19.2.1 Mutual Fund Trusts And Mutual Fund Corporations

Overview

Mutual Fund Trusts and Mutual Fund Corporations

In Canada, Exchange Traded Funds (ETFs) are typically organized either as mutual fund trusts or mutual fund corporations. Both of these structures are subject to regulations under National Instrument (NI) 81-102. Investors can purchase and trade such ETFs through various dealers registered with the Mutual Fund Dealers Association (MFDA) or the Investment Industry Regulatory Organization of Canada (IIROC).

Types of ETFs

Several types of ETFs may be associated with these structures, including index ETFs and active ETFs. Each type has its specific features and strategies, with constraints imposed on leverage and derivative usage for non-hedging purposes by NI 81-102 regulations.

Did You Know?

Under MFDA Policy No. 8 – Proficiency Standard for Approved Persons Selling Exchange Traded Funds, mutual fund dealing representatives must meet specific proficiency standards. These standards are necessary to comply with MFDA Rule 1.2.3 and NI 31-103 – Registration Requirements, Exemptions, and Ongoing Obligations.

Regulatory Bodies and Rules

National Instrument (NI) 81-102

National Instrument 81-102 sets out the framework for the operations of mutual funds in Canada. This regulation ensures that mutual funds remain transparent, have limited leverage, and use derivatives primarily for hedging purposes. The regulation covers the following:

• Investment Restrictions: Limits on asset concentration and exposure to individual issuers.
• Operational Standards: Defines standards for the accounting, valuation, and purchasing/selling of ETFs.
• Limits on Leverage and Derivatives: Ensures limited use of leverage and regulates the use of derivatives strictly for hedging.

MFDA and IIROC

1. MFDA: Oversees mutual fund dealers and sets rules and regulations to protect investors.
2. IIROC: Regulates securities dealers and trading on equity marketplaces in Canada.

These organizations ensure that all dealers adhere to the industry’s standards and regulations, fostering trust and transparency in the system.

Proficiency Standards

To ensure proficiency in dealing with ETFs, MFDA mandates that mutual fund dealing representatives complete specific training and maintain their education. This requirement ensures that investors receive accurate, reliable advice and that they are protected under existing frameworks.

FAQ

What are mutual fund trusts?

Mutual fund trusts are investment structures where investors pool their money to invest in diversified portfolios of stocks, bonds, or other securities. Administrators within the trust manage these portfolios to cater to the set investment objectives.

What are mutual fund corporations?

Mutual fund corporations are another form of investment structure wherein the corporation establishes multiple share classes. This provides a more tax-efficient way of managing various investment outlets within a single corporate structure.

What is NI 81-102?

NI 81-102 is part of Canadian securities regulations guiding the structure, management, and operation of mutual funds. It aims to protect investors by ensuring transparency, limiting risk, and managing leverage and derivatives usage.

Key Takeaways

• ETFs in Canada are structured either as mutual fund trusts or mutual fund corporations.
• These structures are regulated under NI 81-102, ensuring safe investment environments by limiting leverage and derivatives usage for non-hedging purposes.
• Investors can access ETFs through dealers registered with MFDA and IIROC, both of which set high standards for proficiency and ethics.
• Mutual fund trusts pool investor resources to diversify investments, while mutual fund corporations provide multiple share classes under one corporate umbrella.
• Educational and proficiency standards are enforced to safeguard investor interests and maintain industry integrity.

Glossary

• Exchange Traded Fund (ETF): A type of investment fund traded on stock exchanges, somewhat like stocks, that holds assets such as stocks, commodities, or bonds.
• Mutual Fund Trust: An investment vehicle in which numerous investments are funded by a pool of investors and operated by a professional portfolio manager
• Mutual Fund Corporation: A corporate structure allowing investors to diversify through multiple share classes within a single corporate framework.
• NI 81-102: A regulation governing the operation of mutual funds in Canada.
• MFDA: Mutual Fund Dealers Association, the regulatory body for mutual fund dealers in Canada.
• IIROC: Investment Industry Regulatory Organization of Canada, which regulates all investment dealers and trading activity on debt and equity marketplaces in Canada.
• Leverage: The use of borrowed funds to increase the potential return on investment.
• Derivatives: Financial securities whose value is dependent upon or derived from, an underlying asset or group of assets.
• Hedging: An investment strategy used to offset the risk of price movements in an asset.