Investment Funds Practitioner published for March 2014

Darin Renton -

The Investment Funds Branch of the Ontario Securities Commission recently released the March 2014 issue of the Investments Fund Practitioner, which provides an overview of recent issues arising from prospectuses, continuous disclosure documents and applications for discretionary relief filed by investment funds. A few highlights are discussed below.

Continuous Disclosure

According to the Practitioner, the Branch recently received an inquiry in regards to the disclosure of cash and money market funds in the management report of fund performance (MRFP), Fund Facts and quarterly portfolio disclosure. On this point, the Practitioner states that Branch staff expect cash and cash equivalents to be disclosed on a line separate from an investment in a money market fund in the summary of investment portfolio (the list of top 25 positions) in the MRFP. In the portfolio breakdown, however, money market funds holdings may be grouped with cash and cash equivalents as the summary nature of the portfolio breakdown provides for flexibility. Meanwhile, the top 10 investments in the Fund Facts should separate cash and cash equivalents from money market funds and the top 25 holdings in the quarterly portfolio disclosure should be exactly the same as the fund’s MRFP disclosure.

In respect of fixed income funds, while the Branch found that funds generally provide detailed discussion of market events under the management discussion section of the MRFP, the Branch suggested that funds consider increasing the frequency of monitoring their risk ratings in light of elevated volatility in fixed income markets.

The Practitioner also reminds filers of the recent review of ETFs undertaken by Branch staff.

Prospectuses

The Practitioner discusses a recent prospectus reviewed for an investment fund that proposed accepting some securities (exchange eligible issuers or EEIs) under an exchange option inconsistent with the fund's investment objectives. No cap was placed on the amount of non-core EEIs the fund would accept under the exchange option despite the fact that the fund's investment restrictions capped the value of securities of EEIs that did not operate in the fund's core sections to 25% of the portfolio. While the issue was resolved by imposing a limit on the total value of the securities of EEIs not operating in the core sectors, the Branch encourages issuers to review the list of exchange eligible issuers considered acceptable to a fund pursuant to an exchange option to ensure consistency with the fund's investment objectives.

The Practitioner also notes that recent flow-through limited partnership prospectuses have included annualized after-tax returns but not annualized before-tax returns. The Branch reminds filers that staff will generally accept such after-tax disclosure provided annualized before-tax returns are also included in the prospectus.

Further, the Practitioner discusses prospectuses for certain flow-through limited partnerships that permit compensation arrangements involving entities related to the fund manager. Branch staff view such finder's fee arrangements to be a conflict of interest matter under NI 81-107 that should be referred to the fund's Independent Review Committee. Appropriate disclosure of these arrangements should also be made in the prospectus.

The Practitioner also notes the expiry of certain exemptive relief from the prospectus delivery requirement for pre-authorized plans as a result of the finalization of Stage 2 of the Point of Sale disclosure project. Filers intending to pursue exemptive relief in respect of pre-authorized plans after June 13, 2014 are encouraged by the Branch to submit an application for exemptive relief "well in advance" of that date.

The Practitioner also discussed such issues as changes in the method of performance fees made pursuant to a merger, bulleted placeholders in prospectuses, the implementation of point of sale disclosure, the mutual fund risk classification methodology for use in Fund Facts, and the mandatory electronic delivery of documents.

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