December 2015 Investment Funds Practitioner: issues and tips
The Ontario Securities Commission has released the December 2015 edition of the Investment Funds Practitioner, which provides an overview of recent issues arising from applications for exemptive relief, prospectuses and continuous disclosure documents filed by investment funds. This legal update summarizes key issues and provides tips for investment fund issuers.
Up-front commission structure for scholarship plans
Issue: Scholarship plans commonly employ a commission structure that dedicates subscribers’ initial contributions to paying down an up-front sales commission that is paid to sales representatives. The OSC will no longer receipt prospectuses for new group or individual scholarship plans that have such an up-front commission structure unless there is a possibility of a refund for paid sales commissions in appropriate circumstances.
Tip: A scholarship plan provider should consult with the OSC before implementing new compensation models for its sales representatives.
Automatic switching programs
Issue: The OSC has recommended exemptive relief from the Fund Facts delivery requirement for a fund that uses an automatic switching program. An automatic switching program allows a fund manager to switch an investor’s securities between different series of a fund so investors can take advantage of fee discounts for which they become eligible. Such a switch would normally be considered a “distribution” and trigger the Fund Facts delivery requirement.
Tip: As a condition of granting such exemptive relief, the OSC will require (a) prospectus and Fund Facts disclosure of the eligibility requirements and fee rates for the various series and (b) notification be provided to existing and new investors in the relevant series.
No relief from financial statement filing requirements for top funds
Issue: The OSC has decided not to grant exemptive relieve from the financial statement filing and delivery requirements contemplated in NI 81-106 (Investment Fund Continuous Disclosure) for pooled funds that are the top fund in fund-on-fund structures. Previously, the OSC had granted such relief on an ad hoc basis when the bottom fund was established in a foreign jurisdiction and prepared financial statements on a different timeline.
Tip: Pooled funds that are the top fund in a fund-on-fund structure should adopt year-ends that permit them to comply with NI 81-106 filing and delivery requirements.
Transition to IFRS for investment funds
Issue: While financial information from 2012 and all previous years remains in the management report on fund performance (MRFP), financial information calculated according to Canadian Generally Accepted Accounting Practices (GAAP) and International Financial Reporting Standards (IFRS) will exist side-by-side.
Tip: Funds should ensure their MRFP contains an explanation of both IFRS and GAAP principles as long as figures based on both systems continue to co-exist in the historical performance tables.
Transition to corporate issuer status requires securityholder vote
Issue: When a manager decides to transition an investment fund to corporate issuer status, the OSC considers the change a “restructuring” that triggers a securityholder vote pursuant to s.5.1(h)(iii) of NI 81-102 (Investment Funds).
Tip: Managers considering such a change in issuer status should, at minimum, include (a) financial statements and MD&A for the issuer's two most recently completed financial years and most recent interim period prepared in accordance with applicable Canadian securities legislation as if the issuer were a corporate issuer instead of an investment fund; (b) a discussion of the key differences between “investment fund” and “corporate issuer” statuses from a securities law perspective; and (iii) a statement of executive compensation compliant with Form 51-102F6.
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