Securities Law & Instruments

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CSA NOTICE AND REQUEST FOR COMMENT

IMPLEMENTATION OF STAGE 3 OF
POINT OF SALE DISCLOSURE FOR MUTUAL FUNDS
– POINT OF SALE DELIVERY OF FUND FACTS

PROPOSED AMENDMENTS TO
NATIONAL INSTRUMENT 81-101
MUTUAL FUND PROSPECTUS DISCLOSURE AND
COMPANION POLICY 81-101CP
TO NATIONAL INSTRUMENT 81-101
MUTUAL FUND PROSPECTUS DISCLOSURE
(2ND PUBLICATION)



March 26, 2014

Introduction

The Canadian Securities Administrators (the CSA or we) are publishing for second comment changes to proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (the Rule or NI 81-101) and Companion Policy 81-101CP to National Instrument 81-101 Mutual Fund Prospectus Disclosure (the Companion Policy). We refer to the proposed amendments to the Rule and the proposed changes to the Companion Policy together as the Proposed Amendments.

The Proposed Amendments represent an important step in the final stage of implementation of the CSA point of sale disclosure initiative. They set out requirements aimed at implementing pre-sale delivery of the fund facts document (the Fund Facts) for mutual funds.

The Fund Facts is central to the point of sale disclosure framework. It is in plain language, no more than two pages double-sided and highlights key information to investors, including risk, past performance and the costs of investing in a mutual fund.

Pre-sale delivery of the Fund Facts will provide investors with the opportunity to make more informed investment decisions by giving investors key information about a mutual fund, in a language they can easily understand, at a time that is most relevant to their investment decision.

An earlier version of the Proposed Amendments was published by the CSA on June 19, 2009 (the 2009 Proposal). The 2009 Proposal included proposed amendments aimed at implementing all of the elements of the point of sale disclosure regime set out in Framework 81-406 Point of Sale Disclosure for mutual funds and segregated funds (the Framework), published in October 2008 by the CSA and the Canadian Council of Insurance Regulators, as members of the Joint Forum of Financial Market Regulators (the Joint Forum).{1}

The text of the Proposed Amendments follows this Notice and is available on the websites of members of the CSA.

We expect the Proposed Amendments to be adopted in each jurisdiction of Canada.

Background

Following the publication of the Framework by the Joint Forum and the CSA's 2009 Proposal, on June 18, 2010, the CSA published CSA Staff Notice 81-319 Status Report on the Implementation of Point of Sale Disclosure for Mutual Funds (the Staff Notice), which outlined the CSA's decision to implement the Framework in three stages.

• Stage 1, which came into force January 1, 2011, requires mutual funds to produce and file the Fund Facts and for it to be available on the mutual fund's or mutual fund manager's website. Since July 2011, every mutual fund has had a Fund Facts for each class and series of the mutual fund.

• Stage 2 was completed with the publication of final amendments on June 13, 2013. The amendments are phased-in, with the amendments to Form 81-101F3 Contents of Fund Facts Document effective as of January 13, 2014. The amendments that require delivery of the Fund Facts and allow for the Fund Facts to satisfy the current prospectus delivery requirement under securities legislation to deliver a prospectus within two days of buying a mutual fund take effect on June 13, 2014.

• In Stage 3, the CSA conveyed it would publish the Proposed Amendments aimed at implementing pre-sale delivery of the Fund Facts.

As part of Stage 3, the CSA is also proceeding with two other concurrent workstreams: (i) the development of a CSA mutual fund risk classification methodology, which was published for comment on December 12, 2013, and (ii) the development of a summary disclosure document for ETFs, similar to the Fund Facts, and a requirement to deliver the summary disclosure document within two days of an investor buying an ETF, which we anticipate publishing for comment in Fall 2014.

You can find additional background information and other Joint Forum publications on the topic of point of sale disclosure for mutual funds on the websites of members of the CSA.

Substance and Purpose

The principles underlying the CSA point of sale disclosure initiative are:

• 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.

These principles keep pace with developing global regulatory standards,{2} including the International Organization of Securities Commissions (IOSCO) Principles on Point of Sale Disclosure published in February 2011.{3}

We think the Proposed Amendments will provide investors with the opportunity to make more informed investment decisions, by giving investors key information about a mutual fund, in language they can easily understand, at a time that is most relevant to their investment decision. We also think the Fund Facts will assist investors in their discussions with their representatives, and highlight for investors where they can find further information about a mutual fund, before they make their investment decision.

Feedback on the 2009 Proposal

We received 54 comment letters on the 2009 Proposal. Copies of the comment letters have been posted on the Ontario Securities Commission website at www.osc.gov.on.ca. You can find the names of the commenters and a summary of the comments relating to the pre-sale delivery elements of the 2009 Proposal and our responses to those comments in Annex C to this Notice.

Generally, commenters agreed with the benefits of providing investors with the Fund Facts. We did, however, receive significant comments related to operational and compliance concerns in respect of pre-sale delivery of the Fund Facts. The concerns were primarily related to costs and complexity. Commenters also generally supported allowing a waiver from pre-sale delivery requirements for the Fund Facts in certain circumstances.

Changes to the 2009 Proposal

We have revisited the approach taken in the 2009 Proposal with respect to pre-sale delivery of the Fund Facts, informed by the regulatory regimes of other jurisdictions that have implemented pre-sale delivery requirements,{4} by IOSCO principles,{5} and by the comments received on the 2009 Proposal.

To address the feedback we received related to complexity and cost of compliance, the CSA has decided to proceed with a simpler, more consistent approach to pre-sale delivery of the Fund Facts. Accordingly, we are proposing a number of changes to the 2009 Proposal, specifically:

• for all purchases of mutual funds securities, the Funds Facts will be required to be delivered or sent to the purchaser before a dealer accepts an instruction, if the most recent Fund Facts has not previously been delivered;

• subject to certain conditions, an exception from pre-sale delivery of the Fund Facts will be allowed if the purchaser indicates that they want to complete the purchase immediately or by a specified time, and it is not practicable for the dealer to complete pre-sale delivery of the Fund Facts. In such circumstances, the Fund Facts must be delivered or sent within 2 days of purchase; and

• there are no longer exceptions from pre-sale delivery for purchases of money market fund securities, for purchases through an order execution-only account, or for purchases that are not recommended.

We have made a number of other changes to the 2009 Proposal to simplify the pre-sale delivery regime for Fund Facts. An overview of the changes we have made to the 2009 Proposal is set out in the chart at Annex A to this Notice.

We are requesting feedback on all aspects of the Proposed Amendments, and in particular, specific questions in Annex B to this Notice. The CSA continue to be committed to consulting with investors, representatives from the mutual fund industry, dealers, sales representatives and service providers on implementation issues related to pre-sale delivery of Fund Facts. The CSA will continue to work with Self-Regulatory Organizations (SROs) on issues arising from the transition to pre-sale delivery of Fund Facts.

Summary of the Proposed Amendments

Application

The Proposed Amendments apply only to mutual funds subject to NI 81-101.

Pre-Sale Delivery

The Proposed Amendments require delivery of the most recently filed Fund Facts to a purchaser before a dealer accepts an instruction for the purchase. The delivery requirement is for all purchases, without any distinction based on the type of mutual fund security purchased or the distribution channel. Consistent with securities legislation in some jurisdictions today, the Proposed Amendments do not require delivery of the Fund Facts if the purchaser has already received the most recently filed Fund Facts. However, in some jurisdictions, such as Quebec, a legislative amendment may be required to maintain the right of rescission for subsequent trades.

The method for delivery of the Fund Facts is consistent with the method for delivery of a prospectus under securities legislation. For example, it can be in person, by mail, by fax, electronically or by other means. Access will not equal delivery, nor will a referral to the website on which the Fund Facts is posted.

Exception where Delivery Impracticable

The CSA acknowledge that there may be circumstances that make pre-sale delivery of the Fund Facts impracticable. The Proposed Amendments contemplate an exception to pre-sale delivery of the Fund Facts in limited circumstances where the purchaser indicates that they want the purchase to be completed immediately, or by a specified time, and it is not reasonably practicable for the dealer to complete pre-sale delivery of the Fund Facts within the timeframe specified by the purchaser. In such circumstances, the dealer would be required to inform the purchaser of the existence and purpose of the Fund Facts and explain the dealer's obligation of pre-sale delivery of the Fund Facts. The dealer must also provide a general overview of the content of the Fund Facts, verbally, including the applicable rights of withdrawal or rescission that the purchaser is entitled to under securities legislation.

In such circumstances, the Fund Facts would then be required to be delivered or sent to the purchaser within two days of buying the mutual fund. This exception is on a purchase by purchase basis. A dealer cannot rely on standing instructions from the purchaser to effect post-sale delivery of the Fund Facts.

Exception for Pre-Authorized Purchase Plans

For pre-authorized purchase plans, the requirement for pre-sale delivery of the Fund Facts would not apply to subsequent purchases of securities of a mutual fund provided that the dealer provides initial and subsequent annual notices to the purchaser that includes information on how to access and request the Fund Facts and that the purchaser will not have a right for withdrawal of the purchase. A purchaser of a pre-authorized plan will continue to have a right of action for rescission or for damages if there is a misrepresentation in the prospectus of the mutual fund, including any documents incorporated by reference into the prospectus, such as the Fund Facts.

No Effect on Investor Rights

We are not proposing any changes to existing investor rights under securities legislation.

If the investor does not receive the Fund Facts, the investor has a right to seek damages or to rescind the purchase. The rights of the investor for failure of pre-sale delivery of the Fund Facts are the same rights under securities legislation today for failure to deliver the Fund Facts within two days of purchasing securities of a mutual fund.

The investor's right of withdrawal of purchase within two business days after receiving the Fund Facts remains unchanged. Consistent with securities legislation today, depending on the timing of delivery of the Fund Facts and the timing of the trade, the investor may or may not have the right of withdrawal of purchase.

The right for misrepresentation related to the Fund Facts has also not changed. The Fund Facts is incorporated by reference into the prospectus. This means that the existing statutory rights of investors that apply for misrepresentations in a prospectus also apply to misrepresentations in the Fund Facts.

In some jurisdictions, investors also currently have a right of rescission with delivery of the trade confirmation for the purchase of mutual fund securities. This right also remains unchanged under the Proposed Amendments.

Transition

The CSA propose a one year transition period for pre-sale delivery of the Fund Facts following the effective date of the Proposed Amendments. This means, from the time of publication of the Proposed Amendments in final form, a mutual fund will have one year to make any changes to update information delivery systems as well as to make changes to compliance systems for the oversight of pre-sale delivery.

Anticipated Costs and Benefits

We think the pre-sale delivery requirements for the Fund Facts, as set out in the Proposed Amendments, would benefit both investors and market participants by helping address the "information asymmetry" that exists between participants in the mutual fund industry and investors. Unlike industry participants, investors often do not have key information about a mutual fund before they make their investment decision, and may not know where to find the information. Providing pre-sale delivery of the Fund Facts would help bridge this information gap.

However, the extent to which investors and the mutual fund industry would be affected in terms of benefits and costs is difficult to quantify.

Benefits

The benefits of a more effective disclosure regime can be subtle and difficult to measure. It is difficult to quantify the value of investors having the opportunity to make more informed investment decisions. Research suggests that certain behavioral biases of investors may impact the effectiveness of policy initiatives that are designed to encourage better choices about financial products.{6} However, research on investor preferences for mutual fund information, including our own testing of the Fund Facts, indicates investors prefer a concise summary of the information to be offered before the sale so that they can use the information to make a decision.{7}

Some anticipated benefits of pre-sale delivery of the Fund Facts include:

• less risk of investors buying inappropriate products or not fully benefitting from the advice services they pay for;

• investors being in a position to better understand, discuss, and compare one mutual fund to another, particularly the costs of investing in the mutual funds, before making their investment decision; and

• investors becoming better informed overall, which reinforces investor confidence in mutual funds.

Costs

We think the costs of pre-sale delivery of the Fund Facts fall into two main categories: the one-time costs of change in moving to the new regime and the ongoing costs of maintaining the new system, in comparison with the cost of the existing regime.

We anticipate that costs to industry stakeholders will fall into the following general categories:

• updating information delivery systems; and

• compliance and staff costs in overseeing the delivery regime.

As industry stakeholders have already had to develop programs and systems to comply with recent pre-trade costs disclosure requirements in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, we think the costs to implement pre-sale delivery of the Fund Facts will be incremental in nature.

We also note that technology has advanced considerably since the 2009 Proposal. There are now service providers who have created the automated programs and applications for pre-sale delivery of the Fund Facts. These innovations facilitate pre-sale delivery of Fund Facts to investors.

Overall, we continue to believe that the potential benefits of the changes to the disclosure regime for mutual funds, as contemplated by the Proposed Amendments, are proportionate to the costs of making them. We are committed to reviewing the impact of pre-sale delivery of the Fund Facts following its implementation.

Local Matters

Annex F to this Notice is being published in any local jurisdiction that is making related changes to local securities laws, including local notices or other policy instruments in that jurisdictions. It also includes any additional information that is relevant to that jurisdiction only.

