The introduction of a streamlined disclosure system for mutual funds deteriorated into a prolonged battle between the mutual fund industry and securities regulators over the details of the requirements. Now, as regulators attempt to develop a similar disclosure model for the burgeoning exchange-traded fund (ETF) business, many of the same battles may be in the offing.

In June, the Canadian Securities Administrators (CSA) proposed the introduction of ETF Facts – a concise, summary disclosure document that represents the ETF equivalent of Fund Facts to be applied to mutual funds. The new disclosure regime for ETFs was promised during the development of Fund Facts to level the playing field between mutual funds and ETFs.

Yet, now that the ETF industry has seen what the regulators have in mind, many of the same issues that dogged the Fund Facts project appear to be arising once again in connection with regulators’ plans to reform ETF disclosure. The comment period on the CSA’s ETF disclosure proposals closed in late September, revealing significant industry concerns with both the proposed content that’s required to be included in the new documents and the accompanying delivery requirements.

As with the Fund Facts, various comments warned that certain prescribed components of the proposed ETF Facts document could be confusing for investors – or, worse yet, misleading.

At the heart of many of the concerns with the proposed content are the differences between mutual funds and ETFs in terms of how each product is traded and priced. Specifically, ETFs are traded continuously in the secondary market, whereas mutual funds are priced at the end of each trading day and don’t involve trades with other investors. As a result, the CSA is proposing that ETF Facts include additional content detailing the implications of these differences.

Yet, various comments point out possible issues with these added elements of disclosure, including: they will have to rely upon third-party sources for some of the data; this may create licensing and liability issues; and this will be costly, particularly given that the information is likely to be of little benefit to most investors.

These differences in how ETFs and mutual funds are traded also feature in the delivery requirements for ETF Facts. The requirement, and the ability, to deliver disclosure is fundamentally different for mutual funds and ETFs. In particular, trading on an exchange typically doesn’t trigger an obligation to deliver a prospectus to a buyer – and the dealer on the “sell side” of a trade doesn’t necessarily know the investor on the “buy side” of the same trade. The CSA proposal would require the dealer on the buy side to deliver the ETF Facts to the investor within two days of purchase.

That’s not good enough for the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) or the Ontario Securities Commission’s Investor Advisory Panel, as the comments from both argue that investors must receive the disclosure before they decide to make a purchase. Both comments maintain that the CSA should require pre-sale delivery of ETF Facts.

Figuring out the delivery requirements also was a central stumbling block when the CSA was developing Fund Facts. Eventually, the regulators settled on a staged approach that will see pre-sale delivery requirements for mutual funds coming into force on May 30, 2016.

Once again, the securities industry, by and large, is opposed to being required to provide ETF Facts to investors before they make a purchase decision. The Investment Industry Association of Canada’s (IIAC) comment “strongly advocates” against the regulators introducing a pre-sale delivery requirement for ETF Facts in the future, citing the fact that ETFs trade more like equities than mutual funds.

The IIAC’s comment says ETF investors need flexibility to enter the market quickly: “Requiring delivery of the ETF Facts before the dealer can execute the trade would have an impact on the price at which the trade may be executed and in the circumstances would effectively bring the ETF business to a halt.”

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