The Canadian securities administrators (CSA) have granted exemptions to permit all dealers to deliver the Fund Facts documents to investors in the mutual funds managed by 48 specified fund managers, in place of the simplified prospectus. These exemptions were anticipated by the CSA in the February 2011 Staff Notice Early Use of the Fund Facts to Satisfy Prospectus Delivery Requirements. Please see BLG’s Investment Management Alert Canadian Regulators Will Permit Early Use of Fund Facts March 2011 [available here]. In parallel with finalizing the exemptions, the CSA also published for comment proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and its companion policy, as well as proposed amendments to the Fund Facts form requirements and certain consequential amendments. This package of proposed amendments constitutes the CSA’s promised ‘Stage 2’ implementation of the overall point of sale disclosure framework.

EARLY USE OF FUND FACTS EXEMPTIONS

The novel and heavily negotiated exemptions permitting early use of Fund Facts, were granted by the Ontario Securities Commission (OSC) and the Manitoba Securities Commission (MSC) and are expected to be granted by the Autorité des marchés financiers (AMF) in their capacities as principal regulators. These exemptions have a number of important conditions, but essentially permit any distributor of the applicable mutual funds to deliver only the relevant Fund Facts documents to an investor in full satisfaction of the post-trade prospectus delivery obligation set out in securities legislation.

Key conditions to the relief include:

  • Dealers can only rely on the exemption in respect of the securities of mutual funds managed by the specific fund managers named in the exemptions. The CSA were reluctant to grant any relief that could be viewed as a “blanket” exemption. Conversely, however, the exemptions clearly permit any dealer trading in these securities to rely on this exemption. If this relief is important for other mutual fund managers, then those managers will need to seek specific exemptions that will apply to dealers trading in securities of their mutual funds.
  • Dealers can only rely on the exemptions where the prospectus for the applicable mutual fund has been specifically amended to incorporate the Fund Facts by reference into the prospectus. This should become less and less of a concern as the 2011 renewal season proceeds.
  •  Investors must receive notice that the rights tha t typically relate to the delivery of a prospectus apply to the delivery of the Fund Facts.
  • Restrictions on binding Fund Facts with other Fund Facts for the purposes of delivery.
  • Dealers must receive certain written information from the applicable fund manager and must acknowledge and agree to certain specified matters, including:
  • Agreeing to give investors a right equivalent to the legislated rights of withdrawal.
  • Acknowledging that if the Fund Facts is not delivered then a prospectus must be delivered and the legislated rights of rescission will continue to apply, and
  • Confirming it has policies and procedures in place to comply with the decision.
  • To the extent a dealer does not honour a valid right of withdrawal after delivery of the Fund Facts, the fund manager will cause the relevant fund to honour the right.
  • Recordkeeping requirements on both the dealers and the fund managers.

Significantly, the CSA have also required that specific additional disclosure be included in a Fund Facts about fees payable directly by investors to the fund manager, and any requirement to participate in a fee-based arrangement with dealers to purchase the securities. This additional disclosure will affect Fund Facts documents primarily for institutional or fee-based series. Unless this disclosure is included in the applicable Fund Facts document, dealers will not be able to rely on the relief for those series of mutual funds.