Proposal would create new structure for retail investors to access 'long-term assets,' but responses may send regulator back to the drawing board
As demand for alternative strategies and asset classes grows among retail investors, the Ontario Securities Commission (OSC) has proposed a new framework with the intention of improving access while addressing what it sees as some of the underlying challenges in these assets. In OSC Consultation Paper 81-737 the securities commission proposed a new form of public investment fund referred to as an “Ontario Long-Term Fund” (OLTF).
The proposed framework would allow retail investors to buy into OLTFs, which would in-turn invest in underlying funds holding long-term assets like private equity, private credit, real estate, infrastructure, etc. Those OLTFs would be limited to a maximum investment of 10 per cent of each underlying fund with annual redemption caps. At the same time, the underlying fund must have designated ‘cornerstone investors’ who hold at least 10 per cent of the fund’s equity. These would typically be roles filled by institutional investors.
While the proposed OLTF framework is clearly aimed at addressing some of the liquidity issues present in alternative or private assets, the proposal has been widely criticized by a number of industry stakeholders. Even some of the fund issuers and distributor organizations that may benefit more under this model have proposed significant revisions.
“The OSC believes that there’s a need and a demand for access to alternative funds, which based on a theory they’re quoting come with an illiquidity premium, meaning that if you’re willing and able to wait long enough — usually around ten years — there is an illiquidity premium,” says Ken Kivenko, president and CEO of investor advocacy group Kenmar Associates. “They didn’t refer to any academic studies or give any numbers, but they say on that basis these should be made available and there should be access. They came up with this device that would allow retail investors access to securities limited to accredited investors.”
Kivenko says that he and his colleagues were unhappy with the proposed framework, which he says has unresolved issues around the proposed limits to liquidity. They include how far in advance an investor would have to give notice to withdraw their limited amount, or what would happen should there be a run on the fund. Kivenko noted that the proposal came with a long list of questions, with several sub-questions.
“It looks like they didn’t do their homework,” Kivenko says. “They were asking so many questions they should have known the answer to.”
Fair Canada was one of the early respondents to the proposed paper. The investor rights advocate said they were, “concerned the proposal will cause more harm than good to investors.” They noted that most evidence suggests retail demand for these strategies would remain low. They also questioned the necessity of such a complex investment product that would be difficult for even many investment professionals to fully understand.
“While the Proposal is touted as an attempt to “democratize” the private markets, it can also be viewed as an attempt to facilitate the ability of private market ventures to raise capital from the public,” Fair’s commentary reads. “From this perspective, we question why the OSC would facilitate private market ventures' ability to raise capital from everyday Ontarians while avoiding the transparency required by their public company competitors.”
Other stakeholders, including The Canadian Independent Finance and Innovation Counsel (CIFIC), echoed Kivenko’s concerns around the lack of substantiation behind the illiquidity premium. The Canadian Association of Retired Persons (CARP) failed to see a “pressing need for such a risk fund.” They requested a number of amendments to this fund model including a more detailed fund facts, more demanding KYC and KYP requirements, as well as ensuring advisor compensation regarding these funds is congruent with other mutual funds.
Other stakeholders applauded the OSC’s broad goal while offering suggestions to the nature of the framework. Fidelity Investments’ feedback focused largely on aligning the regulation around these proposed funds with existing mutual fund frameworks. Sun Life proposed removing the cornerstone investor requirement as the institutions playing that role would possibly have to accept stringent redemption rights without compensation. Sun Life believes that these institutions would simply access these assets through the means they already use.
Kivenko notes that the stakeholders most likely to benefit from this framework would be mutual fund distributors and manufacturers. Nevertheless, even those stakeholders have proposed wholesale revisions. The Investment Funds Institute of Canada (IFIC) offered what they saw as five major potential issues, including registered plan eligibility, retail distribution issues, and compliance with financial reporting deadlines.
“I sense that industry want a lot of changes. Yeah, or else, just not a business proposition for them. It's too it gets too complicated,” Kivenko says. He expects the proposal to be reformed significantly in line with the wide array of feedback the OSC has received so far.
