The long-awaited “Stage 2” package of reforms that apply to mutual fund “point of sale” disclosure has now been finalized by the Canadian Securities Administrators (CSA) and the rule amendments are expected to come into effect on September 1, 2013. Amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and its companion policy (as well as consequential amendments made to National Instrument 81-102 Mutual Funds) were finalized and published on June 13, 2013 [available here]. This package of reforms will require all mutual funds to file amended Fund Facts that comply with new disclosure requirements by May 13, 2014. Dealers will be required to deliver the applicable Fund Facts to investors in mutual funds within 2 days of the trade (which is the same timing as currently required for delivery of prospectuses) on and after June 13, 2014. Simplified prospectuses will no longer be required to be delivered to investors after June 13, 2014.

Although significant new disclosure requirements are still mandated for Fund Facts, the CSA pulled back on some of the more controversial disclosure proposals in response to industry feedback and as a result of their own testing of the revised Fund Facts documents. The final rules – and the transition periods – reflect an understanding by the CSA of the reasons prompting the feedback and will result in improvements to Fund Facts disclosure for investors

THE CSA POINT OF SALE DISCLOSURE PROJECT

We have been active observers in every stage of the CSA’s Point of Sale Disclosure Project, including summarizing each rule proposal and amendment, as well as commenting on each proposal and working with our clients to obtain early “Stage 2” exemptive relief. Our Investment Management Bulletin Canadian Securities Regulators Release Second Request for Comments on ‘Stage 2’ of Point of Sale Disclosure July 2012 [available here] describes the second publication for comment of these Stage 2 rule changes.

We received feedback from OSC staff on a few implementation issues, including the status of “PAC” prospectus delivery relief, the ability to file Fund Facts using the new form after the effective date of the amendments (September 1, 2013), but before January 13, 2014 (to allow for one filing, rather than two filings in 2014) and confirmation that the “sunset” clause for the existing relief allowing for delivery of Fund Facts rather than the simplified prospectus means that the relief expires on June 13, 2014 and not before.

There remains a “Stage 3” for the CSA’s Point of Sale Disclosure Project. Stage 3 will mandate actual point of sale delivery of the Fund Facts documents – so that investors will receive the Fund Facts before making an investment in a mutual fund. The CSA also promise to expand the concept of Fund Facts to other investment funds. No timing has been suggested for these rule proposals, but we expect that the CSA will be working towards publication of proposed rule changes for comment during 2014.

DELIVERY OF FUND FACTS – MANDATORY ON AND AFTER JUNE 13, 2014

Currently, dealers are required to deliver the simplified prospectus for a mutual fund to investors within 2 days of a trade. Amendments to provincial securities legislation and NI 81-101 will mandate that dealers deliver the applicable Fund Facts instead of the simplified prospectus. No changes to the actual delivery requirements have been made at this stage, nor have the withdrawal and rescission rights been amended, other than to require and acknowledge that the applicable Fund Facts document is to be delivered in place of the simplified prospectus. This requirement will come into force for any trades on or after June 13, 2014.

The CSA has made no move to review existing rescission and withdrawal rights on a national basis – accordingly, the current non-harmonized legislative regimes will continue. We continue to be disappointed with the lack of a policy review of this important investor protection area.

REVISED FUND FACTS – MANDATORY FILING BY MAY 13, 2014

All mutual funds will be required to file Fund Facts according to the new Form requirements on and after January 13, 2014 – that is, on any pro forma or preliminary filing made on or after that date. As the CSA required in 2011 when the Fund Facts were first made mandatory, the CSA will require all mutual funds to file a revised Fund Facts for each series and class by May 13, 2014. OSC staff have confirmed that they will work to alleviate the burden of having to file two sets of Fund Facts in 2014 particularly for those many mutual funds whose lapse dates fall in late spring/early summer.

