Notice: OSC Rule - 41-502 - Prospectus Requirements for Mutual Funds (Repealed by 41-801 on March 17, 2008)

Notice: OSC Rule - 41-502 - Prospectus Requirements for Mutual Funds (Repealed by 41-801 on March 17, 2008)

Request for Comment OSC Rule



NOTICE OF PROPOSED RULE 41-502 AND COMPANION POLICY 41-502CP
PROSPECTUS REQUIREMENTS FORMUTUAL FUNDS

Substance and Purpose of Proposed Rule

The substance and purpose of proposed Rule 41-502 Prospectus Requirements for Mutual Funds is to set out a number of form, content and filing requirementsapplicable to mutual fund prospectuses. The proposed Rule is to be read together with proposed Rule 41-501 General Prospectus Requirements ("Rule 41-501")and proposed Companion Policy 41-501CP and proposed Forms 41-501F2, 41-501F3 and 41-501F4(1), which set out general form, content and filingrequirements that apply to all prospectuses filed in Ontario. Rule 41-501 and its related Companion Policy and Forms apply to mutual fund prospectuses, unlesstheir provisions are explicitly excluded by other rules. To the extent that the provisions of Rule 41-501 and its Companion Policy and Forms ought not to applyto mutual funds, those provisions have been excluded in this proposed Rule.

The proposed Rule consolidates certain provisions currently set forth in the Regulation (the "Regulation") to the Securities Act (Ontario) (the "Act") and variouspolicy statements of the Ontario Securities Commission (the "Commission") concerning the preparation, certification and receipting of mutual fund prospectusesfiled as part of either preliminary or renewal filings. The majority of the provisions in the proposed Rule have been derived from Part III of the Regulation andfrom Ontario Securities Commission Policy 5.1 ("Policy 5.1") and Ontario Securities Commission Policy 5.7 ("Policy 5.7"). As noted in the Noticeaccompanying the publication of Rule 41-501 for comment, as a result of the implementation of Rule 41-501 and its Forms and Companion Policy, most of theprovisions in Part III of the Regulation concerning the form, content, certification, filing and receipting of preliminary prospectuses and prospectuses will nolonger be necessary and it is proposed that the Lieutenant Governor in Council be asked to revoke these provisions.

Unlike Rule 41-501, the proposed Rule does not prescribe a new form for mutual fund prospectuses. Instead the proposed Rule mandates the use of Form 15 ofthe Regulation for those mutual funds not using the simplified prospectus system set out in National Policy Statement No. 36 ("NP36"). Labour sponsoredinvestment fund corporations will be required to continue to use Form 45 of the Regulation. NP36 will continue to be available for use by mutual funds until it isamended or replaced. NP36 is used by the vast majority of mutual funds filing prospectuses in Ontario today.

Since the Canadian Securities Administrators are in the process of formulating a revised disclosure system for use by mutual fund issuers(2), the Commission feltit would not be a useful exercise at this time to review or revise the disclosure requirements of Form 15 or Form 45. The mutual fund disclosure review currentlybeing conducted by the Canadian Securities Administrators will likely result in a reformulation of NP36 to give effect to the revised disclosure system referred toabove. A reformulated national instrument concerning mutual fund disclosure will be published for comment at a later date and the Commission may re-considerForms 15 and 45 at that time.

Summary of Proposed Rule

Part 1 of the proposed Rule provides that terms defined in National Policy Statement No. 39 ("NP 39") or any successor rule and used in the proposed Rule havethe meanings ascribed to them in NP 39 or successor rule.

Part 2 provides that certain provisions of Rule 41-501 are not applicable to mutual funds and their prospectuses. These excluded provisions relate to financialstatement requirements (section 3.1 of Rule 41-501), financial statement disclosure requirements if the proceeds of an offering are to be applied in connectionwith the acquisition of a business (section 3.3 of Rule 41-501), matters relating to non-fixed price and reduced price offerings (Part 4 of Rule 41-501) and theregistration or licensing of an issuer in connection with an offering to be used to fund a new business (section 7.2 of Rule 41-501).

