CSA Notice – Amendments to National Instrument 81-102 Investment Funds Pertaining to Crypto Assets

Introduction

The Canadian Securities Administrators (the CSA or we) are adopting

• amendments (the Amendments) to National Instrument 81-102 Investment Funds (NI 81-102), and
• changes (the CP Changes) to Companion Policy 81-102 Investment Funds (81-102CP)

(collectively, the Amendments and CP Changes).

The Amendments and CP Changes pertain to reporting issuer investment funds that seek to invest directly or indirectly in crypto assets (Public Crypto Asset Funds).

Provided all necessary ministerial approvals are obtained, the Amendments will come into force on July 16, 2025.

Substance and Purpose

The Amendments and CP Changes are intended to provide greater regulatory clarity with respect to certain key operational matters regarding Public Crypto Asset Funds, such as:

• criteria regarding the types of crypto assets that Public Crypto Asset Funds are permitted to purchase, use or hold,
• restrictions on investing in crypto assets by Public Crypto Asset Funds or other types of reporting issuer investment funds, and
• requirements concerning custody of crypto assets held on behalf of a Public Crypto Asset Fund.

The Amendments will codify practices of existing Public Crypto Asset Funds, developed mainly through the prospectus review process, as well as codify exemptive relief previously granted to existing Public Crypto Asset Funds. The Amendments and CP Changes will provide investment fund managers with greater regulatory clarity concerning investments in crypto assets. The intent is to facilitate new product development while also ensuring that appropriate risk mitigation measures are built directly into the investment fund regulatory framework.

Background

The Amendments and CP Changes are a key phase of the CSA's implementation of a regulatory framework for Public Crypto Asset Funds (the Project). The Project's objectives are to review existing requirements, provide guidance, and then implement a regulatory framework relating to Public Crypto Asset Funds that ensures adequate investor protection and mitigates potential risks while providing greater regulatory clarity for product development and management. The Project is a recognition by the CSA that the existing regulatory framework in NI 81-102 needs to be adapted to properly account for the unique aspects of crypto assets as an investment product for publicly distributed investment funds.

The Project is being carried out in three phases.

Phase 1 -- CSA Staff Notice

Phase 1 of the Project entailed communicating information to stakeholders on areas we believe required greater regulatory guidance, including new developments relating to Public Crypto Asset Funds. Phase 1 was completed with the publication of CSA Staff Notice 81-336 Guidance on Crypto Asset Investment Funds that are Reporting Issuers (the Staff Notice) on July 6, 2023.{1}

The Staff Notice provided guidance to stakeholders and outlined CSA staff's views and expectations regarding the operations of Public Crypto Asset Funds within the current framework of NI 81-102, including:

• providing an overview of the Public Crypto Asset Funds market and clarifying the application of existing securities regulatory requirements to them,
• discussing key findings from previous reviews conducted by CSA staff, and
• communicating CSA staff expectations for stakeholders with respect to various matters related to Public Crypto Asset Funds, including key considerations for investing in crypto assets, expectations regarding custody of crypto assets on behalf of Public Crypto Asset Funds, issues concerning staking and other similar yield-generating activities, and reminding registrants of their know-your-product, know-your-client and suitability obligations.

Phase 2 -- The Amendments

The Amendments and CP Changes represent the second phase of the Project. As discussed in greater detail below, the purpose of this phase of the Project is to build on the guidance in the Staff Notice by focusing on targeted amendments that reflect priority issues regarding investment funds investing in crypto assets. This phase seeks to codify policies and practices of existing Public Crypto Asset Funds, many of which were developed and adopted through the prospectus review process and were also cited in the Staff Notice. Also, where appropriate, the Amendments codify routinely granted exemptive relief for these products.

We first published proposed amendments (the Proposed Amendments) and CP Changes relating to this phase of the Project for a 90-day comment period, on January 18, 2024.{2}

Phase 3 -- Consultation Paper and Possible Future Amendments

Phase 3 of the Project will involve a public consultation concerning a broader and more comprehensive regulatory framework for Public Crypto Asset Funds.

Summary of Amendments and CP Changes

The following is a description of the Amendments and CP Changes. The Summary of Changes to the Proposed Amendments in Annex A describes how the Amendments and CP Changes differ from what was initially published for comment.

