BCN 2002/38 - Request for Comment Proposed National Instrument 81-106 Investment Fund Continuous Disclosure [BCN - Rescinded]

Introduction

The Canadian Securities Administrators (CSA or we) are publishing for comment proposed new rules that would require investment funds to provide more timely and useful financial and non-financial information to investors and advisers.

We anticipate that the form of financial disclosure prescribed by the proposed National Instrument will allow an average investor to better assess an investment fund’s performance, position and future prospects. Better and more timely financial disclosure will encourage investors and potential investors, to use the information to compare investment funds and to make informed investment decisions. Likewise, the CSA expect that improved financial disclosure will assist advisers in selecting and recommending appropriate investments that are consistent with their clients’ goals. National adoption of the proposed regulatory regime will harmonize reporting requirements for investment funds across the jurisdictions.

The proposed instrument and form are expected to be adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario, Nova Scotia and Newfoundland and Labrador, as a Commission regulation in Quebec and Saskatchewan and as a policy in all other provinces and territories.  The proposed companion policy is expected to be implemented as a policy in all provinces and territories.

Implementing the proposed instrument and form will require consequential amendments to National Instrument 81-101 Mutual Funds Prospectus Disclosure (NI 81-101) and its related forms, Companion Policy 81-101CP (81-101CP), National Instrument 81-102 Mutual Funds (NI 81-102), Companion Policy 81-102CP (81-102CP), National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR)
(NI 13-101) and the Securities Rules, B.C. Reg. 194/97.

Substance and Purpose

The key features of the proposed instrument, form and companion policy are:
(i)  the introduction of annual and quarterly management reports of fund performance,
(ii)  the revision and updating of the requirements relating to annual and interim financial statements, and
(iii) changes to current filing and delivery requirements.

The proposed instrument will apply to all types of investment funds, including mutual funds, labour sponsored investment funds, exchange traded funds, split share corporations, closed end funds and scholarship plans.

Summary of the proposals

Annual and Quarterly Management Reports of Fund Performance
Because much of the financial information that investment funds provide is outdated, it may not be that relevant for an investor or an advisor. To address this, the CSA are proposing annual and periodic management reports of fund performance. These reports, required to be prepared in accordance with Form 81-106F1, will present both quantitative and qualitative information about the fund in a concise and plain language manner. It is intended that periodic reporting will provide investors and advisers with current information about the investment fund without all the details of full interim or annual financial statements.

A key element of the management reports of fund performance is the Management Discussion of Fund Performance (MDFP).  MDFP is an analysis and explanation that is designed to supplement an investment fund’s financial statements. It addresses two main topics - past performance and the strategic position of the fund going forward. Past performance is analysed within the framework of a fund’s investment objectives and strategies. The MDFP should highlight those aspects of the objectives or strategies that had material impacts on performance. Any changes to the level of risk of the fund must be identified. Discussion of the strategic position of the fund going forward should focus on known material trends, commitments, events, risks or uncertainties that the fund reasonably expect to affect a fund’s future performance or investment activities.

Currently, continuous disclosure is focused on financial statements. While these are important, they are purely numerical and may not always be helpful to an investor deciding whether to buy, or continue to hold, an investment fund. 

The annual management report of fund performance will give financial highlights for a fund for the past year, but will not include the full, traditional financial statements. The quarterly management reports of fund performance will contain less detailed information than an annual management report of fund performance and will highlight significant changes from the information in the last annual management report.

Financial Statement Requirements
The proposed instrument contains updated content requirements for the annual and interim financial statements of investment funds. The aim is to have a consistent set of rules governing financial statement disclosure for investment funds across Canada and to update the current requirements to improve the usefulness of these financial statements.

Filing and Delivery Requirements
The proposed rule lets security holders to choose whether to receive any or all of a fund’s financial statements and management reports of fund performance. Our current regime requires the annual financial statements a fund files with the regulators be delivered to all security holders. We propose this change because:

• the costs to deliver the statements are high
• there is ready public access to financial statements on the SEDAR website
• the manager’s website (in most cases) has this information

Finally, the proposed rule shortens the time periods for filing annual and interim financial statements with the regulators. The time to file annual financial statements is reduced from 140 days after year-end to 90 days after year-end, while the time to file interim financial statements is reduced from 60 days to 45 days after the end of the interim period. Management reports of fund performance must be filed at the same time as financial statements. The time periods for filing have been reduced so the information is more current, relevant and useful to investors and advisers in their investment decisions.

