market value is not available, or the manager believes it is unreliable, a value that is fair and reasonable in all the relevant circumstances.
- When a fair value technique is used, it should be applied consistently and reviewed for reasonableness on a regular basis.
- For less liquid assets, IFMs commonly use external valuation providers.

### Accounting Standards
- Accounting and auditing framework harmonized in NI 52-107 (Acceptable Accounting Principles and Auditing Standards).
- Registrants, other than foreign registrants, are generally required to prepare annual and interim financial statements in accordance with Canadian GAAP applicable to publicly accountable entities.
- Registrants must prepare non-consolidated financial statements.
- Registrants must also prepare a Form 31-103F1 (Calculation of Excess Working Capital) on the same basis as the financial statements.
- IFMs must submit quarterly and annual financial information to regulators, including interim and annual financial statements, and calculations of excess working capital.

### Liquidity Risk Management — Regulatory Framework and Expectations
- Statutory obligation on IFMs to exercise powers and discharge duties honestly, in good faith and in the best interests of the IF; CSA expects IFMs to consider investor redemptions and fund liquidity.
- Relevant instruments:
  - NI 81-102 (applicable to all IFs that are reporting issuers).
  - NI 31-103 (applicable to all registered IFMs) — requires policies and procedures establishing a system of controls and supervision sufficient to address liquidity risk.
  - Companion Policy to NI 81-102 — expects effective liquidity risk management policy considering asset liquidity and IF obligations; IFMs should regularly measure, monitor and manage liquidity, considering time to liquidate, sale price, and pattern of redemptions.
- CSA Staff Notice 81-333 (Guidance on Effective Liquidity Risk Management for Investment Funds) covers:
  - strong and effective governance;
  - creation and ongoing maintenance of a liquidity framework;
  - stress testing;
  - disclosure of liquidity risks;
  - use of liquidity management tools (LMTs).
- Expressly covered LMTs for reporting issuer IFs: suspension of redemptions and redemptions in-kind.
- No current provision for swing pricing or other anti-dilution LMTs; gates or deferred redemptions are not permitted.
- IFMs are encouraged to seek exemptive relief; April 2020 relief allowed fixed income mutual funds to temporarily increase borrowing limits with conditions.

### International Policy Developments and Canadian Response
- FSB Revised Policy Recommendations (December 2023) and IOSCO Anti-dilution Liquidity Management Tools guidance are influential.
- Quoted Recommendation 4 (FSB): Authorities should ensure a broad set of LMTs is available for use by managers of open-ended funds in normal and stressed market conditions; reduce operational and other barriers; IOSCO should review its 2018 recommendations.
- Quoted Guidance 1 (IOSCO): Responsible entities should have appropriate internal systems, procedures and controls for the design and use of anti-dilution LMTs as part of everyday liquidity risk management of OEFs.
- CSA is undertaking a broader policy project on liquidity risk management to align with FSB and IOSCO recommendations.
- Stakeholder feedback: IFMs would welcome a broader range of LMTs being available without exemptive relief; widespread adoption of anti-dilution mechanisms likely requires a strong push from the CSA.

### Policy Recommendations (Liquidity and Stress Testing)
- Recommendation 4:
  - The CSA should take forward its liquidity management project as a priority.
  - The exercise should aim to align the Canadian framework for liquidity risk management with the FSB Recommendations and IOSCO guidance.
  - Once updated, incorporate the framework into registration and compliance review processes.
- On stress testing:
  - Staff Notice 81-333 provides guidance on stress testing (risk identification, frequency, scenario analysis, use of results).
  - Recommendation to elevate guidance to an obligation to promote consistent practices.
  - CSA should work towards performing stress testing itself using enhanced regulatory reporting data.
- Recommendation 5:
  - The CSA should put in place a project to enable authorities to carry out stress testing of IFs to improve supervisory oversight and contribute to systemic risk identification.
  - This should include identifying needed data and adapting regulatory reporting requirements accordingly.

