Request for Comments: CSA Notice - 81-301 - Mutual Fund Prospectus Disclosure System
Request for Comments: CSA Notice - 81-301 - Mutual Fund Prospectus Disclosure System
Mutual Fund Prospectus Disclosure System
Concept Proposal
Request For Comment
The Canadian Securities Administrators are releasing for comment a concept proposal describing the Summary Information Prospectus Disclosure System (the"Summary System"), a revised prospectus disclosure system for use by mutual fund issuers. The revised system would replace the system now set out inNational Policy Statement No. 36 - Mutual Funds: Simplified Prospectus Qualification System. This notice provides background to, and requests comments on,the concept proposal attached as Appendix "A" to this notice. This notice also briefly discusses other disclosure requirements.
As evidenced by the numerous questions raised in the request for comment, the CSA has not made any decision on any aspect of the concept proposal.Investors, mutual fund issuers and managers, and other interested parties are encouraged to comment on any aspect of the concept proposal, whether in responseto specific questions raised in this request for comment or not.
I. PROSPECTUS DISCLOSURE SYSTEM
A. Background
NP 36 was introduced in 1985 to permit mutual funds to use a simplified prospectus disclosure system to qualify their securities for sale to the public.1 NP 36requires the use of two primary documents, a simplified prospectus and an annual information form. The objective of the simplified prospectus is to provide aconcise outline of important information about the mutual fund investment to investors. The AIF duplicates certain of the information in the simplifiedprospectus and provides additional information about the mutual fund. The simplified prospectus and AIF together provide full disclosure of all material factsrelating to the mutual fund investment. Under NP 36, mutual funds must deliver the simplified prospectus to investors and make the AIF available to investorsupon request. Investors rarely request the AIF.
Since 1985, the mutual fund industry has grown rapidly in size and complexity. The simplified prospectus for the typical mutual fund no longer achieves itsintended objective. It has become a lengthy document that is difficult to read and comprehend as a result of a number of factors, including the following:
- Mutual fund offerings are becoming more complex (e.g., availability of multiple purchase options).
- Most managers offer a large number of mutual funds under one simplified prospectus.
- Simplified prospectuses are drafted as legal documents that often focus on technical disclosure at the expense of plain language.
- Managers often draft the simplified prospectus to retain as much flexibility as possible in managing the mutual fund and its investments. To do so, they usegeneral language to describe the mutual fund and its investment objectives and policies rather than providing specific, relevant and meaningful information aboutthe mutual fund to investors.
- Requests by the regulators for additional disclosure have added to the length and complexity of simplified prospectuses.
- NP 36 contains no instructions about how to present information in a way that makes the simplified prospectus easy to read and understand.
The CSA has received submissions from The Investment Funds Institute of Canada that identify deficiencies with NP 36 and suggest changes to address thesedeficiencies. Commissioner Glorianne Stromberg, of the Ontario Securities Commission, discussed her views on the problems with the current disclosure regimein her report2 on the investment fund industry (the "Stromberg Report"). Among other things, she noted that NP 36 does not require a mutual fund to provideinvestors with important information such as performance data and management discussion and analysis ("MD&A").
The CSA Mutual Fund Committee (the "Committee") has reviewed the current prospectus disclosure requirements applicable to mutual funds. The Committeeprepared a discussion paper that considered alternative approaches to address the concerns noted above with the current prospectus disclosure system.3 Thealternative approaches considered include the Stromberg Report disclosure recommendation, the U.S. Securities and Exchange Commission profile prospectusand the IFIC profile prospectus proposal. Based on its review, the Committee recommends an approach the Committee has named the "Summary InformationProspectus Disclosure System". The Committee believes that the Summary System will allow mutual funds to provide a short, readable, yet informativedocument to investors that will address their needs without detracting from the quality of the disclosure provided.
Following the release of the Stromberg Report, several mutual fund managers have substantially revised their simplified prospectuses in order to make them morereadable. The Committee expects the Summary System described in the concept proposal to build on the initiative taken to date by these mutual fund managers.The system is intended to provide flexibility to the industry in the presentation of the information required in the summary information statement. The CSAencourages comment on whether the proposal achieves these objectives.
B. Summary Information Prospectus Disclosure System
As with NP 36, the Summary System continues the use of two primary documents, a summary information statement and a base disclosure document. Thesummary information statement would be the point of sale disclosure document and is intended to provide the investor with the key elements of informationnecessary for an informed investment decision. The base disclosure document would be the underlying information base and is intended to make available toregulators and market participants full disclosure of all relevant information about the mutual fund.
In the Committee's view, the Summary System takes the current simplified prospectus disclosure system to its next logical step by:
(1) revising the items of information required under the point of sale document to better address the information needs of investors,
(2) revising the instructions for the point of sale document to encourage the use of lists, graphs, tables, different typography, colours, graphics and open space sothat the information is presented in an easy to read format, and
(3) simplifying delivery requirements by eliminating the requirement to deliver the financial statements with the point of sale document.
1. Summary Information Statement
The objective of the summary information statement is to provide an investor with a short, easy to read document that would provide specific information onselect items that the Committee believes are necessary for an informed investment decision.4 The concept proposal sets out these items and provides adescription of the type of information contemplated under each item. The concept proposal also briefly describes the guidance that the instructions will provideabout how to make the document easy to read and understand. The summary information statement is not intended to be a verbatim extract of the information inthe base disclosure document but a plain language presentation of the key information. The intention is to allow mutual fund issuers greater flexibility inpresenting information, while ensuring the information provided is meaningful to investors.
