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APPENDIX A

 

SUMMARY OF COMMENTS RECEIVED ON
THE MUTUAL FUND PROSPECTUS DISCLOSURE SYSTEM
DESCRIBED IN THE CONCEPT PROPOSAL
RELEASED AS
CSA NOTICE 81-301

1. INTRODUCTION

In January 1997, the Canadian Securities Administrators (the "CSA") published for comment the Concept Proposaldescribing a proposed prospectus disclosure system for use by mutual funds. In the Concept Proposal, the CSA askedfor general comments and also asked for input on a series of questions.

The CSA received seven comment letters during the comment period that ended on April 30, 1997. These commentletters ranged from a comprehensive submission from The Investment Funds Institute of Canada ("IFIC") to commentletters giving views on single issues.

The commenters were:

The Investment Funds Institute of Canada
BPI Mutual Funds
Canadian Bankers Association
Carmen DeBono
Allan R. Gregory
Joe Killoran
Paul J. Rockel

Copies of the comment letters may be viewed at the office of Micromedia, 20 Victoria Street, Toronto, Ontario (416)312-5211 or (800) 387-2689; the office of the British Columbia Securities Commission, 200-865 Hornby Street,Vancouver, British Columbia (604) 899-6660; the office of the Alberta Securities Commission, 10025 Jasper Avenue,Edmonton, Alberta (403) 427-5201; and the office of the Commission des valeurs mobilieres du Quebec, StockExchange Tower, 800 Victoria Square, 17th Floor, Montreal, Quebec (514) 873-5326.

The CSA have considered the comments received on the Concept Proposal in developing the proposed NationalInstrument, Forms and Companion Policy. The CSA thank all commenters for providing their comments on theConcept Proposal.

The following is a summary of the comments received together with the CSA's responses.

2. COMMENTS OF IFIC

Since the comment letter received from IFIC contained the most comments on the Concept Proposal, the CSA willsummarize it in detail. The NP36 Sub-Committee of IFIC (the "IFIC Committee") wrote the IFIC comment letter. TheIFIC Committee worked with staff of the CSA before the publication of the Concept Proposal and as part of that workdeveloped two prototype Summary Information Statements(1) based on the proposals outlined in the Concept Proposal.The IFIC Committee modified each prototype document, each re-named a "Fund Summary", to reflect the commentsof the IFIC Committee on the Concept Proposal. The revised prototype documents formed part of the IFIC commentletter. The CSA commend the IFIC Committee for its work in preparing the Fund Summary prototypes and thank eachmember of the IFIC Committee for their thoughtful consideration of, and input into, the CSA's proposals during thedevelopment of both the Concept Proposal and the proposed National Instrument.

In the IFIC comment letter, the IFIC Committee outlined suggested changes to the items of disclosure for a SummaryInformation Statement set out in the Concept Proposal. The following table summarizes those comments and theresponse of the CSA, all references to Item numbers in the CSA Response column are to the Fund Summary Form:

Item of Information - ConceptProposal IFIC Comment CSA Response
Name of document Rename the summaryinformation statement to fundsummary and come up with abetter name for the proposed"base disclosure document" The proposed NationalInstrument requires thepreparation of a "FundSummary" and a "FundProspectus"
Introductory Statement Disclosure suggested for anintroductory statement

Include a table in theIntroduction that provides certaindetails about the mutual funds

Item 3 sets out proposedintroductory disclosureconsistent with comments
Item 5 and sections 6.1 and6.2 of Item 6 incorporate thesuggested table of basicinformation
[no item proposed] Require disclosure describingthe suitability of a mutual fundfor particular investors Item 7 incorporates thesuggestion
Investment Objectives andNature of the Fund Agreed See Item 8
Investment Strategy Agreed See Item 9
R.R.S.P./R.R.I.F Qualifications Incorporate suggesteddisclosure into therecommended introductory table Sections 6.1 and 6.2 of Item 6incorporate the comment
Risk Profile and InvestmentConsiderations Do not mandate disclosure ofa quantitative risk measurementor graphic representation ofvolatility

Fund Summary should includespecific risks of investing in thespecific mutual funds -- generalrisks applicable to all mutualfunds should be included in anIFIC produced educationaldocument

Item 10 requires narrativedisclosure of risks specific to theparticular mutual fund

Section 11.1 of Item 11,among other things, is intendedto graphically illustrate that themutual fund's performancechanges from year to year

