Of particular interest, Branch staff are looking at whether an
issuer investing in non-guaranteed mortgages is, in substance, a
corporate issuer rather than an investment fund. In response to an
increase in the number of non-redeemable investment funds investing
all or most of their assets in pools of non-guaranteed mortgages
(also referred to as mortgage investment corporations or MICs),
staff have begun to examine the substance of such transactions.
According to the Practitioner, any degree of control or active
involvement by the mortgage originator or service provider in the
formation or operation of the non-redeemable investment fund or
portfolio of the fund will cause staff to question whether the
issuer is an investment fund. While further guidance on the issue
is expected, the Branch recommends that counsel contact staff at an
early stage of planning in these types of situations.
The Practitioner includes two notes on best practices for
prospectus disclosure—there is one “do” and one
Do: Specifically, the Practitioner outlines Branch staff’s
expectation that, in addition to the form requirements, filers that
use a short form prospectus are expected to include a "Fees
and Expenses" section that describes, among other things, the
(i) expenses of the offering; (ii) the subscription fee; (iii)
management fees; (iv) operating expenses; and (v) fees payable by
securityholders of the fund.
Don’t: Branch staff’s position is that disclaimers
of liability for third party information should not be included in
a prospectus. Many prospectuses include disclaimers indicating that
the issuer is not responsible for information provided by third
parties (such as, for example, economic data). Since securities law
makes issuers liable for any misrepresentation in a prospectus,
including those originating with a reliable third party, in Branch
staff’s view, issuers are unable to waive liability for such
third party information and such disclaimers should not be
Branch staff also remind issuers that Fund Facts documents and
IRC Reports to securityholders must be prominently displayed on the
website of the fund, fund family or manager.
Beyond the issues discussed above, the Practitioner also
considers such topics as scholarship plans making limited
investments of the income portion of the plans in equity
securities, character conversion transactions, past performance
disclosure in flow-through limited partnership prospectuses and
margin deposit exemptive relief for commodity pools.
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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