### Pricing Errors
- IOSCO Principles for the Valuation of CIS: IFs should have policies and procedures to detect, prevent and correct pricing errors; material harm to investors should be addressed promptly and investors fully compensated.
- CSA Companion Policy to NI 31-103: NAV adjustment necessary when there has been a "material" error and NAV per unit does not accurately reflect the actual NAV per unit at computation time.
- Examples of causes of NAV errors:
  - mispricing of a security;
  - corporate action recorded incorrectly;
  - human error, such as inputting an incorrect value.
- Market practice: most firms use 50 bps as the threshold for a material error (in line with guidance developed by the Investment Funds Institute of Canada (IFIC)).
- OSC review of IFMs’ submissions on pricing errors received between April 1, [text redaction], and January 31, 2021 found most errors were identified and rectified in a timely manner.

### Leverage
- Requirements differ between:
  - mutual funds; and
  - alternative mutual funds and NRIFs.
- Mutual funds are generally not permitted to create leverage through borrowing, derivatives or short sales.
- Alternative mutual funds and NRIFs are subject to a 300 percent leverage limit for these transactions.
- Prospectus disclosures must address permitted use of leverage and restrictions/limits; similar information must appear in the summary of the prospectus.
- ETFs and NRIFs that are alternative funds using leverage must disclose sources of leverage and the maximum aggregate exposure permitted.
- Continuous disclosure for reporting issuer IFs must include:
  - the sources of leverage used during the reporting period;
  - the lowest and highest levels of aggregate exposure to these sources during the reporting period;
  - an explanation of the significance to these levels of exposure in the IF’s financial statements and MRFP.
- Non-reporting issuer IFs generally not subject to prospectus and continuous disclosure leverage requirements, though some leverage data are captured via the IFS; in Ontario and Québec, non-reporting mutual funds must include leverage disclosure in financial statements.

### Operational and Conduct of Business Requirements
- Provincial statutory standards of care:
  - Ontario: an IFM must (a) act honestly, in good faith and in the best interests of the IF; and (b) exercise the degree of care, diligence, and skill that a reasonably prudent person would exercise in the circumstances.
  - Québec: an IFM must, in the best interests of the IF and its beneficiaries or in the interest of fulfilment of its purpose, exercise prudence, diligence and skill, and discharge its functions loyally, honestly and in good faith.
- NI 31-103 standards of conduct require internal systems and controls to manage risks, monitoring and supervision systems, appropriate records, and a compliance system.
- IFM must designate:
  - an Ultimate Designated Person (UDP) — supervise firm-wide compliance activities and promote compliance; and
  - a Chief Compliance Officer (CCO) — establish and maintain policies and procedures for assessing and monitoring compliance.
- Since 2006, reporting issuer IFs must have an Independent Review Committee (IRC) with at least three independent members to review conflicts of interest and perform regular assessments of IFM policies and procedures.

### Independent Review Committee (IRC) Role and Recommendation
- IRC provides an independent perspective on IFM decisions that may involve conflicts of interest; particularly important because most IFs are structured as trusts and lack independent boards.
- Stakeholders indicated appetite for expanding the IRC role beyond conflicts-of-interest matters to include oversight of third-party service providers and reviewing valuation policies.
- Recommendation 6:
  - Authorities should assess the merits of broadening the IRC role beyond conflicts-of-interest matters to further safeguard underlying investors.
  - Ensure any extension of the IRC’s mandate does not lead to unintended delegation of accountability by the fund manager to the IRC.

### Composition of Investment Fund Portfolios and Disclosure
- Investments in Canada: if an asset is expressly prohibited, an IF may not invest in it (subject to other restrictions such as concentration or liquidity); otherwise, generally no investment restrictions apply to non-reporting issuer IFs.
- NI 81-102 sets standard investment restrictions for reporting issuers; application varies by NRIFs, alternative mutual funds, precious metals funds, and money market funds.
- Simplified prospectus requirements: mutual funds must describe principal investment strategies and types of securities that may form part of the portfolio under normal market conditions.
- Mutual funds (other than newly established) must include in their Fund Facts a table disclosing:
  - the top 10 positions held by the mutual fund, each expressed as a percentage of the net asset value of the mutual fund;
  - the percentage of net asset value represented by the top 10 positions; and
  - the total number of positions held by the mutual fund.
- ETF Facts: a four-page document summarizing key ETF information; since December 2018, investment dealers must deliver the ETF Facts to investors no later than midnight on the second business day following purchase.