Item 4 requires disclosure ofgeneral risks applicable to allmutual funds

Past Performance Agree with concept thataverage annual total returns fora 10 year period be provided onboth an annual and compoundbasis -- understandable byinvestors and moredemonstrative of volatility

Consider permitting use of arolling time periodmeasurement (illustrates thebest, average and worstperformance of a mutual fundover 1,3,5 and 10 year periods)

Do not require disclosure ofother measures of volatility(beta, Sharpe's ratio - toodifficult to understand)

Require disclosure of pastdistributions of mutual fundunder Financial Summarysection

Do not require disclosure ofportfolio turnover rates - notreadily understood and could bemisleading - that is, nocorrelation between portfolioturnover and performance

Do not require comparison ofperformance to benchmark

See sections 11.1, 11.2 and11.3 of Item 11

Disclosure of pastperformance in a FundSummary must be set out onlyas required by Item 11 - anyother performancemeasurement could be includedin the Fund Prospectus

Disclosure of other measuresof volatility will not be required

Disclosure of pastdistributions to be included withFinancial Highlights - see Item13

Portfolio turnover rate isrelevant information forinvestors; this disclosure movedto the Financial Highlightssection - see Item 13

Comparison of a mutualfund's performance to a broadbased securities market index(such as the TSE 300 Index) isrelevant and useful informationfor investors -- see section 11.2and 11.3 of Item 11

Past Performance (continued) Require a narrative discussionof how past performance relatesto investment objectives andstrategy in MD&A, and not in aFund Summary

Require reference to a changein external portfolio adviser ifmade during the performanceperiods indicated

Permit performanceinformation to be given for so-called young funds -- useaverage rate of return for allmutual funds in same category

The CSA will review the issueof MD&A disclosure as theymove forward to look at financialdisclosure requirements formutual funds

Subsections 11.1(4), 11.2(9)and 11.3(8) of Item 11 requirethe recommended disclosure ofchanges in fund affairs during aperformance period

  • Young funds may not includeperformance information. Theprohibition relating to salescommunications by youngfunds presently carried forwardinto proposed NI81-102 MutualFunds will be reviewed duringthe finalization of that NationalInstrument in light of commentsreceived

  • Selected Financial Information Format suggested for twotables of financial information

    Do not require disclosure ofportfolio turnover rates

    Tables mandated in Item 13were derived from the IFICcomments and from theFinancial Highlights disclosureproposed by the ResearchReport
    Fees and Expenses Format suggested for fees andexpenses tables and for anillustration of the impact of feeson an investment in a mutualfund

    Use a lower rate of return of2.5% in the illustration of theimpact of fees and expenses onan investment in a moneymarket fund

    Tables mandated in Item 16contain elements suggested bycomments

    An illustrative 5% rate ofreturn retained for all mutualfunds regardless of category --the tables provide illustrationsonly, the actual rates of returnmay differ

    Dealer Compensation Agreed See Item 17
    Manager, Trustee andInvestment Advisor Move disclosure torecommended introductory table See Item 4 and sections 6.1and 6.2 of Item 6
    Securities Offered and CapitalStructure Move disclosure torecommended introductory table See Item 4 and sections 6.1and 6.2 of Item 6
    Purchases, Transfers andRedemptions Agreed with disclosureproposal - but move item'sordering See Item 14
    Distributions Agreed - require disclosure onimpact of investing in certainmutual funds late in a calendaryear See Item 12 for disclosure ofdistribution policy

    Item 18 (3) requiresdisclosure of the impact of amutual fund's distribution policyon a taxable investor whoinvests late in a calendar year

    Income Tax Status for Investors Agreed

    Do not require disclosureabout potential tax effect ofportfolio turnover

    Format suggested fordisclosure about tax implicationsof investing via a registered taxplan as opposed to investingoutside of a tax plan

    Item 18 continues to requiredisclosure, if material, of thepotential impact of a mutualfund's anticipated portfolioturnover rate on a taxableinvestor

    Item 18(2) incorporates thesuggested disclosurerequirement

    Statement of Rights andAvailability of AdditionalInformation Agreed -- plain languageversion of the "statement ofrights" suggested

    Move statement about theavailability of other informationto the introduction

    See Item 19 Statement ofRights

    See Item 3 IntroductoryDisclosure and Item 20 BackCover for mandated statementsconcerning the availability ofother information

    The IFIC Committee strongly recommended that the CSA permit consolidation of information about several mutualfunds in one Fund Summary. The IFIC Committee prepared the prototype Fund Summary covering more than onemutual fund using a "catalogue" approach similar to that adopted by the CSA in the proposed National Instrument. Asdescribed in more detail in the Notice, the CSA propose that fund companies be permitted to consolidate disclosureabout their mutual funds in one Fund Summary, provided the catalogue approach is followed and the presentation ofthe information contained in that Fund Summary continues to meet the central aim of the proposed National Instrument:that investors receive clear, concise and readable disclosure documents.

