Proposed Companion Policy 81-101 and Rescission of National Policy No. 36

Proposed Companion Policy 81-101 and Rescission of National Policy No. 36

Request for Comment National Instrument

 


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COMPANION POLICY 81-101CP TO NATIONAL INSTRUMENT 81-101
MUTUAL FUND PROSPECTUS DISCLOSURE

 

TABLE OF CONTENTS

PARTTITLE
PART 1 PURPOSE OF THE COMPANION POLICY
1.1 Purpose of the Companion Policy

PART 2 PURPOSE AND GENERAL APPROACH OF THE INSTRUMENT
2.1 Purpose of the Instrument
2.2 Fund Summary
2.3 Fund Prospectus
2.4 Financial Statements
2.5 Filing and Delivery of Documents
2.6 Supporting Documents

PART 3 PLAIN LANGUAGE AND PRESENTATION
3.1 Plain Language
3.2 Presentation

PART 4 CONSOLIDATION OF FUNDS IN A FUND SUMMARY AND FUND PROSPECTUS
4.1 Consolidation of Funds in a Fund Summary and Fund Prospectus

PART 5 THE FUND SUMMARY
5.1 General Purposes
5.2 Catalogue Approach
5.3 Additional Information
5.4 Format

PART 6 THE FUND PROSPECTUS
6.1 General Purposes
6.2 Accessibility of a Fund Prospectus
6.3 Educational Material

PART 7 DELIVERY
7.1 Delivery of the Fund Summary and Fund Prospectus
7.2 Delivery of Non-Educational Material
7.3 Delivery of Financial Statements

PART 8 NEED FOR MULTIPLE OR SEPARATE APPLICATIONS
8.1 Need for Multiple or Separate Applications

 

COMPANION POLICY 81-101CP TO NATIONAL INSTRUMENT 81-101

 

MUTUAL FUND PROSPECTUS DISCLOSURE

 

 

PART 1 PURPOSE OF THE COMPANION POLICY

1.1 Purpose of the Companion Policy - The purpose of this Companion Policy is to state the views of the Canadian securitiesregulatory authorities on various matters relating to the Instrument, including,

(a) a discussion of the general approach taken by the Canadian securities regulatory authorities in, and the generalregulatory purpose for, the Instrument;

(b) explanation and discussion of various parts of the Instrument; and

(c) examples of some matters described in the Instrument.

PART 2 PURPOSE AND GENERAL APPROACH OF THE INSTRUMENT

2.1 Purpose of the Instrument - The purpose of the Instrument is to ensure that mutual funds provide investors with disclosuredocuments that clearly and concisely state information that investors should consider in connection with an investmentdecision about the mutual fund. Subsection 4.1(1) of the Instrument therefore requires that these documents be preparedusing plain language and in a format that assists in readability and comprehension. The Instrument contemplates the useof two documents by a mutual fund (in addition to financial statements): a fund summary, which is given to all investors,and a fund prospectus, which is available on request, that contains full, true and plain disclosure about the mutual fund.

2.2 Fund Summary

(1) The Instrument contemplates that all investors in a mutual fund will receive a fund summary, which is to be a shortconcise document that is designed to provide the typical investor with the necessary information to permit themaking of an informed investment decision. The Instrument requires only the delivery of a fund summary to aninvestor in connection with a purchase, unless the investor requests additional delivery of the fund prospectus orfinancial statements.

(2) The approach of the Instrument is to give investors a choice of the amount of information that they wish to considerbefore making a decision about investing in the mutual fund. Investors will have the option of purchasing themutual fund's securities after reviewing only the information in the fund summary or after requesting and reviewingthe fund prospectus and financial statements incorporated by reference into the fund summary.