Amendments to NI 81-102

(i) Part 1 -- Definitions

"alternative mutual fund"

The definition of "alternative mutual fund" is being amended to also include a mutual fund that invests in crypto assets.

(ii) Part 2 -- Investments

Section 2.3 -- Restrictions Concerning Types of Investments

We are amending the investment restrictions in section 2.3 to permit only alternative mutual funds and non-redeemable investment funds to buy, sell, hold or use crypto assets directly. This restriction would also apply to investing indirectly in crypto assets through specified derivatives. Mutual funds, other than alternative mutual funds, will only be permitted to invest in crypto assets by (a) investing in underlying alternative mutual funds or non-redeemable funds that invest in crypto assets, subject to the fund of fund restrictions in subsection 2.5(2) of NI 81-102 or (b) investing in a specified derivative for which the underlying interest is a crypto asset, provided the specified derivatives meets the criteria described below.

Investment funds will only be permitted to invest in fungible crypto assets that are listed for trading on, or are the underlying interest for a specified derivative that trades on, an exchange that is recognized by a securities regulatory authority in Canada.

(iii) Part 6 -- Custodianship of Portfolio Assets

We are including provisions that will apply specifically to custodians and sub-custodians that hold crypto assets on behalf of an investment fund (a Crypto Custodian) as described below. These provisions largely codify existing practices of Crypto Custodians and are supplemented by additional guidance in 81-102CP:

• section 6.5.1 will require a Crypto Custodian to keep crypto assets in offline storage (usually referred to as "cold wallet" storage), except as needed to facilitate purchases and sales or other portfolio transactions in the fund.
• section 6.7 will be amended to include a requirement for a Crypto Custodian to obtain, on an annual basis, a report prepared by a public accountant assessing the Crypto Custodian's service commitments and system requirements relating to its custody of crypto assets and to deliver this report to the fund. If the Crypto Custodian is the fund's sub-custodian, the report will also have to be delivered to the fund's custodian.

(iv) Part 9 -- Sale of Securities of an Investment Fund

Section 9.4 -- Delivery of Funds and Settlement

Subsection 9.4(2) is being amended to permit mutual funds that hold crypto assets to accept those crypto assets as subscription proceeds, subject to the following conditions:

• the mutual fund is permitted to purchase the applicable crypto asset, the crypto asset is acceptable to the fund's portfolio advisor, and holding the asset is consistent with the fund's investment objectives, and
• the crypto assets accepted by the mutual fund as subscription proceeds for the mutual fund's securities must be of at least equal value to the issue price of the mutual fund's securities received in exchange.

Changes to 81-102CP

Section 2.01 -- Guidance on what are considered to be "crypto assets"

We are adding guidance relating to what the CSA will generally consider to be crypto assets for the purposes of investment funds regulation, though we note this is not intended to be a legal definition of the term.

Section 3.3.01 -- Investing in crypto assets

We are adding a new section 3.3.01 which will clarify that the listing on a "recognized exchange" requirement for funds investing crypto assets in section 2.3 of NI 81-102 is not intended to restrict funds to only purchasing crypto assets through such an exchange. A fund may purchase crypto assets from other sources as well, including crypto trading platforms, as long as the crypto asset meets the criteria set out in subsection 2.3(1.3) of NI 81-102.

Section 8.1 -- Custody standard of care

We are adding a new subsection 8.1(2) which provides guidance as to how the standard of care for custodians and sub-custodians set out in section 6.6. of NI 81-102 might apply in the context of Crypto Custodians, including best practice suggestions.

Section 8.3

We are adding a new subsection 8.3(2) which will clarify that the reporting requirement for Crypto Custodians in section 6.7. of NI 81-102 can be met by obtaining a System and Organization Controls 2 Type II Report, prepared by a public accountant, in accordance with the framework developed by the American Institute of Chartered Public Accountants.

Summary of Written Comments Received by the CSA

During the comment period we received submissions from 16 commenters. We have considered the comments received and thank all the commenters for their input. The names of the commenters and a summary of their comments together with our responses are provided in Annex B of this Notice.

