OSC to review growth of mutual fund series

The OSC indicates that it wants to ensure that fund prospectuses provide sufficient clarity on the different classes so that investors can understand those differences, and the purpose of each class or series, including the type of investor and fee model for which each class or series is intended.

The OSC also wants to see disclosure of the differences in dealer compensation for each class or series; that explanations of the differences in fees are in plain language and are clear for each class or series; and that prospectuses provide sufficient disclosure regarding switches between classes or series, including automatic and default switches.

Similarly, the OSC will be targeting the disclosure of fees and expenses to ensure that explanations of fees and expenses are in plain language and that investors can understand them; that the disclosure is clear enough to allow the regulator’s staff to determine that there is no duplication of fees and expenses; and that a fund’s overall cost is comparable to similar funds.

Disclosure of funds’ investment objectives and strategies will also be a focus of these reviews, the OSC report says. On that front, the provincial regulator is seeking to ensure that prospectuses provide meaningful information to investors, including a clear picture of the fund and the asset classes that it will invest in; that all material risks associated with the fund’s objectives and strategies are spelled out; and that the prospectus enables investors to distinguish between multiple funds within a fund family as well as explains the difference between funds that appear similar in name and/or investment strategies.

In addition, the OSC newsletter reminds fund managers that the provincial regulator also continues to be interested in the distribution policies of funds that promise regular distributions. In particular, it’s concerned about funds that default to reinvesting distributions rather than paying them in cash unless the investor specifically requests cash distributions.

“Generally, staff’s view is that when investors have the option to receive distributions in the form of reinvested securities or cash, having a ‘default’ feature … can cause investor confusion because such reinvestment appears to be inconsistent with the purpose of these securities, which is to provide monthly cash flow,” the OSC report says.

As a result, OSC staff has been asking fund managers to explain why a default feature for the reinvestment of distributions is appropriate, and to consider changing the distribution policy so that it defaults to cash, rather than reinvestment, the OSC report says.

The OSC newsletter reports that several fund managers have either changed their distribution policies to default to cash distributions, or have committed to doing so: “We generally expect that this change will be made on a going forward basis to new purchases, with the exception of purchases made pursuant to an existing pre-authorized plan.”

Furthermore, the OSC newsletter says that the provincial regulator will be contacting fund managers “to bring this issue to their attention and to communicate staff’s concerns and expectations.”

Finally, the OSC has recently seen variations in the prospectus disclosure of annual compensation paid to members of a fund’s independent review committee (IRC), the OSC newsletter says.

“In certain cases, we have seen only the aggregate compensation paid to all IRC members be disclosed, and in other cases, only the retainer payable to IRC members in the normal course is disclosed,” the OSC report states. “Staff remind issuers that these sections require disclosure of the name of the individual IRC member and the specific amount of compensation, including any expenses reimbursed by the fund, actually paid to the individual IRC member during the fund’s most recently completed financial year.”