Posted by Anjali Kaur on Jul 10, 2022

Disclosure 

Before investors purchase mutual funds, dealers are required to disclose specific information about the funds

The rationale for Mutual Fund Disclosure

The protection of investors is one of the primary objectives of securities legislation. Full disclosure of information material to investors’ decisions is the most important means to attain this objective.

Canada has a comprehensive disclosure regime for mutual funds. Funds are required to make the disclosure necessary to evaluate:

  • the suitability of the fund for a particular investor
  • the value of the investor’s interest in the fund

Disclosure Documents

The main disclosure documents prepared by a mutual fund are:

  • a Fund Facts document for every class or series of a mutual fund
  • the simplified prospectus
  • the annual information form
  • annual and interim financial statements
  • annual and interim management reports of fund performance

In order to have a complete picture of a mutual fund, it is necessary to look at all five sets of documents. Historically, the simplified prospectus was the most important of these documents and it was delivered to every person who invested in a mutual fund. Although it incorporates the other documents by reference, the simplified prospectus is a lengthy document within which investors have trouble finding and understanding the information they need.

The Fund Facts document was developed to make it easier for investors to find and use key information about a mutual fund. It is written in concise, easy-to-read language and is no more than two pages double-sided in length. An investor must receive the Fund Facts document within two days of buying a mutual fund. The simplified prospectus and annual information form will continue to be available to investors upon request.

All the above documents are filed with the securities commissions and can be found online at The System for Electronic Document Analysis and Retrieval (SEDAR). It is also always possible to obtain a copy without charge by contacting the fund manager.

Rights of Investors

Securities legislation in some jurisdictions gives investors the right to withdraw from an agreement to buy mutual funds within two business days of receiving the Fund Facts document, or to cancel their purchase within 48 hours of receiving confirmation of their order.

Securities legislation in some jurisdictions also allows investors to cancel an agreement to buy mutual funds and get their money back if they do not receive the Fund Facts document, or to make a claim for damages if the Fund Facts document misrepresents any fact about the fund.

The above rights must usually be exercised within certain time limits.

IMPORTANT: Rules may differ from province to province. Make sure that you are familiar with the legislation in your jurisdiction.

Fund Facts Document

The delivery of the most recently filed Fund Facts document is a requirement under recently amended securities regulations. As mentioned earlier, the Fund Facts document provides investors with important information, written in plain language, that can be used to determine the appropriateness of a mutual fund purchase or to evaluate a mutual fund purchase that they have recently made. The table below highlights the major sections of the Fund Facts document and the information provided within each
section.

Transition Period

The amendments that require the delivery of the Fund Facts document to investors came into force on September 1, 2013. In order to allow mutual funds and local securities regulatory authorities to make changes to any systems and legislation, the requirement for the delivery of the Fund Facts document is subject to a transition period. As of June 13, 2014, the Fund Facts document must be delivered to the client within 2 days of the trade date.

Simplified Prospectus

Before a security may be offered for sale, a prospectus must be filed and approved by the provincial or territorial securities regulators of those jurisdictions where the securities are to be sold. Its purpose is to give the investor important information in a standard format to facilitate a decision whether to buy or sell units of the fund.

The prospectus is an extremely important document because it provides full disclosure of the material facts relating to a new issue of a stock, bond, mutual fund, or other type of security. Material facts are those that have, or may have in the future, a significant impact on the market value of the securities in question.

However, acceptance or clearance of the prospectus by security regulators does not guarantee that the investment is sound. It only means that investors are given the material facts upon which to base an investment decision.

The simplified prospectus covers important matters such as:

  • general risks of investing in mutual funds and the specific risks applicable to the fund
  • fees and expenses payable by the fund
  • compensation to dealers
  • organization and management of the fund, including the composition of the Independent Review Committee and a summary of its mandate
  • fundamental investment objectives
  • investment strategies
  • legal rights of investors

Depending on the jurisdiction, you are required to provide a simplified prospectus to a client upon request.

Annual Information Form (AIF)

Mutual funds are required to file an annual information form (AIF) with the Fund Facts document and simplified prospectus. Like the simplified prospectus, there is no obligation to deliver the AIF to every investor, but investors may always ask for a copy.