Some jurisdictions may require amendments to local securities legislation, in order to implement the Proposed Amendments. If statutory amendments are necessary in a jurisdiction, these changes will be initiated and published by the local provincial or territorial government.

Unpublished Materials

In developing the Proposed Amendments, we have not relied on any significant unpublished study, report or other written materials.

Request for Comments

We welcome your comments on the Proposed Amendments. To allow for sufficient review, we are providing you with 60 days to comment. In addition to any general comments you may have, we also invite responses to the specific questions for comment identified in Annex B to this Notice.

We cannot keep submissions confidential because securities legislation in certain provinces requires publication of a summary of the written comments received during the comment period.

Please submit your comments in writing on or before May 26, 2014. If you are not sending your comments by email, please send a CD containing the submissions (in Microsoft Word format).

Where to Send Your Comments

Address your submission to all of the CSA as follows:

British Columbia Securities Commission

Alberta Securities Commission

Financial and Consumers Affairs Authority of Saskatchewan

Manitoba Securities Commission

Ontario Securities Commission

Autorité des marchés financiers

Financial and Consumer Services Commission (New Brunswick)

Office of the Superintendent of Securities, Prince Edward Island

Nova Scotia Securities Commission

Office of the Superintendent of Securities, Newfoundland and Labrador

Office of the Superintendent of Securities, Northwest Territories

Office of the Yukon Superintendent of Securities

Office of the Superintendent of Securities, Nunavut

Deliver your comments only to the addresses below. Your comments will be distributed to the other participating CSA.

The Secretary
Ontario Securities Commission
20 Queen Street West
22nd Floor
Toronto, Ontario M5H 3S8
Fax: 416-593-2318
comments@osc.gov.on.ca
 
Me Anne-Marie Beaudoin
Corporate Secretary
Autorité des marchés financiers
800, square Victoria, 22e étage
C.P. 246, tour de la Bourse
Montréal (Québec) H4Z 1G3
Fax : 514-864-6381
consultation-en-cours@lautorite.qc.ca

Contents of Annexes

The text of the Amendments is contained in the following annexes to this Notice and is available on the websites of members of the CSA:

Annex A -

Changes to 2009 Proposal

 

Annex B -

Issues for Comment

 

Annex C -

Summary of Public Comments on the 2009 Proposal (relating to Pre-Sale Delivery of the Fund Facts)

 

Annex D -

Proposed Amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure

 

Annex E -

Proposed Changes to Companion Policy 81-101CP to National Instrument 81-101Mutual Fund Prospectus Disclosure

 

Annex F -

Local Information

Questions

Please refer your questions to any of the following:

Isabelle Boivin
Chantal Leclerc
Senior Policy Advisor,
Lawyer / Senior Policy Advisor,
Distribution Policies and SROs
Investment Funds Branch
Autorité des marchés financiers
Autorité des marchés financiers
418-525-0337, ext. 4817
514-395-0337, ext. 4463
isabelle.boivin@lautorite.qc.ca
chantal.leclerc@lautorite.qc.ca
 
Rhonda Goldberg
Irene Lee
Director,
Senior Legal Counsel,
Investment Funds Branch
Investment Funds Branch
Ontario Securities Commission
Ontario Securities Commission
416-593-3682
416-593-3668
rgoldberg@osc.gov.on.ca
ilee@osc.gov.on.ca
 
George Hungerford
Stephen Paglia
Senior Legal Counsel,
Senior Legal Counsel,
Corporate Finance
Investment Funds Branch
British Columbia Securities Commission
Ontario Securities Commission
604-899-6690
416-593-2393
ghungerford@bcsc.bc.ca
spaglia@osc.gov.on.ca
 
Ian Kerr
Michael Wong
Senior Legal Counsel,
Securities Analyst,
Corporate Finance
Corporate Finance
Alberta Securities Commission
British Columbia Securities Commission
403-297-4225
604-899-6852
ian.kerr@asc.ca
mpwong@bcsc.bc.ca
 
Agnes Lau
Senior Advisor -- Technical & Projects, Corporate Finance
Alberta Securities Commission
403-297-8049
agnes.lau@asc.ca

ANNEX A

CHANGES TO THE 2009 PROPOSAL

Type of account

Type of trade

Type of fund

Time of delivery

 

Initial purchase

Subsequent purchase

Annually

2009 Proposal

 

Full service

Dealer recommended

All funds other than money market funds

Before or at point of sale

 

 

 

 

 

Money market funds

Before or at point of sale OR With trade confirmation

No delivery

Investor will be given option to receive annually Fund Facts for all funds held

 

 

Investor initiated

All funds

 

 

 

 

Order execution only

All trades

All funds

With trade confirmation

 

 

 

Proposed Amendments

Full service

All trades

All funds

Before or at point of sale{*} OR Within 2 days of purchase in limited circumstances, subject to certain conditions (as outlined in the Notice)

No delivery unless a more recent version of the Fund Facts has been filed{**}

Not applicable

 

Order execution only

All trades

All funds

 

 

 

{*}Before a dealer accepts an instruction for the purchase of mutual fund securities.

{**}Subject to legislative amendments in certain jurisdictions.

ANNEX B

ISSUES FOR COMMENT

Exceptions from Pre-Sale Delivery of the Fund Facts

1. While the Proposed Amendments generally require pre-sale delivery of the Fund Facts, they also set out specific circumstances that would permit post-sale delivery.

a) Do you agree that we should allow post-sale delivery of the Fund Facts in certain limited circumstances? In particular, are there circumstances where post-sale delivery of the Fund Facts should be permitted but are not captured in the Proposed Amendments?

b) When pre-sale delivery is impracticable, one of the conditions for post-sale delivery of the Fund Facts is that the dealer provides verbal disclosure to the purchaser of certain elements contained in the Fund Facts. Please comment on whether the proposed disclosure elements are appropriate. If not, what additional disclosure should be included? Alternatively, are there any disclosure elements that should be excluded?

c) In the case of pre-authorized purchase plans, a Fund Facts would only be required to be sent or delivered to a participant in connection with the first purchase provided that certain notice requirements are met. Please comment on whether the Fund Facts should also be sent or delivered to a participant if the Fund Facts is subsequently amended and/or every year upon renewal of the Fund Facts. If so, what parameters should be put in place for such delivery? For example, should it be delivered in advance of the next purchase that is scheduled to take place after the Fund Facts has been amended or renewed? Or would post-sale delivery be more appropriate?

Compliance

2. The CSA expect that dealers will follow current practices to maintain evidence sufficient to demonstrate effective delivery of the Fund Facts. Are there any aspects to the requirements in the Proposed Amendments that require further guidance or clarification? If so, please identify the areas where additional guidance would be useful.

Anticipated Costs and Benefits of Pre-Sale Delivery of the Fund Facts

3. We seek feedback on whether you agree or disagree with our perspective on the benefits and costs of implementing pre-sale delivery of the Fund Facts. Specifically, do you agree with our view that the costs will be incremental in nature and/or one-time cost? We request specific data from the mutual fund industry and service providers on any anticipated costs.

Transition Period

4. We seek feedback from the mutual fund industry and service providers on the appropriate transition period for full implementation of the Proposed Amendments. For example, assuming that publication of final rules takes place in early 2015, please comment on the feasibility of implementing the Proposed Amendments within 3 months of publication. Would a longer transition period of 6 months or 1 year be more appropriate? If so, why? In responding please comment on the impact these different transition periods might have in terms of cost, systems implications, and potential changes to current sales practices.

5. We are currently contemplating a single switch-over date for implementing pre-sale delivery of the Fund Facts. From a business planning and business cycle perspective, are there specific months or specific periods of the year that should be avoided in terms of selecting a specific switch-over date? Please explain.

ANNEX C

SUMMARY OF PUBLIC COMMENTS ON PROPOSED DELIVERY FRAMEWORK IMPLEMENTATION OF POINT OF SALE (POS) DISCLOSURE FOR MUTUAL FUNDS (JUNE 19, 2009)

Part 1 -- Background

- - - - - - - - - - - - - - - - - - - -

Summary of Comments

On June 19, 2009, the Canadian Securities Administrators (CSA) published a notice (Notice and Request for Comment) entitled Implementation of Point of Sale (POS) Disclosure for Mutual Funds, which proposed amendments (the 2009 Proposal) to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), Forms 81-101F1 and 81-101F2 (the Forms) and Companion Policy 81-101CP (the Companion Policy) (NI 81-101, the Forms and the Companion Policy, collectively, the Instrument) aimed at providing investors with more meaningful and effective disclosure. The comment period expired on October 17, 2009. We received submissions from 54 commenters, which are listed in Part 5.

The 2009 Proposal was designed to implement all of the elements of the point of sale disclosure regime set out in Framework 81-406 Point of Sale Disclosure for Mutual Funds and Segregated Funds (the Framework) published by the Joint Forum of Financial Market Regulators on October 24, 2008. The Instrument initially proposed, among other things, requirements for the production and filing of the fund facts document, investor rights in connection with the fund facts document and delivery of the fund facts document before or at the point of sale to an investor.

After considering all of the comments received on the 2009 Proposal, the CSA concluded to proceed with a staged implementation of the Framework, as set out in CSA Staff Notice 81-319 Status Report on the Implementation of Point of Sale Disclosure for Mutual Funds (the Status Report) published on June 18, 2010, and addressed only those comments related to the relevant stage at that time.

This document contains a summary of the comments and the CSA's responses relating to the parts of the 2009 Proposal that deal with pre-sale delivery of fund facts documents for mutual funds.

We have considered all comments received relating to pre-sale delivery of fund facts documents for mutual funds from the 2009 Proposal. We have taken these comments into account in our new proposal for pre-sale delivery of fund facts documents for mutual funds (the Proposed Amendments).

We note that, in comments responding to more recent CSA consultations related to mutual fund fees and standards of conduct for advisers and dealers, we have recently heard from a number of industry commenters that they are in favour of implementing POS principles to enhance consumer-focused regulation in advance of the CSA proceeding with those other policy initiatives. In particular, we have heard from some of these commenters that the POS disclosure initiative should be fully implemented and operational and assessed as to its success before additional regulatory change is introduced as potentially contemplated by the CSA consultations.

- - - - - - - - - - - - - - - - - - - -

Part 2 -- Comments on issues for comment

I) Comments on issues for comment in the Notice and Request for Comment

Issue

 

Comments

Responses

 

1. We seek feedback on whether you agree or disagree with our perspective on the benefits of the Instrument.

 

Support for the benefits of the 2009 Proposal

We continue to be of the view that pre-sale delivery of the fund facts document will provide investors with the opportunity to make more informed investment decisions by giving investors key information about a mutual fund, in a language they can easily understand, at a time that is most relevant to their investment decision.

 

We particularly seek feedback from investors.

 

Investor advocate commenters told us they strongly support the goal of the CSA to provide investors with clear, meaningful and simplified information when the investor needs it most: before or at the time they make their decision to invest their savings in a mutual fund.

 

 

 

 

Only a few industry commenters agreed with the benefit of investors obtaining information about a prospective investment prior to making an investment decision.

We disagree with the commenters who indicated that pre-sale delivery for mutual funds will result in investors being sold alternative products. We expect that dealers, in complying with their suitability obligations, will continue to recommend mutual funds to investors and will not simply recommend other products instead of mutual funds on assumptions related to the level of compliance burden in the sales process for a particular product.

 

 

 

Disagreement with benefits of the 2009 Proposal

 

 

 

 

Many industry commenters told us there is limited benefit to delivering the fund facts document to an investor before a trade.

 

 

 

 

A number of industry commenters remarked that the assumed benefits of pre-sale delivery are not supported by the research about the investor's decision making process.

 

 

 

 

Another industry commenter remarked that the benefit of pre-sale delivery will ultimately be determined by investors, who will simply seek out substitute products if they find that pre-sale delivery of a fund facts document obstructs their ability to complete a transaction.

In terms of creating a level playing field in the disclosure delivery regime for different types of investment products, we expect that disclosure for all types of investment products will evolve with time, and we anticipate that point of sale disclosure for mutual funds may provide a platform for further future regulatory reform.

 

 

 

Many commenters urged us to consider pre-sale delivery for other riskier investment products rather than focussing on the mutual fund industry, which is a comparatively safe and regulated industry.

 

 

2. We seek feedback on whether you agree or disagree with our perspective on the cost burden of the Instrument.

 

Costs and complexity of compliance

Our original proposal was designed to be responsive to comments that a "one-size-fits-all" delivery model could not appropriately reflect the different types of relationships that dealers have with their clients and the various business models of dealers. The 2009 Proposal, therefore, sought to accommodate the various differences while still meeting investor needs. In response to comments, however, we have simplified the delivery regime by eliminating the various decision points that would need to be tracked in order to determine when delivery would need to occur. We are of the view that this more streamlined and simplified delivery regime should address some of the cost and complexity concerns that were previously raised. Please see Annex A for further information regarding the changes that are being proposed in the delivery model.

Specifically, we request specific data from the mutual fund industry and service providers on the anticipated costs and savings of complying with the Instrument for the mutual fund industry.

