The Canadian Securities Administrators (CSA) have taken the first step1 toward implementing recommendations made by Fasken in 20172 to modernize prospectus filing rules for mutual funds and exchange-traded funds (ETFs). The first stage of changes will be an extension of the normal lifespan of a fund prospectus from one year to two years, thereby cutting the number of prospectus renewal filings in half. The second stage of changes, though only at the concept level, will treat fund prospectuses more like base shelf prospectuses used by many public companies in Canada.

The proposals for Stage 1 include draft amendments to securities legislation, so there is a high degree of confidence that these changes will be enacted in the near future. The Stage 2 changes likely are at least three years away from implementation.

Stage 1

The Stage 1 changes mainly will affect how fund facts and ETF facts are updated, but also may impact prospectus filings, as summarized below.

Simplified Prospectuses and Long-Form Prospectuses

  • The lapse date for a simplified prospectus (including the new consolidated version, which becomes mandatory later this year) and a long-form prospectus will be extended to two years.
  • All prospectus amendments will be filed as amended and restated versions of the prospectus, rather than standalone prospectus amendments.

Fund Facts and ETF Facts

Fund facts and ETF facts will continue to be renewed annually.

  • At the time of the annual refiling, the fund will self-identify which (if any) of its updated fund facts or ETF facts contain any material changes. Fund facts and ETF facts without material changes will be submitted using an "Auto Public" System for Electronic Document Analysis and Retrieval (SEDAR) category and released onto the public portion of SEDAR without review by staff of the principal regulator, nor issuance of a receipt. Fund facts and ETF facts containing material changes will be submitted using a "Private" SEDAR category and will undergo a review by staff of the principal regulator equivalent to filing a prospectus amendment, culminating with the issuance of a receipt.
  • Changes to the companion policies to NI 41-101 and NI 81-101 will provide guidance on which changes to fund facts or ETF facts will be considered "material". According to the proposed guidance, essentially any changes to information other than time-sensitive data (e.g. total fund value, MER, top 10 holdings, investment mix, past performance, TER, fund expenses and secondary trading information (for ETFs)) or the risk rating will be considered "material".

Of interest is that the CSA appear to be accepting that a change to a risk rating is not a "material change". Fasken has commented to the CSA on numerous previous occasions to accept this interpretation.

Filing Fees and Cost-Savings

The CSA have made it clear that these changes are not to reduce the filing fees payable to the CSA annually. As a result, fees currently payable upon an annual prospectus renewal will become fees payable upon an annual refiling of fund facts and ETF facts.

In the notice accompanying the draft amendments, the CSA have asked for information regarding anticipated cost savings for the industry, and the extent to which these cost savings are expected to be passed on to investors.

90-Day Rule

In addition to the changes described above, the amendments will eliminate the current requirement in securities regulation that a receipt for a fund's final prospectus must be filed within 90 days after the receipt for its preliminary prospectus3. It is relatively uncommon for mutual funds or ETFs to be affected by this 90-day limitation, but it is a welcome change nonetheless.

Possible Issues

Technical Issues

There are a few possible technical issues in the draft amendments for Stage 1. They include the following:

  • Under the proposals, renewal fund facts and ETF facts would need to be filed between the 12th and 13th month (the refiling window) preceding the new 24-month prospectus lapse date. There is no mention of the current 10-day grace period4. The refiling window also appears to preclude any other filing date to refresh the data in the fund facts and ETF facts without material changes.
  • It is likely that many renewal filings will include a combination of some fund facts and ETF facts qualifying for Auto Public treatment and others not so qualifying. This may result in those Auto Public documents being released immediately onto the public portion of SEDAR while staff of the principal regulator review the Private documents. This could trigger complications if, in response to comments on the Private documents, changes are subsequently made to the Auto Public documents already released to the public.

Amended and Restated Prospectus Amendments

We disagree with the CSA's rationale for proposing that all future prospectus amendments be filed as amended and restated versions of the prospectus, rather than permitting standalone prospectus amendments. The likelihood of investor confusion over prospectus amendments is low given that investors in almost all cases receive only the relevant fund facts or ETF facts. Amended and restated prospectus filings also raise some uncertainty regarding which information in the prospectus needs to be updated.

Guidance on "Material Changes"

The proposed guidance on which changes to fund facts and ETF facts will trigger a regulatory review based on "materiality" may be overly broad. Beyond those changes carved-out in the guidance, there may be other types of changes that normally might not be considered a material change, including reducing or eliminating an account-level fee, or modifying a distribution policy. Since this is guidance only, there is a possibility for reaching a different conclusion when these other types of changes occur.

We agree with the CSA's proposed treatment of changes to risk ratings, but note that it may conflict with other CSA guidance on the same topic.5

Stage 2

The proposal to move mutual funds and ETFs closer to a base shelf prospectus system is only a concept with few details other than a suggestion that the lifespan of a fund's prospectus might be 25 months or more. The CSA are requesting feedback on a number of high level questions about the base shelf prospectus system in the context of investment funds. Their topics include:

  • when CSA review of a filing will be triggered;
  • possible relocation of various information from the prospectus to continuous disclosure documents incorporated by reference;
  • changes to the base shelf prospectus approach that are appropriate in the investment funds context, and;
  • lapse dates possibly extending beyond 25 months.

Invitation to Provide Your Comments to Us

Fasken will be submitting a comment letter to the CSA on both the Stage 1 and Stage 2 proposals. If you have comments on these proposals but are unable to submit a letter to the CSA, please feel free to contact us and we will consider if we can include your comments in our letter.

Footnotes

1. CSA Notice and Request for Comment: Proposed Amendments to National Instrument 41-101 General Prospectus Requirements, National Instrument 81-101 Mutual Fund Prospectus Disclosure, and Related Proposed Consequential Amendments and Changes and Consultation Paper on a Base Shelf Prospectus Filing Model for Investment Funds in Continuous Distribution – Modernization of the Prospectus Filing Model for Investment Funds (January 27, 2022) available on the Ontario Securities Commission website.

2. See the comment letter from Fasken dated October 13, 2017 [PDF] where we first proposed to the Ontario Securities Commission and Autorité des marchés financiers that investment funds should be permitted to use a base shelf prospectus approach with a 2-year lifespan.

3. Section 2.3(1.1) of NI 41-101 and section 2.1(2) of NI 81-101.

4. See, for example, section 17.2(4)(b) of NI 41-101 and section 2.5(4)(b) of NI 81-101.

5. In particular, section 2.7(2) of Companion Policy 81-101 where the CSA suggest (in our view, incorrectly) that any change to a fund's risk rating constitutes a "material change" under securities legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.