PDF Version

PDF Version

May 2013



From the Investment Funds Branch, Ontario Securities Commission

What is the Investment Funds Practitioner?

The Practitioner is an overview of recent issues arising from applications for discretionary relief, prospectuses, and continuous disclosure documents that investment funds filed with the OSC. It is intended to assist investment fund managers and their staff or advisors who regularly prepare public disclosure documents and applications for exemptive relief on behalf of investment funds.

The Practitioner is also intended to make you more broadly aware of some of the issues we have raised in connection with our reviews of documents filed with us and how we have resolved them. We hope that fund managers and their advisors will find this information useful and that the Practitioner can serve as a useful resource when preparing applications and disclosure documents.

The information contained in the Practitioner is based on particular factual circumstances. Outcomes may differ as facts change or as regulatory approaches evolve. We will continue to assess each case on its own merits.

The Practitioner has been prepared by staff of the Investment Funds Branch and the views it expresses do not necessarily reflect the views of the Commission or the Canadian Securities Administrators (CSA).

Request for Feedback

This is the ninth edition of the Practitioner. Previous editions of the Practitioner are available on the OSC website under Investment Funds -- Information For: Investment Funds.{1} We welcome your feedback and any suggestions for topics that you would like us to cover in future editions. Please forward your comments by email to


Scholarship Plans

Since March 2012, the CSA have been working with a group of scholarship plan providers to consider the terms and conditions on which CSA staff would permit, by way of an undertaking (Undertaking), scholarship plans to make limited investments of the income portion of the plans (not principal) in equity securities, otherwise not contemplated by National Policy 15 (NP15). This is in response to feedback that in the current low-interest rate environment, it has been difficult to obtain sufficient rates of return on plan investments, currently limited to fixed income securities. In response, CSA staff have been considering terms and conditions of the Undertaking that would further the CSA's policy objectives with respect to the regulation of scholarship plans. These terms and conditions include:

• precluding further investment by scholarship plans in principal protected notes;

• matching the plans' educational assistance plan eligibility rules with the eligibility rules for RESPs under the Income Tax Act (Canada); and

• mandatory availability to subscribers and potential subscribers of the services of Ombudsman for Banking Services and Investments (OBSI) at the plan providers' expense, to resolve a complaint made by a subscriber or potential subscriber about the manager's dealing activities in its capacity as a registered scholarship plan dealer.

Once an Undertaking is executed, implementation of the terms and conditions of the Undertaking will be subject to a transition period and termination on the earlier of (i) 365 days from the date of notice from the principal regulator of the plans to the manager that the Undertaking may no longer be relied upon, (ii) the Undertaking being superseded or replaced by a new, amended Undertaking, agreed to between the manager and the applicable CSA jurisdictions (Jurisdictions) in respect of the same subject matter, and (iii) the coming into force of any rule of the Jurisdictions that regulates the subject matter of the Undertaking. A plan provider who executes the Undertaking will be required to annually confirm compliance with the terms of the Undertaking and certify that neither it, nor the plans, are in default of securities legislation in any jurisdiction of Canada.

Scholarship plan providers that are interested in negotiating this type of Undertaking should contact their principal regulator as appropriate.

Character Conversion Transactions

On March 21, 2013, the Minister of Finance presented the federal government's 2013 budget. The budget contains proposed amendments to the Income Tax Act (Canada) (the Budget Amendments) which impact certain investment funds that use specified derivatives, typically, forward agreements, to provide investors with an economic return based on the performance of a reference fund. Through the use of a forward agreement, an investment fund characterizes the economic return of a reference fund, which would otherwise be treated as ordinary income, as capital gains. The Budget Amendments will effectively prohibit this character conversion.

In response to the Budget Amendments, we published OSC Staff Notice 81-719 Effect of Proposed Income Tax Act Amendments on Investment Funds -- Character Conversion Transactions on April 3, 2013. The notice sets out staff's views on the types of considerations investment fund managers should be contemplating in response to the Budget Amendments, including their disclosure obligations, the need to cap their affected funds to new and additional investments, and communications with current securityholders. Investment fund managers should also consider their longer-term responses to the Budget Amendments, including whether changes to their funds' investment objectives and strategies will be needed or whether the funds need to be restructured, reorganized or terminated.

Fees Disclosure in Short-Form Prospectuses

A prospectus must provide full, true and plain disclosure of all material facts relating to the securities being distributed. Filers who use short-form prospectuses to qualify their investment funds are reminded that staff consider the fees and expenses of the fund to be material facts that should be disclosed in the investment fund's prospectus. In addition to the form requirements of Form 44-101F1 Short Form Prospectus, filers are expected to include a "Fees and Expenses" section in their short-form prospectus of an investment fund which describes the (i) expenses of the offering, (ii) the subscription fee, (iii) management fees, (iv) operating expenses, (v) other fees and expenses of the fund, if any, and (vi) fees payable by securityholders of the investment fund, as applicable.

