On May 16, 2011, staff at the Ontario Securities Commission ("Staff") released the fifth edition of The Investment Funds Practitioner Guide (the "Practitioner"). The Practitioner provides an overview of recent issues identified by Staff resulting from: (i) applications for discretionary relief; (ii) prospectuses; (iii) continuous disclosure documents; and (iv) public inquiries and frequently asked questions. It is intended to assist investment fund managers and their staff or advisors who regularly prepare public disclosure documents and applications for exemptive relief on behalf of investment funds.
A summary of the issues identified in the latest edition of the Practitioner is provided below:
Applications for Discretionary Relief
- Requirement to Calculate Daily Net Asset Value (NAV): Staff does not view the typical cost of calculating NAV on a daily basis as a significant burden. Applicants for relief from this requirement may therefore need to address the following issues: (a) how a portfolio will be managed without the benefit of a daily NAV calculation; (b) whether the nature of the portfolio assets of the investment fund affects the ability to calculate NAV daily; and (c) the additional costs to the fund to calculate a daily NAV.
- Split Share Companies - Front Running Relief: Historically, relief has been granted from the requirements of section 119 of the Securities Act (Ontario) (the "Act"), a front running prohibition, in order to permit purchases and sales between split share companies and their related dealers. Staff has reconsidered the applicability of section 119 of the Act and determined that it may be more appropriate to obtain relief from section 13.5(2) of National Instrument 31-103 Registration Requirements and Exemptions (formerly section 118 of the Act), which prohibits self-dealing.
- Split Share Companies - Secondary Offerings: At the time of their initial distribution, split share companies have routinely received relief from the requirements in National Instrument 81-102 Mutual Funds ("NI 81-102") relating to investments, the calculation and payment of redemptions, the preparation of compliance reports, and the setting of a record date for payment of distributions. When split share companies engage in a secondary offering of their shares, they often request relief from these same provisions of NI 81-102 again. Staff suggested that filers consider whether such applications are necessary as the original relief will have been granted to the issuer itself, not to a particular class of shares. Staff cautioned that new relief may be needed for the calculation and payment of the redemption price of shares, if the split share company is offering a new class of shares not contemplated in its original exemption.
- Publication of Staff Notice 81-714: Staff reminded issuers of the release of OSC Staff Notice 81-714 Compliance with Form 41-101F2 - Information Required in an Investment Fund Prospectus ("Staff Notice 81-714"). This notice sets out Staff views on certain disclosure required by Form 41-101F2 and the types of comments Staff will generally raise in the course of a review of an investment fund long form prospectus. For our discussion on Staff Notice 81-714, please see our March 9, 2011 bulletin.
- Forward Fees: When the use of forward agreements is a material feature of a fund, Staff has raised comments during its review of the fund's prospectus to request the disclosure of fees and any other costs associated with the forward agreements. Staff noted that Filers have shown such fees as a percentage of the forward agreement and have disclosed either the maximum percentage or a range.
- PIFs for Chief Compliance Officer: The prospectus rules require that a personal information form (PIF) be provided for every director or executive officer of the manager (and issuer, if applicable). Staff reminded issuers that the chief compliance officer of the manager is an individual who falls within the definition of "executive officer" as defined in the prospectus rules and a PIF must be provided for this individual.
- Use of Short Form Prospectus: Staff provided guidance on the use of the short form prospectus by new reporting issuers. Specifically, Staff noted that new reporting issuers are not qualified to use a short form prospectus unless they can rely on the exemption in section 2.7 of National Instrument 44-101 Short Form Prospectus Distributions. One criterion of using the short form is that a new reporting issuer must have a final prospectus that includes comparative annual financial statements for its most recently completed financial year. As the short form prospectus regime incorporates by reference a reporting issuer's continuous disclosure record, a fund must have an established continuous disclosure record before it can file a short form prospectus. If a new fund has not yet completed a financial year, Staff's view is that the fund's continuous disclosure record is not comprehensive enough to permit reliance on the exemption to use the short form prospectus. Staff further clarified that the exemption is not available to a new reporting issuer that has filed a final prospectus with an audited opening balance sheet and has the intention of including unaudited interim financial statements in its short form prospectus. Such financial disclosure can not replace audited "annual financial statements" because: (i) an opening balance sheet, although audited, does not reflect the results of a completed financial year since there have not yet been any operations of the fund; and (ii) while interim financial statements capture the recent operations of the fund, they are not accompanied by an auditor's report.
