The Ontario Securities Commission
(OSC) published the most recent edition of The Investment Funds
Practitioner on July 23, 2015. This edition of
The Investment Funds Practitioner features guidance on the
OSC's prospectus review priorities, including with respect to
disclosure of fees and expenses; default mutual fund distributions
with respect to fixed rate distribution securities and disclosure
of Independent Review Committee compensation.
The OSC noted that in its prospectus reviews of investment
funds, it would focus on three key areas of disclosure.
First, OSC staff will focus on fees and expenses disclosure.
In particular, a summary of all applicable fees and expenses and
plain language explanations of fees and expenses would have to be
provided to enable investors to understand what each fee is for and
what services or activities the fee covers. Fees and expenses
would also have to be disclosed in a sufficiently clear manner to
allow OSC staff to determine that there is no duplication of fees
and expenses and whether the overall cost of the investment fund is
similar to comparable funds.
In addition to fees and expenses, the two other areas that OSC
staff intend to focus their prospectus reviews on are disclosure
with respect to different classes or series of investment funds and
investment strategies and objectives. OSC staff noted that
prospectus disclosure must be sufficient to allow investors to
distinguish between different classes or series of an investment
fund. Investors should be able to understand the different
purposes of the various classes or series, the different types of
investors that the class or series is intended for, differences in
dealer compensation and differences in fees among other
factors. Finally, the OSC noted that investment objectives
and strategies should be described with sufficient clarity to allow
investors to understand the fund and the asset classes the fund
invests in and to understand the differences between multiple funds
in a prospectus or fund family that appear similar in name and/or
Other Notable Issues
The Investment Funds Practitioner also touched on a number of
other key issues:
Fixed rate distribution securities (FRDS or T-series)
default distribution policies. FRDS are funds or series
that seek to make regular distributions to provide monthly cash
flow, partially comprised of return on capital. According to
OSC staff, FRDS should not default to reinvesting monthly
distributions. OSC staff are concerned that such a default
policy could create investor confusion because reinvestment appears
to be inconsistent with the purpose of FRDS. OSC staff advise
that they have been and will continue to ask fund managers to
explain why a default reinvestment policy is appropriate and to
consider having a default policy of making monthly
Mutual funds prohibited from investing in closed-end
funds. OSC staff remind fund
managers that recent amendments to NI 81-102Investment Funds (NI
81-102) prohibit a mutual fund from investing in or holding
securities of a closed-end fund. Mutual funds that filed a
prospectus on or before September 22, 2014 have until March 21,
2016 to comply unless exemptive relief has been obtained.
Mutual funds invested in closed-end funds with renewal prospectuses
receipted between March 2015 and March 2016 are eligible to
distribute securities beyond March 21, 2016 but they can't be
invested in closed-end funds beyond that date.
disclosure. Independent Review
Committee compensation must be disclosed in Annual Information
Forms and in investment fund prospectuses. OSC staff advise
that disclosing only aggregate compensation will not suffice.
The name of the individual IRC member and the amount of
compensation actually paid to such member, including any expenses
reimbursed by the fund, during the fund's most recently
completed financial year must be disclosed.
disclosure. OSC staff refer fund
managers to the requirements of s. 15.3(4) of NI 81-102 and state
that all ratings or rankings disclosed in advertising and marketing
materials must be compliant. In particular, OSC staff advise
that no references should be made to industry awards which are
based partially on a subjective component and that this practice
should be discontinued.
In addition to the foregoing, The Investment Funds Practitioner
also provides guidance with respect to applications for
exemptive relief involving inter-fund trades with pooled funds and
future-oriented relief for pooled funds investing in related pooled
funds. For further information, please consult The Investment
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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