Starting May 30, 2016, investors will only be able to complete their purchase of a Canadian mutual fund, subject to limited exceptions, after their advisor provides them with the Fund  Facts document of the particular class or series they are investing in. The Canadian Securities Administrators (the CSA) have based this investor protection initiative on the regulatory theory that investors will thus have an opportunity to read the Fund Facts document in advance of their purchase and thereby make a more informed investment decision.

On December 11, 2014, the CSA published final amendments to National Instrument 81-101 MutualFund Prospectus Disclosure and its Companion Policy (available [here]). The amendments represent the final chapter in the CSA’s “point of sale” disclosure initiative for mutual funds that was first proposed over five years ago in June 2009.1 The final rules have been amended somewhat from the last draft of the rules published in March 2014 to address comments received, but the CSA have remained steadfast in their conviction that pre-trade delivery of Fund Facts is a vital investor protection initiative that must move forward as soon as possible and with only a minimal degree of flexibility for industry participants and mutual fund investors.

The rules and the regulatory intentions are clear – time and attention should now be spent ensuring that advisors understand this initiative and its impact on their business and clients, as well as working through the changes in dealer compliance programs that will be necessary to move forward. We also recommend building clear linkages between the need for pre-trade and other disclosures under the “client relationship model” (the CRM-2 initiative) and the pre-trade Fund Facts delivery.

Delivery of the Fund Facts Before a Trade

An advisor will be required to deliver to his or her client the current Fund Facts for the applicable class or series of the specific mutual fund under consideration before the purchase order can be accepted and processed. The CSA do not mandate how the document is to be delivered, stating that any method of physical paper or electronic delivery will be acceptable – that is, by mail, courier, email attachment, email hyperlink, fax or in-person delivery.

Despite long-standing industry comments on “access equals delivery”, the CSA are adamant in their refusal to permit any such concept even in the sense of an advisor speaking with his or her client and telling the client where to click on a specific website to access the Fund Facts as part of the pre-trade discussions. Advisors can however email a client a website link to a specific Fund Facts document or email the Fund Facts document as an attachment. The CSA have clarified that several Fund Facts documents can be sent inone email, however, each Fund Facts document being sent via one email must have its own hyperlink or be attached as a separate email attachment.

The CSA responded to industry requests for clarity about what delivery “before” a trade could mean by way of guidance in the Companion Policy. Dealers are not permitted to send a package of Fund Facts to a client a month or so in advance of a meeting with a client, unless that action can be clearly linked to the actual recommendation or instruction of the client to invest in the specific mutual fund. On the other hand, “before” does not mean minutes or seconds before taking the instruction to invest, such that investors will not have a “reasonable opportunity” to consider the information in the Fund Facts before proceeding with the purchase.

In limited client-initiated circumstances, the CSA will permit trades to be executed without advance delivery of Fund Facts, however, advisors must comply with an elaborate process. The client must insist that the purchase be completed immediately or by a specified time and must consent to the post-trade delivery of the Fund Facts. The advisor must consider that it is not “reasonably practicable” to deliver the Fund Facts to the client before the specified time of the trade and also must provide extensive prescribed 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 or consents will be allowed.

The delivery requirements will apply to all purchase orders for all types of mutual funds – including initial and subsequent purchases – except that no Fund Facts will be required to be delivered if the client received the current Fund Facts on a previous purchase. The delivery requirements are the same for both full service and order execution-only accounts. The only stated exceptions (which are new with the final amendments) are for institutional clients which are “permitted clients” (the category of institutional clients provided for in National Instrument 31-103) and for “managed accounts”; the Fund Facts must still be delivered within two days after the applicable trade. The addition of the “managed account” exception is somewhat curious, in light of the long-standing convention that prospectuses (when they are delivered at all) are provided only to the manager of the managed account, given that the manager makes all investment decisions and executes all trades.

The final amendments establish delivery requirements tailored for PAC plans, which requirements have been amended from the March 2014 drafts in response to industry comment. Fund Facts must be sent in advance of the first trade under a PAC plan made on or after May 30, 2016 and thereafter, there are no further requirements for Fund Facts delivery, subject to compliance with prescribed conditions, including an annual notice. The rules provide for transition for PAC plans established before May 30, 2016. For those existing PAC plans, provided the prescribed notice about Fund Facts documents is sent between May 30, 2015 and May 30, 2016, there will be no need to send a Fund Facts document for the first trade under the PAC plan after May 30, 2016.

Missing From the Amendments

The CSA explain that they are not currently proposing amendments to withdrawal or rescission rights applicable to mutual fund trades, notwithstanding  the repeated calls for the need to rationalize and harmonize these provisions. The amendments 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 will mean that these rights will be non-existent if the Fund Facts is provided to investors at least two days before the trade. The CSA have disagreed with our views that the currently mandated disclosure of these investor rights contained in Fund Facts will need to be amended to reflect the new requirements and assert that no changes to the form requirement will be permitted.

The CSA also do not reference any next steps in mutual fund disclosure reform, other than to signal that there will be rule amendments published for comment in the spring of 2015, 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

There are several steps that need to be taken by dealers, advisors and fund managers in order to be ready for the May 30, 2016 implementation date.

  • Determining the compliance processes that will allow dealers to ensure that advisors give clients the Fund Facts before completing a purchase of mutual funds. How will a dealer and an advisor ensure that the current version of the right Fund Facts is delivered at the right time in the sales process? What compliance systems will be necessary in order to track and record that the requirements are met?
  • Consider how these documents will be delivered. What will work best for the dealer’s clients and advisors? Do clients have the ability to receive faxes? Do advisors have email addresses and fax numbers for clients? How many clients will tolerate waiting to receive a Fund Facts document in the mail before investing? How many advisors meet one-on-one with clients and thus will be able to print off Fund Facts in advance and give them personally to clients? Do advisors understand how they can readily access the Fund Facts and send them to clients? How will advisors explain to clients that they cannot process a trade until the client receives the Fund Facts (and presumably has read and understands the contents therein), when they are not meeting face-to-face with the clients? What advisor training is necessary on the new requirements and how they fit with the CRM- 2 requirements?
  • Determine the compliance processes necessary to ensure that the conditions to the limited client- initiated exception to pre-trade delivery of Fund Facts are being respected. What training will be necessary for advisors? What communications will be necessary for clients?
  • How many clients currently invest in mutual funds via PAC plans? Dealers will need to ensure the prescribed notice is sent between May 30, 2015 and May 30, 2016 or else deliver the applicable Fund Facts documents in advance of the first trades under the PAC plans after May 30, 2016. PAC plans established after May 30, 2016 will need to comply with the new requirements, which may require firms to alter their PAC plan forms in order to include the prescribed information.
  • Fund managers should consider their current practices in delivering Fund Facts on behalf of dealers and whether these practices can continue with the new “pre-trade” delivery requirements of Fund Facts. Similarly, dealers who rely on fund managers to fulfil the current delivery requirements will need to consider the implications of the new regime on these practices.

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” now required 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 this regulatory document with clients as a tool in helping clients understand the funds they are considering investing in– 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.