Managing potential conflicts of interest in investment funds

October 6, 2017

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The high level of information asymmetry between investment fund managers and their investors¹ can give rise to significant conflicts of interest which must be adequately managed. This article discusses the main conflicts of interest encountered in standard private equity, venture capital and hedge fund structures and how to mitigate or prevent them.

The idea that conflicts of interest must be adequately managed is not a novel one. However, since 2015, this concern has come to the forefront of regulatory reviews by the United States Securities and Exchange Commission (the “SEC”)² and has been an important focus in many investors’ operational due diligence in Canada and the U.S.³ The concerns arise mainly from inherent deficiencies in private equity, venture capital and hedge fund structures which entail an asymmetry of information between managers and investors and involve inherent conflicts of interest, including those resulting from the compensation of the managers in most of these funds as more fully described below.

Common conflict of interest situations

Fee structure

Compensation arrangements in investment funds can lead to numerous inherent conflicts of interest. While most private equity, venture capital and hedge funds provide for a carried interest or performance fee, it remains that a significant portion of managers’ compensation comes from management fees charged to the fund. Those management fees are intended to compensate the manager for internal overhead costs incurred in its day-to-day operations and are not meant to be a source of profit. However, when a manager plays an active role in managing the assets of the funds (as is often the case with private equity and venture capital funds), those management fees typically do not cover all the overhead incurred in connection with the active management of those assets (for example, as a result of the need to hire additional staff to monitor a portfolio company). In this type of situation, the manager will often seek alternative forms of compensation by charging additional fees or expenses to the investment funds or the portfolio companies in which the funds invest. These fees can be in the form of an asset management fee or a negotiation fee charged in connection with securing a portfolio investment or for the day-to-day management of a portfolio investment. It can also be in the form of compensation paid directly to the principals of the manager acting as officers or directors of such portfolio companies. Although these types of compensation are not problematic in and of themselves, they create an inherent conflict of interest since the additional fees are an expense assumed directly or indirectly by the fund and at the same time constitute a source of revenue for the manager or its principals. As a result, and since any such fees or expenses decrease the overall asset value of the funds, it is imperative that these fees and situations be adequately disclosed to investors (the disclosure must describe not only the type or nature of the fee but also how it will be calculatedand has been an important focus in many investors’ operational due diligence in Canada and the U.S.⁴). The timing of such disclosure is important; investors must be aware at the time of their commitment to the fund, that this type of fee could be charged to the fund or its portfolio investments by the manager or its affiliates or principals and has been an important focus in many investors’ operational due diligence in Canada and the U.S.⁵. Disclosure made during the life of the fund (for example, when the fee is actually paid) would not be considered sufficient or adequate.

An example of the foregoing is the situation that resulted in Blackstone Management Partners (“Blackstone”) being forced to pay a civil monetary penalty in 2015 for failing to disclose that it was entitled to accelerate the payment of future monitoring fees charged to the portfolio companies of its funds upon termination of the monitoring agreements it had signed with those portfolio companies⁶. Blackstone effectively terminated the monitoring agreements upon the private sale or initial public offering of the portfolio companies and then accelerated the payment of the future monitoring fees in accordance with the terms of the agreements. It must be highlighted that Blackstone had disclosed to investors at the time of their investment that it could receive monitoring fees from portfolio companies held by the funds it advised and disclosed the amount of the accelerated monitoring fees during the life of the funds. However, the SEC held that Blackstone had breached the U.S. Investment Advisers Act of 1940 by failing to disclose to the funds’ limited partners prior to their capital commitment that it could accelerate future monitoring fees once the monitoring agreements ended. This decision highlights the importance of not only disclosing the potential fees and expenses to be borne by investors and the funds, but also any circumstances which might lead to an increase or decrease in their amount.

