On June 21, 2012, the Canadian Securities Administrators (CSA) published for second comment changes to proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, including related Form 81-101F3 (the Fund Facts document) and Companion Policy 81-101CP (collectively, the Amendments), which were originally published in August 2011.
On June 16, 2010, the CSA published CSA Staff Notice 81-319 Status Report on the Implementation of Point of Sale Disclosure for Mutual Funds, which set out the implementation of the new point of sale disclosure framework in three stages.
Stage 1 was completed on January 1, 2011 when amendments to NI 81-101 came into force that required mutual funds subject to NI 81‑101 to produce and file Fund Facts to be delivered to investors free of charge upon request. Stage 2 proposes amendments to permit the delivery of the Fund Facts to satisfy the current requirement to deliver a prospectus to investors within two days of buying a mutual fund. In Stage 3, the CSA will publish for further comments any proposed requirements that would implement point of sale delivery for mutual funds and the CSA will consider the use of summary disclosure documents and point of sale delivery for closed-end funds and exchange-traded funds.
PURPOSE OF THE AMENDMENTS
The Amendments constitute further changes to the August 2011 amendments proposed under Stage 2 in response to stakeholder feedback and focus primarily on the presentation of risk and performance in the Fund Facts. It is expected that the Amendments will be adopted in each jurisdiction of Canada, following satisfaction of applicable Ministerial approval requirements.
The CSA acknowledge that investors prefer to be offered a concise summary of key information regarding their mutual fund investments. The Fund Facts has been designed to make it easier for investors to find and use key information. The format currently provides investors with fundamental information regarding the applicable mutual fund, followed by a brief summary of fees, expenses, dealer compensation and the investor’s rights, and on a basis that is specific to the class or series of fund securities being purchased. As a result, it is expected that investors will be able to review key information about the potential benefits, risks and costs of investing in a mutual fund in an accessible format at a time that is relevant to their investment decision.
SUMM ARY OF PROPOSED CHANGES TO FUND FACTS
After considering submissions from 12 commenters regarding the August 2011 amendments, the CSA have proposed a number of changes to the presentation of risk and performance in the Fund Facts, including the following:
- Permitting all recognized and publicly available identification codes for the class or series of the mutual fund securities to be disclosed on the top of the first page.
- Amending the “Quick Facts” section by adding background on the history and relative size of the class or series of fund securities.
- Adding the percentage of each holding to the list of “Top 10 Investments” in order to provide additional information on potential concentration risk.
- Adding stronger warning language about the risks of investing in mutual funds.
- Including an explanation of the risk scale and the relationship between risk and losses.
- A new requirement to include a list of no more than four main risks of the mutual fund, while continuing to direct investors to the simplified prospectus for a more detailed discussion of risk factors.
- Adding a comparison of the mutual fund’s performance to a lower-risk investment – specifically, the one-year Guaranteed Investment Certificate (GIC).
- Adding the worst three-month return to the performance section to better inform investors about the possible loss of investing in the mutual fund.
- Adding a requirement to confirm whether trailing commissions are paid and disclosure of any potential conflicts arising from the payment of trailing commissions.
- Allowing greater flexibility to include disclosure of a material or proposed fundamental change to the mutual fund.
- Extending the time-frame for certain information disclosed in the Fund Facts from 30 days to 45 days to allow greater flexibility in complying with disclosure requirements.
- Adding a cross-reference to the brochure “Understanding mutual funds” which is available on the CSA website.
Additional changes include revising the list and order of documents that may be bound with the Fund Facts to include a cover page, account application documents and registered tax plan documents and removing the ability to attach documents to the simplified prospectus.
The CSA have proposed a six-month transition period to allow mutual funds a reasonable amount of time for the implementation of systems to facilitate the delivery of Fund Facts, including relevant changes to their Fund Fact disclosure templates.
The CSA are welcoming feedback, including industry views on:
- whether the additional explanation of the risk scale and the relationship between risks and losses will assist investors and whether such explanation is compatible with the classification methodologies used by fund managers,
- whether the proposed inclusion of the mutual fund’s four main risks will assist investors or whether short narrative descriptions of each risk should be considered and the manner of describing those risks,
- whether a comparison of the mutual fund’s performance with a lower risk investment could appropriately be made to benchmarks other than the one-year GIC, and
- whether currently filed Fund Facts should be amended to reflect these Amendments or whether they should be amended at the earlier of an amendment to the mutual fund offering documents or the filing of its annual pro forma prospectus.
The CSA are also in the process of testing the proposed changes to the Fund Facts with investors, which will inform any further changes the CSA intend to make. Comments on the proposed Amendments and other consequential amendments, including amendments to NI 81-102, and other areas of concern, are requested to be submitted to the CSA by September 6, 2012.