 

Many industry commenters stressed that the compliance procedures and back-office systems of most mutual funds managers and dealers do not presently facilitate tracking the various delivery obligations and options contemplated in the Instrument.

 

 

 

 

While one industry commenter remarked it may be relatively straightforward for many dealers to implement the delivery of the fund facts document with the trade confirmation, most said the proposed Instrument with its selective waivers and exemptions requires the implementation of costly compliance and audit systems to accommodate such processes.

 

 

 

 

For example, a dealer association remarked that the Instrument will require its members to query and track, among other things:

We also note that technology has advanced considerably since the 2009 Proposal. These innovations have increased the means by which fund facts documents can be delivered or sent to, and received by, investors.

 

Was the trade advisor recommended or client initiated?

 

 

Was the trade an initial or subsequent purchase?

 

 

Is the purchase a money market fund?

 

 

Was the fund facts document delivered at or before the point of sale?

 

 

Was delivery waived?

 

 

Was the fund facts document brought to the attention of the investor?

There are also a number of service providers who have been actively engaged in developing solutions aimed at assisting dealers in complying with pre-sale delivery requirements. We understand that these service providers are able to offer technology solutions that allow for that creation, production, distribution, delivery, tracking and auditing of fund facts documents.

 

 

 

According to one commenter, the creation and maintenance of such systems will result in significant costs including: training, monitoring for compliance, record keeping and producing and updating the fund facts document. All of these requirements will disrupt the sales process, increase compliance costs and ultimately disadvantage the mutual fund industry and increase cost to investors.

In our view, these technological advances should help further mitigate factors affecting the cost and complexity of compliance.

 

 

 

We were further told that the ability to deliver electronically will not sufficiently mitigate delivery costs, as dealers and advisers will still be required to compile and maintain lists of hundreds of links in order to have them readily available to send to clients. Furthermore, another commenter remarked that they expect the electronic delivery mechanisms contemplated by the Instrument will have a high fixed cost and a very low variable cost, resulting in significant economies of scale for larger mutual fund manufacturers that will create an unfair competitive disadvantage for independent mutual fund manufacturers.

It is important to note that, as we have throughout the various stages of the POS disclosure initiative, we will continue to meet with the representatives of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) to discuss compliance issues and to identify possible implementation issues.

 

 

 

Disagreement with stated cost burden

 

 

 

Many industry commenters told us that, although they are unable to provide detailed information about costs at this time, they believe the CSA has underestimated the systems infrastructure, development costs and administrative process that will be involved in moving to pre-sale delivery requirement for mutual funds.

 

 

 

 

A few commenters went on to say that any minimal benefit that pre-sale delivery of the fund facts document would provide is eclipsed by the costly overhaul of the sale process which would be required.

 

 

 

 

Agreement with stated cost burden

 

 

 

A service provider stated that orienting manufacturers towards digital production as a more expeditious means of delivery may reduce print, distribution and environmental costs over the longer term.

 

 

 

 

This same service provider also suggested compliance costs could be contained through the outsourcing of the delivery obligation outside existing dealer systems as well as minimizing integration into back office protocols for the purposes of compliance.

 

 

 

 

Specific cost estimate data

 

 

 

Based on the proposed Instrument, one industry commenter, a mutual fund manufacturer and dealer, gave the following cost estimates:

 

 

Distribution costs to develop or enhance the information delivery systems would be $1,800,000. The ongoing costs to maintain the new system would cost approximately $200,000 per year.

 

 

Compliance/staff costs in overseeing and maintaining the delivery regime could initially cost our related dealers $500,000. On-going compliance costs would include increased staffing and expenses required to manage the new systems and would cost such dealers approximately $150,000 per year.

 

II) Comments on issues for comment on the Instrument

Issue

 

Comments

Responses

 

2. The intention of the requirement to 'bring the fund facts document to the attention of the purchaser' is to allow the investor to link the information in the fund facts document to a particular purchase. In subsection 7.3(3) of the Companion Policy, we have provided guidance on this requirement. Is this guidance sufficient?

 

Compliance with requirement

We do not propose to proceed with this element of the 2009 proposal. However, we do expect that compliance with fund facts delivery will not be a perfunctory process and that clients will be made aware that they are being provided with a fund facts document.

 

 

A number of industry commenters told us that the Instrument and the Companion Policy provide insufficient guidance on how to evidence that the fund facts document has been "brought to the attention of" investors, or what constitutes "adequate records" for this purpose.

 

 

 

 

These commenters said the concept of "bringing to the attention" is problematic because there is no precedent.

As we have stated throughout the various stages of the POS disclosure initiative, we do not anticipate proceeding with an access equals delivery approach.

 

 

 

One commenter indicated that the requirement and the guidance would introduce a whole new compliance process at an unnecessary cost. Another commenter added that the requirement diverges greatly from the current standard of delivery and will pose huge challenges in developing appropriate standards for tracking and proving compliance with the requirement.

 

 

 

 

If the requirement is retained, commenters said the CSA and the self-regulatory organizations (SROs) must be more specific about what is contemplated by the requirement and better identify how the CSA envisions dealers satisfying the requirement.

 

 

 

 

Requirement is not necessary and should be removed

 

 

 

A number of industry commenters told us that delivery of the fund facts document, coupled with suitability requirements (including know-your-client and know-your-product), should be sufficient. As a result, many of these commenters recommended the requirement to "bring to the attention of the purchaser" be removed.

 

 

 

 

It was further suggested that advisors should only have to provide information on the existence of the fund facts document when a client waives pre-sale delivery and chooses to receive the fund facts document with the trade confirmation.

 

 

 

 

To address the CSA's concern about investors understanding the purpose of the fund facts document, one commenter further suggested dealers could include general disclosure explaining the purpose of the fund facts document in client account opening documentation.

 

 

 

 

We were also told that where dealers are required to provide investors with the fund facts document, delivery itself should constitute bringing the fund facts document to the client's attention.

 

 

 

 

Adds complexity and increases liability for dealers

 

 

 

We were told that the extra layer of complexity at the time of an initial purchase will increase the risk of the transaction not meeting the requirements and therefore increase liability for the dealer.

 

 

 

 

One industry commenter remarked that implementation of this requirement will become a significant supervisory and compliance issue.

 

 

 

 

Another commenter added that they believe that there will be many circumstances in which evidence of "bringing to the attention of the purchaser" will be very difficult to document and verify, and can only envisage evidence being in the form of a written client acknowledgement which will further delay a trade, or through a taped phone trading line, which is only practical for the larger brokers

 

 

 

 

Specific suggestions

 

 

 

One industry commenter suggested that whether the fund facts document is delivered prior to or following the sale, investors should be provided with similar information, which should be set out in the Companion Policy, if not in the Instrument itself, so that there will be no confusion as to what is required. This commenter suggested the information to investors include:

 

 

the existence of the fund facts document (and the investor's right to receive it prior to the trade),

 

 

basic information in the fund facts document, and

 

 

the cancellation right.

 

 

 

 

Other commenters told us the meaning of 'linking' the fund facts document to the purchase set out in the Companion Policy is unclear, and similarly suggested the dealer's responsibility be more clearly set out.

 

 

 

 

Still another commenter suggested the requirement "to bring the fund facts document to the attention of the purchaser" be satisfied by an 'access equals delivery' approach, achieved by directing an investor's attention to the relevant fund facts documents on the fund manager's website.

 

 

3. In response to comments, we are considering requiring delivery of the fund facts document for subsequent purchases -- either in instances where the investor does not have the most recently filed fund facts document, or in all instances with the confirmation of trade. What are your views?

 

A few commenters asked the CSA to outline the reasoning behind choosing delivery of the fund facts document with trade confirmations for subsequent purchases and an annual option to receive the fund facts document.

We do not propose to proceed with this element of the 2009 Proposal. Instead, we propose to require delivery with subsequent purchases unless the investor has already received the most recent fund facts document. This is consistent with the current prospectus delivery requirement. It will also ensure that investors have the most up-to-date information in connection with the purchase of securities of a mutual fund. We also propose that delivery of the fund facts document not be required in respect of subsequent purchases under a pre-authorized purchase plan provided that the dealer provides initial and subsequent annual notices to the purchaser that includes information on how to access and request the fund facts document. This is consistent with existing exemptive relief that has been granted in respect of prospectus delivery for pre-authorized purchase plans. We are not proposing a similar exception for money market fund purchases, switches under asset allocation plans, or for fund mergers and reorganizations. We do not think that commenters have provided sufficient rationale for such requests.

 

 

 

Support for delivery of the fund facts document for subsequent purchases

 

Would this approach make it easier to comply with the delivery requirements? What if this could result in the removal of the annual option to receive a fund facts document? Would this approach be more useful for investors? More practical for dealers?

 

We received support from service providers for the fund industry, as well as some investor advocate and industry commenters, for delivery of the fund facts document for subsequent purchases with the confirmation of trade.

 

 

 

 

One investor advocate commenter told us that the fund facts document should be delivered for all purchases, in addition to annual delivery of all fund facts document held, to address changes in the product and in the personal risk tolerance/ circumstances of the investor.

 

 

 

 

An industry commenter agreed, noting that while delivery of an updated fund facts document with trade confirmation for subsequent purchases would be more practical, investors should still be able to receive a fund facts document if they wish to see it again. This commenter suggested the Instrument provide that either method of providing an updated fund facts document to investors be permitted.

 

 

 

 

Two service providers who commented said that following a process similar to the current standard practice of suppressing delivery of the simplified prospectus for subsequent trades where an investor has already received the current version would simplify the implementation of fund facts document delivery and achieve cost efficiencies provided, as one of these commenters noted, that compliance around delivery is left at simple receipting of physical or electronic documents.

 

 

 

 

While a commenter stated that setting up similar systems to deliver the fund facts document with trade confirmations for subsequent purchases would present steep operational challenges , a key service provider disagreed, stating that, if adopted, this approach would:

 

 

provide investors with meaningful current information associated with a mutual fund purchase,

 

 

eliminate the annual delivery option and save the industry the substantial investment that would be required to build a new fulfillment process, and

 

 

simplify implementation of the proposed rules as only minimal infrastructure changes related to the suppression process would be required to support the existing subsequent purchase suppression logic (i.e. current system for the simplified prospectus) based on the delivery history of a fund facts.

 

 

 

 

Opposition to delivery of the fund facts document for subsequent purchases

 

 

 

A number of industry commenters as well as some investor advocate commenters told us that they agreed with the existing requirements and did not support delivery of the fund facts document for subsequent purchases.

 

 

 

 

One industry commenter told us that varying delivery obligations depending on the type of account held, how the purchase is initiated and whether the purchase is an initial or subsequent investment, are positive changes to the original proposals, and expressed disappointment that the CSA is re-opening whether the fund facts document should be delivered for subsequent purchases.

 

 

 

 

No additional benefit

 

 

 

A number of other industry commenters stated investors are often overwhelmed and annoyed by the number of unwanted documents they receive, which will be exacerbated by a subsequent purchase delivery requirement.

 

 

 

 

One commenter told us that if investors have already received the fund facts document and are sufficiently pleased with the performance of the fund as to make an additional purchase, there is no reason to provide the fund facts document with the trade confirmation for each subsequent purchase.

 

 

 

 

Another industry commenter added that absent a material change or an updated fund facts document, delivery of the fund facts document for all subsequent purchases would provide little additional benefit.

 

 

 

 

Several industry commenters told us that a delivery requirement for subsequent purchases of the same securities of a fund would be excessive and would overlap with existing continuous disclosure requirements.

 

 

 

 

Also a few industry commenters noted that the annual delivery option seems somewhat inconsistent with the objective of delivering the fund facts document, which is to assist in the purchase decision process, and is not intended to be a continuous disclosure document. One of these commenters encouraged the CSA to educate investors on how to receive continuous disclosure information about mutual funds.

 

 

 

 

Other industry commenters remarked that they are not convinced that an annual delivery option will be very useful to investors, given that very few investors request annual mailings of its management reports of fund performance (MRFP) and/or financial statements. Some of these commenters suggested the annual option should be removed entirely.

 

 

 

 

One of the commenters additionally noted that removal of the annual option to receive the fund facts document should not be tied to the inclusion of the subsequent purchase requirement.

 

 

 

 

Preference for annual delivery option

 

 

 

Several industry commenters expressed that, if they had to choose, they preferred an annual delivery option to delivery for subsequent purchases, consistent with the current requirements in National Instrument 81-106 Investment Fund Continuous Disclosure with respect to the delivery of the annual and interim financial statements and MRFPs.

 

 

 

 

One of these commenters stated that the annual option to receive the fund facts document will sufficiently raise investor awareness of their ability to obtain a further copy of the fund facts document.

 

 

 

 

One investor advocate commenter added that an annual update should be adequate in the absence of material changes.

 

 

 

 

Compliance

 

 

 

We were told that should we require delivery for subsequent purchases, in order to facilitate compliance with such a requirement, delivery should be with the trade confirmation rather than pre-sale.

 

 

 

 

Several industry commenters also remarked that, should delivery for subsequent purchases be required, there should be exemptions for pre-authorized purchase plans and other similar plans, money market fund purchases, switches under asset allocation plans and for fund mergers and reorganizations.