Other Continuous Disclosure Obligations
If a material change (in the case of a non-NI 81-102 investment fund) or a significant change (in the case of a NI 81-102 investment fund) occurs, an investment fund is required to promptly issue and file a news release disclosing the nature and substance of the change and to post such news release on the website of the investment fund or fund manager. In addition, a material change report is required to be filed no later than 10 days after the date on which the change occurs.  This reporting requirement replaces the significant change requirement for mutual funds currently in NI 81-102.

The proposed instrument also requires investment funds to comply with certain parts of proposed NI 51-102 Continuous Disclosure Obligations.

Related Amendments

Related Consequential Amendments are proposed to be made to NI 81-101 (including Forms 81-101F1 and 81-101F2), 81-101CP, NI 81-102, 81-102CP, NI 13-101 and the Securities Rules, BC Reg. 194/97.

Summary of the Key Consequential Amendments

Proposed Amendments to NI 81-101 Mutual Fund Prospectus Disclosure
The CSA are proposing a change to NI 81-101 to allow annual and quarterly management reports of fund performance to be incorporated into the simplified prospectus by reference. This will reduce the size of the simplified prospectus and ensure that the financial information provided is more current.

The most significant change to NI 81-101 is to delete the top ten holdings, past performance and financial highlights information (Items 8, 11 and 13.1 of Part B) from Form 81-101F1. It is replaced by other disclosure in the annual and quarterly management reports of fund performance. Because the management reports of fund performance will be produced more frequently, investors and advisers will have more current and useful financial highlights, past performance, and holdings data on which to base their investment decisions.

Proposed Amendment to NI 13-101 System for Electronic Document Analysis and Retrieval
Annual and quarterly management reports of fund performance will be added to the list of mandated electronic filings for mutual funds and other issuers in Appendix A of NI 13-101.

British Columbia Carve-Outs

The Commission proposes not to adopt some sections of the proposed rule.  These are as follows:

• the parts of the rule applicable to labour sponsored investment funds (Part 8.3 and Part 9)
• the financial statement requirements for pooled funds (currently found in the Securities Rules and as described in Parts 2 and 3 of the proposed rule)

The Commission does not believe that the rules relating to labour sponsored investment funds are necessary in British Columbia. The legislation governing these funds differs from province to province. We believe that existing rules in British Columbia require this type of fund to provide adequate disclosure to its investors and their advisors.

Local Consequential Amendments

The Commission considered whether the proposed rule should apply to investment funds included in the definition of a “mutual fund in British Columbia”. This includes funds that are non-reporting issuers but which are organized under the laws of British Columbia (often called pooled funds) and that are sold under exemptions. These funds currently file interim and annual financial statements. Requiring this disclosure is inconsistent with the regulatory treatment given to other types of issuers whose securities are sold under exemptions, who do not have these requirements.

Investors in pooled funds have a close relationship with the portfolio manager, which differs significantly from the relationship between investors in retail mutual funds and their managers. Because of this relationship this financial information rarely, if ever, assists an investor in making a decision to make or retain an investment in a pooled fund.

Rather than retaining the current requirements and expanding them as described in Parts 2 to 4 of the proposed rule, the Commission proposes to eliminate the financial statement requirements. These proposals are found in the consequential amendments to the Securities Rules.

If the proposed rule is adopted, Form 81-901F will be rescinded.

Anticipated Costs and Benefits

Applying the requirements in the proposed rule, form and companion policy will improve the readability and usefulness of continuous disclosure documents for investors and advisers. The information in management reports of fund performance will be organized in a clear, concise and standardized manner, which will increase the effectiveness of the information, as well as reduce the risk of selective disclosure. The management discussion of fund performance will bring a qualitative aspect to continuous disclosure by providing management insight and perspective into a fund’s performance. Consequently, it is expected that the proposed regime will better equip investors and advisers to make informed investment decisions.