As is the case with NP 36, the base disclosure document and the financial statements (both the annual and the interim statements) will be incorporated byreference into the summary information statement. Investors will be invited to request these documents for further information concerning their mutual fundinvestment.
2. Base Disclosure Document
The objective of the base disclosure document is to make available more detailed and complete disclosure concerning the mutual fund. The base disclosuredocument and the mutual fund's most recent financial statements, must meet the statutory standard of "full, true and plain" disclosure of all material factsconcerning a mutual fund. The base disclosure document would provide a central, all-inclusive document describing a mutual fund and when read with themutual fund's financial statements provide a complete picture of the proposed mutual fund investment. It, together with the financial statements, will be theprimary document where a mutual fund can discharge its responsibility to provide full disclosure of all material facts.
The Committee expects that most investors would not refer to the base disclosure document in arriving at their investment decisions. The base disclosuredocument would be an additional information source for certain investors, as well as sales representatives, financial advisors and analysts seeking detailedinformation about the mutual fund investment. It would also serve as an additional information source for regulators in reviewing and determining compliancewith applicable regulatory requirements.
The concept proposal briefly describes the items of disclosure that are contemplated to be included in the base disclosure document. Certain of these itemsinclude the same information that is contained in the summary information statement. Comment is being sought on the items of disclosure that should beincluded in the base disclosure document and on whether the items in the base disclosure document should duplicate the information provided in the summaryinformation statement (albeit presented differently) or include only supplementary information.
3. Financial Statements and Annual Report
The concept proposal contemplates that the summary information statement will include selected financial information that, the Committee views as sufficient formost investors to make an informed investment decision. Accordingly, unlike NP 36, the Summary System will not require that financial statements (the latestinterim and annual financial statements) be delivered to investors with the summary information statement. The financial statements (including the annualreport), like the base disclosure document, must be delivered to those prospective investors who request them prior to making an investment decision (orfollowing their decision). The financial statements must still be prepared and delivered to security holders on a continuous basis as currently required undersecurities legislation.
The Committee agrees with the comments of Commissioner Stromberg that mutual funds should be required to prepare an annual report that contains MD&Adisclosure. MD&A disclosure is intended to provide investors with the manager's perspective on the operations of the mutual fund. The availability of thisinformation should balance the increased emphasis placed by investors on short term performance information. The Committee also agrees with CommissionerStromberg's recommendation that mutual funds be required to update MD&A disclosure in the interim financial report. The concept proposal sets out the itemsof discussion that are anticipated to be included as MD&A disclosure in the annual report. The MD&A items have been derived from the Stromberg Report.Comment is being sought on these items.
4. Consolidation
The Committee believes that consolidation of information relating to a number of mutual funds in one point of sale disclosure document has, in the past, resultedin lengthy, complicated documents that were not useful to investors. One solution to this problem considered by the Committee is to impose an outright ban onconsolidation in the summary information statement, but allow it in the base disclosure document. On the other hand, the Committee is cognizant thatconsolidated information relating to multiple mutual funds may benefit investors who want to review the range of investments available to them, on acomparative basis, in order to determine the mutual fund most suitable for them, rather than looking at a single mutual fund in isolation. Consolidation also mayassist industry participants in marketing mutual funds, reduce the administrative cost of preparing separate summary information statements and make it easier tomeet delivery requirements. The Committee is also aware that, following the Stromberg Report, several mutual fund managers have simplified the disclosure inconsolidated prospectuses.
To address the competing concerns, the concept proposal suggests that the use of consolidation in the summary information statement be permitted only inlimited circumstances such as for mutual funds with similar investment objectives and risk profiles. Comment is being sought on whether consolidation should beunconditionally permitted, limited as suggested in the concept proposal or prohibited outright.
5. Consultation
The Committee provided its discussion paper to a sub-group of the Investment Funds Steering Group charged with reviewing the Stromberg Report's disclosurerecommendations. The Committee met with members of the sub-group to discuss the recommendation set out in the discussion paper. The sub-group indicatedits support for the Committee's recommendation regarding the proposed Summary System. With that support, the Committee further developed itsrecommendation into the concept proposal. The sub-group has provided valuable input in the development of the concept proposal.
The representatives of the Commission des Valeurs Mobiliers du Quebec on the Committee have discussed the concept proposal with the CVMQ's AdvisoryCommittee on the Regulation of Mutual Fund Organizations (the "Advisory Committee"). Certain of the comments raised by the Advisory Committee wereconsidered in developing the concept proposal.
The concept proposal is being published for comment to obtain public input at an early stage in the process of developing the system. The Committee willconsider the comments it receives in developing its final recommendations to the CSA on the mutual fund prospectus disclosure system and in developing therules and forms necessary to implement those recommendations. The Committee will also take into consideration the discussion on the Stromberg Reportdisclosure recommendations contained in the report of the Investment Funds Steering Group5 (the "Steering Group Report"), together with past submissions ofIFIC about suggested changes to NP 36. As well, the Committee intends to consider the research report being prepared by a study group assembled by theCanadian Institute of Chartered Accountant (the "CICA Study Group") on financial reporting by investment funds and to review proposals of the S.E.C.concerning that agency's re-consideration of the prospectus disclosure system applicable to investment companies in the U.S. once such proposals are publishedAdditional input from IFIC will also be sought. Once the rules and forms have been developed, they will form the basis for the reformulation of NP 36.
