The Ontario Securities Commission (OSC) published the most recent edition of The Investment Funds Practitioner on July 23, 2015. This edition of The Investment Funds Practitioner features guidance on the OSC's prospectus review priorities, including with respect to disclosure of fees and expenses; default mutual fund distributions with respect to fixed rate distribution securities and disclosure of Independent Review Committee compensation.
The OSC noted that in its prospectus reviews of investment funds, it would focus on three key areas of disclosure. First, OSC staff will focus on fees and expenses disclosure. In particular, a summary of all applicable fees and expenses and plain language explanations of fees and expenses would have to be provided to enable investors to understand what each fee is for and what services or activities the fee covers. Fees and expenses would also have to be disclosed in a sufficiently clear manner to allow OSC staff to determine that there is no duplication of fees and expenses and whether the overall cost of the investment fund is similar to comparable funds.
In addition to fees and expenses, the two other areas that OSC staff intend to focus their prospectus reviews on are disclosure with respect to different classes or series of investment funds and investment strategies and objectives. OSC staff noted that prospectus disclosure must be sufficient to allow investors to distinguish between different classes or series of an investment fund. Investors should be able to understand the different purposes of the various classes or series, the different types of investors that the class or series is intended for, differences in dealer compensation and differences in fees among other factors. Finally, the OSC noted that investment objectives and strategies should be described with sufficient clarity to allow investors to understand the fund and the asset classes the fund invests in and to understand the differences between multiple funds in a prospectus or fund family that appear similar in name and/or investment strategies.
Other Notable Issues
The Investment Funds Practitioner also touched on a number of other key issues:
- Fixed rate distribution securities (FRDS or T-series) default distribution policies. FRDS are funds or series that seek to make regular distributions to provide monthly cash flow, partially comprised of return on capital. According to OSC staff, FRDS should not default to reinvesting monthly distributions. OSC staff are concerned that such a default policy could create investor confusion because reinvestment appears to be inconsistent with the purpose of FRDS. OSC staff advise that they have been and will continue to ask fund managers to explain why a default reinvestment policy is appropriate and to consider having a default policy of making monthly distributions.
- Mutual funds prohibited from investing in closed-end funds. OSC staff remind fund managers that recent amendments to NI 81-102 Investment Funds (NI 81-102) prohibit a mutual fund from investing in or holding securities of a closed-end fund. Mutual funds that filed a prospectus on or before September 22, 2014 have until March 21, 2016 to comply unless exemptive relief has been obtained. Mutual funds invested in closed-end funds with renewal prospectuses receipted between March 2015 and March 2016 are eligible to distribute securities beyond March 21, 2016 but they can't be invested in closed-end funds beyond that date.
- IRC compensation disclosure. Independent Review Committee compensation must be disclosed in Annual Information Forms and in investment fund prospectuses. OSC staff advise that disclosing only aggregate compensation will not suffice. The name of the individual IRC member and the amount of compensation actually paid to such member, including any expenses reimbursed by the fund, during the fund's most recently completed financial year must be disclosed.
- Industry award disclosure. OSC staff refer fund managers to the requirements of s. 15.3(4) of NI 81-102 and state that all ratings or rankings disclosed in advertising and marketing materials must be compliant. In particular, OSC staff advise that no references should be made to industry awards which are based partially on a subjective component and that this practice should be discontinued.
In addition to the foregoing, The Investment Funds Practitioner also provides guidance with respect to applications for exemptive relief involving inter-fund trades with pooled funds and future-oriented relief for pooled funds investing in related pooled funds. For further information, please consult The Investment Fund Practitioner.
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