Investors can buy foreign ETFs, but dealers and fund managers need to be careful not to tout vehicles that aren’t registered in Canada, according to new joint guidance from the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO).
Following a consultation into the practice of Canadian investors buying ETFs that are only listed on foreign exchanges — amid both competitive and investor protection concerns that arise when investors are buying investment vehicles that aren’t subject to domestic regulatory requirements — the CSA and CIRO issued guidance on Wednesday that cautions industry firms against activities that could trigger prospectus and registration requirements. The guidance also highlights dealers’ KYC, KYP, suitability and disclosure obligations.
The regulators said the consultation revealed “broad support” for continuing to allow investors to buy foreign ETFs, but they’re introducing guidance that aims to address some of the concerns raised by foreign ETFs being available to Canadian investors.
In particular, the guidance warns industry firms that actively promoting foreign ETFs in Canada could trigger the requirement for the funds to issue a prospectus, along with registration requirements for fund managers in certain jurisdictions.
Active promotion includes soliciting dealers to recommend specific funds to investors, providing incentives to dealers to sell foreign ETFs, advertising, or targeting Canadian investors on social media — and allowing foreign ETFs to pop up in the results from research tools provided on fund managers’ websites, the guidance noted.
On the distribution side, the guidance highlights how dealers and reps can meet their obligations when dealing in foreign ETFs — and, it calls on discount brokers to consider beefing up their upfront disclosure to investors before they buy foreign funds.
“[A]n alert or notification for investors at a critical interaction point prior to the purchase of a foreign ETF could assist investors in understanding that there are key differences between investing in a foreign ETF and investing in a Canadian ETF,” it said.
“The guidance encourages practices that support investors in making more informed decisions when choosing between Canadian and foreign ETFs,” said Stan Magidson, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC), in a release.
“As the ETF market continues to grow, this guidance will help ensure that Canadian investors who choose to purchase foreign ETFs have a clear understanding of the products they are investing in,” added Andrew Kriegler, president and CEO of CIRO.