The disclosure system outlined in the proposed rule may result in new costs to industry participants because of the introduction of the requirement to prepare and file annual and quarterly management reports of fund performance.  However, these costs should be more than offset by the fact that delivery of financial statements and management reports of fund performance to all securityholders will not be mandatory (other than the first annual management report of fund performance for an investment fund), but rather will only be required at the request of the securityholder. Because the annual document request forms that must be sent to securityholders can be sent together with other mailings or electronically, it should not add significant additional cost.

The CSA have prohibited the consolidation of management reports of fund performance for more than one investment fund.  The CSA understand that the technology to prepare and print such reports individually already exists and is being used by a number of funds.  Any additional costs that some fund managers may incur in the short run to modify their systems are expected to be offset in subsequent years.  The CSA believe the benefit to investors of receiving only that information that pertains to their investment outweighs any potential costs.

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

Request for Comments

We welcome both your general comments on the proposed National Instrument, Form and Companion Policy and any specific comments you may have on the questions we have asked.

Specific Questions of the CSA Concerning Proposed NI 81-106

1.  Management Reports of Fund Performance

Proposed Part 6 of NI 81-106 requires all investment funds that are reporting issuers to prepare, file and make available to those who request it, a quarterly management report of fund performance. The purpose of the quarterly management report of fund performance is to provide up-to-date information about the fund to current and prospective investors and to advisers and dealers who analyze funds and recommend them to their clients. It is expected that the quarterly management reports of fund performance will be approximately two pages in length.

Since quarterly updated financial information will be available in the quarterly management report of fund performance, we propose that NI 81-101 be amended to remove the financial highlights, top 10 holdings and performance data from the simplified prospectus.

The CSA invite comments as to whether the quarterly management reports of fund performance will achieve the goals that they are intended to achieve. Should there be more or less frequent disclosure of fund performance information and why? Should there be quarterly reporting for all investment funds? Does the proposed type of information allow an investor or an adviser to make informed investment decisions? 

2. Financial Statements

The purpose of the annual and interim financial statements of an investment fund is to communicate information that is useful to investors, advisers and other users in making their investment allocation decisions and/or assessing management stewardship.¹  

^{1CICA Handbook, paragraph 1000.15}

The users of an investment fund’s financial statements include: investors, advisers and dealers, financial analysts, management, regulators and creditors.

A key characteristic of financial statements is comparability. With over 2000 investment funds in Canada, investors and advisers need to be able to compare the financial information of different types of investment funds. A certain level of detail within the financial statements is considered necessary to assist comparability and consistency of financial information. 

The CSA invite comment on whether the financial statement requirements set out in the proposed rule meet the needs of the users of the financial statements? Does this detail assist with the preparation, consistency and comparability of the financial statements? Is the proposed instrument too detailed? Is more detail or specific direction necessary?

The majority of investment funds currently prepare and file six month interim financial statements. Should all investment funds be required to prepare and file quarterly financial statements in addition to the proposed quarterly management reports of fund performance?

3. Disclosure of Risk and Volatility

Investors and advisers require information to assess the risk of an investment. The proposed management reports of fund performance would include disclosure of how material or significant changes to the investment fund have affected the overall level of risk associated with an investment in the fund. The concepts of risk and volatility are also reflected in the required disclosure of financial highlights, performance data and the summary of the investment portfolio.

The CSA invite comments on whether alternative methods of disclosing risk and volatility should be used. For example, should there be disclosure of the fund’s best and worst quarter returns or disclosure of the correlation of the fund to a benchmark index? Is there additional disclosure that would provide useful information to the investors and advisers?

Please submit your comments in writing on or before December 19, 2002. If you are not sending your comments by email, in addition to two copies of your letter, a diskette containing the submissions (in Word or WordPerfect) should also be forwarded.

Address your submission to all of the Canadian securities regulatory authorities listed below, in care of the Ontario Securities Commission, as indicated below:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
Manitoba Securities Commission
Ontario Securities Commission
Securities Administration Branch, New Brunswick
Office of the Attorney General, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland and Labrador
Registrar of Securities, Department of Justice, Government of the Northwest Territories
Registrar of Securities, Government of Yukon
Registrar of Securities, Legal Registries Division, Department of Justice, Government of Nunavut

c/o John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
19th Floor, Box 55
Toronto, Ontario M5H 3S8
e-mail: jstevenson@osc.gov.on.ca

A copy of your submission should also be sent to the Commission des valeurs mobilières du Québec care of:

Denise Brosseau, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square, Stock Exchange Tower
P.O. Box 246, 22nd Floor
Montréal, Québec H4Z 1G3
e-mail: consultation-en-cours@cvmq.com

We cannot keep submissions confidential as securities legislation in certain provinces requires that a summary of the written comments received during the comment period be published.

