CSA staff publish guidance on characterization of mortgage investment entities

In light of an increase in prospectus filings by mortgage investment entities in Ontario, the OSC yesterday released staff guidance setting out the factors that staff will consider in determining whether an issuer that proposes to invest all or substantially all of its assets in a pool of mortgages is an investment fund. According to the staff notice, MIEs often describe themselves as non-redeemable investment funds and thus file prospectuses in the form of Form 41-101F2.

In their review of MIE prospectuses, however, staff suggest that MIEs are often an extension of the mortgage originator's business. In the view of staff, "structuring an offering of an issuer that describes itself as a non-redeemable investment fund, where the issuer is, or is an extension of, an operating business is contrary to the spirit and intent of the definition of a non-redeemable investment fund." Even where MIEs exist as separate legal entities, OSC staff are taking a comprehensive look at the relationship between the MIE and originator of the mortgage.

Ultimately, OSC staff characterize such MIEs as more akin to a lending business than an investment fund, and the prospectus form to be completed is Form 41-101F1. For more information, see OSC Staff Notice 81-722. Registration issues arising in connection with MIEs are discussed separately in the previously published CSA Staff Notice 31-323 Guidance Relating to the Registration Obligations of Mortgage Investment Entities.

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