Notice of Proposed Changes to Proposed National Instrument and Companion Policy: NI - 81-104 - Commodity Pools

NOTICE OF PROPOSED CHANGES TO PROPOSED NATIONAL
INSTRUMENT 81-104 AND COMPANION POLICY 81-104CP

COMMODITY POOLS

Substance and Purpose of Proposed National Instrument and Companion Policy

Background

On June 27, 1997, the Canadian Securities Administrators (CSA) published for comment proposed NationalInstrument 81-104 Commodity Pools and proposed Companion Policy 81-104CP (the 1997 Draft NI and the 1997Draft CP or the 1997 Drafts).⁽¹⁾

The CSA received one comment letter during the comment period for the 1997 Drafts (which ended on October 31,1997). This comment letter focussed on one section of the 1997 Drafts and did not address any of the questionsposed by the CSA in their publication of the 1997 Drafts for comment.

Since the end of the comment period, the CSA have concentrated on ensuring that the proposed NationalInstrument is appropriate for the regulation of commodity pools in Canada. CSA staff met with each sponsor ormanager of the commodity pools managed and sold in Canada to ensure that the proposed regulatory regimeaddresses the regulatory issues associated with commodity pools, yet permits the continued viability of thesespecialized investment products. CSA staff also met with representatives of dealers who wish to be able torecommend commodity pools to their clients.

Additional written comments were received as a result of the CSA's efforts. A list of the commentators and asummary of their comments is attached as Appendix A to this Notice of Proposed Changes.

After considering these comments and continuing to assess the 1997 Drafts, the CSA are proposing amendmentsto the 1997 Drafts. The CSA are therefore publishing for a second time the proposed National Instrument andCompanion Policy.

The proposed National Instrument and Companion Policy are a reformulation of Ontario Securities CommissionPolicy Statement No. 11.4 - Commodity Pools Programs (Policy 11.4), which they will replace. Through theproposed National Instrument, the CSA seek to regulate publicly offered commodity pools structured as mutualfunds.

The proposed National Instrument and Companion Policy are initiatives of the CSA, and the proposed NationalInstrument is expected to be adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario, NovaScotia and Newfoundland, as a Commission regulation in Saskatchewan and as a policy in all the otherjurisdictions represented by the CSA. The proposed Companion Policy is expected to be implemented as a policyin all of the jurisdictions represented by the CSA.

This Notice of Proposed Changes summarizes the material changes made in the proposed National Instrument andCompanion Policy from the 1997 Drafts. As described above, Appendix A to this Notice of Proposed Changesoutlines the comments received in respect of the 1997 Drafts, together with the CSA responses. Furtherbackground and explanation of changes are contained in the footnotes contained in the proposed NationalInstrument and Companion Policy.

National Instrument 81-102 Mutual Funds and National Instrument 81-101 Mutual Fund ProspectusDisclosure

The proposed National Instrument is intended to regulate publicly offered commodity pools and is designed to actin conjunction with the mutual fund regulatory regime established by National Instrument 81-102 Mutual Funds(NI 81-102). NI 81-102 came into force on February 1, 2000. The proposed National Instrument will exemptcommodity pools from provisions in NI 81-102 where deemed appropriate and will impose additional requirementson commodity pools where deemed necessary.

The new simplified prospectus disclosure regime for conventional mutual funds established by NationalInstrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), which also came into force on February 1,2000, does not apply to commodity pools. Commodity pools must file a prospectus using the mutual fund "longform" prospectus forms in force in the jurisdictions (in Ontario, Form 15 to the Regulation made under the Act)and currently must comply with Policy 11.4. The proposed National Instrument also imposes additionaldisclosure requirements.

Substance and Purpose of Proposed Instrument

As was proposed by the 1997 Draft NI, the proposed National Instrument is designed to replace Policy 11.4 andwill regulate all publicly offered commodity pools, which are a specialized type of mutual fund that invest in, oruse, commodities and/or derivatives beyond the scope permitted in NI 81-102. Commodity pools are subject to theordinary mutual fund rules unless those rules are specifically excluded or varied by the proposed NationalInstrument.

The underlying purpose for the regulation of commodity pools put forth by the proposed National Instrument andCompanion Policy is discussed in the Notice published with the 1997 Drafts (the 1997 Notice). Additionalbackground information is also provided in the 1997 Notice.

The purpose of the proposed Companion Policy is to state the views of the CSA on various matters relating to theproposed National Instrument. Terms used in the proposed Companion Policy that are defined or interpreted in theproposed National Instrument or a definition instrument in force in the jurisdiction and not otherwise defined inthe proposed Companion Policy should be read in accordance with the proposed National Instrument or thatdefinition instrument, unless the context otherwise requires.

Summary of Changes to the Proposed National Instrument from the 1997 Draft NI

This section describes changes made in the proposed National Instrument from the 1997 Draft NI.Changes of a minor nature, or those made only for purposes of clarification or drafting reasons aregenerally not discussed. Certain changes were made to ensure that the proposed National Instrumentreflects the changes made by the CSA to NI 81-102 since that instrument's first publication for comment,also in June 1997.

For a detailed summary of the contents of the 1997 Draft NI, reference should be made to the 1997Notice. Unless otherwise indicated, all section references in this section pertain to the proposed NationalInstrument.

Section 1.1

Changes to the definitions contained in section 1.1 of the proposed National Instrument reflect changesmade to the operative sections.

The CSA changed the definition of "commodity pool" to better reflect and articulate the CSA's views onthe nature of a commodity pool and how it differs from a conventional mutual fund. The CSA are of theview these changes are of a clarification nature only and do not change the substance of the definition orthe types of investment products to which the proposed National Instrument applies.

Section 1.3

Subsection 1.3(2) is new. It excludes certain over-the-counter forwards and options from the "illiquidassets" restrictions of NI 81-102. Commodity pools are subject to the rule in NI 81-102 restricting mutualfunds from investing more than 10 percent of their net assets in "illiquid assets" (as defined in NI 81-102⁽²⁾). The term "public quotation" (used in the illiquid assets restrictions in NI 81-102) is proposed to bebroadened for commodity pools. Subsection 1.3(2) of the proposed National Instrument expresslydeems forwards and options traded on the interbank market for which there is a counterparty prepared to andcapable of making a market to be those for which there is a "public quotation in common use" within the meaning ofNI 81-102.

The change was made in response to a comment that the rules in NI 81-102 regarding "illiquid assets" might restrictthe operations of a commodity pool. Commodity pools generally make extensive use of forwards and optionstraded on the interbank market in their investment strategies. The CSA agree, for commodity pools, derivativesthat can be considered to be "liquid" in a non-technical sense in that they can be sold at any time should not besubject to the illiquid asset restrictions in NI 81-102.

Section 3.2

Section 3.2 has been modified to permit the issuance of units of a new commodity pool to those persons providingseed capital to the pool. Section 3.2 in the 1997 Draft NI technically prohibited the issuance of any units in the newpool, including units issued to the promoters or manager of the pool, until subscriptions aggregating not less than$500,000 were received. This was an unintended result and the modification corrects the technical prohibition.

Section 3.3

Section 3.3 is new. It imposes on new commodity pools a direct prohibition on commencing distribution until thesubscriptions described in the prospectus, together with the payment for the securities subscribed for, have beenreceived. This provision corresponds to section 3.2 of NI 81-102.

Part 4 of the 1997 Draft NI

Part 4 of the 1997 Draft NI has been deleted from the proposed National Instrument. The 1997 Draft NIincorporated the Policy 11.4 prohibition on commodity pools paying fees to their advisers and managers if thoseparties or their affiliates received, directly or indirectly, brokerage commissions from trades made by thecommodity pools. This prohibition reflected the concern that a manager would "churn" (that is, increase assetturnover) in order to earn additional brokerage commissions. Comments were received which questioned therationale for this prohibition, especially in the case where a manager has delegated the investment decisions to anunrelated portfolio adviser.

