Implementation of Point of Sale Disclosure for Mutual Funds
On October 8, 2010, the Canadian Securities Administrators ("CSA") published the Implementation of Stage 1 of Point of Sale Disclosure for Mutual Funds. This notice of amendments contains changes to National Instrument 81-101 Mutual Fund Prospectus Disclosure, Form 81-101F1 Contents of Simplified Prospectus, Form 81-101F2 Contents of Annual Information Form, and Companion Policy 81-101CP Mutual Fund Prospectus Disclosure. New Form 81-101F3 Contents of Fund Facts Document is part of the amended Instrument. The Instrument only applies to mutual funds subject to National Instrument 81-101 Mutual Fund Prospectus Disclosure.
1. Substance and purpose of the amendments to the Instrument
The CSA believes that investors do not use the information contained in the simplified prospectus because they have trouble finding and understanding the information they need. In view of this, the Fund Facts document has been developed to make it easier for investors to find and use key information. The Fund Facts document (described in detail in Form 81-101F3) is concise, and is written in plain language that highlights the potential benefits, risks and costs of investing in a mutual fund. The CSA believes that these amendments will enhance investor protection by providing investors with an increased understanding and a tool for meaningful comparison with other funds. The CSA also believes that the efficiency of Canadian capital markets will be increased through the harmonization of disclosure regimes for mutual funds and segregated funds.
2. History of the amendments
On October 24, 2008, The Joint Forum of Financial Market Regulators published a framework paper ("the Framework") with the goal of harmonizing the disclosure regime of mutual funds and segregated funds. In order to achieve this, the Framework focused on three main 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. An article discussing the Framework is available here.
Concurrent to the release of the Framework, CSA Notice 81-318 Request for Comment - Framework 81-406 Point of sale disclosure for mutual funds and segregated funds was published, requesting comments on issues related to the implementation of the Framework and its principles. On June 19, 2009 proposed amendments were published. An article discussing the proposed amendments is available here.
The 54 comment letters received indicated that stakeholders generally agreed with the benefits of providing more meaningful and simplified information to investors through a Fund Facts document. Significant comments were made related to operational and compliance concerns with the point of sale delivery for mutual funds, and a large number of comments received requested a point of sale disclosure regime for other types of publicly offered investment funds and other securities at the same time.
3. Summary of Changes to the 2009 Proposal
The Instrument only finalizes those aspects of the 2009 proposal consistent with the first stage of the approach to implementation described in the staff notice. As it pertains to Fund Facts documents, this consists of the production requirements, the online availability, and delivery obligations.
The Fund Facts document content requirements have changed in a number of ways, including:
- a new introductory heading directing the investor to the simplified prospectus for further information must be added;
- the "How risky is it?" section must contain a cross reference to the simplified prospectus for additional information;
- a new section called "A word about tax" has been added to provide general information about the impact of income tax on mutual fund investments;
- the renamed "Fund Expenses" category (previously "Ongoing Fund Expenses") no longer requires the individual management expense ratio ("MER") components to be listed separately, however it is now necessary to display the trading expense ratio ("TER") and the total of MER and TER as a percentage of the mutual fund’s value;
- dollar and cents figures must now be shown in Sales Charges, Fund Expenses and Trailing Commission; and
- the maximum length of the Fund Facts has been increased from three pages to four pages (two double-sided) to accommodate the additional requirements.
While the Fund Facts document must still be written in plain language, using a format that assists in readability and comprehension, the requirement to conform to Grade 6 or lower readability according to the Flesch-Kincaid scale has been removed.
The Instrument no longer contemplates a regular three or six-month filing of the Fund Facts document. Instead, the Fund Facts must be filed any time there is a material change to the information contained in it or when the mutual fund wishes to provide more current information. Once filed, the Fund Facts document must be posted on the website of the mutual fund, the mutual fund family or the mutual fund manager, and a copy must be delivered or sent, free of charge, upon request.
The packaging / binding requirements have been revised to limit the requirements on binding. The Fund Facts document for each class or series of funds must be separately posted online; the Fund Facts document for all funds related to the simplified prospectus (or multiple simplified prospectuses) must be filed together on SEDAR; and, if the Fund Facts is being delivered to the investor with a simplified prospectus, Fund Facts document must be the first document in the package.
As the Fund Facts document is incorporated by reference to the Simplified Prospectus, existing statutory rights for misrepresentation in a prospectus will apply for any misrepresentations in the document. The Instrument no longer contemplates the replacement of the current withdrawal and rescission rights with the proposed harmonized two-day cooling-off right for investors.
The provisions related to point of sale delivery have been removed in this stage of the implementation.
Transition amendments include a transition period of slightly more than three months following the coming-into-force date of January 1, 2011. This provides a mutual fund with at least six months from the publication date of this Instrument to file and post a Fund Facts document.
The CSA has stated that the project has two remaining stages. Stage 2 involves publishing for comment a proposal to require delivery of a prospectus within two days of buying a mutual fund. Stage 3 involves a review of comments obtained and publishing the proposed requirements to implement point of sale delivery for mutual funds. During these stages, the CSA will also consider point of sale delivery for other types of publicly offered investment funds and the harmonization of the withdrawal and rescission rights of investors.
5. Important Dates
The Transition Period - January 1, 2011 to April 7, 2011:
During the transition period, a mutual fund may choose to file a Fund Facts document for each class or series of the mutual fund. This may happen either concurrently with the mutual fund’s filing of its simplified prospectus and annual information form or by the mutual fund initially filing a Fund Facts document separately on SEDAR. Once filed, the Fund Facts document must be posted to the website of the mutual fund or the mutual fund’s manager.
After April 7, 2011
A mutual fund that files a preliminary or pro forma simplified prospectus and annual information form must concurrently file a Fund Facts document for each class or series of the mutual fund offered under the simplified prospectus. A preliminary or pro forma Fund Facts should not be posted to the website of the mutual fund or the mutual fund’s manager.
On or before July 8, 2011
If the mutual fund has not already done so, a Fund Facts document for each class or series of the mutual fund must be filed before July 8, 2011. This may occur either concurrently with the filing of the mutual fund’s simplified prospectus and annual information form or by the mutual fund initially filing a Fund Facts document separately on SEDAR. Once filed, the Fund Facts must be posted to the website of the mutual fund or the mutual fund’s manager.