Exchange-traded fund (ETF) managers are reminded that, as of September 1, 2017, they will be required to file an “ETF Facts” document in conjunction with the filing of any ETF prospectus.

Similar to “Fund Facts” for conventional mutual funds, “ETF Facts” are summary disclosure documents for ETFs.  Amendments to National Instrument 41-101 General Prospectus Requirements came into force on March 8, 2017 (Amendments) and established the regime and content requirements under which ETF Facts must be produced and delivered.  The Amendments also serve to replace the disclosure regime that has previously been in place for ETFs.  Such previous disclosure regime required ETF managers to obtain exemptive relief and to produce, for delivery through selling dealers, an ETF “Summary Document”.  Delivery by a dealer of a Summary Document, and now ETF Facts, to a purchaser of an ETF security within required time frames satisfies the prospectus delivery requirement under applicable securities legislation.

Pursuant to the Amendments, a staged transition was established for the implementation of the new disclosure regime using ETF Facts.  Under the transition rules, as of September 1, 2017, ETF managers may no longer utilize Summary Documents and must file ETF Facts in connection with the filing of any new or renewal prospectus.  The last date on the transition calendar is November 12, 2018 – as of such date, all ETFs that have not yet filed ETF Facts must do so.

Last month, provincial securities regulators approved Policy No. 8 (Policy) of The Mutual Fund Dealers Association of Canada (MFDA).  The Policy establishes proficiency standards for mutual fund dealing representatives (Representatives) who wish to sell exchange-traded fund (ETFs).

Although Representatives are legally permitted to sell certain types of ETFs (which are a type of mutual fund), to date, the number of Representatives actually doing so has been limited.  Representatives have been restricted both in their access to systems permitting the settlement of an ETF sale, as well as educational opportunities that would allow for required proficiency standards to be met.

Under MFDA rules, in order to sell any mutual fund security, Representatives must ensure they have the education, training and experience necessary to perform such activity competently.  Historically, however, educational courses available to Representatives in order to sell conventional mutual funds did not include material pertaining to ETFs.

As ETFs differ from conventional mutual funds in a number of respects, the Policy, and its approval by provincial securities regulators, provides important regulatory guidance as to the minimum training standards required for Representatives to sell ETFs. As outlined in the Policy, such training must at a minimum include:

  • detailed product information in respect of ETFs approved for sale by the Representative’s firm
  • how market quotes will be obtained
  • the types of trades accepted and the information required for each trade accepted
  • the disclosure information required for each transaction
  • how evidence of trade instructions, whether executed or unexecuted, and disclosures will be maintained
  • how trade orders will be processed.

The Policy, and the approval of the minimum training standards it describes, is expected to provide clarity to Representatives as to how to meet their proficiency standards.  Combined with technical advances relating to the settlement of ETF trades, Representatives should be optimistic about increasing their access to the ETF market.

The Toronto Stock Exchange (TSX) announced amendments to the TSX Company Manual (Amendments) effective September 17, 2015 relating to the listing of Exchanged Traded Products, Closed-End Funds and Structured Products, as defined in the Amendments.

Proposed Amendments were first published on January 15, 2015.  Nine commentators (including Fasken Martineau DuMoulin LLP) provided comments.  A summary of the comments and the TSX response to them are included with the announcement.

Among other matters, the final Amendments included the following changes from the proposed Amendments:

