As part of an ongoing sales communication review, the OSC looked at a number of investment fund managers’ advertising and marketing materials that included various industry awards.Peter Power/The Globe and Mail
Fund providers are expressing frustration with an Ontario Securities Commission decision that will limit their ability to promote investment industry awards when advertising products.
Ads promoting mutual funds and exchange-traded funds frequently tout investment awards given out by firms such as Morningstar Inc. and Lipper Inc., which is a division of Thomson Reuters.
But now the Ontario Securities Commission says "this practice should be discontinued."
As part of an ongoing sales communication review, the OSC looked at a number of investment fund managers' advertising and marketing materials that included various industry awards.
The OSC said that awards are, in substance, performance-based ratings. That means any sales communication that contains references to such ratings should comply with the requirements set out in the National Instrument 81-102 Investment Funds regulation. NI 81-102 does not permit the use of a performance rating or ranking of a fund that is based partially on a subjective component.
After reviewing the matter, the OSC determined that criteria for award winners go beyond quantitative considerations to also include a subjective component.
Fund companies such as Fidelity LLC and Horizons ETFs Management (Canada) Inc. were among firms in Canada that publicly promoted their products as award winners on their advertising.
"We believe the regulators are doing a disservice to the investment industry with this guidance," says Steve Hawkins, co-CEO of Horizons ETFs. The ETF provider plans to remove fund awards from all of the firm's advertising by the end of this month.
"While there is the potential someone could abuse these awards in their sales communication, that is why the regulators are here – to monitor the compliance of the rules. If you make it clear that there was a subjective element to the award that you were given, then you should be able to use that award and celebrate that award."
Morningstar Investment Industry Awards cover mutual funds, ETFs, hedge funds and pooled funds, and have separate juries devoted to each product type that determine the winners. In addition to performance criteria, the jury also looks at numerous factors, including how long the fund has been running, the quality of the fund manager and whether the investment strategy can be repeated.
Although the OSC would not clarify which award providers would be impacted, awards that are more quantitative in nature – such as the Lipper and Fundata awards – may be in the clear.
"In our view references to investment awards must be those awards that are based on objective, quantifiable performance measures," the OSC said in a statement.
But references promoting wins in the annual Morningstar Investment Awards will likely be affected.
"I think this took everybody by surprise," says Scott Mackenzie, president and CEO of Morningstar. "We certainly don't look at the awards as a rating process. They are certainly accurate in saying there is a qualitative component to the awards, but to me that's one of the advantages of them. We don't see car companies using 'car of the year' awards as a smoke and mirror campaign."
"What advantage does an investor have now by not knowing what the industry experts consider the best of the best," adds Mr. Mackenzie.
Investment awards may not benefit the investor buying the fund, says Som Seif, president of Purpose Investments Inc. – and the number of awards are starting to clutter the industry.
"I think it's great that the OSC is cracking down on these awards," says Mr. Seif. "To be nominated for many of them, few people know that a fund company actually has to pay to be included, which means not every company is being ranked. There are so many different awards that for the end-investor it's difficult to know what each award even means."
Morningstar fund awards do not require a fee from a fund company to be nominated, but Morningstar submission-based awards do require a charitable donation to the Musicounts organization.
Clare O’Hara