    The IFIC Committee also recommended that IFIC be charged with preparing a "broad educational document" describingmutual funds in a general fashion. As outlined in the Notice, the CSA agree with this comment and look forward toworking with IFIC to prepare this document.

    3. OTHER COMMENTS

    The commenters, other than IFIC, provided comments on various topics as described in the following table. Wherecommenters responded to the questions posed by the CSA in the Concept Proposal, the table identifies the numberingof the original question. All references to Item numbers in the CSA Response column are to the Fund Summary Form.

    Concept ProposalRecommendation or Question Comment CSA Response
    Disclosure of Past Performance Mandate disclosure of pastperformance in fundprospectuses to allowcomparisons of the results ofseveral mutual funds. Require:

    disclosure of year by yearperformance numbers for atleast the most recent 5 years

    uniform presentation of themandated performance numbers(to facilitate comparisons)

    a standard formula forcalculating annual performancenumbers.

    Past performance informationmandated -- see Item 11.
    Disclosure of Past Performance(continued) Complex information such asportfolio turnover rate cannot bemeaningfully disclosed in a FundSummary. Most investorspurchase mutual funds on a taxexempt basis (ie. throughregistered tax plans). As noted above in response tothe IFIC comment made on thispoint, the CSA have retained therequirement to disclose portfolioturnover rate.
    Disclosure of Past Performance(continued) Require disclosure of a fund's"annual, low and closing netasset values" for the last 10years or since inception. Thisdisclosure would permitinvestors to assess the volatilityand long term performance ofthe fund. The CSA propose that mutualfunds disclose the opening andclosing net asset value per unitfor each of their last fivefinancial years -- see Item 13.
    Disclosure of Statement ofRights The provincial securitieslegislation giving investors rightsto rescind their mutual fundpurchase is not uniform. Thislack of uniformity will complicatemutual funds' ability to provideclear disclosure on the issue.Adopt a uniform nationalrescission right for mutual fundinvestors. Item 19 of the Fund SummaryForm sets out a suggested plainlanguage statement of rightsthat the CSA consideradequately describes theapplicable withdrawal andrescission rights. The CSA willconsider the question of auniform rescission right at alater date.
    Fees and Expenses Require disclosure of the actualmanagement fee charged to afund (as opposed to merelydisclosing the "maximum" feethat could be charged). Items 6 and 16, when coupledwith the Financial Highlightstable on fees and expensesrequired by Item 13 respond tothis comment.
    Fees and Expenses - Illustrationof Impact of Expenses Illustrations of the effect of feesunder each purchase optioncannot be meaningfully providedbecause:

    different rates of returnsshould be assumed for differentfunds -- that is, money marketfunds should use less than 5%and equity funds should usemore than 5%- or the actualreturns of the mutual fundshould be utilized

    redemption assumptionsmisleading to investorspurchasing on a deferred chargebasis

    sales charges paid byinvestors vary from 0-6%, mostcharges are from between 0-2%-- need illustrations of the impactof each possible commissionpayment.

