On September 13, 2023, the Ontario Securities Commission (OSC) published Staff Notice 81-734 Summary Report for Investment Fund and Structured Product Issuers (the IFM Report). The IFM Report provides an overview of the key operational and policy initiatives of the Investment Funds and Structured Products Branch of the OSC for the fiscal year ended March 31, 2023.
The IFM Report is organized into the following four key areas: 1) operational highlights; 2) regulatory policy initiatives; 3) emerging issues and initiatives impacting investment funds; and 4) stakeholder outreach. We believe the following will be of most interest to our readers.
A. Prospectus Review of ESG-Related Funds – The OSC provided their findings on the reviews they conducted related to Canadian Securities Administrator (CSA) Staff Notice 81-334 ESG-Related Investment Fund Disclosure Staff Notice regarding the continuous disclosure, sales communications, and portfolio holdings of ESG-related funds.
The IFM Report notes that most of the issues raised by the OSC during these reviews have been in relation to investment strategies disclosure. In particular, most comments sought to clarify which types of ESG strategies are being used, which specific ESG factors are relevant to the portfolio manager’s analysis, and how such factors are being evaluated and monitored by the portfolio manager.
The OSC also encountered issues relating to the investment strategies disclosure of funds that do not have ESG-related investment objectives but that consider ESG factors, where the consideration of ESG factors plays a more limited role in the investment process.
For funds where the consideration of ESG factors plays a more limited role, the OSC asked issuers to clarify the role in the fund’s investment process, including the weight given to ESG factors and the impact that ESG factors will have on the portfolio selection process.
B. Crypto Asset Funds – The OSC conducted an issue-oriented continuous disclosure review on crypto funds which provide exposure exclusively to bitcoin and/or ether. The review involved 16 crypto funds managed by the seven IFMs for which Ontario is the principal regulator. The OSC issued comment letters to the funds on areas such as valuation, liquidity risk management, crypto trading platforms, as well as other continuous disclosure obligations. The OSC also commenced an issue-oriented review focused on custody for funds that primarily hold crypto assets.
As part of the reviews, the OSC reached out to the funds’ auditors to get a better understanding of their audit processes and procedures concerning custody of the funds’ assets. CSA Staff Notice 81-336 Guidance on Crypto Asset Investment Funds that are Reporting Issuers was published on July 6, 2023, to help IFMs understand and comply with securities law requirements for public investment funds holding crypto assets. The results of the custody review are also included in that Staff Notice.
C. Independent Review Committees – The OSC performed a targeted continuous disclosure review focused on National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81- 107). The review covered investment funds managed by 20 IFMs ranging in assets under management from $200 million to over $100 billion and was comprised of a desk review of fund prospectuses, IRC Reports to Securityholders and IFM websites, as well as letters sent to IRC Chairs and IFMs. The review addressed several themes including the scope of IRC oversight, term limits of IRC members, IRC diversity, inclusion and size, skills and competencies of IRC members and compensation of IRC members. The OSC is working with another CSA jurisdiction and are considering potential publication of staff guidance and observations based on the review.
D. Reports of Exempt Distributions – The IFM Report noted that many investment funds are sold to Ontario investors under a prospectus exemption, the most common being the accredited investor exemption under section 2.3 of National Instrument 45-106 Prospectus Exemptions (NI 45-106).
The Form 45-106F1 Report of Exempt Distribution (45-106F1) is required to be filed by investment funds no later than 30 days after the end of the calendar year in which the distribution took place when securities have been distributed in reliance on the specified exemptions. Typically, most 45-106F1 submissions related to investment funds are received in the month of January. The OSC reviews the 45-106F1 submissions to ensure that the activity and late fees, if applicable, have been paid, and to ensure that the 45-106F1 information reconciles with the detailed information in the Schedule 1 contained in the form.
The OSC noted the following six most common deficiencies: 1) activity fees owing; 2) the number of Ontario purchasers differ between 45-106F1 and Schedule 1; 3) incorrect issuer information; 4) late fees owing; 5) purchaser information – distribution amounts differ between 45-106F1 and Schedule 1; and 6) distribution dates on 45-106F1 and Schedule 1 do not match.
The OSC reminded IFMs who offer exempt funds to ensure that the 45-106F1s are filed in a timely manner to avoid late fees, to include the appropriate activity fee payment, and to ensure that the information contained on the 45-106F1 reconciles with the information reported in the detailed Schedule 1.
E. Marketing Materials – The OSC performed ad hoc reviews of marketing materials in response to complaints. The complaints mostly dealt with insufficient disclosure on social media platforms like Facebook, Twitter, and LinkedIn. The IFM Report noted that content limitations with these types of media may prevent IFMs from providing clear, accurate and balanced messages which are necessary when these meet the definition of a sales communication under NI 81-102 Investment Funds (NI 81-102). The required warning language in section 15.4 of NI 81-102 should not be more than one click away when using alternative media.
These principles should be applied to both the IFM’s social media accounts, and those of its employees where they are using their personal platforms such as LinkedIn to market specific funds or performance. IFMs should ensure that they have adequate policies and procedures related to the use and monitoring of social media, and that training is provided to employees where necessary.
F. Investment Fund Settlement Cycle – On December 15, 2022, the CSA published CSA Staff Notice 81-335 Investment Fund Settlement Cycles. This notice advises that the CSA is not proposing amendments to sections 9.4 and 10.4 of NI 81-102 to mandate a shorter settlement cycle one day after the date of the trade (T+1) for mutual funds. This allows investment funds to have flexibility to determine whether a shorter settlement cycle is appropriate for the fund.
G. Review of Principal Distributor Practices – The IFM Report noted that the CSA is reviewing the practices of mutual funds that have principal distributor relationships with registrants to distribute their securities. The first phase of the CSA’s review included surveying IFMs and principal distributors about the scope of their arrangements.
The CSA working group is currently reviewing the survey responses which is meant to guide the CSA to determine whether amendments to National Instrument 81-105 Mutual Fund Sales Practices or other instruments are needed.
H. Emerging Issues and Initiatives Impacting Investment Funds – The IFM Report highlights several issues that could impact IFMs in the coming year: 1) changes to the OSC Fee Rules (especially late fees on covered documents and amendments relating to exempt distributions under NI 45-106); 2) the ongoing transition to SEDAR+; 3) the upcoming cessation of the Canadian Dollar Offered Rate (CDOR); and 4) the need for IFMs to establish and implement controls and supervision to manage the risks of a cyber-attack, including if they are outsourcing functions to third-party service providers.
I. Investment Fund Survey – For the January 2024 version of the Investment Fund Survey (IFS), IFMs registered in Ontario will be required to complete the IFS for all funds for which they act as an IFM, including labour-sponsored funds and scholarship plans, as well as funds with net assets under $10 million. Additionally, each IFM will need to report the following for each investment fund: 1) annual net performance returns; 2) the MER; 3) performance fees charged, if any; and 4) the fund risk rating.
If you have any questions or would like to discuss any of the above further, please contact your regular lawyer at AUM Law. AUM Law can also assist with providing employee training and social media monitoring for employees.
September 28, 2023