CSA releases amendments relating to ETF Facts and risk classification methodology

On December 8, 2016, the Canadian Securities Administrators (CSA) announced they are amending (the Amendments) various national instruments in order to mandate (i) a summary disclosure document for exchange-traded mutual funds (ETFs); and (ii) a risk classification methodology that must be used by managers to determine the investment risk level of conventional public mutual funds and ETFs.

ETF Facts

The Amendments require ETFs to prepare and file a summary disclosure document called “ETF Facts.” A few notes about ETF Facts:

• They were based on the Fund Facts that must be prepared and filed by conventional mutual funds, with necessary adjustments made to reflect the fact that ETF securities are bought and sold on stock exchanges.
• Unlike Fund Facts, which must be delivered to purchasers of conventional mutual funds before a sale takes place, ETF Facts must be delivered to purchasers within two days of the purchase (the ETF Facts Delivery Requirement). The CSA has noted, however, it will consider requiring ETF Facts to be delivered on a pre-sale basis in the future.
• The ETF Facts Delivery Requirement will apply to dealers acting as agents of the purchaser on the “buy” side of the transaction.
• They must be filed at the same time that an ETF files a prospectus.
• They can be delivered to purchasers by a variety of methods (for example, in person, by mail, by fax or electronically); however, access will not equal delivery (so referring a purchaser to the website on which the ETF Facts is posted will not constitute delivery).
• If a purchaser does not receive the ETF Facts then the purchaser will have a right to seek damages or rescind the purchase.
• They will be incorporated by reference into the ETF’s prospectus and, as such, the statutory rights that apply with respect to an ETF’s prospectus will also apply to its ETF Facts.

Managers should note the following dates with respect to the implementation of the ETF Facts requirements:

• September 1, 2017 – ETF Facts must be filed with any preliminary and pro forma prospectus that is filed on or after this date.
• November 12, 2018 – All ETFs must have filed ETF Facts by this date.
• December 10, 2018 – ETF Facts must be delivered to purchasers who purchase ETF securities on or after this date.

Risk Classification Methodology

The Amendments require all managers to use a standard methodology when determining the investment risk level disclosure that is included in Fund Facts and ETF Facts. The CSA believes this will permit investors to more easily compare the investment risk levels of different funds. Managers must use the new mandatory risk classification methodology as of September 1, 2017 (which coincides with the date that managers must begin to file ETF Facts when preliminary and pro forma prospectuses are filed for ETFs).

A few notes about the new mandatory risk classification methodology:

• Managers must determine the fund’s standard deviation in accordance with a mandated formula.
• Once the fund’s standard deviation has been determined, the investment risk level will be determined based on a mandated “risk level” grid.
• Managers may, if reasonable under the circumstances, increase the investment risk level of a fund, but managers are not permitted to decrease the investment risk level of a fund from that which is determined by the grid.
• The fund’s standard deviation must be based on the class or series of the fund that first became available to the public (provided that a manager must calculate a separate standard deviation for a particular class or series if it has an attribute that results in the class or series having a different investment risk level than that of the fund).
• Standard deviation must be calculated for the most recent 10 years of a fund.
• If a fund was launched less than 10 years ago then the available return history of the fund must be used with the return history for the remainder of the 10-year period being imputed based on either (i) if the fund is a clone fund and the underling fund has 10 years of performance history, the performance of the underlying fund; or (ii) if there is another fund with 10 years of performance history that is subject to National Instrument 81-102 and has the same fund manager, portfolio manager, investment objectives and investment strategies, the performance of the other fund. If neither (i) nor (ii) apply then the remainder of the 10-year period must be imputed based on a reference index selected by the manager that reasonably approximates the standard deviation of the fund.

Managers who have obtained an exemption or waiver with respect to the “How risky is it?” section of the Fund Facts form should note all such exemptions or waivers will expire on September 1, 2017.