The Canadian alternative investment sector is urging the federal government to give retail investors greater access to alternative products in registered plans.
Industry associations made the recommendations in submissions to the Department of Finance’s consultation about simplifying and modernizing the definition of “qualified investments,” which are those allowed in RRSPs, RRIFs, TFSAs, RESPs, registered disability savings plans (RDSPs), first home savings accounts and deferred profit sharing plans.
The government acknowledged the qualified investment rules “can be inconsistent or difficult to understand” due to their many updates since their introduction in 1966.
The consultation, which closed July 15, asked for suggested improvements to the regime, whether updated rules should favour Canada-based investments and whether crypto-backed assets should be considered qualified investments.
The Canadian Association of Alternative Strategies and Assets (CAASA) wants exempt market products to be allowed in registered plans.
These private placement products are distributed without a prospectus and are available only to accredited investors. Currently, many such products do not qualify as investment funds or mutual funds, and are therefore ineligible to be held as qualified investments in the registered plans noted above.
In its submission, CAASA said a new category should be created for private placements. To be a qualified investment eligible to be held in a registered plan, products in this category would need to be managed by a registered investment fund manager or distributed through an appropriately registered dealer. Further, the product’s assets would have to undergo a fair market valuation at least annually as well as an independent audit.
Due to the annual minimum withdrawal requirement rules, RRIFs should not be permitted to acquire private placement products, but could hold them upon conversion from an RRSP, CAASA recommended.
CAASA also suggested the existing regulatory framework for the trading of exempt market products, which are executed through registered dealers or registered investment managers, would provide sufficient protection for retail investors for the trading of private placement products.
In its submission, the Alternative Investment Management Association (AIMA) recommended that the suitability of plan investments should be governed via financial regulation rather than a formal registration process. The existing prohibited investment rules, which target investments in property to which a plan holder is “closely connected” should continue to serve as a backstop against potential abuse.
Under this structure, permitted investments could be divided into classes: investments that currently qualify as qualified investments; other investments that provide a valuation at least annually; limited liquidity instruments; and illiquid instruments.
Financial regulators, as opposed to the tax rules, could determine that particular classes of investment are not suitable for certain registered plans, depending on the policy objectives underlying the plan.
“If reliance is placed on the broader financial regulatory regime, the need for a formal registration process is removed,” said AIMA in its submission. “This in turn would make a wider range of investments available to plan investors, with potential cost savings and other benefits from efficiency of scale.”
Both CAASA and AIMA said that allowing more alternative products would encourage investment in Canada.
CAASA said many of the private assets held in exempt market vehicles invest in asset classes such as Canadian-based real estate, infrastructure, early-stage companies and private credit.
AIMA said improving retail investors’ access to alternative investments would provide the small and midsized enterprise sector with much needed new sources of capital.
Similar to the Investment Funds Institute of Canada, both CAASA and AIMA argued that crypto-backed assets should continue to be considered qualified investments.
CAASA believes crypto-backed mutual funds and ETFs “are subject to a myriad of safeguards required by the Canadian securities regulators, and thus concerns about volatility of the sector should be sufficiently addressed such that access to the asset class should not be removed for middle-class Canadians in their registered plans.”
Said AIMA: “Canada was an early adopter of exchange-traded funds backed by cryptoassets, and these are popular vehicles for Canadians to invest in this sector. There is no basis to treat these ETFs differently from other ETFs from a qualified investment perspective.”
