Investors trapped in Canadian ETFs after trading ban

Investors in a suite of Canadian exchange traded funds face being trapped for an extended period after regulators imposed an “indefinite” trading ban on the funds.

Both primary and secondary market trading has been suspended in 11 ETFs after their sponsor, Emerge Canada, failed to file audited financial statements by a March 31 deadline.

The “cease trade order” imposed by the Ontario Securities Commission means that both the creation and redemption of shares in the funds has been halted, and that existing investors cannot sell their units to other investors in the secondary market.

“The CTO means that while we still actively manage our strategies and performance continues, liquidity cannot be achieved as there cannot be any creations/buys of units or redemptions/sales of units,” said Lisa Langley, chief executive of Emerge Canada, in a statement.

Analysts said the trading ban was unprecedented for an ETF anywhere in the world.

“I have heard of similar cease trading orders being issued for individual companies, but a CTO for an ETF provider is a first for me,” said Bryan Armour, director of passive strategies research, North America, at Morningstar.

Deborah Fuhr, co-founder of consultancy ETFGI, said she was unaware of any previous cases of ETF trading being suspended because of a failure to file accounts.

However, ETFs have been suspended or delisted for a variety of other reasons, such as failing to meet minimum criteria for the size of assets or number of investors, or because trading in some or all of the underlying securities has been halted, she said.

This happened last year when trading in Russian equity ETFs was suspended after the invasion of Ukraine, said Todd Rosenbluth, head of research at consultancy VettaFi.

The Ontario Securities Commission told the FT it had never “previously taken similar action against a family of ETFs”. It said the CTO was issued for an “indefinite period of time” and that “when a CTO is issued with no expiry date, it will remain in effect until . . . when and if the company or individual corrects the deficiencies or meets certain conditions”. 

Emerge Canada’s ETFs have combined assets of C$109mn ($82mn).

The Toronto-based company was the first Canadian distributor of Cathie Wood’s Ark Invest ETF range, which accounts for six of its ETFs. The other five are in its EMPWR range, a roster of “elite, emerging women portfolio managers . . . with a special focus on promoting sustainability, diversity and equality within the industry”.

Emerge Canada bills itself as “Canada’s first and only woman-owned investment fund firm”.

It announced in a securities filing in December that BDO Canada LLP had resigned as auditor of its ETFs “on its own initiative” on November 3.

With BDO yet to be replaced, the ETFs missed the deadline to file audited annual financial statements, management’s reports of fund performance and associated filings for 2022 by the prescribed deadline of March 31.

Langley said in a statement to the FT that “the decision to end the relationship [with BDO Canada] was mutual. Since then, we have been engaging in discussions with other potential auditing partners to secure a new auditor.

“Due to our shift to a new auditor, our 2022 financial statements missed the filing deadline, and we are working diligently to complete the requirements provided by the OSC,” she added.

BDO Canada declined to comment.

Langley added that “we are unable to provide any assurances on the timing of lifting of the CTO or whether the CTO will be lifted at all”.

She reiterated that the ETFs “still exist and they have value. All assets of the Emerge ETFs are held in custody by our custodian, RBC Investor Services.”

“This is an unusual sequence of events,” said Armour. “The company’s former auditor resigned in November 2022, so it raises the question of why they haven’t replaced the auditor in the five months since.”

Armour feared the trading suspension could be both long running and potentially terminal for at least some of the affected funds.

“The order requires Emerge to secure a new auditor and file audited annual financial statements before trading is allowed to resume. I would not expect that process to happen overnight, so investors in Emerge ETFs may be held captive for a while longer,” he said.

“I would anticipate many will consider selling their shares once the CTO is lifted.”

Fuhr did not, though, believe that Emerge Canada’s travails should deter people from investing in other small providers, which account for the bulk of the 657 ETF issuers currently active globally.

“Given it hasn’t happened before and there are a lot of small ETF issuers out there, I wouldn’t want to raise a flag about having these issues. It might be a bit alarmist,” she said.

Armour agreed. “I would not conflate this issue with small ETF providers more broadly. This seems to be an Emerge Canada-specific problem that I don’t expect to occur very often,” he said.