In June the Canadian Securities Administrators (the "CSA") published for comment proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure and its related companion policy and forms. Consequential amendments are also proposed to be made to the following instruments:
- National Instrument 81-102 Mutual Funds and Companion Policy 81-102CP Mutual Funds;
- National Instrument 81-106 Investment Fund Continuous Disclosure and Companion Policy 81-106 CP Investment Fund Continuous Disclosure; and
- National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR).
The comment period with respect to these proposed amendments ends on October 17, 2009. The CSA have made a number of requests for comment on specific issues (see Appendix B of the notice).
The CSA describe the proposed amendments as a "significant investor protection initiative" that "sets out the first phase of the CSA's proposed approach to implement the shared vision of securities and insurance regulators to provide investors with more meaningful and effective prospectus disclosure of mutual funds and segregated funds, as described in Framework 81-406 Point of sale disclosure for mutual funds and segregated funds published by the Joint Forum of Financial Market Regulators (Joint Forum) on October 24, 2008."
The CSA state that following the implementation of the proposed amendments they will conduct a review of the overall disclosure regime for mutual funds to reduce "unnecessary duplication" and also consider the application of the new disclosure regime to other investment funds.
The proposed changes are based on three principles:
- providing investors with key information about a fund;
- providing the information in a simple, accessible and comparable format; and
- providing the information before investors make their decision to buy.
The most notable proposed change to the mutual fund prospectus regime is the Fund Facts document. It would be a third disclosure document for mutual funds in addition to the simplified prospectus and annual information form. It is intended to be a plain language document, generally fitting on both sides of one page, that "highlights the potential benefits, risks and the costs of investing in a mutual fund." The most recently filed Fund Facts document would be incorporated by reference into, and form part of, the simplified prospectus. It also would have to be posted to the website of the mutual fund, mutual fund family or manager.
For all initial purchases recommended by a dealer, the Fund Facts document would have to be delivered to an investor either before or at the point of sale. For money market fund purchases recommended by a dealer or purchases initiated by an investor, investors could choose to receive the Fund Facts document either before purchasing or with the confirmation of trade after the purchase. Investors who make initial purchases through an order execution only account would receive the Fund Facts document with the confirmation of trade. The document would not have to be delivered for subsequent purchases of a mutual fund currently held in the investor's account.
The Fund Facts document could be delivered in person, by mail, by fax, electronically or by other means, but not by "oral delivery" or access alone. The number of Fund Facts documents that may be consolidated into a fund family document or other grouping when delivered would be limited in order to make it easier for investors to review.
Existing statutory rights of investors that apply for misrepresentations in a prospectus would also apply to misrepresentations in the Fund Facts document. The proposed changes contemplate replacing the current withdrawal and rescission rights under securities legislation with a single, harmonized two-day cancellation right for investors applicable to all mutual fund purchases. The purpose is to give investors a reasonable opportunity to change their minds "if they have been sold a mutual fund they really do not want."
It is proposed that delivery of the Fund Facts document would satisfy the delivery of a simplified prospectus under securities legislation, although that may require legislative amendments in some jurisdictions. Two alternatives being considered by the CSA are to require the simplified prospectus to be delivered with the Fund Facts document or for the Fund Facts document to become the simplified prospectus.
Dealers, advisers and fund managers should carefully consider the proposed amendments and decide whether to provide the CSA with comments by October 17.