Last week, the Investment Funds Branch of the Ontario Securities Commission released the November 2013 issue of the Investments Fund Practitioner. The publication provides an overview of recent issues identified by the Branch arising from prospectus filings, exemptive relief applications and continuous disclosure documents filed by investment funds.
Of particular interest, the Practitioner states that Branch staff are currently focusing on three priority areas in their prospectus reviews, namely fees and expenses (including whether explanations are in clear and plain language), investment objectives and strategies (including the provision of meaningful information for investors), and conflicts of interest. According to the Practitioner, staff's intention is to encourage more consistent disclosure and promote clear, accurate and understandable disclosure, rather than boilerplate language.
The Practitioner also took note of the use of the term "guarantee", reminding filers that in cases where a fund offers a guarantee, the prospectus and Fund Facts disclosure should allow investors to fully understand the unique characteristics of the fund, the fund's investment objectives, the fund's suitability for investors, the nature of the guarantee and the consequences of early redemptions or termination of the fund. Further, Branch staff expect that Independent Review Committee and shareholder approval be obtained prior to early termination of the guarantee.
The Practitioner also notes that Branch staff have recently seen simplified prospectuses where issuers have identified, in the annual information form, companies that are principal holders of the funds as "Investor A", "Investor B", etc. While staff allow that individuals for principal holders of funds to be referred to as such in a prospectus, privacy concerns with respect to individuals do not apply to companies. As such, absent exemptive relief, the names of companies that are principal holders of a fund must be disclosed in the AIF of the simplified prospectus.
The Practitioner also expressed concern in respect to the marketing materials of scholarship plans and with the possible dilution of securityholders due to recirculation agreements in the case of closed-end funds.
According to the Practitioner, Branch staff recently conducted targeted continuous reviews of risk ratings of mutual funds disclosed in the Fund Facts. On this point, staff noted that, in the case of mutual funds in the same fund family that had both a currency hedged fund and an unhedged fund that provided exposure to the same underlying fund or portfolio, fund managers typically rate both the currency hedged fund and the unhedged fund with the same risk rating despite the difference of volatility of past returns between the funds. In staff's view the risk ratings for currency hedged funds should be determined separately from the unhedged counterparts and staff also reminded filers that a change to a mutual fund's risk level is a considered a material change under securities legislation.
The Practitioner also noted that, as we've discussed previously on this blog, the CSA have adopted January 1, 2014 as the date for investment funds to transition to IFRS.
Finally, Branch staff reminded filers that blacklined versions of Fund Facts filed for review must show changes, including the text of deletions and additions from the previously filed version. Changes must be clearly shown and should not be shown by way of comment bubbles, and side-by-side comparisons are not considered acceptable.