The Canadian Securities Administrators has published proposed amendments that would require ETFs to produce and file summary disclosure documents called ETF Facts.
The proposed amendments also introduce a delivery regime for those ETF Facts documents.
Click here for a sample ETF Facts document.
To start, the proposed ETF Facts documents would have to be written in plain language, and would be expected to be no longer than two pages (double-sided). The documents would have to highlight key information that CSA research has identified as important to investors.
Read: Global ETF assets surpass US$3 trillion
Under the proposed amendments, an ETF will have to produce and file ETF Facts, and make that document available on the fund’s or the ETF manager’s website. Additionally, dealers that receive orders to purchase ETF securities would be required to deliver ETF Facts documents to investors within two days of those purchases.
A prospectus would continue to be available to investors at no cost.
“The introduction of an ETF Facts and its delivery regime will help to provide investors with easy-to-understand information about the potential benefits, risks and costs of investing in ETFs,” says Louis Morisset, CSA chair and president, and CEO of the AMF.
Read: Institutional investors turning to smart beta ETFs
CSA requests that industry stakeholders submit all comment letters by September 16, 2015. Click here to check out the proposed amendments.
Industry commentary
In its comment letter, the Small Investor Protection Association (SIPA) says requiring ETF facts is a positive step that will encourage investors to add ETFs to their portfolios. That would be good, SIPA finds, since “the most often cited benefits of ETF’s are low cost, transparency, diversification and tax efficiency. So, given prevailing low interest rates, a greater use of ETFs [may] increase the chances of Canadians growing adequate retirement nest egg[s].”
But, the association adds the new simplified ETF disclosure regime should be accompanied by an investor education initiative. For example, investors should know that “excessive trading rarely produces the desired results since it has been observed that retail investors tend to trade ETFs too frequently.”
Plus, SIPA says the other risks that aren’t clear to many retail investors are:
- correlation and tracking error risk (Read: Do index products accurately track markets?);
- derivatives risk (Read: Details on derivatives);
- liquidity and valuation risk (Read: Price setting of ETFs); and
- ETF shares trading risk.
Finally, SIPA wonders whether ETF Facts will only be required for Canadian-domiciled ETF manufacturers, and whether copies of summary prospectuses will be provided for U.S.-originated ETFs.
To check out more of SIPA’s recommendations, click here.
Current rules
Dealers that account for the sale of the majority of ETF assets currently deliver a summary disclosure document in lieu of a prospectus, pursuant to exemptive relief from existing prospectus delivery requirements under securities legislation.
The proposed amendments would codify the form and content of the summary disclosure document for ETFs, as well as extend the delivery obligation to all dealers who receive a purchase order for ETF securities.
Read: CSA finalizes mutual fund pre-sale rules, for more on past changes
The CSA continues to work on developing a standardized risk classification methodology for use in ETF Facts and Fund Facts.
Read:
4 upcoming regulatory proposals, for more on the development of ETF disclosure requirements