Canada: Mandatory Delivery Of Fund Facts In Place Of Simplified Prospectus

Highlights

  • CSA to require conventional mutual funds to deliver Fund Facts to investors within two days of purchase, instead of a simplified prospectus, in order to satisfy prospectus delivery requirements
  • CSA further amend the form of Fund Facts in order to enhance the presentation of risk, cost and performance disclosure

On June 13, 2013, the Canadian Securities Administrators (CSA) published amendments (the Amendments) to National Instrument 81-101 – Mutual Fund Prospectus Disclosure (NI 81-101), including Form 81-101 F3 – Contents of Fund Facts Documents (the Form) and Companion Policy 81-101 CP. The Amendments will require delivery of the Fund Facts instead of the simplified prospectus to satisfy the prospectus delivery requirement under securities legislation for conventional mutual funds, and includes proposed changes to the Fund Facts document.

Subject to ministerial approval, the coming into force of the Amendments will be phased-in beginning September 1, 2013.

Background
On October 24, 2008, the Joint Forum of Financial Market Regulators published Framework 81-406 – Point of Sale Disclosure for Mutual Funds and Segregated Funds (Framework) setting out a vision to provide investors with more meaningful and effective prospectus disclosure. The CSA published proposed rule amendments aimed at implementing all of the elements of the point of sale disclosure regime set out in the Framework on June 19, 2009 (2009 Proposals). After considering comments received on the 2009 Proposals, the CSA concluded to proceed with a staged implementation of the Framework as set out in CSA Staff Notice 81-319 – Status Report on the Implementation of Point of Sale Disclosure for Mutual Funds, published on June 18, 2010, which sets out three stages for implementation.

Stage 1 was completed on January 1, 2011 and required conventional mutual funds to produce and file Fund Facts which could be delivered to investors free of charge upon request. With the adoption of the Amendments, Stage 2 will be completed and requires delivery of the Fund Facts, instead of a simplified prospectus, in order to satisfy the prospectus delivery requirements with respect to buying a mutual fund. In Stage 3, the CSA will publish for further comment proposed requirements that will require point of sale delivery of the Fund Facts for conventional mutual funds and also consider the application of a similar summary disclosure document and point of sale delivery for other types of investment funds, including exchange-traded funds (ETFs).

Delivery of Fund Facts in Place of Simplified Prospectus
The Fund Facts is a document that is designed to give investors key information about a mutual fund, in plain language they can easily understand. Currently, mutual fund companies are required to prepare and file a Fund Facts for each class or series of each of their mutual funds and to post the Fund Facts to their website.

Under NI 81-101, the requirement under securities legislation to deliver a prospectus is satisfied by the delivery of a simplified prospectus. Effective June 13, 2014, the Amendments will require delivery of the most recently filed Fund Facts for each class or series of securities of a mutual fund in all instances where the delivery of the simplified prospectus would otherwise be required. Delivery of the Fund Facts will satisfy the current prospectus delivery requirements under securities legislation. The Amendments also limit the documents that may be attached with, or bound to, the Fund Facts.

Current investor rights relating to delivery of a prospectus will not change as a result of the Amendments. It is expected that an investor's right of damages or to rescind the purchase if the investor does not receive the Fund Facts, or right for withdrawal of purchase within two business days after receiving the Fund Facts will be preserved and any required legislative amendments will be in force in all jurisdictions by the effective date under the Amendments. As Fund Facts will continue to be incorporated by reference into the simplified prospectus, existing statutory rights of investors that apply for misrepresentations in a prospectus will apply to any misrepresentation in the Fund Facts.

Mutual funds will continue to be required to prepare and file a simplified prospectus and annual information form. Such documents will continue to be made available on the mutual fund's website or directly to investors upon request, without cost. The Fund Facts must also continue to be filed concurrently with the mutual fund's simplified prospectus and annual information form. In all instances, an amendment to the Fund Facts must be accompanied by an amendment to the annual information form.