### ESG Disclosures
- CSA issued guidance on ESG disclosures reflecting increased investor interest.
- CSA Staff Notice (January 2022) targeted funds whose investment objectives reference ESG factors and other funds using ESG strategies; provided best practices to enhance ESG-related disclosure and sales communications.
- Revised Notice (March 2024) accounted for CSA members’ ESG-focused reviews and indicated a need for guidance for specific types of ESG-Related Funds to reduce potential greenwashing.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1canea2025002-source-pdf.pdf*

### 52.      The OSC has issued a proposal for a new vehicle, the Ontario Long-Term Asset Fund

### The OSC has issued a proposal for a new vehicle, the Ontario Long-Term Asset Fund

### OLTF proposal and objectives
- The OSC published a consultation paper in October 2024 proposing the Ontario Long-Term Asset Fund (OLTF) to improve retail investor access to illiquid investments.
- The initiative stems from the Ontario Government’s 2023 Fall Economic Statement and follows a proposal by the Capital Markets Modernization Taskforce.
- Target asset types for OLTF exposure include venture capital, private debt and equity, and infrastructure and natural resource projects—assets generally available only in exempt funds not open to the general public.
- The framework would allow retail investors to gain exposure via professional management of a registered IFM and registered portfolio manager and through distribution as a prospectus-qualified investment fund product.
- Suitability, know-your-client (KYC) and know-your-product (KYP) requirements would generally apply under the proposed distribution model.
- The consultation seeks feedback on investor access to OLTFs through order-execution-only, or “DIY” dealers.

### Liquidity risk and redemption policy design
- The text emphasizes that the redemption policy prescribed for the OLTF must match the relative illiquidity of the underlying portfolio.
- Authorities are advised to draw on outcomes of the broader project on liquidity risk management (discussed in paragraph 34 of the source) when designing OLTF features.
- The OSC has committed to keep other CSA members informed as the project progresses.

### Regulatory and supervisory implications
- Registration suitability is assessed through proficiency, integrity and solvency criteria; applicants submit extensive information verified by regulators.
- A harmonized approach is pursued via a common CSA registration operations manual; novel issues are raised at the CSA Registration Operational Working Group.
- Individuals seeking designation as CCO of an IFM must satisfy specified criteria (e.g., being a lawyer in a jurisdiction of Canada or passing specified qualifying examinations).
- Firms can apply for registration in more than one province or territory; most use the “passport” and “one-window” systems to submit via a principal regulator.
- The OSC is not part of the passport system; when the OSC is not the principal regulator and a firm seeks registration in Ontario, the principal regulator’s decision does not automatically apply in Ontario. The OSC generally places significant reliance on the principal regulator’s review and opting out is rare.
- Recommendation 7: The CSA regulatory framework is sufficiently harmonized, and supervisory cooperation appropriately embedded, that Ontario should now become a full member of the passporting system for registration of firms.
- The “Registration as a Cash Company Review” (introduced January 2014) includes in-person interviews and document reviews to proactively identify compliance issues and risk-rank new firms.
- Firms applying for registration must describe proposed custody arrangements for assets of an IF.

### Compliance review and enforcement practices
- Authorities have extensive statutory authority to review books, records and documents; regulators conduct full and issue-oriented reviews of continuous disclosure (CD) filings under NI 81-106.
- “Full” reviews cover at least 12 months of records including financial statements, MRFP, prospectus, Fund Facts, press releases and website disclosures. “Issue-oriented” reviews focus on a particular industry segment, topic, or complaints.
- A risk-based blended approach determines inspection plans, combining periodic/routine reviews, for-cause reviews, and thematic sweeps.
- The frequency of reviews varies across Ontario and Québec reflecting jurisdictional risk-based methodologies and resources; the AMF can review all registrants within a prescribed cycle, while the OSC combines risk-based criteria with set review cycles for certain firm types.
- Reviews may be on-site or off-site and can be full or limited in scope. Weaknesses usually are raised for resolution; unresolved or significant deficiencies can lead to enforcement action.
- Compliance reviews of IFMs commonly cover relationships with service providers (including custodians), review of governing agreements, and oversight policies (e.g., monthly reconciliations of custodial portfolio asset positions).
- Follow-up options for deficiencies include suspension of registration, enhanced oversight, terms and conditions, undertakings, mandatory compliance monitors, compliance plans with periodic filings, and enhanced monitoring with regular reports until remediation is complete.
- The OSC distributes a bi-annual Risk Assessment Questionnaire (RAQ) to registered entities to populate registrant risk models and risk-rank registrants; RAQ responses are shared with each firm’s principal regulator.
- The OSC identifies “high impact firms” via RAQ data and subjects such registrants to compliance review on a three-year cycle as part of its high impact program; reviews focus on governance, risk frameworks, and remediation of identified compliance issues.
- Where firms outsource functions, regulators expect access to service providers’ books and records and contract provisions ensuring such access; compliance reviews may include oversight of service-provider agreements and practices.