The AIF supplements the information in the simplified prospectus. It covers matters such as:

  • the investment restrictions to which the fund is subject
  • a description of the units of the fund and their characteristics
  • the methods used to value the various types of portfolio securities
  • details of service providers
  • conflicts of interest, including disclosure of the total ownership of the members of the Independent Review Committee in the units of the mutual fund (if more than 10%), and in the shares of the manager and any service provider of the manager or the fund
  • fund governance, including the mandate and responsibilities of the Independent Review Committee
  • the remuneration of the members of the Independent Review Committee

Amendments to Documents

If there is a material change in a fund, such as a new commission fee structure, the Fund Facts document, prospectus and annual information form must be amended and the amended Fund Facts document should be provided to investors prior to the purchase of fund units.

Financial Statements

Mutual funds are required to file annual and interim (semi-annual) financial statements.

The financial statements of a mutual fund are made up of:

  • a Statement of Net Assets, supported by a Statement of Portfolio Investments
  • a Statement of Operations
  • a Statement of Changes in Net Assets
  • related notes

The annual financial statements must be audited but an audit of the interim financial statements is not mandatory.

Management Reports of Fund Performance (MRFPs)

Mutual funds must also file annual and interim management reports of fund performance (MRFPs). The MRFP contains a discussion and analysis of the fund’s financial statements and discloses transactions with related parties. It also contains a wealth of statistical data, including the management expense ratio (MER) and the historical performance of the fund.

Other Disclosure Documents

In addition to the Fund Facts document, simplified prospectus and the documents incorporated by reference, mutual funds must make certain other disclosures:

Quarterly Portfolio Disclosures

Quarterly portfolio disclosures must be prepared and posted on the fund’s website. The disclosures should include a summary of the fund’s investment portfolio at the quarter-end together with the net asset value of the fund at the same date.

Annual Proxy Voting Record

An annual proxy voting record, showing how the fund voted in respect of matters for which it received proxy materials, must be prepared and posted on the fund’s website.

Material Change Report

A news release must be promptly issued and filed if a material change occurs in the affairs of a mutual fund. A material change is generally a change that would be considered important by a reasonable investor in determining whether to buy or sell the units of the fund. An example of a material change would be the replacement of a sub-adviser.

Annual Report of the Independent Review Committee

The Independent Review Committee is required to prepare an annual report to the unitholders that describes the Committee and its activities. The report must be filed with the securities commissions and posted on the fund’s website.

Account Types Introduction

There are a number of different registered and non-registered accounts that investors can use to meet different objectives

Client Name Accounts vs. Nominee Name Accounts

mutual fund dealer is required to record and maintain adequate records of client information and trade instructions, whether those instructions have been executed or not. How mutual fund transactions take place among the client, the mutual fund and the mutual fund company depends on the custodial agreement. The custodial agreement refers to how property, in this case a mutual fund, is held on behalf of a client. Mutual funds are held in two types of accounts: client name accounts and nominee name accounts.

When a mutual fund transaction is administered through a client name account the registered/legal owner of the mutual fund is the client. When a client account is established in ‘nominee name’, also known as ‘street name’, the registered/legal owner of the mutual fund is the dealer. In this case, the mutual fund dealer holds the mutual fund in trust for the actual owner, the client. An LTA form is not required when an account is established in nominee name.

Regardless of how mutual funds are held, a dealer must record and maintain adequate records of trade instructions. Discretionary trading, where a dealer can complete transactions without client consent, is not permitted. The table below highlights the key characteristics of each account type.

Registered and Non-Registered Accounts

Registered accounts are savings plans that are defined in the federal Income Tax Act , registered with the Canada Revenue Agency (CRA), and administered by various financial institutions. These types of plans are granted special tax status wherein contributions may be tax deductible and taxes payable on any investment earnings may be deferred. There are also a number of limitations/restrictions on these plans including limits on the amount that may be contributed, the types of investments that may be held in the plan, the tax treatment of withdrawals, and how long the plan may remain open, The main types of registered accounts are:

  • registered education savings plans (RESP)
  • registered disability savings plan (RDSP)
  • tax-free savings accounts (TFSA)
  • registered retirement savings plans (RRSP)
  • registered retirement income fund (RRIF)