- Relief from 90-Day Filing Requirement: The simplified prospectus and long form prospectus rules both require a final prospectus to be filed no more than 90 days after the preliminary prospectus. An exemption from this requirement may be evidenced by the issuance of a receipt for the final prospectus. Staff reminded issuers that, while relief from the 90-day filing requirement may be evidenced by receipt, the normal application process (including Staff review and consideration of the application; a recommendation being made to the decision maker; and the signing of an approval letter if the decision maker agrees to the relief) must still be observed. Once these steps have been completed, final materials can be filed for Staff's review.
- Review of NI 81-107 Related Disclosure: Staff previously conducted an issue-oriented review of a sample of investment funds to evaluate compliance with the disclosure obligations introduced in National Instrument 81-107 Independent Review Committee for Investment Funds. The review concluded in 2010 and Staff findings were published in OSC Staff Notice 81-713 Focussed Disclosure Review of National Instrument 81-107 Independent Review Committee for Investment Funds ("Staff Notice 81-713"). For our discussion on Staff Notice 81-713, see our June 6, 2011 bulletin.
Public Inquiries and FAQs
- Definition of Index Participation Unit: Staff provided their view on what constitutes a "widely quoted market index" for the purposes of the definition of "index participation unit" (an "IPU") in NI 81-102. Staff believes that the term "market index" should be interpreted in a manner that is consistent with the investment restrictions set out in NI 81-102. As a result, an index, which provides exposure to asset classes or strategies that a mutual fund would not be able to engage in directly (i.e. an index that tracks the price of a commodity, the performance of hedge funds, real property, or that incorporates leverage or shorting strategies), would not generally qualify as a "market index". For this reason, while an index provider may label something as an "index" and that index may appear to be widely quoted, it still may not qualify as a "market index" under NI 81-102. Staff also noted that prospectuses for certain exchange traded funds ("ETFs") include disclosure stating that securities of these ETFs qualify as IPUs for the purposes of NI 81-102. Staff cautioned mutual fund managers and portfolio managers to conduct their own analysis of whether securities of an ETF qualify as an IPU and not rely solely on disclosure provided by the ETF.
- Point of Sale/Fund Facts FAQs: The following issues were clarified by Staff in respect of the content and filing deadlines for the Fund Facts documents:
- Transition period. Every class or series of mutual fund must file and post the Fund Facts to the mutual fund's or mutual fund manager's website by July 8, 2011.
- Filing fees. There are no fees associated with the filing of a Fund Facts document.
- Frequency of filing. After the initial filing of a Fund Facts, the document must be re-filed along with the renewal simplified prospectus and upon the occurrence of a material change that relates to the information contained in the Fund Facts. A change to the investment mix of the fund is not likely to be considered a material change so there will generally not be any requirement to file an amendment simply to update the Top 10 investments list or the portfolio breakdown chart. A change to the fund's investment objectives, however, would generally result in such a requirement.
- Fund Facts format. Form 81-101F3 Contents of Fund Facts Document sets out requirements for content, order and headings but it does not specify or mandate a specific format other than a requirement to use tables in certain areas and there is no requirement for mutual funds to use that exact layout in the sample published with the new form. Provided that the document follows the mandated order for content, is written in plain language and uses a font that is legible, mutual funds will have flexibility in terms of the format of the Fund Facts. Given that the Fund Facts may be disseminated in an electronic format, the information must be presented in a way that enables it to be printed in a readable format.
- Disclosure of past performance. The year-by-year return chart requires a mutual fund to have completed a calendar year (January 1 to December 31) before including performance in the Fund Facts. A mutual fund that completes a calendar year following the filing of a Fund Facts, but before renewal, may amend the Fund Facts to include the relevant past performance information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.