Exchange-Traded Funds – Summary Disclosure Documents and Related Fund Facts Proposals

Exchange-Traded Funds

Effective August 1st, 2013 the Ontario Securities Commission has granted exemptive relief (“Relief”) from the prospectus delivery requirements to all sponsors of exchange-traded funds (“ETFs”), as well as to those registered dealers and their affiliates that purchase and redeem creation (treasury) units from ETFs or that participate in the resale of such ETF creation units through the secondary market in Canada.

The Relief recognizes the practical difficulties in determining whether a trade in the securities of an ETF constitutes a “distribution” by virtue of being the first re-sale of creation units or whether the trade constitutes a secondary market trade from an existing inventory of units held by a registered dealer (through the facilities of an exchange). The Relief addresses this issue by substituting the prospectus delivery obligation on a distribution with the more practical obligation to deliver the summary disclosure document within two business days of the purchase of an ETF security (corresponding to the timing for prospectus delivery) regardless of whether the trade is a primary distribution or secondary market trade. The summary disclosure document is similar in format and corresponds with the obligation of conventional mutual funds to deliver “Fund Fact” documents, further described below.

This delivery obligation is primarily intended to extend to those dealers acquiring securities of the ETF for their customers (buy-side) to whom the trade-confirmation is required to be delivered and does not extend to those authorised dealers or brokers who are engaged solely in the sale of such securities (sell-side). However, all dealers involved in the trade are required to provide an acknowledgement and undertaking as to their compliance with these requirements. The ETF sponsor will also be required to file an annual certification as to its compliance, on behalf of the ETFs, with the terms and conditions of the Relief.

The Relief is conditional on the filing of summary disclosure documents relating to each class or series of the ETF by September 1, 2013 and, thereafter, concurrently with the filing of the corresponding prospectus or any amendment thereto.

The Relief will expire on September 1, 2015, by which time the Canadian Securities Administrators (“CSA”) intend to codify the new summary disclosure requirements for ETFs, as well as the prospectus delivery requirements, as part of the overall CSA point of sale disclosure initiative.

CSA Staff Notice 81-319

The obligation for ETFs to prepare and file these summary disclosure documents arises primarily from the harmonization objectives of the CSA relating to point of sale disclosures (“Fund Facts”) by conventional mutual funds and which build upon the framework introduced on June 18, 2010 through CSA Staff Notice 81-319 – Status Report on the Implementation of Point of Sale Disclosure for Mutual Funds (“CSA Staff Notice 81-319”).

The three-stage approach outlined in CSA Staff Notice 81-319 is intended to reflect the principles initially contained in the framework published on October 24, 2008 by the Joint Forum of Financial Market Regulators 81-406 – Point of Sale Disclosure for Mutual Funds and Segregated Funds, intended to provide investors with more meaningful and effective prospectus disclosure. It is also consistent with the Final Report entitled “Principles for the Regulation of Exchange Traded Funds” published by the International Organization of Securities Commissions in June, 2013.

Stage 1 of the framework was completed on January 1, 2011 when amendments to National Instrument 81-101 – Mutual Fund Prospectus Disclosure (“NI 81-101”) came into force mandating that mutual funds prepare and file Fund Facts documents and deliver them to investors free of charge upon request.

Stage 2 comprises further amendments to NI 81-101 as well as consequential amendments to related policies and forms in order to permit the delivery of the Fund Facts to satisfy the current requirement to deliver a prospectus to investors within two days of buying a mutual fund and this concept has now, by virtue of the Relief, been extended to include ETFs. Proposed changes to the Fund Facts document will also become effective January 13, 2014 and each mutual fund must, if it has not already done so, file a Fund Facts for each class or series by May 13, 2014 using the new form. With the adoption of these amendments commencing September 1, 2013, Stage 2 is expected to be complete by June 13, 2014.

In Stage 3, the CSA will publish for comment any proposed requirements that would implement point of sale delivery for mutual funds such that investors will receive the Fund Facts before making an investment in a mutual fund. The CSA also intend to consider the use of summary disclosure documents and point of sale delivery for closed-end funds with the expectation that publication of proposed rule changes will occur during 2014.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.