On June 19, 2014, the Ontario Securities Commission (OSC) released Staff Notice 33-743 –Guidance on Sales Practices and Expense Allocation for Investment Fund Managers which resulted from the targeted review of large investment fund managers (IFMs) conducted by Staff of the Compliance and Registrant Regulation Branch of the OSC. The Notice provides a summary of Staff findings and related guidance along with examples and decision trees to assist IFMs.
Staff identified the following areas where deficiencies were more prevalent and additional guidance was needed:
- sales practices
- allocation of expenses to investment funds
- mutual fund borrowings
- prohibited cross trades
- outsourcing and oversight of service providers
The Notice includes guidance on the following:
- assessing whether the primary purpose for certain sales practices is met through content and time including examples of non-permitted topics such as business practice management sessions, motivational speakers, award ceremonies and recreational activities
- the reasonableness of costs of sales practices including with respect to gifts, entertainment and promotional items
- the appropriate types of expenses that may be charged to an investment fund (including with respect to compliance-related costs and costs of in-house service providers)
- the appropriate method to equitably allocate these expenses to investment funds under management
- disclosure of expense policies
- policies regarding overdraft positions and cash management to ensure compliance with the restrictions on borrowing by a mutual fund
- compliance with cross-trade rules under NI 31-103 and NI 81-102 and, to the extent applicable, NI 81-107
- the level of oversight that should be performed on a related service provider by the IFM including in respect of globally centralized functions
- consideration of conflict of interest matters associated with related party service providers.
Staff encouraged Investment Fund Managers to use the Notice as a self-assessment tool to strengthen their compliance with Ontario securities law and, as appropriate, to make changes to their systems of compliance, internal controls and supervision.