The Ontario Securities Commission has issued a staff notice setting out its concerns with the marketing practices of firms registered as investment counsel/portfolio managers.

A review of ICPMs’ marketing practices identified a number of deficiencies in the following areas: the use of hypothetical performance data; linking actual performance of the ICPM’s investment fund or investment strategy with the performance of another fund or investment strategy; the construction and marketing of performance composites; the construction and use of benchmarks in marketing materials; and, the use of exaggerated and unsubstantiated claims in marketing materials.

As a result of the review, the OSC is recommending that firms adopt several key practices in order to meet their obligation to deal fairly, honestly and in good faith with their clients. Failure to follow these practices may result in inaccurate and unfair marketing materials, it warns.

The suggested practices include:

  • ICPMs should present performance data that is based on their actual client performance returns, not on hypothetical returns;
  • performance composites should be constructed to include all portfolios with a similar investment strategy;
  • performance data should be calculated using a consistent methodology so that any comparisons are not misleading;
  • benchmarks should be relevant to the ICPM’s investment strategy;
  • there should be adequate disclosure to make the comparison fair and meaningful for clients; and
  • ICPMs should be able to support the claims made in their marketing materials.

The OSC said that marketing practices have increasingly become an area of concern. During field reviews in recent years, it identified an increasing number of deficiencies in this area.

“In particular, we have seen a rise in the number of issues in the marketing practices of ICPMs for non-prospectus qualified securities, such as pooled funds and hedge funds. We have also seen claims that are more aggressive and a greater complexity in the types of performance data in marketing materials,” it explains, adding that it’s concerned about marketing materials because they influence investors.

“Naturally, ICPMs are motivated to present their performance, skills and services in a favourable light in these materials as a way to attract new clients and to retain existing ones. However, we have seen a number of instances where the materials were prepared in a way that highlights or exaggerates favourable points while omitting or failing to disclose facts that may be less favourable to the ICPM. As a result, we decided to conduct a focused review of the preparation and use of marketing materials by ICPMs,” it said.

The review involved the OSC compliance team gathering preliminary information from about 50 ICPMs that it had not recently reviewed and that were actively carrying on marketing activities. It applied a risk-based approach to select 21 firms for an in-depth review. The sample included ICPMs that were portfolio managers of non-prospectus qualified investment funds, firms that catered to large institutional investors and firms with a variety of clients, including private clients. It did not focus on ICPMs that act as fund managers solely for prospectus-qualified mutual funds.

The OSC sent compliance deficiency reports to each of the ICPMs reviewed. Each firm was required to provide a written response to its deficiencies within 30 days. The OSC says it’s working directly with these ICPMs to help them understand its concerns and to ensure that deficiencies are resolved appropriately within a reasonable time frame. “If they do not resolve their deficiencies, we may take further action, such as imposing terms and conditions on their registration, conducting follow-up reviews or referring the matter to the OSC’s Enforcement Branch,” it warns.

The notice says that the OSC will continue to review the marketing practices of market participants during regular field reviews.