II. DISCLOSURE GENERALLY
The focus of the Committee's review was on prospectus disclosure requirements. The Committee recognizes that the prospectus is only one element of themutual fund disclosure system and that the other disclosure elements are also in need of review. The Committee chose to begin with the prospectus systembecause the prospectus is the primary disclosure document provided to prospective mutual fund investors. The Committee's proposal for improving theprospectus system are set out in Appendix "A". The following briefly discusses the concerns with, and the work being done on, the other elements ofdisclosure.
A. Continuous Disclosure Requirements and Prospectus Amendments
The continuous disclosure requirements (financial statements and material change reports) and the disclosure requirements for amendments to a prospectus affectthe prospectus disclosure regime. Currently, under NP 36, the simplified prospectus incorporates continuous disclosure documents. NP 36 also provides forthe filing of amendments to the simplified prospectus and AIF. These requirements provide a complete and up-to-date picture of the mutual fund's activities andwill be continued under the Summary System. However, a number of technical and other deficiencies with the current requirements must be addressed to makethe requirements more effective.
Critical to the requirements to file material change reports and amendments to a prospectus is the definition of "material change". The Stromberg Report notesthat the term "material change" and the related term "material fact", as defined in securities legislation, do not apply very well to mutual fund issuers. TheCommittee endorses Commissioner Stromberg's recommendation that the concepts of material change and material fact be changed as they apply to mutualfunds6. In addition, the Committee notes that there is a need for greater harmony in the various legislative requirements regarding amendments to prospectuses.There is also a need for improved coordination among the CSA in the review of prospectus amendments filed nationally.
The Committee notes that Commissioner Stromberg recommended changes to the financial disclosure requirements, including enhanced disclosure of relatedparty transactions. Also as noted above, the CICA Study Group is preparing a research report on financial reporting requirements. The Committee, inconjunction with other CSA Committees, intends to consider Commissioner Stromberg's recommendations together with the CICA Study Group's researchreport, in particular the discussion anticipated in that report regarding MD&A, performance measures and summary financial information.
B. Education
The Committee agrees with Commissioner Stromberg that improved investor education is necessary. The Committee considers that the issue of investoreducation should be dealt with as a separate matter from the prospectus disclosure regime. The Committee supports the development of a basic investoreducation document for mutual fund investors. The Committee is considering the recommendations made in the Stromberg Report and the Steering GroupReport.
C. Sales Communications
In addition to providing a simplified prospectus to investors, many mutual funds provide investors with numerous marketing documents. Although thesedocuments are required to comply with the standards set out in section 16 of National Policy Statement No. 39, there are no limitations imposed on the amountof materials provided to investors. Mutual funds may sometimes overwhelm investors with information. The Committee believes that it is important to considerthe extent and type of information provided in these documents as part of reviewing disclosure requirements generally and will do so in conjunction with itsreview of the Stromberg Report and Steering Group Report.
III. REQUEST FOR COMMENTS - SUMMARY INFORMATION PROSPECTUS DISCLOSURE SYSTEM
The CSA is requesting comments generally on the Summary System concept proposal and specifically on the items proposed to be required in the summaryinformation statement and in the base disclosure document.
The CSA is also requesting input on the following questions:
A. Disclosure Item Comments
1. For each item of information identified under the heading "Summary Information Statement - Items of Information" in the attached concept proposal, is theitem necessary to ensure that the investor can make an informed investment decision or not, and why?
2. In addition to the items of information listed, are there other items that should be included in the summary information statement? Is there informationprovided by mutual funds through means other than the prospectus (e.g., in marketing brochures, annual reports, reports to security holders) that should beincorporated in the summary information statement and, if so, why?
3. Should the information in the summary information statement be restricted to the items of information required under the summary information statementform? Should additional information beyond that required under the summary information statement be permitted and, if so, why?
4. Is the order of the items logical? If not, why and how should the items be reordered? Should the items of information under the summary informationstatement be presented in a standardized format wherever possible to facilitate comparison? If so, please provide suggestions for the formats to be adopted.
5. How should the information be presented to facilitate an investor's understanding of the information (e.g., narrative, non-narrative form)? Please provideexamples.
6. The concept proposal draws a distinction between investment objectives and investment strategies. Is the distinction drawn an appropriate one, and if notwhy?
7. A quantitative risk measurement or graphic representation of volatility is required in the summary information statement. Would a quantitative riskmeasurement be useful to investors? If so, what measurement should be required and why?
8. Comparison of past performance to a benchmark is required in the summary information statement. Would this comparison be useful to investors and why?To facilitate and control the comparison, should mutual fund categories with appropriate benchmarks be mandated? If mutual fund categories are not mandated,should the use of benchmarks be permitted and why?
9. In addition to the items of disclosure described under the heading "Base Disclosure Document - Items of Disclosure" in the attached concept proposal, arethere other items of disclosure that should be included in the base disclosure document? Are there items of disclosure that should not be included in the basedisclosure document?
