On December 12, 2013, the Canadian Securities Administrators (CSA) published CSA Notice 81-324 Proposed CSA Mutual Fund Risk Classification Methodology for Use in Fund Facts [available here] The CSA propose to mandate (or adopt as guidance only) that all Canadian mutual funds use standard deviation as the measurement of risk and for risk classification purposes. Once a fund's standard deviation has been calculated, the fund manager will be required to slot the fund into one of six standardized risk bands proposed by the CSA for the purposes of the simplified prospectus and Fund Facts disclosure. Notably, the CSA have not published proposed rule amendments – the Notice describes the CSA's proposed methodology, including its proposals for enhanced disclosure, and is designed to elicit feedback on the proposals in advance of rule-making.

The CSA consider a mandatory standardized risk classification methodology to be useful to investors because it would provide a consistent and comparable basis for measuring the risk of different mutual funds. However, the CSA do not explain in detail why the current disclosure practices of the mutual fund industry need improvement. It will be useful to consider exactly how the CSA's proposals differ from current industry practices – given that most fund managers follow the voluntary guidelines for fund volatility risk classification developed and regularly updated by The Investment Funds Institute of Canada (IFIC).

Comments are due on the matters outlined in the Notice by March 12, 2014. We would be pleased to assist you in providing comments to the CSA on the proposed risk classification methodology. The ability to formally comment on CSA proposals is an excellent opportunity to help shape future regulation that is in the best interests of investors and is appropriate for the financial services industry in Canada and which does not have significant unintended consequences. The CSA set out 14 specific questions for comment, in addition to asking for feedback on all aspects of their proposals.

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.