NIN 98/47 - Proposed National Instrument 81-101, Companion Policy 81-101CP and Forms 81-101F1 and 81-101F2 Mutual Fund Prospectus Disclosure [NIN - Rescinded]

Published Date:	1998-07-31
Effective Date:	1998-07-30

The Commission, together with other members of the Canadian Securities Administrators ("CSA"), is publishing for comment the text of proposed National Instrument 81-101, proposed Companion Policy 81-101 and proposed Forms 81-101F1 and 81-101F2 (the "Forms"); and, in British Columbia, proposed consequential amendments to the Securities Rules. The proposed National Instrument, Companion Policy, Forms and proposed consequential amendments to the Securities Rules deal with mutual fund prospectus disclosure and are a reformulation of National Policy Statement No. 36 ("NP36"), which they will replace. The proposed National Instrument, Companion Policy and Forms contain footnotes that are not part of the proposed document, but which have been included to provide background and explanation.

The proposed National Instrument, Companion Policy and Forms are initiatives of the CSA. The proposed National Instrument is expected to be adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario and Nova Scotia, as a Commission regulation in Saskatchewan and as a policy in all other jurisdictions represented by the CSA, other than Québec. The proposed Companion Policy is expected to be implemented as a policy in all of the jurisdictions of the CSA. In British Columbia, the proposed Forms are expected to be specified by the Executive Director under section 182 of the Securities Act.

The Commission des valeurs mobilières du Québec (the "CVMQ") notes that its securities legislation provides for a specific simplified prospectus disclosure regime for mutual fund disclosure (similar to NP36). The CVMQ will be conducting a review of its securities legislation to determine how best it can integrate the disclosure regime proposed by the National Instrument with its mandated mutual fund prospectus disclosure regime.

Substance and Purpose of Proposed National Instrument, Forms and Companion Policy

The proposed National Instrument, Companion Policy and Forms collectively are intended to replace NP36, which sets out the simplified prospectus disclosure regime¹.

¹ The Concordance Table being published with this Notice outlines the treatment of each provision of NP36 in the proposed documents.

Through these proposed instruments, the CSA seek to implement a new regulatory regime governing the disclosure provided by mutual funds in satisfaction of the prospectus requirements of securities legislation.

Background

The proposed National Instrument, Forms and Companion Policy are the culmination of a regulatory review process initiated in late 1995 by the CSA Mutual Funds Committee (the "Committee"). The Committee's review of alternatives to the current simplified prospectus disclosure regime was prompted, in part, by the release earlier in 1995 of the report of Ontario Commissioner Glorianne Stromberg²

²"Regulatory Strategies for the Mid-'90s - Recommendations for Regulating Investment Funds in Canada" prepared by Glorianne Stromberg for the Canadian Securities Administrators, January 1995.

(the "Stromberg Report"). The Committee shared the concerns expressed by Commissioner Stromberg about the shortcomings of NP36 and the disclosure being provided by many mutual funds in simplified prospectuses.

As it developed its proposals, the Committee worked with a sub-committee of The Investment Funds Institute of Canada ("IFIC") and sought input from the members of the disclosure working committee established by the Investment Funds Steering Group, the industry/regulatory group asked to provide its views on the recommendations contained in the Stromberg Report. Both groups of industry participants encouraged the Committee in its work and acted as valuable resources to the Committee.³

³ The Investment Funds Steering Group in its commentary on the disclosure recommendations contained in the Stromberg Report is supportive of the CSA proposals. See "The Stromberg Report: An Industry Perspective" prepared by the Investment Funds Steering Group for the Canadian Securities Administrators, November 1996 at pages 31-35 of the report.

In January 1997, the CSA released for comment a Concept Proposal⁴

⁴ Canadian Securities Administrators Notice 81-301 Mutual Fund Prospectus Disclosure System -Concept Proposal - Request for Comment, published in the British Columbia Securities Commission Weekly Summary for the week ending January 31, 1997.

that described the Committee's recommended replacement mutual fund prospectus disclosure system, then named the "Summary Information Prospectus Disclosure System" (the "Summary System").

The central concept of the proposed Summary System was to continue the two prospectus document system established by NP36, through the use of a point of sale document (then named the "Summary Information Statement") and a complete base disclosure document (then named the "Base Disclosure Document"). The Base Disclosure Document would not be required to be delivered to all investors, but, like the annual information form mandated by NP36, would be available upon request. However, the Summary System updated and improved on, and standardized the format of, the items of disclosure to be provided in these documents. The Summary System also proposed to eliminate the requirement contained in NP36 to deliver financial statements to investors, along with the simplified prospectus. Instead, the Summary Information Statement would contain certain financial information.

The CSA received submissions from seven commenters in response to its request for comments on the Concept Proposal. IFIC provided the primary submission and included with its submission two versions of a prototype fund summary⁵

⁵ IFIC recommended that the name "summary information statement" be changed to "fund summary".

- one for a single mutual fund and the other covering a number of mutual funds.

The CSA considered these comments in developing the proposed National Instrument, Companion Policy and Forms. Appendix A to this Notice describes the comments received and the response of the CSA to such comments.

CSA Approach to Mutual Fund Prospectus Disclosure

In proposing a new regulatory regime for mutual fund prospectus disclosure, the CSA agree with Commissioner Stromberg's recommendation that the CSA not "abandon disclosure as a regulatory strategy but rather ... concentrate on making disclosure relevant, meaningful, easily identifiable and readily accessible".⁶

⁶Supra, note 2 at page 121.

The CSA also agree with the four essential elements of a strong effective disclosure system identified by Commissioner Stromberg:

• an industry generic, basic investor education document;
• a "base disclosure document" that discloses all relevant information about a mutual fund;
• a short concise point of sale disclosure document; and
• annual and semi-annual financial statements, inclusive of management's discussion and analysis, to be sent to investors once they become investors in a mutual fund.

The CSA seek to achieve two of these elements through the mutual fund prospectus disclosure system outlined in the proposed National Instrument, which will mandate preparation of:

• a Fund Summary to be delivered to all investors within the times prescribed by applicable securities legislation - the short concise point of sale disclosure document; and
• a Fund Prospectus to be delivered to those investors wishing to have more information about an investment in the mutual fund who ask to receive the document - the "base disclosure document that discloses all relevant information about a mutual fund".

The CSA wish to re-affirm as a regulatory strategy for mutual fund prospectus disclosure, the original goals of NP36 to ensure that:

• each mutual fund investor receives a concise outline of important information about his or her mutual fund investment, via a short, readable, informative document, and
• those investors who would like additional information about their mutual fund investments have easy access to a complete document that contains additional information about the mutual fund, as well as to the financial statements of the mutual fund.

The CSA also wish to build on those original goals of NP36, through the proposed National Instrument, Companion Policy and Forms, by:

• revising and updating the items of disclosure required in both a Fund Summary received by all investors and in a Fund Prospectus received by those investors who request it, to address better the information needs of investors;
• ensuring that a Fund Summary is written using plain language and is presented in an easy to read, standardized fashion that facilitates comparison of information about different mutual funds;
• ensuring that a Fund Summary remains a manageable, readable document by limiting the extent to which non-essential information is provided in it;
• encouraging industry participants to provide investors with educational information that explains an investment in a mutual fund, either through the use of an industry generic investor education document or through the addition of relevant educational information in, or attached to, a Fund Summary;
• providing investors with more relevant financial information about mutual fund investments, by substituting user-friendly, understandable financial highlights in a Fund Summary in place of mandated point of sale delivery of financial statements; and
• ensuring that investors are made aware that they can obtain further information about a mutual fund if they wish, and facilitating the receipt by the investor of that information.

Although the proposed National Instrument does not mandate preparation and delivery of an industry generic, basic investor education document, the CSA anticipate that industry participants will further investor education by:

• the preparation by IFIC of an industry generic, basic investor education document that has the CSA's input, and which will be made available to mutual fund managers; and
• mutual fund managers providing this or other educational information either as part of a Fund Summary or attached to a Fund Summary, as permitted by the proposed National Instrument.

The CSA have agreed to work with IFIC to ensure that the industry generic, basic investor education document is finalized, optimally by the time that the proposed National Instrument comes into force. The CSA will consider how best to ensure that investors know about this investor education document and are encouraged to obtain it.

The CSA expect that the final essential element of a strong, effective disclosure system - namely, the financial and other information to be provided to investors on a continuous basis after investment - will be implemented following a proposed review of the current financial disclosure requirements set out in provincial securities legislation. This review will take into account the recommendations contained in the Stromberg Report and the Steering Group report for improvements to the existing disclosure requirements, including the recommendations that mutual funds provide management discussion and analysis disclosure to investors.

The CSA is also reviewing the recommendations contained in the research report of a study group of The Canadian Institute of Chartered Accountants released in August 1997⁷

⁷"Financial Reporting by Investment Funds", Research Report of the Canadian Institute of Chartered Accountants, August 1997.

