The Ontario Securities Commission has released the July 2015 edition of the Investment Funds 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 key issues and provides tips for investment fund issuers.
Sales communication awards
- Issue: The OSC has reviewed selected investment fund managers’ advertising and marketing materials that reference various industry awards and has determined that such awards are performance-based ratings that must comply with the applicable requirements in National Instrument 81-102 – Investment Funds (NI 81-102).
- Tip: The OSC is of the view that the inclusion in sales communications of industry awards that are based partially on a subjective component should be discontinued, as NI 81-102 does not permit the use of subjective performance-based ratings in sales communications.
- Issue: When reviewing prospectuses, the OSC intends to focus on the disclosure provided with respect to (i) the different classes or series offered by the fund, (ii) the fees and expenses of the fund, and (iii) the investment objectives and strategies of the fund.
- Tip: If a fund is offered in different classes or series, the prospectus should clearly explain the differences between them, including details as to the type of investor targeted by each class or series. Fee disclosure should describe what services or activities the fee covers. The investment objectives and strategies of the fund must be meaningful and the related disclosure should enable investors to distinguish between funds within a fund family that may appear similar.
Automatic reinvestment should not be the default option
- Issue: The OSC continues to hold the view that, when investors in T-series securities have the option to receive regular distributions in additional securities of the fund or cash, the default option should be cash.
- Tip: The OSC expects funds that have as their default the automatic reinvestment of T-series distributions to take steps to switch the default to cash, although the OSC states that an exception will be allowed for purchases made under existing pre-authorized plans.
Mutual funds investing in closed-end funds
- Issue: Recent amendments to NI 81-102, which came into effect on September 22, 2014, prohibit mutual funds from investing in closed-end funds.
- Tip: A transition provision in the amendments delays the application of the above prohibition until March 21, 2016, for mutual funds that had filed a prospectus on or before September 22, 2014, provided that such funds were in compliance with NI 81-102 as it existed on September 21, 2014. The OSC indicated that it will consider granting relief from this prohibition on a case-by-case basis, although no guidance was provided regarding the basis upon which relief would be considered.
IRC compensation disclosure
- Issue: The OSC has noted that, in the annual information form for some investment funds, only the aggregate compensation paid to independent review committee (IRC) members was disclosed, contrary to disclosure requirements.
- Tip: Disclosure requirements specify that the name of the individual IRC member and the specific amount of compensation paid to him or her during the most recently completed financial year must be disclosed. In particular, the disclosure must include any reimbursement expenses that are actually paid to the IRC member by the fund during the year.
Scope of future-oriented relief for related pooled fund investments to be limited
- Issue: Applications for exemptive relief to permit pooled funds to invest in related pooled funds often include requests for relief for future fund-on-fund structures (future-oriented relief) that are not yet actually planned and that may not be substantially similar in features and purposes to those structures described in the application.
- Tip: Although the OSC has, in the past, granted broad future-oriented relief with respect to these types of applications, it is now of the view that future-oriented relief should generally be limited to the specific structures that trigger the need for the relief. Accordingly, in recent decisions, the OSC has limited future-oriented relief to structures substantially similar to the planned structures described in the application.