Summary of Changes to the Proposed Amendments

After considering the comments received, we have made some revisions to the materials that were originally published for comment under the Proposed Amendments and CP Changes. These revisions are reflected in the Amendments and CP Changes that we are publishing in Annex A of this Notice. We do not consider these changes to be material and accordingly, we are not publishing the Amendments for a further comment period. A summary of the key changes to the Proposed Amendments is provided in Annex A of this Notice.

Local Matters

An annex is being published in any local jurisdiction that is making related changes to local securities laws, including local notices or other policy instruments in that jurisdiction. It also includes any additional information that is relevant to that jurisdiction only.

Questions

Please refer your questions to any of the following CSA staff:

Contents of Annexes

The text of the Amendments and CP Changes, the Summary of Changes to the Proposed Amendments, and the Summary of Comments and the CSA's Responses is contained in the following annexes to this Notice and is available on the websites of members of the CSA:

Annex A -- Summary of Changes to the Proposed Amendments

Annex B -- Summary of Public Comments Received and CSA Responses

Annex C -- Amendments to National Instrument 81-102 Investment Funds

Annex D -- Changes to Companion Policy 81-102CP Investment Funds

Annex E -- Ontario Rule-Making Authority for the Amendments

{1} CSA Staff Notice 81-336 Guidance on Crypto Asset Investment Funds that are Reporting Issuers, available at https://www.osc.ca/en/securities-law/instruments-rules-policies/8/81-336/csa-staff-notice-81-336-guidance-crypto-asset-investment-funds-are-reporting-issuers.

{2} See "CSA Notice and Request for Comment -- Proposed Amendments to National Instrument 81-102 Investment Funds Pertaining to Crypto Assets" available at https://www.osc.ca/en/securities-law/instruments-rules-policies/8/81-102-81-102cp/csa-notice-and-request-comment-proposed-amendments-national-instrument-81-102-0.

ANNEX A

SUMMARY OF CHANGES TO THE PROPOSED AMENDMENTS

The following summarizes the changes we made to the Proposed Amendments in response to the comments we received. We do not consider these changes to be material.

Part 2 -- Investments

1. Section 2.3 was changed to permit mutual funds that are not alternative mutual funds to also invest in specified derivatives for which the underlying interest is a crypto asset, up to 10% of the fund's net asset value at the time of purchase, provided the specified derivative fits the criteria outlined in subsection (1.4) (i.e. that it is listed for trading on an exchange that is recognized by a securities regulatory authority in Canada).
2. We removed paragraph 13 of subsection 2.12(1) which stated that for securities lending transactions by a fund, neither the loaned securities nor the collateral delivered to the funds can include crypto assets.
3. We removed paragraph 12 of subsection 2.13(1) which stated that no securities transferred by an investment fund as part of a repurchase agreement transaction can be crypto assets.
4. We removed paragraph 10 of subsection 2.14(1) which stated that none of the securities transferred in a reverse repurchase agreement can be crypto assets.
5. We removed the reference to "crypto assets" in subsection 2.18(2) with respect to what constitutes a "money market fund".

Part 6 -- Custodianship of Portfolio Assets

6. We removed subsection 6.6(3.1), which would have required a custodian or sub-custodian holding crypto assets on behalf of a fund to maintain insurance in regard to its custody of crypto assets. The CP Changes will still include guidance that investment fund managers take matters such as the amount and nature of insurance maintained by a custodian or sub-custodian as a relevant factor to consider as part of its due diligence in selecting a custodian or approving the selection of a sub-custodian to hold crypto assets for the investment fund, consistent with the investment fund manager's fiduciary obligations.
7. We changed the provisions in section 6.7 that require a custodian or sub-custodian holding portfolio assets of a fund to obtain a report providing reasonable assurance opinion concerning the design and operational effectiveness of service commitments and system requirements for that custodian or sub-custodian as follows:
   1. the annual report must relate to a 12-month period, but that period does not have to be the custodian or sub-custodian's financial year. However, the same 12-month period must be used for subsequent reports obtained,
   2. the report must be obtained no later than 90 days from the end of the period it relates to, instead of 60 days,
   3. a custodian or sub-custodian cannot hold crypto assets on behalf of a fund unless it has obtained the applicable report relating to a period ending no more than 15 months prior to holding crypto assets on behalf of the fund.