(the "Research Report"). The Research Report also recommends management’s discussion and analysis disclosure be mandated for mutual funds and makes a number of other recommendations for reform of the financial reporting requirements for mutual funds.

Overview of the Proposed Mutual Fund Prospectus Disclosure Regime

Although the CSA have dropped the name "Summary Information Prospectus Disclosure System", the essential elements of the proposed prospectus disclosure system and the documents that are to be completed, filed and delivered under the proposed National Instrument, have not changed from that described in the Concept Proposal.

Part 2 of the proposed Companion Policy outlines the underlying philosophy of the proposed prospectus disclosure system. In particular, section 2.1 explains: "[t]he purpose of the Instrument is to ensure that mutual funds provide investors with disclosure documents that clearly and concisely state information that investors should consider in connection with an investment decision about the mutual fund".

The CSA wish to ensure that all investors are given certain essential information about a mutual fund via a Fund Summary, which will be written in a style that will encourage its review by investors. Investors will be given a choice about how much more information they wish to consider before making a decision to invest in a mutual fund. Those investors who wish more information about their mutual fund investment can request a Fund Prospectus that provides "full, true and plain disclosure" of all "material facts" about the mutual fund and can also request the financial statements of the mutual fund.

The Fund Summary

The Fund Summary mandated by the proposed National Instrument is critical to the success of the proposed disclosure system. Section 2.2 of the proposed Companion Policy describes the central purpose of the Fund Summary to be a "short, concise document that is designed to provide typical investors with the necessary information to permit them to make an informed investment decision".

The CSA wish to achieve three essential goals with the Fund Summary:

• Clarity in communication of essential information about a mutual fund. The proposed National Instrument mandates the use of plain language and also the use of certain specified disclosure statements. The proposed National Instrument also imposes certain presentation requirements.
• Ease of comparability of different mutual funds. All Fund Summaries must follow the same order of disclosure, and use the same headings, of the specified disclosure items.
• Disclosure only of essential information. No additional information can be provided in a Fund Summary, other than "educational information" as defined in the proposed National Instrument. The information to be provided in response to the mandated disclosure items will be the most essential information for a typical investor to assist the investor to make an informed investment decision, and should not be obscured by other information.

The disclosure items included in the Fund Summary Form provide for five major innovations for mutual fund prospectus disclosure:

• standardized performance information;
• selected financial highlights;
• better disclosure of investment objectives and strategy of a mutual fund and the risks associated with an investment in the mutual fund;
• examples of the impact on an investor's return of the fees associated with the different purchase options offered by a mutual fund company; and
• if a Fund Summary contains information about more than one mutual fund, it must follow a catalogue approach under which all the important information about a specific mutual fund must be presented together on consecutive pages.

In identifying the items of disclosure for a Fund Summary and a Fund Prospectus, the CSA worked with the disclosure sub-committee of IFIC and reviewed the comments received on the Concept Proposal. The CSA also reviewed the new rules of the Securities and Exchange Commission of the United States (the "SEC") for mutual fund disclosure in fund profile prospectuses and prospectuses (the "SEC disclosure rules").⁸

⁸ The SEC released, in March 1998, final rules allowing U.S. mutual fund companies to sell mutual funds using a very short fund profile (that contains less information than the CSA proposed Fund Summary), so long as the investor also receives (after the trade) a prospectus (that contains more information than the CSA proposed Fund Summary, but less information than the CSA Fund Prospectus). Through these new rules, the SEC completely reformed the existing disclosure requirements. The SEC is now moving to re-consider the information provided in a "statement of additional information" (that contains certain of the information proposed for the CSA Fund Prospectus, and like the CSA Fund Prospectus, is not delivered to investors, but must be delivered upon request).

In addition, the CSA reviewed the increasing numbers of very good simplified prospectuses that have been filed by mutual funds in recent years to ensure that the proposed Fund Summary does not stifle the innovation and creativity displayed by these funds.

The items of disclosure outlined in the Fund Summary Form and the Fund Prospectus Form represent a significant re-development of the disclosure items presently contained in NP36. Where the CSA were of the view that the disclosure items mandated in NP36 remained appropriate, the CSA retained them, primarily as disclosure items in the Fund Prospectus Form. However, the CSA are of the view that many of the items mandated for annual information forms in NP36 do not result in informative disclosure for investors. In some cases, the disclosure items do not reflect the realities of the form and structure of today's mutual funds or industry. Accordingly, many items have not been carried forward into the new Forms. The Concordance Table published with this Notice indicates the disposition of the disclosure items required by NP36.

Name of Prospectus Documents

Names for mutual fund prospectus disclosure documents should be meaningful and readily understood by investors. The CSA chose the name "fund summary" for the disclosure document required to be delivered to investors under the proposed National Instrument and the name "fund prospectus" for the complete disclosure document required to be prepared by mutual funds and delivered to those investors who request it. The CSA are of the view that the complete disclosure document should continue to bear the descriptive name of "fund prospectus", although they will consider comments in this regard. The CSA are, however, considering alternatives for the name of the "fund summary" and, in particular, are considering whether or not this name should also include the word "prospectus", having regard to the importance of this document as a disclosure document that gives investors legal rights under securities legislation and at law. The CSA note, however, that the name of this document must also give investors notice that this document is not a full disclosure document that contains "full, true and plain disclosure" of all "material facts" about the mutual fund.

Consolidation of Information

The CSA in the Concept Proposal requested specific comment on whether disclosure about more than one mutual fund could be included in a single Fund Summary. The CSA proposed to limit consolidation of information relating to more than one mutual fund in one Fund Summary because of concerns that unlimited consolidation would unduly lengthen the documents, making them less readable and user-friendly. The Concept Proposal indicated that only mutual funds with similar investment objectives and risk profiles or other logical groupings of mutual funds could consolidate their disclosure into one Fund Summary.

The CSA have dropped the concept of limiting consolidation. The comments received on the Concept Proposal were in support of unlimited consolidation. Commenters pointed out the practical problems with a disclosure regime that would require one Fund Summary for each mutual fund or a limited group of mutual funds. The proposed National Instrument does not restrict the number of mutual funds that can provide disclosure in one Fund Summary, provided that the mandated "catalogue" approach established by the Fund Summary Form is followed. The fund-by-fund "catalogue" approach requires that all information specific to a particular fund must be described in a separate section of the Fund Summary, headed with the name of the mutual fund.

Similarly, the CSA are not proposing any limit to the length of a Fund Summary, as suggested in the Concept Proposal. Provided that a mutual fund meets the plain language and presentation requirements mandated by the proposed National Instrument and the Fund Summary Form, the CSA views on the length of a Fund Summary are set out in section 4.1 of the proposed Companion Policy.

Delivery of the Fund Summary

The CSA note the discussion in the Concept Proposal about optimal delivery of the "summary information statement" at the earliest possible time in the investor's decision making process. The CSA in the Concept Proposal pointed out that the information contained in that document would be most useful to investors if it is delivered to, and received by, investors as soon as possible and not later than the trade date.

The proposed National Instrument does not change the delivery requirements or the related withdrawal rights provided for in securities legislation.⁹

⁹ Securities legislation requires that prospectuses be delivered to investors or their agents within two days of a trade. Securities legislation also gives investors the right to withdraw from a purchase within defined time periods (48 hours in B.C.) after a purchase -- presumably following receipt and review of a prospectus -- and a right of action for failure to deliver a prospectus.

Accordingly, section 3.2 of the proposed National Instrument provides that delivery of a Fund Summary to investors will satisfy the requirement under securities legislation to deliver a "prospectus". Part 7 of the proposed Companion Policy sets out the CSA views regarding delivery of Fund Summaries and Fund Prospectuses, including their encouragement to industry participants to give the Fund Summary to investors in advance of the strict requirements of securities legislation.

The CSA will consider further the issue of whether they should recommend that securities legislation be amended, both for delivery requirements and the withdrawal rights for mutual fund investors, at a later date and following experience with the proposed National Instrument.

Statutory Liability

The Concept Proposal discussed the requirements for mutual funds under securities legislation to provide "full, true and plain disclosure of all material facts" in prospectus documents and their liability for misrepresentations contained in prospectuses.

The CSA have not changed the fundamental principles behind NP36 in this regard. Fund Summaries will incorporate by reference the Fund Prospectus and the mutual fund's latest financial statements, by means of a statement to that effect. Therefore,

• civil liability will attach to a misrepresentation contained in any of the Fund Summary, the Fund Prospectus or the financial statements;
• through the combination of the Fund Summary, the Fund Prospectus and its financial statements, a mutual fund will discharge its obligation to provide full, true and plain disclosure of all material facts; and
• a Fund Summary, on its own, will not contain full disclosure of all material facts within the meaning of securities legislation.

