By next summer, all mutual funds publicly offered in Canada will be required to have summary “fund facts” documents prepared and filed with the regulators for each class or series offered to the public. After years of debate with industry and investor advocates alike about a “point of sale” disclosure regime for mutual funds, the Canadian Securities Administrators (CSA) recently published final amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure and related instruments [available here] that are expected to come into force on January 1, 2011. These amendments mandate the preparation and filing of a fund facts document, of no more than four pages long, for each class or series of a mutual fund, as well as the availability of fund facts documents through website postings and free delivery to investors upon request. The fund facts documents for a mutual fund will be in addition to its simplified prospectus and annual information form, but will not be required to be delivered to investors by dealers and advisors at the point of sale (except upon request) – at least not for now.

Consistent with the CSA’s status report published in June 2010 – CSA Staff Notice 81-319 – the CSA propose to implement the new point of sale disclosure regime for mutual funds in stages. Stage 1 will be effective when the amendments to NI 81-101 and related instruments come into force on January 1, 2011; by the specified deadlines, fund facts documents must be filed with the regulators and made available to investors through website postings and upon request. Stages 2 and 3 relate to proposed and, as yet unpublished, rules requiring delivery of the fund facts to investors by dealers and advisors first on a post-trade basis and then at or before the “point of sale”.

POINT OF SALE IMPLEMENTATION AT A GLANCE

Stage 1 – File and Post Fund Facts

January 1, 2011           Final rule effective  

From April 8, 2011      Preliminary and pro-forma filings on and after this date must include preliminary/pro-forma fund facts documents. Once final, the fund facts documents must be filed with the regulators and posted on the mutual fund’s or manager’s website. Delivery to an investor must be made upon request and without charge.  

By July 8, 2011             A mutual fund that has not already filed fund facts documents must have filed them with the regulators and posted them on the mutual fund’s or manager’s website by this date. Delivery to an investor must be made upon request and without charge.

Stage 2 – Post-Trade Delivery of Fund Facts

The CSA to publish for comment rule proposals to permit delivery of fund facts documents in satisfaction of the current post-trade prospectus delivery requirements. If a fund facts document is delivered, the simplified prospectus would not be required to be provided.

Stage 3 – Point of Sale Delivery of Fund Facts

The CSA to publish for comment rule proposals that will mandate delivery of the fund facts document at or before the point of sale. The CSA will also consider extending the point of sale requirements to other types of publicly offered investment funds.

Post – Stage 3

The CSA will review the simplified prospectus and annual information form disclosure requirements to determine if amendments are necessary to reduce duplication. We hope that the CSA will give strong consideration to merging the simplified prospectus and annual information form into a single “foundation” disclosure document.

THE FUND FACTS DOCUMENT

The fund facts document remains the cornerstone of the CSA’s point of sale initiative and is the focus of this Stage 1 and the final rule amendments. Fund facts documents must be prepared on a per-class or series basis for each fund and cannot be longer than four pages (two double-sided pages). Each fund facts document must be separately posted onto a fund’s or fund manager’s website, but the CSA has responded to strong feedback by allowing managers and dealers, when providing the documents to investors, to bind a fund facts document together with other fund facts documents of the same mutual fund or other fund facts documents of the same family of mutual funds. For mutual funds distributed in Québec, the fund facts documents will need to be prepared in French, or in both French and English.

The fund facts documents for a mutual fund would be prepared and filed annually at the same time as the renewal simplified prospectus and annual information form for the mutual fund, which means they will be subject to regulatory review in the same way as the fund’s other prospectus documents. If a material change to the mutual fund relates to a matter that requires a change to the fund facts documents, amended and restated fund facts documents must be filed. In addition, fund facts documents may be updated at any time during a year, by filing amended and restated fund facts documents.

The CSA made some changes to the fund facts disclosure requirements from the previous CSA proposals in response to both industry and investor advocate comments, although they also held the line on many controversial disclosure proposals. The final form requirements are more detailed than previous publications, and will require close attention and some intuitive interpretation to ensure compliance. We expect that there will be challenges to meet the page restrictions, while still providing the level of disclosure required and maintaining appropriate clarity and legibility.