10. Currently the concept proposal contemplates that the information in the summary information statement would also be in the base disclosure document,although in a different form. Would including the same information in both documents be unnecessarily duplicative? If the information presented in the summaryinformation statement is not repeated, how can 'disclosure creep' in the summary information statement, to address liability concerns, be prevented?
11. Consistent with the Stromberg Report recommendation, MD&A of past performance information and certain forward-looking information will be required tobe provided in an annual report and updated in the interim financial statements of the mutual fund. Are the items of discussion under the heading "Annual Report- Management Discussion and Analysis" appropriate? If not, why and what changes should be made to the requirements? Should selected MD&A be providedin the summary information statement and, if so, what should be required and why?
B. General Comments
1. Currently, the concept proposal contemplates limiting consolidation of information relating to more than one mutual fund in one summary informationstatement where mutual funds have similar investment objectives and risk profile because of concerns that permitting unlimited consolidation would lengthen andcomplicate the document. Should consolidation be permitted? Should unlimited consolidation be permitted? If so, why and how can unlimited consolidationresult in the summary information statement being short, informative and easy to read? Are there other logical groupings of mutual funds that should bepermitted for consolidation purposes?
2. Currently, the concept proposal continues the existing system of requiring prospectus disclosure documents to be refiled annually. The Committee recognizesthat the base disclosure document will contain information that will not necessarily change from year to year. How should the refiling requirement be amended?Is it feasible to require the summary information statement to be renewed annually with the base disclosure document being renewed over a longer time frame?
3. The concept proposal contemplates requiring the delivery of the summary information statement at the earliest possible time, and in any event not later thanthe time of trade. This means that the summary information statement is to be provided to investors at the time that an investor is solicited and where there is nosolicitation, at the time of the trade. What practical difficulties are there in mandating delivery of the summary information statement at the time that the investoris solicited and how can these difficulties be overcome? What practical difficulties are there in mandating delivery of the summary information statement at thetime of trade and how can these difficulties be overcome?
4. How should the phrase "time of trade" be interpreted? If it were interpreted to be the time the purchase order is placed or the time net asset value iscalculated for the purpose of the purchase, how would the requirement work vis à vis the various distribution channels now used, (e.g., meetings with registeredsales representatives, telephone instructions including those given via 1-800 numbers) and those that may be used in the future (e.g., ATMs, Internet)?
5. Is there an alternative approach that the CSA should consider in lieu of the Summary System described above? If so, please describe the alternative approach.
Interested persons are invited to provide comments on the concept proposal. Six copies of the comment letter should be submitted by April 30, 1997 to:
CSA Mutual Fund Committee
c/o British Columbia Securities Commission
Policy and Legislation
1100 - 865 Hornby Street
Vancouver BC V6Z 2H4
Comment letters submitted in response to requests for comments are placed on the public file in certain jurisdictions and form part of the public record, unlessconfidentiality is requested. Comment letters will be circulated amongst the securities regulatory authorities, whether or not confidentiality is requested.Although comment letters requesting confidentiality will not be placed on the public file, freedom of information legislation in certain jurisdictions may requirethe securities regulatory authorities in those jurisdictions to make comment letters available. Persons submitting comment letters should therefore be aware thatthe press and members of the public may be able to obtain access to any comment letters.
For further information, clarification or a copy of the discussion paper, please contact any of the following:
Mr. Wayne Redwick, Director,
Corporate Finance
Ms. Lata Casciano, Senior Policy Advisor,
Policy & Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver BC V6Z 2H4
Telephone: (604) 660-4800
Facsimile: (604) 660-5473
Mr. Robert Bouchard, Deputy Director,
Corporate Finance
Manitoba Securities Commission
1128 - 405 Broadway
Winnipeg MB R3C 3L6
Telephone: (204) 945-2548
Facsimile: (204) 945-0330
Mr. Dean Murrison, Deputy Director
Saskatchewan Securities Commission
#850 - 1914 Hamilton Street
Toronto-Dominion Bank Building
Regina SK S4P 3V7
Telephone: (306) 787-5645
Facsimile: (306) 787-5899
Ms. Susan Wolburgh Jenah, Manager
Issuer and Intermediary Regulation,
Market Operations
Mr. Winfield Liu, Senior Legal Counsel
Market Operations
Ms. Rebecca Cowdery, Special Counsel
Market Operations
Ontario Securities Commission
Suite 800, 20 Queen Street, West, Box 55
Toronto ON M5H 3S8
Telephone: (416) 597-0681
Facsimile: (416) 593-8244
Mr. Pierre Martin, Legal Counsel, Service de la reglementation
Ms. Annie Gagne, Deputy Chief of Financial Operations
Commission des Valeurs Mobiliers du Quebec
Tour de la Bourse, C.P. 246
17th Floor, Stock Exchange Tower, Victoria
Square
Montreal PQ H4Z 1G3
Telephone: (514) 873-5326
Facsimile: (514) 873-3090
January 31, 1997
APPENDIX "A" Concept Proposal Summary Information Prospectus Disclosure System
The Summary System builds upon the present prospectus disclosure system set out in NP 36 and uses elements of the S.E.C. profile prospectus and theStromberg Report disclosure recommendation. The revised prospectus disclosure system consists of:
- a summary information statement (a point of sale document),
- a base disclosure document, and
- continuous disclosure documents (e.g., financial statements, material change reports).