The Fund Prospectus

Similar to an annual information form under NP36, a Fund Prospectus must be delivered to an investor on request. A Fund Prospectus is also incorporated by reference into the related Fund Summary, by means of a statement to that effect. A Fund Prospectus is designed to provide complete disclosure about a mutual fund and is designed to be read on its own without reference to any other document. Subsection 2.3(2) of the proposed Companion Policy says that a Fund Prospectus is expected to "contain information that is not necessary to be included in a fund summary ... [it] provides the mutual fund with an opportunity to expand discussions of the matters to be described in the fund summary by including additional information that the mutual fund considers will be useful to some investors".

The proposed National Instrument contains several requirements that the CSA believe will build on and improve the two document system established by NP36:

• mutual fund companies will be required to maintain a toll-free line (or accept collect calls at a specified telephone number) that investors can use to request copies of the Fund Prospectus and other documents incorporated by reference into the Fund Summary;
• documents requested by investors must be sent to them, free of charge, within 3 business days of the request; and
• a Fund Summary must contain introductory and back page information that describes the existence of the Fund Prospectus and other relevant documents, gives the mandated telephone number, gives the fund company Internet site and e-mail address, if applicable, and also gives the SEDAR Internet site¹⁰.

¹⁰ All public documents filed by a mutual fund can be easily accessed through the SEDAR (System for Electronic Document Analysis and Retrieval) website; in particular, Fund Prospectuses will be accessible through this medium.

Prospectus Renewals

The proposed National Instrument does not amend or address the requirements under securities legislation to re-file mutual fund prospectus disclosure documents annually. As noted in the Concept Proposal, the Fund Summary and Fund Prospectus will contain financial and performance information that must be updated at least on an annual basis.

Model Fund Summary

IFIC has posted a "Model" Fund Summary on its website at www.ific.ca. The Model Fund Summary may be obtained from IFIC in Toronto by calling (416) 363-2158. Although the Model Fund Summary illustrates disclosure that responds to the requirements of the Fund Summary Form, it is not intended to be a "CSA approved template" for all Fund Summaries prepared after the proposed National Instrument comes into force. The Model Fund Summary is an example only of what the CSA are proposing, and the CSA discourage fund companies from merely copying this example. Each mutual fund must ensure that its Fund Summary not only complies with the National Instrument and the Fund Summary Form once those instruments are in force, but discloses facts specific to its own circumstances.

Consumer Input into CSA Proposals

Mutual fund prospectus disclosure is intended to assist investors in making informed investment decisions. Accordingly, the CSA consider it important to receive feedback from investors on the proposals. In addition to publishing the proposed documents, together with this Notice, in the various official publications of the CSA, the CSA will:

• forward the proposed documents to those individuals who commented on the Concept Proposal for their review and further comment;
• forward the proposed documents to relevant consumer groups, fund industry watchers and investor advocates with a request that these groups and individuals review the proposed documents and provide comment to the CSA;
• post the proposed documents, together with this Notice, on the Internet website of the British Columbia Securities Commission at www.bcsc.bc.ca and on the Internet website of the Ontario Securities Commission at www.osc.gov.on.ca; and

• request IFIC to post the proposed documents, together with this Notice, on their Internet website at www.ific.ca.

Before releasing the proposed documents, the CSA worked with IFIC to organize a group of mutual fund organizations that have agreed to "test market" the Fund Summary concept. Mackenzie Financial Corporation, Trimark Investment Management Inc., Global Strategy Financial Inc., Investors Group Inc., CentrePost Mutual Funds and TD Asset Management (for the Green Line Funds) will finalize Fund Summaries for certain of their respective mutual funds in August 1998. These fund companies will then work with an IFIC-retained consumer research group during the comment period for the proposed documents to obtain input from investors who will receive the Fund Summaries together with the relevant fund's current simplified prospectus.

The results of this consumer input will be provided to the CSA by the end of the comment period on the proposed documents. The CSA are hopeful that this feedback will enable the CSA to ensure that the proposed mutual fund disclosure system will meet the goals of the CSA -- namely that investors receive clear, better written and truly informative tools to understand better their chosen investment vehicle.

Summary of Proposed National Instrument, Companion Policy and Forms

National Instrument and Companion Policy

The proposed National Instrument mandates the mutual fund prospectus regime to be followed by all conventional mutual funds in Canada. It requires the preparation and filing of a Fund Summary and a Fund Prospectus by all conventional mutual funds and requires that both these disclosure documents be prepared in certain formats. Conventional mutual funds will no longer have the option of preparing a so-called "long-form" prospectus under the various long-form mutual fund prospectus forms set out in securities legislation.<sup>11

11</sup> The Securities Act (British Columbia) permits a mutual fund to prepare a "long-form" prospectus under Form 15. This option will not be possible for conventional mutual funds after the proposed National Instrument comes into force. Virtually no conventional mutual fund presently prepares a long form prospectus.

The proposed National Instrument also:

• sets out the supporting documents required to be filed, delivered or sent to securities regulatory authorities by a mutual fund in connection with the filing of various specified types of Fund Summaries and Fund Prospectuses;
• describes the relationships between the prospectus and continuous disclosure documents of a mutual fund and sets out which documents must be sent to investors within specified time periods;
• requires that the following documents be incorporated by reference into a Fund Summary of a mutual fund, by means of a statement to that effect¹²:

¹² The statement does not change the system established by NP36. It provides that when an investor receives a Fund Summary, the investor is deemed to have received the related Fund Prospectus and financial statements of the mutual fund.

• its related Fund Prospectus; and
• its most recently filed comparative annual and interim financial statements.
• permits satisfaction of the prospectus delivery requirement through the delivery of a Fund Summary;
• requires a mutual fund to send, free of charge, its Fund Prospectus and its financial statements to any investor who asks for them within 3 business days of the investor's request;
• requires the mutual fund to establish a toll-free telephone number for (or accept collect telephone calls from) persons or companies who want to receive a copy of a Fund Summary or any of the documents incorporated by reference into the Fund Summary;
• requires that a Fund Summary and a Fund Prospectus be prepared using plain language and in a format that assists readers to read and understand those documents;
• restricts the information provided in a Fund Summary to the items of information set out in the form and to "educational material" presented in a specified manner;
• prohibits any material, other than educational material and the documents incorporated by reference into the Fund Summary, from being bound together with, or attached to, the commercially printed version of a Fund Summary so that mutual fund managers do not attach material that might detract from the significance of a Fund Summary¹³; and

¹³ The CSA wish to encourage mutual fund managers to provide educational materials to investors. This is the reason the CSA proposes to allow this material to be included in or otherwise accompany Fund Summaries. Ultimately, when the IFIC-produced industry generic investor education document described earlier in this notice is implemented, the CSA hopes that mutual fund managers will attach this document to the commercially printed versions of their Fund Summaries.

• governs the calculation of the management expense ratio of a mutual fund.^{14 15}

¹⁴ As the calculation of a mutual fund's management expense ratio is not purely a matter for mutual fund prospectus disclosure, the CSA propose to move Part 6 to proposed National Instrument 81-102 Mutual Funds when that National Instrument is finalized.

¹⁵ The proposed National Instrument does not bring forward Item 10, Instruction 4 of Schedule A in NP36. Instruction 4 sets out the rule for calculating management expense ratios of those mutual funds that invest in other mutual funds. The CSA are presently considering the appropriate rules in this regard. When proposed National Instrument 81-102 Mutual Funds is released for a further comment period, the CSA will include the appropriate rules for the calculation of management expense ratio by these mutual funds.

The CSA presently propose that the proposed National Instrument become effective on July 1, 1999, which is the date that NP36 ceases to be a rule in Ontario.

The proposed Companion Policy¹⁶

¹⁶ Terms used in the proposed Companion Policy that are defined or interpreted in the National Instrument or a definition instrument in force in the jurisdiction should be read in accordance with the National Instrument or definition instrument, unless the context otherwise requires.

describes the central philosophy of the CSA in proposing the mutual fund prospectus disclosure regime; in particular, it describes the purpose of a Fund Summary and of a Fund Prospectus. The proposed Companion Policy also provides further explanation of certain of the rules contained in the proposed National Instrument and certain disclosure items of the two Forms. In particular, it discusses:

• plain language and presentation principles that can be used in preparing a Fund Summary and Fund Prospectus; and
• issues relating to the consolidation of information about more than one mutual fund in a single Fund Summary and Fund Prospectus.

Fund Summary Form

The Fund Summary Form sets out the items of information required to be included in the Fund Summary, provides basic guidance for preparing a Fund Summary, and discusses plain language and format requirements, the order in which information is to be presented and the use of photographs and artwork.

