The Ontario Securities Commission (OSC) published guidance today explaining why it believes that mortgage investment entities (MIEs) generally do not qualify as investment funds.
Today’s OSC Bulletin includes a new staff notice from the commission that explains why the regulator has determined that issuers that invest all of their assets in a pool of mortgages (MIEs) shouldn’t be considered investment funds. Instead, it suggests, they should be regulated as operating businesses.
According to the notice, OSC staff have recently seen an increase in the number of prospectus filings by MIEs, which describe themselves as non-redeemable investment funds.
However, it says, “in staff’s view, 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.”
And, the notice reports that its reviews of MIE prospectuses, reveals that MIEs are often an extension of a mortgage originator’s business.
“Essentially, the originator sources mortgages, which are then funded through the money raised by the MIE in its public offering. The MIE thereby becomes the lender to the mortgagor, which results in the MIE engaging in, or being the source of funding for, a lending business on behalf of the originator,” it says.
“In staff’s view, this is inconsistent with the nature of an investment fund and is, in essence, an operating business,” it concludes, adding that the performance of the MIE is largely dependent on the originator’s expertise in originating and servicing mortgages. “In fact, this expertise is what the MIE is indirectly offering to the public through its securities,” it says.
Given its view that MIEs are generally not investment funds, the OSC says that they should be filing issuer prospectuses, not fund prospectuses. This, it says, will enhance investor protection, as fund prospectuses are designed to provide disclosure regarding a passively held portfolio “and would not, in staff’s view, provide investors with meaningful disclosure about the MIE’s operating business.”
“This investor protection concern also extends to the continuous disclosure regime,” it adds. And so, MIEs are expected to comply with the continuous disclosure regime for issuers, not investment funds, it says.