The Blackstone case clearly shows the importance of having sufficiently detailed disclosure in the private placement or offering memorandum (“PPM”) (or other disclosure document) provided to investors when they subscribe to the fund⁷. Such disclosure should include, for example, a statement that the principals of a venture capital fund could receive shares or fees to sit on the board of directors of start-ups in which the fund invests. Hedge fund managers should carefully disclose any side arrangement with a portfolio or sub-portfolio adviser, broker-dealer⁸ or custodian (including, in particular, referral or soft dollar arrangements). Managers that use a master-feeder investment fund structure should ensure that the disclosure clearly indicates how the fees and expenses incurred for the benefit of different funds in the structure will be allocated among these funds. These are only a few examples of the types of disclosure that should be provided to investors as part of their pre-investment due diligence. In addition to such disclosure made at the time of subscription, managers should also ensure that the quarterly and annual reports provided to investors are transparent regarding the compensation compensation directly or indirectly received by the manager, its affiliates and principals. The Institutional Limited Partners Association (the “ILPA”) provides a template of the disclosure to be included in quarterly reports as part of its “Reporting Best Practices”⁹, which managers can use to ensure an adequate level of reporting. Investment funds subject to Regulation 81-106 respecting Investment Fund Continuous Disclosure¹⁰ (“NI 81-106”)¹¹ should also refer to the rules in that Regulation and in particular section 2.5 of Form 81-106F1, Contents of Annual and Interim Management Report of Fund Performance (MRFP), which states that any commission, spread or other fee paid by the investment fund to any related party¹² in connection with a portfolio transaction must be discussed under the heading “Related Party Transactions”. Regardless the level of disclosure provided in the PPM or in quarterly reporting, managers should also always ensure that the funds’ organizational documents explicitly authorize them to charge the fees (or other forms of compensation) that are being charged directly or indirectly to the funds. Furthermore, notwithstanding the existing disclosure requirements, the Canadian Securities Administrators also provide that registered managers should consider whether any particular benefits, compensation or remuneration practices are inconsistent with their obligations to clients¹³.

Transactions involving multiple funds managed by a single manager

Another typical conflict of interest is the transfer, as part of the liquidation process of a private equity or venture capital fund, of the interest the fund held in certain portfolio companies to a follow-on fund. Such transfers occur when the manager was unable to find a successful exit for a portfolio company but considers that the investment is performing sufficiently well to justify transferring it to a follow-on fund. These situations lead to an inherent conflict of interests since the fund manager will effectively be negotiating on both sides of the table with respect to the sale of such investment between the funds as it manages both the selling fund that controls the portfolio company and the follow-on fund purchasing the investment in the portfolio company. The manager can be incentivized to benefit the selling fund to maximize its carried interest or, depending on how the selling fund has been performing, might be tempted instead to use the portfolio company as an attractive seed asset for its follow-on fund. Since the manager is negotiating with itself, investors could be concerned that the transaction will not occur at a fair market value. This can adversely impact either the investors of the selling fund or those of the follow-on fund as some limited partners of a previous fund will often invest in the follow-on fund, but typically not all of them. The favored way to manage such conflicts of interest is by stating in the funds’ organizational documents that if a transaction occurs among funds managed by the fund manager, the manager will seek a formal valuation of the portfolio companies being transferred from an independent third party appraiser or will submit the pricing terms and conditions of the transaction for approval to the investors or to the fund’s advisory committee. The organizational documents could also provide that the investors or the fund’s advisory committee can be entitled to require an independent third party valuation if they so wish.

Funds with overlapping investment periods and investment policies create another situation in which a manager can be incentivized to favour one or more funds it manages over others. A manager finding itself in this situation will have to choose which funds will invest in a specific opportunity and in what proportion. Again, the manager could be tempted to favour certain funds over others depending on how they have been performing or according to their compensation structure. The rules set forth in the organizational documents of private equity and venture capital funds typically prohibit their managers from managing simultaneous competing¹⁴. funds in order to avoid such conflicts of interest, often with an exception allowing the manager to create a follow-on fund (with a similar or overlapping investment policy) once a certain percentage of the undrawn capital commitments of the previous fund have been invested (or reserved for follow-on investments and expenses). The best way for investors to protect themselves against the inherent conflict of interest arising from such a situation is to provide in the fund’s organizational documents or in side letters that the manager is required to cause both funds to make parallel investments during any such period based on the amount of each fund’s respective undrawn capital commitment. Contrary to private equity and venture capital fund managers, hedge fund managers typically are not prevented from managing competing funds and often simultaneously manage various funds with investment policies that overlap in certain situations (and may also manage other clients’ accounts under a discretionary mandate). These managers should adopt a clear policy to determine how they will allocate investment opportunities among their funds. The policy should be sufficiently detailed to allow an investor to determine whether the terms of the policy have been met with respect to a given investment. Preferably, the policy should not simply state that the manager will allocate trades in a fair and equitable manner in light of the investment objectives and strategies of the funds and other factors. The content of the policy should be adequately described to investors in the PPM given to them when they subscribe. The PPM should also clearly describe that such a conflict of interest could arise and how the manager will deal with it.

