Canadian securities regulators have announced that they expect to implement on June 1, 2005 a national rule that will impose important new uniform continuous disclosure requirements on all listed and unlisted investment funds that are sold to retail investors. In some provinces and territories, including Ontario, some parts of the rule will apply to privately offered mutual funds (pooled funds).
National Instrument 81-106, Investment Fund Continuous Disclosure, will apply to all investment funds, including mutual funds (that is, funds that are redeemable by reference to their net asset value, usually on a quarterly or more frequent basis), closed-end funds, exchange-traded funds (including those with limited redeemability), split-share corporations, certain limited partnerships investing in flow-through shares, scholarship plans, labour-sponsored funds and venture capital funds. This represents a significant change for closed-end and exchange-traded funds, which may have previously been treated as regular issuers.
New requirements for financial statements, summarized below, will apply to all investment funds that are reporting issuers and to privately offered mutual funds (pooled funds) in all provinces and territories other than Alberta, British Columbia, Manitoba, and Newfoundland and Labrador.
Content. The rule will impose specific requirements on the form and content of financial statements. The rule will require investment funds to provide statements of net assets, operations, changes in net assets, cash flows (unless not required by GAAP), and investment portfolio, all presented in accordance with GAAP. The rule will mandate disclosure of current asset values, securities lending, derivatives, repurchase and reverse repurchase transactions, short sales, incentive fees, the cost of distribution of the fundís securities, and the distinctions between classes or series of securities issued by a fund.
Semi-Annual Statements. Investment funds subject to the rule must prepare annual and semi-annual financial statements. This will be a significant change for closed-end and exchange-traded funds, which have been preparing and filing financial statements quarterly; mutual funds, however, have always filed semi-annually.
Shortened Filing Deadlines for Annual Statements. Annual financial statements must be filed within 90 days of a fundís financial year-end. Interim financial statements must be filed within 60 days of the end of each interim period (currently the requirement for mutual funds).
Pooled Funds. Mutual funds that are not reporting issuers will be exempted from the requirement to file their financial statements with the applicable securities regulatory authority (either on SEDAR or in paper format) if they notify the regulator that they are relying on this exemption. A one-time notice may be given.
Review of Financial Statements. Boards of directors of corporate funds and the manager, the trustee or other authorized persons of trusteed funds must approve both a fundís interim financial statements and the fundís annual financial statements. Disclosure must be made if a fundís auditor has not performed a review of its interim financial statements.
Reports of Fund Performance
Investment funds that are reporting issuers must prepare and publicly file annual and semi-annual reports of fund performance, which are similar to the MD&A required to be prepared by other issuers (although semi-annual reports by scholarship plans will not be required). These reports must be concise, prepared in plain language and include prescribed information.
Annual Report. This report must provide material information about the results of a fundís operations over the past year, including information about how the fundís portfolio relates to its investment objectives and strategies, about events that might have a material effect on future performance or about the overall risk associated with the fund, and related party transactions. The report must contain financial highlights, including net asset value, distributions, portfolio turnover rate, trading expense ratio, management expense ratio and management expense ratio before waivers or absorptions for the previous five years. The report must also include past performance information, including a bar chart of year-by-year returns for the most recent ten-year period, a chart of annual compound returnsócalculated in accordance with Part 15 of National Instrument 81-102, Mutual Fundsófor the most recent ten- , five- , three- and one-year periods for the fund as well as at least one broad-based securities market index. In calculating past performance, all investment funds will be entitled to assume that distributions made during relevant prior periods have been reinvested. The report must also contain a summary of the fundís portfolio investments, including its top 25 positions (either long or short) each expressed as a percentage of net assets, and a breakdown of the percentage of the fundís net assets represented by long and short positions. Disclosure of the basis for calculating management fees must also be included, including a breakdown of the services received in consideration for those fees. National Instrument 81-101, Mutual Fund Prospectus Disclosure, is being concurrently amended to eliminate the requirement to include financial results and performance information in the simplified prospectus of a mutual fund.
Semi-Annual Reports. These reports must update the results of operations, performance information and related party transactions over the interim period, and disclose financial highlights for the period, past performance, a summary of investment portfolio and any significant developments that may affect the fund.
Approval of Reports. Annual reports and semi-annual reports must be approved by boards of directors of corporate funds and the authorized persons of trusteed fundsóthat is, typically the trustee or manager of the fund.
Quarterly Portfolio Disclosure. In addition to semi-annual reports of fund performance, at the end of each three- or nine-month period, an investment fund must determine its total net asset value and prepare a summary of its investment portfolio. An investment fund that has a website must post this disclosure on it within 60 days of the quarter end. These requirements will not apply to scholarship plans, labour-sponsored investment funds or venture capital funds.
Filing Requirements. Annual reports must be filed within 90 days of a fundís financial year-end, concurrently with the filing of its financial statements; semi-annual reports must be filed within 60 days of the end of the interim period. Quarterly portfolio disclosure will not need to be filed with the securities regulators.
