OSC warns fund managers over misleading yields

In the high interest rate environment, some investment fund managers are over-hyping their funds’ yield numbers to investors, the Ontario Securities Commission (OSC) warns.

In a notice to the industry, the OSC said its latest reviews of fund managers’ sales materials have found instances of firms hyping up performance numbers — touting yields as high as 15% and prominently highlighting this data over the fund’s other aspects.

“Even where factually accurate, the inclusion of attention-grabbing high yield or high distribution rate information in a sales communication without complying with the performance data requirements . . . may be misleading,” the OSC warned.

As a result, the regulator has been asking fund managers to remove misleading statements from their sales materials — including their websites and other marketing.

The OSC stressed that the fund rules’ reporting requirements are intended to ensure investors receive information that is “fair and balanced.”

“Staff’s view is that sales communications that include yield information and/or distribution rates are subject to the performance data requirements . . . including the requirement that the sales communication include standard performance data in order to provide a balanced picture of the investment returns of the fund,” it said.

Additionally, the regulator called on fund managers to be careful when using the term “yield” to refer to distribution rates, which investors may interpret as a fund’s investment returns when these distributions may include a return of capital.

The OSC also noted that the performance reporting requirements prohibit funds from including performance data in sales communications until the fund has “sufficient performance history” — generally at least 12 consecutive months of data. Annualized yield or distribution numbers are generally considered to be hypothetical performance data, it said.

In the wake of its reviews, the OSC also said it “will continue to consider whether future policy initiatives are needed in this area.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.