The Canadian Securities Administrators (“CSA”) have published for comment proposed amendments and changes to modernize the continuous disclosure regime for investment funds (collectively, the “Proposed Amendments”). The Proposed Amendments consist of several workstreams and other initiatives that are intended to improve the quality of disclosure and reduce unnecessary regulatory burden. If adopted, the Proposed Amendments would, among other things, replace the MRFP with a “Fund Report” (as defined below), introduce an exemption from certain conflict of interest reporting requirements and eliminate the requirement to prepare certain class- or series-level financial disclosure. Comments will be accepted until January 17, 2025.
Background
To further their strategic goal of delivering smart and responsive regulation that protects investors while reducing regulatory burden, the CSA conducted a review of investment fund continuous disclosure requirements to identify areas that might be updated to benefit investors, investment funds and other stakeholders. As part of this review, the CSA considered feedback received in response to CSA Notice and Request for Comment Reducing Regulatory Burden for Investment Fund Issuers – Phase 2, Stage 1 and OSC Staff Notice 11-784 Burden Reduction as well as recommendations made by the Ontario government’s Capital Markets Modernization Taskforce. The CSA also engaged a third-party consulting firm with expertise in behavioural insights to assist with research, investor surveys, analysis and testing.
Following this review, the CSA have proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, National Instrument 81-102 Investment Funds, 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”), along with related consequential amendments and changes to other instruments and policies. The Proposed Amendments have been divided into three workstreams, whose objectives are to:
- Workstream One: replace the annual and interim Management Reports of Fund Performance (each, a “MRFP”) with new annual and interim Fund Reports (each, a “Fund Report”), by implementing a revised version of Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance (“Form 81-106F1”);
- Workstream Two: provide an exemption from certain conflict of interest reporting requirements where other similar requirements are satisfied; and
- Workstream Three: eliminate certain required class- or series-level disclosure from investment fund financial statements.
The CSA have also proposed unrelated, minor amendments to: (i) implement the fund expense ratio (which describes the sum of the management expense ratio and the trading expense ratio of an investment fund) into the Fund Facts and ETF Facts documents; and (ii) make editorial revisions to Form 81-101F1 Contents of Simplified Prospectus.
Workstream One: Fund Report
In replacing the MRFP with the Fund Report, the CSA have proposed revisions to Form 81-106F1 that would:
- streamline the required disclosure to focus on information that is most pertinent to investors;
- organize information thematically by topic within single sections of the Fund Report instead of having related information contained in multiple sections;
- minimize narrative forms of disclosure in favour of bullet points;
- define key terms and explain key concepts in call-out boxes;
- provide opportunities to include brief summaries of information contained in various sections of the Fund Report; and
- provide directions to more detailed sources of information throughout the Fund Report.
As part of their efforts to streamline the required disclosure, the CSA have proposed to eliminate the following requirements on the basis that most investors would not find them practically useful:
- several requirements in the “Results of Operations” and “Recent Developments” sections of the MRFP;
- the “Fund’s Net Assets per [Unit/Share]” table in the “Financial Highlights” section of the MRFP;
- several metrics (i.e., total net asset value, number of units/shares outstanding, net asset value per unit/share and closing market price) in the “Ratios and Supplemental Data” table in the “Financial Highlights” section of the MRFP. In addition, only one year’s worth of information, instead of five, would generally be required in a new “Costs” section of the Fund Report;
- the “Management Fees” section of the MRFP; and
- the requirement to provide performance information in respect of each series or class of an investment fund, in favour of a requirement to provide performance information for the series or class with the highest management fee (and, if applicable, any other series or class for which performance would vary based on a characteristic besides fees).
The Proposed Amendments also involve moving some information (i.e., related party transactions and quarterly portfolio disclosure) from the MRFP to other disclosure documents and adding certain new information (i.e., a summary of the investment fund manager's (“IFM”) assessment of the investment fund’s success in achieving its investment objectives by using its investment strategies, and disclosure regarding the liquidity profile of the investment portfolio) to the Fund Report. A sample Fund Report is proposed to be included for illustrative purposes in the companion policy to NI 81-106.
The CSA are of the view that, compared to the MRFP, the Fund Report would be easier to read, understand and use, be more likely to be seen as containing an appropriate amount of information, be more likely to be read and be significantly less burdensome for IFMs to prepare.
Workstream Two: Conflicts Reports
The Proposed Amendments would also introduce an exemption from certain statutory requirements that obligate IFMs to file reports for specified types of related party transactions, as such transactions are in some cases already subject to substantially similar reporting requirements in NI 81-107. The types of transactions in focus include:
- a purchase or sale of securities between an investment fund and any related person or company;
- a purchase or sale effected by an investment fund through a related person or company with respect to which the related person or company received a fee from the investment fund, the other party to the transaction or both; and
- a transaction in which the investment fund is a joint participant with at least one related person or company, excluding arrangements relating to insider trading in portfolio securities.
A new form requiring disclosure of key details regarding related party transactions has been proposed for NI 81-107 to standardize information requirements and remove unnecessary duplication.
Workstream Three: Financial Statements
The CSA have also proposed to remove the requirement in NI 81-106 to prepare certain class- or series-level disclosure that is not required by International Financial Reporting Standards, in the Statement of Comprehensive Income, Statement of Changes in Financial Position and notes to financial statements. The CSA are of the view that, where investment funds have multiple classes or series, such disclosure may become excessively lengthy and complex, making it difficult for investors to read and understand the information presented. Moreover, as it does not generally assist investors in making decisions regarding their investment fund holdings, the CSA believe that such disclosure is unduly burdensome for investment funds to prepare.
What’s Next?
While the British Columbia Securities Commission (“BCSC”) has not published the Proposed Amendments for comment at this time, BCSC staff anticipate doing so following the British Columbia provincial election.
If adopted, the Proposed Amendments are expected to take effect approximately three months after their final publication date, with a nine-month transition period, during which time an exemption from compliance would be provided. The CSA also note that work on the initiative to implement an access-based model for investment fund reporting issuers remains ongoing and is unlikely to impact the Proposed Amendments.
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