Browse Analysis of Managed and Structured Products

19.2.1 Mutual Fund Trusts And Mutual Fund Corporations

Learn about the structures, regulations, and key differences between mutual fund trusts and mutual fund corporations in Canada, including their governance under National Instrument (NI) 81-102.

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.

CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## What are the two main structures for ETFs in Canada? - [ ] Real estate trusts and equity corporations - [ ] Closed-end funds and mutual fund trusts - [x] Mutual fund trusts and mutual fund corporations - [ ] Pension funds and insurance funds > **Explanation:** In Canada, ETFs are typically structured as either mutual fund trusts or mutual fund corporations. These structures allow ETFs to be regulated and managed effectively. ## Which regulatory instrument primarily governs mutual fund trusts and corporations in Canada? - [ ] National Instrument 51-201 - [ ] National Instrument 43-101 - [x] National Instrument 81-102 - [ ] National Instrument 31-103 > **Explanation:** Mutual fund trusts and corporations in Canada are governed under National Instrument (NI) 81-102, which regulates their structure and operating procedures. ## What organization must ETF-related dealers be registered with in Canada? - [x] Mutual Fund Dealers Association (MFDA) and Investment Industry Regulatory Organization of Canada (IIROC) - [ ] Canadian Banking Association (CBA) - [ ] Canadian Securities Exchange (CSE) - [ ] Toronto Stock Exchange (TSX) > **Explanation:** Dealers dealing with ETFs must be registered with either the Mutual Fund Dealers Association (MFDA) of Canada or the Investment Industry Regulatory Organization of Canada (IIROC). ## Which types of ETFs are mentioned in the text under NI 81-102 regulations? - [ ] Commodity ETFs and bond ETFs - [ ] Real estate ETFs and currency ETFs - [x] Index ETFs and active ETFs - [ ] Forex ETFs and leveraged ETFs > **Explanation:** The text mentions index ETFs and active ETFs as examples of types under NI 81-102 regulations. ## Under NI 81-102, what is limited? - [ ] The number of dealers selling ETFs - [x] The use of leverage and derivatives for non-hedging purposes - [ ] The number of ETF types available - [ ] The maximum investment in ETFs > **Explanation:** NI 81-102 limits the use of leverage and the use of derivatives for non-hedging purposes to manage risks effectively. ## According to the text, what must mutual fund dealing representatives meet to deal in ETFs? - [ ] Marketing standards - [ ] Performance benchmarks - [x] Minimum proficiency standards - [ ] Membership requirements > **Explanation:** Mutual fund dealing representatives must meet minimum proficiency standards to sell ETFs to fulfill requirements under MFDA Rule 1.2.3 and NI 31-103. ## Which MFDA policy discusses proficiency standards for mutual fund dealing representatives who sell ETFs? - [ ] Policy No. 6 - [x] Policy No. 8 - [ ] Policy No. 10 - [ ] Policy No. 5 > **Explanation:** MFDA Policy No. 8 covers the proficiency standards that mutual fund dealing representatives must meet to sell ETFs. ## Which specific rule under MFDA must representatives satisfy to sell ETFs? - [x] MFDA Rule 1.2.3 - [ ] MFDA Rule 2.1.4 - [ ] MFDA Rule 3.2.2 - [ ] MFDA Rule 4.1.5 > **Explanation:** Representatives must satisfy requirements under MFDA Rule 1.2.3 to be proficient in selling ETFs. ## What other National Instrument is mentioned in conjunction with the MFDA rules related to ETFs? - [ ] NI 51-201 - [ ] NI 43-101 - [ ] NI 81-104 - [x] NI 31-103 > **Explanation:** NI 31-103, which covers registration requirements, exemptions, and ongoing obligations, is also mentioned alongside MFDA rules regarding ETFs. ## Why is proficiency important for mutual fund dealing representatives according to the provided text? - [ ] To compete with other financial institutions - [ ] To increase their commission rates - [x] To meet regulatory requirements and ensure proper investment advice - [ ] To diversify their professional skills > **Explanation:** Proficiency is critical so that representatives can meet regulatory requirements and provide proper investment advice to ensure that clients are well-informed and protected.

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Sunday, July 21, 2024