Non-registered accounts have no restrictions. You can save any amount and the plan can hold almost any kind of investment. However, there are no particular tax benefits associated with non-registered accounts. Contributions are not tax deductible and you must pay tax on the plan’s investment income as you earn it. The main types of non-registered accounts are:

  • cash accounts
  • margin accounts

Registered Education Savings Plans

Registered education savings plans (RESPs) are attractive, tax-sheltered investment plans that allow anyone to save money for a qualified post-secondary education for anyone else, including themselves. Although anyone can open an RESP, the plan is most likely to be used to support a child’s qualified post-secondary education. Usually, parents or grandparents will open an account for their child or grandchild. The child or grandchild must have a social insurance number in order to be a beneficiary of a RESP.

Contributors, also known as subscribers, may contribute a lifetime maximum of $50,000 per beneficiary to an RESP. The contributions that are made to an RESP are not deductible from a subscriber’s income for the purpose of calculating income taxes payable. In other words, contributions are not tax deductible.

Canada Education Savings Grant

The Government of Canada assists families with the cost of post secondary education by offering the Canada Education Savings Grant (CESG). The CESG is available until the end of the calendar year in which the child turns 17, as long as:

  • the child is a Canadian resident
  • an RESP has been opened in his or her name
  • a request is made for the CESG

The federal government will match 20% on the first $2,500 annual contribution (i.e. up to $500 CESG). If you cannot make a contribution or do not receive the full CESG in any given year, you may be able to catch up in future years. Qualified beneficiaries are eligible to accumulate $500 of CESG each year up to a lifetime limit of $7,200.  However, the federal government will only pay a maximum of $1,000 of CESG each year per beneficiary and only up to the age of 17.

In addition to the CESG, residents of Saskatchewan, Alberta, and Quebec may be eligible for provincial education savings grants.

Additional Canada Education Savings Grant (A-CESG)

The federal government offers additional CESG (A-CESG) payments on contributions made by families with adjusted family net income below a certain threshold income. Adjusted net family income limits are updated every year. For 2013, the additional A-CESG is determined as per the following table:

The A-CESG is payable on the first $500 of annual contributions made within the year. The CESG lifetime maximum of $7200 does not change if A-CESG payments are made.

George and Maria have an adjusted family net income of $25,000. As a result, their annual $1000 contribution to their 3 year-old daughter’s RESP account will also generate a $100 A-CESG payment, calculated as $500 x 20%.

Canada Learning Bond (CLB)

The Canada Learning Bond (CLB) is additional money offered by the federal government for families that receive the National Child Benefit Supplement (NCBS). The maximum amount that a beneficiary may receive in their RESP account from CLB payments is $2,000, calculated as $500 payable immediately plus $100 each year until the child is 15 years old. To help cover the cost of opening an RESP, the CLB program will pay an extra $25 with the first $500 CLB payment. In order to receive CLB payments, the beneficiary must be born after December 31, 2003. CLB payments are in addition to the amount that is available from the CESG program.

RESP Withdrawals

Once a beneficiary is accepted into a qualified post-secondary educational institution, they become eligible to make withdrawals from their RESP. These withdrawals are called Educational Assistance Payments (EAPs). The taxable payments may consist of the CESG, A-CESG, CLB, and any investment earnings on all contributions. In addition, the contributions made by the subscriber, which are not taxable, may be paid to the beneficiary or returned to the subscriber at any time.

Withdrawals from an RESP may be used for a number of expenses related to the beneficiary’s post-secondary education, such as tuition, books, accommodation, transportation, and computers.

If the beneficiary does not immediately attend a qualified post-secondary education program, the money in the plan, with the exception of the CLB, can be transferred to a brother or sister’s RESP. The CLB is non-transferable and would have to be returned to the federal government. If transferring the plan is not an option, the contributions may be refunded to the contributor and the CESG money must be returned to the government. Any investment earnings from the RESP is paid to the subscriber as an Accumulated Income Payment (AIP) and becomes taxable income for the subscriber. It’s important to note that RESPs can remain open for up to 36 years. So, you may want to wait to close the plan just in case the beneficiary decides to go to school later on.