Questions may be referred to any of:

Noreen Bent
Manager and Senior Legal Counsel
British Columbia Securities Commission
Tel: (604) 899-6741
or 1-800-373-6393 (in B.C. and Alberta)
nbent@bcsc.bc.ca

Patricia Gariepy
Legal Counsel
Alberta Securities Commission
Tel: (403) 297-5222
patricia.gariepy@seccom.ab.ca

Bob Bouchard
Chief Administrative Officer & Director
Manitoba Securities Commission
Tel: (204) 945-2555
Bbouchard@gov.mb.ca

Wayne Bridgeman
Senior Analyst, Corporate Finance
Manitoba Securities Commission
Tel: (204) 945-4905
Wbridgeman@gov.mb.ca

Anne Ramsay
Senior Accountant, Investment Funds
Capital Markets
Ontario Securities Commission
Tel: (416) 593-8243
aramsay@osc.gov.on.ca

Raymond Chan
Accountant, Investment Funds
Capital Markets
Ontario Securities Commission
Tel: (416) 593-8128
rchan@osc.gov.on.ca

Annie Smargiassi
Analyste
Service du financement des sociétés
Direction des marchés des capitaux
Commission des valeurs mobilières du Québec
Tel: (514) 940-2199 ex 4435
annie.smargiassi@cvmq.com

Jean Hébert
Mutual Fund Analyst
Commission des valeurs mobilières du Québec
Tel: (514) 940-2199 ex 4359
jean.hebert@cvmq.com

Anick Ouellette
Mutual Fund Analyst
Commission des valeurs mobilières du Québec
Tel: (514) 940-2199 ex 4379
anick.ouellette@cvmq.com

September 20, 2002

Douglas M. Hyndman
Chair

Ref: NI 13-101
 NI 51-102 
 NI 81-101
 81-101F1
 81-101F2
 81-101CP
 NI 81-102
 81-102CP
 81-106F1
 81-901F

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.

National Instrument 81-106 Investment Fund Continuous Disclosure

Proposed Amendments to the Securities Rules

1. Subsection 1(1) of the Securities Rules, B.C. Reg. 194/97, is amended by striking out the definition of “investment issuer” and substituting the following:

“investment issuer” means an issuer that is not an investment fund as defined in National Instrument 81-106 Investment Fund Continuous Disclosure, whose principal business is or will be the acquisition of or investment in securities and includes an issuer that issues any of the following:

(a) investment certificates;
(b) savings certificates;
(c) savings contracts;
(d) investment contracts;
(e) other similar securities;

2. Section 113 is repealed and replaced by the following:

Financial statements - prospectus - mutual fund

113. A prospectus of an investment fund as defined in National Instrument 81-106 Investment Funds Continuous Disclosure must contain the financial statements required by National Instrument 81-106 Investment Funds Continuous Disclosure, and each for, or as at the end of, as appropriate, its latest financial year and for or as at the end of, as appropriate, the financial year immediately preceding the latest financial year, if any, or for any period or periods permitted or required by the executive director. 

3. Subsection 144(2) is amended by striking out “a mutual fund in British Columbia” and replacing it with “a reporting issuer that is a mutual fund”.

4. Subsection 144(6) is repealed.

5. Subsection 144(8) is amended by striking out “in British Columbia”.

6. Subsection 145(1) is amended by striking out “, including a mutual fund in British Columbia”.

7. Subsection 145(1)(a) is amended by striking out “or mutual fund in British Columbia”.

8. Subsection 145(2)(b) is amended by striking out “in British Columbia”.

9. Subsection 145(2)(c) is repealed.

10. Section 146 is amended by striking out “or a mutual fund in British Columbia”.

11. Sections 147 and 148 are repealed.

12. Section 149 is varied by adding “except an investment fund defined in National Instrument 81-106 Investment Fund Continuous Disclosure” after “A person”.