The Canadian Securities Administrators (“CSA”) recently published proposed amendments to National Instrument 81-102 Investment Funds (“NI 81-102”) and changes to its companion policy (the “Proposed Amendments”) relating to reporting issuer investment funds that seek to invest directly or indirectly in crypto assets (“Public Crypto Asset Funds”). The Proposed Amendments are expected to enhance regulatory clarity by supplementing previous guidance and codifying established policies, practices and exemptive relief. They are also intended to incorporate appropriate risk mitigation measures into the investment fund regulatory framework to reflect the specificities of the crypto asset class while facilitating new product development in this space.

Background

The Proposed Amendments mark the second phase of the CSA’s project to implement a regulatory framework for Public Crypto Asset Funds. Whereas the first phase led to the publication of guidance regarding the operations of Public Crypto Asset Funds within the existing framework of NI 81-102, the second phase builds on this guidance with targeted amendments that reflect CSA priorities in this space. The third and final phase will include a public consultation concerning the development of a broader and more comprehensive regulatory framework for funds that invest in crypto assets.

Proposed Amendments

The Proposed Amendments to NI 81-102 include:

• Section 1.1 (Definitions): an amendment to the definition of “alternative mutual fund” to capture mutual funds that invest in crypto assets;
• Section 2.3 (Restrictions Concerning Types of Investments): amendments to: (i) permit only alternative mutual funds and non-redeemable investment funds to buy, sell, hold or use crypto assets directly, which restriction would also apply to indirect investments in crypto assets through specified derivatives; (ii) limit the types of crypto assets in which such funds may invest to crypto assets that are listed for trading on, or are the underlying interest for a specified derivative where that derivative trades on, an exchange that has been recognized by a securities regulator in Canada; and (iii) prohibit Public Crypto Asset Funds from buying or holding crypto assets that are not fungible. Related guidance would also be added to the companion policy;
• Sections 2.12 (Securities Loans), 2.13 (Repurchase Transactions) and 2.14 (Reverse Repurchase Transactions): amendments to prohibit the use of crypto assets in securities lending, repurchase transactions or reverse transactions as the loaned securities, transferred securities or collateral posted in connection with these transactions, as applicable;
• Section 2.18 (Money Market Fund): an amendment to clarify that a “money market fund” may not buy or hold crypto assets;
• Section 6.5.1 (Holding of Portfolio Assets that are Crypto Assets): a requirement for custodians and sub-custodians that hold crypto assets on behalf of a fund (“Crypto Custodians”) to keep crypto assets in offline, “cold wallet” storage, except as needed to facilitate portfolio transactions;
• Section 6.6 (Standard of Care): a requirement for Crypto Custodians to maintain insurance for crypto assets in their custody, of a type and amount that a reasonably prudent person would maintain. Related guidance would also be added to the companion policy;
• Section 6.7 (Review and Compliance Reports): amendments to require Crypto Custodians to obtain and provide to funds an annual report prepared by a public accountant assessing the Crypto Custodian’s internal management and controls relating to security, availability, processing integrity, confidentiality and privacy. Related guidance would also be added to the companion policy; and
• Section 9.4 (Delivery of Funds and Settlement): an amendment to permit Public Crypto Asset Funds to accept crypto assets as subscription proceeds without the need for exemptive relief.

Request for Comments

The CSA welcome feedback on any aspect of the Proposed Amendments during the comment period, which ends on April 17, 2024. They have also posed specific questions for stakeholders regarding: (i) assets that would be considered crypto assets for the purpose of NI 81-102; (ii) restrictions on investing in crypto assets; (iii) custody; and (iv) broader consultation. For more information, see CSA Notice and Request for Comment: Proposed Amendments to National Instrument 81-102 Investment Funds Pertaining to Crypto Assets.

Subject to their approval, the nature of comments received and any applicable regulatory requirements, the Proposed Amendments would likely come into force approximately 90 days after their final publication date.

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