(3) The Instrument and the required form for a fund summary (the "Fund Summary Form") provide detailedrequirements as to the contents and format of a fund summary. These requirements

(a) are designed to ensure that fund summaries are clear, concise, understandable and well-organized, andcontain the most important information that an investor would consider in making an investment decision,in order to encourage investors to read and consider the contents of the fund summary;

(b) standardize the order in which information is presented in a fund summary, in order to ensure thatinvestors may easily compare disclosure about one mutual fund with disclosure about other mutual fundsin the same or a different fund summary; and

(c) prohibit the addition of information in the fund summary not specifically required by the Fund SummaryForm, in order to prevent a fund summary from expanding to a size that discourages an investor fromreading it, and that obscures the most important information about a mutual fund that should beconsidered by an investor.

2.3 Fund Prospectus

(1) The Instrument contemplates that a more complete disclosure document, the fund prospectus, will be provided toany person on request. The fund prospectus is incorporated by reference into the fund summary.

(2) The purpose of the fund prospectus is to provide more information about the mutual fund than is contained in thefund summary. The fund prospectus will contain information that is not necessary to be included in the fundsummary, but that some investors may find useful, such as information concerning the internal operations of themanager of the mutual fund. The fund prospectus provides the mutual fund with an opportunity to expanddiscussions of the matters described in the fund summary by including additional information that the mutual fundconsiders will be useful to some investors. The fund prospectus is intended to be a free-standing document thatcan be read without reference to the related fund summary.

(3) The Instrument and the required form for a fund prospectus (the "Fund Prospectus Form") are designed to ensurethat a fund prospectus, like a fund summary, is prepared in a clear manner that will encourage investors to readit. Therefore, a fund prospectus is subject to the same general requirements of subsection 4.1(1) of the Instrumentas the fund summary, which is that both documents must be prepared using plain language and in a format thatassists readability and comprehension.

(4) The Instrument and the Fund Prospectus Form allow for more flexibility in the preparation of a fund prospectus thanis the case with a fund summary. The rules pertaining to the order in which information is to be disclosed in a fundprospectus are not as stringent for a fund prospectus as for a fund summary, and a fund prospectus may includeinformation not specifically required by the Fund Prospectus Form. These rules are designed to provide a mutualfund with the latitude necessary to permit it to discharge its obligations to provide full, true and plain disclosureabout the securities of the mutual fund.

2.4 Financial Statements - The Instrument contemplates that the mutual fund's most recently filed audited financial statements,and any interim statements filed after those audited statements, be provided upon request to any person or companyrequesting them. Like the fund prospectus, these financial statements are incorporated by reference into the fund summary.The result is that future filings will be incorporated by reference into the fund summary, while superseding the financialstatements previously filed.

2.5 Filing and Delivery of Documents - Section 2.2 of the Instrument distinguishes between documents that must be "filed"with the securities regulatory authority and those that must be "delivered" or "sent" to the securities regulatory authority.The Canadian securities regulatory authorities remind mutual funds that documents that are "filed" are on the public record,and documents that are "delivered" or "sent" are not necessarily on the public record.

2.6 Supporting Documents - Section 2.2 of the Instrument and Canadian securities legislation require supporting documentsto be filed with a fund summary and fund prospectus and amendments. A list of documents required is set out in anAppendix to National Policy 43-201 Mutual Reliance Review System for Prospectuses and Initial AIFs.(1)

PART 3 PLAIN LANGUAGE AND PRESENTATION

3.1 Plain Language - Subsection 4.1(1) of the Instrument requires that the fund summary and fund prospectus be written inplain language. The Canadian securities regulatory authorities have not mandated in the Instrument any particulars of howthe plain language requirements are to be satisfied. The Canadian securities regulatory authorities note that the purposeof requiring documents to be written in plain language is to ensure that disclosure documents will be easy to read, andtherefore more widely read by investors than traditional prospectuses. Mutual funds should consider the following plainlanguage techniques in preparing their documents:

 

  • using short sentences

     

     

  • using definite, concrete, everyday language

     

     

  • using active voice

     

     

  • avoiding superfluous words

     

     

  • organizing a document into clear, concise sections, paragraphs and sentences

     

     

  • avoiding legal or business jargon

     

     

  • using strong verbs

     

     

  • using personal pronouns to speak directly to the reader

     

     

  • avoiding reliance on glossaries and defined terms unless they facilitate understanding of the disclosure

     

     

  • avoiding vague boilerplate wording

     

     

  • avoiding abstractions by using more concrete terms or examples

     

     

  • avoiding excessive detail

     

     

  • avoiding multiple negatives

     

     

  • using technical and business terms only when unavoidable and only if clear and concise explanations areprovided for these terms.