### Exchange-Traded Funds (ETF) sector developments and risks
- Key statistics:
  - Total ETFs listed in Canada: 1,189 (over 900 on the Toronto Stock Exchange (TSX)).
  - Assets of ETFs: C$478.5 billion at the end of September 2024 according to IFIC statistics (a rise of 25 percent over the year).
  - Actively managed ETFs: 176 as of December 2022, growing to 223 as of December 2023 (27 percent increase).
  - Index-tracking ETFs: 451 as of December 2022, growing to 555 as of December 2023 (23 percent increase).
  - Alternative mutual funds in ETF form: 54 in December 2022 rising to 89 in December 2023.
  - Mutual funds with an ETF series: 141 as of December 2022, growing to 185 in December 2023.
- ETF mechanics and risks:
  - ETFs rely on authorized participants (APs) to create and redeem shares at NAV per share, and market makers (MMs) to provide continuous two-way quotes and liquidity.
  - APs and MMs are investment dealers required to be registered and be members of CIRO; MMs must meet listing-exchange market making program requirements.
  - Based on the OSC’s IFS, as of December 2023, approximately 9  percent of ETFs had   or more APs. However, 60 ETFs (6 percent of the sector) had 1 AP, 23 ETFs had 2 APs and 6 ETFs had 3 APs.
- Regulatory coordination:
  - Different entities oversee ETF components: OSC or AMF supervise IFMs, CIRO oversees APs and MMs, and TSX verifies continued listing requirements and disclosure compliance.
  - Close monitoring and effective cooperation across these authorities is important as the ETF sector grows.
- Crypto fund developments:
  - The first Bitcoin ETF was approved in Canada in February 2021; earlier, an OSC Tribunal decision in 2019 overturned an OSC director’s decision regarding a closed-end Bitcoin fund.
  - The CSA is finalizing rules (including custody rules) for crypto funds that it hopes to issue in early 2025.

*Source: 1canea2025002-source-pdf - 52.      The OSC has issued a proposal for a new vehicle, the Ontario Long-Term Asset Fund*

### 72.      The CSA has already launched a review of the regulatory framework for ETFs in

### E. Enforcement; F. Reporting and Data; G. International Cooperation; Appendix I. Rules on Investment Fund Investments

### ETF regulatory review and Recommendation 8
- The CSA has launched a review of the regulatory framework for ETFs in Canada aimed at aligning rules with IOSCO’s Good Practices Relating to the Implementation of the IOSCO Principles for Exchange Traded Funds (May 2023).
- The review will examine possible changes to disclosure rules, including information needed for the arbitrage mechanism to function effectively.
- Finding: Rapid increase in number and complexity of ETFs highlights the need for resilient mechanisms on which smooth functioning of ETFs relies.
- Recommendation 8: The CSA should use its ongoing review of the regulatory framework for ETFs with a view to ensuring more robust and transparent arrangements between ETF providers and APs/MMs.

### Enforcement framework across CSA jurisdictions
- CSA jurisdictions share similar investigation and remedial powers, and a broadly similar delineation between administrative/regulatory and criminal/quasi-criminal investigations.
- CSA members harmonize and collaborate on novel or significant matters through the CSA Enforcement Committee and on cross-jurisdictional investigations.
- OSC and AMF have implemented prioritization processes for enforcement actions and employ multi-level review and approval processes from intake to litigation.
- OSC’s Enforcement Division Case Assessment Team:
  - Centralized intake process covering tips, inquiries, complaints, referrals, and a separate intake for the OSC whistleblower program.
  - Case selection factors include:
    - the nature or seriousness of the misconduct;
    - when it occurred;
    - for how long it has been occurring;
    - who is engaged in it and whether they are registered or reporting issuers; and
    - who is being harmed and to what extent.
- AMF’s Enforcement Division Case Assessment Team follows a similar approach and considers:
  - jurisdiction;
  - risks of the activity;
  - who is being harmed and to what extent;
  - impact on the markets and impact on the confidence in the markets; and
  - public profile of the misconduct.
- Cases for further enforcement action are those with reliable evidence of breaches of securities law and that meet thresholds set by enforcement prioritization.

