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Significant changes have been proposed to National Instrument 81-102 Investment Funds and its companion policy that would impact liquidity risk management (LRM) policies and procedures for all investment funds, regardless of their reporting issuer status. The proposed amendments would build on previously published CSA guidance and require funds to create a LRM framework, govern LRM operational matters, and require specific oversight of the LRM framework.
In the view of the CSA, non-reporting issuer investment funds are similarly susceptible to liquidity risk and should have a robust framework to manage this risk and thus will be subject to a number of the requirements set out in the amendments.
The proposed amendments would require investment funds to establish and maintain an LRM framework, including policies that address the matters set out in the consultation. The proposed operational requirements address LRM in various stages of the life of a fund, including its establishment and when considering potential portfolio transactions. Managers of new funds would need to ensure its objectives and strategies and redemption frequency align with the nature of the fund's expected portfolio assets and expected redemption activity. A fund would also need to assess the impact of a portfolio transaction on its liquidity profile before entering into a transaction, as well as monitor the liquidity profile of the fund and relevant markets conditions on an ongoing basis to determine if adjustments to the portfolio assets are necessary. For this purpose, liquidity profile references the ability of the portfolio of the investment fund to be disposed of and settled quicky and easily without a significant loss in value.
Ongoing monitoring would include requirements for liquidity thresholds and targets to monitor, review and assess the fund's liquidity profile. The proposals include specifically mandated stress testing, as well as contingency planning that would include the use of liquidity risk management tools, such as the suspension of redemptions, redemptions in kind, and the use of redemption fees. A fund would have to appoint an LRM supervisor or LRM committee to oversee the framework. If an individual, an LRM supervisor would have to be the CCO of the investment fund manager, or an individual who reports directly to the CCO (or a person who reports directly in respect of LRM matters). A LRM committee must include the CCO or a person who reports directly to the CCO. In any case, the individuals must have sufficient knowledge of the management of liquidity risk. The manager of an investment fund would need to refer matters that "would reasonably be expected to significantly impact the liquidity profile of the investment fund" to the LRM supervisor or LRM committee. Any such committee need to meet at least quarterly.
The companion policy expands on several details of the proposed LRM framework. In addition to the specific items in the Proposed Amendments, there are other matters relating to LRM that may need to be addressed in policies and procedures, including circumstances where independent valuations for portfolio assets are not available, and conflicts of interest between the fund and manager.
The CSA is also seeking feedback in a consultation paper on further changes to the LRM framework, including the use of specific LRM tools, liquidity classification of underlying assets, and regulatory disclosure related to LRM matters (including certain confidential reporting requirements).
Among other things, the consultation paper asks for feedback on whether there is a need to permit or require the use of liquidity management tools that are not currently permitted in Canada. The potential liquidity classification framework would require the classification of the liquidity of each of the fund's investments when the fund is designed, as well as for each new investment, and a review of the liquidity classification of each of the fund's investments on an ongoing basis (at least monthly). The liquidity classification would be based on the number of business days within which a fund's portfolio asset would be readily disposed of and its disposition would be settled at an amount that approximates the amount at which the asset is valued for NAV calculation purposes. All investment funds, including private funds, would need to report on a confidential basis to the regulators the liquidity classification of each investment held by the fund on a quarterly basis. All investment funds, including private funds, would also need to report to the regulators when certain liquidity events occur, including if the fund suspends redemptions or borrows cash to accommodate redemption requests.
Comments are open until March 27, 2026. For more information on how these proposals could impact your business, please see BLG's Insight.
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