A. SUMMARY INFORMATION STATEMENT
The objective of the summary information statement is to provide information that an investor needs to make an informed investment decision. The informationin the summary information statement must be specific, relevant and meaningful to the investment decision. This information includes the mutual fund'sinvestment objectives, strategies and risk profile, the costs associated with the investment together with the impact of those costs on the investment, andhistorical information about the mutual fund's performance. The list of items set out below under the heading "Summary Information Statement - Items ofInformation" reflects the Committee's views on the information that would be important to an investor.
The instructions to the summary information statement form will emphasize that the information provided must be specific to the mutual fund, presentedconcisely and in plain language. These instructions will encourage the use of non-technical terminology, a conversational tone and, where appropriate, the use oflists, tables, charts, graphs, different typography, colours, graphics and open space so that the information is presented in an easy to read format. TheCommittee's focus is on ensuring that the summary information statement is a user-friendly document.
The items of information in the summary information statement are to be presented in the order listed below under the heading "Summary Information Statement- Items of Information" to make it easier for investors to compare mutual funds.
The length of the summary information statement will, in large part, be determined by the complexity of the mutual fund and the extent to which consolidation ofinformation relating to one mutual fund is permitted. A summary information statement for a single non-complicated mutual fund should be 5 to 8 pages. Wherethe nature of the mutual fund is complex or there is consolidation of information for more than one mutual fund, the summary information statement would belonger but should not be more than 15 - 20 pages.
B. BASE DISCLOSURE DOCUMENT
The focus of the base disclosure document is on providing "full, true and plain" disclosure of all material facts about the mutual fund. The base disclosuredocument, summary information statement and continuous disclosure documents, together represent the permanent information record of the mutual fund.However, the base disclosure document is designed to be a comprehensive disclosure document that provides investors or any other interested person withcomplete details about the operations, governance, administration and management of the mutual fund it covers. Effectively, the base disclosure document wouldbe equivalent to a long form prospectus, less the financial statements. A list of the items the Committee anticipates will be required in the base disclosuredocument is briefly outlined below under the heading "Base Disclosure Document - Items of Disclosure".
The base disclosure document is intended to be read together with the financial statements of the mutual fund. Accordingly, it would not, for example, containMD&A disclosure or present performance information or provide the historical financial detail currently required to be provided in an AIF under NP 36 (on thebasis that this information is included in the financial statements or annual report).
The information to be provided in the base disclosure document would be presented differently from that contained in the summary information statement andwould tend to be more detailed.1 Whereas the summary information statement will alert investors to certain aspects of a mutual fund's organization, the basedisclosure document will provide more expanded information about these topics. For example, the summary information statement will disclose the name andaddress of the manager of a mutual fund. The base disclosure document will supply details as to the management contract between the mutual fund and themanager as well as other material information concerning the management arrangements. On the other hand, the summary information statement will containcertain financial information and numerical examples that are derived from the financial statements. This financial information will not be required to be repeatedin the base disclosure document since it is already provided in the financial statements.
The items of disclosure outlined below under the heading "Base Disclosure Document - Items of Disclosure" will be assessed further to determine theappropriateness of including the item in the base disclosure document and whether any changes ought to be made to the item. In assessing the items ofdisclosure to be provided in the base disclosure document, the Committee will review the items currently required by the forms for the simplified prospectus andthe AIF under NP 36, modified to take account of the CSA's experience in administering NP 36, past comments of IFIC and the work proposed by the S.E.C. inreforming its prospectus forms.
The Committee seeks input on the base disclosure document and the purpose it should serve in the Summary System. The Committee also seeks input on theitems of disclosure that should be included in the base disclosure document and on whether the items in the base disclosure document should duplicate theinformation provided in the summary information statement (albeit presented differently) or only include supplementary detailed information.
C. FINANCIAL STATEMENTS AND ANNUAL REPORT
The Summary System will not require the latest interim and annual financial statements to be delivered to investors with the summary information statement.Rather, it is contemplated that the summary information statement will include selected financial information. The Committee considers that the selectedfinancial information set out below under the heading "Summary Information Statement - Items of Information" is the information most useful to prospectiveinvestors. The financial statements together with the annual report must, however, be delivered to prospective investors who request them prior to making aninvestment decision. The financial statements must still be prepared and delivered to security holders on a continuous disclosure basis.
In addition to the financial statements, an annual report containing MD&A disclosure will be required. A list of the items set out below under the heading"Annual Report - Management Discussion and Analysis - Items of Discussion" reflect the MD&A items the Committee anticipates will be required in the annualreport. The items listed will be assessed further by the Committee. In assessing the items, the Committee will consider the research report being prepared by theCICA Study Group on financial reporting by investment funds.
D. STATUTORY LIABILITY
The summary information statement will incorporate by reference the base disclosure document and continuous disclosure documents, and will together form the"prospectus" as required by securities legislation. Securities legislation requires a mutual fund to provide "full, true and plain disclosure of all material facts"concerning the securities issued or proposed to be distributed. Securities legislation also imposes civil liability for misrepresentations contained in prospectuses.
