According to the Practitioner, Branch staff have noticed that
some pricing supplements for linked notes whose reference asset is
a fund or ETF do not disclose the fees associated with the
ownership of the reference asset. As such, funds are reminded to
disclose any fees charged by the reference asset that affect the
return of the notes.
Meanwhile, the Practitioner states that Branch staff are
increasingly scrutinizing linked notes that have autocall features.
Staff are specifically concerned that autocall notes could be
mistaken for, and sold as, alternatives to fixed income or
money market securities. Staff are thus now asking that the
front page of autocall note prospectus supplements include a
textbox disclosing the existence of downside risk and that such
notes are not designed to be alternatives to fixed income or money
According to the Practitioner, Branch staff have recently
noticed applications that contemplate the merger of funds with
significantly different investment objectives. In such cases, staff
have required filers to make representations in respect of the
reasons for the merger, the process undertaken to choose the
continuing fund, and the reasons why the merger is in the best
interests of securityholders. According to Branch staff,
boiler-plate statements respecting such things as the reduction of
expenses and increased diversification are not sufficient.
In respect of prospectuses, Branch staff have noticed that
some recent preliminary simplified prospectuses disclosed the
ability of fund managers to address short-term trading by
preventing an investor's account from further transactions for
a certain period of time through actions that included the
suspension of redemptions. The Practitioner reminds fund managers
that they may generally not suspend redemptions except in certain specific
Further, Branch staff take the position that a default rate
feature attached to the direct payment of ongoing dealer
service fees is inconsistent with the negotiation of the
service fee. As such, Branch staff expect that new funds will not
have a default rate feature while in respect of renewal
prospectuses, Branch staff will ask fund managers for a reasonable
transition period for the removal of the default rate feature.
The Practitioner provides the findings of a recent review of
investment funds with high management expense ratios. The sampled
funds either had fund managers that absorbed a significant
level of expenses in order to present MERs after absorption
consistent with industry average (in which case investor
expectations should be managed to clarify that
absorptions could cease in the future), or had relatively
high MERs due to their small size (in which case staff expect fund
managers to consider all options to reduce the MER).
The Practitioner also stated that Branch staff intend to conduct
a continuous disclosure review of the first IFRS financial
statements disclosed by funds (generally, due by August 29, 2014),
and will be asking filers general questions in respect of
implementation issues and justifications of accounting treatments
The Practitioner also advised fund managers against placing too
much reliance on the materiality threshold of $50 per investor in
respect of miscalculated and overpaid fees requiring repayment to
investors. According to Branch staff, fund
managers "should use their judgement in determining
whether a $50 threshold is appropriate in their particular
situation and be mindful of their statutory duty as fund manager
when selecting a materiality threshold."
Branch staff also reminded filers that no substantive changes
should be made to a prospectus after the SEDAR project status
is "clear for final". According to the Practitioner,
filers have asked staff to update the project status "clear
for final" even where further substantive changes were
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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