On February 24, 2011, the Canadian Securities Administrators published CSA Staff Notice 81-321 Early Use of the Fund Facts to Satisfy Prospectus Delivery Requirements [available here], which clearly signals the CSA’s willingness to permit post-trade delivery of Fund Facts documents for mutual funds in lieu of the simplified prospectus. If relief is granted, the CSA will permit dealers to deliver only the Fund Facts document for a mutual fund in full satisfaction of the post-trade prospectus delivery obligation set out in securities regulation. The Staff Notice sets out the key terms and conditions that the CSA will impose when granting this discretionary relief.
There can be expected to be significant cost savings for the fund industry through reduced printing and mailing costs if the Fund Facts document is delivered in place of the simplified prospectus. The CSA also believe that investors will be better served by receiving the shorter Fund Facts documents. While it is not entirely clear how the exemption process will operate, the proposed conditions will likely require co-operation between distributors and fund managers.
We expect that integrated fund families, where distribution of third party funds is limited, will derive significant benefit from the CSA’s suggested process, but we also suggest that other fund managers consider whether or not they wish to apply for relief on behalf of all the distributors of their funds. Dealers distributing mutual funds of various fund managers may also wish to apply for relief, even if the mutual fund managers do not apply for exemptions.
The discussion in the Staff Notice raises issues.
Who will apply for the relief? Delivering a prospectus after a trade is a dealer’s obligation. If a dealer obtains the relief, the dealer would have to consider how to meet the conditions when a number of the conditions are matters under the fund manager’s control. We believe it would be appropriate for a fund manager or a group of fund managers to apply for relief on behalf of dealers that distribute the manager’s mutual funds, similar to the relief that many fund managers have obtained from the requirement to deliver a renewal simplified prospectus to investors in pre-authorized investment plans.
How to apply for the relief? Although the Staff Notice does not specify whether the CSA will only consider applications on an individual basis, or whether the CSA will consider an application from a group of named applicants, we have clarified with the staff of the Ontario Securities Commission that the CSA fully expects group applications to be made. The Staff Notice is silent on whether the CSA would be prepared to grant a blanket/omnibus relief without naming specific applicants, but we know that the OSC is increasingly reluctant to grant relief on this basis.
A dealer must establish compliance systems – If a Fund Facts document is delivered in place of a simplified prospectus to satisfy the delivery obligation, the time limit on an investor’s withdrawal and rescission rights will be triggered when the investor receives the Fund Facts document pertaining to the series of units or shares that the investor purchased. A dealer must establish a suitable compliance process to document that the correct Fund Facts document pertaining to not only the right fund but the right series is sent to the investor.
A dealer must coordinate with fund managers – Many of the proposed conditions to the relief described in the Staff Notice will be within the control of fund managers and not dealers. For example, the simplified prospectus for the funds must specifically incorporate by reference the Fund Facts, which means the prospectus must either have been renewed or amended. This may affect the timing of any application for exemption. We recommend coordination amongst dealers and fund managers.
The Staff Notice represents the latest step towards the CSA’s ultimate goal of “point of sale” delivery of Fund Facts documents. For a discussion on the CSA’s intended implementation schedule relating to the point of sale initiative and a discussion on the current requirements relating to the Fund Facts document, please see BLG’s Investment Management Bulletin Fund Facts Mandatory for Canadian Mutual Funds in 2011 October 2010 [available here].