Canada's Fund Industry Clashes with Regulators Over New Liquidity Rules

TORONTO, ON – March 27, 2026 – A significant battle is brewing between Canada's powerful investment industry and its top regulators over a sweeping new framework designed to protect investors from liquidity crises. The Securities and Investment Management Association (SIMA), which represents firms overseeing approximately $4 trillion in assets, has formally pushed back against proposed rules from the Canadian Securities Administrators (CSA), arguing they are overly burdensome and costly.

While supporting the CSA's goal of strengthening market stability, SIMA is urging regulators to reconsider key aspects of the proposal. The association claims the new rules, in their current form, could create significant operational hurdles and impose excessive costs on the industry.

"We commend the CSA's commitment to safeguarding the interests of investors and minimizing the risk of liquidity crises," said Andy Mitchell, President and CEO of SIMA, in a statement. "However, we urge the CSA to review practical considerations to establish an LRM framework that reduces regulatory burden and promotes operational efficiency."

The response sets the stage for a critical debate that will shape the future of investment fund regulation in Canada, pitting the drive for enhanced investor protection against the industry's concerns about competitiveness and operational feasibility.

The Regulatory Push for Stronger Safeguards

The CSA's proposed Liquidity Risk Management (LRM) framework, unveiled in late 2025, aims to transform what was previously guidance into legally enforceable rules. This initiative is part of a broader global effort to bolster the financial system in the wake of market stresses that have exposed vulnerabilities in open-ended funds.

Regulators are seeking to align Canada with international standards set by bodies like the International Organization of Securities Commissions (IOSCO). A 2022 IOSCO review found Canada's framework only "broadly consistent" with global best practices, a rating the CSA is keen to upgrade to "fully consistent."

The proposed rules would mandate that all investment funds—including, for the first time, many private and non-reporting funds—establish a comprehensive LRM framework. Key requirements include:

• Mandatory Stress Testing: Funds would be required to conduct stress tests on their portfolio liquidity at least quarterly, with more frequent testing during volatile market periods.
• Dedicated Oversight: Firms would need to appoint a dedicated LRM supervisor or committee, with specific expertise and reporting lines to the Chief Compliance Officer.
• Lifecycle Integration: Liquidity risk would have to be managed and considered at every stage of a fund's life, from its initial design to its ongoing operation.

Investor advocacy groups have lauded the CSA's direction. FAIR Canada, a prominent investor rights organization, has expressed full support for the move, emphasizing that enforceable standards are critical for investor protection, especially as retail investors gain more access to complex and long-term assets.

Industry Sounds the Alarm on Cost and Complexity

While regulators see the proposals as necessary safeguards, the investment industry sees a mountain of new costs and operational headaches. SIMA's submission highlights several key recommendations aimed at tempering the CSA's approach.

The association is demanding a minimum 12-month implementation period, arguing that firms need significant time to design, build, and test the complex systems required for compliance. It also calls for the elimination of proposed pre-trade liquidity assessments, which it argues are redundant given existing limits on illiquid assets.

Central to the industry's objection is the financial burden. While the CSA estimates initial industry-wide costs at a modest $5.5 million, industry insiders and broader economic data suggest the true impact could be far greater. Research from the C.D. Howe Institute has repeatedly flagged Canada's growing regulatory burden as a drag on competitiveness. One study suggests that for every dollar a regulator spends on oversight, the private sector incurs $20 in compliance costs. For smaller firms, which the CSA's own analysis admits will face proportionally higher costs, this burden could be a significant barrier to growth.

Other industry groups have been even more forceful in their criticism. The Alternative Investment Management Association (AIMA) has labeled the proposals "uncalled for and overly prescriptive," warning they threaten the competitiveness of Canada's institutional asset management industry by going "far further than the international standards require."

A Contentious Debate: Who Should Be Covered?

Perhaps the most contentious point in SIMA's response is its call to exclude Exchange Traded Funds (ETFs) and non-reporting issuers (private funds) from the framework. This recommendation directly challenges the CSA's core principle that all funds are susceptible to liquidity risk and should be regulated accordingly.

Excluding these funds could create a two-tiered regulatory system, raising questions about market fairness and investor protection. While private funds are typically sold to more sophisticated institutional or accredited investors, they are not immune to liquidity crunches that can have systemic consequences. Regulators are increasingly focused on the private markets as a potential source of hidden risk.

The proposed exclusion of ETFs is particularly striking. ETFs now represent a significant and growing portion of the Canadian investment landscape. While they are often perceived as highly liquid due to their exchange-listed nature, experts warn this liquidity can be "illusory" during market-wide stress. Recent regulatory actions, such as OSFI's move to impose stricter rules on high-interest savings account (HISA) ETFs, demonstrate a growing recognition of the unique liquidity risks these products can pose.

Excluding a major segment of the market from a comprehensive LRM framework could leave a significant gap in Canada's financial safety net, a risk that regulators are unlikely to ignore.

Canada's Global Balancing Act

The debate unfolding in Toronto is not happening in a vacuum. Regulators worldwide are tightening liquidity rules. The CSA's proposals largely mirror frameworks already in place or being enhanced in other major financial centers.

The United States' SEC Rule 22e-4, for instance, has required open-end funds, including ETFs, to implement robust LRM programs since 2016. These programs include mandatory liquidity classification of assets and stress testing. Similarly, European and UK regulators have been moving aggressively to ensure fund managers have a full suite of liquidity management tools and processes at their disposal.

From this international perspective, the CSA's actions appear to be an attempt to catch up and ensure Canada's regulatory regime remains credible on the world stage. A decision to grant the broad exclusions requested by SIMA would represent a significant divergence from this global trend.

As the comment period closes, the CSA now faces the difficult task of balancing these competing pressures. It must weigh the domestic industry's valid concerns about cost and competitiveness against the imperative to protect investors and maintain a financial system that is aligned with strengthening global standards.