OSC keeping an eye on three investment issues

By Mathieu Carbasse | February 24 2016 10:13AM

The Ontario Securities Commission (OSC) has identified structured note offerings, past performance presentation in Fund Facts documents, and index-tracking investments as areas worthy of attention.

On Feb. 17, the OSC published its Summary Report for Investment Fund and Structured Product Issuers. The report singled out three emerging issues and trends that the regulator is monitoring.

Structured products market

The first is the structured products market, from which the OSC says it is currently collecting data in order to better detect market trends at an early stage. Later this year, the regulator plans to publish staff responses to frequently asked questions about structured products to provide guidance to the industry. The OSC says it is also considering “whether gaps may exist under our current regulatory approach to structured notes and whether more formal regulatory requirements may be necessary to ensure we are regulating similar products in a consistent way to achieve investor protection and promote fair and efficient capital markets.

Past performance

Another area of interest to the OSC is how past performance is presented in Fund Facts documents, which must disclose the average annual return for the mutual fund. In some instances, however, certain classes or series of a fund may have periods during which no securities were outstanding (i.e., asset gaps), which make it impossible to show performance for a complete calendar year. In these cases, the OSC is asking fund managers to consider alternative approaches to presenting past performance, such as the using the performance record of another class or series of the mutual fund as a proxy for the missing information.

“When selecting the proxy class or series, staff have indicated that the fund manager should ensure that the fees are not lower than those of the class or series with the asset gap. In addition, the proxy class or series should not have any special features that would result in a material difference in performance, such as currency hedging,” reads the OSC report. “As well, staff expect that the Fund Facts include a notation indicating that the performance of a proxy class or series has been presented. We will continue to provide guidance on performance presentation in the Fund Facts as necessary.”

Index tracking funds

Finally, the OSC is scrutinizing investment funds that track an index. The regulator says that in order to qualify as an index-tracking fund, the investment should not involve material discretion in the administration of the index, and that the makeup of the index itself should be transparent so that investors understand what they are buying. The OSC has determined that a fund should not have the word "index" in its name if these two factors are not present. "We will continue to monitor the use of the term ‘index’ as we see more offerings of Index Tracking Funds, and provide additional guidance if necessary," says the OSC.

Related to the same topic …