The Ontario Securities Commission (OSC) reports that it reviewed bullion funds in the wake of falling gold prices, is considering allowing scholarship plans some equity exposure, and it is reminding fund firms of certain disclosure obligations, among other things.
In its latest newsletter, the OSC’s investment funds branch reports that, “in response to the significant drop in gold bullion prices in mid-April”, its staff conducted a targeted review of investment funds that have most of their assets in precious metals 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,” it says, adding, “We continue to review and monitor developments in this area.”
The commission also notes that it has begun to examine certain aspects of non-redeemable funds that largely invest in pools of non-guaranteed mortgages, including: the relationship between the issuer and the other entities such as the mortgage originator, the mortgage service provider and the promoter to determine whether 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,” it says, adding that it will provide further guidance on this topic in the future.
Additionally, the newsletter reminds fund firms that are impacted by federal budget measures designed to eliminate so-called character conversion transactions to consider their longer-term responses to the budget, including whether changes to their funds’ investment objectives and strategies will be needed or whether the funds need to be restructured, reorganized or terminated.
In terms of disclosure issues, the commission stresses that firms must make prominent disclosure of their Fund Facts documents, and the reports from their independent review committees, on their websites; noting that it has observed instances of non-compliance with these obligations.
And, it warns firms that their prospectuses cannot include disclaimers of liability for information from third parties that is included in their prospectuses. The regulator says that issuers are 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,” it notes.
The newsletter also sets out the work it has undertaken with scholarship plan providers to consider conditions under which regulators would plans to invest some of the income portion of the plans (not principal) in equity securities. “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,” it says.
As a result, regulators have been considering terms and conditions of possible undertakings with scholarship plans to allow this sort of investment, including: precluding further investment in principal protected notes; matching the plans’ educational assistance plan eligibility rules with the eligibility rules for RESPs; and, mandatory dispute resolution at the Ombudsman for Banking Services and Investments (OBSI).