Staff of the Compliance team at the Ontario Securities Commission (OSC) recently published OSC Staff Notice 33-729 Marketing Practices of Investment Counsel/Portfolio Managers [link available here]. The Staff Notice describes the results of OSC Compliance staff’s recent focused review (sweep) of the marketing practices of firms registered as investment counsel and portfolio manager (ICPMs) and highlights practices that staff believe are inappropriate and should be modified.

The sweep by the Compliance team was designed to broaden staff’s understanding of the type and content of marketing materials used by ICPMs, as well as to assess compliance by ICPMs with Ontario securities law. Staff also wanted to see if any regulatory gaps exist. Given that marketing of publicly offered mutual funds is governed by National Instrument 81-102 Mutual Funds, the sweep focused only on ICPMs which are not in the business of managing mutual funds. The Staff Notice describes staff’s findings from their in-depth review of the marketing practices of 21 ICPMs, some of which are portfolio managers of non-prospectus qualified investment funds (that is, pooled funds), with others being principally managers for large institutional investors and other private clients. These firms were selected for review using staff’s risk-based criteria for carrying out compliance reviews from a pool of around 50 ICPMs, none of which had been the subject of a recent Compliance staff review.

Staff reiterated that they expect ICPMs to comply with section 2.1 of OSC Rule 31-505 Conditions of Registration (OSC Rule 31-505) in connection with their marketing activities. Section 2.1 of OSC Rule 31-505 requires registrants to develop and enforce written procedures that conform to prudent business practice and to deal fairly, honestly and in good faith with their clients. This broad principled-based provision applies to all registrants and to all aspects of the business of registrants, including marketing. Staff also encourage ICPMs to look to the rules contained in NI 81-102 relating to marketing of mutual funds for best practices guidance.

Through staff’s review of marketing documents of the ICPMs, which included brochures, websites, market commentaries, offering documents for the pooled funds managed by the ICPMs, newspaper and magazine advertisements and one-on-one presentations made by ICPMs, staff identified several deficiencies. Most of the deficiencies fell into one of the following areas

  1. Use of hypothetical performance data
  2. Inappropriate linking of the actual performance of a pooled fund or investment strategy with the performance of another pooled fund or investment strategy
  3. Use of performance composites
  4. Use of benchmarks
  5. Exaggerated and unsubstantiated claims in marketing materials.

Staff highlight suggested best practices for marketing materials, including

• ICPMs should present performance data that is based on actual client performance returns and not on hypothetical, model portfolio or back-tested returns, given the inherent risks and verification difficulties associated with hypothetical returns. Specific guidance is given around the use of back-tested returns in a fund of fund situation.

  • Performance composites should be constructed to include all portfolios with a similar investment strategy. Cherry-picking of portfolios is not permitted and composites should have accompanying disclosure that explains all the factors that make the composite presentation meaningful.
  • Performance data should be calculated using a consistent methodology so that any comparisons are not misleading
  • Benchmarks should be relevant to the ICPM's investment strategy and there should be adequate disclosure to make the comparison fair and meaningful for clients.
  • ICPMs should be able to support the claims made in their marketing materials and reference supporting claims in the marketing material to allow clients access.
  • ICPMs must have adequate policies and procedures dealing with marketing activities, including processes for reviewing and approving marketing materials.