Use of the Term "Guarantee"

This article was originally published in the Investment Funds Practitioner in November 2013.

Although not common, there are some investment funds that offer a form of “guarantee” if the securities are held for a particular period of time. We remind filers that if a fund offers a guarantee, the disclosure in the prospectus and in the Fund Facts should enable investors to fully understand the unique characteristics of the fund, the fund’s investment objectives, the fund’s suitability for investors and, in particular, the nature of the “guarantee” and the consequences of an investor redeeming units early or an early termination of the fund. Specifically, Item 6(4) of Part B of Form 81-101F1 Contents of Simplified Prospectus sets out the required prospectus disclosure for funds offering a form of a guarantee, which includes identifying the person or company providing the guarantee. If the guarantee relates to distributions, and such distributions may consist primarily of returns of the investor’s capital, then the distributions should not be described as “yield”, “income” or “returns” of the fund. If early termination of the guarantee is a possibility, staff expect IRC approval and securityholder approval to be obtained prior to termination.