Industry divided on OSC’s proposed ‘long-term asset funds’ 

The regulator’s consultation on the new category, which ends Friday, presents this as “an opportunity to improve retail investor access to long-term assets through investment fund product structures.” But not everyone believes this is a good idea.“We’re very concerned that the OSC wants to open this up to the retail investor,” said Ken Kivenko, president of Kenmar Associates, an Ontario-based investor advocacy organization.Kivenko said he gets nervous whenever the industry tries to expand access to investments outside the mainstream to retail investors, especially after incidents such as the collapse of the asset-backed commercial paper market in Canada in 2007.The proposed framework would allow for a new type of investment fund that could hold a larger percentage of illiquid assets in its portfolio than currently allowed for mutual funds and non-redeemable investment funds (NRIFs) under National Instrument 81-102.As it stands, mutual funds (excluding alternative mutual funds) and NRIFs are prohibited from purchasing an illiquid asset, if immediately after the purchase, more than 10% or 20%, respectively, of their net asset value (NAV) would be made up of illiquid assets. They’re also prohibited from purchasing certain types of long-term assets, including real property and non-guaranteed mortgages.Under the proposal, OLTFs would be required to invest between 50% and 90% of NAV in illiquid assets, with the rest invested in liquid assets to allow the fund to manage its liquidity needs. And the fund would be required to disclose the type of illiquid assets it holds and explain its investment objectives.Among other things, the OSC is also proposing that OLTFs would exist in the form of a fixed-term fund or an evergreen fund, with redemptions limited to monthly, quarterly, semi-annually or annually, and that OLTFs “would include capital-intensive assets in Ontario” but not be limited to assets located within the province.The consultation paper noted that the Ontario government is “looking at innovative ways to finance transportation, housing, energy and municipal services, including through the ‘crowding in’ of private sector investment from pension funds and other institutions.”The OSC did not respond to a request for comment about the motivations behind the proposal and investor advocates’ concerns that OLTFs present too much risk for retail investors.However, in its consultation paper, the regulator said its role is not to “comment on the merits” of illiquid assets, but rather to “ensure there is clarity about the benefits and risks of such investments as we determine whether, and how, to develop a regulatory framework that would permit greater retail investor access” to them.Heightened risksWhile giving retail investors access to opportunities that exist for other types of investors is a “laudable objective,” private-market investments are riskier, said Jean-Paul Bureaud, executive director, president and CE