On June 19, 2025, the Canadian Securities Administrators ("CSA") published for comment CSA Consultation Paper 81-409 – Enhancing Exchange-Traded Fund Regulation: Proposed Approaches and Discussion (the "Consultation Paper"), which outlines proposed amendments to the regulatory framework for exchange-traded funds ("ETFs") in Canada. The CSA have identified the ETF industry as an important area of focus, citing the strong growth of ETFs in Canada and their evolution from primarily aiming to replicate the performance of broad Canadian and U.S. equity market indices to offering investors exposure to a wide range of assets and investment strategies, including index tracking, smart beta strategies, daily leveraged/inverse exposure to indexes and commodity prices, asset allocation, and active management strategies. Noting that the existing regulatory framework is not highly tailored to ETFs, the CSA have published the Consultation Paper outlining their views on potential gaps that may need to be addressed and proposing enhancements to the regulatory framework for ETFs. The comment period closes on October 17, 2025. Following the consultation period, in the areas where the CSA conclude rules are necessary, the CSA have indicated that they plan to publish proposed rules or rule amendments through their usual public comment process.
Background
Since the introduction of the first ETF in Canada in 1990, ETFs have experienced strong growth, with assets under management reaching C$518 billion by December 31, 2024, representing approximately 19% of publicly offered fund assets. Retail investors make significant use of ETFs, with retail holdings comprising approximately 62% of total ETF assets as of December 2024.
Currently, ETFs are regulated within a framework that is largely aligned with that of conventional mutual funds. However, ETFs differ from conventional mutual funds in several key respects, including their unit creation and redemption processes, the ability to trade their units on the secondary market, and the presence of an arbitrage mechanism designed to keep the market price of ETF units closely aligned with the value of their underlying portfolio.
In 2023, members of the CSA undertook a review to assess the current regulations for ETFs, which included a study of the Canadian ETF market (the findings of which are detailed in the Ontario Securities Commission (OSC) ETF Study, An Empirical Analysis of Canadian ETF Liquidity and the Effectiveness of the Arbitrage Mechanism published on June 19, 2025) and an analysis to identify potential gaps in the existing regulatory framework and ways to update and enhance the existing framework. The Consultation Paper outlines the CSA's views on potential gaps that may need to be addressed and proposes enhancements to the regulatory framework for ETFs.
Request for Comments
To better tailor the regulatory framework to the unique features of ETFs, the CSA are consulting on a series of proposed reforms, which are intended to enhance the existing regulatory framework with an emphasis on proposals designed to promote the effective functioning of the ETF arbitrage mechanism. The proposals also consider guidance published by the International Organization of Securities Commissions (IOSCO): Good Practices Relating to the Implementation of the IOSCO Principles for Exchange Traded Funds (published May 2023), which supplements the Principles for the Regulation of Exchange Traded Funds (published June 2013). The CSA believe that the proposed amendments can enhance investor protection, promote confidence in ETF products, and foster competition in the marketplace.
The proposals and consultation questions are organized into six key areas of focus:
- Policies and Procedures for Creations and Redemptions of Units: The CSA propose requiring the creation of formal written policies and procedures with respect to creations and redemptions of ETF units (such as the methodology for constructing creation and redemption baskets and specific considerations with respect to the use of "custom baskets"), and propose requiring that such policies be approved by the ETF manager's board of directors and be subject to review, testing, and conflict of interest considerations.
- Secondary Market Trading: The CSA propose requiring specific disclosures be included on an ETF's designated website, including up-to-date information about the functioning of the arbitrage mechanism and secondary market trading, and enhancing certain disclosure in the ETF facts documents. In addition, the CSA propose requiring ETF managers to monitor the functioning of the arbitrage mechanism and liquidity provision on the secondary market and to establish, maintain, and follow policies and procedures for their monitoring, to ensure consistent monitoring and oversight of the functioning of arbitrage and liquidity.
- Authorized Dealers or Authorized Participants ("AP") Arrangements: The CSA propose enhanced transparency and disclosure regarding AP arrangements and that ETF managers be required to provide the same information to facilitate liquidity provision and arbitrage to all APs at the same time and under the same conditions. Last, the CSA seek feedback on the requirement that ETFs be required to have a minimum number of APs (i.e., at least two APs).
- Disclosure of Portfolio Information for Arbitrage and to the Public: The CSA seek feedback on whether an ETF should be required to provide specific valuation information to facilitate arbitrage and whether an ETF should be required to make the valuation information available to all market participants for the trading day by disclosing the information on its website. For the most part, the CSA do not propose introducing new specific disclosure requirements, but do propose requiring ETFs to establish, maintain, and follow written policies and procedures governing the disclosure of portfolio information. The CSA have also proposed mandating certain disclosure regarding the ETF's policies and practices with respect to the disclosure of portfolio information for arbitrage and to the public.
- Offering of Exchange-Traded Series together with Unlisted Series: The CSA have flagged an increase in funds that offer both exchange-traded series and unlisted "mutual fund" series, and seek feedback on the differences between investing in an exchange-traded series and a standalone ETF, whether additional disclosure is needed to clarify the differences, including potential costs, risks (including conflicts of interests), and benefits, whether portfolio transaction costs related to unlisted series inflows and redemptions could be allocated solely to the unlisted series, as if the unlisted series were a separate fund, and whether funds that offer both exchange-traded and unlisted series should be required to prohibit switches between the two series of units.
- Availability of Foreign ETFs: The CSA have noted the current ways in which Canadian investors can access U.S. listed ETFs and foreign ETFs and seek feedback on the availability of foreign ETFs to the public, both directly through brokerage accounts and indirectly through publicly offered investment funds.
The CSA have included specific questions for stakeholders to consider when making submissions, but also invite stakeholders to comment on any aspect of the Consultation Paper, particularly with respect to the costs and benefits of any potential measures. Stakeholders are encouraged to review the Consultation Paper for the complete list of questions and further context. If you have any comments or questions related to the current Canadian ETF regulatory framework or the proposals, please contact any of the authors of this bulletin.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