Part 3 of the proposed Rule prescribes the prospectus forms to be used by those mutual fund issuers not using NP36. Part 3, as well as NP36, permit mutualfunds in Ontario to use a prospectus form that is specifically designed for mutual funds, rather than Form 41-501F1, being the prospectus form prescribed for useby all other issuers by Rule 41-501.

Section 3.1 of the proposed Rule provides that mutual fund prospectuses that are not filed under NP36, or any successor rule, must comply with Form 15 of theRegulation. Section 3.2 provides that prospectuses of mutual funds that are labour sponsored investment fund corporations must comply with Form 45.

Part 4 of the proposed Rule prescribes the financial disclosure to be contained in "long form" mutual fund prospectuses and is derived from, and is consistentwith, section 54 of the Regulation (which will be revoked as part of the revocation of regulations proposed in connection with the implementation of Rule41-501). Part 4 does not replace the financial disclosure requirements for mutual funds filing prospectuses in compliance with NP36.

Section 4.1 sets out the financial statement requirements applicable to mutual fund prospectuses prepared in accordance with either Form 15 or Form 45. Undersubsection 4.1(1), these mutual fund prospectuses must include the financial statements of the mutual fund for its last completed financial year and its most recentsix month financial period, in both cases, where such statements have been filed or are required to be filed with the Commission.

Section 4.2 provides that the financial statements to be included in "long form" mutual fund prospectuses must comply with Part IV of the Regulation. Part IV ofthe Regulation will remain unaffected by this proposed Rule. The Commission may reconsider Part IV of the Regulation following a review of the final report ofthe study group of the Canadian Institute of Chartered Accountants that is reviewing financial disclosure requirements for mutual funds.

Part 5 complements certain sections of Part 6 of Rule 41-501 and is derived from Policy 5.1 and Policy 5.7, as modified by current administrative practice ofCommission staff.

Section 5.1 is in addition to the requirements of section 6.8 of Rule 41-501. Section 5.1 of the proposed Rule requires that a prescribed statement must beincluded in the prospectus of a mutual fund that is managed by a non-Canadian manager. The statement is designed to inform investors that the manager of themutual fund is incorporated, continued or otherwise governed under the laws of a foreign jurisdiction, or that the manager of the mutual fund resides outside ofCanada, if this is the case. Section 5.2 requires a non-Canadian manager of a mutual fund to file a submission to the jurisdiction and an appointment of an agentfor service of process at the time the prospectus of the mutual fund is filed, if it has not already been filed. Proposed Form 41-501F3 is to be used for this latterpurpose. Sections 5.1 and 5.2 are derived from similar requirements contained in section 25 of Policy 5.1.

Section 5.3 of the proposed Rule is in addition to the requirements of section 6.1 of Rule 41-501 and is derived from Policy 5.7. Section 5.3 of the proposedRule requires that a mutual fund deliver to the Commission, at the time of filing a preliminary prospectus or pro forma prospectus, prescribed informationrelating to the directors and officers of the manager of the mutual fund, together with a completed Form 41-501F2 prescribed by Rule 41-501 and as required bythe Freedom of Information and Protection of Privacy Act. This information is only required to be delivered, however, if it has not previously been delivered tothe Commission in connection with a prospectus filing of the applicable mutual fund or another mutual fund managed by the same manager.

Part 6 of the proposed Rule is a technically necessary section designed to implement in Ontario the simplified prospectus system set out in NP36. This sectionprovides that a simplified prospectus that is prepared and filed in accordance with NP36 is a prospectus by virtue of section 63 of the Act, so that the provisionsof the Act that apply to prospectuses will also apply to simplified prospectuses.