The Summary System is based on the same fundamental principles as NP 36. Liability will attach to a misrepresentation contained in any of the documentsforming the system. Through the combination of the summary information statement, the base disclosure document, the financial statements and other continuousdisclosure documents, the mutual fund will discharge its obligation to provide full, true and plain disclosure of all material facts.
The Summary System, however, contemplates that the base disclosure document together with the financial statements will be the primary documents where amutual fund will discharge its responsibility to provide full, true and plain disclosure of all material facts. The summary information statement will provide, inplain language, information essential for informed decision-making by investors, but the system will emphasize that this document on its own is not designed tocontain full disclosure of all material facts within the meaning of securities legislation.
E. CONSOLIDATION OF INFORMATION
The Committee considered requiring that a summary information statement be prepared for each mutual fund offered for sale in order to facilitate the goal ofproducing a simple, user-friendly document. The consolidation of information relating to more than one mutual fund under one summary information statementwould lengthen and complicate the document thereby detracting from the objective of providing specific, relevant and meaningful information about each singlemutual fund. However, the Committee also recognizes that consolidation may facilitate investors' comparisons between mutual funds offered by the samemanager. Accordingly, the proposal contemplates consolidation of information relating to more than one mutual fund under one summary information statementwhere the consolidation includes information about a limited number of mutual funds with similar investment objectives and risk profile. Other logical groupingsof mutual funds may also be permitted where consolidation will not detract from the utility of the document provided to investors. Consolidation of disclosurerelating to more than one mutual fund will be available for the base disclosure document without restriction. Where consolidation is permitted, the instructionsto the form will require that the information be presented in a manner that facilitates comparability and clearly delineates between the mutual funds covered underone summary information statement.
The Committee seeks input on whether consolidation of information relating to more than one mutual fund under one summary information statement should beunconditionally permitted, limited as discussed above, or prohibited outright.
F. DELIVERY REQUIREMENTS
Securities legislation requires that a prospectus and any amendments made to it be delivered to purchasers by dealers either before the trade date or not later thanmidnight on the second day (exclusive of weekends and holidays) after the trade date.
The Summary System will emphasize that the summary information statement, not the base disclosure document or the financial statements of the mutual fund,should be delivered to purchasers at the earliest possible time in the investor's decision-making process (where the investor is solicited, at the time of solicitation).The Committee is of the view that the information contained in the summary information statement will be most useful to investors if it is delivered to, andreceived by investors as soon as possible and not later than the trade date.
The Committee recognizes that legislative changes would likely be required in order to change the statutory delivery requirements and that an appropriatedefinition is required for the term "time of trade". In addition, the Committee understands that the industry may experience practical difficulties with mandatoryearly delivery requirements given the realities of how trades in mutual fund securities are processed (e.g., via telephone and other telecommunication facilities)and may in the future be processed (e.g., ATMs and the Internet). The Committee seeks input as to practical solutions to ensure delivery of the summaryinformation statement to investors at the time the investment decision is being made.
Mutual funds will be required to make available to investors upon request, at no cost, the base disclosure document and continuous disclosure documents(including the financial statements and annual report). Mutual funds will be required to provide a 1-800 number and a postage paid self-addressed card in thesummary information statement that investors can use to request the documents. If these documents are available via the Internet, a mutual fund should providethe Internet address. It is anticipated that most investors will not request the base disclosure document just as most investors do not currently request a copy ofthe AIF under NP 36.
G. PROSPECTUS RENEWALS
The one year lapse date will continue to apply to the summary information statement and base disclosure document in recognition that the documents containfinancial and performance information that must be updated at least on an annual basis. The renewal time periods will likely be reconsidered by the Committeeafter the proposed Summary System is operational and practical experience has been obtained.
H. FORMS
1. Summary Information Statement - Items of Information
The summary information statement will be required to provide, in the order listed, the items of information set out below.
(a) Introductory Statement
This item contemplates an introductory statement that identifies the mutual fund, the type of fund it is and its manager. The introductory statement would alsobriefly discuss the purpose of the document (e.g., that it provides information about the mutual fund) and how to use it (e.g., where to find information).
(b) Investment Objectives and Nature of the Fund
The information contemplated under this item is specific information concerning the investment objectives of the mutual fund, i.e., information that describes thefundamental nature of the mutual fund and/or fundamental features of the mutual fund that distinguish it from other mutual funds.
The information should identify the goals of the mutual fund (e.g., long-term growth, current income, stability) as well as describe the type of mutual fund it is(e.g., money market, income, balanced, equity).
Where the mutual fund indicates in the base disclosure document, marketing documents or other written materials, or the name of the mutual fund implies thatthe mutual fund does or intends to:
(1) invest solely or a specific portion of its assets in:
(i) Canadian securities or foreign securities;
(ii) a particular type of issuer (e.g., small cap issuers, emerging companies); or
(iii) a particular type of security (e.g., bonds, common shares, preferred shares, money market instruments);
(2) concentrate its investments geographically or in a particular industry segment; or
(3) invest in property other than securities;
the information concerning that intention or practice or implied intention or practice will also be required. In addition, where a mutual fund does or may invest ina manner or in types of securities other than as contemplated above, information concerning that intention or practice will be required.
The objectives will be required to be clearly identified in the summary information statement and explained in concise, plain language.
