(June 19 – 15:40 ET) – The Ontario Securities Commission is set to release rules relaxing the concentration restrictions on index funds. The rules are contained in amendments to National Instrument 81-102 and National Instrument NI 81-101.

The OSC proposes to drop the requirement for index funds to hold no more than 10% in any one stock, allowing them to mimic indices precisely. The 10% limit will remain for actively managed funds, despite a lobbying effort by the Investment Funds Institute of Canada earlier in the year to have it removed for them, too.

Index funds will have to meet additional disclosure obligations requiring them to disclose that they may not be diversified.

All mutual funds will have to disclose their management expense ratios based on a rolling 12 month period in media other than official filings. And any mutual fund with multiple classes of shares will have to provide cover page disclosure in its simplified prospectus of the classes offered and performance and financial highlight disclosure for the different classes.

This move will alleviate the Nortel problem, which saw index funds falling far off their benchmarks once Nortel started driving the performance of the TSE 300 with a market weight of around 20%.

“The fundamental investment objective of an index mutual fund is generally to replicate the composition, and therefore the resulting performance, of its target index. To the extent recent market conditions have caused the weighting of some issuers in certain indices to rise substantially about 10%, certain index mutual funds have been prevented from achieving their investment objective,” said Chantal Mainville, legal counsel with the OSC. “The CSA wish to allow index mutual funds to invest in issuers in excess of the 10% restriction, to the extent required to achieve their stated investment objective, and provided enhanced prospectus disclosure requirements are met. We are also publishing additional amendments to the rules governing mutual funds in order to provide investors with more disclosure information for both index and actively managed funds.”

Ms. Mainville added, “concentration restrictions are intended to ensure that mutual funds are sufficiently diversified so as to minimize risk. We are confident that these amendments appropriately balance the needs and particular characteristics of index mutual funds with the investor protection concerns that arise when mutual funds are not fully diversified.”
-IE Staff