The Fund Summary Form requires the following information to be included in a Fund Summary:

• an introductory statement that describes the purpose of the Fund Summary and provides information about how the investor may obtain additional documents and information about the mutual fund;
• a plain language description of the nature of a mutual fund and of the risk factors or other investment considerations associated with investing in mutual funds that investors should take into account;
• basic information about the firms that provide specified services to the mutual funds;
• fund-specific information for each mutual fund presented using a "catalogue", or fund-by-fund, approach;
• a brief statement about the suitability of the mutual fund for particular investors, describing the characteristics of the investor as well as the portfolios for which the mutual fund may or may not be an appropriate investment¹⁷;

¹⁷ The CSA note that the SEC disclosure rules make disclosure of suitability optional. The SEC noted in its release of its final rules that commenters argued that the disclosure originally proposed by the SEC could be viewed as requiring a fund to determine whether its shares, among other things, are a suitable investment for a particular investor. Commenters also noted that the disclosure would tend to be generic and not meaningful or useful for investors.

When reviewing existing simplified prospectuses, the CSA found examples of suitability disclosure that was specific to the applicable mutual fund and would be useful information for investors. However, the CSA seek specific comment on whether suitability disclosure should be mandatory or optional.

• a description of the investment objectives¹⁸

¹⁸ The CSA view investment objectives as extremely important disclosure. The Fund Summary will cause mutual funds to give more specific information about their investment objectives that will enable investors to understand the nature of their mutual fund investment. Current disclosure provided by many mutual funds about their investment objectives is often vague and completely uninformative. For example, the CSA expect that a Canadian equity mutual fund will no longer be able to disclose only that its fundamental investment objective is to achieve capital appreciation. This type of statement will not be acceptable disclosure under Item 8.

National Policy Statement No. 39 and its proposed replacement instrument, proposed National Instrument 81-102 Mutual Funds, require that unitholder approval be obtained before any change in a fundamental investment objective of a mutual fund. The CSA propose to amend proposed National Instrument 81-102 to clarify that for unitholder approval purposes, the fundamental investment objectives of a mutual fund are those set out in the Fund Summary.

of the mutual fund, including information that describes the fundamental nature of the mutual fund or the fundamental features of the mutual fund that distinguish it from other mutual funds;

• a description of the principal investment strategies that the mutual fund intends to use to achieve its investment objectives, as well as a description of the process by which the portfolio adviser selects securities for the portfolio;
• specific information about any material risks associated with an investment in the particular mutual fund;
• certain past performance information¹⁹

¹⁹ The past performance information required parallels requirements imposed by the SEC in the SEC disclosure rules and is consistent with the discussion about performance disclosure contained in the Research Report.

of the mutual fund, including;

• a bar chart showing its annual return for each of the 10 most recently completed calendar years (or since inception, if the mutual fund is less than 10 years old);
• a line graph²⁰

²⁰ The line graph requirement is consistent with the SEC disclosure rules and is designed to give investors an illustration of past performance that is expected to be more visually informative for certain investors than the tables.

illustrating its past performance for each of the least of the past 10 calendar years, the time since inception of the mutual fund and the time since the mutual fund began distributing its securities and illustrating the growth of a hypothetical $10,000 investment in the mutual fund, and a line graph showing a comparison to the change in one or more broad-based securities market indices for the same time period;²¹ and

²¹ The comparison of mutual fund performance to a broad-based market index is not intended to provide a benchmark for the performance of the mutual fund; it is designed simply to give investors a better sense of how the mutual fund performed relative to the performance of the overall financial market. The CSA expect that the performance comparisons will provide useful information to investors so that they can better gauge their investment options. The CSA do not propose to mandate the indices against which particular categories of mutual funds should compare their performance. The CSA acknowledge the work of the Investment Funds Steering Group in its report (supra note 3 at pages 67-71) in defining categories of mutual funds and recommending that each category of fund benchmark their performance against certain defined indices. When the CSA are considering the comments received on the proposed National Instrument, the CSA will consider the issue of mandating, or at least encouraging, the use of defined indices by the different categories of mutual funds.

• a table showing its annual compound total returns for the ten, five, three and one year periods ended on December 31 in the year immediately before the year in which the Fund Summary is filed (or since inception and each applicable period to the longest applicable period for those mutual funds younger than 10 years);
• information regarding mutual fund distributions;
• key financial information about the mutual fund for its past five completed financial years (or since inception for those funds younger than five years)²²;

²² The financial information to be provided by a mutual fund in a Fund Summary is consistent with the recommendations made in the Research Report for "financial highlights" to be provided in financial statements of the mutual fund. Item 13 is also consistent with SEC disclosure rules.

All of the financial disclosures to be provided in Item 13, except for portfolio turnover rate, is presently disclosed in the financial statements of the mutual fund. Portfolio turnover rate is a new disclosure item. The CSA believe that taxable investors in particular (that is, those investors who do not invest in a mutual fund through a registered tax plan) should take account of the portfolio turnover rate for a mutual fund having regard to the significance that a high portfolio turnover rate will have on their tax position.

• a brief description of how an investor can purchase and redeem securities of the mutual fund or mutual funds offered in a Fund Summary;
• information about any optional services offered by a mutual fund to typical investors;
• a table²³

²³ The SEC disclosure rules require a mutual fund to include an example of the fees and expenses payable by the mutual fund and by an investor expressed as a dollar figure for one, three, five and ten year periods, assuming a five percent annual return and that the fund's operating expenses remained the same. The SEC described that they intend this example as a "relatively straightforward means of illustrating the effect of costs in investing in a fund over time". The CSA share the SEC's objective of giving investors a means of understanding and comparing the expenses of different funds in an easy to understand format. However, the Fund Summary Form does not require an example similar to that required by the SEC. Since most Fund Summaries will likely provide disclosure about more than one mutual fund, this fee example would be a fund-specific disclosure item. Before deciding to require an example of this nature, which would add to the length of the fund-specific information, the CSA would like comment on whether an example would be useful and meaningful disclosure of the effect of the fees and expenses payable by a fund and an investor.

that summarizes the fees and expenses payable both by the mutual fund or funds described in the Fund Summary and by investors directly, including management fees and the fees for any optional services;

• a number of tables illustrating the effect of the fees associated with the mutual fund's various purchase options on an initial $1,000 investment in the mutual fund;
• a brief discussion of certain sales practices and ownership interests as required by National Instrument 81-105 Mutual Fund Sales Practices; and
• a brief discussion of the income tax consequences for investors.

Fund Prospectus Form

The Fund Prospectus Form sets out the items of disclosure required to be included in a Fund Prospectus, provides basic guidance to mutual funds in preparing a Fund Prospectus, and includes discussion relating to the purpose of a Fund Prospectus, the extent of the information to be included, the use of photographs and artwork, and an explanation of the "catalogue" approach that is required where a Fund Prospectus covers more than one mutual fund.

The general instructions to the Fund Prospectus Form emphasize:

• that a Fund Prospectus is intended to be a complete "free-standing" disclosure document -- an investor should not need to review any other document, except the financial statements for the mutual fund, in order to receive "full, true and plain disclosure of all material facts" related to the mutual fund;
• although the Fund Prospectus Form cross-refers to the disclosure items required in the Fund Summary Form, the CSA expect that a mutual fund will include additional information in the Fund Prospectus, as necessary, in order to satisfy its obligation to provide "full" disclosure of all material facts about the mutual fund;
• other than the "catalogue" approach to be followed in respect of fund-specific information, a mutual fund will be free to provide the required disclosure in a Fund Prospectus in any order and style it chooses, provided that it follows the plain language and presentation rule established by the proposed National Instrument; and
• a mutual fund may include additional information in the Fund Prospectus.

In addition to the information contained in the Fund Summary, the Fund Prospectus Form requires the following to be included in a Fund Prospectus:

• certain disclosure about the method of calculating the mutual fund's net asset value, as well as the frequency at which it is determined together with a description of the methods used to value the mutual fund's various types or classes of portfolio assets and liabilities for the purpose of calculating net asset value;
• a description of how the operations of the mutual fund are administered and who carries out these functions including:
• the manager of the mutual fund;
• the portfolio adviser;
• individuals employed by the manager or a portfolio adviser, as applicable, who are involved in making investment decisions for the fund;^{24 25}

²⁴ Disclosure of the names and experience of the individuals responsible for portfolio management of the mutual fund is a new disclosure item for mutual funds in Canada. This disclosure has been added because of the importance of the portfolio management function.

²⁵ The CSA are considering what, if any, disclosure a mutual fund should make if an individual employed by the manager or portfolio adviser stops providing portfolio management services in respect of the mutual fund. The issue is most acute in cases in which the mutual fund has promoted that individual's expertise or reputation in its advertising. The CSA will consider this issue in finalizing proposed National Instrument 81-102 Mutual Funds and the obligation contained in that proposed Instrument to disclose "significant changes".

• the custodian, the auditor and the registrar of securities of the mutual fund; and
• all other persons or companies that provide services in respect of the mutual fund, such as those relating to portfolio valuation, unitholder records, fund accounting or other material services;
• disclosure of the principal holders of securities of the mutual fund and of the manager of the mutual fund and disclosure about certain affiliated entities that provide services to the mutual fund or manager;²⁶

²⁶ Item 17 is designed to replace Items 13, 15 and 16 of Schedule B of NP36. It should produce more precise descriptions of the relationships between the various entities providing services to the mutual fund, so that investors will be made aware of potential conflicts of interest.