Part 7 of the proposed Rule is intended to formalize for all applicable mutual funds, a Commission ruling made in 1980(3) and Commission staff administrativepractice since at least that date. Since at least 1980, the Commission and Commission staff have considered that mutual funds that have filed current prospectusesare not required to comply with subsection 81(2) of the Act. Subsection 81(2) of the Act requires reporting issuers that are not required to prepare managementinformation circulars to file annually a report on Form 28. Since largely the same disclosure that would be disclosed by mutual funds via Form 28 is disclosed inprospectuses of mutual funds (whether filed in accordance with NP36 or Form 15 or Form 45 of the Regulation), the Commission is of the view that subsection81(2) of the Act need not be applied to mutual funds with current prospectuses.

Part 8 allows the Director to grant an exemption to the proposed Rule, in whole or in part, subject to any conditions or restrictions that may be imposed. Section8.2 provides that the issuance by the Director of a receipt for a prospectus or an amendment to a prospectus is evidence of the granting of an exemption, if twoconditions are met. These conditions are, first, that the person or company that sought the exemption delivered to the Director a letter or memorandumdescribing the matters relating to the exemption, and explaining why the Director should consider granting the exemption. The letter must be delivered to theDirector at the times described in the proposed Rule. Second, the Director must not have sent written notice denying the exemption to the person or companythat sought the exemption before, or at the time, the receipt was issued.

Substance and Purpose of Proposed Companion Policy

The substance and purpose of the proposed Policy is to clarify how the proposed Rule integrates with other rules and policies of the Commission and theCanadian Securities Administrators relating to prospectuses, to bring certain matters relating to the proposed Rule to the attention of persons or companiesinvolved with mutual fund prospectuses and to provide interpretative guidance as to certain of the provisions in the proposed Rule.

Summary of Proposed Companion Policy

Section 1.2 explains how the proposed Rule treats the terms "prospectus", "preliminary prospectus", "pro forma prospectus" and "simplified prospectus".

Section 2.1 reminds persons or companies preparing mutual fund prospectuses to have regard to other rules and policies that apply to mutual funds and theirprospectuses; the applicable instruments are referred to in the remainder of Part 2, as follows:

Section 2.2 - Rule 41-501

Section 2.3 - National Instrument 41-101 Prospectus Disclosure Requirements

Section 2.4 - NP36

Section 2.5 - National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR)

Section 2.6 - National Instrument 81-102 Mutual Funds, and its predecessor, NP39

Section 2.7 - National Instrument 81-103 Mortgage Funds, and its predecessor, National Policy Statement No. 29

- National Instrument 81-104 Commodity Pools, and its predecessor, Ontario Securities Commission Policy 11.4

Subsection 3.1(1) refers to section 6.4 of Rule 41-501, which requires that issuers file a copy of material contracts requested by the Director. Subsections 3.1(2)and (3) describe that the Director is likely to request contracts between the mutual fund and a service provider to the mutual fund, trust agreements, trustindentures and declarations of trust or similar documents. Subsection 3.1(4) indicates that the Director is not likely to consider contracts between the mutualfund manager and service providers to the manager to be material contracts, although there may be occasion when the Director will request that such contractsbe filed. This will likely be the case if the contract appears to affect the rights or obligations of holders of securities of the mutual fund in a material way.

Subsection 3.2(1) refers to the provision contained in section 6.1 of Rule 41-501 that requires an issuer to deliver to the Commission certain personalinformation for directors and officers of the issuer. Subsection 3.2(2) sets out the Commission's view that an individual that is the trustee of a mutual fund issuerconstituted as a trust is acting in a capacity similar to that of a director and accordingly is a "director" for the purposes of the Act. Therefore, the Commission'sview is that these individuals must provide the personal information required by Rule 41-501, although the Commission is of the view that this requirement is notapplicable to registered trust companies acting as trustees.

Subsection 3.2(3) states that general partners of a mutual fund constituted as a limited partnership are also acting in a capacity similar to that of a director andwill therefore be required to provide the personal information required by Rule 41-501.

Subsection 3.3(1) refers to the personal information in respect of directors and officers of a manager of a mutual fund required by section 5.3 of the proposedRule to be delivered to the Commission by the mutual fund. Subsection 3.3(2) states that the personal information required by section 5.3 of the proposed Ruleneed only be provided if it has not already been provided in connection with another prospectus filing of the mutual fund or a mutual fund managed by the samemanager and sets out the typical circumstances when this personal information would be required to be provided.