The main changes to the Fund Facts disclosure requirements are largely positive, particularly when viewed against the June 2012 proposed changes:

  • Fund Facts will be permitted to be bound with account application documents, registered tax plan documents, transaction confirmations and certain other disclosure documents relating to transactions listed on the confirmations. We expect that this will provide much needed flexibility for delivery of the documents and will be welcomed by investors receiving the information packages.
  • Funds will be permitted to disclose material changes and proposed fundamental changes in their Fund Facts and there will be flexibility on where this information can be placed in the Fund Facts.
  • Disclosure of fund codes and other forms of identifiers will be permitted in the Fund Facts.
  • The Quick Facts section of the Fund Facts will disclose the date that the applicable series or class started – and not the date that the fund was created and commenced distribution. We consider information about both dates to be important for investors and accordingly recommend requesting permission to also include this date.
  • Funds will be permitted to present financial information as at a date within 60 days of the date of the Fund Facts, which represents an extension from the current 30 days, providing some much needed breathing room to allow for the collection and presentation of financial data.
  • The new form requires clarifications on risk ratings and how to read the information provided. The CSA have dropped the 2012 proposal to provide additional narrative disclosure about the top risks to a mutual fund, but the revised form now requires additional mandatory disclosure regarding volatility.
  • Additional performance information will be required. Mutual funds will have to disclose both the best and the worst 3-month periods for the past 10 years (or since inception). The disclosure will be both in percentage and dollar formats. The average return for the last 10 year period (or since inception) will also be required. The CSA improved on the 2012 proposals for this disclosure in response to comments, by adding in the “best” 3-month period, by limiting the disclosure to the past 10 years (or since inception) and also by dropping the 2012 proposal that mutual funds compare their performance to a 1-year GIC rate.
  • The Fund Facts will be required to refer readers to the CSA brochure on mutual funds Understanding mutual funds. We recommend all industry participants keep track of this brochure to ensure an appropriate understanding of its contents, particularly since investors/clients may ask about this brochure.
  • Additional language about trailing commissions will be required – as well as a mandatory statement about the influence that differing commissions may have on advisors’ recommendations. This latter statement is intended by the CSA to be less fund focused – and more generic to differing types of investments.
  • For new funds or series – disclosure of the management fees and expenses will be required, in lieu of the mandatory MER and TER disclosure (which won’t be available because the fund or series is new).

Notwithstanding the additional mandatory information, Fund Facts continue to be limited to 4 pages in length.

The CSA also published the results of their testing of the July 2012 version of the revised Fund Facts, which informed their decisions on the changes to the Fund Facts, as well as the industry feedback received as part of the comment process. The CSA testing results are [available here].

NEXT STEPS

Although no definitive timing has been announced, the CSA clearly intend to press forward with “Stage 3” of the point of sale disclosure project which, if it does proceed as currently contemplated, will entail:

  • Mandated pre-trade delivery of Fund Facts at point of sale and
  • Expanding the scope of Fund Facts to require other investment funds, including exchange-traded funds and closed-end funds, to prepare these documents for delivery to investors. Exemptive relief expected to be granted by fall 2013 to distributors of ETFs will mandate delivery of a “summary” document for all ETF trades within 2 days of the trade, which is a significant change to the disclosure regime that applies to ETFs currently.

The CSA also signal that they continue to work in the area of mutual fund “risk” – specifically on the development of a CSA risk classification methodology.

In this most recent publication, the CSA do not mention any project to revamp the simplified prospectus and the annual information form to reflect the changes to the Fund Facts and the delivery system. We consider this review to be an essential adjunct to the point of sale disclosure project and to be very important to ensure the best possible disclosure system for mutual funds and their investors, as well as the elimination of unnecessary costs and duplication of disclosure and effort.

It is also important that the CSA coordinate disclosure proposals and requirements. It will be particularly important that “Stage 3” of the point of sale disclosure initiative recognize and be coordinated with the CSA’s “client relationship model” cost and performance disclosure changes (CRM-2), which come into effect over a three-year period ending July 15, 2016. As it stands, there has been little recognition by the CSA as to how the Fund Facts fit with the CRM-2 disclosure initiative and vice versa, notwithstanding that very similar retail investor protection aims are apparent for both initiatives.

In light of the CRM-2 changes when coupled with the revised Fund Facts regime, registrants’ “relationship disclosure” information ideally should refer to the new Fund Facts documents in order to assist mutual fund investors in understanding the information that will be provided to them, as well as knowing what additional information they may access. Dealing representatives may need training in order to meet the CSA’s expectations that they will use the Fund Facts in the sales process with clients and prospective mutual fund investors.