 

 

 

 

We were also asked to clarify whether, in the context of subsequent purchases, delivery would be required following the filing of an amendment of the fund facts document or the annual renewal.

 

 

4. In response to comments, we are considering allowing delivery of the fund facts document with the confirmation of trade in instances where the investor expressly communicates they want the purchase to be completed immediately, and it is not reasonably practicable for the dealer to deliver or send the fund facts document before the purchase is completed. We request comment on this approach.

 

A commenter noted that based on research, almost 63% of Canadian mutual fund investors would rather have the choice to receive fund information before or after a new fund purchase.

As part of Stage 2 of the POS disclosure initiative, we tested the proposed changes to the fund facts document with investors in Fall 2012. In the final report, "CSA Point of Sale Disclosure Project: Fund Facts Document Testing," prepared by Allen Research Corporation, half of the mutual fund investors tested indicated that they would like the fund facts document sent to them before meeting with their advisers and a third of them indicated that they would like it presented by their adviser during the meeting but before purchase.{1} These findings would suggest that there is strong preference for pre-sale disclosure.

 

 

 

An investor advocate and a SRO commenter stated they do not believe that investors should be permitted to waive delivery of the fund facts document, which is an essential source of important information for investors.

 

 

If we made this change, what information should an investor receive before the purchase? In addition to delivery of the fund facts document with the trade confirmation, we think that at least some type of oral communication about the fund facts document would be necessary. What specific information should be conveyed in each instance to satisfy this aspect of delivery?

 

Another investor advocate commenter remarked that they hoped the number of instances where an investor would express a need to complete a purchase immediately would be a rare, given that mutual funds are long-term investments.

 

 

Are there alternatives to this approach?

 

A service provider commented that delivery of the fund facts document should be made as close as possible to the point of sale in order to capture the spirit under which the 2009 Proposal is being implemented, and so as to not dilute the benefit of investor disclosure.

We acknowledge that there may be circumstances that make pre-sale delivery of the fund facts document impracticable. As a result, similar to what we set out in our consultation question contained in the 2009 Proposal, we are proposing an exception to pre-sale delivery that would permit post-sale delivery of the fund facts document in circumstances where the purchaser indicates that the purchase has to be completed immediately, or by a specified time, and it is not reasonably practicable for the dealer to complete delivery of the fund facts document within the timeframe specified by the purchaser. In such circumstances, the dealer would be required to provide certain information, including verbal disclosure of certain information contained in the fund facts document. We are seeking specific feedback on whether the information to be conveyed to investors is adequate or whether any modifications are necessary. The fund facts document must then be provided to the purchaser within two days of purchase.

 

 

 

Most industry commenters were in favour of this approach, telling us they were encouraged by the CSA's recognition that some investors will want their purchase completed in a timely manner.

 

 

 

 

Many industry commenters told us this modification will reduce the level of frustration that would otherwise exist for many investors. Telephone sales or order instructions via electronic means are examples where there should be an exemption at the option of the investor.

 

 

 

 

One industry commenter said the option for an oral waiver to be completed and then clearly documented for all types of mutual fund purchases, with delivery of the fund facts document with the trade confirmation to follow, is reasonable.

 

 

 

 

Increased complexity

We agree with investor advocates that the number of instances where it would be necessary to rely on this exception should be limited. Accompanying guidance in the Companion Policy highlights our expectation that pre-sale delivery would be the primary mechanism of delivery and that post-sale delivery would be used only in instances where pre-sale delivery is impracticable.

 

 

We were told by a number of industry commenters that it will be difficult for an advisor to establish and record that (i) it was not reasonably practicable for the dealer to deliver the fund facts document prior to the trade; (ii) the investor "expressly communicated" that they wanted the purchase to be completed immediately; and (iii) that the investor then received oral communication about the fund facts document.

 

 

 

 

The evidentiary process for waivers, said one of these commenters, is likely to be complex, cumbersome and will result in a lack of appropriate evidence due to the number of steps now incorporated into the trading process. This will significantly increase the implementation challenges that dealers and advisors will face.

Although we anticipate that this exception is most likely to be used in instances where the dealer and the client are not meeting face-to-face, we have kept the exception broad since we cannot anticipate all the circumstances that might arise which would make pre-sale delivery impracticable. We note, however, that we are not of the view that it will always be impracticable to deliver the fund facts document where methods of distance communication, such as telephone and e-mail, are being used. We expect that dealers will make an effort to determine whether pre-sale delivery is possible and will not automatically default to post-sale delivery in such circumstances.

 

 

 

We were told further guidance on compliance from the SROs would be needed.

 

 

 

 

Information to be conveyed

 

 

 

Most industry commenters recommended that investors be informed of the existence of the fund facts document, the ways in which it can be reviewed and delivered, an explanation of the rescission right, as well as basic information about a fund, such as its objective, strategies, nature of its holdings, fees and recent performance, that can easily be communicated orally by an advisor.

We recognize dealers will express concerns regarding compliance with the proposed requirements to utilize the exception to pre-sale delivery. As noted in the Companion Policy, dealers will be required to maintain adequate records relating to fund facts delivery generally, whether pre-sale or post-sale. In respect of post-sale delivery, the expectation will be that dealers will maintain adequate records to evidence that satisfactory disclosure about the fund facts document has been provided to purchasers. As noted in the Companion Policy, such records should indicate why delivery of the fund facts document was impracticable in the circumstances. It is our expectation, however, that dealers will follow their current practices to maintain evidence of required disclosures to sufficiently document delivery of the fund facts document. As a result, written consent from a client will not be necessary in connection with post-sale delivery. A dealer may decide of its own initiative, however, to adopt such a practice.

 

 

 

One commenter even suggested that the general disclosure regarding the fund facts document could be included in the account opening documentation.

 

 

 

 

We were told that the information should be allowed to be conveyed in the same manner that the request by the investor is made (i.e., in an e-mail reply).

 

 

 

 

A few industry commenters further suggested that the information that should be required to be conveyed should be similar to what is required with respect to the proposed waiver provisions for money market funds and client-initiated purchases.

 

 

 

 

If a waiver with each purchase is required, one commenter stressed that information about the fund facts document should be communicated orally, since requiring the waiver in written form would undermine the rationale for this exception. We were also told by another industry commenter that oral disclosure should not be prescribed. Rather, dealers should be able to determine what they believe to be sufficient oral disclosure in each circumstance.

 

 

 

 

As noted earlier, as we have throughout the various stages of the POS disclosure initiative, we will continue to meet with the representatives of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) to discuss compliance issues and to identify possible implementation issues. Based on conversations to date, we expect that dealers will be able to follow their current practices of maintaining evidence of required disclosures to document delivery of the fund facts document.

 

 

 

Still another industry commenter said consistent with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), dealers should only be required to maintain notes to document whether a client waived receipt of the fund facts document.

 

 

 

 

We also heard from an investor advocate commenter who recommended that investors be given an oral description of the fund and how it fits into the portfolio, including the initial and ongoing costs of the fund, its worst 12 month performance, any liquidity constraints and the advisor's position on investor suitability for the portfolio

We disagree with the suggestion that it should be sufficient to include disclosure in the account agreement to indicate that, in situations where it is possible for post-sale delivery of the fund facts document to occur, delivery will automatically occur with the trade confirmation. As a result, we continue to make clear in the Proposed Amendments that a dealer cannot rely on standing instructions from the purchaser to effect post-sale delivery of the fund facts document.

 

 

 

Alternatives

 

 

 

One industry commenter thought that satisfaction of either of the two conditions, not both, would be appropriate, i.e. where the investor expressly communicates they want the purchase to be completed immediately or it is not reasonably practicable for the dealer to deliver or send the fund facts document before the purchase is completed.

 

 

 

 

Most industry commenters, however, suggested that if an investor wishes to use the waiver, it should be the investor's right to waive, and the test for the waiver should be based solely upon the investor wishing to complete the transaction immediately, regardless of immediacy or practicality of delivery. This approach, said the commenters, would place the right to choose solely in the hands of investors.

 

 

 

 

Other industry commenters proposed that, in lieu of the requirement to solicit a waiver for each and every such transaction, there should be an obligation to include in the account agreements disclosure that delivery of the fund facts document in these circumstances will always be with the trade confirmation, thereby eliminating the need to ask the client for each and every trade.

 

 

6. Is the transitional period for delivery of the fund facts document appropriate? If not, what period would be appropriate and why?

 

The investor advocate commenters we heard from urged the CSA to move forward as expeditiously as possible with pre-sale delivery so that investors can benefit from disclosure that is clear, streamlined, and user-friendly.

In response to comments, we decided to implement the POS disclosure initiative in stages as set out in the Status Report. We believe that such an approach has provided industry with ample time to prepare for pre-sale delivery of the fund facts document, which represents the final stage of the POS disclosure initiative. In addition, modifications that we have made to the 2009 Proposal to simplify the delivery regime should make it easier for dealers to make any necessary changes to compliance procedures and back-office systems.

 

 

 

Another commenter recommended that the transition period for pre-sale delivery of the fund facts document be moved from two years to six months.

 

 

 

 

Still, the majority of industry commenters told us that adopting and complying with the various elements of the Instrument will take time to accomplish, irrespective of how the manufacturer or dealer approaches its operational implementation and we must give them sufficient time to come up with the compliance and technological systems that are necessary to ensure compliance.

We propose a one year transition period for pre-sale delivery of fund facts documents following the effective date of the Proposed Amendments. This will provide dealers with one year from the time of publication of the Proposed Amendments in final form to make any systems changes necessary to comply with the Proposed Amendments.

 

 

 

One industry commenter expressed support for the proposed transition period and indicated that two years is a reasonable estimate as to how long it would take the industry to be ready.

 

 

 

 

Many industry commenters remarked that until the pre-trade delivery issues are resolved, including the establishment of compliance procedures and back-office systems that will enable interfaces with third party service providers to facilitate delivery in accordance with the pre-sale delivery exemptions, it is uncertain whether two years will be sufficient. One of these commenters remarked that it was premature to comment on whether the proposed transition period is sufficient.

 

 

 

 

Some industry commenters, including a national trade association for the investment funds industry, went on to say that discussions regarding a transition period should be deferred until such a time as the final form of the Instrument is known and a fully functioning, universally available, cost effective fund facts documents clearing house/central repository/delivery mechanism has been established. We were told a central industry electronic warehouse for fund facts documents is critical before the transition period expires.

 

 

 

 

Yet, there were a few industry commenters who generally supported the two-year transition period for pre-sale delivery of the fund facts documents, although they noted it may be too short given the significant costs and technological issues that are associated with implementation.

 

 

 

 

One of these commenters said there has not been sufficient study of the technology that would need to be developed and implemented for all market participants to comply with the Instrument. Accordingly, they cannot definitively comment on whether the transition period is sufficient.

 

 

 

 

Another industry commenter remarked that a two year transition period would be the minimum time that would be required.

 

{1} The final report, "CSA Point of Sale Disclosure Project: Fund Facts Document Testing," is available on the websites of the Ontario Securities Commission and the Autorité des marchés financiers at www.osc.gov.on.ca and www.lautorite.qc.ca, respectively.

Part 3 -- Comments on pre-sale delivery

Issue

Sub-Issue

 

Comments

Responses

 

General comments on delivery

General comments

 

Support for pre-sale delivery of the fund facts document continues to be divided among industry and investor advocate commenters.

We remain committed to the principles set out in the Framework. We continue to be of the view that pre-sale delivery of fund facts documents will provide investors with the opportunity to make more informed investment decisions by giving investors key information about a mutual fund, in a language they can easily understand, at a time that is most relevant to their investment decision.

 

 

 

 

Almost all industry commenters continued to express varying concerns with pre-sale delivery, particularly around cost and complexity, and the focus exclusively on mutual funds, with many endorsing the submissions made by their respective industry organizations on the Instrument.

We have revisited the approach taken in the 2009 Proposal with respect to pre-sale delivery of the fund facts document, informed by the regulatory regimes of other jurisdictions, who have implemented pre-sale delivery requirements, and by the comments received on the 2009 Proposal.

 

 

 

 

One commenter noted that the practicalities of the 2009 Proposal need additional exploration and various alternatives to be considered before a formal rule is developed.

 

 

 

 

 

Investor advocate commenters, on the other hand, reiterated their strong support for providing investors with clear, meaningful and simplified information before or at the time they make their decision to invest.

To address the feedback we received related to complexity and cost of compliance, the CSA has decided to proceed with a simpler, more consistent approach to pre-sale delivery of the fund facts document.

 

 

 

 

We also heard from a service provider of plain language communications who remarked that the CSA's consideration to allow exceptions to the principle of delivery before the decision to buy a fund will cause the 2009 Proposal to fall short of a significant investor protection initiative.

 

 

 

 

 

For further general comments on pre-sale delivery, see: Part 2, I. -- Comments on issues for comment in the Notice and Request for Comment.