• detailed information concerning the governance of the mutual fund, including policies concerning conflicts of interest and business practices, whether the mutual fund has any independent directors and trustees and the identities of those individuals or any independent business conduct review committee;²⁷

²⁷ This is a new disclosure item for mutual funds in Canada. The CSA will monitor the disclosure provided under this Item to ensure that Item 18 continues to require disclosure of appropriate information. The CSA will also monitor whether or not an abbreviated version of this disclosure should be included as part of the Fund Summary.

• certain disclosure about the taxation of the mutual fund;
• disclosure about compensation paid to executive officers of the mutual fund, if the management functions of the mutual fund are carried out by employees of the mutual fund and the directors or the members of an independent governance or advisory board of the mutual fund, either in that capacity or as consultants or experts;²⁸

²⁸ Item 23 significantly re-works Items 11 and 12 of Schedule B of NP36 and is designed to reflect better the legal and management structure of most conventional mutual funds in Canada.

• a description of, and certain details about, specified legal and administrative proceedings related to the mutual fund or its manager or principal distributor and sanctions imposed by any court or securities regulator on the manager, or a director or officer of either the mutual fund or the manager within the past 10 years relating to trading in securities, promotion or management of a publicly offered mutual fund, or theft or fraud;
• disclosure of all exemptions from, or approvals under, the proposed National Instrument, National Instrument 81-102 Mutual Funds, National Instrument 81-105 Mutual Fund Sales Practices or National Policy Statement No. 39 that were obtained by the mutual fund or the manager and that continue to be relied upon by the mutual fund or the manager; and
• disclosure about material breaches of securities legislation by the mutual fund or the manager.

Alternatives Considered

The CSA, in the Concept Proposal, noted that in developing the proposed "Summary Information Prospectus Disclosure System", they considered:

• retaining the disclosure documents required by, and the system established by, NP36, but updating the disclosure requirements;
• the recommended four document disclosure system set out in the Stromberg Report;
• the SEC profile prospectus system (as it was then proposed); and

• a proposal developed by IFIC in 1995 for a profile prospectus to be used in Canada.

The CSA identified and considered the pros and cons of each of the above-noted alternatives. Ultimately, the CSA decided that the proposed Summary System as outlined in the Concept Proposal would "allow mutual funds to provide a short, readable, yet informative document to investors that will address their needs without detracting from the quality of the disclosure provided".

Following the release of the Concept Proposal, the CSA considered the comments received and continued to work with industry participants as described earlier in this Notice. The CSA also reviewed the SEC disclosure rules. The CSA have not seriously considered any alternative to the proposed disclosure system described in the proposed National Instrument since they released the Concept Proposal.

Anticipated Costs and Benefits

The proposed National Instrument, Companion Policy and Forms promote mutual fund disclosure documents that effectively communicate essential information to investors. The CSA have focused the disclosure items required in a Fund Summary and Fund Prospectus on information that will help investors make informed investment decisions. The information to be included in a Fund Summary and Fund Prospectus will be organized in an efficient, clear, concise and standardized manner, which will increase the effectiveness of the information. Investors will be able to use Fund Summaries in a more efficient and effective manner to compare one mutual fund to another. The Fund Summary is expected to equip investors better to make informed investment decisions, since they will have access to clearer and more relevant information.

The CSA do not believe that the disclosure system outlined in the proposed documents will result in a significant cost increase to industry participants over time because the proposed National Instrument and the Forms do not require that mutual funds disclose a significant amount of new information or prepare an additional number of disclosure documents than are required presently. Rather than increase the disclosure and filing burden, the proposed National Instrument and Forms primarily re-order disclosure items, clarify the formatting and presentation of information and require new formats for certain information.

The initial expense that will likely be experienced by mutual fund organizations in having to prepare new disclosure documents to comply with the proposed National Instrument and Forms is expected to be offset by future savings such as lower printing and distribution costs from a shorter Fund Summary and no longer having to give each investor the financial statements of the funds at the time of trade.

The CSA have imposed no limits on the number of mutual funds that may be consolidated into one Fund Summary. However, the CSA acknowledge that one result of the proposed National Instrument and the Forms is that fund companies may decide that a Fund Summary will be more effective as a disclosure document if less mutual funds are covered in it. In particular, those fund companies with in excess of thirty funds in their fund families may decide that one Fund Summary covering all funds would be too unwieldy and would not meet the stated goals of the disclosure system proposed by the CSA. Those fund companies will experience increased costs in producing more than one Fund Summary. Distributors of the mutual funds may experience increased costs in having to ensure that sales representatives have the proper Fund Summaries on hand for their clients. The CSA believe these increased costs will be outweighed by the benefits to investors in having more manageable and relevant disclosure documents.

The costs to the industry in having to learn plain language principles in order to write fund disclosure documents in plain language and to follow presentation standards is unquantifiable, but, in the view of the CSA, is more than offset by the benefits to investors in receiving better written disclosure documents.

On balance, the CSA are of the view that the benefits to investors, and also for the mutual fund industry, expected by the proposed National Instrument and Forms will outweigh any costs to industry participants.

Consequential Amendments to theSecurities Rules

Currently the simplified prospectus system of disclosure set out in NP36 is implemented in British Columbia through sections 100 to 105 of the Securities Rules. The implementation of the proposed National Instrument, Companion Policy and Forms will require the repeal or amendment of those and other related provisions of the Securities Rules and the addition of new provisions to the Securities Rules. The proposed changes are set out in the proposed consequential amendments of the Securities Rules being published with this Notice.<sup>29

29</sup> Certain other consequential amendments required to implement the proposed new disclosure system are dealt with in proposed National Instrument 41-101 and the consequential amendments proposed to be implemented with that instrument. NI 41-101 and the consequential amendments were published in the British Columbia Securities Commission Weekly Summary for the week ending May 16, 1997 (NIN#97/15).

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument, Companion Policy, Forms and the consequential amendments to the Securities Rules. Submissions received by October 30, 1998 will be considered.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission, in duplicate, as indicated below:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Department of Government Services and Lands, Newfoundland
Registrar of Securities, Government of Northwest Territories
Registrar of Securities, Government of the Yukon Territory

c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
E-mail: diggers@osc.gov.on.ca

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows

Claude St Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3
E-mail: claude.stpierre@cvmq.gouv.qc.ca

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions cannot be maintained.

Comments may also be sent via e-mail to the above-noted e-mail addresses of the respective Secretaries of the Ontario Securities Commission and to the Commission des valeurs mobilières du Québec.

Questions may be referred to any of:

Robert Hudson
Senior Legal Counsel
British Columbia Securities Commission
(604) 899-6691
or (800) 373-6393 (in B.C.)
E-mail: rhudson@bcsc.bc.ca

Wayne Redwick
Director, Corporate Finance
British Columbia Securities Commission
(604) 899-6699
or (800) 373-6393 (in B.C.)
E-mail: wredwick@bcsc.bc.ca

Wayne Alford
Legal Counsel
Alberta Securities Commission
(403) 297-2092
E-mail: wayne.alford@gov.ab.ca

Dean Murrison
Deputy Director, Legal
Saskatchewan Securities Commission
(306) 787-5879
E-mail: dean.murrison.ssc@govmail.gov.sk.ca

Bob Bouchard
Director, Corporate Finance
The Manitoba Securities Commission
(204) 945-2555
E-mail: bbouchard@cca.gov.mb.ca

Rebecca Cowdery
Investment Funds Team Manager
Ontario Securities Commission
(416) 593-8129
E-mail: rcowdery@osc.gov.on.ca

Winfield Liu
Senior Legal Counsel
Ontario Securities Commission
(416) 593-8250
E-mail: wliu@osc.gov.on.ca

Pierre Martin
Legal Counsel, Service de la reglementation
Commission des valeurs mobilières du Québec
(514) 873-5326
E-mail: pierre.martin@cvmq.gouv.qc.ca

DATED at Vancouver, British Columbia, on July 30, 1998.

