ETF Regulation. in Canada IMPLICATIONS FOR YOUR BUSINESS. Whitney Bell. Presented By

Transcription

1 IMPLICATIONS FOR YOUR BUSINESS ETF Regulation in Canada Presented By Whitney Bell April 30, 2018

2 2 Agenda ETF Regulation in Canada Proficiency Point of Sale Disclosure and Delivery Obligations Suitability

3 3 New MFDA Proficiency Requirements o Basic proficiency requirements for MFDA dealing representatives must not perform an activity that requires registration unless you have the education, training and experience necessary to perform the activity competently must understand the structure, features and risks of each security that you recommend o MFDA Policy No. 8 Proficiency Standards for Approved Persons Selling ETFs o Establishes minimum proficiency standards for approved persons trading in ETFs to meet the requirements of MFDA Rule and National Instrument o Mutual funds of ETFs does not require additional proficiency o Offering ETFs directly requires additional proficiency

4 4 Considerations for Member Firms Wanting to Offer ETFs o Operational challenges o Change of business for member firm must submit proposal to MFDA o Your firm must have appropriate policies and procedures in place regarding the sale of ETFs o Due diligence to ensure all ETFs meet the definition of a mutual fund o Training provided by your firm must include detailed product information in respect of the ETFs approved for sale 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

5 5 ETF Product Training for Dealing Representatives o Overlap with courses you have already taken on the sale of conventional mutual funds But additional training is required o MFDA explicitly recognized certain courses that meet the requirements Exchange Traded Funds for Mutual Fund Representatives (Canadian Securities Institute) The Exchange-Traded Funds Course (IFSE Institute) Exchange Traded Funds for Representatives of Mutual Fund Dealers (Smarten Up Institute) o There have been other courses since the publication of the bulletin that meet the requirements o Product training can also be offered by member firms Where provided by a member firm, must include an examination

6 6 ETF Product Training for Dealing Representatives (continued) o Characteristics of ETFs Training must address all matters prescribed by the MFDA including Active vs. passive What are indices and different methods of tracking indices Creation and redemption of units Role of designated brokers and market makers Risks of market price diverging from NAV o Exchange trading ETF pricing Quotes system (bid and ask) Market depth and liquidity Types of orders and order entry o Investing in ETFs KYC, KYP and suitability obligations

7 7 Targeted Reforms Proficiency and KYP o Consultation Paper Proposal to Enhance the Obligations of Advisers, Dealers and Representatives Toward their Clients (April 2016) o Expect proposed rule to be published on the targeted reforms early this summer o New proficiency requirements may require all representatives to generally understand the basic structure, features, product strategy, cost and risks of all types of securities o New KYP requirements may require representatives to understand and consider the structure, product strategy, features, costs and risk of each security on their firm s product list Unrealistic and unduly onerous Potential chilling effect as it becomes risky to have a broad product shelf

8 ETF Facts Point of Sale Disclosure o Amendments came into force in September 2017 requiring ETFs to file a summary disclosure document called an ETF Facts o Objective of the regulators was apples-to-apples comparison to mutual funds o Disclosure looks very similar to Fund Facts What does the fund invest in? Risk rating Year-by-year returns Best and worst 3-month returns Average return 8

9 Differences from Fund Facts o Major differences Average daily trading volume over a 12 month period Number of days traded out of the total number of trading days over a 12 month period Market price highest and lowest prices over a 12 month period Average bid-ask spread (amount by which the ask price exceeds the bid price) as a percentage of market price over a 12 month period A description of the difference between market price and NAV A description of market orders and limit orders A warning that ETFs can be volatile at the start and end of the trading day and that limit orders may be useful at that time 9

10 10 ETF Facts Delivery Requirement o New delivery regime requiring a dealer that receives an order to purchase ETF securities to deliver an ETF Facts to the purchaser within two days of the purchase Different delivery requirement for Fund Facts, which are required to be delivered on a pre-sale basis CSA has noted that it will consider the feasibility of requiring pre-sale delivery of ETF Facts - It hasn t made a determination on this yet o Not required to deliver prospectus This is not new, but now there is a statutory exemption rather than having to rely on exemptive relief o The delivery requirement takes effect on December 10, 2018 Before December Dealers relying on relief must deliver ETF Fact or summary document (if no ETF Fact is filed) - Dealers not subject to exemptive relief will have to start delivering ETF Facts on December 10, 2018

11 11 Suitability o Managers of conventional mutual funds are now offering ETFs with strategies that are similar to their conventional mutual fund offerings ETF series of conventional mutual funds o What does this mean for suitability? o Things you should consider Pricing Need for intraday liquidity Switchability o Risk ratings for ETFs Effective as of September 2017, each ETF must calculate a risk rating using the CSA s mutual fund risk classification methodology Onus of determining risk rating for suitability purposes now shifted to the managers

12 Questions?

13 Thank You For more information, contact: Whitney Bell The information contained herein is of a general nature and is not intended to constitute legal advice, a complete statement of the law, or an opinion on any subject. No one should act upon it or refrain from acting without a thorough examination of the law after the facts of a specific situation are considered. You are urged to consult your legal adviser in cases of specific questions or concerns. BLG does not warrant or guarantee the accuracy, currency or completeness of this presentation. No part of this presentation may be reproduced without prior written permission of Borden Ladner Gervais LLP Borden Ladner Gervais LLP. Borden Ladner Gervais is an Ontario Limited Liability Partnership.