The Investment Funds Branch of the Ontario
Securities Commission recently published the April
2012 issue of its Investment Funds
Practitioner. The publication provides an overview
of issues identified by the Branch arising from exemptive relief
applications, prospectus filings and continuous disclosure
documents filed by investment funds with the OSC.
The Practioner highlights a number of issues that have come to
light in the course of prospectus reviews, including amending a
final prospectus to fix incorrect fee disclosure, and fund names
that are inconsistent with the fund's investment objectives or
strategies. On the latter issue, Branch Staff state that fund
managers should select names that "closely reflect the
fund's investment objectives" and that distinguish the
funds from others. Branch Staff will consider whether additional
guidance or rule-making is needed on this point.
Staff have also considered the issue of ETFs that track indices
that are not widely used or recognized. According to the
Practitioner, a fund's disclosure respecting investment
objectives cannot be limited to a statement that the fund aims to
replicate the performance of a specific index. Additional
information is required, including with respect to primary asset
composition and key features of the fund under normal market
conditions. Staff have also started reviewing portfolio
transparency of actively-managed ETFs in continuous distribution
and advise that they expect any separate fees that are paid to a
counterparty under a forward agreement (intended to compensate for
the cost of hedging its exposure) to be disclosed in the prospectus
of the fund.
Also discussed is Branch Staff's concern with closed-end
funds that propose to invest either directly or through a
derivative such as a forward agreement, in foreign-based investment
funds or portfolios that are not reporting issuers in Canada.
According to the Practitioner, Branch Staff will generally ask for
certain disclosure concerning each underlying fund in the course of
their prospectus review, and may ask that certain disclosure, such
as the risk associated with enforcing legal rights against
non-residents, be highlighted and put in a textbox on the
prospectus cover page. Staff further express their views on how
continuous disclosure obligations of the fund may be impacted and
advise that they typically will request the underlying fund manager
to file a submission of jurisdiction and appointment for service of
process. The Practitioner advises that Staff typically will ask
that the financial statements and other continuous disclosure of
the underlying fund be filed on the SEDAR profile of the closed-end
Finally, with respect to prospectus offerings, Branch Staff have
highlighted their ongoing concerns with standalone warrant
offerings by closed-end funds, including the dilutive effective on
the value of units, the potential for such offerings to be coercive
to existing unitholders and the potential conflict of interest that
may exist with respect to the manager of the fund.
Continuous Disclosure Issues
In this area, the Practioner canvasses issues emanating from
Branch Staff's recent review of select investment funds that
make regular distributions to investors. A number of issues
emanating from the review were identified, including the practice
of paying distributions that are regularly and significantly in
excess of the fund's increase in NAV from operations. According
to Branch Staff, whereas terms such as "yield" or
"income" imply earnings, such distributions are, in
substance, a return to investors of capital.
Further, Branch Staff state that funds that pay distributions in
the form of reinvested units as a default conflicts with a
fund's stated focus of providing investors with regular income,
as the onus falls on the investor to select distributions in cash.
The Practioner thus outlines a number of disclosure related
obligations required of such funds. Further guidance or rule-making
may be released.
The Practitioner also discusses Branch Staff's recent
reviews of portfolio disclosure (observations and guidance arising
out of the review are expected by this summer) and Fund Facts
risks. On the latter issue, Branch Staff remind filers that they
will generally consider changes to a mutual fund's risk level
to be a material change under securities legislation.
Staff of the Investment Funds Branch are accepting feedback on
the Practioner and suggestions for future topics to be
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.
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