 

 

 

Disruption of the sales process

 

A number of industry commenters reiterated their earlier remarks that requiring pre-sale delivery of the fund facts document will significantly disrupt the ability of advisers to meet the needs of their clients and would be a complete overhaul of the sales process for mutual funds.

As noted earlier, we recognize that there may be circumstances that make pre-sale delivery of the fund facts document impracticable. As a result, we are proposing an exception to pre-sale delivery that would allow the fund facts documents to be delivered within 2 days of the purchase provided certain requirements are met. This should help minimize the potential for disruptions to the sales process. We reiterate our expectation, however, that post-sale delivery of the fund facts document will be the exception rather than the norm.

 

 

 

 

One of these commenters noted that if the CSA requires pre-sale delivery of fund facts documents, broad exemptions should be allowed in situations where a client does not have immediate access to the fund facts document and wishes to complete a trade.

 

 

 

 

 

A number of industry commenters further told us that many investors will object to the delay in placing their trade, the inconvenience of having to wait and the repeated interactions with their advisor to effect the trade under the 2009 Proposal. One commenter said, some of those investors may make their investments without the benefit of advice in order to trade immediately, or may choose alternative investments.

 

 

 

 

 

We also heard that the Instrument will put significant administrative pressure on the client/advisor relationship and make it more cumbersome for investors in a business that is already administratively burdened.

 

 

 

 

 

A few commenters noted that rural investors would be disproportionately impacted by the 2009 Proposal as electronic means are often either unavailable or expensive, rendering electronic delivery impractical for advisors in dealing with their rural based clients.

 

 

 

Regulatory arbitrage

 

We were asked by an investor advocate commenter to consider how pre-sale delivery of fund facts documents for mutual funds can provide a platform for future regulatory reform for other types of investment funds. This commenter urged us, however, to proceed with the 2009 Proposal for mutual funds, agreeing that it can provide a platform for future regulatory reform.

As noted earlier, we disagree with the notion that pre-sale delivery will cause mutual funds to become a less attractive product for both investors and for dealers and their representatives.

 

 

 

 

 

With respect to investors, we think the Proposed Amendments will provide investors with the opportunity to make more informed investment decisions by giving them key information about a mutual fund, in language they can easily understand, at a time that is most relevant to their investment decision.

 

 

 

 

Yet, industry commenters again stressed that they have significant concerns about pre-sale delivery of fund facts documents from a competitive standpoint, since the 2009 Proposal will not apply to ETFs, other investment funds not subject to NI 81-102, as well as other competitive products such as stocks, bonds, options, commercial paper including asset backed commercial paper and linked GICs. This, noted one industry commenter, could prove to be the most significant cost of the initiative over time.

With respect to dealers, we reiterate our view that dealers, in complying with their suitability obligations, will continue to recommend mutual funds to investors and will not simply substitute mutual funds for another product on the basis of assumptions related to the level of compliance burden associated with pre-sale delivery.

 

 

 

 

We were told that pre-sale delivery will make purchasing mutual funds and segregated funds far more cumbersome to purchase, and ultimately will make mutual funds a far less attractive investment option. The same commenter stated that the 2009 Proposal will create an incentive for advisors and investors to take on a higher risk profile by investing in riskier non-mutual fund products.

As noted earlier, we expect disclosure for all types of investment products that fall within the securities regulatory regime will evolve with time, and we anticipate that point of sale disclosure for mutual funds may provide a platform for further future regulatory reform.

 

 

 

 

In fact, an independent review committee asked for clarification on why the CSA believe that the additional step of delivery of a fund facts document is required before investors can make an initial investment in a mutual fund, when the securities regulatory regime for mutual funds far exceeds the regulation of other investment products. Some industry commenters agreed, noting that the disclosure requirements of many other investment products are not at the same level as the current mutual fund disclosure regime.

 

 

 

 

 

Industry commenters told us that they expect the end result of the 2009 Proposal to be that dealers and advisors will favour non-mutual fund products that will be easier to sell, especially on short notice, and to discourage investors, diverting them to other delivery channels and products.

 

 

 

 

 

Even a moderate shift of Canadian investor assets to alternative product choices as a result of the different requirements around the sale process, remarked one commenter, should be cause for regulatory concern.

 

 

 

 

 

Many of these industry commenters requested that if the CSA proceeds, pre-sale delivery requirements should be simultaneously imposed on other types of investment fund products.

 

 

 

 

 

We were told imposing pre-sale delivery on other types of investment fund products would:

 

 

 

prevent mutual funds from being used as a test case for the new legislation,

 

 

 

create a level playing field whereby all products are subject to the same disclosure requirements, which will in effect negate the competitive disadvantage placed on mutual funds, and

 

 

 

extend the benefits of this legislation to all products, thereby enhancing investor protection.

 

 

 

Reduced product choice

 

A number of industry commenters reiterated their earlier remarks that pre-sale delivery will make it more difficult for advisors and dealers to distribute a wide selection of mutual funds. In particular, a number of industry commenters told us that to ensure that they can effectively deliver the fund facts document and effect transactions on a timely basis for their clients, advisors will be forced to narrow their "product shelf". This, said the commenters, will leave investors, especially for those who reside outside of urban centres, with fewer products from fewer companies.

We think the wide range of options available for delivering the fund facts document provides dealers with sufficient flexibility to accommodate existing business models. We were encouraged to hear from a service provider to the mutual fund industry that the technology is available to assist in the production, distribution and delivery of fund facts documents.

 

 

 

 

Noted another industry commenter, the result of this is mutual fund manufacturers needing to consolidate their product offerings in a way that limits the options available to investors.

 

 

 

 

 

It was further stressed that reduced product choice will particularly disadvantage smaller dealers and their advisors. This could limit the competitiveness of the mutual fund industry and the range and innovation of mutual fund products in the marketplace.

 

 

 

 

 

Finally, one commenter questioned whether the resulting reduced product choice is consistent with the CSA's broader policy objectives.

 

 

 

Impact on independent fund companies

 

Independent fund managers reiterated their concern that they face the most risk from the 2009 Proposal, as independent dealers may not want to manage such a large volume of documents and therefore may reduce the number of funds or series they offer.

As noted earlier, technology has advanced considerably since the 2009 Proposal. There are a number of service providers that have created automated programs and applications for pre-sale delivery of fund facts documents. These innovations have increased the means by which fund facts documents can be delivered or sent to, and received by, investors. Overall, we continue to believe that the potential benefits of the changes to the disclosure regime for mutual funds, as contemplated by the Proposed Amendments, are proportionate to the costs of making them.

 

 

 

 

We were reminded that a significant portion of Canadian mutual funds rely on third party distributors, which often deal with their clients by telephone or via other non-face-to-face communications. These distributors, and the independent fund companies they are affiliated with, said a number of commenters, will be disproportionately impacted by the 2009 Proposal, since it will be more cumbersome for them to comply with pre-sale delivery than bank-owned distributors who have the benefit of meeting with clients and facilitating personal delivery much more readily.

If you disagree with our view that the costs will be incremental and/or one-time costs, we request specific data from the mutual fund industry and service providers on any anticipated costs.

 

 

 

 

We were told that since banks have the ability to offer investors a variety of non-mutual fund financial services, independent fund companies will be put at a significant disadvantage. One commenter also noted that banks with branch networks can share overhead costs and facilitation costs.

 

 

 

 

 

One of these commenters remarked that without additional, regulatory changes affecting other products, mutual funds risk becoming a product offered predominantly by providers who have captive distribution.

 

 

 

 

 

Added one commenter, there will be a significant temptation for those who operate in the independent channel to reduce the number of mutual funds they offer and reduce the number of fund companies with whom they do business.

 

 

 

Failure to recognize the role of advisers

 

A number of industry commenters again expressed concern that pre-sale delivery calls into question the merits/benefits of professional financial advice.

We are no longer proposing an exemption from pre-sale delivery of the fund facts document for discount brokers so we anticipate that this should address concerns related to the possible creation of an uneven playing field between the advice distribution channel and the non-advice distribution channel.

 

 

 

 

One commenter said, the 2009 Proposal create an unlevel playing field with the advantage going to the non-advice distribution channels.

 

 

 

 

 

Several commenters told us that disclosure about a particular product is important, but equally, if not more important, are the principles that dealers and their registered representatives must follow when making recommendations to their clients. As a result, the fund facts document may be less important to the client in situations when they are following their advisor's recommendations.

In response to commenters who said that we have failed to recognize the role of advisers, we stress that nothing in the Proposed Amendments is intended to detract from the role of the adviser. The focus of this initiative is to develop a more effective disclosure regime for mutual funds.

 

 

 

 

We were further told that with the renewed emphasis on dealers in NI 31-103, the CSA puts far too high an importance on disclosure in the context of investors' decision-making and fails to acknowledge the overall regulatory framework.

We think pre-sale delivery builds on an adviser's existing obligation to determine suitability of all mutual fund purchases. We also anticipate that the fund facts document will become a tool used by advisers to assist in the sales process and will help encourage a better dialogue between clients and their advisers. This in turn will provide investors with the opportunity to make more informed investment decisions.

 

 

 

 

One commenter stated investors may see the fund facts document as a substitute for qualified, professional investment advice and that this could lead them to take a "do-it-yourself" approach, since execution-only transactions and investor-initiated transactions do not require the proposed disclosure.

 

 

 

 

 

A few industry commenters further queried why an exemption from pre-sale delivery was proposed for discount brokers, especially since they do not have a suitability obligation and it assumes the client has performed the necessary due diligence which may or may not be the case.

 

 

 

 

 

Finally, we were asked to consult further with dealers of all sizes to better understand the practical impact of pre-sale delivery on the ability of advisors to service their clients, and the breadth of product offerings they will be able to make available to investors.

 

 

Compliance

Cost and complexity of compliance

 

A few commenters said that the compliance systems of most fund managers and dealers do not presently catch all of the nuances set out in the 2009 Proposal, and these systems will not likely come on stream until costly system rebuilds are engaged.

We are proposing a more streamlined system for fund facts delivery. Fund facts documents will be required to be delivered or sent to the purchaser before a dealer accepts an instruction for all purchases of mutual funds securities. An exception to pre-sale delivery of the fund facts document will be permitted but only in limited circumstances, subject to certain conditions.

 

 

 

 

Industry commenters reiterated that the creation of an audit trail for pre-sale delivery will be particularly challenging for dealers and advisors, and may result in the wrong documents inadvertently being sent to investors. One commenter told us they expect the industry will struggle to achieve full compliance with the proposed Instrument.

 

 

 

 

 

Another commenter added that it will be logistically difficult, time consuming and costly to prove delivery in every client situation where a transaction is completed.

 

 

 

 

 

We were told the rate of compliance with regulations generally will decline, and investor complaints will increase, as a result of this added complexity.

 

 

 

 

 

Finally, an industry commenter stated that the CSA's claim that existing audit requirements will be sufficient to evidence pre-sale delivery is unrealistic. We were asked to outline a detailed system for delivery and audit, as well as provide the necessary infrastructure to facilitate this system before any requirements are imposed.

 

 

 

Availability of technology solutions

 

A couple of service providers that are active in the fund industry reiterated their previous comments that increasingly advanced technology will be of tremendous assistance in meeting the 2009 Proposal.

We are encouraged to hear that technological solutions are available to address possible implementation challenges related to pre-sale delivery of fund facts documents.

 

 

 

 

While acknowledging there will still be costs to the industry, one service provider told us that it expects to leverage its existing fulfilment infrastructure to have fund facts documents available for distribution to investors by e-mail, download, fax or print and mail on a timely basis and that its automated system ensures that only the current fund facts document is distributed.

 

 

 

Need for CSA guidance and SRO consistency in approach

 

A few industry commenters again urged the CSA to work with the two SROs to develop proposals capable of practical implementation, given that significant new requirements will be imposed on dealers and their representatives.

As noted earlier, as we have throughout the various stages of the POS disclosure initiative, we will continue to meet with the representatives of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) to discuss compliance issues and to identify possible implementation issues. As part of these discussions, consideration will be given to what additional guidance, if any, is necessary.

 

 

 

 

A few industry commenters asked us to ensure that SRO guidance on the 2009 Proposal will be made available to SRO members prior to the effective date of the Instrument.

 

 

Specific aspects of the 2009 Proposal

Delivery for money market funds

 

We received varying feedback on pre-sale delivery of fund facts documents for money market funds.

We do not propose to move forward with pre-sale delivery regime that distinguishes between money market funds and non-money market funds. The Proposed Amendments apply to all mutual funds.

 

 

 

 

Investor advocates questioned the implied view that money market funds are low risk and so may be exempt from pre-sale delivery, with one commenter reiterating their earlier recommendation that the fund facts document be delivered before or at the point of sale for all categories of funds, including money market funds, which, had some of the biggest issues due to the credit crisis.

 

 

 

 

 

Yet, many industry commenters agreed with the principle of exempting money market funds from the pre-sale delivery requirement, and urged the CSA to remove the pre-sale delivery requirement altogether with respect to money market fund purchases.

 

 

 

Delivery for order execution-only accounts

 

A few industry commenters reiterated their earlier comments that differentiating delivery requirements for clients receiving advice and those trading through discount brokers was inappropriate.

