Crypto assets are making their way into Regulation 81-102 respecting Investment Funds

On March 27, the Autorité des marchés financiers (AMF, Quebec’s financial markets regulator) published proposed amendments (the Amendments) in a publication titled Regulation to amend Regulation 81-102 respecting Investment Funds pertaining to crypto assets.

The Amendments apply to reporting issuer investment funds seeking to invest directly or indirectly in crypto assets (Public Crypto Asset Funds). They aim at clarifying the regulatory standards applicable to developing and managing such financial products.

The Amendments are not yet in force, as they will be submitted to the Quebec minister of finance for approval. Other Canadian Securities Administrators members are considering adopting equivalent changes in their respective jurisdictions.

The Amendments clarify the types of crypto assets that funds may acquire, the restrictions on investments in crypto assets, and the custody requirements for crypto assets held on behalf of Public Crypto Asset Funds. It is stated these changes will codify practices that are already applicable, which were developed mainly through the prospectus review process and exemptive reliefs granted to existing Public Crypto Asset Funds. 

The proposed changes are as follows:

• The definition of "alternative mutual fund" would be amended to include mutual funds investing in crypto assets.
• Investment restrictions would only allow alternative mutual funds and non-redeemable investment funds to directly buy, sell, hold, or use crypto assets, as well as to indirectly invest in crypto assets through specified derivatives. 
• Mutual funds, other than alternative mutual funds, would only be able to invest in:
  • underlying alternative mutual funds or non-redeemable funds that invest in crypto assets; or
  • specified derivatives for which the underlying interest is a crypto asset, and are listed for trading on an exchange that is recognized by a securities regulatory authority in Canada, subject to an investment limit of 10% of the fund’s net asset value.

• Only fungible crypto assets listed for trading on, or being the underlying interest for a specified derivative that trades on, a recognized exchange could be traded by mutual funds. Bitcoin and Ether qualify as such.
• Investment funds custodians and sub-custodians would need to mostly hold crypto assets in offline storage (cold wallet) and obtain annually an accountant's report assessing their service commitments and system requirements, for example a SOC-2 Type II report.
• Mutual funds that hold crypto assets would be allowed to accept in-kind crypto assets as subscription proceeds, under certain conditions.

• Certain modifications to the policy statement are proposed, including to the description of what constitutes "crypto assets," how crypto assets can be traded, and explanations about the standard of care applicable to custodians.

We also note certain paragraphs that were initially published for consultation are not included in the Amendments, such as those mentioning that crypto assets could not be used for securities lending transactions, repurchase agreements, and reverse repurchase agreements. The prohibition for money market funds to invest in crypto assets was also abandoned.

The Amendments constitute the first modifications incorporating mentions of crypto assets into Regulation 81-102 respecting Investment Funds. The AMF stated a public consultation concerning a broader and more comprehensive framework for Public Crypto Asset Funds is also planned in the future.