Canada: "Point Of Sale" Delivery Of Fund Facts For Canadian Mutual Funds – The Final Chapter?

On March 26, 2014, the Canadian Securities Administrators (the CSA) published for comment revised proposed rules that would require all dealers trading in public mutual funds to give clients the specific Fund Facts for their mutual fund before proceeding with any trade. The proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure and its Companion Policy are available [here].

The proposed amendments represent the final chapter in the CSA's "point of sale" disclosure initiative for mutual funds (also referred to by the CSA as the "Stage 3 POS amendments") that were first proposed almost five years ago in June 20091.

Much has changed in the intervening five years since the CSA first published the initial proposal2:

  • Mutual funds now prepare Fund Facts for each series, which they post on their websites and file on SEDAR – these rules became effective in January 2011. The Fund Facts are in addition to the simplified prospectus and annual information form (AIF), which are still required.
  • Mutual funds are in the process of revising their Fund Facts to reflect significant new disclosure requirements that came into effect on January 1, 2014 – all mutual funds must have their Fund Facts in the new form available on their websites and filed on SEDAR by May 13, 2014.
  • Dealers will be required to deliver to investors the Fund Facts for the applicable series invested in, for trades made on or after June 13, 2014.
  • All registrants, including dealers, portfolio managers and investment fund managers must comply with significant new client disclosure requirements, known as 'the client relationship model – Part 2'  (or CRM-2), which rules are being phased-in from July 2013 to July 2016. New "pre-trade" disclosure requirements under CRM-2 become effective on July 15, 2014.

Perhaps in implicit recognition of the above- noted changes, but also in response to comments, the CSA have significantly simplified and streamlined the proposed requirements for point of sale delivery of Fund Facts.

The proposed amendments are out for an unusually compressed 60-day comment period – until May 26, 2014 – it is evident that the CSA want to put the final rules into place as soon as possible – perhaps as early as the beginning of 2015. Comments on an appropriate transition period will be vital. We intend to provide comments, with a particular emphasis on the matters outlined in this Bulletin. We would be pleased to assist you in providing your comments to the CSA.

The Proposed Amendments – Delivery of the Fund Facts Before a Trade

Dealers will be required to deliver or send the most recent Fund Facts for the applicable series of the mutual fund to their client before the dealer can accept or process the trade. The CSA do not propose to mandate how the document is to be delivered or sent, stating that any conceivable method of actual delivery or electronic sending will be acceptable – that is, by mail, courier, email, fax or in-person delivery.

The CSA are adamant in their refusal to permit any concept of "access equals delivery", even in the sense of an advisor speaking with his or her client and telling them where to click on a specific website to access the Fund Facts. We find the CSA's position to be regressive, given the ease of access to Fund Facts on websites and the fact that the pre-trade conversations expected under CRM-2 can be a logical platform for advisors to efficiently satisfy Fund Facts delivery by explaining how clients can access the Fund Facts before the trade is processed. We will urge the CSA to re-consider this issue, and will also encourage them to clarify the ability of an advisor to email the client a website link to a specific Fund Facts document, given that questions on this method of delivery are not clearly answered in the CSA proposals.

The CSA address industry requests for clarity about what delivery "before" a trade could mean, by way of proposed guidance in the Companion Policy. The CSA clearly do not mean for dealers to send a package of Fund Facts to a client a month or so in advance of any meeting or call about the client's investments, unless that action can be linked to the actual recommendation or instruction of the client to invest in the specific mutual fund. As for "before" meaning minutes before taking the instruction to invest, there is guidance in the proposed Companion Policy that the CSA expect that investors will be given a "reasonable opportunity" to consider the information in the Fund Facts before proceeding with the purchase.

While the CSA will permit trades to be executed without advance delivery of Fund Facts, if the client indicates that the purchase must be completed immediately or by a time specified by the client, the CSA will require dealers to comply with an elaborate process in order to do this and it's clear that this request must be client initiated. The Fund Facts must be delivered within two days after the trade, the client must consent to this timing of delivery and must indicate that he or she wishes the trade to be processed immediately or at a specific time, the dealer must consider that it is not "reasonably practicable" to deliver the Fund Facts to the client before the specified time of the trade and the advisor must provide extensive required verbal disclosure to the client. And having allowed for this delivery system, the CSA explain that they expect reliance on "post-trade" delivery to be the "exception, rather than the norm". Any client instructions to proceed and consent to this delivery timing can only apply to the specific transaction and no standing instructions will be allowed. We can foresee that many clients may wish to give their advisor and dealer instructions to proceed with trades in advance of Fund Facts delivery and we anticipate that it will be difficult to explain to clients that this is not permitted.

The CSA propose that the delivery requirements will apply to all purchase orders for all types of mutual funds (as opposed to the exceptions noted in the 2009 proposal) – including initial and subsequent purchases – except that no Fund Facts will be required to be delivered if the client received the most recent Fund Facts on a previous purchase. The CSA also note that the delivery requirements will be the same for both full service and order execution-only accounts.

The CSA also set out proposed delivery requirements tailored for PAC plans – delivery for the first trade and thereafter no requirements for delivery, subject to certain conditions including an annual investor notice. Appropriate transition will be important in respect of PAC plans; the CSA's proposals suggest that a Fund Facts will be required to be delivered for the first trade after the proposals come into force, notwithstanding that PAC plan arrangements have been in place for many years.