We do not propose to move forward with a pre-sale delivery regime that distinguishes between full service and discount brokerage.

 

 

 

 

We were told that not requiring the delivery of a fund facts document for trades through discount brokers was unfair to the dealer/advisor community, since it places them at a competitive disadvantage and encourages investors not to seek advice in order to trade immediately. These commenters questioned the justification for requiring a higher standard for investors who work with a fully licensed and regulated financial advisor, who is subject to know-your-client and product suitability obligations. One commenter noted that in the absence of an advisor, the need for these investors to be properly informed is even greater from a public policy perspective.

 

 

 

Adviser recommended vs. investor-initiated trades

 

A few industry and investor advocate commenters again expressed their view that it is presumptuous to think investors who do their own investing are more informed than other investors, and disagree with the distinction made for pre-sale delivery between dealer recommended and investor initiated sales.

We do not propose to move forward with a pre-sale delivery regime based on whether advice was provided in respect of a purchase.

 

 

 

 

Noted one investor advocate commenter, the scale of who initiates a trade is a blurry continuum rather than a clear distinction and is not an appropriate distinction for pre-sale disclosure. The same commenter said this would raise significant legal, compliance and operational issues for dealers and investors. Another commenter said that there has been a lack of guidance as to when a trade has or has not been recommended.

 

 

 

 

 

Another investor advocate suggested that the distinction between dealer recommended and investor initiated trades should be changed to a distinction premised on the degree of previous investing experience, which takes into account the varying degrees of sophistication and knowledge that individual investors have.

 

 

 

Delivery for accredited investors

 

We heard from one industry commenter who told us that delivery of a fund facts document should not apply to accredited investors, since they are sophisticated enough to make an informed purchase decision without a fund facts document.

We are not proposing a specific exception from pre-sale delivery of fund facts documents for accredited investors.

 

 

Waiver of Pre-Sale Delivery

 

A number of industry commenters have told us that investors should be able to avail themselves of the pre-sale delivery waiver at all times and should not be restricted by the requirements in subsection 3A.3(2) (i.e. money market funds, not dealer recommended, inform purchaser of the fund facts document).

As noted earlier, we propose to provide an exception to pre-sale delivery of the fund facts document under certain conditions provided dealers comply with requirements to provide certain information to investors.

 

 

 

 

We've also been told that the waiver, as contemplated in the proposals, will add great complexity and increase implementation challenges as dealers will have to create policies and processes for the waiver of pre-sale delivery.

 

 

 

Annual delivery of Fund Facts

 

One industry commenter, a national dealer association, told us that the policies and procedures required for dealers to demonstrate that they have satisfied the annual delivery requirements would be impractical and costly, in comparison to the benefits.

We do not propose to move forward with this element of the 2009 Proposal. We propose to require delivery with subsequent purchases unless the investor has already received the most recent fund facts document.

 

 

 

 

Furthermore, we've also heard that collecting investors' opt-in or opt-out preferences for the annual option in the Instrument to receive the fund facts document for all mutual fund securities held will create fairly significant additional procedural complexities for dealers, who currently have no mechanism in place to comply with this type of requirement, particularly smaller independent mutual fund dealers.

 

 

 

 

 

In the alternative, these commenters suggested that the fund facts document direct clients to the fund manager should they wish to receive an annual fund facts document and, given that dealers do not have systems in place to support the annual option, a flexible approach should be introduced where either fund managers who deliver the fund facts document fulfill the annual delivery obligation on behalf of dealer or, dealers optionally provide investors with the fund facts document for subsequent purchases.

 

 

 

Delivery of simplified prospectus

 

An investor advocate commenter told us that the simplified prospectus should continue to be provided to investors, either at the point of sale or with the trade confirmation, since it provides vital information to investors, particularly retail investors. Setting non-delivery of the simplified prospectus as the default position, said this commenter, means that the simplified prospectus will not be delivered to the great majority of retail investors.

While we will continue to require that the simplified prospectus be delivered upon request, we do not propose to require delivery of the simplified prospectus with the fund facts document.

 

 

 

 

 

Although we agree that the simplified prospectus contains useful information, we know that investors have trouble finding and understanding that information because the simplified prospectus is a long and complex document. We think the fund facts document provides key information about the mutual fund in a simple, accessible and comparable format for investors to use to inform their investment decision.

 

 

 

 

 

We note that, during the development of the fund facts document, in response to comments, we revised the disclosure in the fund facts document to indicate that while the fund facts document contains key information about a fund, more detailed is available in the simplified prospectus.

 

 

Electronic Delivery

 

One commenter noted that the Instrument will complicate and inhibit access to mutual fund products by rural investors and will have a disproportionate impact on such investors and the advisers who service them. In such locales, the electronic delivery methods are impractical for many advisers and their clients, and the long distances travelled by such advisers to service clients complicates even the paper delivery of fund facts documents at pre-sale.

As noted earlier, technology has advanced considerably since the 2009 Proposal. There are now service providers who have created the automated programs and applications for pre-sale delivery of fund facts documents, which have increased the means by which fund facts documents can be delivered or sent to, and received by, investors.

 

 

 

 

We were also told that the electronic delivery methods contemplated will also have a disproportionate negative impact on elderly investors who are poorly served by electronic delivery means.

We continue to think electronic delivery provides dealers with flexibility to accommodate the needs of investors and their business models.

 

 

 

 

However, we were also told that adding an option for electronic delivery of fund facts documents eases some of the delivery issues for investors who do not have physical access to an advisor or who wish to make a purchase quickly.

We disagree with the comments that proof of electronic delivery will impede its use. We further disagree with the comment that electronic delivery negates the value of pre-sale delivery.

 

 

Access equals delivery

 

A few industry commenters reiterated their earlier comments that the CSA should continue to explore "access equals delivery" for investors. Noted some industry commenters, making fund facts documents available on the manager's website should be sufficient to satisfy electronic delivery, especially where the investor consents to that method of delivery.

We disagree with the comments. We do not consider 'access equals delivery' to meet the principles set out in the Framework. As a result, we have not included the concept of 'access equals delivery' in the Proposed Amendments.

 

 

 

 

One of these commenters further commented that the Instrument should reflect the possibility that technological solutions may be developed for posting fund facts documents online, making them available for access (and printing) by dealers, sales representatives and investors, alike. This commenter urged us to consider mandating availability and accessibility of all disclosure documents rather than mandating physical pre-sale delivery.

 

 

Alternatives

Deliver fund facts documents with trade confirmation

 

An industry commenter suggested that a far less demanding alternative to pre-sale delivery would be to allow fund facts documents to be provided with the trade confirmation in lieu of the prospectus or with the prospectus.

We remain committed to the principles set out in the Framework for providing investors with key information, in language they can easily understand, about a mutual fund at a time that is most relevant to their investment decision.

 

 

 

 

A service provider of plain language communications stated that mutual fund investors pay attention to the trade confirmation, and recommended that key information about a purchase be incorporated into the trade confirmation.

 

 

 

 

 

Allowing delivery of fund facts documents post trade, said one commenter, still furthers the goals of the CSA, but without severely limiting the manner in which mutual funds are sold or imposing arduous audit requirements which will be necessary to ensure pre-sale delivery.

 

 

 

Key information at account opening

 

A few industry commenters suggested providing key information about mutual funds at the time the investor completes their account application, which would be before they buy any funds.

We disagree with this comment. Providing information at account opening cannot be a substitute for providing information at the time that an investor is actually making their investment decision. In addition, it is unclear how this concept would be applied in practice. In our view, it would not be feasible to provide anything more than general information about investing in mutual funds.

 

Creation of central fund facts document repository

 

 

Many industry commenters, including a number of national trade associations for the investment fund/dealer industry, recommend the development of a clearing house/central repository/delivery mechanism to assist delivery by dealers and as noted previously, we were told that this repository should be established and fully functional before the 2009 Proposal is implemented.

Although we do not propose to create a central repository for fund facts documents, we understand that several service providers have already established one with the aim of facilitating fund facts delivery by dealers.

Part 4 -- Comments on the Instrument

Issue

Sub-Issue

 

Comments

Responses

 

Part 3A -- Delivery of fund facts document

Section 3A.1 -- Definitions

 

We were told by one industry commenter that the definition of "initial purchase" was over-inclusive and should be narrowed. In particular, this commenter suggested that if an investor held units of Fund A, Series A, redeemed those units and a month later decided to repurchase those units, the dealer should not be required to provide a fund facts document prior to that purchase, since as a previous holder of Fund A, Series A, it is fair to presume that the investor has full knowledge of that fund. In such cases, this commenter suggested that the investor should be permitted to waive the requirement to receive a fund facts document.

Given the changes that we have made to the 2009 Proposal, these comments are no longer applicable.

 

 

 

 

One SRO commented that, in order to avoid confusion, the definition of "order execution-only service" should be clarified so that it applies only to investment dealers and not to mutual fund dealers.

 

 

 

Section 3A.3 -- Timing of delivery

 

One industry commenter told us that for trades initiated by the investor, paragraph 3A.3(2)(b) should be revised so that the dealer does not have to describe the fund facts document or obtain an explicit waiver from the client, in order to deliver the fund facts document with the confirmation of trade.

We are no longer proposing a delivery regime that contemplates differentiating between advisor-recommended and investor-initiated trades. We do, however, still contemplate an exception to pre-sale delivery where the fund facts document can be sent within 2 days of purchase. In those circumstances, we are not requiring that the fund facts document be delivered with the confirmation of trade. The provision related to what can be bundled or attached to a fund facts document, however, would not preclude a fund facts from being delivered with the confirmation of trade.

 

 

 

 

We were also asked us to clarify whether delivery of a fund facts document "with the confirmation of trade" in subsection 3A.3(3) means delivery of the fund facts document within the timeframe of the confirmation mailing, or in the same envelope as the confirmation.

 

 

 

 

 

Some commenters noted that, currently, the trade confirmation may be sent by the dealer (in a nominee name account) or by the fund manager (in a client name account) and recommended that the CSA not require the fund facts document be delivered with the confirmation of trade.

 

 

 

 

 

We were also told by an investor advocate commenter that the trade confirmation identify the trade as either "advisor-recommended" or "investor-initiated".

 

 

 

 

 

One SRO commented that the instruction of the purchaser under paragraph 3A.3 (1) (b) should be evidenced in writing in order to avoid contestation of the instruction. That commenter also suggested that paragraph 3A.3 (2) (a)(ii) should read as follows: (ii) is initiated by the purchaser. It was noted that an adviser may still recommend a purchase that is initiated by the purchaser.

 

 

 

Section 3A.4 -- Methods of delivery

 

One investor advocate and one SRO commenter told us that the delivery of a fund facts document should include a purchaser's signature (and date) to confirm that the fund facts document was received, read and the content understood. Yet, another investor advocate commenter disagreed, stating that if delivery of the fund facts document satisfies the prospectus delivery requirement, and the simplified prospectus has no acknowledgement requirement, then they believe that an acknowledgment is also unnecessary for fund facts document.

The Proposed Amendments do not contain a requirement for purchasers to provide written acknowledgement confirming receipt of the fund facts document. We agree with the commenter that indicated if delivery of the simplified prospectus does not have an acknowledgement requirement then no such requirement should be required in respect of delivery of the fund facts document.

 

 

 

 

One industry commenter further noted that section 3A.4 should be revised to create a deeming provision for electronic and fax delivery similar to the one that exists for prepaid or registered mail . An SRO commenter, however, suggested that no deeming provision should be included for any type of delivery.

 

 

 

 

 

Finally, we also heard from a service provider in the mutual fund industry who told us that fund facts documents should be deemed 'delivered' and 'accepted' using receipting methodologies via existing physical or electronic protocols. This commenter told us that logs of these activities indexed to the investor's account asynchronously could be kept to validate that the delivery occurred on or prior to purchase of the investment.

 

 

 

Section 3A.5 -- Annual option to receive fund facts documents

 

One industry commenter made a number of recommendations with respect to the annual delivery option, suggesting:

We do not propose proceeding with this element of the 2009 Proposal. We propose to require delivery of fund facts documents with subsequent purchases unless the investor has already received the most recent fund facts document.

 

 

only the most recent fund facts document filed on SEDAR, or another central repository, at (or within a reasonable number of days prior to) the time of the annual mailing (and not necessarily the version filed -- and receipted -- with the simplified prospectus) should be delivered,

 

 

 

dealers should be permitted to select a date during the year for annual delivery that is most beneficial to both investors and the dealer,

 

 

 

annual delivery should apply at the client account level (as is the case for MRFPs and financial statements), and not at the individual fund (or series) level, and

 

 

 

annual delivery should not be implemented until after the transition period expires (to ensure that all fund facts documents are available).

 

 

Comments on Companion Policy 81-101CP to NI 81-101

 

 

 

 

 

Part 7 Delivery

Section 7.2 -- Delivery of fund facts documents

 

A number of industry commenters asked the CSA to further explain what is expected of dealers in terms of evidencing compliance with pre-sale delivery of the fund facts document.

In accordance with existing practices, dealers must establish internal policies and procedures to ensure delivery of the fund facts document occurs in accordance with Proposed Amendments.

