The Investment Management Group of Fasken has provided the Canadian Securities Authorities (the “CSA”) with an extensive comment letter in response to the proposals described in Reducing Regulatory Burden for Investment Fund Issuers – Phase 2, Stage 1 (the “Proposals”) set out in the CSA Notice and Request for Comment dated September 12, 2019.
Our comments were based mainly on our experience advising clients in the investment funds industry, and took into consideration feedback we have received through consultations with a number of industry participants about the Proposals.
This blog summarizes our comments and suggestions to further reduce the regulatory burden of investment fund issuers and their managers, and further discusses two specific comments that we believe would foster such objectives in a meaningful manner.
Our comments to the CSA on each of the workstreams may be summarized as follows:
- Workstream One: We believe that the proposed consolidation of the simplified prospectus and annual information form will not reduce regulatory burden and may, in fact, increase burden. To reduce regulatory burden, we have recommended that (i) more immaterial prescribed disclosure be removed from the prospectus, (ii) formatting and drafting style expectations for the prospectus be relaxed, and (iii) the prospectus filing system be changed to a regime similar to shelf prospectuses of public companies.
- Workstream Two: We believe that the proposal for mandatory websites will create a significant new regulatory burden without an offsetting burden reduction in other areas. We have recommended that (i) websites not become mandatory until other regulatory changes involving the use of those websites also come into effect (for example, extending the notice-and-access approach to any regulatory disclosure requirement), and (ii) regulatory oversight of websites be limited to ensuring that information is posted to the website when required.
- Workstream Three: We view the codification of notice-and-access relief as a housekeeping matter that does not change regulatory burden. In order to reduce regulatory burden, we have recommended a wider use of the notice-and-access approach.
- Workstream Four: We agree with eliminating the requirement for personal information forms in certain circumstances, and have recommended that the CSA collaborate with Canadian stock exchanges to assist with removing their equivalent requirements.
- Workstream Five: We view the codification of various conflict of interest relief as a housekeeping matter that does not change regulatory burden. To reduce regulatory burden, we have recommended that the CSA (i) eliminate or streamline conflict of interest prohibitions that will become unnecessary with the coming into force of a clear duty for registered firms to avoid material conflicts of interest when they cannot be addressed in the best interest of the clients (as part of the Client Focused Reforms) (ii) codify other relief which has not yet been widely obtained by industry participants, (iii) adopt measures to prevent such codification from becoming obsolete, and (iv) replace certain technical requirements with a principles-based approach.
- Workstream Six: We agree that eliminating the need for CSA approval of certain fund mergers will reduce regulatory burden. We have recommended that further burden reduction occur by no longer requiring securityholder approval of the fund mergers in those same circumstances.
- Workstream Seven: We agree that eliminating the need for CSA approval of certain changes relating to the managers of investment funds potentially reduces regulatory burden if the eliminated requirements do not resurface in the context of approval under NI 31-103. We have also recommended the repeal of OSC Staff Notice 81-710, which we believe created substantial new regulatory requirements outside the rule-making process.
- Workstream Eight: We view the codification of various prospectus delivery relief as a housekeeping matter that does not change regulatory burden. To reduce regulatory burden, we have recommended replacing certain technical requirements in that relief with a principles-based approach.
For each of the above workstreams, we have made specific and detailed proposals aimed at increasing the reduction of the regulatory burden, and have outlined the reasons supporting them. In some cases, we examined what we understand were the initial underlying policy reasons supporting the current disclosure requirements or regulatory regime, and noted that subsequent regulatory changes and actual industry practices warranted the elimination or reduction of a variety of additional requirements, the whole without compromising investor protection or the general quality of disclosure provided to investors. For example, we have made detailed proposals to improve and shorten the preparation of the new disclosure document combining the current annual information form and short form prospectus.
Changing the prospectus filing system
We have also proposed that the current process for filing and reviewing the simplified prospectus for mutual funds be substituted by a regime similar to that applicable to base shelf prospectuses for public companies. Our view is that when compared to the prospectus review process for public companies that frequently raise capital by public offering, the level of scrutiny by CSA staff of mutual fund prospectuses, the extent of the technical comments made by CSA staff during those reviews, and the timespans for completing such filings appear unduly onerous, burdensome and inefficient. We have consequently come to the conclusion that the prospectus filing and review process applicable to mutual funds has become obsolete and should be modernized, and believe that it should be possible for mutual funds to achieve the same level of efficiency as is currently available to public companies using the shelf prospectus system.
Consequently, we have proposed that the prospectus filing process for mutual funds include the following features:
- the simplified prospectus should be usable for at least 24 months before expiring and needing to be renewed;
- the principal regulator should be required to provide its comments within 3 business days such that the refiling process can be completed within 10 business days;
- a longer review period should only be required if the simplified prospectus raises novel issues;
- the review should include a template for the mutual funds’ fund facts. However, like a prospectus supplement to a shelf prospectus for a public company, the fund facts should not be reviewed when filed during the lifespan of the simplified prospectus unless the fund facts raise a novel issue; and
- a mutual fund should not be required to file an amendment nor obtain a receipt when the mutual fund files fund facts during the lifespan of its simplified prospectus.
We believe these changes would not compromise investor protection since it would be adopting a prospectus filing process already in place for public companies in Canada. The main impact of these changes is that they would achieve a level of efficiency comparable to public companies, which, we believe, should be made available to all public mutual funds.
New regulation and guidance
We have also noted that a significant amount of regulatory burden results from the CSA creating new requirements for the investment fund industry without using the rule-making process. This occurs by a variety of means including;
- comments made by CSA staff in the course of reviewing prospectuses or following desk and field audits of specific issues;
- CSA staff notices and informal publications such as the OSC Investment Funds Practitioner; and
- positions taken during enforcement proceedings.
In order to produce better regulation which (i) takes into account issues which may not have been considered by CSA staff, (ii) is proportional to the protection provided to investors by considering relative costs and benefits, and (iii) is implemented fairly by applying to all industry participants at the same time and in the same manner, we have encouraged CSA staff to discontinue the practice of effectively creating new regulations through positions and guidance issued outside the rule-making process.
While we do not support the creation of new regulation outside the rule-making process, we endorse and encourage the dissemination of true “guidance”. In our view, a statement by CSA staff that limits the possible interpretation of a securities law requirement is effectively amending those securities laws. Similarly, guidance which states that an industry participant will be treated as non-compliant if it does not adopt the procedures described in the guidance is effectively creating new securities legislation.
In our view, “guidance” only should provide industry participants with confirmation when various practices are sufficient to meet the requirements of securities legislation. It should not preclude other possible interpretations of securities law requirements, nor trigger adverse consequences for industry participants that choose not to follow that guidance.