### Cross-border assistance and previous FSAP recommendation
- Authorities can request assistance from foreign agencies or regulators via IOSCO’s MMoU and EMMoU (OSC, AMF, ASC, BCSC are signatories).
- Provisions in provincial legislation support inter-jurisdictional cooperation among Canadian securities regulatory authorities.
- The 2019 FSAP recommended deploying a full range of enforcement tools (including monetary sanctions) and enhancing collaboration with other law enforcement bodies.
- Finding: Some progress made, but number of sanctions (especially monetary sanctions) imposed on registrants in the IF sector remains low.

### Sanctions data (AMF and OSC, 2019–2023)
- Table summary (counts and actions):
  - AMF sanctions by year:
    - 2019: 0
    - 2020: 1 — Entity type: Fund Manager, Director/Officer of Fund; Breach: Fraud/registrant misconduct; Sanction type: Administrative penalty, director/officer ban, disgorgement
    - 2021: 0
    - 2022: 3 — Entity type: Portfolio Manager, Fund Manager; Breach: Registrant Misconduct/Non-conformity; Sanction type: Administrative penalty
    - 2023: 4 — Entity type: Portfolio Manager, Fund Manager; Breach: Registrant Misconduct/Non-conformity; Sanction type: Administrative penalty, director/officer ban, mandatory training
  - OSC sanctions by year:
    - 2019: 3 — Entity type: Fund Manager, Portfolio Manager; Breach: Registrant Misconduct; Sanction type: Administrative penalty, Costs of investigation
    - 2020: 1 — Entity type: Portfolio Manager; Breach: Fraud; Sanction type: Registration ban
    - 2021: 0
    - 2022: 3 — Entity type: Fund Manager; Breach: Registrant Misconduct; Sanction type: Administrative penalty, Costs of investigation, Disgorgement
    - 2023: 3 — Entity type: Investment Fund; Breach: Fraud; Sanction type: Administrative penalty, Costs of investigation, Disgorgement
- Monetary totals:
  - The total value of monetary sanctions imposed over the period 2019-23 by the AMF was C$2.4 million.
  - The total value of monetary sanctions imposed over the period 2019-23 by the OSC was C$4.5 million.
- Recommendation 9: The OSC and AMF should make greater use of enforcement action involving monetary sanctions as a means of deterring misconduct.
  - Note: Shifting to greater monetary sanctions likely requires active engagement by senior management to challenge whether breaches are pursued through enforcement rather than handled solely as compliance reviews.

### Reporting, data collection, and Recommendation 10
- Authorities collect regulatory reporting data and financial statements; requirements vary by IF type.
  - Reporting issuer IFs must file annual financial statements including a statement of investment portfolio disclosing, for each portfolio asset held or sold short: name of issuer, description of portfolio asset, number or aggregate face value, cost, and current value.
  - Reporting issuer IFs must file an annual MRFP and an interim MRFP; MRFPs must include a portfolio breakdown by appropriate subgroups and the top 25 positions as percentages of net asset value, plus a discussion of how changes affected risk.
  - CSA guidance: IFs should consider disclosing significant liquidity challenges faced and how they were addressed.
- OSC’s Investment Fund Statistics (IFS):
  - Introduced in 2021; standardized reporting to collect data on leverage, liquidity, and asset class exposures.
  - Frequency increased from every two years to yearly.
  - Scope expanded to include both reporting issuer IFs and non-reporting issuer IFs.
  - OSC shares IFS data with other CSA members and the BoC; aggregated summary data available on OSC’s website.
- Key IFS items:
  - Leverage metrics: short positions by geographical exposure, asset class and derivatives, borrowing and lending broken down by cash borrowing, securities borrowing, and securities lending.
  - Liquidity metrics: breakdown of portfolio liquidity as a percentage of net assets (8–30 days, 31–90 days, 91–180 days, etc.).
  - Purpose: Monitor liquidity and leverage to identify potential systemic risks.
- Third-party data sources used to complement reporting: Morningstar Direct, Fundata, Bloomberg.
- Recommendation 10: OSC should broaden scope and increase frequency of IF data collection as part of financial stability monitoring:
  - Collect data on liquidity and leverage quarterly to identify developments more timely; leverage data should feed into systemic risk analysis by the CSA or other agencies (e.g., BoC work on the cash-futures basis trade).
  - Collect data on credit lines, including whether credit lines are shared and the extent to which they have been drawn down, to assess interconnectedness between IFs and credit institutions and short-term liquidity management.
  - Add data on principal counterparty exposures (IFS currently asks to identify any prime broker used but does not gather principal counterparty exposure data) to better identify concentration risks.
  - Option: Make corresponding changes to the IFS or ensure any alternative mechanism replicates key IFS features — same broad universe of IFs covered and data shared with all CSA members.

