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Canadian Securities Law News: OSC Issues Report on Continuous Disclosure Review of Investment Fund Sales Communications

Last week, the OSC published Staff Notice 81-720 - Report on Staff's Continuous Disclosure Review of Sales Communications by Investment Funds.

The notice summarizes the findings of an OSC targeted continuous disclosure (CD) review of the advertising and marketing materials of publicly offered investment funds and provides related OSC guidance.

Summary of findings:

  • Investment funds are generally in compliance with disclosure requirements related to sales communications;
  • Some basic requirements were frequently not met, such as:
    • the date of first publication for a written sales communication was not provided;
    • sales communications contained only some of the required information and referred the reader to other sources (e.g. the fund's website or prospectus), for more information.

OSC guidance:

"Sales Communication"

The OSC considers the definition of "sales communication" and the parameters set out in Part 15 of National Instrument 81-102 - Mutual Funds (NI 81-102) to be the best-practice standards for marketing materials of all types of investment funds.

The term "sales communication" is broadly defined in NI 81-102:

  • It applies to communications that "relate to" mutual funds, fund managers, companies providing services to them, or a number of other entities;
  • May include:
    • communications that reference a specific fund or fund family;
    • short communications (including tweets or internet banners) if one of their purposes is to induce someone to buy one or more investment funds;
  • Does not include:
    • communication intended to promote a corporate identity or the expertise of a fund manager (i.e. "branding exception"), provided that the marketing material is not about one or more investment funds;
    • documents labeled "for advisor use only", provided that, in addition to this label, a more pro-active effort is made to restrict broad distribution of any internal document not designed as a sales communication to potential investors.

Fairness of sales communications

The OSC adopts the perspective of a retail investor when assessing whether sales communications are fairly presented:

  • Sales communications should be in plain language;
  • Sales communications should not rely on the use of industry jargon, defined terms, or acronyms not easily understood by retail investors;
  • Important facts and risks must be clearly outlined and not "buried" within the disclaimer or fine print;
  • Warnings, disclaimers or qualifications used in sales communications should be consistent with the content of the sales communication, including any headline claims;
  • If a distribution or yield is quantified in a sales communication, the disclosure should specify:
    • the basis of the calculation;
    • the percentage of total distributions comprising reinvested units;
    • whether the yield is calculated based on the net asset value or market price of the fund's securities;
    • the time period covered by the distributions;
    • the key assumptions and the impact of any changes to the key assumptions on the target distribution or yield;
  • Return of capital distributions should not be marketed in a manner that suggests that they represent investment returns.

Misleading sales communications

A sales communication of an investment fund may be misleading when a particular term, phrase, description, illustration or other statement may create an unrealistic expectation or an unjustified sense of safety, particularly from the perspective of the retail investor:

Sales communications regarding commodity pools:

  • Must clearly identify the issuer as a commodity pool;
  • Must explain how the commodity pool differs from a conventional mutual fund;
  • Should not refer to a commodity pool as a "mutual fund".

Exaggerated and unsubstantiated claims:

  • Include vague or exaggerated statements that cannot otherwise be verified such as "superior proven performance" or "superior risk adjusted performance".

"Bait and switch":

  • Sales communications for publicly offered investment funds must:
    • convey the attributes and performance of the investment fund that is actually being offered for distribution;
    • give equal prominence to key information regarding the investment fund that is actually being offered for distribution when the sales communication also highlights the attributes and investment returns of a similar fund offered by the fund manager or an affiliate, but that fund is not available for sale in Canada;
    • all facts that, if disclosed, could materially alter the conclusions reasonably drawn or implied by the comparison;
    • data for each subject of the comparison for the same time periods;
    • a clear explanation of any factors necessary to make the comparison fair and not misleading.

Investment fund risk disclosure in sales communications:

  • Risks associated with the investment fund:
    • must be clearly disclosed and easily visible in marketing, advertisements and other types of communications;
    • must be given equal prominence to disclosure about the potential investment returns and benefits of the fund;
    • must not be downplayed through the "tone" of a sales communication;
  • If a particular benefit is highlighted in a sales communication, any potential risks associated with the investment strategy in achieving the benefit should also be disclosed;
  • Sales communications should clearly disclose:
    • the nature of special risk factors that may not be immediately apparent to the retail investor;
    • any unique characteristics of the fund, particularly if specific risks are associated with the unique feature.

Representative client lists and endorsements in sales communications:

  • Should only include the clients of the fund manager's asset management business;
  • Should not list the clients the fund manager may deal with in another capacity;
  • Are properly used if:
    • there is some nexus between the representative clients listed in the sales communication and the investment fund that is being promoted;
    • the clients listed are investors in the same fund that is the subject of the sales communication or in a similar fund.

Perfomance data

Standard performance data:

  • Should be given equal prominence to any other performance data disclosed in the sales communication;
  • Should not be placed in the disclaimer at the end of the sales communication;
  • Should be regularly updated so as to not become stale or misleading.

Performance Awards:

  • Only awards that the investment fund has won should be used in sales communications;
  • Awards won more than two years ago may be referenced in sales communications only if they are still relevant to the investment fund's current investment objectives and strategies;
  • The name of the award provider, the ranking (if any) and where to go for additional information about the award (including the criteria upon which the award is based) should be included in the sales communication;
  • The type of award must be clearly disclosed (i.e. whether based on fund performance or award to the fund manager or portfolio manager);
  • Awards to the fund manager can be referred to in the sales communications of the fund manager's family of funds, provided the award was not for a specific investment fund.

Hypothetical data

Hypothetical data should not be used in sales communications intended for retail investors because:

  • There is often little indication that the performance shown is hypothetical;
  • Retail investors may not have the investment knowledge to fully understand the risks and limitations of the hypothetical performance data;
  • The disclosure does not or cannot adequately describe the underlying methodology and the risks and limitations of the hypothetical performance data in a manner that is clear and easily accessible to the retail investor within the space limitations of the sales communication.

Hypothetical performance data may be properly used in marketing materials for dealers and their sales representatives if clear and meaningful disclosure is provided regarding the methodology and assumptions used to calculate the hypothetical performance data, and any other relevant factors.

Alternative media

The OSC provides the following guidance for fund managers that use internet advertising such as webpages, banner advertisements, video streaming (such as YouTube), discussion forums, social networking and micro-blogging (such as Twitter):

  • Fund managers should consider the appropriateness of certain new media formats if content limitations prevent the fund manager from providing clear, accurate and balanced messages in the sales communication or insert the required warning language;
  • Warning language must be visible on the same page as the sales communication or within "one click";
  • All information, including disclaimers, should be easily comprehensible to the retail investor on their first viewing of the advertisement;
  • Disclaimers should not scroll too quickly.
Should you have any questions on these matters, please contact any of the members of our Securities Regulation & Investment Products Group.

Michael Nicholas
Partner
[email protected]

Sean Sadler
Partner
[email protected]

Rene Sorell
Partner
[email protected]

Cristian Blidariu
Associate
[email protected]

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