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The OSC recently issued a cease-trade order for all Emerge ETFs 'due to a failure to file audited annual financial statements and an annual management report of fund performance' by the March 31 deadline.Klaus Schneider/iStockPhoto / Getty Images

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The unprecedented trading halt of Emerge Canada Inc.’s exchange-traded funds (ETFs) has raised investor concerns about the often-touted liquidity of the popular investment product and the potential risk of buying them from smaller, niche providers.

Advisers and experts say the regulatory decision underscores the importance of staying on top of disclosures and having a diversified mix in a portfolio of not only ETFs but also providers.

The Ontario Securities Commission (OSC) recently issued a cease-trade order (CTO) for all Emerge ETFs “due to a failure to file audited annual financial statements and an annual management report of fund performance” by the March 31 deadline. It’s the first time the OSC has taken this type of action against a fund family of ETFs.

The OSC has said the CTO remains in place until “the company or individual corrects the deficiencies or meets certain conditions.”

An OSC spokesperson said in an e-mail to Globe Advisor last week that the organization “will not be commenting beyond the CTO at this time.”

Toronto-based Emerge, which manages about $118-million in assets, said BDO Canada LLP had resigned as the auditor of its funds late last year and it has been working on finding a new one.

The CTO comes at a time when the ETF industry is expanding rapidly, driven in part by a growing number of thematic ETFs like those Emerge offers. The provider, which operates in Toronto and New York, has six Emerge ARK ETFs, subadvised by Cathie Wood’s ARK Investment Management LLC, and launched five EMPWR ETFS last year, all of which are managed by women and have an environmental, social and governance (ESG) focus.

More investor guidance needed

Some industry experts are calling on the OSC to provide more information on how the Emerge CTO affects investors other than their assets being left in limbo.

“I don’t see [the OSC] providing much in the way of guidance or comfort. … Surely the OSC has more insights into how this will or should play out,” says Yves Rebetez, who doesn’t hold any Emerge ETFs and is a partner at Credo Consulting Inc., a financial services consulting company in Toronto.

“There’s a lot of uncertainty and I don’t think it’s good for the Canadian marketplace.”

Mr. Rebetez also says the CTO doesn’t bode well for the future of Emerge when it’s lifted, particularly given its small asset base.

“A run to the exit is looking increasingly likely and possibly warranted,” he says. “If I was a unitholder and saw all of my money tied up in this situation for an unspecified period of time … I would not be very pleased.”

And while it’s a company-specific issue, Mr. Rebetez says the Emerge CTO could cast a pall across the industry, in particular over smaller providers with fewer assets and resources.

“The fact that ETF holders find themselves in an insufficiently clear limbo is not a positive … and there’s a possibility smaller players could suffer from the aftermath of this situation,” he says.

Pat Dunwoody, executive director of the Canadian ETF Association, says her organization is monitoring the situation, which she says is between the OSC and Emerge, and wants investors to understand CTOs aren’t specific to the ETF industry.

“We want to make sure people realize that this could happen to any investment fund or any product,” she says. “It’s a mechanism that the regulators use, it’s not an ETF-specific issue.”

She also notes the Emerge CTO is a company-specific issue, not an investment issue.

“It has nothing to do with the investments that Emerge made or the portfolios,” she says. “We want to make sure that distinction is there. So that the smaller ETF issuers don’t get painted with the same brush … because we don’t know what the issues are.”

Robert Sneddon, founder, president and chief portfolio manager at CastleMoore Inc. in Mississauga, says his firm is considering creating its own ETF either on its own or with a large provider, and the Emerge CTO isn’t a deterrent but is informative.

“It will be cautionary for us,” he says, adding that it underscores the risk of not meeting regulatory requirements.

Mr. Sneddon, who doesn’t hold Emerge funds, says it’s also a reminder that the more niche your product is when launched, the harder it will be to convince investors to buy and stay invested if issues arise.

‘Wake-up call’ for providers

Mary Hagerman, senior portfolio manager and investment adviser with The Mary Hagerman Group at Raymond James Ltd. in Montreal, doesn’t believe the Emerge CTO will lead to widespread investor concern across the broader ETF industry.

She also finds it reassuring that regulators stepped in to ensure fund providers follow the rules and says it’s a “wake-up call” for ETF providers, especially smaller ones, to follow the rules regardless of their limited resources and asset size.

“Let’s hope that this is a one-off event and that the industry will avoid anything like this happening down the road,” says Ms. Hagerman, who invests primarily in ETFs, but doesn’t own any Emerge funds.

She says the situation should also reinforce the need for advisers and investors to look more closely at what they’re buying and be comfortable with the various risks, including regulatory decisions.

Daniel Straus, director of ETFs and financial products research at National Bank Financial Inc. in Toronto, says while a CTO on a family of funds is unprecedented, it’s a reminder for investors to diversify not only their holdings but also their ETF providers.

“We often tell people that all forms of diversification are great. But another form of perhaps underlooked diversification is provider diversification,” he says.

Given the proliferation of ETFs in recent years, Mr. Straus says it’s easier than ever for investors to find similar funds across different providers, and with near-equivalent fees.

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