Ontario securities regulators have uncovered several instances of mutual funds that are understating their riskiness in new point-of-sale disclosure documents.
In Friday’s OSC Bulletin, the Ontario Securities Commission reports that in reviewing the initial implementation of the new Fund Facts documents it has begun a targeted continuous disclosure review of risk classification methodologies and risk ratings. Initially, it has focused on mutual funds that have a “low to medium” or “medium” risk level rating when similar funds managed by peers were rated “medium to high” or “high”.
As a result of these reviews, it reports, six mutual funds, with total assets under management exceeding $1.3 billion, have increased their risk ratings to “medium to high”. The commission notes that in these cases, the fund managers were asked to file amended Fund Facts documents and simplified prospectus, and “to consider how best to publicly notify unitholders of the change in risk rating”.
Earlier this year, regulators indicated that they are considering possible changes to the presentation of risk in the new Fund Facts documents, which has been criticized by investor advocates. It’s expected that proposed amendments to the rules would be published in the spring or summer.
The OSC says that changes to a mutual fund’s risk level would generally be considered a material change under securities legislation. And, it notes that where historical information is not available for a new mutual fund, “it is appropriate for a fund manager to use a benchmark in assessing the fund’s risk classification rating”.
Fund names not consistent with investment objectives, investment strategies
Separately, the regulator says that it’s recently seen preliminary prospectus filings for funds with names that are not consistent with the fund’s investment objectives or investment strategies. “In naming new funds, we encourage fund managers to select names which closely reflect the fund’s investment objectives and which distinguish the fund from other funds,” it says, adding that it will continue to examine fund names and consider whether additional guidance or rule-making is needed in this area.
The OSC also reports that its staff have begun a review of portfolio transparency of actively-managed exchange-traded funds. And, as part of prospectus reviews, it’s requesting information on how often the ETF portfolio holdings are publicly disclosed on the website of the fund manager, and how it’s disclosed to their designated brokers or market makers. It says that once it has completed the review, it will consider whether additional guidance or rules are needed in this area, too.