Delivery of Reports and Financial Statements
Investment funds must deliver their financial statements and reports of fund performance to all their registered and beneficial securityholders or do so in accordance with either standing instructions from those securityholders or annual instructions obtained by sending request cards to the investment fundís securityholders. If standing instructions are obtained, annual instructions cannot be used subsequently. The relief from the requirement to send annual financial statements to securityholders is a significant change. For standing or annual instructions, reports and financial statements must be sent by the later of the filing deadline and 10 days following a securityholder request only to owners who have returned a request card or otherwise asked to receive annual or annual and interim financial statements and/or reports.
Financial statements for a fund will be permitted to be bound together with the statements and reports for other funds only if information about the fund is not intermingled with that of the other funds. In the case of fund families, information may not be presented in columns for the various funds. The binding of management reports of fund performance with those of another fund will not be permitted, except in the case of situations in which it is known that the securityholders who will receive the bound reports own each of the relevant investment funds.
Investment funds that are reporting issuers and that have websites must post their reports of fund performance and financial statements concurrent with the filing with securities regulatory authorities. The quarterly summaries of investment portfolio must be posted on these websites and provided to securityholders on request.
Proxy Voting Guidelines and Disclosure of Voting Records
An investment fund that is a reporting issuer will be required to develop proxy voting policies and procedures and to disclose these policies and procedures in an annual information form prepared under either NI81-101 or NI81-106, or in a current prospectus. Each fund will also be required to maintain proxy voting records with respect to meetings of reporting issuers, to disclose its proxy voting records to the fundís securityholders on request and to post these records on its website. This requirement may have significant systems and compliance implications for investment funds, particularly for fund families.
Management Expense Ratio
If an investment fund discloses its management expense ratio (MER) in any way, including in sales communications or any report provided to securityholders, the MER must be calculated by dividing the fundís total expenses and other charges, before income taxes, by the average NAV for the period. Non-optional fees paid directly by investors in connection with their holdings in a fund do not have to be included in the MER calculation. If management has waived or absorbed any fees and expenses of the investment fund for the financial period, the MER (without the waived or absorbed amount) must be disclosed in a note. Expenses rebated by a manager or a fund to a securityholder may not be deducted from total expenses in determining MER.
The following provisions of the rule will apply to all investment funds that are reporting issuers. A number of these may be significant changes for exchange-traded and closed-end funds.
Calculation of Net Asset Value. A fund that uses specified derivatives (including swaps, forwards, futures, call or put options and credit derivatives) will be required to calculate its NAV every business day; otherwise NAV will have to be calculated at least once each week. Funds that exist on the effective date of the rule, however, may continue to calculate NAV at least once a month.
Annual Information Form. A fund that is not in distribution (that is, does not have a current prospectus) must prepare and file an annual information form substantially similar to the AIF required of mutual funds under NI81-101, within 90 days of its financial year-end.
Material Changes. When a material change occurs, a fund will be required to issue and file a news release, file a material change report in the form of the report under NI51-102, Continuous Disclosure, post disclosure of the material change on its website (or the website of its manager) and file an amendment to its prospectus or simplified prospectus. A "material change" is defined as a change in business, operations or affairs of a fund that is considered important by a reasonable investor in determining to purchase or continue to hold securities. The Companion Policy indicates that, in the view of securities regulators, a change in the portfolio adviser of a fund will be a material change, while the departure of a high-profile individual from the portfolio adviser may be a material change.
Proxy Solicitation. A fund that holds meetings must comply with the proxy solicitation requirements of NI51-102.
Voting Results. Following each meeting of securityholders, a fund must file a report containing a brief description of each matter voted on by its securityholders and the results of the vote.
Filing Material Contracts. Unless already subject to a similar requirement, a fund must file material contracts and any amendments either with its final prospectus or at the time the contract or amendment is signed. Investment funds must also file any additional disclosure documents that they may send to their securityholders. For funds that are not in continuous distribution, the requirement to file material contracts on an ongoing basis is new and significant.
The rule is expected to come into force on June 1, 2005 but will apply with exceptions as follows: to annual financial statements and annual management reports of fund performance for financial years ending on or after June 30, 2005; to interim financial statements and interim management reports of fund performance for interim periods ending after the financial year determined for the above purpose; and to quarterly portfolio disclosure for periods ending on or after June 1, 2005. The requirements for proxy voting records will apply for the annual period beginning July 1, 2005 and proxy solicitation and information circulars will apply as of the same date. However, for the first filing of annual financial statements, the annual management report of fund performance and the annual information form required in accordance with the rule, a fund may file within 120 days, rather than 90 days, of the year-end. The first annual management report of fund performance must include an explanation of the new continuous disclosure requirements.
A copy of the proposed national instrument, companion policy and forms are available on the Ontario Securities Commissionís website at
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.