The Ontario Securities
Commission (OSC) recently published guidance on
investment funds whose investment objectives are to replicate the
performance of an index and that include the word "index"
in their names (Index Tracking Funds). In OSC staff's
view, the applicable index should generally (a) not allow for the
application of material discretion; and (b) be transparent.
In cases where these conditions are not satisfied, in the
course of prospectus reviews, OSC staff will ask that references to
the index be removed from the fund's name and investment
objectives to avoid potentially misleading investors.
Absence of Discretion: First, the
methodology governing the applicable index (Methodology) must not
allow for material discretion in respect of administering the
index. OSC staff's view is that replicating the
performance of an index is a passive investment strategy. The
ability of the index provider or another party to employ material
discretion in administering the index results in the Methodology
being more like an active investment strategy according to OSC
Transparency of Index: Second,
the applicable index must be transparent. OSC staff suggest
that transparency can be achieved by making public key information,
such as the Methodology or the constituents of the index, by
posting such information to the website of the fund or index
provider. Furthermore, OSC staff expect that the prospectus
should sufficiently describe: the index; how the fund replicates
the index; the key factors in determining the constituents of the
index; the frequency with which the index is rebalanced and
reconstituted; and links to the website where the Methodology or
index constituents can be found. OSC staff have taken the
view that if a fund manager does not wish to disclose the
Methodology or the constituents of the index, the purported index
is considered a proprietary quantitative model.
If either condition is not met, OSC staff have taken the view
that it is inappropriate and perhaps misleading for the fund to
market itself as an Index Tracking Fund. OSC staff have asked
such funds to remove references to "index" from their
names and investment objectives in the course of prospectus
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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