Part 9 -- Sale of Securities of an Investment Fund

8. We changed the wording in proposed paragraph 9.4(2)(c) that permits funds holding crypto assets to accept in-kind purchases to better align with the wording in paragraph 9.4(2)(b), and with the wording used in the exemptive relief orders the provision is codifying.

ANNEX B

SUMMARY OF PUBLIC COMMENTS AND CSA RESPONSES

INTRODUCTION

We received comment letters from 16 different commenters on all aspects of the Amendments and CP Changes, as well as the additional consultation questions for which we sought specific comment (the Consultation Questions). A summary of the comments received, and the CSA's responses are provided below. The names of the commenters are provided at the end.

COMMENTERS

ANNEX C

AMENDMENTS TO NATIONAL INSTRUMENT 81-102 INVESTMENT FUNDS

1. National Instrument 81-102 Investment Funds is amended by this Instrument.

2. Section 1.1 is amended in the definition of "alternative mutual fund" by adding ", crypto assets" before "or specified derivatives".

3. Section 2.3 is amended

(a) in paragraph (1)(e) by adding "or a crypto asset" before "if, immediately" and by adding "and crypto assets" after "physical commodities",

(b) in paragraph (1)(g) by deleting "or" after "sections 2.7 to 2.11",

(c) in paragraph (1)(i) by replacing "." with ";",

(d) in subsection (1) by adding the following paragraph:

(j) purchase, sell, use or hold a crypto asset or a specified derivative of which the underlying interest is a crypto asset except to the extent permitted by paragraph (e) or subsections (1.3) or (1.4).,

(e) by adding the following subsections:

(1.3) Paragraph (1)(j) does not apply to an alternative mutual fund with respect to the purchase, sale, use or holding of a crypto asset if,

(a) except in British Columbia, the crypto asset is fungible and either of the following apply:

(i) the crypto asset trades on an exchange recognized by a securities regulatory authority in a jurisdiction of Canada;

(ii) the crypto asset is the underlying interest of a specified derivative that trades on an exchange recognized by a securities regulatory authority in a jurisdiction of Canada, or

(b) in British Columbia, the crypto asset is fungible and either of the following apply:

(i) the crypto asset trades on an exchange recognized in British Columbia or designated for the purposes of this paragraph;

(ii) the crypto asset is the underlying interest of a specified derivative that trades on an exchange recognized in British Columbia or designated for the purposes of this paragraph.

(1.4) Paragraph (1)(j) does not apply to a mutual fund with respect to the fund entering into a specified derivative that trades on an exchange if,

(a) except in British Columbia, the exchange is recognized by a securities regulatory authority in a jurisdiction of Canada, or

(b) in British Columbia, the exchange is recognized in British Columbia or designated for the purposes of this subsection., and

(f) in subsection (2) by replacing "." with ";" at the end of paragraph (c) and by adding the following paragraphs:

(d) purchase, sell, use or hold a crypto asset unless it is a crypto asset referred to in subsection (1.3);

(e) enter into a specified derivative the underlying interest of which is a crypto asset, unless the specified derivative is a specified derivative referred to in subsection (1.4)..

4. Part 6 is amended by adding the following section:

6.5.1 Holding of Portfolio Assets that are Crypto Assets

Despite subsections (3) and (4) of section 6.5, a custodian or a sub-custodian that holds portfolio assets that are crypto assets must hold the private cryptographic keys to those assets in offline storage unless the assets are required to facilitate a portfolio transaction of the investment fund..

5. Section 6.7 is amended

(a) by adding the following subsections:

(1.1) A custodian or sub-custodian of an investment fund that holds portfolio assets that are crypto assets must, on a periodic basis not less frequently than annually, and no more than 90 days after the end of the period it references, obtain a report prepared by a public accountant that expresses a reasonable assurance opinion concerning the design and operational effectiveness of the service commitments and system requirements of the custodian or sub-custodian relating to its custody of crypto assets during a 12-month period.

(1.2) If a report referred to in subsection (1.1) is required to be obtained by the custodian of an investment fund, then the custodian must deliver a copy of the report to the investment fund promptly after receipt.