     

3.2 Presentation

(1) Subsection 4.1(1) of the Instrument requires that a fund summary and fund prospectus be presented in a formatthat assists in readability and comprehension. The Instrument and related forms also set out certain aspects ofthe fund summary and fund prospectus that must be presented in a required format, requiring some informationto be presented in the form of tables, charts or diagrams. Within these requirements, mutual funds haveconsiderable flexibility in the format used for fund summaries and fund prospectuses. The formatting of documentscan contribute substantially to the ease with which the document can be read and understood. Mutual funds shouldconsider using the following formatting ideas when preparing their documents:

 

  • tabular or bulleted presentation of complex information

     

     

  • maintaining white space on each page to lessen the density of the text

     

     

  • reasonably-sized, easy-to-read typeface

     

     

  • question and answer formats

     

     

  • avoiding presenting blocks of text in upper-case or italicized letters

     

     

  • avoiding full-justified margins.

     

(2) The Canadian securities regulatory authorities are of the view that documents may be easier to read andunderstand with the use of design features such as pictures, colour, boxes, shading, graphs, charts, tables,graphics, sidebars and logos that accurately depict aspects of the mutual fund industry, the mutual fund or mutualfund family or products and services offered by the mutual fund family. Mutual funds should, however, exercisecaution when using design features in their documents, as excessive use or crowding of design features mightmake the documents more difficult to read or understand.

(3) The Canadian securities regulatory authorities note that they have, on occasion, seen amendments to simplifiedprospectuses prepared in highly legal and technical styles. For example, some amendments merely referencespecific lines or sections of a simplified prospectus that are being amended, without providing the reader with arestated section. In addition, some amendments have been presented in the form of photocopies of some otherdocuments, such as meeting materials, with the word "amendment" written on the top of the photocopy. TheCanadian securities regulatory authorities are of the view that these approaches are inappropriate ways ofamending a fund summary or fund prospectus under the Instrument. Material changes to funds must be describedin a format that assists in readability and comprehension, as required by subsection 4.1(1) of the Instrument.Therefore, the Canadian securities regulatory authorities expect that amendments will be expressed clearly, andin a manner that enables the reader to easily read and understand both the amendment and the revised sectionsof the relevant document. This manner of expression may require the preparation of either an amended or restatedfund summary or fund prospectus or a clearly worded amendment insert for the existing fund summary or fundprospectus.

PART 4 CONSOLIDATION OF FUNDS IN A FUND SUMMARY AND FUND PROSPECTUS

4.1 Consolidation of Funds in a Fund Summary and Fund Prospectus

(1) The Instrument contains no specific rules on how disclosure concerning which or how many different mutual fundsmay be combined or consolidated in one or more fund summaries or fund prospectuses. Therefore, subject to theconsiderations discussed in this Part, a mutual fund has considerable latitude in consolidating disclosure ofdifferent mutual funds in one fund summary.

(2) As examples of how disclosure of different mutual funds may be combined in fund summaries and fundprospectuses

(a) the disclosure concerning several mutual funds may be combined into one fund summary and into onefund prospectus; and

(b) the disclosure concerning several mutual funds may be provided in more than one fund summary and inonly one fund prospectus; for instance, a mutual fund may wish to prepare separate fund summaries fordifferent groups of its mutual funds, but use only one fund prospectus.

(3) It is also noted that, as with NP36, mutual funds may create and file a combined pro forma and preliminary fundsummary and a combined pro forma and preliminary fund prospectus in order to include the disclosure of a newmutual fund in the documents that already pertain to existing mutual funds.

(4) The Instrument contains no restrictions on how many mutual funds a fund summary or fund prospectus maydescribe.