    The CSA believe that thedisclosure required by Item 16will provide meaningfulinformation to investors. TheCSA do not wish to clutter upthe illustrations with differentvariations and have accordinglyfixed the central assumptionsoutlined in section 16.2 of Item16.
    Fees and Expenses - Illustrationof Impact of Fees (continued) Existing investors shouldunderstand the actual impact offees on their return. Mandatedisclosure in client accountstatements of the dollaramounts charged to anindividual's account to paymanagement fees and otherfees and expenses. The CSA have not tackled thissuggestion in the proposedNational Instrument, but willkeep it in mind as they moveforward to reform the financialdisclosure required to beprovided to existing investors ona continuous basis.
    Other Disclosure Items for theFund Summary - Question A - 2 Permit disclosure of optionalinformation such as investorservices. Item 15 responds to thiscomment.
    Quantitative risk measurementsor graphic representations ofvolatility - Question A - 7 Clearly establish in the rule howvolatility should be presented. The CSA propose not tomandate any particular riskmeasurement -- instead the bargraph mandated by section 11.1of Item 11 is designed toillustrate that a mutual fund'sperformance changes from yearto year.
    Disclosure of Past Performance- Comparison to a Benchmark -Question A - 8 The determination of anappropriate comparative indexmay be difficult for a number ofCanadian mutual funds,particular sector funds. The CSA propose requiredcomparisons of fundperformance against anappropriate broad-basedsecurities index. Accordingly, aCanadian equity sector fundmay compare its performance tothe TSE 300 Index, rather thantrying to find a narrowlyfocussed index.
    Consolidation of Informationabout Several Mutual Funds inOne Fund Summary - QuestionB - 1 Continue the present system ofunlimited consolidation ofmutual funds in one FundSummary. If consolidation notpermitted, industry participants,including investors, willexperience increased costs.Disclosure in one documentabout the full range of mutualfunds offered by a fundcompany eases comparability ofdifferent investment options. As described in the Notice, theCSA propose no limits on thenumber of mutual funds that canbe included in one FundSummary, subject tocompliance with thepresentation requirementsoutlined in the Fund SummaryForm.
    Annual Re-filing Requirements -Question B - 2 Give mutual funds the ability tomake "non-material"amendments to a FundSummary, to disclose matterssuch as changes to optionalservices offered by a fundcompany, without having torefile and obtain regulatoryapproval for the amendeddocument. The CSA do not propose toamend the securities legislationat this time to change therequirement to file amendmentsto fund summaries or the annualprospectus re-filingrequirements.
    Delivery Requirements -Question B - 3 CSA suggestion that a FundSummary should be delivered atthe earliest possible time and inany event prior to the time of atrade, appears to be based onthe assumption that most tradestake place after or during a face-to-face meeting between aninvestor and his or her adviser.This is not at all the case. Thecurrent rules should not bechanged or if they are, theyshould be amended to deal withdelivery through new distributiontechnologies. The CSA are reviewing theissues around electronic deliveryof documents. The CSA do notpropose to change the currentlegislation applicable to mutualfund prospectuses until thatreview is concluded andrecommendations made.Accordingly the proposedNational Instrument does notchange the current deliveryrequirements.
    Plain Language Requirements Although plain languagedisclosure principles are good,the CSA must confirm that theFund Summary is not intendedto provide full disclosure.Without this clear confirmation,the Fund Summary may becomemore lengthy and technical inwording as fund companiesattempt to minimize legal risksthat might arise from its use. The proposed NationalInstrument does not change thesystem provided for by NP36 inthis regard. As outlined in theNotice, fund companies mustunderstand the centralphilosophy behind the FundSummary and must not permitthe aims of the disclosuresystem to be diluted because ofconcerns of legal liability.
    [new] Delivery of FinancialStatements Investors receive too muchinformation that they do notwant, do not understand and donot read. Financial statementssent to existing unitholders onan annual and semi-annualbasis are unnecessary. Giveinvestors the option of sayingwhether or not they wish tocontinue to receive thesedocuments. The CSA propose to eliminatethe current requirement to giveinvestors financial statementsalong with the prospectusdisclosure documents. Insteadthe Fund Summary mustcontain the mandated FinancialHighlights tables set out in Item13. The CSA will keep in mindthe comments about thecontinuous disclosure materialas they move forward to reformthe mutual fund financialdisclosure regime.
    [new] Disclosure of Voting ofPortfolio Securities by Managers Mandate disclosure on howmutual fund managers voted theportfolio securities of the mutualfunds they manage. The CSA do not propose tointroduce such a disclosurerequirement in the proposedNational Instrument. The CSAwill keep this comment in mindas they move forward toimplement the MD&A disclosureproposals.
    [new] Point of Sale DisclosureStatement Mandate delivery of a point ofsale document - a "mutual fundchecklist" designed to be usedby sales representatives duringthe sales process and prior to asale of a mutual fund. The Fund Summary will provideclear meaningful disclosure forinvestors and the CSA do notpropose to adopt a requirementthat would introduce anotherdocument into the sales processat this time.

     

    Footnotes

    1. A single fund Fund Summary and a "multi-fund" Fund Summary were prepared.