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Monday, April 20, 2020

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The coronavirus (“COVID-19”) pandemic continues to disrupt global markets and business operations causing unprecedented challenges and risks to asset managers and their investment portfolios. Through our discussions with a number of private asset managers, focussing primarily on alternative assets, we have identified several considerations relating to operational and legal compliance matters for asset managers and their portfolios, which are summarized below.

Investment Portfolios: Carpe Diem (carefully)

Investment Policies and Strategies  

The market disruption caused by the COVID-19 pandemic has created new investing opportunities as well as the need to adjust related strategies. Managers should continue to carefully review their investment policies and restrictions to determine whether they can invest (or maintain investment) in asset classes that may be exhibiting distressed tendencies or which, as a result of pricing anomalies, may exceed stipulated concentration percentages.

Managers should consider the flexibility offered within the existing framework outlined in the relevant constating and offering documentation of the investment portfolio. Where formal amendments are required, managers must assess what approvals and related steps are required and, where possible, consider those action items that may be accelerated.

Raising Capital

Many managers have indicated their intention to raise opportunistic capital into current or new funds in order to take advantage of the current market environment. Managers should ensure that any shift into new asset classes or the adoption of new strategies or techniques are well documented, understood by the portfolio managers responsible for executing these trades and approved, where necessary, by their board and/or independent investment or review committees.


Managers should ensure that any pricing methodology is consistent across all investment portfolios as concerns have surfaced between the application of contrasting methodologies across existing platforms. For example, maintaining “book value” for positions held in existing portfolios and related net asset value (NAV) strikes, whereas new funds sponsored by the same platform are seeking to raise capital to invest in assets on a “fair market value” assessment, resulting in potential exposure to these managers.

This potential for a pricing mismatch is enhanced by what is anticipated to be an active secondaries market with investors seeking liquidity, increasing the potential for an additional layer of pricing mismatching in the marketplace. In most instances, private fund managers or general partners must approve the transfer of any registered or beneficial interests, thereby raising the question as to whether these secondary trading inputs need to be considered as part of their fair value assessments.  


Managers should continue to engage with the funds’ board of directors and/or independent review committee to ensure that the board/IRC is keeping up to date with available information around risks of the COVID-19 pandemic. Matters relating to any proposed changes in investment policies or related strategies should be referred for review and approval, in particular those items where there is any doubt as to whether a course of action is permitted within an existing framework.

If they have not already done so, asset managers and their boards should consider forming independent committees that have the responsibility of assessing and acting on ongoing risks related to the COVID-19 pandemic. The identification and disclosure of any potential conflict of interest continues to be a critical piece of the analysis, in particular for alternative asset managers operating in volatile markets where actions and opportunities tend to move on accelerated timelines and where fund groups may be considering a re-allocation of assets across investment portfolios.1 A reminder as well that a conflict of interest matter may include a determination as to the appropriate methodology to be consistently applied vis-à-vis the redemption process (e.g., when a large or well known investor seeks preferential or otherwise advantageous liquidity rights).


Managing the liquidity needs of a fund is a priority for asset managers given market volatility. Certain alternative assets classes are highly susceptible to liquidity issues, such as funds with exposure to high yield fixed income or senior loans, small cap equity and emerging market issuers.3

The CSA have previously reminded asset managers holding such investments to ensure that they carefully consider and document their policies and procedures concerning the evaluation of liquidity levels of individual fund holdings and how the fund holdings fit within the illiquid asset restrictions.

Asset managers should ensure that they consider the following:

  • the specific factors and metrics used to assess liquidity levels, what steps to take should any particular holdings run afoul of internal thresholds for such metrics, as well as information concerning the frequency of such monitoring; 
  • from a risk management perspective, any stress testing and scenario analysis managers may have conducted for their fund portfolios, both at the individual and class level of holdings. Investment funds should consider and be prepared to meet higher than normal redemption demands and, in so doing, should maintain focused on the composition of assets and the associated settlement cycles in order to minimize redemption settlement mismatches; and 
  • the valuation of illiquid assets, the valuation policies and procedures and whether there is any oversight by the fund’s independent review committee. Factors and metrics that may be used to assess liquidity levels holdings susceptible to liquidity concerns may include: (a) the frequency of trades and quotes for the particular holding, (b) the size of bid-offer spreads, (c) data freshness, (d) the size of the holding on an absolute and relative basis, (e) the credit rating of the issue, (f) the number of dealers willing to purchase or sell the holding and the number of potential purchasers, and (g) the mechanics of the transfer.

Action Items:

  • In reviewing portfolio liquidity test models as part of ongoing business continuity planning, managers should, wherever possible, engage internal and external valuation specialists to re-evaluate certain less liquid asset classes against the funds’ liquidity classification categories.
  • Managers operating on a committed capital basis should confirm that their banks are still willing to provide funding despite what may be interpreted as potential material adverse changes in the liquidity profile of certain limited partners.
  • Managers may need to consider lengthening the notice period for capital calls and should continue to proactively reach out to investors.
  • Private funds may need to activate their gating provisions.
  • Managers should explore innovative capital retention and raising strategies, such as implementing new classes with lower fees, repackaging redemptions into opportunistic strategies for retention purposes, and offering to share the upside via updated fees structures or side-pockets.


