The Ontario Securities Commission (OSC) recently released its annual Summary Report for Investment Fund Issuers, providing an overview of key policy initiatives, emerging issues and compliance reviews concerning the investment fund industry. This legal update summarizes the key trends and provides tips for investment fund issuers.

Electronic delivery of documents

  • Trend: In keeping with the trend to shift from paper filings to electronic filings, OSC Rule 11-501 – Electronic Delivery of Documents to the Ontario Securities Commission, makes it mandatory for market participants to deliver the following documents electronically: (i) reports of exempt distributions, (ii) applications for exemptive relief and notices, (iii) pre-files or waiver applications (for prospectuses or applications), and (iv) forms, notices and other documents required under applicable securities rules that are not filed through SEDAR, SEDI or NRD.
  • Tip: The above rule became effective February 19, 2014. The steps required for electronic delivery under the rule are set out at: https://www.osc.gov.on.ca/filings.

Mortgage pools

  • Trend: Over the last year, the OSC saw an increase in the number of prospectus offerings by issuers, purporting to be investment funds, that invest substantially all of their assets in a mortgage investment entity (MIE) holding a pool of mortgages. Typically, the mortgages that the MIEs purchase are originated and serviced by mortgage originators who sometimes act as the MIE's manager and who use the MIE as a source of funding for their mortgage lending business.
  • Tip: The OSC has taken the view that these types of MIEs are not investment funds. Such issuers must therefore prepare and file any initial prospectuses under Form 41-101F1 – Information Required in a Prospectus, and will be subject to continuous disclosure requirements under National Instrument 51-102 – Continuous Disclosure Obligations.

Increased use of derivatives

  • Trend: The OSC has seen investment funds increase their use of derivatives to more efficiently gain exposure to investments that may be hard to reach directly as well as to modify or hedge their exposure in response to macro-economic changes.
  • Tip: The OSC is focusing on whether funds are sufficiently disclosing their use of investment exposure derivatives. In particular, the OSC has stated that the disclosure must be sufficient for investors to understand how investment exposure is created and modified as well as the additional risk associated with these derivatives. In addition, the OSC is looking to ensure that the use of exposure adjustments falls within the scope of a fund's stated investment objectives and strategies.

Non-investment grade debt

  • Trend: The OSC has noticed an increase in offerings of non-investment grade fixed income products. The OSC has noted that the names and description of the type of investment funds that offer non-investment grade debt products may include words such as "senior" or "secured," which may prevent investors from being alerted to the higher risks accompanying these products.
  • Tip: Where a fund offers non-investment grade debt, the OSC will likely focus on (i) whether the fund's name and description may preclude investors from being alerted to the higher risks associated with the non-investment grade debt, and (ii) whether the fund's disclosure documents contain sufficient information about the type, features and risks of the non-investment grade debt included in the fund's portfolio.

Risk rating in Fund Facts

  • Trend: The OSC reviewed the Fund Facts of mutual funds where two funds within a fund family each had exposure to the same underlying fund or portfolio, but one of the funds was a currency hedged fund and the other was an unhedged fund. The OSC found that the Fund Facts tended to have the same risk rating for both the currency hedged fund and the unhedged fund, even though the volatility of past returns between the two funds differed.
  • Tip: If two funds in the same fund family are similarly exposed to the same underlying fund or portfolio but one fund is a currency hedged fund and the other is unhedged, the risk rating in the Fund Facts of the currency hedged fund should be determined separately from that of the unhedged fund.

Operating expenses

  • Trend: In the past year, the OSC has focused on reviewing the disclosure of fees and expenses in prospectuses and continuous disclosure documents, including a review of the allocation of overhead expenses between fund managers and their funds.
  • Tip: The OSC's review is ongoing and is targeting publicly offered investment funds, including conventional mutual funds, ETFs and closed-end funds, as well as bank-affiliated fund managers. The OSC is focused on how fund managers are addressing conflicts of interest and whether the disclosure in prospectuses, financial statements and management reports of fund performance provides investors with a sufficient description of related-party transactions.

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