Notable changes and requirements include:

  • Fund facts documents need not meet specified grade levels on the Flesch-Kincaid reading level test, although the CSA continue to refer positively to this test in the companion policy to NI 81-101. Plain language, including brevity and simple phrasing, will still be the key to producing acceptable fund facts documents.  
  • The form requirements for the fund facts document are in two parts: Part 1 – Information about the Fund; and Part II – Costs, Rights and Other Information. Each part is intended to be no longer than two pages in length and the entire document cannot be longer than four pages. The specific ordering and headings mandated in the form requirements must be adhered to.  
  • Required information about investment portfolio and performance of the fund must be provided as of a date that is within 30 days of the date of the fund facts document, notwithstanding the many comments outlining the problems associated with providing this information on such a current basis. Information about short positions must be provided, and the same “look through” tests for derivative and index instruments are mandated as in National Instrument 81-106 for financial disclosure.
  • The risk disclosure requirements have not been materially changed. The CSA have retained the simple five risk-level scale they first proposed. Managers will be permitted to use whatever risk assessments they wish in order to determine the risk levels of their funds. However, the methodology must now be described in the simplified prospectus of the applicable mutual funds, on a fund-by-fund basis (i.e. in the Part B sections of the simplified prospectus). Managers must also disclose how frequently the investment risk level is reviewed, and provide the actual methodology to investors upon request.  
  • The fund facts document must now include brief disclosure about tax, under a new heading a word about tax.  
  • Disclosure of the various sales charges, including deferred sales charges, must now also be provided in “dollars and cents”, which the CSA believe will give an investor a more accurate understanding of the cost of investing. The disclosure requirements have been modified to allow funds to emphasize that the sales charges are negotiable and may be zero.  
  • Fund expenses are to be provided by way of the annual management expense ratio (MER) and the trading expense ratio (TER). These two ratios are to be provided based on the information in the latest annual financial statements of the fund – and in response to comments – the MER is to be provided on an actual basis – that is, including any waivers or fee absorptions by the manager. The final rules no longer require disclosure of the component parts of the MER, but the CSA have also clearly stated that there is no ability for a fund to disclose, for example, how much of the MER is made up of the new Harmonized Sales Tax which is payable by funds in various provinces. The CSA also have mandated a new requirement – “fund expenses”, which is required to be the combination of the MER and the TER and described as a percentage, as well as in “dollars and cents”. The CSA explain that this fund expenses figure must be portrayed in bold font or other formatting, so as not to confuse a reader into thinking that this is a separate expense to the fund. We are concerned that this figure could be misinterpreted, particularly since there is no ability to provide a reader with any context or further explanation about this disclosure.  

OTHER DEVELOPMENTS

In addition to explaining their staged approach to move forward with the point of sale disclosure regime, the CSA also indicated that they have put aside, for now, their proposals to harmonize investor rights across the country. This means that the 2009 proposal for a two-day cooling off right for investors is not part of the current stage of the rule amendments.

UPDATE ON POINT OF SALE DISCLOSURE FOR SEGREGATED FUNDS

The CLHIA’s Guideline G2 – Individual Variable Insurance Contracts Relating to Segregated Funds was amended on November 25, 2009, with such amendments taking effect January 1, 2011. Pursuant to these amendments, insurers will be required to make fund facts continuously available to contract holders on their websites and to provide printed copies upon request without charge. The amendments also provide that the requirement to deliver the information folder of an individual variable insurance contract includes a requirement to deliver the fund facts. Insurers will also be required to include a new “key facts” executive summary of the contract in the information folder. The CLHIA has indicated that the issue of the delivery of fund facts for subsequent transactions will be addressed when the CSA completes its review and consideration of the issues related to point of sale delivery.

INTERNATIONAL DEVELOPMENTS

As we noted in our June Investment Management Bulletin, the Canadian point of sale disclosure project is similar in many respects to disclosure reform initiatives currently underway in other international markets. The CSA explain that they consider the Canadian reforms to be in line with developing global standards, which they consider essential for the continued success of the Canadian mutual fund industry.