On August 2, 2012, the Ontario Securities Commission (OSC) issued Staff Notice 81-717 Report on Staff's Continuous Disclosure Review of Portfolio Holdings by Investment Funds (OSC Staff Notice).
The OSC Staff Notice summarizes the findings of Staff's review, conducted between August 2011 and June 2012, of the portfolio disclosure provided by a sample of 203 investment funds managed by 40 different fund managers in Ontario in their annual or interim Management Reports of Fund Performance (MRFPs), Statements of Investment Portfolio and Fund Facts. The purpose of the review was to assess how effectively the categorization of the fund's investment portfolio in its disclosure reflects the fund's investment objectives as set out in the prospectus of each fund and to assess regulatory compliance in the fund's on-going disclosure.
In summary, OSC Staff observed three key trends:
- the use of portfolio categories that did not reflect the unique characteristics of the fund as set out in its investment objectives;
- inconsistencies in the categories used across different disclosure documents of the fund to describe the investments in the portfolio; and
- the use of broad, generic categories instead of more discrete, specific categories that would provide more meaningful information on portfolio composition and the alignment of portfolio investments with the fund's investment objectives.
Staff's findings suggest that investment funds can further improve the quality of their continuous disclosure relating to their portfolio holdings. In Staff's view, it is critical that investors are provided with disclosure that shows how the investments made by the fund are consistent with the fund's investment objectives. According to Staff, classification by the categories reflected in the fund's investment objectives is important because it is likely that the fund was sold to investors based on the distinguishing characteristics described in the fund's investment objectives and strategies. This allows investors to better understand if the fund holds what it set out to invest in, or whether over time its investments have drifted from the stated objectives. Further, in Staff's view, each disclosure document must be considered independent of any other disclosure document since investors may not review or receive all of them. Fund managers are reminded of the requirement in Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3) to ensure consistency between the basis for portfolio categorization in the Fund Facts and the MRFP. Fund managers are also encouraged by Staff to consider whether the specific portfolio categories used in the MRFP should also be mirrored in the financial statements. Where a top fund is invested in underlying funds managed by the same fund manager, fund managers are encouraged by Staff to consider an Investment Mix that looks through to the holdings of the related underlying funds. Given the common management of the top and bottom funds, Staff would expect a fund manager to have access to the portfolio holdings of the underlying funds and, accordingly, be in a position to provide meaningful information to investors in the Investment Mix on the exposure to various securities resulting from the fund-of-funds structure.
Fund managers are encouraged to carefully review and consider the guidance set out in the Staff Notice when preparing their continuous disclosure to ensure it complies with securities rules and regulations. A copy of the Staff Notice is available on the OSC website.
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