  • the definition of Closed-End Fund was amended to align with the definition of non-redeemable investment fund in the Securities Act (Ontario);
  • the minimum market capitalization for a Closed-End Fund was reduced from $20 million to $10 million;
  • management of Non-Corporate Issuers must have adequate and appropriate experience in the asset management industry and with listed issuers;
  • the net asset value of a Closed-End Fund must be calculated no less frequently than required under applicable securities laws (rather than a minimum weekly basis);
  • the issuance of additional securities of a Closed-End Fund must yield net proceeds per security of no less than 100% of the most recently calculated net asset value (NAV) per security calculated prior to the pricing of such issuance (no longer requiring it to be ‘immediately prior’) and all transactions must close within 30 days of the pricing (rather than from the date of the calculation of NAV);
  • the TSX may require securityholder approval for any amendments to the constating documents of an Exchange Traded Product or Closed-End Fund that are not covered by the amendment provisions of the documents that may materially affect the rights of securityholders;
  • the extension of an Exchange Traded Product or Closed-End Fund beyond the originally contemplated termination date may require securityholder approval unless securityholders are provided with the opportunity to redeem securities at NAV within 3 months of the originally contemplated termination date and notice of the extension at least 30 days prior to the redemption deadline;
  • Non-Corporate Issuers must pre-clear any information circulars and other materials related to corporate actions (for example, redemptions, consolidations or stock splits) to be sent to securityholders at least 5 business days in advance of finalization (which narrows the requirements from what was in the Proposed Amendments); and
  • the TSX agreed that the requirements of National Instrument 81-102 – Investment Funds provide substantial comfort regarding the approval for fund mergers and accordingly repealed Section 604(g) of the TSX Manual.

On June 18, 2015, the Canadian Securities Administrators (CSA) published proposed legislative amendments to the disclosure framework for exchange-traded funds (ETFs).  If implemented, such amendments will require ETF managers to produce a summary disclosure document called “ETF Facts”.  The ETF Facts for an ETF will need to be filed at the same time as the ETF’s prospectus.  Dealers will also be required to deliver the ETF Facts to investors within two days of the purchase of an ETF’s securities.   Delivery of an ETF’s prospectus will not be required (unless an investor requests it) and the use of ETF Facts will mirror that of “Fund Facts” currently applicable to regular mutual funds.

The intent of the ETF Facts is to provide investors with key information about an ETF in a more easily understandable format. This new regime is also intended to replace the existing disclosure regime currently potentially available to ETF managers as a result of exemptive relief.  Managers who have obtained such relief are permitted to fulfil the prospectus delivery requirements for an ETF through delivery of a summary disclosure document instead.

For more information, including a sample of the proposed ETF Facts, please see CSA Notice and Request for Comment – Mandating a Summary Disclosure Document for Exchange-Traded Mutual Funds and its Delivery.

Comments on the rule changes are due by September 16, 2015, with the amendments due to come in force by early 2016.  Implementation is expected to occur in stages between 2016 to 2018.


On June 24, 2013, the International Organization of Securities Commissions (IOSCO) published its final report (the Report) outlining nine principles against which, in its view, the quality of regulation and industry practices concerning exchange-traded funds (ETFs) can be measured.

IOSCO is an international organization that brings together the world’s securities regulators in order to set global standards for the securities industry. IOSCO develops, implements, and promotes adherence to internationally recognized standards for securities regulation.  As noted in the Report, increasing interest and investments in ETFs worldwide has drawn regulatory concern over their impact on individual investors and the marketplace.  The Report was therefore developed in order to assist in guiding the regulation of ETFs.

Principles Related to Disclosure

The Report is divided into two parts.  The first part describes principles for addressing ETF disclosure standards in four areas:

  1. Appropriate Classification – the Report suggests disclosure which allows investors to clearly differentiate between ETFs and other types of exchange-traded products.  Disclosure should also assist investors in understanding an ETF’s investment strategy – particularly whether index based or not.
  2. Methodology of Index Tracking and Portfolio Transparency – for index based ETFs, disclosure should provide details on the manner in which the applicable index will be tracked and the associated risks with whatever methodology is used.  The Report also suggests consideration be given to disclosing index composition, as well as the operation of performance tracking.
  3. Fees and Expenses – disclosure should allow investors to make informed investment decisions based on clearly described expense structures.
  4. ETF Strategies – as ETF investment objectives and strategies have become increasingly diverse and complex, the Report encourages issuers to assess the adequacy and completeness of their disclosure, including whether it is comprehensible and addresses applicable risk factors.

