The Canadian Securities Administrators (“CSA”) have proposed amendments and changes to National Instrument 81-102 Investment Funds (“NI 81-102”) and its companion policy pertaining to the liquidity risk management (“LRM”) of all investment funds, including both reporting and non-reporting issuer investment funds (the “Proposed Amendments”). The Proposed Amendments are intended to strengthen LRM frameworks and were published together with a consultation paper that seeks feedback on potential additional changes to LRM regulation (the “Consultation Paper”, and together with the Proposed Amendments, the “Proposals”). Comments on the Proposals are due by March 27, 2026.
Background
The Proposed Amendments contemplate a fund-level LRM framework that would impose significant operational and oversight obligations on all investment funds as discussed below. In addition to the Proposed Amendments, the Consultation Paper seeks feedback on: (i) LRM tools (“LMTs”), such as gating fund redemptions; (ii) liquidity classification of underlying portfolio assets; and (iii) potential regulatory disclosure and data relating to LRM. The Consultation Paper also includes a long-awaited reopening of the definition of “illiquid asset” under NI 81-102. The CSA have proposed that an “illiquid asset” would be one that cannot be readily disposed of within five business days. This is largely consistent with U.S. Securities and Exchange Commission rules, under which illiquid investment fund assets are investments that are not reasonably expected to be able to be sold or disposed of in current market conditions in seven calendar days or less without significantly changing the market value of the investment.
Collectively, the Proposals aim to codify existing guidance into enforceable rules, align with international standards and enhance investor protection and financial system stability.
The inclusion of pooled funds and non-redeemable investment funds under the Proposals goes beyond the scope of U.S. regulation and the August 2025 recommendation of the International Monetary Fund (IMF) (published in its Financial System Stability Assessment for Canada) that Canada align its regulatory framework relating to liquidity of assets held by publicly offered funds with guidance issued by the International Organization of Securities Commissions (“IOSCO”) and the Financial Stability Board (“FSB”).
Proposed Amendments
LRM framework – a fund-level obligation
An investment fund must establish and maintain an LRM framework, which includes establishing LRM policies and procedures, appointing an LRM supervisor or committee and operational compliance throughout the fund’s lifecycle. An LRM framework should take into account: the fund’s “liquidity profile” (i.e., its ability to dispose of and settle its portfolio quickly and easily without a significant loss in value); current market conditions; redemption activity; investor behaviour; and the fund’s unique characteristics.
Operational requirements
An investment fund must address the following LRM requirements throughout various stages of its lifecycle:
- Consider potential liquidity mismatch: A new investment fund must ensure that the permitted redemption frequency aligns with the nature of its expected portfolio assets and redemption activity;
- Liquidity profile: Establish and maintain liquidity thresholds and targets as part of its liquidity profile;
- Liquidity monitoring: Monitor, review and assess its liquidity profile and relevant market conditions using qualitative and quantitative metrics. Examples of qualitative metrics may include the credit quality of underlying portfolio assets, investor concentration in the fund, investor profile, industry risk, geographic risk and the specific terms and conditions of underlying portfolio securities. Examples of quantitative metrics may include volume metrics, market depth, reasonably anticipated size of trade and third-party assessments of liquidity of the underlying portfolio assets;
- Quarterly stress testing: Stress test the liquidity of its portfolio assets at least quarterly and more frequently if market conditions are stressed. Such stress testing must include historical and hypothetical scenarios that are relevant to the fund’s liquidity profile (often referred to as “scenario analysis”);
- Portfolio transactions: Assess the impact of a portfolio transaction on its liquidity profile before making a decision in respect of entering into the transaction;
- Contingency plans: Establish, maintain and periodically test contingency plans that address liquidity risk and include the use of LRM tools. Contingency plans are operational arrangements to address liquidity challenges during stressed market conditions, and LRM tools may include the suspension of redemptions, redemptions in kind and the use of redemption fees.
Oversight
An investment fund must appoint an LRM supervisor or establish an LRM committee with oversight of the new LRM requirements summarized above. An LRM supervisor must be the chief compliance officer (“CCO”) of the investment fund manager (“IFM”) or an individual who reports to the CCO. An LRM committee must include either the CCO of the IFM or an individual who reports to the CCO.