Conclusion

While the above describes some of the more commonly encountered conflicts of interests, the diversity of such situations should not be underestimated. For example, different “related-party” transactions

“Not all conflicts of interests are problematic and need to be addressed.”

can occur during the life of a fund. Both the manager and investors have an incentive to ensure that the organizational and disclosure documents of the funds clearly define what types of transactions they will consider to be “related-party transactions” and how these transactions will be handled and reviewed by the managers and/or the advisory committee¹⁵. Adequate and detailed disclosure will make clear to the manager which situations fall within the scope of “relatedparty transactions” and are thus subject to the conflict of interest rules established by the manager. In its reporting template, the ILPA proposes a definition of “related party”¹⁶ which can be used by managers and investors as a guideline to determine which situations should be covered. On the other hand, investors must understand that not all conflicts of interests are problematic and need to be addressed.

There is a certain level of misalignment between the manager’s and the investors’ respective interests in a fund¹⁷ and not all of it can be managed in a cost-efficient manner; meaning that it is preferable for investors to accept that managerial actions may conflict with their best interests rather than seeking a perfect alignment of the manager’s interests with their own or trying to give to the advisory committee a power of oversight over any type of misalignment. Hence, all parties involved should take a balanced approach in negotiating the conflict of interest provisions of a fund’s limited partnership agreement or a side letter between the manager and an investor and pinpoint specific situations in which the advisory committee should be consulted or approve a related-party transaction.

See SAHLMAN, William A. (1990). The Structure and Governance of Venture-Capital Organizations. Journal of Financial Economics, Vol 27, pp. 473-521 regarding the issue of information asymmetry in investment funds.
Securities and Exchange Commission speech – Julie M. Riewe, Co-Chief, Asset Management Unit, Division of Enforcement, “Conflicts, conflicts everywhere”, February 26, 2015.
This article cites certain regulations and policy statements of the Canadian Securities Administrators(« CSA ») and certain cases litigated by the SEC in the United States. Although many Canadian private equity or venture capital funds and their managers are not subject to regulatory oversight by the CSA and are therefore not governed by these regulations or case law, the guidelines developed by the CSA and the extensive jurisprudence developed by the SEC could potentially support a lawsuit brought by investors in Canada against unregistered managers for breach of fiduciary duty based on the Civil Code of Québec, , in Québec, the organizational documents of the funds, or the securities legislation of certain provinces providing for a statutory right of rescission or damages for misrepresentations in PPMs. The standards discussed in this article should therefore be relevant and should also be used as guidance for Canadian managers not registered with a Canadian securities regulator.
In the case of a fee based on an amount of assets under management, for example, the disclosure should clarify how those assets are valuated
See Section 13.4 of the Policy Statement to Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (“Policy Statement 31-103”) which states: “Registered firms and their representatives should disclose conflicts of interest to their clients before or at the time they recommend the transaction or provide the service that gives rise to the conflict.”
SEC, Litigation, Release No. 4219, 2015.
Policy Statement 31-103 states that the disclosure must “be prominent, specific, clear and meaningful to the client, and explain the conflict of interest and how it could affect the service the client is being offered”.
See in particular the requirements set forth in Regulation 23-102 respecting Use of Client Brokerage Commissions and the related policy statement. Reminder: A registered manager has a “best execution” obligation, i.e. it must find the most advantageous trading execution terms reasonably available under the circumstances when selecting a broker-dealer for trades effected on behalf of the fund, as prescribed by Regulation 23-101 respecting Trading Rules.
ILPA Best Pracices. See more particularly footnotes 4 and 5 of the sample report attached to the Quarterly Reporting Standards, Version 1.1 of the ILPA (originally released in October 2011 and revised in September 2016).
Regulation 81-106 respecting Investment Fund Continuous Disclosure in Québec.
NI 81-106 applies to investment funds (as defined in the Securities Act (Québec)) that are reporting issuers. For more information on the definition of “investment funds” in the Securities Act (Québec), see our article entitled “Registration Requirements of Venture Capital and Private Equity Fund Managers in Canada: A Favourable Regulatory Framework” published in May 2014 in the Lavery Capital newsletter.
NI 81-106 refers to the Canadian Institute of Chartered Accountants Handbook with respect to the notion of “related party”.
See Section 13.4 of Policy Statement 31-103 under the “Compensation Practices” section. See also the “Compensation-related conflicts of interest” section in the Investment Industry Regulatory Organization of Canada (IIROC) Notice 12-0108.
In this article, the term “competing funds” simply refers to funds that are authorized to invest in the same opportunities and can therefore be considered to be competing with each other with respect to certain types of investment opportunities.
The requirement to submit a related party transaction to the advisory committee is typically found in investment funds raising capital from institutional investors, not in retail-type funds
See the “Related Party Definition” tab of the ILPA Reporting Template (Version 1.1 published in January 2016).
For example, the carried interest compensation structure typically found in many funds can give the manager an incentive to make riskier or more speculative investments than what would normally be in the best interests of the fund’s investors in order to generate greater compensation.

