Commencing March 8, 2017, new rules relating to the risk classification of conventional mutual funds and exchange-traded funds (collectively, mutual funds) will come into force. The new rules will primarily involve amendments to National Instrument 81-102 Investment Funds (NI 81-102), but will also involve consequential amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), certain forms under NI 81-101, and its companion policy (the Amendments).
The Canadian Securities Administrators (CSA) initially introduced the idea of a standardized risk classification methodology applying to all mutual funds in December 2013 and later refined it in draft amendments published in December 2015. The CSA considered the comments it received on both publications in developing this final version of the Amendments, which is largely similar to the 2015 version.
Pursuant to the Amendments, mutual fund managers will be required to use a standardized methodology, based on standard deviation, to classify the investment risks of their mutual funds. Currently, mutual fund managers are permitted to adopt a risk classification methodology of their own choosing, provided it is described in the mutual fund’s prospectus and fund facts. The CSA believe that a standardized methodology will allow investors to better compare the investment risk levels of different mutual funds.
The Amendments will be effected by adding a new Part 15.1 to NI 81-102, which will set out the requirement for mutual fund managers to determine and disclose a mutual fund’s investment risk level at least annually and in accordance with the following formula:
The foregoing formula and risk levels are generally consistent with the risk classification methodology currently recommended by the Fund Risk Classification Task Force of the Investment Funds Institute of Canada (IFIC). Because many investment fund managers currently follow IFIC’s recommendations to classify the investment risks of their mutual funds, the Amendments may not result in a significant, or any, change to the investment risk ratings assigned to such mutual funds.
The Amendments will come into force on March 8, 2017, but will not become effective until September 1, 2017. This means that mutual fund managers filing final prospectuses on or after September 1, 2017 will be required to comply with the Amendments in assigning risk classifications to their mutual funds. The September 1, 2017 effective date is also consistent with the effective date for new rules requiring exchange-traded funds to complete and file “ETF Facts” documents, which also require a description of the fund’s risk classification.