Principles Related to Structure

The second part of the Report addresses principles related to the structure of ETFs in the following two areas:

  1. Conflicts of Interests – the Report encourages regulators to ensure applicable rules are adequate to address situations where inherent conflicts of interests are present.  For example, in circumstances where an index provider is also affiliated with an ETF sponsor or, for synthetic ETFs, where affiliates act as counterparties.
  2. Counterparty Risks – for synthetic ETFs seeking to achieve their investment objective through the use of a derivative, requirements should be considered that address counterparty credit risk and collateral management.

Please find the full text of the Report here. 


On October 4, 2018, the Canadian securities administrators published the final version of the amendments that will create a new regime for liquid alternative mutual funds (alt funds).

The regime will come into effect on January 3, 2019 and could provide retail investors with greater access to alternative investment strategies, including leveraged and market neutral portfolios.


Key to the regime is the ability of alt funds to use leverage. The leverage limit is effectively set at 4X the alt fund’s net asset value (NAV) and can be achieved through a combination of derivatives (alt funds are not required to hold cover for their derivatives), short selling (alt funds do not need to set aside cash cover for their short sales, and can reinvest their short sale proceeds in additional long positions) and borrowing. There will be a cap set at 50% of NAV for the aggregate amount of exposure through short sales and borrowing, with a further cap of 10% per issuer sold short (other than government securities). These caps are somewhat arbitrary within the overall 4X leverage limit, but are based on the investment restrictions the securities regulators saw in the closed-end fund space. Accordingly, 130/30 funds and other levered funds can be launched as alt funds, but the 50% cap on short sales means that a market neutral fund using a pairs trading strategy will need exemptive relief.

Interestingly, the final amendments include a new feature allowing alt funds to enter into derivatives with counterparties who do not have a designated rating.

Continue Reading The New Liquid Alt Funds Regime – and some changes for conventional mutual funds and closed-end funds


In their latest effort to adapt Canadian capital markets to the reality of high-frequency trading (HFT), the Canadian Securities Administrators (CSA) approved amendments to National Instrument 23-101 Trading Rules and its Companion Policy, that came into force in Ontario on April 10, 2017. Following the capping of active trading fees on Canadian exchanges to regulate rebates received by market-making liquidity providers, the latest amendments lowered fee caps for certain non-inter-listed securities while also requiring exchanges to post quarterly lists of inter-listed securities (securities listed in both Canada and the US) and adjust their fee structures accordingly. The new caps represent an attempt by the regulators to fine-tune the Canadian response to HFT activity by further harmonizing trading fees with the US.

Liquidity providers use HFT technology to increase trading volume on exchanges by posting trade orders in anticipation of demand. As an incentive to “make” markets, these liquidity providers are paid a rebate per share or unit traded by the exchange. The rebates earned by market “makers” are then passed on to the “takers” through increased exchange fees, which regulators believe have the potential to distort capital markets. To strike a balance between the benefits of market liquidity and the added cost to other market participants, US regulators set a cap at $0.0030 per unit traded for equity securities and exchange traded funds (ETFs) priced at or above $1. Recognizing the high degree of integration between US and Canadian capital markets as well as the risk of losing HFT liquidity providers due to a significant disparity in available rebates, the CSA instituted an identical cap effective July 6, 2016.

Responding to criticism that the cap was too high, the CSA have now lowered the cap for non-inter-listed equity securities and ETFs from $0.003 to $0.0017 per security traded for equity securities and ETF units with an execution price greater than or equal to $1. Adhering to the widely-held principle that the fee should reflect the underlying value of the security, the CSA assert that the lower cap for non-inter-listed securities is equivalent to the higher fee for inter-listed securities when the volume-weighted average price of each is taken into account; non-inter-listed securities are traded far less than their inter-listed counterparts. The risk of losing HFT market makers is supposedly diminished in this instance because non-inter-listed securities are shielded from the competitive pressures of the US markets.