Douglas M. Hyndman
Chair

Reference: National Policy Statement No. 36
CSA Notice 81-301


1. INTRODUCTION

In January 1997, the Canadian Securities Administrators (the "CSA") published for comment the Concept Proposal describing a proposed prospectus disclosure system for use by mutual funds. In the Concept Proposal, the CSA asked for 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 comment letters ranged from a comprehensive submission from The Investment Funds Institute of Canada ("IFIC") to comment letters 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 reception area of the British Columbia Securities Commission, 200-865 Hornby Street, Vancouver, British Columbia (604) 899-6600 or (800) 373-6393 (in B.C.); the office of the Alberta Securities Commission, 10025 Jasper Avenue, Edmonton, Alberta (403) 427-5201; the office of Micromedia, 20 Victoria Street, Toronto, Ontario (416) 312-5211 or (800) 387-2689; or the library of the Commission des valeurs mobilières du Québec, Stock Exchange 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 National Instrument, Companion Policy and Forms. The CSA thank all commenters for providing their comments on the Concept 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 will summarize it in detail. The NP36 Sub-Committee of IFIC (the "IFIC Committee") wrote the IFIC comment letter. The IFIC Committee worked with staff of the CSA before the publication of the Concept Proposal and as part of that work developed two prototype Summary Information Statements¹

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

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 comments of the IFIC Committee on the Concept Proposal. The revised prototype documents formed part of the IFIC comment letter. The CSA commend the IFIC Committee for its work in preparing the Fund Summary prototypes and thank each member of the IFIC Committee for their thoughtful consideration of, and input into, the CSA's proposals during the development 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 Summary Information Statement set out in the Concept Proposal. The following table summarizes those comments and the response of the CSA, all references to Item numbers in the CSA Response column are to the Fund Summary Form:

Item of Information - Concept Proposal	IFIC Comment	CSA Response
Name of document	• Rename the summary information statement to "fund summary" and come up with a better name for the proposed "base disclosure document"	• The proposed National Instrument requires the preparation of a "Fund Summary" and a "Fund Prospectus"
Introductory Statement	• Disclosure suggested for an introductory statement • Include a table in the Introduction that provides certain details about the mutual funds	• Item 3 sets out proposed introductory disclosure consistent with comments • Item 5 and sections 6.1 and 6.2 of Item 6 incorporate the suggested table of basic information
[no item proposed]	• Require disclosure describing the suitability of a mutual fund for particular investors	• Item 7 incorporates the suggestion
Investment Objectives and Nature of the Fund	• Agreed	• See Item 8
Investment Strategy	• Agreed	• See Item 9
R.R.S.P./R.R.I.F Qualifications	• Incorporate suggested disclosure into the recommended introductory table	• Sections 6.1 and 6.2 of Item 6 incorporate the comment
Risk Profile and Investment Considerations	• Do not mandate disclosure of a quantitative risk measurement or graphic representation of volatility • Fund Summary should include specific risks of investing in the specific mutual funds -- general risks applicable to all mutual funds should be included in an IFIC produced educational document	• Item 10 requires narrative disclosure of risks specific to the particular mutual fund • Section 11.1 of Item 11, among other things, is intended to graphically illustrate that the mutual fund's performance changes from year to year • Item 4 requires disclosure of general risks applicable to all mutual funds
Past Performance	• Agree with concept that average annual total returns for a 10 year period be provided on both an annual and compound basis -- understandable by investors and more demonstrative of volatility • Consider permitting use of a "rolling time period" measurement (illustrates the best, average and worst performance of a mutual fund over 1,3,5 and 10 year periods) • Do not require disclosure of other measures of volatility (beta, Sharpe's ratio - too difficult to understand) • Require disclosure of past distributions of mutual fund under Financial Summary section • Do not require disclosure of portfolio turnover rates - not readily understood and could be misleading - that is, no correlation between portfolio turnover and performance • Do not require comparison of performance to benchmark	• See sections 11.1, 11.2 and 11.3 of Item 11 • Disclosure of past performance in a Fund Summary must be set out only as required by Item 11 - any other performance measurement could be included in the Fund Prospectus • Disclosure of other measures of volatility will not be required • Disclosure of past distributions to be included with Financial Highlights - see Item 13 • Portfolio turnover rate is relevant information for investors; this disclosure moved to the Financial Highlights section - see Item 13 • Comparison of a mutual fund's performance to a broad based securities market index (such as the TSE 300 Index) is relevant and useful information for investors -- see section 11.2 and 11.3 of Item 11
Past Performance (continued)	• Require a narrative discussion of how past performance relates to investment objectives and strategy in MD&A, and not in a Fund Summary • Require reference to a change in external portfolio adviser if made during the performance periods indicated • Permit performance information to be given for so-called "young" funds -- use average rate of return for all mutual funds in same category	• The CSA will review the issue of MD&A disclosure as they move forward to look at financial disclosure requirements for mutual funds • Subsections 11.1(4), 11.2(9) and 11.3(8) of Item 11 require the recommended disclosure of changes in fund affairs during a performance period • "Young funds" may not include performance information. The prohibition relating to sales communications by "young funds" presently carried forward into proposed NI81-102 Mutual Funds will be reviewed during the finalization of that National Instrument in light of comments received
Selected Financial Information	• Format suggested for two tables of financial information • Do not require disclosure of portfolio turnover rates	• Tables mandated in Item 13 were derived from the IFIC comments and from the Financial Highlights disclosure proposed by the Research Report
Fees and Expenses	• Format suggested for fees and expenses tables and for an illustration of the impact of fees on an investment in a mutual fund • Use a lower rate of return of 2.5% in the illustration of the impact of fees and expenses on an investment in a money market fund	• Tables mandated in Item 16 contain elements suggested by comments • An illustrative 5% rate of return retained for all mutual funds regardless of category -- the tables provide illustrations only, the actual rates of return may differ
Dealer Compensation	• Agreed	• See Item 17
Manager, Trustee and Investment Advisor	• Move disclosure to recommended introductory table	• See Item 4 and sections 6.1 and 6.2 of Item 6
Securities Offered and Capital Structure	• Move disclosure to recommended introductory table	• See Item 4 and sections 6.1 and 6.2 of Item 6
Purchases, Transfers and Redemptions	• Agreed with disclosure proposal - but move item’s ordering	• See Item 14
Distributions	• Agreed - require disclosure on impact of investing in certain mutual funds late in a calendar year	• See Item 12 for disclosure of distribution policy • Item 18 (3) requires disclosure of the impact of a mutual fund's distribution policy on a taxable investor who invests late in a calendar year
Income Tax Status for Investors	• Agreed • Do not require disclosure about potential tax effect of portfolio turnover • Format suggested for disclosure about tax implications of investing via a registered tax plan as opposed to investing outside of a tax plan	• Item 18 continues to require disclosure, if material, of the potential impact of a mutual fund’s anticipated portfolio turnover rate on a taxable investor • Item 18(2) incorporates the suggested disclosure requirement
Statement of Rights and Availability of Additional Information	• Agreed -- plain language version of the "statement of rights" suggested • Move statement about the availability of other information to the introduction	• See Item 19 Statement of Rights • See Item 3 Introductory Disclosure and Item 20 Back Cover for mandated statements concerning the availability of other information

The IFIC Committee strongly recommended that the CSA permit consolidation of information about several mutual funds in one Fund Summary. The IFIC Committee prepared the prototype Fund Summary covering more than one mutual fund using a "catalogue" approach similar to that adopted by the CSA in the proposed National Instrument. As described in more detail in the Notice, the CSA propose that fund companies be permitted to consolidate disclosure about their mutual funds in one Fund Summary, provided the catalogue approach is followed and the presentation of the 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" describing mutual funds in a general fashion. As outlined in the Notice, the CSA agree with this comment and look forward to working 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. Where commenters responded to the questions posed by the CSA in the Concept Proposal, the table identifies the numbering of the original question. All references to Item numbers in the CSA Response column are to the Fund Summary Form.