(1.3) If a report referred to in subsection (1.1) is required to be obtained by a sub-custodian of an investment fund, then the sub-custodian must deliver a copy of the report to the investment fund's custodian and to the investment fund promptly after receipt.

(1.4) A custodian or sub-custodian of an investment fund must not hold portfolio assets of the investment fund that are crypto assets unless

(a) the custodian or sub-custodian has obtained a report referred to in subsection (1.1) that relates to a 12-month period ended no more than 15 months before the date on which the custodian or sub-custodian first holds portfolio assets of the investment fund that are crypto assets, and

(b) the custodian or sub-custodian has delivered a copy of the report, before the date it first holds crypto assets that are portfolio assets of the investment fund,

(i) if the report is obtained by the custodian under paragraph (a), to the investment fund, or

(ii) if the report is obtained by the sub-custodian under paragraph (a), to the investment fund and the custodian.

(1.5) For the purposes of subsection (1.4), if a custodian or sub-custodian ceases to hold portfolio assets of an investment fund that are crypto assets, paragraphs (1.4)(a) and (b) apply to each subsequent period during which the custodian or sub-custodian holds crypto assets that are portfolio assets of the investment fund as if the custodian or sub-custodian were holding portfolio assets of the investment fund that are crypto assets for the first time., and

(b) in subsection (2) by deleting "and" at the end of paragraph (b), by replacing "." with ";" at the end of paragraph (c) and by adding the following paragraph:

(d) whether the custodian or each sub-custodian that holds portfolio assets of the investment fund that are crypto assets, has delivered a copy of the report referred to in subsection (1.1)..

6. Subsection 9.4(2) is amended by replacing "." at the end of subparagraph (b)(iii) with ";" and adding the following paragraph:

(c) by making good delivery of crypto assets that are not securities if

(i) the mutual fund would at the time of payment be permitted to purchase those crypto assets,

(ii) the crypto assets are acceptable to the portfolio adviser of the mutual fund and consistent with the mutual fund's investment objectives, and

(iii) the value of the crypto assets is at least equal to the issue price of the securities of the mutual fund for which they are payment, valued as if those crypto assets were portfolio assets of the mutual fund..

Effective date

7. (1) This Instrument comes into force on July 16, 2025.

(2) In Saskatchewan, despite subsection (1), if this Instrument is filed with the Registrar of Regulations after July 16, 2025, this Instrument comes into force on the day on which it is filed with the Registrar of Regulations.

ANNEX D

CHANGES TO COMPANION POLICY 81-102 INVESTMENT FUNDS

1. Companion Policy 81-102 Investment Funds is changed by this Document.

2. Section 2.01 is changed by adding the following subsection:

(4) The term "crypto asset" is not defined in the Instrument, but for the purposes of the Instrument, the Canadian securities regulatory authorities will generally consider a crypto asset to include any digital representation of value that uses cryptography and distributed ledger technology, or a combination of similar technology, to record transactions..

3. Part 3 is changed by adding the following section:

3.3.01 Investing in Crypto Assets

Subsection 2.3(1.3) of the Instrument provides an exception to the general prohibition on mutual funds investing in crypto assets in paragraph 2.3(1.2)(j) to permit alternative mutual funds to invest in crypto assets provided the crypto asset is either (a) listed for trading or (b) is the underlying interest in a specified derivative that is listed for trading, on an exchange that has been recognized by a securities regulatory authority in Canada. Subsection 2.3(2) provides a similar exception for non-redeemable investment funds. For greater clarity, this is not intended to restrict investment funds to only purchasing crypto assets through a recognized exchange. It is meant to be the criteria to determine whether a fund can invest in a particular type of crypto asset. Funds will continue to be permitted to acquire crypto assets from other sources, such as crypto asset trading platforms, provided the crypto asset qualifies under the criteria set out in subsection 2.3(1.3) and subject to any other existing requirements that may impact how an investment fund acquires its portfolio assets..