To effect this lower cap, exchanges must now maintain and update a comprehensive list of inter-listed securities. Once a security is subtracted from the list, exchanges have 35 days to lower the trading fee as applicable. Exchanges, alternate trading systems, and other market participants should familiarize themselves with the details of these amendments. Similar regulations will likely follow as the CSA reckon with wide-reaching effects of HFT activity on modern capital markets.

office-1209640_1280On January 10, 2017, the Canadian Securities Administrators (CSA) issued for comment CSA Consultation Paper 81-408 – Consultation on the Option of Discontinuing Embedded Commissions (the Consultation Paper) for a 150-day comment period. The Consultation Paper presents for discussion, the CSA’s position regarding the effects of sales of investment fund securities or structured notes through commissions, including sales and trailing commissions, paid by investment fund managers (embedded commissions), and proposes that the use of embedded commissions be discontinued in favour of direct pay arrangements.

Proposed Changes

The Consultation Paper currently anticipates that the new regulatory framework would aim to

discontinue any payment of money to dealers in connection with an investor’s purchase or continued ownership of a security described above that is made directly or indirectly by a person other than the investor.

This would, at a minimum, include ongoing trailing commissions or service fees as well as upfront sales commissions for purchases made under a deferred sales commission (DSC) option.

Continue Reading The CSA Move Forward on Consultations Regarding the Discontinuation of Embedded Commissions

pexels-photo-27406Commencing 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.

Continue Reading Mutual Fund Risk Classification Methodology Amendments to come into force March 8, 2017


On January 29, 2015, the Canadian Securities Administrators (CSA) published CSA Staff Notice 81-325 Status Report on Consultation under CSA Notice 81-324 and
Request for Comment on Proposed CSA Mutual Fund Risk Classification Methodology
for Use in Fund Facts
(Staff Notice).

As its names  reveals, the Staff Notice was a follow-up to previously issued CSA Staff Notice 81-324 (Previous Staff Notice).  The Previous Staff Notice proposed a new framework and methodology (Proposed Methodology) for the purpose of calculating and disclosing a fund’s volatility risk in its Fund Facts document (or other similar documents for other types of investment funds, such as ETFs) and requested feedback on the Proposed Methodology.  Currently, the manager of a mutual fund has the discretion to choose what it believes to be an appropriate risk methodology.  The CSA were therefore seeking industry feedback on the merits of introducing a standardized methodology  to determine a fund’s risk rating.

The Staff Notice set out the key themes arising from the feedback received, as well as potential next steps to be taken by the CSA.

Key Themes

Certain of the key themes discussed in the Staff Notice were as follows:

  • Use of Standard Deviation (SD) as the risk indicator – the majority of commenters agreed with the use of SD as a fund’s risk indicator.
  • 10 year history to calculate SD – many supported a 10 year history, as such a relatively lengthy measurement period would be less sensitive to sudden market changes. Such period would also provide a reasonable balance between indicator stability and availability of data.  However, concerns were raised by some that a shorter period is more appropriate given that the lifespan of the majority of mutual funds is only 5 or 6 years.
  • Fund series/class used – most commenters agreed that, in most instances, all series and classes of a Fund bear the same risk and therefore applying the Proposed Methodology to the oldest series/class of a fund (rather than all series/classes) is appropriate.
  • Use of reference index data – for funds without a 10 year history, the Proposed Methodology contemplates using the returns of an appropriate index to provide the missing performance data required to calculate SD. There were a wide range of comments, concerns and discussion points that arose from this suggestion.
  • Six Category Risk Scale – the Proposed Methodology contemplates changing the Fund Facts volatility scale from five bands to six. Most were opposed as such a change would likely lead to a large number of funds being re-labeled with an apparent higher risk classification, without any change in the fund’s volatility.
  • Monitoring and changing of risk categorizations – the Proposed Methodology sets out a monthly process that must be followed by fund managers when monitoring changes in the risk categories. Many commenters felt that monthly monitoring is excessive and burdensome and that an annual monitoring process would be more appropriate.

Next Steps

The CSA confirmed that SD continues to be the preferred risk indicator for the Proposed Methodology.  The CSA will continue also to assess the impact of moving to a six category risk scale.  Proposed rule amendments, based on the feedback received on the Proposed Methodology, are expected to be issued for comment by the CSA at some point in 2015 addressing risk classification.