The Canadian Securities Administrators (CSA) recently released proposals to modernize the continuous disclosure regime for investment funds, which is intended to improve the quality of disclosure provided to investors as well as reduce unnecessary regulatory burden of certain requirements. The proposals impact all the key rules governing investment funds, including National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), National Instrument 81-102 Investment Funds (NI 81-102), National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) (collectively, the Proposed Amendments). The British Columbia Securities Commission has not published the proposals at this time given the upcoming provincial election but is anticipated to do so shortly thereafter.
The Proposed Amendments would replace the annual and interim Management Report of Fund Performance (MRFP) with a new annual and interim fund report (a Fund Report). As a separate workstream, the CSA is proposing to provide an exemption from certain conflict of interest reporting requirements if similar, new requirements are satisfied. As a third workstream, the Proposed Amendments would eliminate certain class/series level disclosure from investment fund financial statements.
The new Fund Report form is intended to be an improved update document for investors that is also easier for reporting issuer investment funds to put together. The CSA worked together with a behaviour insights consulting firm (Behavioural Insights (Canada) Ltd.) to suggest the appropriate form of the report. The consultant’s background work has been published to the CSA website for those seeking further information on its research and process.
According to the notice accompanying the Proposed Amendments, the Fund Report has been improved as follows:
- Streamlined required disclosure to help investors focus on the most pertinent information;
- Thematically chunked information to avoid investors having to review different sections of the document;
- More bullets and less use of narrative;
- Call-out boxes for definitions and key concepts for ease of understanding;
- Opportunities to summarize the information in certain sections of the form; and
- Directions for investors to find more information in different documents.
A sample form is included in the Proposed Amendments, where the use of information boxes and call-out boxes is readily apparent.
Certain information is proposed to be deleted from the form, including several metrics in the “Ratios and Supplemental Data” table and provision of five years of cost information (only one year will be required). Other deletions include some of the information in the “Management Fee” section, and the requirement to provide performance information in respect of each series/class of a fund; instead, only the series or class with the highest management fee will be provided (as well as the performance of any other series/class for which performance will vary based on a characteristic besides fees).
It is intended that the section of the Fund Report describing the fund’s investment objectives and strategies will require an overview of the manager’s view of the success of the fund in achieving its investment objectives and using its investment strategies to achieve those objectives, and factors that are reasonably likely to materially impact the ability of the fund to do so. There are instructions provided for funds with environmental, social and governance (ESG) related aspects with respect to this section. For example, a fund will be expected to discuss how its use of proxy voting, shareholder engagement and issuer engagement, as applicable, as principal investment strategies satisfied the stated ESG-related aspects of the fund’s investment objectives or the stated ESG-related criteria for the investment strategies. It will be interesting to review the comments on this section to determine the industry’s comfort level with the proposed disclosure.
Several other changes have also been proposed. As an example, regulators have been closely following potential liquidity issues for certain types of investment funds. The Fund Report will have a new requirement to include disclosure of the liquidity profile of the investment portfolio of the fund. The quarterly portfolio disclosure will also be moved to a new standalone form pursuant to amendments to NI 81-106.
The second workstream included in the Proposed Amendments involves removing the related party transaction disclosure that is currently required in the MRFP in favour of a new appendix report (prepared by the fund manager) to the annual report to securityholders that an Independent Review Committee must prepare under NI 81-107. The IRC report is already required to include disclosure of certain related party transactions, and the new appendix will standardize this disclosure and disclosure of other transactions currently subject to reporting in securities legislation. If the form is completed, managers will be exempt from the requirement found directly in the securities legislation of certain jurisdictions to separately file certain related party transaction reports (e.g. under section 117 of the Securities Act (Ontario)). The proposed exemption from the overlapping statutory reporting requirements is intended to clarify reporting obligations, standardize information requirements, and remove unnecessary duplication.
In the third workstream, it is proposed that certain class/series level of disclosure be removed from the Statement of Comprehensive Income, the Statement of Changes in Financial Position, and the notes to the financial statements, including disclosure in the notes identifying the differences between the classes/series of a fund.
Other minor amendments include utilizing the term Fund Expense Ratio (FER) in a fund’s Fund Facts or ETF Facts as the sum of the fund’s management expense ratio and trading expense ratio, as well as certain editorial revisions to the simplified prospectus form. The change regarding FER disclosure would align with what will be required in the annual report on charges and other compensation pursuant to the total cost reporting amendments.
The CSA intends to engage with its Investor Education Committee to consider how the CSA can obtain strong investor awareness and understanding of the new Fund Report. The CSA has asked twenty specific consultation questions in addition to seeking general feedback on the proposals, including with respect to the frequency of preparation of the Fund Reports, how many years of FER disclosure should be required, and the type of educational tools needed to support investor understanding of the Fund Report. They have also asked for data and information to help evaluate the effects of the Proposed Amendments. Comments are due by January 17, 2025. If you wish to comment on or discuss the Proposed Amendments, please contact a member of our team.
September 27, 2024