Consultation Paper
LMTs
The CSA are consulting on additional LMTs for investment funds that are reporting issuers, beyond what is currently allowed without exemptive relief, citing international momentum to broaden anti‑dilution and quantity‑based tools in normal and stressed markets as well as investor protection. Currently, there are generally only three LMTs that are used by such funds: suspension of redemptions, redemption fees and redemptions in kind. The Consultation Paper provides an overview, with advantages and disadvantages, of the following commonly used LMTs that are not currently permitted in Canada:
- Price-based or anti-dilution LMTs: swing pricing, dual pricing, redemption or liquidity fees, anti-dilution levies and/or valuation at bid or ask prices, each with distinct design choices, calibration and transparency tradeoffs;
- Quantity-based LMTs: expanded suspension of redemptions, redemption gates, notice periods, extension of settlement periods and/or use of side pockets; and
- Other LMTs: potential increases to the temporary borrowing limit above 5% of a fund’s net asset value (“NAV”) in stress to help the fund meet its redemption needs or settle trades.
The Consultation Paper invites views on whether to merely permit these tools or to require that reporting issuer funds adopt a minimum set, recognizing product design, governance, investor communication and potential unitholder approval implications.
Liquidity classification
The Consultation Paper seeks stakeholder feedback on a potential liquidity classification framework for portfolio assets. The CSA propose the classification of portfolio assets into four “liquidity buckets”, based on the number of business days within which such asset would be readily disposed of and settled at an amount that at least approximates the amount at which the asset is valued in calculating the NAV per security of the fund as follows:
- Highly liquid assets: within three business days;
- Moderately liquid assets: within either four or five business days;
- Less liquid assets: assets disposed of within five business days, but where settlement is reasonably expected to take more than five business days; and
- Illiquid assets: more than five business days.
Regulatory disclosure
The Consultation Paper sets out and solicits stakeholder feedback on potential regulatory disclosure and confidential reporting requirements, including:
- Confidential quarterly disclosure: The CSA are considering requiring that all investment funds, including those that are not reporting issuers, confidentially disclose to the applicable securities regulatory authority on a quarterly basis the liquidity classification category of each investment held by the fund; and
- Periodic event reporting: The CSA are also considering requiring that all investment funds, including those that are not reporting issuers, promptly report to the applicable securities regulatory authority when any of the following liquidity-related events occur:
- the fund receives redemption requests above a certain threshold;
- the fund breaches its applicable illiquid asset restriction under NI 81-102;
- the fund suspends redemptions;
- the fund activates LMTs that impact the redemption price or an investor’s ability to redeem out of the fund; and
- the fund borrows cash or provides a security interest over any of its portfolio assets as a temporary measure to accommodate requests for the redemption of the fund’s securities while the fund effects an orderly liquidation of portfolio assets.
The reporting would include an explanation of how the event has impacted the fund’s liquidity profile and in the case of redemption requests above a certain threshold and breaches of the illiquid asset restriction, how the fund is managing the liquidity-related event.
Public disclosure
- Proposed Fund Report: As we discussed in a previous post, in September 2024, the CSA proposed to replace the existing annual and interim management report of fund performance with a new annual and interim fund report that includes a section relating to the liquidity profile of the fund (the “Proposed Fund Report”). The Consultation Paper reiterates that the liquidity profile information in the Proposed Fund Report would include the following:
- a pie chart that presents the percentage of the fund’s portfolio that can be sold for cash in certain periods of time, organized into liquidity classification categories (to be aligned with the four liquidity buckets noted above, if implemented, rather than the ranges originally proposed in 2024);
- if the fund faced any material liquidity issues during the applicable period, a discussion of the fund’s liquidity profile, including the fund’s ability to satisfy redemptions on a timely basis; and
- if the fund did not face any material liquidity issues during the applicable period, a statement to that effect.
- Prospectus, fund facts and exchange-traded fund (ETF) facts: If the CSA permit or require the use of LMTs that are not already permitted or required, as described above, the CSA are considering requiring that an investment fund disclose in its prospectus information relating to all LMTs that may be used by the fund, including disclosure about any LMT that impacts redemption prices or an investor’s ability to redeem out of the fund.
What’s Next?
Subject to the nature of comments received and applicable regulatory requirements and approval, the Proposed Amendments would come into force three months after their final publication date. Any proposal to create new or amend existing rules in response to the Consultation Paper would require a further public comment process.
IOSCO and the FSB have also led significant international initiatives and galvanized momentum for securities regulators to strengthen regulatory frameworks relating to LRM in recent years. Among other developments, in May 2025, IOSCO published Revised Recommendations for Liquidity Risk Management for Collective Investment Schemes, in which it notes that “IOSCO expects that securities regulators will actively promote the implementation of the Revised Liquidity Recommendations” and that “IOSCO will review progress by member jurisdictions” beginning with “a stocktake, to be completed by the end of 2026.”
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