(c) Investment Strategy
The information contemplated under this item is specific information on how the mutual fund intends to meet its objectives, including its intended use ofderivatives. The strategy should describe the process by which the portfolio manager selects securities for the portfolio (e.g., tactical asset allocation) and anyinvestment approach, practices or techniques used by the portfolio manager. Where a particular style of portfolio management is followed, that style will berequired to be described.
The investment strategy will be required to be clearly identified in the summary information statement and explained in concise, plain language.
(d) R.R.S.P./R.R.I.F. Qualifications
This item contemplates a brief statement of the R.R.S.P./R.R.I.F. qualifications of the mutual fund and a brief statement of whether the mutual fund securitieswould be considered foreign property under the Income Tax Act.
(e) Risk Profile and Investment Considerations
The information contemplated under this item is specific information concerning the principal risks (e.g., market, liquidity, interest rates, foreign currency,diversification, credit, legal, and operational risks) and investment considerations (e.g., not CDIC insured, volatility, duration, conflicts of interest) associatedwith an investment in the mutual fund. The information on risks and investment considerations will be required to be specific to the mutual fund and focus on themutual fund portfolio as a whole. The information should identify only those risks that are material to a mutual fund given the mutual fund's investmentobjectives and strategies.
The information should discuss how the risks relate to the investment objectives and strategies of the mutual fund.
A quantitative risk measurement or graphic representation of volatility will be required.
The risk information will be required to be presented in order of likelihood and materiality. The information relating to risks and investment considerations maybe presented using narrative or non-narrative forms (graphs, charts and tables to depict risk levels) or a combination of both.
(f) Past Performance
To provide investors with historical performance information, this item contemplates requiring the annual total performance of the mutual fund for the lesser ofthe last 10 calendar years or the life of the mutual fund on both an annualized and compound basis, the income and capital gains distributions made by the mutualfund in each of those years and the portfolio turnover rate in each of those years to be set out. The information is to be presented in part in a bar graph that isintended to be a visual aid in comprehending the volatility and long term performance of the mutual fund. The bar graph will be required to include the yearlyperformance in numerical value. Footnotes to the bar graph must contain the assumptions relevant to the calculation of the performance information (e.g.,reinvestment of distributions and no incorporation of sales, redemption, distribution or optional charges that would reduce returns), a statement of thesignificance for taxable investors of the assumption that distributions are reinvested (e.g., the investor will pay taxes on distributions reinvested), the manner inwhich the portfolio turnover rate may affect an investor, and any fundamental structural changes (e.g., mergers or changes in investment objectives) andoperational changes (e.g., changes in the manager or adviser) in the mutual fund and its policies. Where a mutual fund has different classes of securities, thisperformance information may be required to be presented on a class-by-class basis.
Performance will be required to be compared with a relevant benchmark (i.e., a benchmark or index that includes the same types of investments as the mutualfund).
A brief discussion of past performance as it relates to the investment objectives and strategies (including a discussion of the mutual fund's performance relative tothe relevant market, benchmark or index) will be required. The discussion should cover the period that is the lesser of 2 years or the life of the mutual fund.
(g) Selected Financial Information
The selected financial information (derived from the annual financial statements) contemplated under this item would cover a period that is the lesser of 5 yearsor the life of the mutual fund. The type of information required would include information about net asset value provided on a total and a per unit basis, and themanagement expense ratio with a breakdown of the ratio into its component parts (e.g., management fees, operating costs charged to the mutual fund) providedon a total and (where appropriate) class-by-class basis. The type of information required would also include information about net income, realized capital gains(losses) of the mutual fund, distributions of income and realized capital gains, and return of capital, provided on a per unit basis. The number of times theportfolio turned over annually would be required to be provided as well.
The information will be required to be presented in the form of a chart. Where the mutual fund has different classes of securities, the financial information maybe required to be presented on a class-by-class basis.
(h) Fees and Expenses
The information contemplated under this item is the fees and expenses paid by the mutual fund (e.g., management fees, adviser fees, operating costs) and thosepaid by the investor (e.g., sales charges, redemption fees, account opening fees, other service fees and administrative charges). The information will be requiredto be presented in the form of a chart.
An illustration of the impact of the total fees paid (including any sales, redemptions and other distribution fees) under each purchase option on the performanceof the mutual fund using a hypothetical investment of $1,000 that will be held for 1, 3, 5 and 10 years, assuming an annual return of 5%, will be required. Theillustration should show the investor the impact of the real cost of the investment on the return over varying time periods.
Where the mutual fund has different classes of securities, the information on fees and expenses may be required to be presented on a class-by-class basis.
(i) Dealer Compensation
The information contemplated by this item is information regarding sales incentives (including commissions, trailer fees, co-operative marketing, educationconferences, etc.) available to dealers. The information should be provided in a chart.
The maximum compensation that may be provided to a dealer will be required to be set out.
(j) Manager, Trustee and Adviser
The information contemplated by this item is the name and address of the manager and trustee, and the name of the adviser.
(k) Securities Offered and Capital Structure
The information contemplated by this item is a brief statement of the classes or series of securities offered under the summary information statement, and a briefdescription of other classes or series of securities offered by the mutual fund (but not under the summary information statement), and their impact, if any, on thesecurities offered under the summary information statement.
