On October 19, 2022, the OSC published Staff Notice 81-733 Summary Report for Investment Fund and Structured Product Issuers (the Report). The Report provides an overview of the key activities and initiatives of the OSC’s Investment Funds and Structured Products Branch (IFSP) during the 2021-2022 fiscal year. The Report’s overview of the market composition of investment funds and structured products in Canada highlighted the rising numbers of ESG investment funds and a comparative decline in the creation of new crypto asset funds in Canada through fiscal 2021-2022. The Report is organized into the following four broad areas and some of the highlights are summarized below.
Operational Highlights
IFSP completed a total of 359 prospectus reviews during the 2021-2022 fiscal year (slightly less than the 364 reviews completed in the 2020/2021 fiscal year). Some of the novel prospectus filings that were receipted during the fiscal period included crypto asset funds, an income for life fund, an interval fund, and two carbon credit future funds.
The Report included a reminder of the CSA’s staff notice released in January of this year that provides guidance for investment funds on their disclosure practices as they relate to ESG considerations (the ESG Notice), particularly funds whose investment objectives reference ESG factors and other funds that use ESG strategies (ESG Related Funds). Staff have been reviewing, and will continue to review, the prospectus and related documentation of ESG Related Funds in accordance with the ESG Notice. The Report highlights the most common issues raised in comments for ESG Related Funds and notes that as part of these reviews staff are reviewing the sales communications relating to the ESG Related Funds in question.
Exemptive Relief Applications
IFSP completed 142 exemptive relief applications during the fiscal period. In addition to the relief applications granted in connection with the prospectus products noted above, noteworthy relief included an exemption granted to a group of investment funds and a registered adviser to permit domestic and cross-border inter-fund trading. In addition, the CSA granted relief to a Schedule I bank to facilitate the distribution of Canadian Depositary Receipts.
Continuous Disclosure Reviews
Some of the major reviews completed by IFSP during the fiscal period include:
- A review on liquidity risk management for IFMs that experienced significant redemptions during the first half of 2020. The purpose of the review was to assess how the fund managers dealt with the significant redemption events and to obtain information on their liquidity risk management policies. IFSP found that all managers subject to the review were able to manage their funds’ significant redemptions as part of the normal course of operations without breaching any borrowing restrictions under National Instrument 81-102 Investment Funds or requiring exemptive relief. Investment fund managers (IFMs) are reminded to review CSA Staff Notice 81-333 Guidance on Effective Liquidity Risk Management for Investment Funds for recommended practices in this area.
- An issue-oriented review on crypto asset ETFs in light of a period of market volatility in May 2021 in order to understand how IFMs managed their subscription and redemption activity, where they sourced crypto assets, and how they continued to accurately value their funds. IFSP found that the majority of the crypto asset ETFs traded very close to their NAV during the period of volatility.
- A targeted continuous disclosure review of the disclosure documents and sales communications of a number of ESG Related Funds to assess the quality of the fund’s ESG disclosure. Based on the findings of the review, CSA published the ESG Notice mentioned above which includes findings from this review.
- Several ad hoc reviews of marketing materials in light of complaints received related to sales communications that dealt with insufficient disclosure and exaggerated and misleading claims in internet advertising and social media platforms. Staff reiterated that all information, including disclaimers, should be easily comprehensible to the retail investor on their first viewing of an advertisement and direct IFMs to a prior staff notice that provides additional guidance when the sales communication is presented with alternative media. The Report also reminds IFMs that they should be reviewing the use of personal social media with their employees who use their accounts to market investment funds and that IFMs should have adequate policies and procedures related to the use and monitoring of social media (an area in which AUM Law can assist).
- A review of the cybersecurity risk disclosure for a sample of funds, focusing on whether there was some type of cybersecurity risk disclosure in the publicly filed fund documents. The Report notes that given the threat of cybersecurity attacks, all IFMs should review the risks disclosed in their funds’ disclosure documents and perform a thorough risk assessment to determine whether cybersecurity risk is a material risk to its funds which merits disclosure in the prospectus. IFMs who do not include cybersecurity risk may be selected for a more in-depth review to explain why the disclosure was excluded.
Regulatory Policy
The Report summarizes the major policy initiatives that were completed or are in progress during the period including the prohibition of deferred sales charges, the blanket order to codify permitted means to comply with the trailer ban for order execution only dealers and the amendments to reduce the regulatory burden for investment fund issuers (much of which dealt with relief from certain conflict of interest requirements).
If you have any questions or wish to discuss any aspects of the Report with us, please contact your usual AUM lawyer.
October 31, 2022