Missing From the Proposed Amendments

The CSA explain that they are not currently proposing amendments to withdrawal or rescission rights applicable to mutual fund trades, without acknowledging the various industry submissions made over the past decade underscoring the need for rationalization and harmonization of these provisions, as well as for additional clarity on their interpretation and application. The revised proposals bring the need to respond to these submissions into sharper focus, since, among other things, the "withdrawal rights" for investors are tied to receipt of the "prospectus", which could mean that these rights will be non-existent if the Fund Facts is provided to investors at least 2 days before the trade. The currently mandated disclosure of these investor rights contained in Fund Facts will need to be amended to reflect the new proposals.

The CSA also do not reference any next steps in mutual fund disclosure reform, other than to signal that there will be proposed rule amendments published in the fall 2014, which will be designed to require exchange-traded funds (ETFs) to prepare summary documents akin to Fund Facts and require their delivery by dealers in advance of any trade.

We will continue to urge the CSA to move to review the simplified prospectus and annual information form requirements for mutual funds as we believe that both documents are in need of rationalization and reform, particularly now that these documents will be read only very rarely by investors in light of the focus on Fund Facts.

Recommendations for Next Steps for Dealers and Fund Managers

Given the inevitability of the CSA working towards putting in place requirements for pre-trade delivery of Fund Facts, we recommend:

  • Focusing on the appropriate transition period for the effective date of these provisions – the CSA ask specifically for feedback on the appropriate timing – they reference a one-year transition in several places, but also mention a 3-month transition period. The CSA ask for an explanation behind any suggestion for transition – it will be important for industry participants to explain in detail what will be involved to implement the revised requirements, given the CSA's stated views that implementation will be "incremental in nature" to CRM-2 implementation. It is clear that the CSA are working towards an implementation date sometime in 2015, which we consider quite aggressive
    given the industry's current focus on implementing CRM-2.
  • Pushing back on the CSA's refusal to consider "access equals delivery", particularly for "accredited investors", including individuals who would fall within this class of investor. Advisors should be permitted to direct clients (electronically or orally) to a specific link to a website where they can immediately find the applicable Fund Facts.
  • Pushing back on the CSA's proposed guidance limiting advisors from mailing out bundles of Fund Facts for various alternatives of suitable mutual funds, in advance of meeting with the client to make recommendations and take instructions. This form of delivery will allow investors to have an opportunity to read the material and then to be able to have the trade proceed immediately on making an investment decision after their meeting (in person or by telephone) with the advisor. We see this approach as being in the best interest of clients, as well as a common sense, practical and efficient way of achieving the CSA's objectives.
  • Providing the CSA with specifics on the technical, cost and practical issues that may be associated with pre-trade delivery – the CSA appear to be convinced that technological advances in the last 5 years have removed most, if not all, of the cost barriers to implementation. It will be important to explain that the costs of implementing the point of sale delivery requirements are in addition to implementing the CRM-2 requirements. If there are substantive costs in retaining the service providers the CSA speak of as being available to the industry, these costs should be outlined to the CSA in detail.
  • Thinking about how your firm would implement the requirements – what will work best for your advisors and for your clients - but also the compliance systems that will be necessary to track that the requirements are met. For example, how many of your clients will be comfortable reading an email copy of the Fund Facts? Do you have email addresses for your clients and are your clients set up for email delivery? Are there regional differences for your clients based in the different jurisdictions of Canada? Do your clients have the ability to receive faxes? How many clients will tolerate waiting to receive a Fund Facts document in the mail before investing? How many of your advisors meet one-on-one with your clients and will be able to print off Fund Facts in advance and deliver them personally to clients? And do your advisors understand how they can readily access the Fund Facts and send them to their clients? How will your advisors explain to clients that they cannot process a trade until the client receives the Fund Facts (and presumably has read the contents therein), when they are not meeting face-to-face with the client? Will you develop a script for your advisors? How will you train and educate your advisors on the new requirements and how they fit with the CRM-2 requirements?

Fund managers should consider their current practices in delivering prospectuses on behalf of dealers and whether these practices can continue with the new "pre-trade" delivery requirements. Similarly dealers who rely on fund managers to fulfil the current delivery requirements, will need to consider the implications of the new proposals on these practices.

Finally, we recommend that firms consider, as a way to "pre-test" and refine their own internal systems, implementing pre-trade delivery of Fund Facts "early", perhaps in the context of the "pre-trade disclosure" expected of advisors as of July 15, 2014 under CRM-2. Advisors can use the Fund Facts to lead the clients through the various elements of the required CRM-2 pre-trade disclosure – at least insofar as the trade relates to mutual funds. This will have the advantage of making advisors more comfortable in using these regulatory documents with clients as a tool in helping clients understand the funds – and also to allow clients to become more familiar with the type of information that is available in Fund Facts in order to make more informed investment decisions. It will be important to document this "pre-trade" delivery of the Fund Facts.

BLG's Investment Management Group has closely followed the process of the CSA's work to enhance mutual fund disclosure and related issues. We are proud to have worked with many mutual fund managers over the years to prepare the required disclosure documents and ensure compliance with the various new and modified requirements, including Fund Facts and plain language disclosure.

Please call your usual lawyer in BLG Investment Management Group, any of the following lawyers or any of the leaders of the group listed below, if we can assist you in any way, including with your comment letter, or if you have questions about the current proposals.

Footnotes

1. Please see BLG's Investment Management Advisory Point of Sale Disclosure Proposals for Canadian Mutual Funds Released for Comment Borden Ladner Gervais LLP July 2009.

2. Please see BLG's Investment Management Bulletins Canadian Securities Administrators Finalize Rules Requiring Enhanced Account Level Disclosure by Registrants: Effective July 15, 2013 (June 2013) and Canadian Securities Regulators Finalize New Format for Fund Facts and Mandate Delivery Effective June 13, 2014 (June 2013).

About BLG

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