Proposed Companion Policy: NI - 81-104 - Commodity Pools

COMPANION POLICY 81-104 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 MutualFunds (the "Mutual Fund National Instrument"), and to bring certain matters relating to the Instrument to the attention of persons or companies involved withthe establishment or administration of commodity 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 or invest in specified derivatives and physical commoditiesbeyond what is permitted by the Mutual Fund National Instrument. Commodity pools are subject to the ordinary mutual fund rules unless those rules arespecifically excluded. Therefore, the Instrument contains only those provisions that are specific to commodity pools, and provisions applicable to all mutualfunds, including commodity pools, are contained in the Mutual Fund National Instrument.

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

1. The Mutual Fund National Instrument. That National Instrument contains general rules concerning the operation of mutual funds, all of which are applicableto commodity pools except as excluded by specific provisions of the Instrument.

2. The securities legislation relating to mutual funds of the jurisdictions in which a prospectus for the commodity pool will be filed. For example, commoditypools are subject to the financial statement reporting requirements of mutual funds, except as varied or supplemented in the Instrument.

3. The prospectus requirements of the securities legislation of a jurisdiction applicable to long form issuers generally, and mutual funds in particular. NationalPolicy Statement No. 36 states that commodity pools may not use the simplified prospectus system available to conventional mutual funds.

PART 3 EDUCATIONAL REQUIREMENTS IN BRITISH COLUMBIA

3.1 Educational Requirements in British Columbia - Pursuant to subsection 5.1(4) of the Instrument, the regulator in British Columbia specifies the CanadianFutures Examination for the purposes of subsection 5.1(1) of the Instrument and specifies the Canadian Commodity Supervisory Examination and the CanadianFutures Examination for the purposes of paragraph 5.1(2)(b) of the Instrument.

PART 4 LIMITED LIABILITY

4.1 Limited Liability

(1) Mutual funds generally are structured in a manner that ensures that investors are not exposed to the risk of loss of an amount more than an originalinvestment. The CSA consider this a very important and essential attribute of funds. This is especially important in the context of commodity pools. One of themost important rationales for the existence of commodity pools is that they enable investors to invest indirectly in certain types of derivative products,particularly futures and forwards, without putting more than the amount of their investment at risk. A direct investment in some derivative products couldexpose an investor to losses beyond the original investment.

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

(3) Mutual funds structured as limited partnerships may raise some concerns about the loss of limited liability if limited partners participate in the management orcontrol of the partnership. Therefore, section 6.1 of the Instrument has been included to ensure, to the extent possible, that the rights provided to investors insection 5.1 of the Mutual Fund National Instrument do not expose investors to greater liability than the amount of their investment in the commodity pool. Thestatute and case law concerning when limited partners can lose their limited partner status varies from province to province, and the CSA cannot, and do notwish to try to, state a definitive view as to what rights could lead to this exposure. Therefore, section 6.1 requires each commodity pool to obtain counsel'sopinion concerning these matters at appropriate times.

(4) There also appears to be a very remote risk in Canada that beneficiaries of a trust could be liable for the actions of a trust. There is some case law that findsbeneficiaries liable for the actions of a trust, but only in the context of finding the true relationship between the trust and the beneficiaries to be one ofprincipal/agent. These cases are unlikely to be applied in circumstances in which the trustee has significant obligations and powers, with which the beneficiariesare not entitled to interfere.1 There is a line of authority in the U.S. in which beneficiaries can be held liable if they exercise significant control over the trustee;this line of cases has not to date been adopted in Canada.

(5) The CSA have not included in this Instrument any general requirement that commodity pools must be structured in such a way as to afford theirsecurityholders limited liability due to the difficulty of defining the precise ambit of such a requirement. However, persons considering the creation of acommodity pool are reminded of the importance that the CSA attach to this issue. The CSA expect that commodity pools will be structured in a manner thatprovides as much assurance as possible to their securityholders that securityholders will not be at risk for more than the amount of their original investment.

(6) The CSA recommend that commodity pool promoters and managers 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 the other party to the agreement agreed to limit recourse under theagreement to the assets of the pool.

PART 5 EXEMPTIONS

5.1 Exemptions - The procedures for applying for an exemption from the Instrument in more than one jurisdiction that are described in the Mutual Fund NationalInstrument for mutual funds should be followed for commodity pools that are applying for an exemption from the Instrument.