Types of RESPs

There are two basic types of RESPs:

  • Individual or family self-directed RESPs
  • Group or scholarship plans

Individual or family self-directed RESPs provide the subscriber with more flexibility and control over their contributions and investment options. The individual plan is ideal if you want to maintain separate RESP accounts for your children. If one child does not use their benefits, the benefits may be transferred to the other child. The individual plan also allows you to open an RESP account for children that you are not related to you. You can also use this plan to open a plan for yourself or another adult.

The family plan is ideal if you have more than one child. Within a family plan, each child has their own account, but benefits may be easily shared if one or more children do not attend a qualified post-secondary institution. Under a family plan, the subscriber and beneficiary must be related, either by blood or adoption.

With a group or scholarship plan, individual contributions are pooled with other participants. Usually, you must make regular contributions and the investments are determined by the scholarship  plan dealer. Each group plan is different and has its own rules.

Registered Disability Savings Plan (RDSP)

registered disability savings plan (RDSP) is a savings plan that is intended to help parents and others save for the long-term financial security of an individual who is eligible for the Disability Tax Credit. In order to be eligible for the Disability Tax Credit, a qualified practitioner must certify that the individual has a prolonged impairment.

Usually, contributors to an RDSP will be the beneficiary or a legal parent/guardian if the beneficiary is a minor (or an adult but not competent to enter into a contract). Contributions are not tax deductible and anyone can make contributions to an RDSP with the written permission of the plan holder. Contributors to an RDSP are not entitled to a refund of their contributions.There is no annual maximum contribution limit; however, the lifetime limit is $200,000. Contributions may be made until the end of the year in which the beneficiary turns 59 years of age.

RDSP Withdrawals

Payments from an RDSP must begin by the end of the year in which the beneficiary turns age 60. Payments from an RDSP are referred to as Disability assistance payments (DAPs). For tax purposes, the beneficiary must report any interest income, grants, and bonds paid out as part of a DAP.

Tax-free Savings Account

The tax-free savings account (TFSA) provides a way to earn investment income tax-free. Whereas other registered accounts allow the deferral of tax on income earned within the plan; the TFSA is unique in that any investment income earned within the plan is tax-free when it is withdrawn.

In order to open a TFSA account, you must have reached the age of majority, defined as age 18 or 19, for the province or territory in which you live. The types of investments permitted in a TFSA include:

  • Cash
  • Mutual funds
  • Securities listed on a designated stock exchange
  • Guaranteed investment certificates (GICs)
  • Bonds
  • Certain shares of small business corporations

TFSA Contribution Limit

The annual TFSA dollar limit was established at $5,000 in 2009, the year that TFSAs were introduced as a registered account. Depending on the rate of inflation, the annual dollar limit will be periodically increased by $500. For example, in 2013, the annual dollar limit was increased to $5,500.

If an individual over contributes to a TFSA in any month, a 1% penalty tax is payable in that month on the highest balance recorded during that month. The 1% penalty tax will be applied every month until the over contribution is withdrawn, or the excess amount is absorbed in the following year’s contribution room limit. If an individual does not contribute to a TFSA, the contribution room is carried forward until it is used. There is no age limit as to how long you can contribute to a TFSA. Contributions to a TFSA are not tax deductible.

Withdrawals from a TFSA

The rules for withdrawing your money from a TFSA are very flexible. You can make withdrawals at any time. In addition, the amount that you withdraw, including any investment income earned, can be recontributed starting January 1st of the following calendar year. All withdrawals are tax-free. Since contributions can be carried forward and withdrawals can be rec-contributed, the contribution room for a TFSA in any given year has three components:

  • the maximum contribution for the current year, i.e. $5,500 plus indexation, if applicable
  • any unused contribution room in the previous year
  • withdrawals made from the TFSA in the previous year
John Smith invested $100,000 in a Canadian equity mutual fund and paid a 4% front-end sales charge. The net asset value per unit (NAVPU) of the fund at the time of purchase was $10. John decides to set up a ratio withdrawal plan under which he receives an annual payment at the end of each year based on 8% of the market value of his investment at the time of the withdrawal. His first withdrawal is due when the fund is valued at $11.75 per unit. Approximately what amount does John withdraw this year?