Past Performance Disclosure in Flow-Through LP Prospectuses

In many flow-through limited partnership prospectuses, staff have noticed that performance data includes annualized after-tax returns. Filers have indicated that the after-tax returns are relevant to investors of flow-through limited partnerships since investors may be entitled to certain investment tax credits. Generally, staff are prepared to allow the presentation of annualized after-tax returns provided that annualized before-tax returns are also disclosed in the prospectus. We remind filers that where performance data is presented in a long-form prospectus, annual compound returns must be presented for standard applicable performance periods of 1, 3, 5 and 10 year periods and the period since inception unless otherwise specified by the requirements of Form 41-101F2 -- Information Required in an Investment Fund Prospectus.

Disclaimers of Liability for Third Party Information in Prospectuses

We have seen disclaimers in prospectuses that relate to the accuracy of third party information. The disclaimers indicate that the issuer is not responsible for information provided by third parties, which is typically information that is publicly available, including economic data or index information provided by an index sponsor. Staff are of the view that such disclaimers do not reflect the liability for prospectus misrepresentations under securities law. Section 130 of the Securities Act (Ontario) makes an issuer liable for any misrepresentation in a prospectus, even if the misrepresentation was taken from a reliable third party source. The only defence to a misrepresentation claim available to an issuer is that the purchaser making the claim was aware of the misrepresentation at the time of purchase. As issuers are unable to disclaim liability for third party information in a prospectus, staff's position is that such disclaimers should not be included in prospectuses.

Investments in Mortgages by Investment Funds

Recently, we have seen an increase in the number of non-redeemable investment funds which invest all or substantially all of their assets in pools of non-guaranteed mortgages.

In our reviews, staff have begun to examine the relationship between the issuer and the other entities named in the prospectus, namely, the mortgage originator, the mortgage service provider and the promoter of the issuer, to determine whether, in substance, the issuer is a corporate issuer rather than an investment fund. Generally, any degree of control or active involvement by the mortgage originator or service provider in the formation or operation of the non-redeemable investment fund or the investment portfolio of the investment fund will cause staff to question whether the issuer is an investment fund.

We expect to provide further guidance on this topic. In the interim, issuers and their counsel are encouraged to contact staff at an early stage in the planning of an offering by a non-redeemable investment fund that seeks to invest in mortgages as described above.


Margin Deposit Exemptive Relief

Staff have recently been reconsidering margin deposit relief for commodity pools. Past relief permitted portfolio assets of up to 30% of a commodity pool's net asset value (NAV) to be deposited as margin with any single dealer for certain specified derivatives transactions. The limit, under subsections 6.8(1) and (2) of NI 81-102, which represents an exception to the custodial provisions of NI 81-102, would otherwise be 10%. Past relief was based in part on the condition that these assets would be held by the dealer in a segregated account and would not be available to satisfy any claims against the dealer made by parties other than the fund or its manager. We are reconsidering the conditions of past relief and similar relief going forward because it has come to our attention that these assets could be available to satisfy claims against the dealer made by parties other than the fund or its manager, for example, in certain circumstances of financial failure or bankruptcy of the dealer.

We continue to review and monitor developments in this area and will provide further guidance as needed. Issuers and their counsel are encouraged to contact staff at an early stage in the planning of any structure that may give rise to any questions concerning this issue.

Continuous Disclosure

Review of Bullion Funds

In response to the significant drop in gold bullion prices in mid-April 2013, staff conducted a targeted review of investment funds that hold substantially all of their assets in precious metals bullion. Several of the funds selected for review have exemptive relief from the concentration restriction in securities legislation to enable the funds to invest exclusively in bullion.

In order to understand how the funds and their managers responded to the recent market events, we asked about the asset flows in these funds and in bullion markets, as well as the impact of the market events on the premium and discount spread of bullion exchange-traded funds (ETFs). We also looked into how the fund manager assessed each fund's ability to liquidate bullion to meet redemptions in times of stress.

We continue to review and monitor developments in this area.

Accessibility of Continuous Disclosure Documents on Websites

We have recently observed that the display of Fund Facts documents and IRC Reports to Securityholders on the websites of certain fund managers does not comply with requirements set out in NI 81-101 and NI 81-107, respectively.

Subsection 2.3.1(2) of NI 81-101 requires a Fund Facts document posted to the website of the mutual fund or the mutual fund family to be displayed in a manner that would be considered 'prominent' to a reasonable person. With respect to IRC Reports to Securityholders, subsection 4.4(2) of NI 81-107 requires the IRC Report to Securityholders to be prominently displayed by the manager on the website of the fund, fund family or manager. Commentary 2 to subsection 4.4(2) of NI 81-107 notes staff's expectation that the IRC Report to Securityholders will be displayed in an easily visible location on the home page of the website of the investment fund, the investment fund family or the manager, as applicable.

We remind issuers of the requirements in securities legislation that specify where on a fund/fund family/manager's website certain disclosure documents, such as the Fund Facts and IRC Reports to Securityholders, should be posted with a view to making them accessible to the general public.

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