The Ontario Securities Commission (OSC) is reviewing how fund managers allocate expenses between themselves and their funds, and planning to propose point-of-sale delivery requirements for Fund Facts documents.
The OSC Thursday issued Staff Notice 81-723 Summary Report for Investment Fund Issuers 2013, which details its recent, and ongoing, work in the investment fund arena. The report discusses its various policy initiatives, emerging issues, and its compliance reviews for investment fund issuers, among other things.
In terms of compliance reviews, the report notes that OSC staff are currently examining the allocation of overhead expenses between fund managers and their funds, “in particular, how fund managers address conflicts of interest and whether sufficient disclosure is provided to investors in prospectuses, financial statements and the management reports of fund performance relating to these related party transactions.”
The OSC notes that the review is focusing on all types of investment funds, including mutual funds, exchange-traded funds (ETFs) and closed-end funds, and is looking at a range of managers, from the small independents to large bank-owned firms. It says that the review is currently ongoing and that the OSC intends to publish a staff notice this year with the findings of the review.
Among the emerging issues discussed in the report, the OSC says that it is continuing to review novel linked note supplements, and is considering new guidance in this area.
It also says that it’s seeing an increase in the use of derivatives by investment funds. “In response to this trend, our focus has been to ensure that there is a sufficient and appropriate level of disclosure so that investors can understand how the investment exposure is modified and created, and the additional risk that accompanies certain derivative transactions. We also focus on whether these exposure adjustments are within the fund’s stated investment objectives and strategies,” it says.
Similarly, it says that OSC staff have observed an increase in offerings of non-investment grade fixed income products; where, again, its focus is on ensuring adequate disclosure by investment funds investing in fixed income.
On the policy front, the report notes that the Canadian Securities Administrators (CSA) expect to publish proposed amendments aimed at implementing pre-sale delivery of the Fund Facts documents in the spring. Later in the year it also intends to publish proposals codifying exemptive relief that has been granted to ETFs introducing an alternative delivery regime, which requires delivery of a summary disclosure document with the trade confirmations for all ETF purchases.