13.4 Mutual Fund Regulation, Fund Facts & Account Opening

Canadian Securities Course CSC

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1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

13.4 Mutual Fund Regulation, Fund Facts & Account Opening

Key Takeaways Explain This Topic AI

NI 81-102 generally limits a mutual fund to 10% of net assets in one issuer and 10% of an issuer's voting or equity securities.

Dealers must deliver the Fund Facts before accepting a purchase; it is usually two pages and never more than four.

A purchaser can withdraw within two business days after receiving the Fund Facts, or cancel within 48 hours after receiving the trade confirmation.

Opening an account requires KYC information, identity verification and a request for a trusted contact person.

KYC must be updated after material changes and at least every 36 months for non-managed accounts.

Last updated: October 2026

Mutual Fund Regulation

NI 81-102 sets investment restrictions that keep conventional mutual funds diversified and liquid. Key limits include:

Concentration: generally no more than 10% of net assets in the securities of any one issuer (government securities are exempt).

Control: a fund may not own more than 10% of the voting or equity securities of one issuer, or invest to gain control of it.

Illiquid assets: no more than 10% of net assets at purchase, with a 15% hard limit.

Borrowing: only temporary borrowing (for example, to meet redemptions), limited to 5% of net assets.

Short selling: conventional mutual funds may short up to 20% of net assets (5% per issuer), with cash cover.

Custody: a qualified custodian must hold the fund's assets.

Mutual funds are sold by registered dealers (mutual fund dealers and investment dealers, both CIRO members) and, for exempt products, by exempt market dealers.

1. Regulatory Disclosure under NI 81-101: The Fund Facts Document

Under National Instrument 81-101 ( Mutual Fund Prospectus Disclosure ) , Canadian securities regulators recognized that lengthy, 100+ page Simplified Prospectuses were rarely read or understood by retail consumers. In response, regulators instituted the mandatory Fund Facts disclosure regime. The Fund Facts Document (usually two pages; never more than four):

• Part I: Quick Facts, Top 10 Investments, Investment Mix, Risk Rating, Performance
• Part I: Best and Worst 3-Month Returns, Who Is This Fund For?, A Word About Tax
• Part II: How Much Does It Cost? (sales charges, MER + TER, trailing commissions)
• Part II: What If I Change My Mind? (withdrawal and cancellation rights) & Unitholder Legal Rights
• Core Properties of Fund Facts

Strict Format & Length: Form 81-101F3 sets two parts. Part I and Part II should each fit on one page, and the whole document may never exceed four pages . It must be written in clear, plain language.

Mandatory Pre-Sale Delivery: Under Canadian securities legislation, a dealer is legally required to deliver or send the Fund Facts document to the client before accepting an agreement to purchase mutual fund units. (Exceptions exist for certain telephone orders or pre-authorized contribution plans where delivery occurs within two business days after transaction execution).

The Seven Core Sections of Fund Facts

Quick Facts: Key fund data at a glance, including fund inception date, total asset value, MER, portfolio manager name, distribution frequency, and minimum initial and subsequent investment amounts.

What Does the Fund Invest In?: Displays the fund's Top 10 Investments (as a percentage of net assets) and the Investment Mix (asset allocation and industry sector breakdown).

How Risky Is It?: Features the standardized 5-tier CSA risk scale ( Low, Low to Medium, Medium, Medium to High, High ) based on the fund's 10-year annualized standard deviation.

How Has the Fund Performed?: Discloses past performance over the past 10 calendar years (net of MER), highlighting returns, negative years, and the fund's best and worst 3-month rolling returns to illustrate short-term volatility.

Who Is This Fund For?: Delineates the fund's suitability profile, outlining the target investor's time horizon, capital growth vs. income objectives, and ability to endure market fluctuations.

A Word About Tax: Explains the tax consequences of holding units in registered accounts (RRSP, TFSA, FHSA, RRIF) versus non-registered taxable accounts.

How Much Does It Cost?: Outlines all ongoing costs, including front-end load ranges, ongoing fund expenses ( MER and TER breakdown ), and ancillary costs (switch fees, short-term trading fees).

2. Unitholder Legal Rights and Statutory Remedies

To ensure fair dealing and protect consumers from aggressive or fraudulent sales tactics, Canadian provincial securities acts provide mutual fund unitholders with robust statutory legal rights: Unitholder Statutory Legal Protections:

1. Withdrawal and Cancellation Rights (Cooling-Off):

• Withdraw from an agreement to buy within 2 business days after
• receiving the simplified prospectus or Fund Facts, OR

• Cancel the purchase within 48 hours after receiving the trade confirmation.

2. Statutory Right of Action for Damages or Rescission:

• Triggered if the Simplified Prospectus, Fund Facts, or financial statements

contain a material misrepresentation.

• Right to unwind trade (rescission) or sue manager/dealer for financial losses (damages).

1. The Right of Withdrawal and the Right to Cancel

Under provincial securities acts, a mutual fund purchaser has two separate cooling-off rights, as the Fund Facts itself explains:

Right of withdrawal: The investor may withdraw from an agreement to buy mutual fund units within two business days after receiving the simplified prospectus or Fund Facts document.

Right to cancel: The investor may cancel a purchase within 48 hours after receiving the trade confirmation.

Amount returned: In some provinces, a cancelled purchase returns the lower of the amount invested and the current value, so a market decline in the meantime can reduce the refund.

Remedy: The transaction is rescinded, and the investor's purchase capital is refunded in full.

2. Right of Rescission and Action for Damages

If a mutual fund's Simplified Prospectus, Annual Information Form, Fund Facts, or continuous financial disclosure contains a material misrepresentation (an untrue statement of material fact or an omission of a material fact necessary to make the statement not misleading):

Right of Rescission: The unitholder has the legal right to unwind the transaction and receive back their original purchase capital (or prevailing NAVPS, depending on jurisdiction).

Action for Damages: The unitholder can initiate legal action for financial damages against the investment fund manager, the fund's corporate directors, and the dealer firm that sold the security.

Opening and Updating a Mutual Fund Account

Before accepting a purchase, the dealer must open the account properly:

Know your client: collect personal and financial circumstances, investment needs and objectives, investment knowledge, risk profile and time horizon, as required by NI 31-103.

Verify identity: confirm the client's identity, and the identity of any third party with an interest, as required by Canada's anti-money-laundering law (the PCMLTFA).

Trusted contact person: ask the client to name a trusted contact person. Since the Client Focused Reforms, firms may place a temporary hold if they reasonably believe a vulnerable client is being financially exploited or lacks mental capacity.

Disclose leverage risk: if the client borrows to invest, give the required written disclosure that leverage magnifies gains and losses, and assess whether borrowing suits the client.

Relationship disclosure: explain the account, the products offered, costs, conflicts and how complaints are handled.

KYC information must be kept current: update it when the firm learns of a material change, and at least every 36 months for accounts that are not managed (every 12 months for managed accounts).