Correct

The correct answer: $9,024
Your answer: $9,024
Solution: John Smith withdraws $9,024 in the first year, calculated as follows: Step 1: Determine the purchase price. Given the 4% front-end sales commission, the purchase price for John’s units is $10.42, calculated as ($10 NAVPU ÷ (1 – 4% front-end sales charge)). Step 2: Determine the number of units purchased net of commission charges. John purchases 9,600 units, calculated as ($100,000 ÷ $10.42). Note: To receive an accurate calculation, do not clear your calculator. Otherwise, you will incur a rounding error. Step 3: Determine the number of units redeemed via 8% ratio withdrawal plan. John will redeem 768 units, calculated as (9,600 x 8%). Step 4: Determine the amount withdrawn. John will receive a total of $9,024, calculated as (768 units x $11.75 NAVPU).

Thank You!

You can read more posts related to IFIC Exams:

  1. https://learnwithanjali.com/ific-exam/regulatory-environment/
  2. https://learnwithanjali.com/ific-exam/canadian-securities-administrators-csa/
  3. https://learnwithanjali.com/ific-exam/securities-regulatory-bodies-in-quebec/
  4. https://learnwithanjali.com/ific-exam/mutual-fund-legislation/
  5. https://learnwithanjali.com/ific-exam/mutual-funds-collecting-personal-information/
  6. https://learnwithanjali.com/ific-exam/registrant-responsibilities/
  7. https://learnwithanjali.com/ific-exam/compliance/
  8. https://learnwithanjali.com/ific-exam/maintaining-evidence-of-relationship-disclosure/
  9. https://learnwithanjali.com/ific-exam/compliance-issues/
  10. https://learnwithanjali.com/ific-exam/dual-licensing-as-a-life-insurance-agent/
  11. https://learnwithanjali.com/ific-exam/sales-communication/
  12. https://learnwithanjali.com/ific-exam/registration-requirements/
  13. https://learnwithanjali.com/ific-exam/strategic-investment-planning/
  14. https://learnwithanjali.com/ific-exam/suitability-requirement/
  15. https://learnwithanjali.com/ific-exam/know-your-client-kyc/
  16. https://learnwithanjali.com/ific-exam/risk-tolerance/
  17. https://learnwithanjali.com/ific-exam/know-your-product/
  18. https://learnwithanjali.com/ific-exam/assessing-suitability/
  19. https://learnwithanjali.com/ific-exam/economic-factors-and-financial-markets/
  20. https://learnwithanjali.com/ific-exam/financial-markets/
  21. https://learnwithanjali.com/ific-exam/canadas-financial-system/
  22. https://learnwithanjali.com/ific-exam/types-of-investment/
  23. https://learnwithanjali.com/ific-exam/what-you-should-know-about-bonds/
  24. https://learnwithanjali.com/ific-exam/what-are-equities/
  25. https://learnwithanjali.com/ific-exam/what-are-derivatives/
  26. https://learnwithanjali.com/ific-exam/types-of-mutual-funds%ef%bf%bc%ef%bf%bc/
  27. https://learnwithanjali.com/ific-exam/growth-oriented-mutual-funds%ef%bf%bc%ef%bf%bc/
  28. https://learnwithanjali.com/ific-exam/competitive-products%ef%bf%bc%ef%bf%bc/
  29. https://learnwithanjali.com/ific-exam/portfolio-management%ef%bf%bc%ef%bf%bc/
  30. https://learnwithanjali.com/ific-exam/financial-analysis%ef%bf%bc%ef%bf%bc/
  31. https://learnwithanjali.com/ific-exam/mutual-fund-organization%ef%bf%bc%ef%bf%bc/
  32. https://learnwithanjali.com/ific-exam/purchasing-mutual-funds%ef%bf%bc%ef%bf%bc/
  33. https://learnwithanjali.com/ific-exam/redeeming-mutual-funds%ef%bf%bc%ef%bf%bc/
  34. https://learnwithanjali.com/ific-exam/fee-structure/

Disclosure: Some of the links on the website are added, meaning at no additional cost to you, I will earn a commission if you click through or make a purchase. Please support me so that I can continue writing great content for you.

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

Learn with Anjali started because there wasn't an easy-to-consume resource to help students with their studies. Anjali is on single-minded mission to make you successful!

If you would like to suggest topics, leave feedback or share your story, please leave a message.

Leave a message