The Investment Funds and Structured Products Branch of the Ontario Securities Commission recently released the November 2014 issue of The Investment Funds Practitioner, which provides an overview of recent issues arising from applications for discretionary relief, prospectuses and continuous disclosure documents filed by investment funds. Below is a summary of a few issues identified.
Fee-Based Series with Dual Dealer Compensation
According to the Practitioner, Branch staff have recently become aware of certain investment fund series intended for fee-based accounts with a trailing commission embedded in the fund series' ongoing cost. According to staff, embedding a trailing commission in a fee-based series is potentially misleading for investors and this practice may raise the issue of double charging by dealers, contrary to a dealer's general duty to deal fairly, honestly and in good faith with its clients. Staff will require managers of existing funds to transition out of this commission model in a reasonable time period.
Min / Max Offering Bullets
Staff also provided an update on their earlier commentary in respect of the use of bulleted placeholders in preliminary prospectuses. According to the Practitioner, staff expect disclosure of a minimum offering amount in every case, even if the amount is the minimum listing requirement. In respect to a maximum offering size, where an investment fund manager can reasonably anticipate an offering size, that amount should disclosed. In cases where a maximum amount is not disclosed but the investment fund manager has made assumptions about the offering size for the purpose of other disclosure, staff believe those assumptions should be disclosed.
Definition of Mutual Fund Reinterpreted
Staff have revisited a long-standing interpretation of the term “mutual fund”. In order to ensure that the monthly redemption amount of securities of non-redeemable investment funds (NRIF) do not exceed the NAV of a NRIF in contravention of section 10.3(4) of NI 81-102, staff have asked filers to provide that the monthly redemption amount will not exceed the NAV of the NRIF (i.e the monthly redemption amount would be the lesser of (ii) a price determined with reference to the market price and (ii) NAV). Historically, an investment fund that was redeemable with reference to NAV more than once annually was considered to be a mutual fund. Staff’s view is that such disclosure does not mean that the monthly redemption amount is being calculated with reference to the NAV and a NRIF whose prospectus includes such disclosure will not be considered by staff to be a “mutual fund”.
T+2 Settlement Cycle for European Securities
Further guidance was also provided in respect of disclosure regarding monthly redemption amounts regarding closed-end funds, currency hedging in investment objectives, the T+2 settlement cycle for European securities and securities lending.
According to the Practitioner, Branch staff are currently conducting targeted reviews focusing on asset classes that may be at risk of liquidity issues. Funds with exposure to high yield fixed income, small cap equity and emerging market issuers include those on which the Branch has focused. Once the reviews are complete, the Branch intends to publish their findings and guidance.
Branch staff have also focused their ongoing continuous disclosure reviews on fixed income funds with exposure to senior loans. As a result of the reviews and on recent prospectus filings, staff have focused on textbox disclosure, management liquidity assessments and stress testing and scenario analysis.