The OSC's Investment Funds Branch yesterday released the November 2012 issue of its Investment Funds Practitioner. The publication is intended to provide an overview of issues identified by the Branch in recent filings made by investment funds and is published on a periodic basis.
In this edition of the newsletter, of particular interest are the Branch's comments regarding when an entity meets the definition of a "non-redeemable investment fund". Consistent with what the OSC (and other Canadian Securities Administrators') staff have said in the past, the newsletter states that staff continue to regard an investment fund as an issuer that does not seek to exercise control over or become involved in the management of investee companies, and that they generally expect the investment approach to be passive in nature. However, the newsletter goes on to state that, in staff's view, "any degree of control or active involvement in the management of the investee companies by an issuer would mean that the issuer is not an investment fund."
According to the newsletter, in determining whether an issuer exercises control over, or is involved in the management of an investee company (which would disqualify the issuer from being considered an investment fund), staff will consider indicators including: (i) whether the issuer holds securities representing more than 10% of the outstanding equity or voting securities of the investee company; (ii) any right of the issuer to appoint board or board observer seats on the investee company; (iii) restrictions on the management, or approval or veto rights over decisions made by the management, of the investee company by the issuer; or (iv) any right of the issuer to restrict the transfer of securities by other securityholders of the investee company. The presence of one or more of the preceding factors, according to the newsletter, is "generally indicative of control".
These comments are noteworthy because the issue of whether a fund is an "investment fund" has broader implications, including in determining whether a person who manages the business or affairs of an entity is an "investment fund manager" and therefore required to register as such. This is a question which "managers" of private equity, venture capital and similar types of funds/investment entities have struggled with for quite some time, especially where the investment portfolio includes a degree of passive investment. This interpretation could arguably help to clarify the situation for such managers, given the statement in the newsletter that "any degree of control, would mean the issuer is not an investment fund". The caveat, of course, is that it remains to be seen whether this view is shared by the Investment Funds Branch's counterparts in the Compliance and Registrant Regulation Branch of the OSC, and by other CSA staff, and if not, whether any disparate views among staff can be reconciled. We intend to continue our discussions with CSA staff in order to obtain greater clarity on this issue.
With respect to prospectuses, the newsletter highlights a number of issues identified in recent investment funds' filings, including the use of bulleted placeholders for items that should be disclosed at the time of preliminary filings, insufficient statements regarding the investment objectives of a bottom fund in certain fund-of-fund structures, recommended practices for filing linked note pricing supplements, recommended practices where the manager charges a fixed administration fees with adjustment payments, and the use of images and artwork in prospectuses.
On the issue of applications for exemptive relief, the newsletter discusses relief applications granted in connection with certain managed accounts, sub-adviser conflicts of interest (including how the related provisions of NI 81-102 and NI 81-107 intersect in that regard), the use of past performance data in a prospectus, and index funds that change the index being tracked.
Meanwhile, continuous disclosure issues are also discussed. Specifically, staff recently began a review program for advertising and marketing materials of a sample group of investment funds. Going forward, four to six fund managers will be selected for review on a quarterly basis. The requirement to provide notification of changes to IRC composition, the electronic filing of NI 45-106 reports, and the need to provide the complete history of amended documents are also discussed.
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