The Investment Funds Branch of the Ontario Securities Commission (OSC) recently issued OSC Staff Notice 81-709 Report on Staff's Continuous Disclosure Review of Investment Funds (Notice). The Notice focused on issues identified by the Branch in the course of an issue-oriented review of general compliance with the continuous disclosure rules specific to investment funds. These rules are set forth in National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106), which came into force on June 1, 2005. The review covered financial year-ends in 2005 and 2006, as well as some in 2007, and focused on conventional mutual funds. The Notice is intended to assist preparers of financial statements and management reports of fund performance (MRFP) in improving their future continuous disclosure.
In the Notice, the Branch noted and commented on several areas for improvement under three topic headings.
Quality Of The Discussion
- Results Of Operations —
Management's discussion of the investment
fund's activities in the results of operations
section should be more thorough, and should analyze and
explain the nature of and reasons for changes in the fund.
The summary should put the financial statements into words
and provide context for the financial results, including a
discussion of changes to an investment fund. Discussion
should be included for changes in portfolio assets, revenue
and expenses, and redemptions or sales, which correspond to
data in financial statements. Factors such as changes to the
economy and markets should be related back to changes in the
composition of the investment portfolio.
- Broad-Based Index — Discussion of the
relative performance of the investment fund as compared to a
broad-based securities market index is required, and cannot
be replaced by a comparison to a narrow index or blended
- Discussion Of Relative Performance — A
more thorough discussion of the relative performance of the
investment fund as compared to the appropriate index should
be provided. An explanation as to why the investment fund
under- or over-performed relative to the index is
- Plain Language — MRFPs should be
written in plain language, and should avoid the use of jargon
and technical language.
- Investment Subgroups — Management
should review the investment portfolio to determine if the
most appropriate categories have been used when disclosing
the summary of investment portfolio in the MRFP or quarterly
portfolio disclosure, and whether the breakdown conveys the
nature of the fund to readers.
- Analytical Review Of Financial Statements
— Management should perform an analytical review of
the financial statements to ensure that all significant
changes have been explained in management's
discussion of the results of operations.
- Financial Statement Notes Presentation
— Notes to the financial statements are part of
continuous disclosure and should not be convoluted with
- Websites — Fund managers should
provide easily accessible links to continuous disclosure
documents on their websites.
- SEDAR Filings — Only the stand-alone
financial statements and MFRPs relevant to the individual
investment fund should be filed under that particular
fund's profile on SEDAR.
- Commissions To Related Parties —
Unless exemptive relief has been obtained, a monthly report
must be filed when a fund pays a fee to a related company on
a purchase or sale of portfolio securities.
- Financial Highlights Tables — The
format specified in Form 81-106F1 for financial highlights
and past performance is mandated and must be followed.
- Annual Compound Returns — Certain
information must be discussed, including the performance of
all series and changes in an index from the prior period.
Discussion of past performance should be limited to the
standard performance periods.
- Mandatory Notes To Financial Statements
— Certain information must be disclosed in the
notes to the financial statements to provide consistent and
comparable financial statements.
- Management Fees — The requirements for
breakdown of management fees should be followed to provide
transparency for the composition of management fees.
- Investment Objective And Strategies —
A more concise summary of the investment objective and
strategies of an investment fund is required.
- Risk — Fund managers were reminded
that discussion of how changes to the investment fund have
affected the overall level of risk associated with an
investment in the investment fund is required. Additionally,
a mere recitation of risk factors contained in the
fund's prospectus or annual information form is not
The Branch urged investment funds to consider the guidance in the Notice to ensure their continuous disclosure documents comply with NI 81-106. In future situations, where disclosure requirements are not met, the Branch will ask that the disclosure documents be revised and refiled. The scope of the Branch's review of continuous disclosure documents will be expanded to include other investment funds, such as closed-end funds, exchange traded funds, labour sponsored investment funds, limited partnerships and scholarship plans.
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.