Summary of Proposed Changes to Fund Facts
The Fund Facts document is central to the Framework. The CSA designed the Fund Facts to make it easier for investors to find and use key information. Proposed amendments to NI 81-101 and the companion policy were originally published in August 2011 and further revised and published for comment on June 21, 2012 (the 2012 Proposals), and described in our previous Blakes Bulletin: CSA Propose Disclosure Enhancements to Fund Facts.

As set out in the 2012 Proposals, the CSA committed to testing the proposed changes to the Fund Facts with investors, particularly the presentation of risk and past performance, before proceeding with any changes to the document. This testing revealed that:

  • Investors would be in favour of receiving the Fund Facts at or before the point of sale
  • Investors did not always understand the explanation of the risk scale and the relationship between risk and losses
  • Investors did not understand the three to four main risks of the mutual fund that were listed
  • Investors did not generally view the comparison of the return on a one-year GIC to the past performance as an illustration of risk and return, but rather, as a tool to assess potential future performance
  • Investors thought it was useful to see the worst three-month return of the mutual fund but also wanted to see the best three-month return
  • Investors wanted to know about trailing commissions but did not fully understand the language relating to potential representative conflicts of interest.

After considering submissions from commenters and after taking into consideration feedback from the testing of the Fund Facts, the CSA propose the following changes to the content of the Fund Facts document:

  • Adding an explanation of "volatility" in the risk section to provide greater explanation of the risk scale
  • Removing the requirement to include a list of main risks of the mutual fund
  • Removing the comparison to the mutual fund's performance with the one-year GIC
  • Adding the best three-month returns to the performance section in addition to the worst three-month returns
  • Refining the disclosure about potential conflicts arising from the payment of commissions to refer to investments in general rather than mutual funds specifically.

Transition of Amendments
Effective June 13, 2014, the Fund Facts will be required to be delivered to an investor within two days of buying a conventional mutual fund. Any existing exemptive relief obtained by mutual funds to allow for the early use of Fund Facts to satisfy the current prospectus delivery requirements will expire in accordance with the sunset provisions of such relief, which typically occur on the date the Amendments come into force, expected September 1, 2013.

The changes to the Fund Facts document will become effective January 13, 2014. Mutual funds will have a six-month period to make any changes to their compliance and operational systems that are necessary in order to be in a position to produce the Fund Facts in the amended form. In order to fully implement the Amendments, the Amendments require that each mutual fund must, if it has not already done so, file a Fund Facts for each class or series by May 13, 2014 using the new form. If this filing does not occur concurrently with the filing of a mutual fund's simplified prospectus and annual information form, it is expected that the Fund Facts will be separately filed on SEDAR.

Next Steps – Stage 3
The CSA plan on continuing the staged implementation of the Framework, including proposals for Stage 3 point of sale delivery of the Fund Facts for conventional mutual funds. As part of the proposals for Stage 3, the CSA will also consider the applicability of a summary disclosure document and point of sale delivery for other types of publicly offered investment funds, including ETFs.

The CSA are considering applications from ETF providers and dealers for exemptive relief from the current prospectus delivery requirements in favour of summary disclosure documents. Currently, the prospectus delivery requirement generally only arises where an investor's purchase is filled from securities that are newly issued by ETFs to dealers (creation units). In the CSAs view, the first re-sale of creation units by dealers over an exchange constitutes a distribution that triggers the prospectus delivery requirement. However, if an ETF investor's purchase order is not filled through the creation unit, but through a secondary market trade of previously issued and outstanding ETF units, the prospectus delivery requirement does not apply and a prospectus will generally only be delivered to such investor, upon request. The proposed exemptive relief will require applicant dealers that are acting on the "buy" side of a transaction, rather than dealers acting in a distribution on the "sell" side of a transaction, to deliver a summary disclosure document (similar to the Fund Facts) within two days of the investor buying an ETF (if the investor has not previously received the latest summary disclosure document of the ETF), whether or not the purchase order is filled from creation units. The proposed relief is intended to create a more consistent disclosure framework between conventional mutual funds and ETFs.

The CSA expect the exemptive relief for ETFs to be effective by fall of 2013, and will be followed by legislative amendments that codify such exemptive relief.

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.

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