 

 

 

 

A commenter indicated that it is unclear what "in accordance with existing practices" means with respect to dealer compliance with delivery.

Dealers must maintain evidence of delivery of the fund facts document, as well as receipt of purchaser consent to receive delivery of the fund facts document after entering into the purchase of a security of a mutual fund. Dealers must also maintain adequate records to evidence that satisfactory disclosure about the fund facts document has been provided to purchasers. Such records should also indicate why delivery of the fund facts document was impracticable in the circumstances. We expect that dealers will follow their current practices to maintain evidence of required disclosures to sufficiently document delivery of the fund facts document.

 

 

 

 

We were asked whether the CSA would be satisfied with contemporaneous notes to file. If client signatures are not required, we were asked to explicitly state this.

 

 

 

 

 

 

Finally, as noted above, the Proposed Amendments do not impose any requirement for written client acknowledgements of receipt of the fund facts document.

 

 

Section 7.4 -- Subsequent purchases

 

A number of industry commenters recommended that the existing waiver of delivery obligations for subsequent purchases be extended to include trades that result from fund merger activity that occur from time to time.

As mentioned above, although we propose that delivery of the fund facts document not be required in respect of subsequent purchases under a pre-authorized purchase plan provided that certain requirements are met, we do not propose a similar exception for money market fund purchases, switches under asset allocation plans, or for fund mergers and reorganizations.

 

 

Section 7.5 -- Dealer recommended and non-recommended purchases

 

We heard from one investor advocate commenter who agreed with the CSA's view that an investor should not be able to waive receipt of the fund facts document on a blanket basis on account opening.

Although we are no longer proceeding with a delivery regime that distinguishes between dealer recommended and non-recommended purchases, in circumstances where the requirements for the exception to pre-sale delivery are met, we have retained the requirement that such consent be obtained for each purchase of a security of a mutual fund and that it cannot be in the form of standing instructions from the purchaser.

 

 

 

 

An SRO commenter asked us to indicate that mutual fund dealer representatives need to review suitability of a proposed purchase, even if the trade is initiated by the investor.

 

 

 

Section 7 .7 -- Electronic delivery

 

One investor advocate commenter told us that e-mail delivery seriously negates the value of pre-sale delivery and effectively amounts to "access equals disclosure", with no client-adviser discussion on costs, risks or suitability.

The methods of delivery of a fund facts document are consistent with methods of delivery of a prospectus under securities legislation. We are not providing specific guidance around how delivery can be achieved using the various methods of delivery that are available. As noted in the Companion Policy, however, we do not consider making the fund facts document available on a website, or simply referring an investor to a general website address where the fund facts document can be found, as being sufficient to satisfy delivery requirements under the Proposed Amendments. We would consider such methods to be akin to access-equals-delivery, which we have consistently rejected throughout the various stages of the POS disclosure initiative.

 

 

 

 

Yet, we were also asked by another investor advocate to clarify in the Companion Policy that electronic delivery is satisfied by either sending (i) an electronic copy of the fund facts document, or (ii) an email with a direct link to the fund facts document.

 

 

 

 

 

Other commenters further asked for greater clarification of the phrase "or directing the investor to a specific fund facts document on a website". These commenters noted it would be impossible for a dealer to prove that real time instructions were given by the advisor to the investor in the manner contemplated in the Companion Policy.

 

 

 

Section 7.8 -- Annual Option to receive Fund Facts

 

An SRO commenter stated that the absence of a response from an investor should not allow a dealer to determine if a fund facts document is to be delivered. The dealer should be required to receive as an express waiver of the annual option to receive fund facts document from the investor.

We do not propose proceeding with an annual delivery option. We propose to require delivery with subsequent purchases unless the investor has already received the most recent fund facts document.

 

 

Section 7.10 -- Delivery of Non-Educational Materi

 

An SRO commenter suggested that allowing delivery of non-educational material with the fund facts document can create confusion for the investor since it could potentially obscure the fund facts document, which goes against the principles of point of sale disclosure.

For the purposes of pre-sale delivery, we are proposing that the fund facts document only be allowed to be attached to, or bound with, other fund facts fund facts documents, provided the size of the overall document does not make the presentation of the information inconsistent with the principles of simplicity, accessibility and comparability. When delivery of the fund facts document occurs after the purchase transaction, we are proposing permitting the fund facts document to be attached to, or bound with, certain other materials or documents provided the fund facts document documents are located first in any package. We are of the view that the limitations on binding that are being considered will ensure that the investors will not be confused and that the information in the fund facts document will not be obscured.

Part 5 -- List of commenters

Commenters

- - - - - - - - - - - - - - - - - - - -

• Advocis

• AGF Management Limited

• Anderson, James

• Banque Nationale Groupe financier

• BMO Guardian Group of Funds Ltd.

• BMO Investments Inc.

• Board of Governors for CI Investments Inc. and United Financial Corporation

• Borden Lardner Gervais LLP

• Brandes Investment Partners

• Broadridge Investor Communication Solutions, Canada

• Canadian Bankers Association

• Canadian Foundation for Advancement of Investor Rights

• i International Asset Management (Canada), Inc.

• Chambre de la sécurité financière

• CI Financial Group

• CIBC

• Durnin, James S.

• Fédération des caisses du Québec -- Desjardins

• Fidelity Investments Canada ULC

• Franklin Templeton Investments Corp.

• Fugal Bugle

• Gauthier, Jean-Francois

• Harvey, Ronald P.

• Horan, Chris

• Independent Financial Brokers

• Independent Planning Group Inc, IPG Insurance

• Invesco Trimark Ltd.

• Investment Funds Institute of Canada

• Investment Industry Association of Canada

• Investment Planning Counsel, IPC Investment Corporation, IPC Securities Corporation

• Investors Group Inc.

• Keybase Financial Group Inc.

• Mackenzie Financial Corporation

• Manulife Securities, Manulife Investments Mutual Funds

• MGI Financial Inc.

• MGI Funds Inc.

• MGI Securities Inc.

• Miller Thomson LLP

• Mouvement d'éducation et de défense des actionnaires

• PFSL Investments Canada Ltd.

• Quirt Brown, Jeanie

• RBC Asset Management Inc., Phillips, Hager & North Investment Management Ltd.

• RBC Dominion Securities Inc. Royal Mutual Funds Inc, Philips, Hager & North Investment Funds Ltd.

• RESP Dealers Association of Canada

• RocheBanyan

• Rogers Group Financial

• Scotia Securities Inc.

• Simplified Communications Group Inc.

• Small Investor Protection Association

• TD Bank Financial Group

• Tradex

• Qtrade Financial Group

• VAULT Solutions Inc.

• Williams, Bill

- - - - - - - - - - - - - - - - - - - -

Annex D

PROPOSED AMENDMENTS TO NATIONAL INSTRUMENT 81-101 MUTUAL FUND PROSPECTUS DISCLOSURE

1. National Instrument 81-101 Mutual Fund Prospectus Disclosure is amended by this Instrument.

2. Section 1.1 is amended by adding the following definition:

"pre-authorized purchase plan" means a contract or other arrangement, that can be terminated at any time, for the purchase of securities of a mutual fund by payments in a specified amount on a regularly scheduled basis;.

3. Subsections 3.2(2) and (2.1) are replaced with the following:

(2) If a prospectus for a mutual fund is required under securities legislation to be delivered or sent to a person or company, the fund facts document most recently filed under this Instrument for the applicable class or series of securities of the mutual fund must be delivered or sent to the person or company in accordance with section 3.2.1.1.

(2.1) The requirement under securities legislation to deliver or send a prospectus for a mutual fund does not apply if a fund facts document is delivered or sent under section 3.2.1.1.

4. The following is added after section 3.2.1:

3.2.1.1 Delivery of Fund Facts Document

(1) Before a dealer accepts an instruction for the purchase of a security of a mutual fund, the dealer must deliver or send to the purchaser the most recently filed fund facts document for the applicable class or series of securities of the mutual fund.

(2) Despite subsection (1), a dealer is not required to deliver or send the fund facts document if the purchaser has previously received the most recently filed fund facts document for the applicable class or series of securities of the mutual fund.

(3) Despite subsection (1), a dealer may deliver or send to the purchaser the most recently filed fund facts document for the applicable class or series of securities of the mutual fund not later than midnight on the second business day after entering into the purchase of a security of the mutual fund, if all of the following apply:

(a) before accepting the instruction for the purchase of the mutual fund, the dealer informs the purchaser of the existence and purpose of the fund facts document and explains the dealer's obligation to deliver or send the fund facts document;

(b) the purchaser indicates that the purchase must be completed immediately or by a time specified by the purchaser;

(c) it is not reasonably practicable for the dealer to deliver or send the fund facts document before the time specified by the purchaser under paragraph (b);

(d) the purchaser consents to the dealer delivering or sending the fund facts document after entering into the purchase;

(e) the dealer provides verbal disclosure of all of the following:

(i) a description of the fundamental features of the mutual fund, and what it primarily invests in, as set out under the heading "What does the fund invest in?" in Item 3 of Part I of the fund facts document;

(ii) the investment risk level of the mutual fund as set out under the heading "How risky is it?" in Item 4 of Part I of the fund facts document;

(iii) a brief statement of the suitability of the mutual fund for particular investors as set out under the heading "Who is this fund for?" in Item 7 of Part I of the fund facts document;

(iv) an overview of any costs associated with buying, selling, and owning a security of the mutual fund as set out under the heading "How much does it cost?" in Item I of Part II of the fund facts document;

(v) a summary of any applicable withdrawal rights or rescission rights that the purchaser is entitled to under securities legislation, as set out under the heading "What if I change my mind?" in Item 2 of Part II of the fund facts document.

(4) A consent referred to in paragraph (3)(d) must be obtained for each purchase of a security of a mutual fund and, for greater certainty, cannot be in the form of standing instructions from the purchaser.

(5) Subsection (1) does not apply to a purchase of a security of a mutual fund by a participant under a pre-authorized purchase plan if all of the following apply:

(a) the purchase is not the first purchase under the plan;

(b) the dealer provided a notice to the participant that

(i) states that the participant will not receive a fund facts document after the date of the notice, unless they specifically request it,

(ii) includes a form that a participant can use to request the fund facts document,

(iii) includes information about where to send the request form referenced in subparagraph (ii),

(iv) includes information about how to access the fund facts document electronically,

(v) states that the participant will not have a right of withdrawal for subsequent purchases under the plan but will continue to have a right of action for damages or for rescission if there is a misrepresentation in the prospectus, annual information form, fund facts document or financial statements, and

(vi) states that the participant may terminate the plan at any time;

(c) within the previous 12 months, the dealer notified the participant in writing of how the participant can request the fund facts document or any amendment to the fund facts document..

5. Section 5.2 is replaced with the following:

5.2 Combinations of Fund Facts Documents for Delivery Purposes

(1) If a fund facts document for a particular class or series of securities of a mutual fund is delivered or sent under subsection 3.2.1.1(1), the fund facts document must not be attached to or bound with any other materials or documents, except that it may be attached to or bound with one or more other fund facts documents if the attachment or binding is not so extensive as to cause a reasonable person to conclude that the attachment or binding prevents the information from being presented in a simple, accessible and comparable format.

(2) Despite subsection (1), if a fund facts document for a particular class or series of securities of a mutual fund is sent electronically under subsection 3.2.1.1(1), the fund facts document must not be attached to other materials or documents including another fund facts document.

(3) A fund facts document delivered or sent under subsection 3.2.1.1(3) must not be attached to or bound with any other materials or documents, except that it may be attached to or bound with one or more of the following:

(a) a general front cover pertaining to the package of attached or bound materials and documents;

(b) a trade confirmation which discloses the purchase of securities of the mutual fund;

(c) a fund facts document of another mutual fund if that fund facts document is being delivered or sent under section 3.2.1.1;

(d) a simplified prospectus or a multiple SP of the mutual fund;

(e) any document incorporated by reference into the simplified prospectus or the multiple SP;

(f) account application documents;

(g) registered tax plan applications and documents.

(4) If a trade confirmation referred to in paragraph (3)(b) is attached to or bound with a fund facts document, any other disclosure document required to be delivered or sent to satisfy a regulatory requirement for purchases listed in the trade confirmation may be attached to or bound with the fund facts document.

(5) If a fund facts document is attached to or bound with any of the materials or documents referred to in subsection (3), a table of contents specifying all documents must be attached to or bound with the fund facts document, unless the only other documents attached to or bound with the fund facts document are the general front cover or the trade confirmation.

(6) If one or more fund facts documents are attached to or bound with any of the materials or documents referred to in subsection (3), only the general front cover, the table of contents and the trade confirmation may be placed in front of the fund facts documents..

6. Expiration of exemptions and waivers

Any exemption from or waiver of a provision of National Instrument 81-101 Mutual Fund Prospectus Disclosure in relation to the prospectus or fund facts document delivery requirements for mutual funds, or an approval in relation to those requirements, expires on the date that this Instrument comes into force.

