Canada: Continuous Disclosure Of Investment Funds

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 benchmark.

  • 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 required.

Overall Presentation

  • 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 inapplicable information.

  • 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.

Regulatory Compliance

  • 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 sufficient.

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.

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