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Bill 30 – legislative changes concerning insurance

On June 7, 2023, the Minister of Finance of Quebec tabled and presented Bill 30 before the National Assembly, an omnibus bill entitled An Act to amend various provisions mainly with respect to the financial sector (hereinafter the “Bill”). The Bill includes certain amendments to the provisions of the Insurers Act (“IA”) and the Act respecting the distribution of financial products and services (“DA”). Although the Bill may evolve through the stages of the legislative process as Parliament resumes, here is an overview of the main amendments that are expected to have implications for the insurance industry. Proposed legislative changes As indicated, the legislative changes will affect both the IA and the DA. Below are the main amendments that will be made to each of these Acts should the Bill be assented to: Insurers Act The Bill proposes that associations constituted under the Civil Code of Québec be allowed to apply for authorization to carry on insurer activities among their members as a reciprocal union,1 and it sets out several provisions relating to the organization and governance of such an entity. The Bill clarifies the meaning of a reciprocal union, defining it as a group of parties that, under the terms of the contract constituting the union, join together to pool sums enabling them to be reciprocally bound by damage insurance contracts.2 The restriction preventing reciprocal unions from accepting a risk that would require them to pay, after reinsurance, an amount that exceeds 10% of the net value of their assets will also be lifted and replaced with a more general obligation to reserve sufficient sums to carry on their insurer activities.3 Life and health insurers will become subject to a new obligation to take the necessary means (which may be specified by regulation) to obtain certain information in order to determine whether an amount they have committed to pay under a life insurance contract is payable.4 As such, life and health insurers that know that a sum is payable will be bound, for a period of three years from the date the sum is payable, to take the necessary means (which may be specified by regulation) to inform beneficiaries that a sum is payable and provide them with support in making their claim. Act respecting the distribution of financial products and services Under the Bill, a person employed by a firm, an independent partnership or a claims adjuster will be allowed to carry out activities under the supervision of a claims adjuster in certain situations.5 The restriction preventing claims adjusters from acting in a sector other than claims adjustment will also be lifted.6 Section 424 of the ARDFPS will be amended to remove vehicle replacement insurance from products that can be distributed without a representative, which will particularly affect vehicle dealers.7 The directors and officers of a regulated entity will become solidarily liable with that entity for the payment of a monetary administrative penalty, unless they establish that they exercised due care and diligence. It will be possible to secure the payment of such monetary administrative penalty by a legal hypothec on the debtor’s movable and immovable property.8 What to expect It is important to note that the Bill is in its first stage of the legislative process and may be subject to change. Anyone wishing to comment on it may do so online on the National Assembly website. We will continue to follow the progress of this Bill. Do not hesitate to contact a member of Lavery’s insurance team if you have questions on the subject matter of this article. Section 1 of the Bill, amending section 6 of the IA Section 2 of the Bill, amending section 7 of the IA Section 21 of the Bill, amending section 188 of the IA Section 74 of the Bill, introducing section 72.1 in the IA Section 90 of the Bill, amending section 10 of the ARDFPS Section 92 of the Bill, striking out section 45 of the ARDFPS Sections 105 and 106 of the Bill, amending section 424 of the ARDFPS Section 71 of the Bill, introducing sections 115.2.1 and 115.2.2 in the ARDFPS