7. Transition for pre-authorized purchase plans

For the purposes of section 3.2.1.1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure, as enacted by section 4 of this Instrument, the first purchase of a security of a mutual fund by a participant under a pre-authorized purchase plan made on or after [*], is considered to be the first purchase transaction under the plan.

8. Effective date

This Instrument comes into force on [*].

Annex E

PROPOSED CHANGES TO COMPANION POLICY 81-101CP TO NATIONAL INSTRUMENT 81-101 MUTUAL FUND PROSPECTUS DISCLOSURE

1. The changes proposed to Companion Policy 81-101CP To National Instrument 81-101 Mutual Fund Prospectus Disclosure are set out in this Annex.

2. Part 7 is replaced with the following:

PART 7 Delivery

7.1 Delivery of the Simplified Prospectus and Annual Information Form -- The Instrument contemplates delivery to all investors of a fund facts document in accordance with the requirements in securities legislation. It does not require the delivery of the simplified prospectus, or any other documents incorporated by reference into the simplified prospectus, unless requested. Mutual funds or dealers may also provide investors with any of the other disclosure documents incorporated by reference into the simplified prospectus.

7.2 Pre-Sale Delivery of the Fund Facts Document -- (1) The Instrument requires a fund facts document to be delivered before a dealer accepts an instruction for the purchase of a security of a mutual fund. The purpose of pre-sale delivery of a fund facts document is to provide a purchaser with key information about the mutual fund that will inform a purchase decision. What constitutes "before" is intended to be flexible, provided it occurs within a reasonable timeframe before the purchaser's instruction to purchase. Accordingly, the Canadian securities regulatory authorities would generally expect that delivery of a fund facts document will occur within a timeframe that provides a purchaser with a reasonable opportunity to consider the information in the fund facts document before proceeding with the transaction. It should not be delivered or sent so far in advance of the purchase of a security of a mutual fund that the delivery cannot be said to have any connection with the purchaser's instruction to purchase the mutual fund.

(2) Where a purchaser has already received a fund facts document for a particular class or series of securities of a mutual fund, it is not necessary to deliver or send to the purchaser another fund facts document for a subsequent purchase of that same class or series of securities of a mutual fund, unless a more recent version of the fund facts document has been filed.

7.3 Post-Sale Delivery of the Fund Facts Document -- (1) While the Instrument generally requires pre-sale delivery of the fund facts document, it also sets out specific requirements that would permit post-sale delivery of the fund facts document in circumstances where the purchaser has indicated that they require the purchase of a security of a mutual fund to be completed immediately, or by a specified time, and it is not reasonably practicable for the dealer to effect pre-sale delivery of the fund facts document within the timeframe specified by the purchaser.

(2) The requirements for post-sale delivery of the fund facts document are set out in subsection 3.2.1.1(3) and must be interpreted consistently with the dealer's general duties to act fairly, honestly and in good faith and to establish and maintain a compliance system in accordance with securities legislation. Accordingly, the Canadian securities regulatory authorities expect dealers will adapt their business models to comply with the general requirement for pre-sale delivery of the fund facts document.

(3) Subsection 3.2.1.1(3) requires dealers to provide an overview of the information contained in the fund facts document. This should include describing the purpose of the fund facts document, the type of information it contains, and advising purchasers that they are entitled to receive and review the fund facts document before the purchase of a security of a mutual fund. Where the purchaser consents to post-sale delivery of the fund facts document, dealers are required to provide verbal disclosure of certain information contained in the fund facts document. This would include a description of the fundamental features of the mutual fund and what it primarily invests in, as well as the investment risk level of the mutual fund. The Canadian securities regulatory authorities would not generally consider it necessary to disclose the information included in the fund facts document under "Top 10 investments" or "Investment mix". In disclosing the suitability of the mutual fund for particular investors, dealers would be required to describe the characteristics of the investor for whom the mutual fund may or may not be an appropriate investment, and the portfolios for which the mutual fund is and is not suited. In terms of providing an overview of any costs associated with buying, selling and owning the mutual fund, the information provided should, at a minimum, include a discussion of any applicable sales charges, as well as ongoing fund expenses (e.g., MER and TER), and any applicable trailing commissions. Information related to sales charges and trailing commissions is also required as part of pre-trade disclosure requirements set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registration Obligations. Finally, dealers would also be required to provide purchasers with a summary of any applicable right to withdraw from a purchase within two days after receipt of the fund facts document and to rescind a purchase within 48 hours after receipt of the trade confirmation for the purchase. This latter requirement is intended to alert purchasers to the fact that they will have an opportunity to consider the information in the fund facts document that will be delivered or sent post-sale and, based on that information, determine whether they want to cancel their purchase of the mutual fund securities at that time.

(4) Where a purchaser consents to receive delivery of the fund facts document after entering into the purchase of a security of a mutual fund, the consent will only be valid for the particular transaction. A dealer cannot rely on standing instructions from a purchaser to carry out post-sale delivery of the fund facts document for other purchases of mutual fund securities.

(5) In accordance with existing practices, dealers must establish internal policies and procedures to ensure delivery of the fund facts document occurs in accordance with section 3.2.1.1. Dealers must maintain evidence of delivery of the fund facts document, as well as receipt of purchaser consents to receive delivery of the fund facts document after entering into the purchase of a security of a mutual fund. Dealers must also maintain adequate records to evidence that satisfactory disclosure about the fund facts document has been provided to purchasers in compliance with subsection 3.2.1.1(3). Such records should also indicate why delivery of the fund facts document was impracticable in the circumstances. The Canadian securities regulatory authorities expect that dealers will follow their current practices to maintain evidence of required disclosures to sufficiently document delivery of the fund facts document.

(6) The Instrument does not specify a particular manner of evidencing a purchaser's consent to allow delivery of the fund facts document after entering into the purchase of a security of a mutual fund. In particular, the Instrument does not require dealers to obtain written consent from clients. The Canadian securities regulatory authorities expect that dealers will follow their current policies and procedures for tracking and monitoring client instructions and authorizations.

(7) The Canadian securities regulatory authorities expect that dealers will remain faithful to the overall objective of ensuring that purchasers are provided with a fund facts document prior to accepting instructions to purchase a security of a mutual fund. Although the instrument allows for post-sale delivery of the fund facts document delivery in certain limited circumstances, the Canadian securities regulatory authorities expect that post-sale delivery of the fund facts document will be the exception rather than the norm. The Canadian securities regulatory authorities may examine practices or arrangements that raise the suspicion of being structured to permit dealers to do indirectly what they cannot do directly and that are inconsistent with the overall intent of providing key information to investors at a time that is most relevant to their purchase decision.

7.4 Methods of Delivery -- (1) The methods of delivery of a fund facts document are consistent with methods of delivery of a prospectus under securities legislation. Although there is flexibility in the methods of delivery, the Canadian securities regulatory authorities do not consider making the fund facts document available on a website, or simply referring an investor to a general website address where the fund facts document can be found, as being sufficient to satisfy delivery requirements under the Instrument.

(2) In addition to the requirements in the Instrument and the guidance in this section, dealers may want to refer to National Policy 11-201 Delivery of Documents by Electronic Means and, in Québec, Policy Statement 11-201 Respecting Electronic Delivery of Documents for additional guidance.

7.5 Consolidation of Fund Facts Documents -- (1) For the purposes of pre-sale delivery, subsection 5.2(1) of the Instrument allows a fund facts document to be attached to, or bound with, one or more fund facts documents, provided the size of the document does not make the presentation of the information inconsistent with the principles of simplicity, accessibility and comparability. For example, a fund facts document may be attached to, or bound with, fund facts documents of other classes or series of securities of the same mutual fund, other mutual funds from the same fund family, or other mutual funds of a similar type from different fund families. In making this determination, mutual funds, managers and participants in the mutual fund industry should consider the ability of an investor to easily find and use the information that is relevant to the particular mutual funds securities they are considering purchasing, and whether a reasonable person in the circumstances would come to the same conclusion. We think a document with more than 10 fund facts documents bound together may discourage an investor from finding and reading a fund facts document and obscure key information, which is inconsistent with the principles of simplicity, accessibility and comparability.

(2) When delivery of the fund facts document occurs after the purchase transaction, subsections 5.2(3) and (4) of the Instrument permit a fund facts document to be attached to, or bound with, certain other materials or documents provided the fund facts document is located first in any package.

7.6 Preparation of Disclosure Documents in Other Languages -- Nothing in the Instrument prevents the simplified prospectus, annual information form or fund facts document from being prepared in other languages, provided that these documents are delivered or sent in addition to any disclosure document filed and required to be delivered in accordance with the Instrument. The Canadian securities regulatory authorities would consider such documents to be sales communications.

7.7 Delivery of Documents by a Mutual Fund -- Section 3.3 of the Instrument requires that a mutual fund deliver or send to a person or company, upon request, a simplified prospectus or documents incorporated by reference. The CSA are of the view that compliance with this specifically-mandated requirement by an unregistered entity is not a breach of the registration requirements of securities legislation.

7.8 Delivery of Separate Part A and Part B Sections -- Mutual fund organizations that create physically separate Part B sections are reminded that any obligation to provide the simplified prospectus would be satisfied only by the delivery of both the Part A and Part B sections of a simplified prospectus.

7.9 Delivery of Non-Educational Material -- The Instrument and related forms contain no restrictions on the delivery of non-educational material such as promotional brochures with either of the simplified prospectus and the annual information form. This type of material may, therefore, be delivered with, but cannot be included within, wrapped around, or attached or bound to, the simplified prospectus and the annual information form. The Instrument does not permit the binding of educational and non-educational material with the Fund Facts Document. The intention of the Instrument is not to unreasonably encumber the Fund Facts with additional documents..

ANNEX F

ONTARIO RULE-MAKING AUTHORITY AUTHORITY FOR THE PROPOSED AMENDMENTS

The following provisions of the Securities Act (Ontario) (the Act) provide the Commission with authority to adopt the Proposed Amendments:

Subparagraph 143(1)2(i) of the Act authorizes the Commission to make rules prescribing the standards of practice and business conduct of registrants in dealing with their customers and clients and prospective customers and clients.

Paragraph 143(1)7 of the Act authorizes the Commission to make rules prescribing requirements in respect of the disclosure or furnishing of information to the public or the Commission by registrants or providing for exemptions from or varying the requirements under this Act in respect of the disclosure or furnishing of information to the public or the Commission by registrants.

Paragraph 143(1)31 of the Act authorizes the Commission to make rules regulating investment funds and the distribution and trading of the securities of investment funds, including

• making rules varying Part XV (Prospectuses -- Distribution) or Part XVIII (Continuous Disclosure) by prescribing additional disclosure requirements in respect of investment funds and requiring or permitting the use of particular forms or types of additional offering or other documents in connection with the funds (subparagraph (i)); and

• making rules prescribing procedures applicable to investment funds, registrants and any other person or company in respect of sales and redemptions of investment fund securities (subparagraph (xi)).

Paragraph 143(1)49 of the Act authorizes the Commission to make rules permitting or requiring, or varying this Act to permit or require, methods of filing or delivery, to or by the Commission, issuers, registrants, security holders or others, of documents, information, notices, books, records, things, reports, orders, authorizations or other communications required under or governed by Ontario securities law.

Paragraph 143(1)53 of the Act authorizes the Commission to make rules providing for exemptions from or varying the requirements of section 71.

Paragraph 143(1)54 of the Act authorizes the Commission to prescribe the disclosure document that is required to be sent or delivered in respect of the purchase and sale of an investment fund security for the purpose of subsection 71(1.1). Each of these provisions received Royal Assent on May 12, 2011 as part of the Better Tomorrow for Ontario Act (Budget Measures), 2011 and comes into force on proclamation. The power to make rules authorized by passed but not proclaimed provisions is provided by subsection 10(1) of the Legislation Act (Ontario).

{1} The goal of the Joint Forum is to continuously improve the financial services regulatory system through greater harmonization, simplification and co-ordination of regulatory activities. Under the framework, investors would receive more meaningful information about a mutual fund or segregated fund at a time that is relevant to their investment decision.

{2} In the United Kingdom, Australia, Hong Kong and Malaysia, disclosure documents must generally be provided before a product is purchased.

{3} See, for example: Principles on Point of Sale Disclosure, Final Report, Technical Committee of the IOSCO, February 2011; G20 High-level principles on Financial consumer protection, Organization for Economic Co-operation and Development (OECD), October 2011; and Regulation of Retail Structured Products, Consultation Report, IOSCO, April 2013.

Principle 2 of the IOSCO Principles on Point of Sale Disclosure specifies: "key information should be delivered, or made available, for free, to an investor before the point of sale, so that the investor has the opportunity to consider the information and make an informed decision about whether to invest."

{4} See footnote 2 above.

{5} See footnote 3 above.

{6} Financial Services Authority, July 2008 Financial Capability A Behavioural Economics Perspective -- Consumer Research 69.

{7} OSC, October 2006 Fund Facts Document Research Report; Investment Company Institute, August 2006 Understanding Investor Preferences for Mutual fund Information; Securities and Exchange Commission, April 2004 Results of Focus Groups with Individual Investors to Test Proposed Rules 15c2-2 and 15c2-3.