The Canadian securities administrators (CSA) have granted exemptions to permit all dealers to deliver the Fund Facts documents to investors in the mutual funds managed by 48 specified fund managers, in place of the simplified prospectus. These exemptions were anticipated by the CSA in the February 2011 Staff Notice Early Use of the Fund Facts to Satisfy Prospectus Delivery Requirements. Please see BLG's Investment Management Alert Canadian Regulators Will Permit Early Use of Fund Facts March 2011 [available here]. In parallel with finalizing the exemptions, the CSA also published for comment proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and its companion policy, as well as proposed amendments to the Fund Facts form requirements and certain consequential amendments. This package of proposed amendments constitutes the CSA's promised 'Stage 2' implementation of the overall point of sale disclosure framework.
EARLY USE OF FUND FACTS EXEMPTIONS
The novel and heavily negotiated exemptions permitting early use of Fund Facts, were granted by the Ontario Securities Commission (OSC) and the Manitoba Securities Commission (MSC) and are expected to be granted by the Autorité des marchés financiers (AMF) in their capacities as principal regulators. These exemptions have a number of important conditions, but essentially permit any distributor of the applicable mutual funds to deliver only the relevant Fund Facts documents to an investor in full satisfaction of the post-trade prospectus delivery obligation set out in securities legislation.
Key conditions to the relief include:
- Dealers can only rely on the exemption in respect of the
securities of mutual funds managed by the specific fund managers
named in the exemptions. The CSA were reluctant to grant any relief
that could be viewed as a "blanket" exemption.
Conversely, however, the exemptions clearly permit any dealer trading in these securities to rely on this exemption. If this relief is important for other mutual fund managers, then those managers will need to seek specific exemptions that will apply to dealers trading in securities of their mutual funds.
- Dealers can only rely on the exemptions where the prospectus for the applicable mutual fund has been specifically amended to incorporate the Fund Facts by reference into the prospectus. This should become less and less of a concern as the 2011 renewal season proceeds.
- Investors must receive notice that the rights that typically relate to the delivery of a prospectus apply to the delivery of the Fund Facts.
- Restrictions on binding Fund Facts with other Fund Facts for the purposes of delivery.
- Dealers must receive certain written information from the applicable fund manager and must acknowledge and agree to certain specified matters, including:
- Agreeing to give investors a right equivalent to the legislated rights of withdrawal,
- Acknowledging that if the Fund Facts is not delivered then a prospectus must be delivered and the legislated rights of rescission will continue to apply, and
- Confirming it has policies and procedures in place to comply with the decision.
- To the extent a dealer does not honour a valid right of withdrawal after delivery of the Fund Facts, the fund manager will cause the relevant fund to honour the right.
- Recordkeeping requirements on both the dealers and the fund managers.
Significantly, the CSA have also required that specific additional disclosure be included in a Fund Facts about fees payable directly by investors to the fund manager, and any requirement to participate in a fee-based arrangement with dealers to purchase the securities. This additional disclosure will affect Fund Facts documents primarily for institutional or fee-based series. Unless this disclosure is included in the applicable Fund Facts document, dealers will not be able to rely on the relief for those series of mutual funds.
'STAGE 2' POINT OF SALE AMENDMENTS
The CSA have published proposed amendments intended to implement 'Stage 2' of the CSA's point of sale disclosure framework published in October 2008 by the Joint Forum of Financial Market Regulators. These amendments to NI 81-101 and its companion policy, as well as to the Fund Facts form requirements were published for a 90-day comment period [available here]. Written comments on these proposals are due by November 10, 2011. We intend to submit a comment letter and we would be pleased to assist you in providing your comments to the CSA.
The Stage 2 amendments essentially codify the exemptions discussed above and, once effective, will:
- Require delivery of the Fund Facts within two days of a trade in a mutual fund.
- Permit the delivery of the Fund Facts to satisfy the current legislative requirement to deliver the prospectus.
- Restrict the documents that may be attached to, or bound with, the Fund Facts on delivery.
- Require the disclosure of any requirement for an investor to participate in a fee-based arrangement with their dealer to be eligible to purchase the class or series.
- Require the disclosure of any fees payable directly by investors.
- Permit a notation of FundSERV Inc. fund codes in the Fund Facts, which is currently only permitted upon obtaining exemptive relief from the regulators.
Mutual funds would continue to be required to file a simplified prospectus and annual information form with the regulators, post them on their website and deliver these documents to investors upon request. The statutory rights for misrepresentation in the prospectus documents, including the Fund Facts and any other document incorporated by reference into the simplified prospectus, would continue to apply.
We note that certain jurisdictions will need to implement legislative amendments to preserve the right of withdrawal after receipt of the Fund Facts and to permit an investor to claim damages or rescind the purchase if the investor does not receive the Fund Facts. Having regard to the CSA rule making procedures and the need for legislative amendments in some jurisdictions, we expect that realistically, these amendments cannot come into force any earlier than Spring 2012 and, given the comments already raised by investor advocates over the proposals, the CSA may require a significant amount of additional time to consider the responses received.
For more information about the CSA's overall "point of sale" disclosure project, please click here to access BLG's Investment Management Bulletin Fund Facts Mandatory for Canadian Mutual Funds in 2011 October 2010.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.