On November 7, 2013, the Ontario Securities Commission (OSC) published its 2013 Annual Summary Report for Dealers, Advisers and Investment Fund Managers. It contained, among other matters, information specific to investment fund managers (IFMs) including current trends in deficiencies and suggested practices to address them.
The deficiencies noted by the OSC with respect to IFMs include:
- inappropriate expenses being charged to funds by IFMs including fees for the audit of the IFM, insurance premiums, professional dues and recruiting expenses of the IFM. The OSC considers these expenses to be the cost of running a fund management business and should therefore be borne by the IFM, and not its investment funds;
- inappropriate expense allocation methodology resulting in an improper allocation of the appropriate amount of expenses between the operation of the IFM and its funds under management;
- inadequate disclosure in offering memoranda of investment funds including with respect to conflict of interest matters (including fees paid to related parties), types of expenses that are paid by the investment funds and the method of calculating performance fees;
- failure to recognize that certain promotional documents (such as term sheets and confidential information memoranda) provided to potential investors met the definition of offering memorandum under the Securities Act (Ontario) resulting in a failure to disclose a purchaser’s right of action for damages or rescission in such documents and to deliver these documents to the OSC as required;
- inadequate oversight of outsourced functions and service providers; and
- failure to deliver net asset value adjustments to the OSC as part of IFM annual or interim financial reporting in accordance with applicable law.
Please refer to the complete report for more information on these deficiencies and the suggested practices to address them.