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January 19, 2023

Clarifications regarding insurance products offered on the Internet

In early 2022, the Autorité des marchés financiers (the “AMF”) conducted specific consultations on financial products offered on the Internet. Further to these consultations, the AMF published explanations on the Regulation respecting Alternative Distribution Methods (the “RADM”) in late December 2022.1 Here are some key points that the AMF has clarified: Definitions The AMF has elaborated on the meaning of certain terms and expressions included in the RADM, thereby clarifying the obligations incumbent on firms as concerns insurance products offered on the Internet: “Providing” or “presenting” information: This implies delivering, giving or handing over information to a client without them having to take any action. A client should not have to search for the information to find it. As such, making the information accessible or referring to a policy is not enough.2 “Making visible at all times”: The information should be visible to the client at all times, regardless of the page the client is on. A representative’s contact information is the only information that must be visible on the digital transactional space at all times. Websites that are accessible to people who are blind or use a voice assistant must also have means to present this information.3 “Making a representative available”: The AMF only requires that representatives be available during regular business hours.4 “Making information readily accessible”: A client must have the option of taking cognizance of the information and be able to easily find it. The information must be accessible in one or two clicks. Including a hyperlink or an icon, for example, are ways of making information accessible.5 Under this obligation, a hyperlink may be used to redirect a client to a website or document external to the digital space.6 External documents that are accessible through hyperlinks, such as sample insurance policies, must be up to date. Summary of the complaint processing policy The AMF specifies that the summary of the complaint processing policy referred to in the RADM must be that of the firm running the transactional website, not of a third party. Thus, a property and casualty insurance brokerage cannot refer to an insurer’s policy summary.7 Identification of the firm A firm may display partner logos on its digital space only if doing so does not cause confusion. A client must know which firm runs the space and must be able to distinguish it from partners that do not offer the products or services.8 Product coverage, exclusions and limitations Further to its supervisory activities, the AMF has confirmed that product coverage appears to be well presented in digital spaces. However, exclusions and sometimes limitations are not as well presented. Given that exclusions and limitations constitute information that is necessary for a client to make an informed decision, the AMF urges firms to pay attention to these and to select them based on a proper analysis.9 Suspension of transactions The AMF has clarified how to apply the criteria under section 14 of the RADM, more specifically paragraph 3 of this section, which provides that a firm must suspend a transaction initiated through a digital space when no representative can immediately intervene with a client who asks to deal with a representative and there is a risk that the client will not be able to make an informed decision. The AMF specifies that it is up to the firm to assess and manage its risk. In order to determine whether such a risk exists, the AMF has proposed the following solutions: The firm may caution the client as follows: “Do you wish to continue the process even though no representative is available at this time?” The firm could post its representatives’ availability. If a client decides to enter into a contract through a digital space, the firm could ensure that a representative contacts them within 24 hours. A transaction does not have to be suspended immediately; it can be done at the end of the transaction, before the contract is concluded. Moreover, stopping or temporarily suspending a transaction may also be necessary if a contradiction or irregularity in the information the client provides could lead to an error.10 The digital space must be set up to detect such a contradiction automatically. The AMF considers it preferable to discontinue a transaction if contradictions are detected. It can also be temporarily suspended while the client is informed of the consequences of making false statements and the importance of knowing their entire situation, for example, and to allow them to make corrections, if necessary.11 To better understand the obligations of the RADM, we invite you to consult our bulletin Bill 141: Checklist on insurance products offered via the internet and distribution without a representative. These are only available in French at this time; Regulation respecting Alternative Distribution Methods, CQLR, c. D-9.2, r. 16.1. Autorité des marchés financiers, Explications à l’égard du règlement – Le RMAD expliqué article par article (hereinafter the “Explanations”), ss. 7, 9, 11, 12 and 12.2. The terms “explaining information” or “providing information” under section 12.1 of the RADM should be interpreted in the same manner. Explanations, s. 8. Explanations, s. 8. Explanations, ss. 8 and 10. Explanations, ss. 8 and 10. A representative’s contact information does not have to appear on external documents and websites at all times. It is important to note that under section 9 of the RADM, a document that is to be “provided” or “presented” to a client cannot be located on an external website. Explanations, s. 8. Explanations, s. 8, para. 1. Explanations, s. 9. For example, a client declaring they have no children yet selecting insurance for their children constitutes a contradiction. Explanations, s. 14.

