Point Of Sale Disclosure Proposals For Canadian Mutual Funds Released For Comment

Comment Deadline: October 17, 2009

The Canadian Securities Administrators have released draft rules

that would implement the first stage of the CSA's goal to

improve mutual fund disclosure. Draft amendments to National

Instrument 81-101 Mutual Fund Prospectus Disclosure and

its companion policy, along with consequential amendments to other

national instruments, were released for public comment on June 19,

2009 [click here for the

proposals]. Comments on the proposals must be

submitted to the CSA by October 17, 2009.

The amendments are designed to implement the revised disclosure

proposals recommended by the Joint Forum of Financial Market

Regulators in the October 2008 Framework 81-406 Point of sale

disclosure for mutual funds and segregated funds. The CSA

have, to a limited extent, taken into account the comments provided

to the CSA on the above-noted Framework, but continue to ask for

feedback on the costs and other issues associated with the current

proposals. Some concessions have been made by the CSA in response

to comments, but many of the same concerns as were raised with the

Framework continue to exist.

In concert with the CSA, the Canadian Council of Insurance

Regulators (CCIR) is also consulting on changes to the regulatory

framework that applies to segregated funds. The CCIR is working

with the Canadian Life and Health Insurance Association of Canada

(CLHIA) and its members in recommending changes to CLHIA's

Guideline G-2 on Individual Variable Insurance Contracts

Relating to Segregated Funds to implement improved disclosure

and investor rights for purchasers of segregated funds. On June 26,

2009, the CCIR published for comment a consultation document

entitled Implementation of the Joint Forum Point of Sale

Framework for Segregated Funds [available here], which consists of the

sections of CLHIA Guideline G-2 that will change as a result of

implementing the Joint Forum Point of Sale Framework. Comments on

this consultation paper are requested by September 11, 2009.

Mutual Fund Disclosure —

Background

Before 1986 - Canadian mutual funds prepared prospectuses and

summary prospectuses. Many fund managers consolidated the

disclosure about their mutual funds into one document for ease of

reference. Financial statements for the mutual funds had to

accompany the summary prospectus.

From 1986-2000 - National Policy Statement No. 36 required a

mutual fund to prepare a simplified prospectus and an annual

information form. Often the simplified prospectus and AIF documents

covered more than one mutual fund. Under NP 36, an investor

received both the simplified prospectus and the latest financial

statements for the fund.

From 2000 to present - National Instrument 81-101 Mutual

Fund Prospectus Disclosure replaced NP 36 and largely retained

the same regime, with important modifications to simplify the

disclosure. Simplified prospectuses are divided into two parts

– Part A, which is intended to describe the elements that

are common to all mutual funds and Part B, which contains specific

disclosure for each mutual fund covered by the simplified

prospectus. The Part B sections are required to be ordered

sequentially in a catalogue format to allow investors to easily

compare one fund with another. Financial documents mandated by

National Instrument 81-106 Investment Fund Continuous

Disclosure are incorporated by reference into the simplified

prospectus, but are not required to be given to investors.

Provincial securities legislation mandates delivery of the

prospectus by dealers to investors within two days of the purchase.

Prospectuses are generally delivered along with the trade

confirmation. Only the simplified prospectus is delivered (with the

financial statements until 2000), with the AIF being available on

demand. This post-trade delivery mechanism (which applies to all

prospectused offerings of securities) is coupled with time-limited

rights to withdraw from or rescind the purchase after receipt of

the prospectus.

The Joint Forum of Financial Market Regulators began looking at

disclosure (and its delivery) relating to mutual funds and

segregated funds as part of their work to harmonize the regulatory

regime of these investment products. The Joint Forum's first

consultation paper was released in February 2003 Consultation

Paper 81-403 Rethinking Point of Sale for Segregated Funds and

Mutual Funds, which was followed by Proposed Framework 81-406

Point of Sale Disclosure for Mutual Funds and Segregated

Funds (June 2007) and Framework 81-406 Point of sale

disclosure for mutual funds and segregated funds (October

2008).

The Proposed System

The CSA proposals consist of draft amendments to National

Instrument 81-101 and its companion policy, as well as a proposed

form for the fund facts document. The proposals contain detailed,

prescriptive rules for the creation of the fund facts document, as

well as for its delivery to investors. The CSA explain that their

proposals are built on three central principles

Providing investors with key information about a mutual

fund

Providing the information in a simple, accessible and

comparable format and

Providing the information before investors make their decision

to buy.

The cornerstone of the proposed disclosure regime continues to

be the fund facts document that must be developed for each series

or class of securities of a mutual fund. The fund's simplified

prospectus and annual information form must still be prepared and

filed, but will not be given to investors unless requested. Dealers

will, generally, be required to give an investor the most current

fund facts before placing an "initial" order for

securities of a mutual fund. Delivery can be achieved in person, by

regular or electronic mail, via fax, or by providing a specific

link to the fund facts posted on a website. Dealers also must bring

to their clients' attention the fund facts once it has been

delivered, and before finalizing the trade. Posting of fund facts

on a fund company's website will be required, but will not

eliminate the requirement for an...