(5) Although the Instrument does not impose specific rules concerning the way in which disclosure of multiple mutualfunds is spread over, or combined in, one or more fund summaries or fund prospectuses, the Canadian securitiesregulatory authorities are of the view that the handling of this issue is relevant to whether a fund summary and fundprospectus satisfy both the requirements contained in section 4.1 of the Instrument to be in a format that assistsin readability and comprehension and the general requirement of securities legislation to provide "plain" disclosure.The Canadian securities regulatory authorities are of the view that the consolidation of disclosure of a large numberof mutual funds could be inappropriate in a single fund summary or fund prospectus, and will in appropriatecircumstances require that disclosure to be divided into different fund summaries.

PART 5 THE FUND SUMMARY

5.1 General Purposes - The general purposes of a fund summary are described in section 2.2 of this Policy. In light of thosepurposes, the Canadian securities regulatory authorities wish to bring a number of matters to the attention of the personsor companies that prepare fund summaries.

5.2 "Catalogue" Approach - The Fund Summary Form requires that a fund summary containing disclosure about more thanone mutual fund must present the "fund-specific" disclosure about each fund using a "catalogue" approach, with thedisclosure about each mutual fund presented separately from the disclosure about each other mutual fund. The Canadiansecurities regulatory authorities consider this requirement to be a key element of the disclosure regime created by theInstrument and related forms and expect that the "catalogue" approach will be strictly followed.

5.3 Additional Information

(1) Paragraph 4.1(2)(a) of the Instrument provides that a fund summary shall provide all information briefly andconcisely. Paragraph 4.1(2)(d) of the Instrument requires that a fund summary shall include only the informationthat is specifically mandated by the required form.

(2) As described in Part 2 of this Policy, the general requirements referred to in subsection (1) are important elementsof the disclosure regime implemented by the Instrument and related forms. The Canadian securities regulatoryauthorities are of the view that fund summaries must be restricted to key information and kept short in order toencourage as many potential investors as possible to read fund summaries.

(3) Section 4.2 of the Instrument permits educational material to be included within a fund summary. Educationalmaterial is the only information that may be included in a fund summary other than the disclosure specificallymandated by the Fund Summary Form. The Canadian securities regulatory authorities emphasize that ifeducational material is included within a fund summary, the requirements of section 4.2 of the Instrument mustbe satisfied, so that the educational material must appear only in sidebars or be otherwise separated from thedisclosure, but it must also be close to the related disclosure. For example, a sidebar describing the volatile natureof equity markets could be located directly beside the mandated disclosure concerning the risks of investing in aparticular equity fund. In addition, the educational material should be presented in a manner consistent with therest of the fund summary; therefore, the educational material should be concise, clear and not so lengthy as todetract from the clarity or presentation of the balance of the fund summary.

(4) The definition of "educational material" contained in section 1.1 of the Instrument excludes material that promotesor refers to a particular mutual fund or mutual fund family or to the products or services offered by the mutual fundor mutual fund family. Mutual funds should ensure that any material included within, attached to or bound with afund summary is educational material within the meaning of this definition.

5.4 Format - The Canadian securities regulatory authorities emphasize that a fund summary is required to use the headingsand specified sub-headings exactly as they are set out in the Instrument. The headings and specified sub-headings in a fundsummary should therefore not include any numbers, nor should they include the word "Item", since neither is included inthe headings set out in the Instrument. For sections for which no sub-heading is specified, a fund summary is permittedto include sub-headings, under the required headings, if it is so desired.

PART 6 THE FUND PROSPECTUS

6.1 General Purposes - The general purposes of a fund prospectus are described in section 2.3 of this Policy. In light of thosepurposes, the Canadian securities regulatory authorities wish to bring a number of matters to the attention of the personsor companies that prepare fund prospectuses.

6.2 Accessibility of a Fund Prospectus - The Canadian securities regulatory authorities expect that mutual funds, managersof mutual funds, principal distributors and participating dealers will encourage investors who want more information abouta mutual fund to both request and read fund prospectuses. The Instrument requires that a fund prospectus be sent withinthree days of a request, and the Canadian securities regulatory authorities expect that mutual funds and their managers willbe diligent in complying with this requirement.