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July 7, 2022

Amendments to the Charter of the French Language: Impacts on the Insurance Sector

Bill 96 – An Act respecting French, the official and common language of Québec (the “Act”) - was adopted on May 12, 2022 and assented to on June 1, 2022, its effective date. Certain provisions are already in force; for other provisions, a transitional period ranging from several months to three years will apply. This document provides an overview of the modifications included in the reform of the Charter of the French Language (the “Charter”) that will have an impact on various aspects relevant to insurance sector stakeholders doing business in Québec. Forming the centrepiece of the announced changes, the reform of the Charter includes strengthened oversight mechanisms governing the use of French as the language of commerce and business, as well as linguistic rights in the areas of employment and communications with agents of the State. Overseeing the language of commerce and business The reform of Section 55 of the Charter stipulates that contracts of adhesion and related documents must be drawn up in French. However, effective June 1, 2023, a French-language version of these contracts and documents must be provided to participants First Alinea of this amended section reads as follows: 55. Contracts pre-determined by one party and the related documents, must be drawn up in French. The parties to such a contract may be bound only by its version in a language other than French if, after its French version has been remitted to the adhering party, such is their express wish. The documents related to the contract may then be drawn up exclusively in that other language.1 Therefore, contractual clauses in which the parties simply indicate that they agree to be bound by a contract drawn up in a language other than French are no longer sufficient. The Civil Code of Québec stipulates that “A contract of adhesion is a contract in which the essential stipulations were imposed or drawn up by one of the parties, on his behalf or upon his instructions, and were not negotiable.”2 To qualify a contract, the importance of the negotiated terms and conditions and their connection with the contract must be analyzed. It is generally recognized that if the essential stipulations are not negotiable, the contract is a contract of adhesion, even though some less important terms and conditions may have been negotiated by the parties. This amendment codifies the interpretation adopted by the Office québecois de la langue française (“OQLF”) and the courts,3 particularly given that negotiated contracts were not covered by this provision. To remove any doubt concerning this interpretation, Bill 96 was amended so as not to extend the scope of this requirement to include contracts containing “printed standard clauses”. The insurance contract Since their essential stipulations are typically drawn up by the insurer, insurance contracts and their endorsements are contracts of adhesion, as a general rule. Therefore, the French-language version of all related documents — notices, letters, insurance product summaries — must be provided to clients before they can decide whether they will be bound by a version drawn up in another language. During the parliamentary debates, Minister Jolin-Barette commented that Section 55 of the Charter only referred to consumers and that contracts between two companies could be drawn up in the language of their choice if that was the express wish of both parties. The term “consumer”, however, is not defined in the Charter. Ambiguity remains as to whether the Minister’s comment only referred to contracts containing standard clauses or whether contracts of adhesion were included. We will have to wait for the publication of the interpretation bulletins and the annotated edition of the act to determine whether Section 55 of the Charter applies to commercial insurance policies. In the meantime, we are of the opinion that if Québec lawmakers had wanted to exclude commercial contracts of adhesion, they would have expressly done so by means of an amendment. Insurance contracts in effect before June 1, 2023 will not have to be translated, nor will insurance contracts renewed without modifications since under those circumstances, the contract would not be regarded as a new contract.4 However, if an existing insurance contract is renewed with significant modifications, it will be regarded as a new contract and the French-language version thereof must be provided to clients so they may validly express their wish to be bound by a contract drawn up in a language other than French. Given that in most cases, insurance contracts are sent out to policyholders by regular mail or email, effective June 1, 2023, insurers, agents or brokers, as applicable, will have to send both the French-language and English-language versions of the contract in the same mailing or simply send the French-language version thereof. It is important to note that the Act provides for an exception to the requirement to provide the French-language version if: The insurance policy has no equivalent in French in Québec; and The insurance policy is originates from outside Québec or is not widely available in Québec.5 [unofficial translation] In all likelihood, this exception will only apply to highly specialized insurance products and will be interpreted restrictively given the Act’s primary objective. Unlike insurance contracts and related documents, invoices, receipts, discharge notices and other similar documents may be sent out in English if the French-language version remains available on terms that are at least as favourable.6 Services and marketing in French The Act introduces the Charter’s new Section 50.2, which states that businesses must respect consumers’ fundamental