Browse Analysis of Managed and Structured Products

19.2 Regulation And Structure Of Exchange-traded Funds

Comprehensive guide on the regulation and structure of exchange-traded funds (ETFs), covering regulatory requirements and legal structures in Canada.

The Regulation And Structure Of Exchange-Traded Funds

Exchange-traded funds (ETFs) are popular investment vehicles that combine the features of mutual funds and stocks. They are regulated under either of two national instruments in Canada, depending on their structure. Understanding the regulatory requirements and different legal structures of ETFs is crucial for financial professionals and investors alike.

Types of ETFs Structures and Their Regulatory Requirements

There are two primary legal structures under which ETFs operate:

  1. Corporate Class ETFs
  2. Trust Class ETFs

1. Corporate Class ETFs

Corporate Class ETFs are established as classes of shares within a mutual fund corporation. These funds are regulated by the National Instrument 81-102 ( extit{NI 81-102}):

  • Key Features:

    • They can provide tax-efficient distributions through the corporation.
    • They have the ability to offer capital gains reduction benefits when structured correctly.
  • Regulatory Compliance:

    • Corporate Class ETFs must comply with the legal and taxation standards stipulated in NI 81-102.
    • They are subject to fiduciary standards and periodic financial disclosures.
    • Investment restrictions and governance outlines are dictated by the Instrument.

2. Trust Class ETFs

Trust Class ETFs are structured as investment trusts, the most frequent form for ETFs. They are governed by National Instrument 81-107 ( extit{NI 81-107}):

  • Key Features:

    • Beneficiaries hold the units of the ETF.
    • The trustee is responsible for managing the trust’s assets in favor of the unit-holders.
    • They can facilitate efficient distribution of income and capital gains.
  • Regulatory Compliance:

    • Trust Class ETFs must adhere to guidelines set by NI 81-107, concerning investment policies and operating standards.
    • Regulations including disclosure, mutual funds restrictions, and operational attributes are administered by NI 81-107.

Frequently Asked Questions (FAQs)

Q1: What is an Exchange-Traded Fund (ETF)?

A: An ETF is a type of investment fund that is traded on stock exchanges and holds a collection of assets such as stocks, bonds, or commodities.

Q2: How are ETFs different from mutual funds?

A: ETFs are traded on exchanges like stocks, while mutual funds are bought and sold based on their net asset value (NAV) at the end of the trading day. ETFs typically have lower expense ratios than mutual funds.

Q3: What are the advantages of investing in ETFs?

A: ETFs offer advantages such as liquidity, tax efficiency, low expense ratios, and diversification.


  • National Instrument 81-102 (NI 81-102): A regulatory framework for mutual funds and ETFs, governing their operations, disclosure, and investor interactions.
  • National Instrument 81-107 (NI 81-107): A regulatory framework targeted at mutual funds organized as investment trusts, covering governance and operational criteria.
  • NAV (Net Asset Value): The value of one share of the Fund, computed as total assets minus total liabilities divided by outstanding shares.
  • Unit-holder: An investor who owns units of a mutual fund or ETF.
  • Fiduciary Standards: Legal obligations of fidelity and care owed by trustees or fund managers to the beneficiaries or investors.

Key Takeaways

  • ETFs are structured as either Corporate Class or Trust Class funds, each governed by distinct National Instruments in Canada.
  • Both structures have unique regulatory compliance requirements involving sufficient disclosure, investment limitations, and fiduciary responsibilities.
  • Understanding the structure and regulation of ETFs helps investors make informed decisions to meet their financial goals.

Diagram: ETF Structure Overview

    graph TB
	    A[Exchange-Traded Funds] --> B[Corporate Class ETFs]
	    A --> C[Trust Class ETFs]
	    B --> D[Regulated by NI 81-102]
	    C --> E[Regulated by NI 81-107]
	    D --> F[Tax-efficient distributions and capital gains]
	    E --> G[Efficient distribution of income and capital gains]

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## Under which national instruments are exchange-traded funds (ETFs) regulated? - [ ] NI 31-103 and NI 81-107 - [x] NI 81-102 and NI 41-101 - [ ] NI 23-103 and NI 33-109 - [ ] NI 44-102 and NI 45-106 > **Explanation:** ETFs are regulated under National Instrument 81-102 (investment funds) and National Instrument 41-101 (general prospectus requirements), depending on their structure. ## What is the primary regulatory instrument for investment funds, including ETFs? - [ ] National Instrument 31-103 - [ ] National Instrument 23-103 - [x] National Instrument 81-102 - [ ] National Instrument 45-102 > **Explanation:** National Instrument 81-102 is the primary regulatory instrument covering investment funds, including ETFs, setting forth the rules and regulations applicable to their operations. ## Which national instrument sets the general prospectus requirements for ETFs? - [ ] National Instrument 81-104 - [ ] National Instrument 31-101 - [x] National Instrument 41-101 - [ ] National Instrument 23-101 > **Explanation:** National Instrument 41-101 outlines the general prospectus requirements for ETFs, describing the necessary disclosures and framework for offering these funds to the public. ## How are ETFs different from traditional mutual funds in terms of trading? - [ ] ETFs cannot be traded during market hours - [ ] ETFs require a middleman for buying and selling - [x] ETFs are traded on the stock exchange - [ ] ETFs have no regulatory oversight > **Explanation:** Unlike traditional mutual funds, ETFs are traded on stock exchanges, allowing investors to buy and sell ETF shares throughout the trading day at market prices. ## What legal structure type can an ETF have if it is regulated under NI 81-102? - [ ] Closed-end fund - [x] Mutual fund - [ ] Private equity fund - [ ] Hedge fund > **Explanation:** ETFs regulated under NI 81-102 typically have the legal structure of a mutual fund, adhering to specific rules and regulations set forth for such funds. ## What characteristic typically distinguishes an ETF regulated under NI 41-101 from others? - [ ] Lack of transparency - [ ] Limited liquidity - [x] Simplified disclosure requirements - [ ] High management fees > **Explanation:** ETFs regulated under NI 41-101 typically have simplified disclosure requirements as outlined in the general prospectus requirements outlined in this national instrument. ## Which of the following is NOT a characteristic of ETFs? - [ ] Transparency of holdings - [x] Lack of regulation - [ ] Lower expense ratios - [ ] Intraday trading > **Explanation:** ETFs are well-regulated financial instruments, offering transparency of holdings, lower expense ratios, and the ability to trade intraday, unlike the characterized option. ## What benefit do the regulatory frameworks NI 81-102 and NI 41-101 provide to investors in ETFs? - [ ] No protection or clarity - [ ] Fixed percentage returns - [x] Legal protection and transparency - [ ] Guaranteed profits > **Explanation:** The regulatory frameworks NI 81-102 and NI 41-101 provide legal protection and ensure transparency in the operation and assessment of ETFs, safeguarding investors' interests. ## What is the role of the Canada Securities Administrators (CSA) in the regulation of ETFs? - [ ] Setting interest rates - [ ] Enforcing tax laws - [x] Coordinating securities regulation across Canada - [ ] Issuing ETF shares > **Explanation:** The Canada Securities Administrators (CSA) coordinates securities regulation across Canada to ensure uniformity, protect investors, and oversee the proper functioning of ETFs and other securities. ## Why is transparency of holdings beneficial for investors in ETFs? - [x] It allows investors to see the exact assets the fund holds - [ ] It restricts the fund’s performance - [ ] It increases the fund’s volatility - [ ] It hides the fund's strategies > **Explanation:** Transparency of holdings in ETFs allows investors to see the exact assets the fund holds, aiding in informed decision-making and building trust in the investment product.

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