The CSA have reconsidered Part 4 of the 1997 Draft NI and deleted the prohibition on the basis that commoditypools should be treated in a similar manner to conventional mutual funds unless a reason exists to treat themdifferently. Investors in commodity pools can evaluate the performance of their investments in commodity poolsand redeem those investments if the pool is not performing after all expenses and fees (including brokeragecommissions) are paid.

Part 4 (formerly, Part 5 of the 1997 Draft NI)

Part 5 of the 1997 Draft NI has been renumbered as Part 4. Part 4 of the proposed National Instrument containsthe proficiency and supervisory requirements for participating dealers selling commodity pools. The proficiencyrequirements for both salespersons and supervisors of those salespersons have been changed from the 1997 DraftNI in response to comments.

The 1997 Draft NI departed from the dual registration provisions outlined in Policy 11.4 that necessitated both thesalesperson and the dealer selling a commodity pool interest to be registered under the Commodity Futures Act(Ontario) and the Securities Act (Ontario). As mentioned in the 1997 Notice, staff of the Ontario SecuritiesCommission (OSC) currently administer Policy 11.4 to require only that the participating dealer be registered underboth statutes. The 1997 Draft NI proposed increased proficiency standards for salespersons and their supervisorsrather than dual registration of the participating dealer for reasons that are outlined in the 1997 Notice.

Two exams offered by the Canadian Securities Institute were proposed in the 1997 Draft NI . The 1997 Draft NIrequired salespersons to pass the Canadian Futures Examination and their supervisors to pass the CanadianCommodity Supervisors Examination. Since 1997, the Canadian Futures Examination has been split into twoparts: the Derivatives Fundamentals Course and the Futures Licensing Course.

In response to the comments received on Part 5 of the 1997 Draft NI and after reviewing the DerivativesFundamentals Course, the CSA are of the view that the regulatory approach to ensure increased proficiency forsalespersons selling commodity pools and their supervisors will be achieved by requiring these individuals tosuccessfully attain a passing grade in the Derivatives Fundamentals Course.

Section 12.3 of the proposed National Instrument delays the coming into force of the new proficiency requirementsuntil six months after the effective date of the proposed National Instrument. The Derivatives FundamentalsCourse is a self-study course which is to be written within 12 months of enrollment. The CSA expect that the sixmonth delay will allow those salespersons and supervisors affected to complete the new proficiency standardwithout incurring undue hardship.

Part 6 of the 1997 Draft NI

The CSA have deleted Part 6 of the 1997 Draft NI. Part 6 of the 1997 Draft NI brought forward provisions fromPolicy 11.4 which dealt with liability of investors in a commodity pool structured as a limited partnership. The CSAre-considered whether they need to make rules in this area and concluded that the statutory and common lawapplicable to limited partnerships should prevail. Accordingly Part 6 has been deleted, but the CSA haveaddressed the questions surrounding limited partnerships through an expanded discussion in the proposedCompanion Policy and expanded disclosure requirements. Subsection 3.1 (4) of proposed Companion Policy nowhighlights the CSA's views that pools should be structured so as to limit the liability of securityholders to the amountinitially invested. Paragraph 10.2(l) of the proposed National Instrument sets out the enhanced disclosurerequirements.

Part 6

Part 6 is new and sets out the parameters for managers of commodity pools who propose to charge an incentivefee to commodity pools. Part 6 modifies the requirements in section 7.1 of NI 81-102 relating to incentive feescharged to commodity pools. An incentive fee is a fee paid by a mutual fund which is based on some measure ofperformance of the manager of that mutual fund.

The 1997 Draft NI required commodity pools and their managers to comply with section 7.1 of NI 81-102 withoutany modification. Section 7.1 of NI 81-102 permits a manager to charge a mutual fund an incentive fee, amongother requirements, so long as the fee is calculated with reference to a representative benchmark or index thatreflects the market sectors in which the fund invests.

Commodity pool managers commented that no benchmark or index exists in respect of commodity pools that wouldmeet the requirements in section 7.1 of NI 81-102. The CSA noted this issue in the 1997 Notice. Also,commentators claimed that without the ability to charge an incentive fee, managers of commodity pools would be ata significant disadvantage in attracting successful commodity futures advisers to sub-manage the assets ofcommodity pools. These commentators point out that, particularly, United States-based commodity futuresadvisers expect to be compensated based on performance.

The CSA are of the view that the performance of fund managers for the purposes of incentive fee calculations mustbe measured against the performance of an appropriate objective benchmark or index. However, in recognition ofthe difficulties in determining an appropriate benchmark or index for commodity pools, the CSA propose thatcommodity pool managers may levy an incentive fee in respect of commodity pools, in circumstances no otherappropriate benchmark exists, where the pools' performance is benchmarked against the 90-day Canadian orUnited States government treasury bill rate. One rationale for permitting this benchmark is that commodity poolsgenerally hold 60 percent to 80 percent of their assets in treasury bills (as cover for derivatives transactions).

The CSA have considered the issues of incentive fees charged to commodity pools very carefully and havedetermined that incentive fees charged to commodity pools should be regulated in the fashion proposed by theproposed National Instrument. However, the CSA are aware that commodity pools require specializedmanagement that may only be available if the portfolio adviser or manager receives compensation that is based onthe performance of that adviser or manager, without regard to an objective benchmark or index. The CSA areseeking specific comment on whether alternatives exist to section 6 of the proposed National Instrument.

Section 9.4

Section 9.4 is new and requires commodity pools to file and deliver a modified statement of portfolio transactions.Section 9.1 of the proposed National Instrument clarifies that commodity pools must comply with applicablesecurities legislation regarding financial statements except as varied by the proposed National Instrument.

Section 9.4 will require a commodity pool's statement of portfolio transactions to contain summary disclosure of alltrades, through listing on an aggregate basis all purchases and sales of each contract (or investment) entered intoby the pool during the applicable quarter. The CSA believe that this aggregate disclosure will help investorsevaluate the level of trading activity, the trading patterns and the types of contracts traded by the pool. Thestatement gives information on asset turnover and can be used to analyse the liquidity of the positions traded by thepool.

The CSA propose this change in response to comments received, questioning the rationale for requiringcommodity pools to prepare full statements of portfolio transactions in the form required by securities legislation.The CSA agree that the current form of a statement of portfolio transactions would not give meaningful informationto an investor in a commodity pool (due to extensive use of derivatives and higher levels of asset turnover). Themodified statement mandated by section 9.4 is designed to address this concern.

Section 10.2 (formerly, section 10.3 of the 1997 Draft NI)

Clause 10.2(g) of the proposed National Instrument will require a commodity pool to provide in its prospectus pastperformance disclosure in the format contemplated by NI 81-101 for conventional mutual funds, modified forcommodity pools. Commodity pools will be required to disclose: (1) in a bar chart, the quarterly returns of the pool(conventional mutual funds show these returns on an annual basis); (2) the performance of the pool in a line graphas compared to the 90-day Canadian or US treasury bill rate (conventional mutual funds must use an "appropriatebroad based securities market index"); and (3) the annual compound returns of the pool for the 10, five, three andone year periods ended on December 31. The CSA believe that these graphic and numerical presentations of pastperformance will help investors evaluate a pool's average returns over a period of time and the volatility of thepool's returns on a quarterly basis.

The CSA are of the view that these graphic depictions of a commodity pool's performance over time will giveinvestors a sense of the inherent risks associated with investing in these investment vehicles. The CSA have notrequired at this time, that either conventional mutual funds or commodity pools provide investors with astandardized and accepted measure of risk. Since commodity pools are specialized mutual funds with a verydifferent risk profile to conventional mutual funds, as described below, the CSA seek specific comment on whethera standardized risk measure should be disclosed by commodity pools.

Subclause 10.2(l)(ii) has been added. As outlined above, Part 6 of the 1997 Draft NI which dealt with loss oflimited liability for securityholders of a commodity pool organized as a limited partnership has been deleted fromthe proposed National Instrument. Subclause 10.2(1)(ii) has been added to alert investors to any issues related tolimited partnerships. The CSA ask commentators for their views on whether this disclosure should be included alsoon the front page of the prospectus for a commodity pool.

Section 10.3 of the 1997 Draft NI

Clause 10.3(e) of the 1997 Draft NI has been deleted. The 1997 Draft NI required (as did Policy 11.4) a commoditypool to disclose whether the proposed fees charged by the portfolio adviser to the pool are higher or lower thanthose charged to other pools that are advised by the portfolio adviser, together with any information concerningbrokerage charges to those other pools that the pool considers relevant.

Similarly, clause10.3(g) of the 1997 Draft NI has been deleted. The 1997 Draft NI required a commodity pool with ahistory of less than three years to disclose the total return of the portfolio adviser (or manager, as the case may be)for all other commodity pools for which the portfolio adviser has acted in that capacity for a specified time period.

The CSA believe that no continuing regulatory purpose exists to require the above disclosure, which the CSA notesis not required of conventional mutual funds. Instead, the CSA propose clause 10.2(g), which they consider moremeaningful and relevant disclosure.

Section 11.2 of the 1997 Draft NI

The CSA have deleted section 11.2 of the 1997 Draft NI in order to conform the exemptive provisions to thecomparable provisions contained in NI 81-102.

Summary of Changes to the Proposed Companion Policy from the 1997 Draft CP

This section describes the material changes made to the proposed Companion Policy from the 1997 Draft CP.Changes made in order to ensure that the proposed Companion Policy conforms to the proposed NationalInstrument are not described here. For a detailed summary of the contents of the 1997 Draft CP, reference shouldbe made to the 1997 Notice. Unless otherwise indicated, all section references in this section of this Notice ofProposed Changes pertain to the proposed Companion Policy.

Section 2.2

Section 2.2 is new. The CSA discuss the use of derivatives by commodity pools and clarify that commodity poolsare excluded from the rules of NI 81-102 governing specified derivatives, but remain subject to the otherinvestment restrictions in NI 81-102. For example, commodity pools remain subject to the restrictions onpurchasing securities on margin and the prohibition on selling securities short.

Specific Questions of the CSA

In addition to welcoming submissions on any provision of the proposed National Instrument and the proposedCompanion Policy, the CSA seek comment on the three matters referred to below.

Incentive Fees

As noted above, Part 6 of the proposed National Instrument addresses the levying of incentive fees against assetsof commodity pools when no benchmark or index exists that would meet the requirements in section 7.1 of NI 81-102. The CSA seek comment on whether the proposed National Instrument should completely exempt commoditypools from the operation of section 7.1 of NI 81-102 and require only disclosure of the incentive fee and the basison which it is calculated. In responding to this issue, commentators should address whether disclosure alone wouldprovide consumers with enough information to make informed decisions and whether market forces would be ableto adequately regulate incentive fees charged by commodity pools. In other words, why should commodity poolsbe treated differently in this respect than conventional mutual funds? The CSA note that the primary regulatorypurpose in mandating a benchmark or index is to ensure that investors will be able to properly assess whether thefees being charged in respect of their investment are appropriate having regard to the performance of the pool. TheCSA have traditionally required that a manager of mutual funds inform investors that it will attempt to out-perform aspecified recognized and widely used benchmark or index and if it does so, it will be entitled to fees based on thatperformance. Will investors be able to make informed decisions about the performance of the commodity pool'sperformance without any measure of performance?

Risk Measures

The CSA are proposing that commodity pools provide in their prospectuses, graphic depictions of past performancewhich are consistent with the requirements for conventional mutual funds set out in NI 81-101. The CSA seekspecific comment on whether commodity pools are sufficiently different from conventional mutual funds in their riskprofile to warrant the CSA requiring disclosure of a standardized measure of risk. Commentators believing that thisdisclosure would be appropriate should explain which measure would be appropriate, with a focus on whether thisrisk measure would be comprehensible to the average commodity pool investor. Does a common measure of riskexist in the commodity pool industry in Canada? In the United States?

Risk of Loss of Limited Liability

The proposed National Instrument requires that a commodity pool address the possibility of loss of limited liabilityin specialized circumstances in its prospectus. Is this risk sufficiently important and material that front pagedisclosure should be given?

Authority for Proposed National Instrument (Ontario)

In those jurisdictions in which the proposed National Instrument is to be adopted or made as a rule or regulation,the securities legislation in each of those jurisdictions provides the securities regulatory authority with rule-makingor regulation-making authority in respect of the subject matter of the proposed National Instrument.

In Ontario, the following provisions of the Securities Act (Ontario) provide the OSC with authority to make theproposed National Instrument. Paragraph 143(1)23 of the Act authorizes the OSC to make rules exemptingreporting issuers from any requirement of Part XVIII (Continuous Disclosure) among other things, undercircumstance that the OSC considers justify the exemption. Paragraph 143(1)34 of the Act authorizes the OSC tomake rules regulating commodity pools, including certain matters specified in the paragraph. Paragraph 143(1)35of the Act authorizes the OSC to make rules regulating or varying the Act in respect of derivatives, includingprescribing requirements that apply to mutual funds and commodity pools.

Anticipated Costs and Benefits

The 1997 Notice describes the anticipated costs and benefits to commodity pools of the proposed NationalInstrument. The CSA are of the view that none of the proposed changes outlined in this Notice of ProposedChanges will serve to increase costs to commodity pools, and may, reduce the costs of commodity pools andindustry participants. The proposed change to the proficiency requirements for sales representatives andsupervisors is expected to reduce the impact of the proposed National Instrument on the distribution of commoditypools through participating dealers when compared with the rules proposed in the 1997 Draft NI.

Regulations to be Revoked or Amended

The Ontario Securities Commission will amend section 87 of the Regulation to the Act in conjunction with themaking of the proposed National Instrument as a rule by adding the following subsection 87(7):

"(7) Subsections (1) to (6) do not apply to a commodity pool subject to National Instrument 81-104Commodity Pools.".

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument andCompanion Policy. Submissions received by August 4 , 2000 will be considered.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of theOntario Securities Commission, in duplicate, as indicated below:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Securities Registry, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territory
Registrar of Securities, Government of Nunavut

c/o John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
E-mail: [email protected]
 

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows:

Claude St. Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 22nd Floor
Montréal, Québec H4Z 1G3
E-mail: [email protected]

 

 

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also besubmitted. As securities legislation in certain provinces requires that a summary of written comments receivedduring the comment period be published, confidentiality of submissions cannot be maintained.

 

 

Comments may also be sent via e-mail to the above noted e-mail addresses of the respective Secretaries of theOSC and to the Commission des valeurs mobilières du Québec, and also to any of the individuals noted below attheir respective e-mail addresses.

Questions may be referred to any of:

Noreen Bent
Senior Legal Counsel
British Columbia Securities Commission
(604) 899-6741
or 1-800-373-6393 (in B.C.)
E-mail: [email protected]

Wayne Alford
Legal Counsel
Alberta Securities Commission
(403) 297-2092
E-mail: [email protected]

Dean Murrison
Deputy Director, Legal
Saskatchewan Securities Commission
(306) 787-5879
E-mail: [email protected]

Bob Bouchard
Director, Capital Markets and Chief Administrative Officer
The Manitoba Securities Commission
(204) 945-2555
E-mail: [email protected]

Rebecca Cowdery
Manager, Investment Funds
Capital Markets
Ontario Securities Commission
(416) 593-8129
E-mail: [email protected]

Anne Ramsay
Senior Accountant, Investment Funds
Capital Markets
Ontario Securities Commission
(416) 593-8243
E-mail: [email protected]

Darren McKall
Legal Counsel, Investment Funds
Capital Markets
Ontario Securities Commission
(416) 593-8118
E-mail: [email protected]

Ann Leduc
Conseillère en réglementation
Direction de la recherche et du développement des
marchés
Commission des valeurs mobilières du Québec
(514) 873-2150, ext. 4572
E-mail: [email protected]

 

 

Proposed National Instrument and Companion Policy

 

 

The text of the proposed National Instrument and Companion Policy follow, together with footnotes that are not partof the proposed National Instrument or Companion Policy, but have been included to provide background andexplanation.

DATED: June 2, 2000.

¹ In Ontario, at (1997) 20 OSCB (Supp2)109.

²"Illiquid asset" means (a) a portfolio asset that cannot be readily disposed of through market facilities on which public quotations in commonuse are widely available ....".

APPENDIX A

Summary of Comments Received on Proposed National Instrument 81-104 Commodity Pools andProposed Companion Policy 81-104CP Commodity Pools andResponse of the Canadian Securities Administrators

In June 1997, the Canadian Securities Administrators (CSA) released for public comment proposed National Instrument81-104 Commodity Pools (the 1997 Draft NI) and proposed Companion Policy 81-104CP Commodity Pools (the 1997Draft CP). During the comment period which ended on October 31, 1997, the CSA received one comment letter fromMeighen Demers.

As outlined in the Notice of Proposed Changes, since no comments were received during the comment period thataddressed the issues raised by the CSA in the 1997 Notice, the CSA considered it important to contact each of theexisting commodity pools in Canada to ensure that the proposed regulatory regime for commodity pools is appropriateand reflects the commodity pool industry in Canada. As a result of that contact, the CSA received additional writtencomments from:

1. AGF Management Limited

2. The Di Tomasso Group

3. Dorsey & Whitney LLP on behalf of Friedberg Mercantile Group

4. Fogler, Rubinoff on behalf of Friedberg Mercantile Group

5. Merrill Lynch Canada Inc.

6. Mondiale Asset Management Ltd.

7. Russell & DuMoulin

Copies of the comment letters may be viewed at the office of Micromedia Limited, 20 Victoria Street, Toronto, Ontario(416) 312-5211 or 1- (800) 387-2689; the office of the British Columbia Securities Commission, 200-865 Hornby Street,Vancouver, British Columbia (604) 899-6660; the office of the Alberta Securities Commission, 10025 Jasper Avenue,Edmonton, Alberta (780) 427-5201; and the office of the Commission des valeurs mobilières du Québec, StockExchange Tower, 800 Victoria Square, 22^nd floor, Montréal, Québec (514) 940-2150.

The CSA have considered the comments received on the 1997 Drafts and thank all commentators for providing theircomments.

The attached Table contains a summary of all comments received, together with the response of the CSA to thosecomments.

Note: In this Table, "1997 Draft" means the proposed version of NI 81-104 and Companion Policy 81-104CPpublished for comment in June 1997; "Revised NI" means the proposed revised version of NI 81-104 andCompanion Policy 81-104CP; "CSA" means the Canadian Securities Administrators.

	1997 DraftReference	Revised NIReference	Comment	CSA Response
1.	Definition of "illiquid asset" in NI 81-102	S. 1.3(2)	Commodity pools should be permitted toinvest in inter-bank forwards and optionsfor which there is a counterpartyprepared to and capable of making amarket without regard to whether thesetransactions are restricted by the "illiquidassets" rules provided for in NI 81-102.	Change made. Subsection 1.3(2) of theproposed National Instrument excludesinterbank forwards and options for whichthere is a counterparty prepared to andcapable of making a market from thedefinition of "illiquid asset" forcommodity pools.
2.	Definition of"underlyingmarketexposure" in the1997 draft of NI81-102	N/A	The definition of "underlying marketexposure" in the June 1997 publisheddraft of NI 81-102 does not include allderivative instruments that may be usedby a commodity pool. As a result, thelook-through provision used to calculateconcentration in one issuer for theconcentration restriction will not operateto include all derivatives that may beused by a commodity pool.	The final version of NI 81-102 addressesthis discrepancy. The term "underlyingmarket exposure" was replaced by theterm "underlying interest of thatspecified derivative" in subsection 2.1(3)of NI 81-102.
3.	S. 1.3	DELETED	Section 1.3 of the 1997 Draft should beclarified to ensure that all references to"permitted derivatives" in NI 81-102 areread as references to "specifiedderivatives" for commodity pools.	The comment was addressed in the finalversion of NI 81-102 which only uses theterm "specified derivatives". Allreferences to "permitted derivatives"were removed from the final rule.
4.	S. 2.1	S. 2.1	The 10 percent concentration restrictionshould not apply to commodity pools.The use of leverage will cause acommodity pool to easily exceed the 10percent concentration restriction. Thisresult would not be consistent with acommodity pool's ability to leverage andspeculate. E.g., a commodity pool withnet assets of $1 million that purchasesforward contracts with market exposureof $300,000 (30 percent of the netassets) may only need to deposit$12,000 margin (2 to 4 percent ofunderlying market exposure).	No change made. The 10 percentconcentration restriction in s. 2.1(1) ofNI 81-102 restricts commodity poolsfrom investing in any one issuer morethan 10 percent of the net assets of thepool. Commodity pools should not useleverage to gain more than 10 percentexposure to any one issuer. The generalrules applicable to mutual funds shouldapply to commodity pools. Theconcentration restriction would notpreclude a commodity pool fromexposing more than 10 percent of its netassets to a commodity (such as gold).
5.	S. 3.2(1)(a) & (b)	S. 3.2(1)(a) & (b)	Clause 3.2(1)(b) forbids the issuance ofany units prior to receiving subscriptionsaggregating not less than $500,000.This prohibition precludes the issuanceof units for the seed capital moneyinvested.	Clause 3.2(1)(b) was amended to reflectthis comment.
6.	S. 3.2(2)	S. 3.2(2)	The prohibition on removal of the initialseed capital (until the commodity pool isterminated or dissolved) is notnecessary if the commodity pool is wellestablished and has grown very large.	No change made. The CSA believe thatthe seed capital should remain in thecommodity pool for the duration of thecommodity pool's existence.
7.	S. 4.1	DELETED	No restrictions should be placed on acommodity pool's ability to pay amanagement fee to parties receiving orparticipating, directly or indirectly, inbrokerage commissions. In addition, amanager not acting as portfolio adviserto the commodity pool will not controlportfolio turnover (or "churning"activities) - as a result, the conflict ofinterest provision should not apply to amanager that does not provide portfolioadvice.	The prohibition was removed.Commodity pools are now treated in alike manner to conventional mutualfunds on this issue. Investors canevaluate the performance of thecommodity pool after management andbrokerage fees are paid and can redeemunits if the net returns of the pool are notacceptable.
8.	S. 5.1	S. 4.1	The Canadian Securities Institute ("CSI")proficiency courses proposed in the1997 Draft for salespersons andsupervisors are not appropriate courses.The courses aim at proficiencyrequirements for those trading inindividual futures accounts. Commoditypools differ from the individual futuresaccounts as the pools are professionallymanaged by advisers with the requisiteproficiency and experience. Also, thequalifications suggested are rare,particularly for representatives of mutualfund dealers. Since the distributionchannels will be limited, a majority of thepublic in Canada will be deprived of anopportunity to participate in commoditypools. Why impose additionalproficiency requirements for commoditypools, when no such additionalspecialized knowledge is mandated forconventional mutual funds specializingin niche markets, for example, or usingderivative instruments.	Section 4.1 has been changed. Theadditional proficiency requirements forboth the salesperson and the supervisorwould be to successfully complete theDerivatives Fundamentals Courseoffered by the CSI. This course providesa knowledge base in derivatives that theCSA believes is appropriate for anyoneseeking to sell commodity pools. Thiscourse reflects the additional knowledgerequired to sell a professionallymanaged commodity pool which usesderivatives to create leverage and tospeculate. A six month transitionalperiod is proposed in respect of thisrequirement.
9.	S. 5.1	S. 4.1	The additional proficiency requirementsfor selling commodity pools should notapply to SRO members as their generalrequirements are higher.	Changes described above made. SROmembers are not exempt at presentfrom the requirements described above.The CSA are of the view that SROmembers should also have specializedknowledge about derivatives to sellcommodity pools, notwithstanding theadditional courses they take.
10.	S. 5.1	S. 4.1	The proposed National Instrumentshould include an exemptive reliefprovision for proficiency requirements.	No change necessary. Applications forexemptive relief from provisions of theproposed National Instrument can bemade under section 11.1.
11.	Pt 5	Pt 4	It is difficult for the mutual fund dealer tomonitor whether the dealer orsalesperson selling a pool is properlyregistered. The National Instrumentshould provide clear direction that theonus to ensure proper registration in onthe salesperson. Clear liability for thefailure to comply must be set outexplicitly in the National Instrument or byreference to a stated provision.	No changes were made. The CSA donot believe that the proposed NationalInstrument regulating commodity poolsshould restate or contribute to theexisting penalties for non-compliancewith registration requirements.
12.	S.7.1	S. 7.1	Is it intended that a change in[redemption] policy is a material change,requiring a unitholder meeting if thepolicy is amended?	The proposed National Instrumentpermits commodity pools to setredemption policies that are consistentwith, if not, less restrictive that previouspolicy statements. Each commoditypool must determine how it will complywith the National Instrument once itcomes into force and must decide foritself what approvals it must seek andobtain.
13.	S. 7.3	S. 7.3	Supports allowing commodity poolsadditional time to redeem units (i.e.15days rather than 3 days for conventionalmutual funds). Is the "15 days"business days or calendar days?	The 15 days are calendar days.
14.	Pt 7 & 8	Pt 7 & 8	Rationale for reducing the time periodsfor redemptions (30 days to 15 days)and frequency of calculation of the NAV(once per week to daily) is clear andacceptable. However, these changeswill result in significant back-officesystem changes; will require time andmoney; and may be difficult for somedistributors to implement.	Commodity pools facing undue hardshipshould seek exemptive transitional reliefonce the National Instrument comes intoforce. However, commodity pools havebeen given a long period of notice ofthese proposed changes (since June1997) in which to change their affairs.Any commodity pool seeking exemptivetransitional relief should explain why thislengthy period of notice has not beensufficient.
15.	S. 9.2	S. 9.2	The requirement for quarterly interimfinancial statements is not appropriate.It is onerous and costly. A quarterlyinvestment update should besubstituted for quarterly interim financialstatements.	No changes made. Due to the abilityfor commodity pools to use leverage andtheir inherent volatility, the CSA believethat semi-annual financial statementsare not sufficient. Also, the quarterlyinterim statements are not required to beaudited statements and costs associatedwith such audits do not need to beincurred on a quarterly basis.
16.	S. 9.4	S. 9.4	Preparing and filing of statements ofportfolio transactions and statements ofinvestment portfolio are of no utility toinvestors in a commodity pool.	Section 9.4 of the proposed NationalInstrument incorporates a revisedstatement of portfolio transactions forcommodity pools. The statement willprovide aggregate disclosure of thecontracts purchased and sold by thecommodity pool during the period. Thisinformation will allow investors toevaluate the level of leverage used, theturnover of assets and level of liquidityof the contracts being traded. Theregulations applicable to mutual fundsand Statements of Investment Portfolioare proposed to apply to commoditypools.
17.	(New)	S. 6.1	In requiring compliance with section 7.1of NI 81-102, a commodity poolmanager must base an incentive feecharged to a commodity pool on thepool's performance relative to arepresentative benchmark. There is nosuch representative benchmark for ahighly leveraged investment fund suchas a commodity pool. The currentrequirement would preclude the use ofincentive fees by commodity poolmanagers in Canada. If Canadiancommodity pool managers areprecluded from charging incentive fees,this fact would impact on the availabilityof top-ranked U.S. commodity tradingadvisers and the viability of commoditypools in Canada. The U.S. modelallows for incentive fees to be chargedwithout regard to a benchmark, if thefees are fully described to the investors. As 65 - 80 percent of a commoditypool's assets are generally invested intreasury bills, a government treasury-billrate would be consistent with section 7.1of NI 81-102. A treasury-bill ratebenchmark is easily measurable andapplicable to all types of commoditypools.	Section 6.1 was added to the proposedNational Instrument. Section 6.1permits a commodity pool to pay anincentive fee based on performance,where the pool's performance is basedon a 90-day Canadian or USgovernment treasury-bill ratebenchmark, if a more appropriatebenchmark is not available.
18.	S. 6.8 of NI 81-102	S. 6.8 of NI 81-102	Section 6.8 of NI 81-102 is not broadenough to accommodate all types ofderivatives that commodity pools mightuse. Section 6.8 of NI 81-102 should bebroadened in the proposed NationalInstrument to accommodate all types ofderivatives that a commodity pool mightuse. Commentator focussing on section6.8 of the June 1997 version of NI 81-102.	No changes made. The CSA believethat the custodial provisions doaccommodate the expanded use ofderivatives by commodity pools.Changes made to section 6.8 of NI 81-102 since the June 1997 publication.

NATIONAL INSTRUMENT 81-104

COMMODITY POOLS⁽¹⁾

PART 1 DEFINITIONS, APPLICATION AND INTERPRETATION

1.1 Definitions⁽²⁾

(1) In this Instrument

"commodity pool" means a mutual fund, other than a precious metals fund, that has adoptedfundamental investment objectives⁽³⁾ that permit it to use or invest in

(a) specified derivatives in a manner that is not permitted by National Instrument 81-102 MutualFunds, or

(b) physical commodities in a manner that is not permitted by National Instrument 81-102;

"Derivatives Fundamentals Course" means a course prepared and conducted by the CanadianSecurities Institute and so named by that Institute as of the date that this Instrument comes intoforce, every predecessor to that course, and every successor to that course that does not narrow thescope of the significant subject matter of the course; and

"precious metals fund" means a mutual fund that has adopted fundamental investment objectives,and received all required regulatory approvals, that permit it to invest in precious metals or inentities that invest in precious metals and that otherwise complies with National Instrument 81-102.

(2) Terms defined in National Instrument 81-102 and used in this Instrument have the respectivemeanings ascribed to them in National Instrument 81-102.

1.2 Application - This Instrument applies only to

(a) a commodity pool that

(i) offers, or has offered, securities under a prospectus for so long as the commodity poolremains a reporting issuer, or

(ii) is filing a preliminary prospectus or its first prospectus; and

(b) a person or company in respect of activities pertaining to a commodity pool referred to in paragraph(a) or pertaining to the filing of a prospectus to which subsection 3.2(1) applies.

1.3 Interpretation

(1) Each section, part, class or series of a class of securities of a commodity pool that is referable to aseparate portfolio of assets is considered to be a separate commodity pool for purposes of thisInstrument.

(2) In relation to the application to commodity pools of the illiquid asset tests contained in NationalInstrument 81-102, the term "public quotation" in section 1.1 of National Instrument 81-102 includesany quotation of a price for foreign currency forwards and foreign currency options in the interbankmarket.

PART 2 INVESTMENT RESTRICTIONS AND PRACTICES

2.1 Investment Restrictions and Practices - Paragraphs 2.3(d), (e), (f), (g) and (h) and sections 2.7, 2.8 and2.11 of National Instrument 81-102 do not apply to a commodity pool.⁽⁴⁾

PART 3 NEW COMMODITY POOLS

3.1 Non-Application - Sections 3.1 and 3.2 of National Instrument 81-102 do not apply to a commodity pool.

3.2 New Commodity Pools

(1) No person or company shall file a prospectus for a newly established commodity pool unless

(a) an investment of at least $50,000 in securities of the commodity pool has been made, andthose securities are beneficially owned, before the time of filing by

(i) the manager, a portfolio adviser, a promoter or a sponsor of the commodity pool,

(ii) the directors, officers or shareholders of any of the manager, a portfolio adviser, apromoter or a sponsor of the commodity pool, or

(iii) any combination of the persons or companies referred to in subparagraphs (i) and (ii);and

(b) the prospectus of the commodity pool states that the commodity pool will not issue securitiesother than those referred to in paragraph (a) unless subscriptions aggregating not less than$500,000 have been received by the commodity pool from investors other than the personsand companies referred to in subparagraphs (i) and (ii) of paragraph (a) and accepted by thecommodity pool.

(2) A commodity pool shall not redeem, repurchase or return any amount invested in, a security issuedupon an investment in the commodity pool referred to in paragraph (1)(a) except as part of thedissolution or termination of the commodity pool.

3.3 Prohibition Against Distribution - If a prospectus of a commodity pool contains the disclosure describedin paragraph 3.2(1)(a), the commodity pool shall not distribute any securities unless the subscriptionsdescribed in that disclosure, together with payment for the securities subscribed for, have been received.⁽⁵⁾

PART 4 PROFICIENCY AND SUPERVISORY REQUIREMENTS

4.1 Proficiency and Supervisory Requirements

(1) No registered salesperson, partner, director or officer of a principal distributor or participating dealershall trade in a security of a commodity pool on behalf of the principal distributor or participatingdealer unless that individual

(a) has received at least a passing grade for the Derivatives Fundamentals Course; or

(b) meets the proficiency standards applicable to trading in securities of commodity poolsrequired by a self-regulatory organization to which the individual, or his or her organization, isa member if the securities regulatory authority or regulator has completed any requiredreview, approval or non-disapproval of the regulatory instrument of the self-regulatoryorganization that establishes those proficiency standards.⁽⁶⁾

(2) No principal distributor or participating dealer shall trade in a security of a commodity pool in thelocal jurisdiction⁽⁷⁾ unless

(a) the principal distributor or participating dealer has designated an individual located in thelocal jurisdiction to be responsible for the supervision of trades of securities of commoditypools in the local jurisdiction; and

(b) the individual referred to paragraph (a) has received at least a passing grade for theDerivatives Fundamentals Course.

(3) Despite subsection (2), but subject to compliance with securities legislation,⁽⁸⁾ a principal distributormay agree to act as principal distributor of a commodity pool and may trade in securities of acommodity pool if all trades are effected through a participating dealer that satisfies therequirements of subsection (2).

PART 5 TERMINATION OF AGREEMENTS

5.1 Termination of Agreements - A commodity pool shall not enter into an agreement retaining any personor company to provide services to it unless the retainer is terminable by the commodity pool withoutpenalty with no more than 60 days' notice.

PART 6 INCENTIVE FEES

6.1 Incentive Fees - The benchmark or index to be used by a commodity pool in relation to the calculation orpayment of fees to which paragraph 7.1(a) of National Instrument 81-102 applies shall be the averageyield of either 90-day Government of Canada treasury bills or 90-day Government of the United States ofAmerica treasury bills during the relevant period if there is no benchmark or index known to the commoditypool that satisfies the requirements of that paragraph.⁽⁹⁾

PART 7 REDEMPTION OF SECURITIES OF A COMMODITY POOL

7.1 Frequency of Redemptions - If disclosed in its prospectus, a commodity pool may include, as part of therequirements established under subsection 10.1(2) of National Instrument 81-102, a provision thatsecurityholders of the commodity pool shall not have the right to redeem their securities for a period up tosix months after the date on which the receipt is issued for the initial prospectus of the commodity pool.

7.2 Required Notice of Redemption - Despite section 10.3 of National Instrument 81-102, a commodity poolmay implement a policy providing that a person or company making a redemption order for securities shallreceive the net asset value for those securities determined, as provided in the policy, on the first or secondbusiness day after the date of receipt by the commodity pool of the redemption order.

7.3 Payment of Redemption Proceeds - The references in subsection 10.4(1) of National Instrument 81-102to "three business days" shall be read as references to "15 days" in relation to commodity pools.

PART 8 CALCULATION OF NET ASSET VALUE

8.1 Non-Application - Subsections 13.1(1) and (2) of National Instrument 81-102 do not apply to acommodity pool.

8.2 Calculation of Net Asset Value - The net asset value of a commodity pool shall be calculated at leastonce each business day.

PART 9 CONTINUOUS DISCLOSURE - FINANCIAL STATEMENTS

9.1 Variation of Securities Legislation - The provisions of securities legislation that pertain to the filing,content and sending to securityholders of financial statements for mutual funds are varied for commoditypools to the extent described in this Part.

9.2 Interim Financial Statements

(1) Instead of filing and delivering interim financial statements on a semi-annual basis, a commoditypool shall, within 60 days of the date to which they are made up, file and deliver to eachsecurityholder whose last address as shown on the books of the commodity pool is in the localjurisdiction, interim financial statements

(a) if the commodity pool has not completed its first financial year, for the periods commencingwith the beginning of that financial year and ending nine, six and three months before thedate on which that year ends; and

(b) if the commodity pool has completed its first financial year, for the periods beginning at theend of its last completed financial year and ending three, six and nine months after the end ofthe last completed financial year, together with, if applicable, comparative statements to theend of each of the corresponding periods in the last completed financial year.

(2) Despite paragraph (1)(a), a commodity pool is not required to prepare, file or deliver interimfinancial statements for a period that is less than three months in length.

9.3 Income Statements - In addition to any other matters required by securities legislation, the incomestatement forming part of the interim financial statements of a commodity pool shall include

(a) the total amount of realized net gain or net loss on positions liquidated during the period;

(b) the change in unrealized net gain or net loss on open positions during the period;

(c) the total amount of net gain or net loss from all other transactions in which the commodity poolengaged during the period, including interest;

(d) the total amount of all incentive fees paid during the period; and

(e) the total amount of all brokerage commissions paid during the period.

9.4 Statements of Portfolio Transactions⁽¹⁰⁾

(1) A statement of portfolio transactions of a commodity pool shall provide disclosure, in the form of thetable in subsection (2), of the aggregate total volume and total value or nominal value of allpurchase and sale transactions of the commodity pool for

(a) each security, by class or series, purchased or sold by the commodity pool during the period;

(b) each physical commodity, purchased or sold by the commodity pool during the period; and

(c) each derivative, by type of contract and underlying interest, for which a derivativestransaction was entered into by the commodity pool during the period.

(2) The table contemplated by subsection (1) shall be in the following form:

	Total Volume	Total Value orNominal Value
Purchases
Sales

PART 10 PROSPECTUS DISCLOSURE

10.1 Front Page Disclosure - In addition to any other requirements of securities legislation, the front page of apreliminary prospectus and prospectus of a commodity pool shall

(a) state, in substantially the following words:

" You should carefully consider whether your financial condition permits you to participate inthe [commodity pool]. The securities of the [commodity pool] are [highly] speculative and involve ahigh degree of risk. You may lose a substantial portion or even all of the money you place in the[commodity pool].

The risk of loss in trading [nature of instruments to be traded by the commodity pool] can besubstantial. In considering whether to participate in the [commodity pool], you should be aware thattrading [nature of instruments] can quickly lead to large losses as well as gains. Such tradinglosses can sharply reduce the net asset value of the [commodity pool] and consequently the valueof your interest in the [commodity pool]. Also, market conditions may make it difficult or impossiblefor the [commodity pool] to liquidate a position.

The [commodity pool] is subject to certain conflicts of interest.

The [commodity pool] will be subject to the charges payable by it as described in thisprospectus that must be offset by revenues and trading gains before an investor is entitled to areturn on his or her investment. It may be necessary for the [commodity pool] to make substantialtrading profits to avoid depletion or exhaustion of its assets before an investor is entitled to a returnon his or her investment.";

(b) state, for the initial prospectus of a commodity pool, in substantially the following words:

" The [commodity pool] is newly organized. The success of the [commodity pool] will dependupon a number of conditions that are beyond the control of the [commodity pool]. There is asubstantial risk that the goals of the [commodity pool] will not be met.";

(c) state, if the promoter, manager, or a portfolio adviser of the commodity pool has not had a similarinvolvement with any other commodity pool, in substantially the following words:

" The [promoter], [manager] [and/or] [portfolio adviser] of the [commodity pool] has notpreviously operated any other publicly offered commodity pools [or traded other accounts].";

(d) state, if the commodity pool will execute trades outside of Canada, in substantially the followingwords:

" Participation in transactions in [nature of instrument to be traded by the commodity pool]involves the execution and clearing of trades on or subject to the rules of a foreign market.

None of the Canadian securities regulatory authorities or Canadian exchanges regulateactivities of any foreign markets, including the execution, delivery and clearing of transactions, orhas the power to compel enforcement of the rule of a foreign market or any applicable foreign laws.Generally, any foreign transaction will be governed by applicable foreign law. This is true even if theforeign market is formally linked to a Canadian market so that a position taken on the market maybe liquidated by a transaction on another market. Moreover, such laws or regulations will varydepending on the foreign country in which the transaction occurs.

For these reasons, entities such as the commodity pool that trade [nature of instrument to betraded by the commodity pool] may not be afforded certain of the protective measures provided byCanadian legislation and the rules of Canadian exchanges. In particular, funds received fromcustomers for transactions may not be provided the same protection as funds received in respect oftransactions on Canadian exchanges.";

(e) state, immediately after the statements required by paragraphs (a), (b), (c), and (d), in substantiallythe following words:

" These brief statements do not disclose all the risks and other significant aspects of investingin the [commodity pool]. You should therefore carefully study this prospectus, including adescription of the principal risk factors at page [page number], before you decide to invest in the[commodity pool.]";

(f) if applicable, state that the tax consequences to the commodity pool or its securityholders are notcertain; and

(g) state that the commodity pool is a mutual fund but that certain provisions of securities legislationdesigned to protect investors who purchase securities of mutual funds do not apply.

10.2 Prospectus Disclosure - In addition to any other requirements of securities legislation, the preliminaryprospectus and prospectus of a commodity pool shall

(a) disclose the fundamental investment objectives and strategy of the commodity pool, and howspecified derivatives are or will be used in connection with those objectives and that strategy;

(b) disclose any limitation on the use of specified derivatives by the commodity pool contained in theconstating documents, or forming part of the fundamental investment objectives or investmentstrategy, of the commodity pool;

(c) disclose the risks associated with the use or intended use by the commodity pool of specifiedderivatives and the policies and practices of the commodity pool to manage those risks;

(d) disclose any existing or potential conflicts of interest between the commodity pool and anypromoter, manager, adviser, dealer, broker, any of their respective associates or affiliates, or any ofthe officers, directors or partners of any of the foregoing, and the steps that will be taken to alleviateany existing or potential conflicts of interest;

(e) disclose whether an affiliate of the manager or of a portfolio adviser of the commodity pool receivesor will receive brokerage commissions arising from trades of the commodity pool;

(f) disclose if the commodity pool will be wound up without the approval of securityholders if the netasset value per security falls below a certain predetermined level, and, if so, the net asset value persecurity at which this will occur;

(g) provide the disclosure concerning the past performance of the commodity pool that is required to beprovided by a mutual fund under Item 11 of Part B of Form 81-101F1 Contents of SimplifiedProspectus, except that

(i) the past performance of the commodity pool in the bar chart prepared in accordance withItem 11.2 of Part B of Form 81-101F1, shall show quarterly, non-annualized, returns of thecommodity pool over the period provided for in Item 11.2, rather than annual returns; and

(ii) the commodity pool shall, in the disclosure required by Items 11.3 and 11.4 of Part B of Form81-101F1, compare its performance to that of the average yield of either 90-day Governmentof Canada treasury bills or 90-day government of the United States treasury bills for therelevant periods, rather than to "one or more broad-based market indices" as otherwiserequired by those Items, and shall provide disclosure and discussion concerning the averageyield of those treasury bills, to the extent possible, in the manner required by Items 11.3 or11.4 for broad-based market indices;

(h) include a statement that how the commodity pool performed in the past does not necessarilyindicate how it will perform in the future;

(i) describe the financial reporting that is required of the commodity pool;

(j) in addition to the front page disclosure required by paragraph 10.1(g), disclose that certainprovisions of securities legislation designed to protect investors who purchase securities of mutualfunds do not apply to the commodity pool, and disclose the implications of this;

(k) describe the redemption procedures and requirements of the commodity pool, making specificreference to the adoption of any policies established under this Instrument or National Instrument81-102;

(l) disclose, in the "Risk Factor" section of the prospectus, any information that may bear on thesecurityholder's assessment of risk associated with an investment in the commodity pool, including

(i) the risk associated with those commodity pools structured as trusts that purchasers of thesecurities offered may become liable to make an additional contribution beyond the price ofthe securities, and

(ii) any risks associated with the loss of limited liability of a limited partner of a commodity poolthat is structured as a limited partnership; and

(m) disclose the details of compliance of the commodity pool with the requirements of sections 3.2 and3.3 of this Instrument.⁽¹¹⁾

10.3 Financial Statements

(1) A preliminary prospectus and prospectus of a commodity pool shall contain the financial statementsof the commodity pool for the time periods that are required by the securities legislation applicableto issuers other than mutual funds.

(2) The financial statements required by subsection (1) shall be prepared in accordance with therequirements of Part 9.

PART 11 EXEMPTION

11.1 Exemption

(1) The regulator⁽¹²⁾ or the securities regulatory authority⁽¹³⁾ may grant an exemption to this Instrument, inwhole or in part, subject to such conditions or restrictions as may be imposed in the exemption.

(2) Despite subsection (1), in Ontario, only the regulator may grant such an exemption.

PART 12 EFFECTIVE DATE AND TRANSITIONAL

12.1 Effective Date - This Instrument comes into force on , 2000.

12.2 Prospectus Disclosure - The prospectus of a commodity pool for which a receipt is obtained before thedate that this Instrument comes into force is not required to comply with the disclosure requirements of thisInstrument.

12.3 Delayed Coming into Force - Despite section 12.1, Part 4 does not come into force until , 2001 [6months after the date contained in section 12.1].⁽¹⁴⁾

COMPANION POLICY 81-104CP TO NATIONAL INSTRUMENT 81-104

 

COMMODITY POOLS

 

PART 1 PURPOSE

1.1 Purpose - The purpose of this Policy is to clarify how National Instrument 81-104 (the "Instrument")integrates with National Instrument 81-102 Mutual Funds, and to bring certain matters relating to theInstrument to the attention of persons or companies involved with the establishment or administration ofcommodity pools.

PART 2 GENERAL STRUCTURE OF THE INSTRUMENT

2.1 Relationship to Securities Legislation Applicable to Mutual Fund Instruments

(1) The term "commodity pool" is defined in the Instrument as a mutual fund that is permitted to use orinvest in specified derivatives and physical commodities beyond what is permitted by NationalInstrument 81-102. Commodity pools are subject to the ordinary mutual fund rules unless thoserules are specifically excluded. Therefore, the Instrument contains only those provisions that arespecific to commodity pools, and provisions applicable to all mutual funds, including commoditypools, are contained in National Instrument 81-102.

(2) Persons involved with the establishment or administration of a commodity pool are referred to thefollowing rules:

1. National Instrument 81-102. That National Instrument contains general rules concerning theoperation of mutual funds, all of which are applicable to commodity pools except as excludedby specific provisions of the Instrument.

2. The securities legislation relating to mutual funds of the jurisdictions in which a prospectusfor the commodity pool will be filed. For example, commodity pools are subject to thefinancial statement reporting requirements for mutual funds, except as varied orsupplemented in the Instrument.

3. The prospectus requirements of the securities legislation of a jurisdiction applicable to longform issuers generally, and mutual funds in particular. National Instrument 81-101 MutualFund Prospectus Disclosure states that commodity pools may not use the prospectusdisclosure system created by that National Instrument.

2.2 Derivatives Use - The regime implemented by the Instrument is designed to allow commodity poolsconsiderable freedom in entering into derivatives transactions. Commodity pools are not subject tosections 2.7 and 2.8 of National Instrument 81-102, which contain most of the rules governing specifiedderivatives used by mutual funds. Commodity pools, however, remain subject to the main investmentrestrictions and rules governing investment practices contained in National Instrument 81-102 that do notrelate directly to derivatives or commodity transactions. In particular, commodity pools remain subject toparagraphs 2.6(b) and (c) of National Instrument 81-102, which prohibit mutual funds from purchasingsecurities on margin or selling securities short, unless permitted by sections 2.7 or 2.8 of that NationalInstrument. These provisions allow a commodity pool to purchase securities on margin or sell securitiesshort only to the extent that a pool would be considered to do so when entering into a specified derivativestransaction in compliance with the requirements of sections 2.7 or 2.8 of National Instrument 81-102.