6.3 Educational Material

(1) The Instrument and Fund Prospectus Form do not prohibit the inclusion in a fund prospectus of information notspecifically required by the Fund Prospectus Form. Among other things, a mutual fund may therefore includeeducational information in a fund prospectus. Additional material in a fund prospectus is, however, subject to thegeneral requirements contained in subsection 4.1(1) of the Instrument that all information must be presented inplain language and in a format that assists in readability and comprehension.

(2) The Canadian securities regulatory authorities remind mutual funds that include additional information, such aseducational material, in a fund prospectus to ensure that that material is not included primarily for purpose ofpromotion. A fund prospectus is designed to be easily understandable to investors and less "legalistic" in itsdrafting than traditional prospectuses, but it still constitutes a prospectus under securities legislation.

(3) The Canadian securities regulatory authorities note that any educational material included in a fund prospectusis not subject to the requirements contained in section 4.2 of the Instrument concerning its location in relation tothe mandated disclosure. If educational material is included within the fund prospectus, the Canadian securitiesregulatory authorities encourage mutual funds to consider presenting this material so as to reflect the "catalogue"approach. Using this approach, educational material concerning more general matters would be included in thegeneral sections of the fund prospectus, and educational material relevant to only specific mutual funds would beincluded with the sections describing only those mutual funds.

PART 7 DELIVERY

7.1 Delivery of the Fund Summary and Fund Prospectus

(1) The Instrument requires delivery to all investors of a fund summary. However, a mutual fund is free to adopt apractice of routinely providing investors or potential investors with a fund summary, fund prospectus and financialstatements if it so chooses.

(2) The Canadian securities regulatory authorities encourage mutual funds, their managers or principal distributorsto make fund summaries available to potential investors as soon as possible in the sales process, in advance ofany requirements contained in the Instrument or securities legislation, either directly or through dealers and othersinvolved in selling mutual fund securities to investors.

(3) The Canadian securities regulatory authorities do not consider the requirements of section 3.4 of the Instrumentto be exclusive. Mutual funds are therefore encouraged to inform investors that they may use the mutual fund'sInternet sites and e-mail addresses to request further information and additional documents.

7.2 Delivery of Non-Educational Material - The Instrument and related forms contain no restrictions on the delivery of non-educational material such as promotional brochures with either of the fund summary or the fund prospectus. This type ofmaterial may, therefore, be delivered with, but cannot be included within, wrapped around, or attached or bound to, the fundsummary and fund prospectus.

7.3 Delivery of Financial Statements - The Canadian securities regulatory authorities remind mutual funds that statementsof portfolio transactions, as part of the financial statements of a mutual fund, are documents that are incorporated byreference in a fund summary and are to be delivered upon request.

PART 8 NEED FOR MULTIPLE OR SEPARATE APPLICATIONS

8.1 Need for Multiple or Separate Applications

(1) The Canadian securities regulatory authorities note that a person or company that obtains an exemption from aprovision of the Instrument need not apply again for the same exemption at the time of each fund summary andfund prospectus refiling unless there has been some change in an important fact relating to the granting of theexemption.

(2) It should be noted that the principle described in subsection (1) does not necessarily apply to applications requiredto be made under the Regulations to the Securities Act (Quebec) for relief from provisions of those Regulations thatare substantially similar to those contained in the Instrument. In that case, an application may be required witheach refiling of a fund summary and fund prospectus of a mutual fund.

(3) In Quebec, it may be necessary to apply for exemptions from the equivalent sections in the Act and theRegulations.(2)

Footnotes

1. Proposed National Policy 43-201 was published for comment by the CSA in June 1998 (in Ontario, at (1998), 21 OSCB 3889). It is expected thatan Appendix to that proposed National Policy will contain an appendix listing the documents to be filed or delivered under National Instrument 81-101; this appendix will replace the lists of documents now contained in National Policy Statement No. 1.

2. The Commission des valeurs mobilières du Québec will be conducting a review of its securities legislation to determine how best it can integratethe disclosure regime proposed by the Instrument with the mandated mutual fund prospectus disclosure regime.