Staff of the Ontario Securities Commission recommend that labour-sponsored investment funds continue to get relief from the sales practices rule, allowing them to pay distribution expenses out of fund assets. However, they suggest that fee disclosure by LSIFs should be improved, too.

The recommendations come as the result of a survey the OSC commissioned after granting relief from National Instrument 81-105 — Mutual Fund Sales Practices for LSIFs in early 2004

In a staff notice 81-707, the OSC reports that during late 2003 and early 2004, it began receiving applications from LSIFs for an exemption from the mutual fund sales practices rule to permit them to pay distribution costs, including sales and trailing commissions, directly out of fund assets. At the time, OSC staff recommended that relief be granted, and the commission agreed.

However, it reports, “During that period of time, staff began to notice overall commission rates increasing slightly which caused staff some concern.” So, in order to allow more time to research the issue, the commission imposed November 30 sunset clauses on the exemption orders granted at the beginning of 2004.

The OSC then hired Compas Inc. to conduct a survey of LSIF managers and dealers on an anonymous basis regarding their sales practices. The survey was conducted during March and April. Eighteen managers and 28 dealers were surveyed. That survey found that, “commission rates did not rise significantly and were comparable to rates paid by mutual funds over an eight year period. Therefore, we believe that no immediate regulatory response is necessary at this time.”

“Further, we believe that it would not be harmful to investors to permit LSIFs that choose to pay commissions out of fund assets to continue to do so,” it said. “Finally, we also found that disclosure of fees and expenses could, and should be, improved and simplified. Added support for improving disclosure was found in the survey responses where both LSIF managers and dealers responded positively to the idea of presenting fees in chart form in the fund prospectus.”

As a result of the survey, OSC staff continue to recommend relief from the sales rule. OSC staff also strongly encourage the presentation of fees, expenses, management expense ratio and annual returns in a simplified chart format in the prospectus summary.

Most LSIFs already include in their prospectus summary a fee chart in one form or another, it says. “However, inclusion of the MER and the annual return will help investors understand the overall fee structure of the fund. The suggested disclosure enhancements do not represent a radical change from current practice,” OSC staff maintains.

It suggests that the simplified chart format include: a summary of fees and expenses including all commissions paid to dealers; the MER for the LSIF for each of the last five years; and, the LSIF’s annual return for each of the last five years.