The Ontario Securities Commission (OSC) has released the
September 2016 edition of the Investment Funds Practitioner (the
Practitioner), which provides an overview of recent issues arising
from applications for exemptive relief, prospectuses and continuous
disclosure documents filed by investment funds. This legal update
summarizes a select number of key issues contained in the
Pursuant to National Instrument 81-102 - Investment
Funds, each class or series of a fund that is referable to a
separate portfolio of assets is considered to be a separate fund.
Despite the fact that gains and losses associated with the
derivatives used to deliver currency hedging for a hedged series
are referable only to the hedged series and not to all series of a
fund, hedged series of a fund have historically not been treated as
a separate fund by the OSC.
However, the OSC has recently seen instances of all or
substantially all of the foreign currency exposure associated with
a fund's portfolio not being hedged by a hedged series (for
example, a hedged series employing discretionary currency hedging
where a manager hedges anywhere from 0% to 100% of the hedged
series' foreign currency exposure or different hedged series
within a fund having differing levels of discretionary currency
hedging). Where all or substantially all of the foreign currency
exposure associated with a fund's portfolio is not being hedged
by a hedged series then the OSC may question a manager as to
whether it is appropriate to consider the hedged series to be a
In addition, the OSC has advised that it will begin requesting,
as part of its prospectus reviews, that a fund with a hedged series
include in its prospectus disclosure that prior approval of
securityholders of the hedged series will be obtained before the
currency hedging strategy of the hedged series is changed.
Fund-of-funds disclosure of fees and expenses
The OSC has advised that managers should
"look-through" the expenses in fund-of-funds when
calculating the management expense ratio (MER) and the trading
expense ratio for top funds, including top funds that invest in
mutual funds and ETFs that are managed by third parties. With
respect to expenses of underlying funds managed by third parties,
the OSC expects managers to use reasonable estimates.
When providing disclosure in a prospectus for a fund-of-funds
the OSC expects top funds to provide adequate information so that
investors are made aware of the impact that the expected management
fees of underlying funds will have on the MER of the top fund. For
example, it is inappropriate to only disclose a minimal management
fee for a top fund where the underlying funds in which it will
invest have higher management fees, particularly for a new top fund
that does not have a historical MER. Instead, prospectus disclosure
outlining the fact that the underlying funds may have higher
management fees should also be included.
IRC reporting under Section 4.5 of NI 81-107
Pursuant to section 4.5 of National Instrument 81-107 -
Independent Review Committee for Investment Funds an
Independent Review Committee (IRC) must provide notice to a
fund's principal regulator when the IRC becomes aware of any
instance in which the manager of the fund acted in certain conflict
of interest matters but did not comply with a condition imposed by
securities legislation or any IRC approval.
The OSC has advised that a materiality threshold should not be
applied to the IRC's reporting obligations – any instance
involving a breach that an IRC becomes aware of (even a breach that
the manager and the IRC do not believe is material) must be
reported to the fund's principal regulator. The Practitioner
outlines the OSC's expectations regarding the content of a
letter reporting a breach.
About Norton Rose Fulbright Canada LLP
Norton Rose Fulbright is a global law firm. We provide the
world's preeminent corporations and financial institutions with
a full business law service. We have 3800 lawyers and other legal
staff based in more than 50 cities across Europe, the United
States, Canada, Latin America, Asia, Australia, Africa, the Middle
East and Central Asia.
Recognized for our industry focus, we are strong across all the
key industry sectors: financial institutions; energy;
infrastructure, mining and commodities; transport; technology and
innovation; and life sciences and healthcare.
Wherever we are, we operate in accordance with our global
business principles of quality, unity and integrity. We aim to
provide the highest possible standard of legal service in each of
our offices and to maintain that level of quality at every point of
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").
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).