Managers should consider what specific risk factor language to include regarding the potential impact of the COVID-19 pandemic into fund offering documents. For privately offered funds, this may include updating the offering memorandum prior to conducting the subsequent NAV calculation associated with any additional investment into a fund. Managers should also consider the anticipated impact of market conditions in previously disclosed performance and investment valuations. Under Canadian securities laws, investors have statutory rights of rescission and action for damages if a funds’ offering documents contain any misrepresentation, which includes omissions of material facts.

CSA Relief

In light of the disruptions caused by the COVID-19 pandemic, on March 23, 2020, the Canadian Securities Administrators (“CSA”) issued temporary blanket relief orders for certain regulatory filings required to be made on or before June 1, 2020 (the “CSA Relief”). The CSA Relief extends deadlines for registered dealers, registered advisers and registered investment fund managers to deliver certain financial statements and excess working capital requirements by up to 45 days if their original disclosure deadlines fall between March 23, 2020 and June 1, 2020 (the “Relief Period”). The CSA Relief further provides a 45-day extension for registered firms and unregistered capital market participants to satisfy certain fee-related requirements in connection with the payment of participation fees with deadlines falling within the Relief Period.

Investment Managers; Maintaining the Platform

Material Agreements

Managers should be reviewing all material contracts, including leases, for notice requirements, termination triggers and default provisions. Some contracts may be rendered impossible to complete due to impacts of the COVID-19 pandemic. “Force majeure” is a legal doctrine that allows parties to a contract to assert that they are not required to meet their contractual obligations due to significant events beyond their control which prevent fulfilment of such contract. For more information, please see our previous update on contractual compliance in light of the COVID-19 pandemic. 

Know-your-client (KYC) & Suitability Obligations

The impact of the COVID pandemic has been remarkable in its scope and the impact it has had on all investors. For registrants required to conduct and maintain up-to-date KYC information, as well as those required to conduct a suitability assessment in respect of a managed account before making a recommendation, accepting a client’s instruction, or making a purchase or sale of a security, registrants must take reasonable steps to ensure that the purchase or sale of the security is suitable for the client.

Moreover, as the personal circumstances of many, if not most, clients may have been impacted, all registrants must ensure that they consider and document the planned approach as to the potential need to conduct an updated KYC review on a large scale and the manner in which it intends to execute such a plan. Pending specific guidance from the CSA, managers should ensure they can demonstrate that they have planned for such a contingency in a timely fashion and have considered the associated client communication strategy prior to implementation.

Business Continuity

All managers that have activated their business continuity plans (“BCP”) should consider conducting a “COVID cleanse” in real-time as a means of enhancing existing BCP protocols and procedures. In many cases, BCPs have focused primarily on “redundancy,” whereas the current environment is one that is almost exclusively focussed on “remoteness.” If real-time deviations are necessary from established BCPs, managers should document the reasons for those deviations and update their BCPs accordingly.

Moreover, managers should engage in open dialogue with key service providers to ensure continued delivery of services. Managers should plan for back-up service providers if they see a risk of ongoing interruption of a service provider critical to the portfolio companies.

Additionally, given the necessity of remote workplaces and online transactions, managers should review their portfolio companies’ IT policies and protocols, support and equipment. Reinforcing cybersecurity should be priority in any BCP as every new remote access presents new cyber risks and vulnerabilities. Companies are expected to have taken measures such as requiring the use of virtual private networks and multi-factor authentication before permitting access to company systems through employees’ personal devices. The need to give employees remote access should not compromise sound privacy and cybersecurity risk mitigation measures.

Incentive Compensation

Managers may consider restructuring compensation for key employees of portfolio companies to account for adjusted performance targets. Senior management compensation is often weighted towards stock-based awards, which may not adequately compensate and incentivize those key employees navigating portfolio companies through this challenging environment. Portfolio companies that have upcoming regularly scheduled stock option grants should consider whether to keep such grants on cycle or delay them. Tax implications to the portfolio company should be considered in advance of any changes to existing plans.

Wage Subsidy Eligibility

Portfolio companies impacted by the COVID-19 pandemic are advised to assess whether they are eligible for the Canada Emergency Wage Subsidy (“Wage Subsidy”). The Wage Subsidy extends relief to distressed employers by providing for 75% of remuneration paid to an employee up to a maximum of $847 per week. For more information, please see our previous update regarding the Wage Subsidy.

If you have any questions with respect to this legal update, please contact Geoffrey Cher (, Ron Schwass (, Nick Gray (, Sarim Ali ( or any other member of our Structured Finance and Asset Management practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

See part 13 of National Instrument 31-103. A reminder as well that an amendment published on October 3, 2019 and to take effect on December 31, 2020, implements the requirement for registrants to resolve conflicts of interest in the best interest of a client, subject to a materiality threshold to the new requirements for firms to address, disclose or, in some cases, avoid conflicts of interest. The Companion Policy provides guidance regarding the Canadian Securities Administrators’) expectations for registered firms to address and document the resolution of material conflicts of interest relating to referral arrangements, sales practices, compensation arrangements and incentive practices.

See OSC Staff Notice 81-727 Report on Staff’s Continuous Disclosure Review of Mutual Fund Practices Relating to Portfolio Liquidity and the paper entitled “Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities” published by the Financial Stability Board on June 22, 2016.