Terms used in the proposed Companion Policy that are defined or interpreted in the proposed Rule or the definition instruments in force in Ontario should bedefined or interpreted in accordance with the proposed Rule or those definition instruments, unless the context otherwise requires.

Authority for the Proposed Rule

The following sections of the Act provide the Commission with authority to make the proposed Rule. Paragraph 143(1)7 of the Act authorizes the Commissionto make rules that prescribe requirements in respect of the disclosure or furnishing of information to the public or the Commission by registrants. Paragraph143(1)13 of the Act authorizes the Commission to make rules regulating trading or advising in securities to prevent trading or advising that is fraudulent,manipulative, deceptive or unfairly detrimental to investors. Paragraph 143(1)23 of the Act authorizes the Commission to make rules that exempt reportingissuers from any requirement of Part XVIII (Continuous Disclosure) under certain circumstances. Paragraph 143(1)31 of the Act authorizes the Commission tomake rules that, among other things, provide for the regulation of mutual funds, including the requirement to use particular forms in connection with the funds.Paragraph 143(1)39 of the Act authorizes the Commission to make rules respecting, among other things, the form and content of all documents required underthe Act, including prospectuses.

Alternatives Considered

No alternatives to the proposed Rule and Companion Policy were considered; it was developed in connection with the reformulation of the general prospectusregime in Ontario and largely carries forward the prospectus regime currently applicable to mutual funds in Ontario.

Unpublished Materials

In proposing the Rule and Companion Policy, the Commission has not relied on any significant unpublished study, report, decision or other written materials.

Anticipated Costs and Benefits

The proposed Rule does not materially alter the existing regulatory regime for mutual fund prospectuses, and the Commission expects that there will be no newmaterial costs or benefits associated with the proposed Rule, other than as described in the Notice accompanying Rule 41-501 for comment.

Regulations to be Amended

The Commission will request the Lieutenant Governor in Council to revoke section 237 of the Regulation in connection with the implementation of the proposedRule. In addition, subsections 33 and 44(1) of the Regulation are to be replaced by provisions in the proposed Rule; those subsections are among the provisionsof the Regulation that the Commission will request the Lieutenant Governor in Council to revoke in connection with Rule 41-501.

Related Instruments

Each of the proposed Rule and Companion Policy is related to the other as they deal with the same subject matter. These proposed instruments are also relatedto Rule 41-501 and its Companion Policy and applicable Forms.

Comments

Interested parties are invited to make written submissions with respectto the proposed Rule and proposed Companion Policy. Submissions receivedby September 30, 1997 will be considered.

Submissions should be made in duplicate to :

Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario
M5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferablyWordPerfect) should also be submitted. As the Act requires that a summary ofwritten comments received during the comment period be published, confidentialityof submissions received cannot be maintained.

Questions may be referred to:

Rebecca Cowdery
Special Counsel, Market Operations
Ontario Securities Commission
(416) 593-8129

James Ross
Legal Counsel, Market Operations
Ontario Securities Commission
(416) 593-3690

 

Proposed Rule

The text of the proposed Rule and the proposed Companion Policy follows, together with footnotes that are not part of the proposed Rule or Companion Policy,but which have been included to provide background and explanation.

DATED: June 27, 1997.



Footnotes

1. Rule 41-501, the proposed Companion Policy 41-501CP and four related forms were published for comment in a supplement to the May 2, 1997 edition ofthe Ontario Securities Commission Bulletin - (1997) 20 OSCB (Supp).

2. See the Concept Proposal describing a Summary Information Prospectus Disclosure System which was released on January 31, 1997 as Canadian SecuritiesAdministrators' Notice 81-301. This Concept Proposal was published for comment in the Ontario Securities Commission Bulletin at (1997) 20 OSCB 559.

3. In the Matter of Certain Mutual Funds - Exemption (Section 79) dated June 5, 1980, (1980) OSC Weekly Summary, No. 21/80, for the week ending June6, 1980.