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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.

Overview

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. 

 

The long-awaited amendments to reduce the regulatory burden on investment funds were published by the Canadian securities administrators (CSA) in final form on October 7, 2021 and take effect on January 5, 2022. The amendments mostly relate to housekeeping matters that reduce very little regulatory burden, while other aspects might actually increase regulatory burden in the short term. We are disappointed that the CSA did not introduce a number of additional changes that would have had a far greater impact on reducing the regulatory burden on industry participants.

Continue Reading Securities Law Amendments to Reduce the Regulatory Burden on Investment Funds

Overview

In an effort to reduce the regulatory burden for issuers who wish to conduct “at-the-market” (“ATM”) offerings in Canada and facilitate capital raising by public companies, the Canadian Securities Administrators (the “CSA”) announced significant amendments (the “Amendments”) to the ATM distribution regime under National Instrument 44-102 – Shelf Distributions (“NI 44-102”) and Companion Policy 44-102CP. Notably, the Amendments, which will become effective on August 31, 2020, will streamline the process for ATM offerings in Canada.  Going forward, issuers commencing an ATM offering will no longer have to apply for and obtain exemptive regulatory relief or be subject to the limitations on (i) overall ATM offering size under a single prospectus supplement (which the current regime limits to 10% of an issuer’s market capitalization at the time of the ATM launch (the “10% Aggregate Cap”)), or (ii) the aggregate number of a class of securities that can be distributed on any trading day (which the current regime restricts to 25% of an issuer’s average daily trading volume of that class (the “25% Daily Cap”)).

ATMs – An Overview

An ATM offering is a distribution of equity securities (typically common shares) at variable market prices that is qualified by a base shelf prospectus and prospectus supplement under the shelf offering procedures of NI 44-102. Through an ATM offering, an issuer may, from time to time, on an as-needed basis, sell its securities at the prevailing market price into a pre-existing trading market in which securities of the same class are traded. Sales of securities under an ATM offering are effected by one or more registered securities dealer(s) engaged by the issuer to act as its agent(s).

ATM offerings can be an effective capital raising alternative for issuers, as they: (i) allow issuers to sell securities into an existing market, typically at no discount to the current market price; (ii) offer quick access to capital, on an ongoing basis, in line with an issuer’s financing needs; (iii) allow issuers to capitalize on favourable market conditions; (iv) are typically subject to lower commissions, fees and expenses than traditional offerings; (v) do not require road shows or marketing, thereby allow management to continue to focus on the business; and (vi) give issuers more discretion as to the size, price, timing and terms of the offering.

Although the current regime under NI 44-102 permits ATM distributions, in order to conduct an ATM offering in Canada issuers first needed to apply (on a case-by-case basis) for exemptive relief from the Canadian securities regulators as it is impracticable for issuers and dealers to comply with certain requirements under applicable securities laws, including:

  • the requirement to deliver a prospectus to purchasers (the “Delivery Requirement”);
  • disclosure of certain modified withdrawal and rescission rights and certification requirements (the “Form Requirements”); and
  • the requirement to publicly disclose the number and average price of the securities distributed under the ATM offering and the aggregate gross and net proceeds raised and aggregate commissions paid or payable on a monthly basis (the “Monthly Reporting Requirement”).

ATM offerings have historically required French translations of the base shelf prospectus, applicable ATM offering prospectus supplement and all documents incorporated by reference.  The Amendments do not provide issuers relief from the French translation requirement, however, an application to the Autorité des marchés financiers can be made to obtain exemptive relief from the French translation requirements in connection with an ATM offering.

The Amendments

When the Amendments take effect on August 31, 2020 they will, among other things, codify certain standard terms that are typically included in ATM exemptive relief orders. As a result, issuers will not have to apply for exemptive relief to conduct ATM offerings in Canada.

In particular, the Amendments will make the following changes to the Canadian ATM offering regime:

  • Delivery Requirement – The Delivery Requirement will not apply in connection with a distribution of securities under an ATM offering.
  • Form Requirements – The Form Requirements for ATM offerings to include: (i) specified “forward-looking” certificates, to be included in the base shelf prospectus or applicable prospectus supplement and (ii) modified form of statement of rights
  • Reporting Obligations – The Monthly Reporting Requirement is replaced with a new quarterly reporting requirement, pursuant to which issuers conducting an ATM offering must disclose the number and average price of the securities distributed under the ATM offering and the aggregate gross and net proceeds raised and aggregate commissions paid or payable by either: (i) filing a standalone report within 60 days after the end of each applicable interim period or 120 days after the end of each applicable annual period; or (ii) including such disclosure in their interim and annual financial statements and related management discussion and analysis.
  • Limits on Offering Size and Trading Volume – ATM offerings will not be subject to the 25% Daily Cap and 10% Aggregate Cap. Notwithstanding the removal of these limitations, the CSA has advised that they will continue monitoring ATM offerings, focusing on distributions that may have had a material impact on the price of the issuer’s securities where prior public disclosure of the distribution was made, and expect issuers and dealers to conduct ATM offerings in a manner that limits any negative impact on market integrity.
  • Additional Disclosure Obligations – To ensure the applicable prospectus contains full, true and plain disclosure of all material facts relating to the securities distributed under the ATM offering, issuers may incorporate new material facts into the prospectus by disseminating a news release disclosing information that, in the issuer’s determination constitutes a “material fact”, provided that such news release is identified on its face page as a “designated news release”. Similarly, a prospectus for an ATM offering should disclose that any such designated news release will be deemed to be incorporated by reference therein.
  • Investment Funds – All (i) non-redeemable investment funds and exchange traded mutual funds that are not in continuous distribution, and (ii) all mutual funds that are traded on an exchange that are in continuous distribution and meet the definition of an “ETF” in National Instrument 41-101 – General Prospectus Requirements, will now be permitted to conduct ATM offerings.

Anticipated Impact

By reducing the time and cost required to implement an ATM offering in Canada, the Amendments stand to make ATM offerings a more accessible and attractive capital raising alternative for Canadian issuers. As such, we expect to see more Canadian issuers using ATM offerings as a way to raise supplemental capital once the Amendments come into effect.

Historically, ATM offerings have been more popular in the United States than Canada and cross listed issuers typically relied on the United States markets to complete ATM programs. This is attributable, in part, to the more favourable regulatory framework that exists in the United States. The Amendments help align the Canadian and United States’ regimes which should facilitate cross-border ATM offerings, allowing issuers to capitalize on favourable market conditions and access capital in both markets.

Transition

Issuers with a base shelf prospectus filed prior August 31, 2020 under which the issuer is qualified to make an ATM distribution pursuant to an exemptive relief order will not have to re-file their base shelf prospectus to comply with the Amendments.  Issuers will be permitted to rely upon the more lenient framework prescribed by the Amendments through the filing of an ATM prospectus supplement or an amended and restated ATM prospectus supplement (in the case of an existing ATM offering).  If you have any questions regarding the Amendments or ATM offerings in general, please feel free to contact either of the authors.

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.

Leverage

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.

On 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