Canada: Canadian Securities Regulators Release Second Request For Comments On ‘Stage 2’ Of Point Of Sale Disclosure

In late June, the Canadian Securities Administrators (CSA) published for a second comment period proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81–101) and its companion policy, which include new proposed amendments to the form requirements for Fund Facts. This package of proposed amendments [available here] constitutes the second iteration of the CSA's 'Stage 2' implementation of the overall point of sale disclosure framework, being the proposed requirement to deliver the Fund Facts to investors in lieu of the fund's simplified prospectus, within two days of the trade.

This second round of proposed amendments was prompted by feedback, particularly from investor advocates, to the first publication in August 2011, of the proposed 'Stage 2' amendments, as well as feedback on Fund Facts, which have been available to investors since July 2011. A new sample Fund Facts document was published as part of the proposals, which is appropriate since much of the proposed amendments relate to changes to the form requirements for this document.

The first version of the 'Stage 2' amendments was published for comment in August 2011. BLG's Investment Management Bulletin Canadian Regulators Permit Delivery of Fund Facts in Lieu of Simplified Prospectus and Release Proposed 'Stage 2' Point of Sale Amendments September 2011 is [available here]. 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.

Comments on these proposals are due on September 6, 2012. As we have done for the previous steps of the CSA's point of sale disclosure initiative, we intend to comment on these proposals. We would be pleased to assist you in providing your comments to the CSA.

John Hall and Kathryn Fuller, partners in BLG's Investment Management Group, continue to be active members in the Point of Sale Advisory and Implementation Task Force of The Investment Funds Institute of Canada.

The Proposed Amendments

Some of the proposed amendments to NI 81-101 are positive changes that we believe will improve disclosure for investors. Some are not. The highlights are set out below categorized according to our views on "the good, the bad and the ugly".

The good:

  • Fund Facts will be permitted to be bound with account application documents, registered tax plan documents, transaction confirmations and certain other documents relating to transactions listed on the confirmations, although there remains some lack of clarity on what can be included as those "other" documents. This will provide much needed flexibility.
  • Funds will be permitted to disclose material changes and proposed fundamental changes in their Fund Facts. This change is a welcome one as it will eliminate the current need to submit an exemption application to allow disclosure of this important information.
  • Disclosure of fund codes and other forms of identifiers will be permitted in the Fund Facts without resort to an exemption application.
  • The "Quick Facts" section in the Fund Facts will disclose both the date the fund began offering under a prospectus, as well as the date the series commenced, thus correcting the misleading date information mandated currently. The "ugly" is that certain other references to "fund" in the form requirements have not been updated to reflect the fact that they are, in fact, references to "series" information.
  • Funds will be permitted to present financial information as at a date within 45 days of the date of the Fund Facts, which represents an extension from the current 30 days, providing some breathing room to allow the collection and presentation of financial data.
  • Additional disclosure about the relationship between risk and returns will be required, which, although a bit simplistic and somewhat negatively phrased, may be useful for some investors.
  • A cross-reference to the CSA's brochure Understanding mutual funds will be required at the end of the Fund Facts. The brochure may be of assistance to some investors who need more educational and background information than can be provided in the Fund Facts.

The bad:

  • Rescission and withdrawal rights across the country are still not harmonized and there is no indication as to when the CSA will tackle this long-standing problem.
  • Up to four risk factors will be required to be disclosed in the Fund Facts with a cross reference to the simplified prospectus discussion of these risks. These risk factors cannot be described, which may result in such listings being ineffective, or worse, misleading, particularly given that different funds use the same terms, but with different meanings. In any event, we view this requirement as a classic example of regulated "disclosure creep".
  • Although we have categorized the required cross-reference to the CSA's brochure as "good", we note that this brochure may change and we recommend that managers and dealers alike keep an eye on the information contained in this brochure.
  • The "A word about tax" section of the Fund Facts has not been amended, notwithstanding BLG's (and others') comments on how this section is potentially misleading and needs to be revised to make it less generic.
  • Trailing commission disclosure continues to be an issue for the CSA, fuelled by submissions by investor advocates. A new sentence highlighting the conflicts these payments may cause for dealers and sales representatives will be mandatory. The "ugly" is the mandatory statement to "ask your dealer representative for more information". What response will be expected of sales representatives when asked this question?
  • Regardless of the investment objective or benchmark of a fund, a fund must compare its performance with a 1-year GIC in a year-by-year bar chart in the Fund Facts, as well as its since inception (or 10-year) performance. The GIC data is to be taken from the Bank of Canada, notwithstanding that GICs tend to be specific to their issuing financial institution. The CSA explain that this comparison is intended to highlight the risks of investing in a mutual fund when compared to a risk-free investment, but it is not clear whether this explanation (which we find helpful) could be provided in the Fund Facts. Without additional explanation, investors may not understand the trade-offs between investing in GICs and the risk of not generating enough income to enable retirement, and investing in mutual funds.

The ugly:

  • Funds will be required to disclose their worst three-month performance -ever- under a new heading "Worst return". The CSA explain that this disclosure is necessary to better inform investors about the possible loss of investment in the fund. We consider this disclosure to unduly emphasize short-term performance, without a counterbalance showing the potential for upside performance over the long-term, which is the commonly understood essence of mutual fund investing. This information may also be difficult to obtain for those funds that are of a long duration, given that the data must be provided for the worst three-month period since the inception of the fund (with no 10-year cut-off), and will put those funds at a significant disadvantage because of the greater chance that those funds at some point fell into a significant down-turn situation.
  • The CSA propose a six-month transition period to the new requirements and explain that they expect the industry to start making "the systems changes" now to permit delivery of the Fund Facts in lieu of the simplified prospectus. We consider this expectation to be a bit presumptuous for proposals that have not been finalized.
  • The CSA are considering whether to require the Fund Facts of all mutual funds to be amended within a specific time period after the rule amendments become effective, which will be a huge administrative burden on everyone's part – including the regulators. We will urge the CSA to permit the Fund Facts to be amended to comply with the new requirements at the next renewal cycle, which is more usual for significant disclosure changes.

What 's Next?

Given that comments on these amendments are due by September 6, 2012, we anticipate that the CSA are working to publish the final form of rule amendments by year-end 2012, although the CSA explain that certain CSA members require amendments to the legislation in their province/ territory before they can finalize the proposals.1 Whether or not they meet this deadline, we believe that this will be the last chance for the industry to provide comments on these amendments.

More changes to the Fund Facts can be expected even after these amendments are finalized. The CSA explain that they are considering mandating a specific CSA risk classification methodology, which would require all mutual funds to calculate their risk level in accordance with this methodology. This will affect the "risk classification" disclosure in the Fund Facts and we can expect the impact of any new methodology to reverberate throughout the industry, given the dependence on risk classifications for suitability purposes by dealers.

We remain disappointed that the CSA have not set a timetable for harmonizing the other disclosure documents – the simplified prospectus, the annual information form and the continuous disclosure documents, but are gratified that they recognize the need for a "single foundation" document to replace the simplified prospectus and annual information form.

Finally, the final stage of the point of sale amendments should be kept in mind – the CSA continue to work towards mandating pre-trade delivery of Fund Facts. The CSA are also considering extending the Fund Facts concept to other investment funds, in addition to mutual funds regulated under NI 81-101. No indication on timing is suggested in the CSA Notice nor in the recently completed OSC's Statement of Priorities for 2012-2013.

Footnote

1. The proposed amendments to the Securities Act (Ontario) are not yet in force, but were finalized in 2011 as part of the 2011 Ontario Budget Bill 173 [S.O. 2011, c.9]. They are included as "proposed additions" in the 52nd edition of the Consolidated Ontario Securities Act, Regulations and Rules published by Carswell and edited by Paul G. Findlay of Borden Ladner Gervais LLP.

About BLG

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions