Proposed Companion Policy: OSC Rule - 41-502 - Prospectus Requirements for Mutual Funds (Repealed by 41-801 on March 17, 2008)

Proposed Companion Policy: OSC Rule - 41-502 - Prospectus Requirements for Mutual Funds (Repealed by 41-801 on March 17, 2008)

Request for Comment OSC Rule



COMPANION POLICY 41-502CP
TO ONTARIO SECURITIES COMMISSION RULE 41-502
PROSPECTUS REQUIREMENTS FOR MUTUAL FUNDS

PART 1 INTRODUCTION
1.1 Purpose of Policy
1.2 Use of Term "Prospectus" in the Rule

PART 2 GENERAL STRUCTURE OF THE RULE
2.1 Relationship to Securities Legislation Applicable to Mutual Fund Instruments
2.2 Rule 41-501 General Prospectus Requirements
2.3 National Instrument 41-101 Prospectus Disclosure Requirements
2.4 Simplified Prospectuses
2.5 National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR)
2.6 National Instrument 81-102 Mutual Funds
2.7 National Instrument 81-103 Mortgage Funds and National Instrument 81-104 Commodity Pools

PART 3 DISCLOSURE
3.1 Filing of Material Contracts
3.2 Individual Trustees or General Partners
3.3 Notices/Consent Forms and Security Check Information

PART 1 INTRODUCTION1.1 Purpose of Policy - The purpose of this Policy is to clarify how Rule 41-502 Prospectus Requirements for Mutual Funds (the "Rule") integrates with otherrules and policies of the Ontario Securities Commission (the "Commission") and the Canadian Securities Administrators ("CSA") relating to prospectuses. ThisPolicy also is designed to bring certain matters relating to the Rule to the attention of persons or companies involved with mutual fund prospectuses.

1.2 Use of Term "Prospectus" in the Rule

(1) The Rule generally uses the term "prospectus" in reference to the prospectus of a mutual fund. The Act uses the term "prospectus" to refer to a finalprospectus, and that usage is consistent with the usage in the Rule.

 

(2) No specific reference is made in the Rule to a preliminary prospectus as section 54 of the Act requires a preliminary prospectus to substantially comply withthe form and content requirements of Ontario securities law applicable to a prospectus, except that the reports or report of the auditor or accountant required bythe regulations need not be included. Therefore, the form and content requirements of Parts 2, 3 and 4 and section 5.1 of the Rule are applicable to preliminaryprospectuses as well as to (final) prospectuses.

 

(3) Section 1.2 of the Rule provides that a pro forma prospectus is required to comply with the requirements of the Rule that relate to a prospectus; thisapproach is consistent with subsection 52(1) of the Regulation. Subsection 52(1) of the Regulation is not technically applicable to the Rule, and so the substanceof that subsection has been repeated in the Rule. Therefore, the form and content requirements of Parts 2, 3 and 4 and section 5.1 of the Rule are applicable topro forma prospectuses as well as to (final) prospectuses.

 

(4) Section 4.4 of National Policy Statement No. 36, contained in the Rule In the Matter of a Simplified Prospectus Qualification System for Mutual Funds[Including National Policy Statement No. 36 and National Policy Statement No. 39] ("NP36"), provides that a simplified prospectus prepared under thesimplified prospectus system of that Rule is a prospectus within the meaning of Canadian securities legislation. Therefore, no specific references to "simplifiedprospectuses" are made in the Rule. A reference to a "prospectus" will include a simplified prospectus, and a reference to a preliminary or pro forma prospectuswill include a preliminary simplified prospectus or pro forma simplified prospectus.

 

PART 2 GENERAL STRUCTURE OF THE RULE

2.1 Relationship to Securities Legislation Applicable to Mutual Fund Instruments - The Rule sets out the Ontario prospectus requirements that are specificto mutual funds. A person or company preparing a mutual fund prospectus must have regard to other rules and policies of the Commission and the CSA thatrelate to prospectuses, in addition to the applicable provisions of securities acts and regulations of the jurisdictions of Canada. This Part is designed to outlinewhich of those instruments will apply.

 

2.2 Rule 41-501 General Prospectus Requirements(1)

(1) Rule 41-501 General Prospectus Requirements ("Rule 41-501") is an Ontario-only Rule that sets out the general requirements in Ontario concerning thepreparation, certification, filing and receipting of a prospectus filed in Ontario. Rule 41-501 consolidates various provisions previously set out in the Regulationand in various policy statements and notices of the Commission and Commission staff concerning the preparation, certification, filing and receipting ofprospectuses.

 

(2) Rule 41-501 applies to a prospectus of a mutual fund unless its application is excluded in the Rule. Section 2.1 of the Rule excludes a number of theprovisions of Rule 41-501 from applicability in the case of mutual funds.

 

2.3 National Instrument 41-101 Prospectus Disclosure Requirements(2) - National Instrument 41-101 Prospectus Disclosure Requirements is based onNational Policy Statements Nos. 12, 13, 32 and 35, and contains a number of provisions that are applicable to all prospectuses, including certain front pagedisclosure requirements, plan of distribution disclosure requirements and statutory rights disclosure requirements. This National Instrument is applicable tomutual fund prospectuses.

 

2.4 Simplified Prospectuses - A person or company preparing a simplified prospectus under NP36, or under any successor instrument, will be subject to thespecific requirements of NP36 or of the successor instrument. As described in subsection 1.2(4) above, since a "simplified prospectus" is a prospectus underCanadian securities legislation, a simplified prospectus is subject to the rules generally applicable to a "long form" prospectus, except as excluded by theoperation of NP36, or other specific provisions of applicable securities legislation.

 

2.5 National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR) - National Instrument 13-101 System for ElectronicDocument Analysis and Retrieval (SEDAR) mandates the electronic filing of various documents with the Canadian securities regulatory authorities, and isapplicable to mutual fund prospectuses.

 

2.6 National Instrument 81-102 Mutual Funds(3)

 

(1) National Instrument 81-102 Mutual Funds ("National Instrument 81-102"), which will replace National Policy Statement No. 39 ("NP39"), contains anumber of specific disclosure requirements applicable to mutual fund prospectuses. Until National Instrument 81-102 comes into force, reference should be madeto the specific disclosure requirements of NP39.

 

(2) Particular attention should be paid to section 16.9 of National Instrument 81-102, which requires compliance with certain of the disclosure obligationscontained in NP36. The requirements of section 16.9 relate to disclosure obligations that were previously contained in both NP39 and NP36, but that were notcarried forward into National Instrument 81-102 in order to avoid duplication with NP36, or any instrument replacing it. Those disclosure provisions of NP39remain obligations of all mutual funds, whether the mutual fund files long form or simplified prospectuses. The items listed in section 16.9 of National Instrument81-102 relate to disclosure of sales charges and fees, standard investment restrictions, valuation of portfolio securities, management expense ratio calculation,specific investments, and eligibility for investment under the Income Tax Act.

 

2.7 National Instrument 81-103 Mortgage Funds and National Instrument 81-104 Commodity Pools(4) - A mutual fund that is a mortgage fund or acommodity pool will be subject to the applicable disclosure requirements contained in National Instrument 81-103 Mortgage Funds and National Instrument81-104 Commodity Pools. Until these national instruments come into force, their predecessor instruments, National Policy Statement No. 29 for mortgage fundsand Ontario Securities Commission Policy 11.4 for commodity pools, will be applicable.

 

PART 3 DISCLOSURE

 

3.1 Filing of Material Contracts

 

(1) Section 6.4 of Rule 41-501 requires issuers to file, on or before the time the issuer files a prospectus, a copy of any material contract of an issuer referred toin the prospectus requested by the Director.

 

(2) In the context of mutual fund prospectuses, the Director is most likely to request contracts between the mutual fund and a service provider to the mutualfund, such as management, distribution, custodianship or portfolio management service contracts. The Director will likely consider any of these contracts,including, without limitation, contracts between the mutual fund and the manager, the custodian and the principal distributor of the mutual fund, to be a materialcontract.