linguistic right to be informed and served in French. The same section reiterates this requirement with respect to “a public other than consumers” to whom are offered goods and services and who must henceforth be informed and served in French by businesses. Unlike consumers, however, clients who are businesses do not enjoy a fundamental linguistic right protected by the Charter. As regards marketing, the addition of the words “regardless of the medium used” to Section 52 of the Charter confirms that marketing documents in “hard copy” format must be in French, as must websites. If a version is available to the public in a language other than French, the French-language version must be available on terms that are at least as favourable. This provision took effect on June 1, 2022. Chat-type platforms or those facilitating direct communications with the insurer should make it possible for members of the public to communicate with the insurer’s representatives in French at all times. Communications with insurance agents and brokers Effective June 1, 2022, insurers are required to communicate in French with insurance agents and brokers who express the desire to do so.7 In addition, all information documents sent to insurance agents and brokers regarding underwriting or claims must be in French if they so wish. As regards contractual agreements between insurers, insurance agents and brokers, the need to provide a French-language version depends on the nature of the contract, i.e. whether it can be qualified as a contract of adhesion. French in the workplace Effective June 1, 2022, all companies doing business in Québec must comply with the following requirements in the area of employment rights: Respect employees’ right to work in French8; Use French in all written communications sent to employees; Ensure that all offers of employment, promotion or transfer; individual employment contracts; employment application forms; and documents concerning employment conditions and training sent to employees are drawn up in French;9 Take all reasonable means to avoid requiring employees to have knowledge or a specific level of knowledge of a language other than French for employees to obtain employment or to maintain their position, including in particular: Assess the actual needs associated with the duties to be performed; Make sure that the language knowledge already required from other staff members was insufficient for the performance of those duties; Restrict as much as possible the number of positions involving duties whose performance requires knowledge of or a specific level of acknowledge of a language other than French.10 It should be noted that individuals whose employment contracts are currently drawn up in English have until June 1, 2023, to ask their employer to translate their contract. Effective June 1, 2025, businesses with 25 employees or more in Québec must meet additional francization requirements for their Québec employees to obtain a francization certificate, including: Registering with the OQLF; Submitting an analysis of the status of the French language within the business; Putting in place a francization program within three months following an OQLF request to that effect. The above requirements were already in effect for businesses with more than 50 employees in Québec. French as the language of the civil administration The Act includes various modifications with respect to French as the language of the civil administration. The Québec government will be required to make exemplary and exclusive use of French, with certain exceptions. Effective June 1, 2023, all agents of the State and provincial government bodies will be required to communicate in French with all persons, including business representatives. All documents exchanged with the civil authorities, as well as all contracts and permits, must be drawn up in French. Insurance sector stakeholders outside Québec should expect to receive more communications in French from the Autorité des marchés financiers (“AMF”) given that the AMF is a body of the “civil administration”. Penalties It should be noted that new powers will be granted to the OQLF enabling it to conduct investigations and impose administrative and disciplinary penalties. As regards infractions of the Charter’s provisions, the Act provides for fines ranging from $3,000 to $30,000 for businesses and from $700 to $7,000 for individuals. These fines are doubled for a second offence and tripled for further offences. In addition, if an infraction continues for more than one day, each day constitutes a separate infraction. If an infraction is committed by a corporate director or officer, the Act provides for fines ranging from $1,400 to $14,000. Questions of interpretation Various provisions have raised questions of interpretation that are still difficult to resolve at the time of writing. Interpretation bulletins and an annotated edition of the act will be published by the provincial government with a view to guiding businesses in the application of the Act; they will also help to clarify certain provisions that remain ambiguous for the time being. For further information on changes concerning trademarks, please consult a recent publication by our colleagues specializing in intellectual property. Sec. 55, Para. 1 of the Charter. Civil Code of Québec, CQLR ch. CCQ-1991, Sec. 1379, Para. 1. Westboro Mortgage Investment vs. 9080-9013 Québec inc., 2018 Superior Court of Québec 1. Leave to appeal dismissed 2019 Court of Appeal of Québec 1599. Didier LLUELLES, Droit des assurances terrestres, 6th ed., Montréal, Éditions Thémis, 2017, Para. 186. Sec. 21.5 and Sec. 55 of the Charter. Sec. 57 of the Charter. Sec. 50.2 of the Charter. Sec. 5 and Sec. 50.2 of the Charter. Sec. 41 of the Charter. Sec. 46 of the Charter.

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