On March 4, 2011, the Ontario Securities Commission (the "OSC") released a staff notice (the "Notice") regarding the disclosure required by Form 41-101F2 – Information Required in an Investment Fund Prospectus (the "Form" or "Form 41-101F2) and the types of comments the OSC generally will raise in the course of a review of an investment fund prospectus. According to the Notice, the OSC recently has seen a number of prospectuses filed in the form of Form 41-101F2 that have departed from Form requirements and the general requirements relating to the use of plain language, brevity, the ordering of information and use of headings. The OSC's concerns focused on three main areas: (i) cover page and summary disclosure; (ii) disclosure about investment objectives; and (iii) prospectuses for multiple investment funds.
Cover Page and Prospectus Summary Disclosure
The Notice indicates that the OSC increasingly has observed what it sees as deficiencies with cover page and prospectus summary disclosure, including that:
- they contain too much detail about the investment fund's strategies, manager, portfolio advisor and distribution policies and the sectors that the fund will invest in
- they include information not specifically contemplated by the Form
- they introduce headings (such as "Investment Rationale") not contemplated by the Form
- entire disclosure items from other sections of the Form have been included in the cover page and prospectus summary, including performance data, charts and graphs and
- there has been an increase in promotional and marketing language in the cover page and prospectus summary. These include the managers' beliefs regarding the economy and why an investment strategy adopted by the fund should be considered attractive by investors.
The OSC advised in the Notice that in prospectus reviews, the OSC will consider the purpose of the Form, and specifically, the intent of the cover page and prospectus summary disclosure, which is to ensure investors are presented with information about the investment fund in a clear, concise and comparable format that assists them in making informed investment decisions. The OSC indicated that cover page disclosure should provide only a brief description of the fund and the securities to be distributed and be limited to the disclosure specifically mandated by Item 1 of the Form. As a result, the OSC may ask that cover page disclosure be reduced or request that certain disclosure be removed.
Similarly, the OSC expects that the prospectus summary disclosure generally will provide only a brief summary of the information that appears elsewhere in the prospectus, as set out by Item 3.3 of the Form. The OSC may request some disclosure in the prospectus summary be removed and be replaced with cross-references to the more detailed disclosure that appears elsewhere in the prospectus in order to maintain the brevity of the summary. The OSC has requested that charts and graphs not mandated by the Form be removed from the prospectus summary.
The OSC reminded filers that information not contemplated under any other section of the Form may be disclosed under "Other Material Facts" as specified by Item 35 of the Form.
In instances where the investment fund has complex or unique risks, features or costs, the OSC indicated that it has begun to request that additional, tailored disclosure which is specific to the fund's securities be added to the cover page or the prospectus summary disclosure to ensure investors are provided with full, true and plain disclosure of all material facts. This tailored disclosure has included a plainly worded, brief warning presented in bold type or in text boxes in these sections.
Disclosure About Investment Objectives
The Notice states that the OSC has observed what it sees as deficiencies in the investment objectives included in investment fund prospectuses filed in Form 41-101F2. The Form requires that the investment objectives of a fund describe the fundamental nature of the investment fund, or the fundamental features of the investment fund, that distinguish it from other investment funds. In addition, the filer is required to include in the investment objectives a statement of the type(s) of securities in which the investment fund will primarily invest under normal market conditions.
The OSC has observed investment objectives limited to a statement about the nature of the returns that the investment fund seeks to provide to investors without sufficient accompanying detail. For example, the OSC has seen disclosure that states that the objective of the investment fund is simply to provide shareholders with the opportunity for capital appreciation. The OSC indicated that it expects that filers will comply with all aspects of Item 5 of Form 41-101F2. The Notice states that the OSC has requested that some investment strategies which are an essential aspect of the investment fund be disclosed as an investment objective of the investment fund. In addition, the OSC may ask that certain disclosure that does not form part of the investment objective, such as an investment fund's initial indicative yield, be removed from the stated investment objectives of the fund.
Prospectuses For Multiple Investment Funds
The Notice indicates that as the number and types of exchange trades mutual funds ("ETFs") have proliferated, the OSC has observed multiple ETF prospectuses that combine disclosure for different types of ETFs, including index participation units, actively managed ETFs, inverse and leveraged ETFs and commodity pools, The Notice states that generally the OSC's view is that the number of investment funds offered in one document should be limited to investment funds with substantially similar investment objectives, strategies and features. In its review of multiple ETF prospectuses, the OSC will consider whether the combination of multiple investment funds into one single prospectus document impacts the ability of investors to be provided full, true and plain disclosure. When the number of investment funds incorporated into one prospectus document interferes with the presentation of key information in a clear, concise and comparable format for investors, the OSC will request that the filer separate the investment funds into different prospectus documents.