The Investment Funds Branch of the Ontario Securities Commission recently released its latest issue of the Investment Fund Practitioner, dated May 2013. The publication provides an overview of issues identified by the Branch arising from prospectus filings, exemptive relief applications and continuous disclosure documents filed by investment funds.
Of particular interest, Branch staff are looking at whether an issuer investing in non-guaranteed mortgages is, in substance, a corporate issuer rather than an investment fund. In response to an increase in the number of non-redeemable investment funds investing all or most of their assets in pools of non-guaranteed mortgages (also referred to as mortgage investment corporations or MICs), staff have begun to examine the substance of such transactions. According to the Practitioner, any degree of control or active involvement by the mortgage originator or service provider in the formation or operation of the non-redeemable investment fund or portfolio of the fund will cause staff to question whether the issuer is an investment fund. While further guidance on the issue is expected, the Branch recommends that counsel contact staff at an early stage of planning in these types of situations.
The Practitioner includes two notes on best practices for prospectus disclosure—there is one “do” and one “don’t”.
Do: Specifically, the Practitioner outlines Branch staff’s expectation that, in addition to the form requirements, filers that use a short form prospectus are expected to include a "Fees and Expenses" section that describes, among other things, the (i) expenses of the offering; (ii) the subscription fee; (iii) management fees; (iv) operating expenses; and (v) fees payable by securityholders of the fund.
Don’t: Branch staff’s position is that disclaimers of liability for third party information should not be included in a prospectus. Many prospectuses include disclaimers indicating that the issuer is not responsible for information provided by third parties (such as, for example, economic data). Since securities law makes issuers liable for any misrepresentation in a prospectus, including those originating with a reliable third party, in Branch staff’s view, issuers are unable to waive liability for such third party information and such disclaimers should not be included.
Branch staff also remind issuers that Fund Facts documents and IRC Reports to securityholders must be prominently displayed on the website of the fund, fund family or manager.
Beyond the issues discussed above, the Practitioner also considers such topics as scholarship plans making limited investments of the income portion of the plans in equity securities, character conversion transactions, past performance disclosure in flow-through limited partnership prospectuses and margin deposit exemptive relief for commodity pools.