PART 3 LIMITED LIABILITY

3.1 Limited Liability

(1) Mutual funds generally are structured in a manner that ensures that investors are not exposed to therisk of loss of an amount more than their original investment. The CSA consider this a veryimportant and essential attribute of funds. This is especially important in the context of commoditypools. One of the most important rationales for the existence of commodity pools is that theyenable investors to invest indirectly in certain types of derivative products, particularly futures andforwards, without putting more than the amount of their investment at risk. A direct investment insome derivative products could expose an investor to losses beyond the original investment.

(2) Mutual funds structured as corporations do not raise pressing liability problems because of thelimited liability regime of corporate statutes.

(3) Mutual funds structured as limited partnerships may raise some concerns about the loss of limitedliability if limited partners participate in the management or control of the partnership. The statuteand case law concerning when limited partners can lose their limited partner status, including theQuebec Civil Code, varies from province to province. Therefore, paragraph 10.2(l) of the Instrumentrequires each commodity pool to disclose risks associated with the loss of limited liability of alimited partner that has invested in a commodity pool structured as a limited partnership; propercompliance with this requirement will involve disclosure of risks associated with the jurisdictions inwhich the prospectus is filed. Mutual funds structured as trusts may also raise liability issues insome contexts. Paragraph 10.2(l) of the Instrument also requires disclosure of risks associated withthe structuring of a commodity pool as a limited partnership or as a trust in relation to the possibilitythat purchasers of commodity pool securities may become liable to make an additional contributionbeyond the price of the securities.

(4) The CSA expect that commodity pools will be structured in a manner that provides as muchassurance as possible to their securityholders that securityholders will not be at risk for more thanthe amount of their original investment. The CSA recommend that commodity pool promoters andmanagers consider other ways, apart from the structuring of a pool, to limit the liability ofsecurityholders. For example, commodity pools could attempt to enter into contracts only if theother party to the agreement agreed to limit recourse under the agreement to the assets of the pool.In addition, managers of commodity pools structured as limited partnerships should considerwhether a securityholder meeting could cause limited partners to lose limited liability status.

¹ This proposed National Instrument is based on OSC Policy 11.4 ("Policy 11.4"), reformulated as a national instrument.This proposed Instrument is expected to be adopted as a rule in British Columbia, Alberta, Manitoba, Newfoundland, Ontario andNova Scotia, as a Commission regulation in Saskatchewan, and as a policy in all other jurisdictions represented by the CSA.

This is the second publication for comment of the proposed National Instrument, and amends the draft published in June 1997 (the "1997 Draft"). Amendments to the 1997 Draft have been made as the result of comments received on that draft and as the result of further consideration of this Instrument by the CSA. Amendments have alsobeen made to ensure that this draft relates properly to National Instrument 81-102 ("NI81-102"), which came into forceon February 1, 2000. Substantive amendments from the 1997 Draft are discussed in the footnotes to this Instrumentor the notice published with this Instrument.

² A national definition instrument has been adopted as National Instrument 14-101 Definitions. It contains definitions of certain terms usedin more than one national instrument. National Instrument 14-101 also provides that a term used in a national instrument and defined inthe statute relating to securities of the applicable jurisdiction, the definition of which is not restricted to a specific portion of the statute, willhave the meaning given to it in that statute, unless the context otherwise requires. National Instrument 14-101 also provides that aprovision or a reference within a provision of a national instrument that specifically refers by name to a jurisdiction, other than the localjurisdiction, shall not have any effect in the local jurisdiction, unless otherwise stated in the provision.

³ The term "fundamental investment objectives" is defined in NI81-102 as "the investment objectives of a mutual fund that define thefundamental nature of the mutual fund and define the fundamental investment features of the mutual fund that distinguish it from othermutual funds." The intent of the use of these words is to define a commodity pool as a mutual fund that is primarily defined by its use ofderivatives or commodities in a manner different from what is permitted by NI81-102.

⁴ Commodity pools are subject to the investment restrictions and practices contained in NI81-102 except those pertaining to commoditiesand derivatives. This provision excludes the application of NI81-102 to commodity pools in respect of the following matters:

paragraph 2.3(d) - prohibition on purchase of gold certificates other than permitted gold certificates

paragraph 2.3(e) - prohibition on purchase of gold or permitted gold certificates in excess of 10 percent of assets

paragraph 2.3(f) - prohibition on purchase of physical commodities

paragraph 2.3(g) - prohibition on purchase of specified derivatives other than in compliance with sections 2.7 to 2.11 of NI81-102

paragraph 2.3(h) - prohibition on purchase of specified derivatives having an underlying interest of a physical commodity other thangold

sections 2.7, 2.8, 2.11

- general rules respecting specified derivatives use; section 2.9 will apply to commodity pools so that commoditypools will have the benefit of that provision if they use derivatives for hedging purposes.

⁵ This provision is new and corresponds to section 3.2 of NI81-102, which imposes a direct prohibition on a mutual fund in respect of theinitial capitalization requirements of the mutual fund.

⁶ The CSA have changed the proficiency standards required for individuals trading in securities of commodity pools from the 1997 Draft.The CSA now are proposing that such individuals have completed the Derivatives Fundamentals Course or any relevant SROrequirements. These standards will ensure adequate knowledge of commodity pool products by persons engaged in their sale, withoutimposing requirements that are excessively difficult to satisfy.

⁷ The term "local jurisdiction" is defined in National Instrument 14-101 Definitions. The definition is "in a national instrument adopted ormade by a Canadian securities regulatory authority, the jurisdiction in which the Canadian securities regulatory authority is situate". Theterm "jurisdiction" is defined in National Instrument 14-101 Definitions as meaning a province or territory of Canada, except when used inthe term foreign jurisdiction. The term "Canadian securities regulatory authorities" is defined in National Instrument 14-101 Definitionsas meaning the securities commissions or similar regulatory authorities set out in an appendix to that instrument.

⁸ The term "securities legislation" is defined in National Instrument 14-101 Definitions as meaning the particular statute and legislativeinstruments of the local jurisdiction set out in an appendix to that instrument and will generally include the statute, regulations and, in somecases, the rules, forms, rulings and orders relating to securities in the local jurisdiction.

⁹ The CSA are proposing that commodity pools follow the same rules for incentive fees as conventional mutual funds, as set out in NationalInstrument 81-102. However, the CSA recognize that there may not always be benchmarks that form appropriate bases for comparisonwith the performance of the commodity pool; in those circumstances, this Instrument requires the commodity pool to use the 90-dayGovernment of Canada or the 90-day Government of the United States treasury bill yield as a comparison.

¹⁰ This provision permits a commodity pool to provide summary disclosure of its trading activities in a statement of portfolio transactions,rather than have to disclose particulars of every trade, as would otherwise be required under securities legislation. The CSA are satisfiedthat summary disclosure in this context provides investors with an adequate overview of the trading activity of the commodity pool for theperiod to which the statement relates.

¹¹ The CSA have deleted from the disclosure requirements paragraph 10.3(g) of the 1997 Draft, which required disclosure of the "trackrecord" of the portfolio adviser and manager of the commodity pool for the previous three years if the pool itself had a history of less thanthree financial years, and paragraphs 10.3(e) and (i) of the 1997 Draft, which required the prospectus to, in effect, compare the brokerageexpenses and portfolio management fees paid by the commodity pool to what was paid by other pools. These paragraphs, which werebased on provisions in Policy 11.4, have been deleted as inconsistent with the general rules applicable to the regulation of mutual funds.

¹² The term "regulator" is defined in National Instrument 14-101 Definitions as meaning, in a local jurisdiction, the person set out in anappendix to that instrument opposite the name of the local jurisdiction.

¹³ The term "securities regulatory authority" is defined in National Instrument 14-101 Definitions as meaning, for a local jurisdiction, thesecurities commission or similar regulatory authority set out in an appendix to that instrument opposite the name of the local jurisdiction.

¹⁴ The CSA are proposing to delay the effective date of Part 4 of this Instrument, which prescribes proficiency standards for persons involvedin trading, or supervising the trading of, securities of commodity pools, in order to allow market participants adequate time to obtain anyrequired qualifications.