Concept Proposal Recommendation or Question	Comment	CSA Response
Disclosure of Past Performance	Mandate disclosure of past performance in fund prospectuses to allow comparisons of the results of several mutual funds. Require: • disclosure of year by year performance numbers for at least the most recent 5 years • uniform presentation of the mandated performance numbers (to facilitate comparisons) • a standard formula for calculating annual performance numbers	Past performance information mandated -- see Item 11
Disclosure of Past Performance (continued)	Complex information such as portfolio turnover rate cannot be meaningfully disclosed in a Fund Summary. Most investors purchase mutual funds on a tax exempt basis (i.e., through registered tax plans).	As noted above in response to the IFIC comment made on this point, the CSA have retained the requirement to disclose portfolio turnover rate.
Disclosure of Past Performance (continued)	Require disclosure of a fund's "annual, low and closing net asset values" for the last 10 years or since inception. This disclosure would permit investors to assess the volatility and long term performance of the fund.	The CSA propose that mutual funds disclose the opening and closing net asset value per unit for each of their last five financial years -- see Item 13.
Disclosure of Statement of Rights	The provincial securities legislation giving investors rights to rescind their mutual fund purchase is not uniform. This lack of uniformity will complicate mutual funds' ability to provide clear disclosure on the issue. Adopt a uniform national rescission right for mutual fund investors.	Item 19 of the Fund Summary Form sets out a suggested plain language statement of rights that the CSA consider adequately describes the applicable withdrawal and rescission rights. The CSA will consider the question of a uniform rescission right at a later date.
Fees and Expenses	Require disclosure of the actual management fee charged to a fund (as opposed to merely disclosing the "maximum" fee that could be charged).	Items 6 and 16, when coupled with the Financial Highlights table on fees and expenses required by Item 13 respond to this comment.
Fees and Expenses - Illustration of Impact of Expenses	Illustrations of the effect of fees under each purchase option cannot be meaningfully provided because: • different rates of returns should be assumed for different funds -- that is, money market funds should use less than 5% and equity funds should use more than 5%- or the actual returns of the mutual fund should be utilized • redemption assumptions misleading to investors purchasing on a deferred charge basis • sales charges paid by investors vary from 0-6%, most charges are from between 0-2% -- need illustrations of the impact of each possible commission payment	The CSA believe that the disclosure required by Item 16 will provide meaningful information to investors. The CSA do not wish to clutter up the illustrations with different variations and have accordingly fixed the central assumptions outlined in section 16.2 of Item 16.
Fees and Expenses - Illustration of Impact of Fees (continued)	Existing investors should understand the actual impact of fees on their return. Mandate disclosure in client account statements of the dollar amounts charged to an individual's account to pay management fees and other fees and expenses.	The CSA have not tackled this suggestion in the proposed National Instrument, but will keep it in mind as they move forward to reform the financial disclosure required to be provided to existing investors on a continuous basis.
Other Disclosure Items for the Fund Summary - Question A - 2	Permit disclosure of optional information such as investor services.	Item 15 responds to this comment.
Quantitative risk measurements or graphic representations of volatility - Question A - 7	Clearly establish in the rule how volatility should be presented.	The CSA propose not to mandate any particular risk measurement -- instead the bar graph mandated by section 11.1 of Item 11 is designed to illustrate that a mutual fund's performance changes from year to year.
Disclosure of Past Performance - Comparison to a Benchmark - Question A - 8	The determination of an appropriate comparative index may be difficult for a number of Canadian mutual funds, particular sector funds.	The CSA propose required comparisons of fund performance against an appropriate broad-based securities index. Accordingly, a Canadian equity sector fund may compare its performance to the TSE 300 Index, rather than trying to find a narrowly focused index.
Consolidation of Information about Several Mutual Funds in One Fund Summary - Question B - 1	Continue the present system of unlimited consolidation of mutual funds in one Fund Summary. If consolidation not permitted, industry participants, including investors, will experience increased costs. Disclosure in one document about the full range of mutual funds offered by a fund company eases comparability of different investment options.	As described in the Notice, the CSA propose no limits on the number of mutual funds that can be included in one Fund Summary, subject to compliance with the presentation requirements outlined in the Fund Summary Form.
Annual Re-filing Requirements - Question B - 2	Give mutual funds the ability to make "non-material" amendments to a Fund Summary, to disclose matters such as changes to optional services offered by a fund company, without having to refile and obtain regulatory approval for the amended document.	The CSA do not propose to amend the securities legislation at this time to change the requirement to file amendments to fund summaries or the annual prospectus re-filing requirements.
Delivery Requirements - Question B - 3	CSA suggestion that a Fund Summary should be delivered at the earliest possible time and in any event prior to the time of a trade, appears to be based on the assumption that most trades take place after or during a face-to-face meeting between an investor and the investor’s adviser. This is not at all the case. The current rules should not be changed or if they are, they should be amended to deal with delivery through new distribution technologies.	The CSA are reviewing the issues around electronic delivery of documents. The CSA do not propose to change the current legislation applicable to mutual fund prospectuses until that review is concluded and recommendations made. Accordingly the proposed National Instrument does not change the current delivery requirements.
Plain Language Requirements	Although plain language disclosure principles are good, the CSA must confirm that the Fund Summary is not intended to provide full disclosure. Without this clear confirmation, the Fund Summary may become more lengthy and technical in wording as fund companies attempt to minimize legal risks that might arise from its use.	The proposed National Instrument does not change the system provided for by NP36 in this regard. As outlined in the Notice, fund companies must understand the central philosophy behind the Fund Summary and must not permit the aims of the disclosure system to be diluted because of concerns of legal liability.
[new] Delivery of Financial Statements	Investors receive too much information that they do not want, do not understand and do not read. Financial statements sent to existing unitholders on an annual and semi-annual basis are unnecessary. Give investors the option of saying whether or not they wish to continue to receive these documents.	The CSA propose to eliminate the current requirement to give investors financial statements along with the prospectus disclosure documents. Instead the Fund Summary must contain the mandated Financial Highlights tables set out in Item 13. The CSA will keep in mind the comments about the continuous disclosure material as they move forward to reform the mutual fund financial disclosure regime.
[new] Disclosure of Voting of Portfolio Securities by Managers	Mandate disclosure on how mutual fund managers voted the portfolio securities of the mutual funds they manage.	The CSA do not propose to introduce such a disclosure requirement in the proposed National Instrument. The CSA will keep this comment in mind as they move forward to implement the MD&A disclosure proposals.
[new] Point of Sale Disclosure Statement	Mandate delivery of a point of sale document - a "mutual fund checklist" designed to be used by sales representatives during the sales process and prior to a sale of a mutual fund.	The Fund Summary will provide clear meaningful disclosure for investors and the CSA do not propose to adopt a requirement that would introduce another document into the sales process at this time.