(l) Purchases, Transfers and Redemptions
The information contemplated under this item is a brief statement of how investors can purchase, transfer and redeem mutual fund securities, and that pricing isbased on the net asset value of the mutual fund.
(m) Distributions
The information contemplated under this item is a brief statement indicating whether distributions are distributed in cash or reinvested in securities of the mutualfund and the time period for the distribution or reinvestment.
(n) Income Tax Status for Investors
This item contemplates a brief statement of income tax consequences for investors with respect to income and capital gains distributions, capital gains or losseson the disposition of securities and the possible significance of the rate of portfolio turnover on an investor's after tax return.
(o) Statement of Rights and Availability of Additional Information
The information contemplated under this item is a brief statement, written in plain language, of the incorporation by reference of, and the availability of additionalinformation in, the base disclosure document, financial statements and other continuous disclosure documents, together with a brief description of the categoriesof additional information to be found in these documents and an invitation to obtain the documents. A brief statement, written in plain language, of investors'statutory rights of rescission and damages, including the right of action for misrepresentations contained in the summary information statement and anydocuments incorporated by reference in the summary information statement, will also be required.
2. Base Disclosure Document - Items of Disclosure
Subject to further assessment by the Committee of the items of disclosure to be included in the base disclosure document, the Committee expects that thefollowing items would be included in the base disclosure document:
(a) a detailed description of the investment objectives and strategies of the mutual fund;
(b) a detailed description of the risk profile and investment considerations applicable to the mutual fund (the quantitative risk measurement or graphicrepresentation of volatility in the Summary Information Statement would not be repeated);
(c) the legal nature of the mutual fund (e.g., corporate entity or trust);
(d) the capital structure of the mutual fund;
(e) the methods used to distribute securities of the mutual fund;
(f) the service providers to the mutual fund and a description of how the services they provide are carried out (e.g., the management, portfolio management,distribution, administration, brokerage transactions, the custodianship of portfolio assets, registrar and transfer agency services);
(g) a detailed description of all fees and expenses payable by the mutual fund and by investors;
(h) the dividend and income distribution policy of the mutual fund;
(i) the income tax status of the security holders in the mutual fund and of the mutual fund;
(j) a detailed description of all sales and redemption procedures followed by the mutual fund;
(k) the methods used for valuation of portfolio assets and the calculation of net asset value;
(l) a description of all conflicts of interest or potential conflicts of interest between the mutual fund and the service providers to the mutual fund;
(m) detailed information about mutual fund governance and policies of the manager relating to conflicts of interest and business practices (e.g., whether themutual fund and/or manager has independent directors and trustees, an audit committee and a business conduct review committee; whether the mutual fundand/or the managers have policies, practices or guidelines relating to business practices, sales practices, risk management controls and internal conflicts ofinterest); and
(n) the names of the directors and officers of the manager of the mutual fund and, if the mutual fund is a corporation, of the directors and officers of the mutualfund, together with the names of any individual trustees or of any independent governance committee established for the mutual fund.
3. Annual Report - Management Discussion and Analysis
It is contemplated that MD&A in the annual report will include: 2
(a) information regarding investment strategies or approaches, including who has been managing the investment portfolio, any changes that have been made inthis respect, the performance of the mutual fund in relation to any performance goals that have been set for the portfolio manager, the risk profile of the mutualfund and variances from it and the intended rate of portfolio turnover;
(b) a discussion of the mutual fund's performance for the current year in comparison with the prior year's performance, focused on the total performance of themutual fund, including income by type (dividends, interest) and realized and unrealized capital gains/losses both on a per unit basis and in the aggregate;
(c) a comparison of the mutual fund's performance with relevant benchmarks and an explanation of why the benchmarks chosen are appropriate;
(d) a discussion and analysis of expenses with the significant components of expenses being highlighted and compared to the previous year with an analysis ofany material changes; a discussion of the relevant provisions in the agreements in respect of the mutual fund that govern what expenses may be charged to themutual fund and (to the extent known) how they relate to the actual amount charged to the mutual fund;
(e) a discussion, to the extent applicable, of known trends, commitments, events and uncertainties that are reasonably expected to affect mutual fundperformance; a general macroeconomics analysis addressing global interest rates, currencies and the economic performance of countries (that are often includedin annual reports) related back to historical fund performance and anticipated performance in the future;
(f) a comparative analysis of the composition of the year-end investment portfolio and changes in portfolio mix from the prior year on a geographical basis andalso by type of security;
(g) where the investment portfolio composition differs from the mutual fund's disclosed investment objectives, a discussion of why it differs;
(h) a discussion of any unusual trends such as a high level of net redemptions and the impact on the mutual fund; the impact of a high level of sales (e.g., is themutual fund so large that it cannot manage its portfolio trading easily or anonymously); and
(i) a discussion of the supervisory and compliance procedures that are in place to ensure conformity of transactions with:
(i) the investment objectives, policies and restrictions of the mutual fund,
(ii) restrictions imposed on the use of derivatives, and
(iii) relevant provisions of material contracts,
and, if there have been any breaches in respect of these matters, the action that has been taken to remedy the breaches and to guard against re-occurrence shouldbe outlined.
The disclosure should focus on differences and changes in past performance. Where there has been no change, no discussion is required.