According to the Practitioner, Branch staff have recently become
aware of certain investment fund series intended for fee-based
accounts with a trailing commission embedded in the fund
series' ongoing cost. According to staff, embedding a trailing
commission in a fee-based series is potentially misleading for
investors and this practice may raise the issue of double charging
by dealers, contrary to a dealer's general duty to deal fairly,
honestly and in good faith with its clients. Staff will require
managers of existing funds to transition out of this commission
model in a reasonable time period.
Min / Max Offering Bullets
Staff also provided an update on their earlier commentary in
respect of the use of bulleted placeholders in preliminary
prospectuses. According to the Practitioner, staff expect
disclosure of a minimum offering amount in every case, even if the
amount is the minimum listing requirement. In respect to a maximum
offering size, where an investment fund manager can reasonably
anticipate an offering size, that amount should disclosed. In cases
where a maximum amount is not disclosed but the investment fund
manager has made assumptions about the offering size for the
purpose of other disclosure, staff believe those assumptions should
Definition of Mutual Fund Reinterpreted
Staff have revisited a long-standing interpretation of the term
"mutual fund". In order to ensure that the monthly
redemption amount of securities of non-redeemable investment funds
(NRIF) do not exceed the NAV of a NRIF in contravention of section
10.3(4) of NI 81-102, staff have asked filers to provide that the
monthly redemption amount will not exceed the NAV of the NRIF (i.e
the monthly redemption amount would be the lesser of (ii) a price
determined with reference to the market price and (ii) NAV).
Historically, an investment fund that was redeemable with reference
to NAV more than once annually was considered to be a mutual fund.
Staff's view is that such disclosure does not mean that the
monthly redemption amount is being calculated with reference to the
NAV and a NRIF whose prospectus includes such disclosure will not
be considered by staff to be a "mutual fund".
T+2 Settlement Cycle for European Securities
Further guidance was also provided in respect of disclosure
regarding monthly redemption amounts regarding closed-end funds,
currency hedging in investment objectives, the T+2 settlement cycle
for European securities and securities lending.
According to the Practitioner, Branch staff are currently
conducting targeted reviews focusing on asset classes that may be
at risk of liquidity issues. Funds with exposure to high yield
fixed income, small cap equity and emerging market issuers include
those on which the Branch has focused. Once the reviews are
complete, the Branch intends to publish their findings and
Branch staff have also focused their ongoing continuous
disclosure reviews on fixed income funds with exposure to senior
loans. As a result of the reviews and on recent prospectus filings,
staff have focused on textbox disclosure, management liquidity
assessments and stress testing and scenario analysis.
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