 

(3) The Director is also likely to request the trust agreement, trust indenture, declaration of trust or similar document pursuant to which a mutual fundconstituted as a trust was created. The Director will likely consider any of these documents to be a material contract.

 

(4) The Director is not likely to consider any contracts between the manager of a mutual fund and service providers to the manager to be a material contract,although the Director may request that a contract of that nature be filed in circumstances in which the contract appears to affect the rights or obligations ofholders of securities of the mutual fund in a material way.

 

3.2 Individual Trustees or General Partners

 

(1) Paragraph 2 of section 6.1 of Rule 41-501 requires that an issuer deliver to the Commission, at prescribed times, personal information for each director andexecutive officer of the issuer.

 

(2) The Commission is of the view that any individual that is a trustee of a mutual fund constituted as a trust is "acting in a capacity similar to that of a director ofa company", according to the definition of "director" in section 1 of the Act. Therefore, the Commission is of the view that these individuals are required toprovide the specified personal information. However, the Commission is of the view that this concept is not applicable to registered trust companies acting astrustees, and so personal information for the directors and officers of a registered trust company is not required to be provided under paragraph 2 of section 6.1of Rule 41-501.

 

(3) The Commission is of the view that general partners of a mutual fund constituted as a limited partnership are also acting in a capacity similar to that of adirector. As a result, the Commission is of the view that these general partners will be required to provide the personal information referred to in subsection (2).Furthermore, if a general partner is itself a corporation or partnership, the Commission is of the view that the personal information should be provided for each ofthe directors and officers of that corporation or partners of that partnership.

 

3.3 Notices/Consent Forms and Security Check Information

 

(1) Section 5.3 of the Rule requires that a mutual fund deliver to the Commission, at the time of filing a preliminary prospectus or pro forma prospectus, certainpersonal information for each director or officer of the manager of the mutual fund if that information has not been previously delivered to the Commission inconnection with a prospectus filing of the mutual fund or another mutual fund managed by the manager, together with the notices and consent forms required bythe Freedom of Information and Protection of Privacy Act.

 

(2) Due to the repeated prospectus filings made by mutual funds, the Commission has provided in the Rule that this information must be provided only if it hasnot already been provided in connection with an earlier prospectus filing of the mutual fund or another mutual fund managed by the same manager. TheCommission does not wish to encourage duplicative filings, and so notes that information concerning a particular individual is considered to have been alreadyprovided if it has been provided previously by the mutual fund or by another mutual fund in the same family as the mutual fund. Therefore, this would typicallymean that

 

(a) for a mutual fund filing a preliminary prospectus, if the mutual fund is not a member of a mutual fund family for which this type of information was previouslyprovided, the information would be required for all relevant persons;

 

(b) for a mutual fund filing a preliminary prospectus, if the mutual fund is a member of a mutual fund family for which this type of information was previouslyprovided, the information would be required only for those persons for whom the information was not previously provided by other members of the mutual fundfamily; and

 

(c) for a mutual fund that is filing a pro forma prospectus and that, therefore, has previously provided this type of information, the information would be requiredonly for those persons in respect of which the information had not been previously provided.

 


Footnotes

 

1. This Rule was published for comment on May 2, 1997 in (1997) 20 OSCB (Supp).

 

2. The Ontario Securities Commission published for comment proposed National Instrument 41-101 Prospectus Disclosure Requirements on May 16, 1997 at(1997) 20 OSCB 2563.

 

3. The Ontario Securities Commission is publishing for comment proposed National Instrument 81-102 Mutual Funds concurrently with the proposed Rule.

 

4. The Ontario Securities Commission intends to publish for comment proposed National Instrument 81-103 Mortgage Funds in due course; meanwhile, it ispublishing for comment proposed National Instrument 81-104 Commodity Pools concurrently with the proposed Rule.