### International cooperation
- OSC and AMF cooperate extensively with foreign counterparts via IOSCO and MoUs.
  - CEOs of OSC and AMF serve on the IOSCO Board and participate in FSEG and CER.
  - OSC and AMF participate in all major IOSCO Committees.
  - OSC uses IFS data to contribute to IOSCO’s Investment Fund Statistics Report.
  - Authorities are signatories to IOSCO’s MMoU and EMMoU; they can share information with other domestic and international authorities even without a specific MoU or formal arrangement.
- Cooperation with the U.S. SEC:
  - MoU signed by OSC and AMF in 2010; several other CSA members have joined.
  - OSC uses the MoU to seek information on SEC compliance reviews; SEC notifies OSC under the MoU, particularly for regulatory inquiries or examinations of SEC-registered investment advisers located in Ontario.
  - OSC staff may request SEC material findings for firms also registered under Ontario securities legislation.
  - OSC and SEC conduct joint reviews leveraging the MoU for efficient information exchange.
  - AMF has made outbound requests to SEC staff regarding SEC proceedings involving a crypto trading platform to assess probity and suitability for registration in Canada.
- Note: Securities regulators are signatories to over 50 international cooperation agreements directly or indirectly related to IF management activities.

### Appendix I — Rules on Investment Fund Investments
- Concentration Restrictions:
  - No more than 10 percent of the NAV of the IF can be held in the securities of one issuer (exceptions: government securities, securities issued by a clearing corporation, index participation units that are securities of an IF and securities issued by an IF if the purchase is made within certain parameters).
  - Same restrictions apply to alternative mutual funds and NRIFs but cap increased to 20 percent of the NAV.
  - For concentration restrictions, each long position in a specified derivative held for a purpose other than hedging is considered to directly hold the underlying interest of that specified derivative.
- Control Restrictions:
  - IFs generally hold passive stakes; may hold no more than 10 percent of the votes attaching to outstanding voting securities of an issuer or 10 percent of outstanding equity securities of that issuer.
  - Some exceptions allowed (e.g., when the issuer is an IF and purchase made in accordance with certain requirements).
- Restrictions Concerning Types of Investments:
  - Prohibited investments include real property, mortgages excluding guaranteed mortgages (if after purchase no more than 10 percent of NAV consists of guaranteed mortgages), physical commodities, precious metal certificates other than a permitted precious metal certificate, and interest in a loan syndication or loan participation if IF would have responsibility for administering the loan.
  - An IF cannot buy, sell or use a specified derivative instrument that does not comply with regulatory requirements.
  - An IF cannot have more than 10 percent of its NAV in a permitted precious metal (gold, silver, platinum or palladium), a precious metal certificate or a specified derivative whose underlying interest is a physical commodity. An alternative mutual fund is not subject to such limits for these three types of investments.
  - A precious metal fund can hold up to 100 percent of its NAV in permitted precious metals, permitted metal certificate or a specified derivative of which the underlying interest is one or more permitted precious metals.
- Restrictions Concerning Illiquid Assets:
  - Illiquid asset defined as:
    - a portfolio asset that cannot be readily disposed of through market facilities on which public quotations in common use are widely available at an amount that at least approximates the amount at which the portfolio asset is valued in calculating the net asset value per security of the investment fund, or
    - a restricted security held by an investment fund.
  - An IF must not purchase more than 10 percent of its NAV in illiquid assets and must not hold more than 15 percent of its NAV in illiquid assets for a period of 90 days or more.
  - A NRIF must not hold more than 20 percent of its NAV in illiquid assets and must not hold more than 25 percent of its NAV in illiquid assets for a period of 90 days or more.

*Source: 1canea2025002-source-pdf - 72.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1canea2025002-source-pdf.pdf_