NP36 PROVISION	TREATMENT	COMMENT
SECTION 1 - APPLICATION
Section 1.1	Deleted	Mandatory under the NI to prepare a Fund Summary
Section 1.2	NI - section 1.3	Modified to exclude LSVCCs and mutual funds listed and posted for trading on a stock exchange or quoted on an OTC market
-paragraph (a)	Deleted
-paragraph (b)	NI - paragraph 1.3(b)
Section 1.3	NI - section 1.2	Reference to NI81-105 added
SECTION 2 - DOCUMENTS COMPRISING THE SIMPLIFIED PROSPECTUS DISCLOSURE SYSTEM
Section 2.1	NI - section 3.1	Concept of a Fund's "permanent information record" not referred to in the NI
Section 2.2	CP - Part 4	No rule in the NI restricting consolidation
SECTION 3 - ANNUAL INFORMATION FORM
Section 3.1	NI - section 2.1	Notification of annual acceptance to the mutual fund not necessary
Section 3.2	NI - paragraphs 2.1(1)(a) and (b), subsection 2.2(3) and section 3.5 Prospectus Form - Items 1(1) and (6)
Section 3.3	NI - sections 3.2, 3.3 and 3.4 Summary Form - Items 3(1) and (2) and 20(2) Prospectus Form - Item 33(2)	No undertaking required; replaced with rule to deliver documents upon request
Section 3.4	NI - section 2.2	Now refers more generally to supporting documents required to be filed under securities legislation
Section 3.5	Deleted	Not necessary
SECTION 4 - SIMPLIFIED PROSPECTUS
Section 4.1	NI - sections 2.2 and 3.5
Section 4.2	Summary Form - Items 1(3) and (4)
Section 4.3	Deleted
Section 4.4	NI - section 2.3
Section 4.5	Deleted	Covered by securities legislation
Section 4.6	Deleted
Section 4.7	Deleted	Covered by securities legislation
SECTION 5 - FINANCIAL STATEMENTS
Section 5.1	Deleted	Financial statements are not required to be filed with the Fund Summary; requirements concerning contents of financial statements are covered by securities legislation
Section 5.2	NI - section 3.2	Annual and interim financial statements are not required to be delivered with the Fund Summary to purchasers
Section 5.3	Deleted	Covered by securities legislation
Section 5.4	Deleted
Section 5.5	Summary Form - Item 13 Prospectus Form - Item 8
SECTION 6 - REVIEW PROCEDURE
Section 6.1	Deleted
Section 6.2	CP - section 2.6
Section 6.3	Deleted	NP30 to be reformulated with NP1 in National Policy 43-201
SCHEDULE A - INFORMATION REQUIRED TO BE INCLUDED IN A SIMPLIFIED PROSPECTUS
General Instruction	CP - section 2.2, Part 3 NI - section 4.1	Other documents do not accompany the Fund Summary
Item 1. Cover Statement	Deleted
Item 2. Introductory Statement	Summary Form - Item 3 Summary Form - Item 19	Language re securityholder's rights has been moved to Fund Summary - Item 19
Item 3. Name and Formation of Issuer	Summary Form - Items 4 or 6.1, as applicable Prospectus Form - Item 3	No longer requires disclosure of promoter Disclosure about laws and formation moved to Prospectus Form - Item 3
Item 4. Description of Business	Deleted
Item 5. Risk Factors	Summary Form - Items 4 and 10
Item 6. Description of Securities Offered
- paragraph (a)	Summary Form - Items 6.1 and 6.2 under item "Securities Offered" Prospectus Form - Item 9(1)
- paragraph (b)	Deleted
- Instruction 1.	Deleted
- Instruction 2.	Prospectus Form - Item 10	The second and third sentences have been deleted
Item 7. Price of Securities on Sale or Redemption
- paragraph (a)	Summary Form - Item 14(2)
- paragraph (b)	Summary Form - Item 16
- paragraph (c)	Summary Form - Items 14 and 16
- paragraph (d)	Prospectus Form - Item 12(5)	Clause (i) not carried forward
- paragraph (e)	Prospectus Form - Item 13(4)	Clause (i) not carried forward
- paragraph (f)	Summary Form - Item 12
- paragraph (g)	Deleted
- Instruction 1.	Deleted
Item 8. Method of Distribution	Prospectus Form - Items 12 and 16.5
- Instructions	Summary Form - Items 15 and 16.1
Item 9. Responsibility for Principal Functions
- paragraph (a)	Summary Form - Items 4 and 6.1 Prospectus Form - Item 16
- paragraph (b)	Deleted
- paragraph (c)	Prospectus Form - Item 16.2(5)
- paragraph (d)	Prospectus Form - Item 17
- Instruction 1.	Deleted	The tables in the Summary Form - Items 4 and 6.1 determine the form of address to be disclosed
- Instruction 2.	Summary Form - Items 4 and 6.1
- Instruction 3.	Summary Form - Items 4 and 6.1
Item 10. Management Fees and Other Expenses
- paragraph (a)	Summary Form - Item 16
- paragraph (b)	Summary Form - Item 16
- paragraph (c)	Deleted	Financial Highlights included in Fund Summary
- paragraph (d)	Summary Form - Item 13
- Instruction 1.	Deleted	NI - Part 6 mandates the method for calculating management expense ratio
- Instruction 2.	Deleted	NI - Part 6 does not contemplate disclosure of the management expense ratio for less than one financial year
- Instruction 3.	NI - subsection 6.1(1)
- Instruction 4.	Deleted, pending determination of appropriate rule	This provision will be included in NI81-102
- Instruction 5.	Summary Form - Item 13
- Instruction 6.	NI - section 6.1	NI - subsection 6.1(3) now requires a management fee paid directly by investors to be included in the calculation of the management expense ratio
- Instruction 7.	Deleted
Item 11. Investment Objectives and Practices
- paragraph (a)	Summary Form - Item 8
- paragraph (b)	Prospectus Form - Item 4(6)
- paragraph (c)	Deleted
- paragraph (d)	Deleted	Replaced by Prospectus Form - Item 4(3)
- Instruction 1.	Summary Form - Item 8 (Instructions)
- Instruction 2.	Summary Form - Item 8 (Instructions)
- Instruction 3.	Summary Form - Items 6 and 18
Item 12. Dividends or Distributions	Summary Form - Items 12 and 13
- Instruction 1.	Summary Form - Item 13
- Instruction 2.	Summary Form - Item 13
Item 13. Tax Status of Securityholders	Summary Form - Item 18 Prospectus Form - Item 22
Item 14. Legal Proceedings	Prospectus Form - Item 25
- Instruction 1.	Prospectus Form - Item 25
Item 15. Other Material Facts	Prospectus Form - Item 26
Item 16. Auditors, Transfer Agent and Registrar
- paragraph (a)	Summary Form - Items 4 and 6 Prospectus Form - Item 16.8
- paragraph (b)	Prospectus Form - Item 16.9	Information about the transfer agent is no longer required to be disclosed
Item 17. Purchasers' Statutory Rights	Summary Form - Item 19	The mandated language has been rewritten in plain language
Item 18. Identification	Summary Form - Item 1(5)	Encoding requirement deleted - Fund Summary to be dated on the front cover
- Instruction 1.	Deleted
APPENDIX 1 TO SCHEDULE A
Summary of Fees, Charges and Expenses Payable by the Securityholder	Summary Form - Item 16
SCHEDULE B - INFORMATION REQUIRED TO BE INCLUDED IN THE ANNUAL INFORMATION FORM
General Instructions	CP - section 2.3
Item 1. Name and Formation of Issuer	Prospectus Form - Item 3
Item 2. Business of Issuer	Deleted
- Instruction 1.	Prospectus Form - Item 3
- Instruction 2.	Prospectus Form - Items 3(5) and 17	This is now a more general disclosure requirement
Item 3. Price of Securities on Sale or Redemption	Prospectus Form - Items 11 and 15
- paragraph (a)	Prospectus Form - Items 11 and 15
- paragraph (b)	Deleted
- paragraph (c)	Deleted
Item 4. Method of Distribution	Prospectus Form - Items 12 and 16.5
- paragraph (a)	Deleted
- paragraph (b)	Deleted
- paragraph (c)	Deleted
- Instruction 1.	Deleted
Item 5. Responsibility for Principal Functions
- paragraph (a)	Prospectus Form - Item 16	Mandates the information required to be disclosed for each person or company
- paragraph (b)	Prospectus Form - Item 8
- Instruction 1.	Deleted
- Instruction 2.	Prospectus Form - Item 16.5
- Instruction 3.	Deleted
- Instruction 4.	Prospectus Form - Item 16.4	Clauses (i), (ii) and (v) have not been carried forward
- Instruction 5.	Deleted
- Instruction 6.	Deleted
Item 6. Investment Objectives and Practices	Prospectus Form - Item 4
- paragraph (a)	Prospectus Form - Item 4
- paragraph (b)	Prospectus Form - Item 4(6)
- Instruction 1.	Deleted
- Instruction 2.	Prospectus Form - Item 15(1)	This disclosure is no longer confined to securities whose resale is restricted
- Instruction 3.	Deleted
Item 7. Significant Holdings in Other Issuers	Deleted
Item 8. Tax Status of Issuer and Security Holder
- paragraph (a)	Prospectus Form - Item 22(1)
- paragraph (b)	Prospectus Form - Item 22(3)
Item 9. Legal Proceedings	Prospectus Form - Item 25
Item 10. Directors, Officers and Trustees	Prospectus Form - Items 16.6 (1) and (2)
- Instruction 1.	Deleted
- Instruction 2.	Prospectus Form - Item 16.6(4)
- Instruction 3.	Prospectus Form - Item 16.6(5)
Item 11. Remuneration of Directors, Officers and Trustees	Prospectus Form - Item 23	This item has been substantially revised
Item 12. Indebtedness of Directors, Officers and Trustees	Deleted
Item 13. Associated Persons	Prospectus Form - Item 17	This item has been substantially revised
Item 14. Promoter	Deleted	A promoter is now only referred to in connection with a promoter's certificate
Item 15. Principal Holders of Securities	Prospectus Form - Item 17.1	This item has been substantially revised
Item 16. Interest of Management and Others in Material Transactions	Prospectus Form - Item 17	This item has been substantially revised
Item 17. Custodian of Portfolio Transactions
- paragraph (a)	Prospectus Form - Item 16.7	This item now requires disclosure relating to any principal sub-custodian
- paragraph (b)	Prospectus Form - Item 24(1)(d)
Item 18. Material Contracts	Prospectus Form - Item 24	This item no longer requires disclosure of material contracts only dating back two years
- Instruction 1.	Prospectus Form - Item 24(1)(f) and Instruction
- Instruction 2.	Deleted
- Instruction 3.	Prospectus Form - Item 24(3)
- Instruction 4.	Deleted
Item 19. Other Material Facts	Prospectus Form - Item 26
Item 20. Certificates
- paragraph (a)	Prospectus Form - Items 28 and 29	This item no longer specifies the persons required to sign the certificate or the mutual fund, except where the mutual fund is established as a trust
- paragraph (b)	Prospectus Form - Item 31
- Instruction 1.	Deleted	Prospectus Form - Item 29 specifies how the manager's certificate shall be signed
- Instruction 2.	Deleted	Prospectus Form - Item 28 specifies how a certificate signed by a trustee shall be signed
- Instruction 3.	Deleted
APPENDIX 1 TO SCHEDULE B - STATEMENT OF EXECUTIVE COMPENSATION	Prospectus Form - Item 23	This item has been substantially revised

The Securities Rules, B.C. Reg. 194/97 are amended

(a) by adding the following sections:

Alternative Certificate of Issuer

98.1 An issuer is exempt from the requirement in section 68 of the Act of ensuring that a prospectus contains the certificate in the form required by that section i

(a) the prospectus contains the certificate set out in the required form of prospectus; and
(b) the issuer otherwise signs the certificate in accordance with section 68 of the Act.

Alternative Certificate of Underwriter

98.2 An underwriter that is required to sign a certificate under section 69 of the Act is exempt from the requirement to provide the certificate in the form required by that section if

(a) the prospectus contains the certificate set out in the required form of prospectus; and
(b) the underwriter otherwise signs the certificate in accordance with section 69 of the Act.¹

¹ This section is intended only to provide an alternative certificate and does not relieve underwriters from an action for damages pursuant to section 131(1) of the Securities Act.

(b) by repealing sections 100 to 105; and

(c) by repealing section 113 (2) (b) and substituting the following:

(b) forms part of the prospectus and is sent to a person that requests a copy of the statement of portfolio transactions.