4. Section 8.1 is changed:

(a) by renumbering it as subsection "8.1(1)", and

(b) by adding the following subsections:

(2) The Canadian securities regulatory authorities expect that custodians and sub-custodians responsible for the custody of portfolio assets that are crypto assets implement policies and procedures that address the unique risks concerning safeguarding of crypto assets compared to other asset types. We also expect that investment fund managers take note of these policies and procedures in conducting their due diligence on custodians or sub-custodians to hold crypto assets for an investment fund, consistent with their fiduciary obligations. Examples of what we understand to be industry best practices may include, but are not limited to:

(a) having specialist expertise and infrastructure relating to the custody of crypto assets;

(b) storing private cryptographic keys to the investment fund's crypto assets in segregated wallets separate from wallets the custodian or sub-custodian uses for its other customers so that unique public and private keys are maintained on behalf of an investment fund and visible on the blockchain;

(c) maintaining books and records in a way that enables the investment fund, at any time, to confirm its transactions and ownership of the crypto assets it holds. Custody and record-keeping controls (e.g., reconciliation to the blockchain) that ensure investors' crypto assets exist, are appropriately segregated and protected, and that ensure transactions with respect to those assets are verifiable, should be maintained;

(d) using hardware devices to hold private cryptographic keys that are subject to robust physical security practices, with effective systems and processes for private key backup and recovery;

(e) using effective cybersecurity solutions that minimise single point of failure risk, such as the use of multi-signature wallets;

(f) maintaining robust systems and practices for the receipt, validation, review, reporting and execution of instructions from the investment fund;

(g) maintaining website security measures that include two-factor authentication, strong password requirements that are cryptographically hashed, encryption of user information and other state-of-the-art measures to secure client information and protect the custodian and sub-custodian's website from hacking attempts;

(h) maintaining robust cyber and physical security practices for their operations, including appropriate internal governance and controls, risk management and business continuity practices;

(i) maintaining insurance with respect to the crypto assets in their custody that is reasonable and appropriate. The Canadian securities regulatory authorities expect investment fund managers to use their best judgment, consistent with their fiduciary obligation to the investment fund, to determine whether the insurance maintained by the custodian or sub-custodian is satisfactory in the circumstances, which would include a consideration of whether the amount and nature of the insurance is consistent with standard industry practices where applicable.

(3) For the purposes of section 6.5.1, the Canadian securities regulatory authorities generally consider offline storage to mean the storage of private cryptographic keys in a manner that prevents any connection to the internet..

5. Section 8.3 is changed by renumbering it as subsection 8.3(1) and by adding the following subsections:

(2) Subsection 6.7(1.1) requires a custodian or sub-custodian of an investment fund that holds portfolio assets of that investment fund that are crypto assets to obtain a report prepared by a public accountant to assess its internal management and controls. The Canadian securities regulatory authorities would consider obtaining a System and Organization Controls 2 Type II report, generally referred to as a "SOC-2 Type II" report, prepared in accordance with the framework developed by the American Institute of Certified Public Accountants, to satisfy this requirement.

(3) We are not prescribing a specific 12-month period the report required under subsection 6.7(1.1) must refer to. However, we expect that report will generally refer to the same 12-month period each year, similar to how other types of annual reporting, such as financial reporting is provided..

Effective date

6. These changes become effective on July 16, 2025.

ANNEX E

ONTARIO RULE-MAKING AUTHORITY FOR THE AMENDMENTS

The following provisions of the Securities Act (Ontario) (the Act) provide the Commission with authority to adopt the Amendments:

Paragraph 143(1)31 of the Act authorizes the Commission to make rules regulating investment funds and the distribution and trading of the securities of investment funds, including

• making rules prescribing permitted investment policy and investment practices for investment funds and prohibiting or restricting certain investments or investment practices for investment funds (subparagraph (ii));

• making rules prescribing requirements for investment funds in respect of derivatives (subparagraph (ii.1));

• making rules prescribing requirements governing the custodianship of assets of investment funds (subparagraph (iii));

Paragraph 143(1)34 of the Act authorizes the Commission to make rules regulating commodity pools.

Paragraph 143(1)49 of the Act authorizes the Commission to make rules permitting or requiring, or varying the Act to permit or require, methods of filing or delivery, to or by the Commission, issuers, registrants, security holders or others, of documents, information, notices, books, records, things, reports, orders, authorizations or other communications required under or governed by Ontario securities law.