Proposed National Policy: NI - 81-104 - Commodity Pools
Proposed National Policy: NI - 81-104 - Commodity Pools
NATIONAL INSTRUMENT 81-104 - COMMODITY POOLS
PART 1 DEFINITIONS, APPLICATION AND INTERPRETATION
1.1 Definitions
1.2 General Application
1.3 Application of Provisions of the Mutual Fund National Instrument
PART 2 INVESTMENT RESTRICTIONS AND PRACTICES
2.1 Investment Restrictions and Practices
PART 3 NEW COMMODITY POOLS
3.1 Non-Application
3.2 New Commodity Pools
PART 4 CONFLICTS OF INTEREST
4.1 Conflicts of Interest
PART 5 REQUIREMENTS FOR DEALERS AND OTHERS
5.1 Proficiency and Supervisory Requirements
5.2 Termination of Agreements
PART 6 RIGHTS OF LIMITED PARTNERS
6.1 Rights of Limited Partners
PART 7 REDEMPTION OF SECURITIES OF A COMMODITY POOL
7.1 Frequency of Redemptions
7.2 Required Notice of Redemption
7.3 Payment of Redemption Proceeds
PART 8 CALCULATION OF NET ASSET VALUE
8.1 Non-Application
8.2 Calculation of Net Asset Value
PART 9 CONTINUOUS DISCLOSURE - FINANCIAL STATEMENTS
9.1 Variation of Securities Legislation
9.2 Interim Financial Statements
9.3 Income Statements
PART 10 PROSPECTUS DISCLOSURE
10.1 Non-Application
10.2 Front Page Disclosure
10.3 Prospectus Disclosure
10.4 Financial Statements
PART 11 EXEMPTION
11.1 Exemption
11.2 Evidence of Exemption or Approval
PART 12 TRANSITIONAL
12.1 Effective Date
12.2 Prospectus Disclosure
PART 1 DEFINITIONS, APPLICATION AND INTERPRETATION
1.1 Definitions
(1) In this Instrument
"Canadian Commodity Supervisors Examination" and "Futures Examination" each means an examination prepared and conducted by the Canadian SecuritiesInstitute and so named by that Institute on the date that this Instrument comes into force, every predecessor to that examination, and every successor to thatexamination that does not narrow the scope of the significant subject matter of the examination;3
"commodity pool" means a mutual fund, other than a precious metals fund, that has adopted investment policies and practices that permit it to invest in
(a) derivatives other than or in addition to permitted derivatives,
(b) permitted derivatives other than as permitted by the Mutual Fund National Instrument, or
(c) physical commodities other than as permitted by the Mutual Fund National Instrument;4
"limited partnership pool" means a commodity pool that is a limited partnership;5
"Mutual Fund National Instrument" means National Instrument 81-102 Mutual Funds;6 and
"precious metals fund" means a mutual fund that has adopted investment policies and practices and received all required regulatory approvals that permit it toinvest in precious metals or entities that invest in precious metals and that otherwise complies with the Mutual Fund National Instrument.7
(2) Terms defined in the Mutual Fund National Instrument and used in this Instrument have the respective meanings ascribed to them in the Mutual FundNational Instrument.
1.2 General Application
(1) This Instrument applies to
(a) a commodity pool that offers or has offered securities under a prospectus for so long as the commodity pool remains a reporting issuer; and
(b) a person or company in respect of activities pertaining to a commodity pool referred to in paragraph (a).
(2) Each section, part, class or series of a class of securities of a commodity pool that is referable to a separate portfolio of assets is considered to be a separatecommodity pool for purposes of this Instrument.8
1.3 Application of Provisions of the Mutual Fund National Instrument - The references in the definition of "restricted security" contained in section 1.1, inparagraph 2.1(1)(b), in subsections 2.1(2) and (3), in paragraph 2.2(d), in subsections 2.3(1) and 10.6(1) and in sections 13.5 and 18.1 of the Mutual FundNational Instrument to "a permitted derivative" or "permitted derivatives" shall be read as references to "a specified derivative" or "specified derivatives", asapplicable, in relation to commodity pools.9
PART 2 INVESTMENT RESTRICTIONS AND PRACTICES
2.1 Investment Restrictions and Practices - Paragraphs 2.1(1)(i), (j), (k) and (l), subsections 2.3(2), (3), (4), (5), (6), (7), (9) and (10) and subsection 20.3(2) ofthe Mutual Fund National Instrument do not apply to a commodity pool.10
PART 3 NEW COMMODITY POOLS
3.1 Non-Application - Section 3.1 of the Mutual Fund National Instrument does not apply to a commodity pool.11
3.2 New Commodity Pools
(1) No person or company shall file a prospectus for a commodity pool unless
(a) an investment of at least $50,000 in securities of the commodity pool has been made, and the securities resulting from the investment are held, 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, a promoter or a sponsor of the commodity pool, or
(iii) any combination of the persons and companies referred to in subparagraphs (i) and (ii); and
(b) the prospectus of the commodity pool states that the mutual fund will not issue securities unless subscriptions aggregating not less than $500,000 have beenreceived by the commodity pool from investors other than the persons referred to in paragraph (a).
(2) A commodity pool shall not take any action that will result in the return of any investment referred to in paragraph (1)(a) to the persons or companies thatmade that investment except as part of the dissolution or termination of the commodity pool.12
PART 4 CONFLICTS OF INTEREST
4.1 Conflicts of Interest
(1) A commodity pool shall not pay a fee to the manager or a portfolio adviser of the commodity pool if the manager or portfolio adviser receives or participates,directly or indirectly, in any brokerage commissions generated by the commodity pool.13
(2) An affiliate of a promoter or the manager of a commodity pool shall not act as portfolio adviser of the commodity pool if the promoter or manager receivesor participates, directly or indirectly, in any brokerage commissions generated by the commodity pool.14
PART 5 REQUIREMENTS FOR DEALERS AND OTHERS
5.1 Proficiency and Supervisory Requirements15
(1) No registered salesperson, partner, director or officer of a principal distributor or participating dealer shall trade in a security of a commodity pool on behalfof the principal distributor or participating dealer unless he or she has successfully completed the Canadian Futures Examination.
(2) No principal distributor or participating dealer shall trade in a security of a commodity pool in the local jurisdiction16 unless
(a) the principal distributor or participating dealer has designated an individual located in the local jurisdiction to be responsible for the supervision of trades ofsecurities of commodity pools in the local jurisdiction; and
(b) the individual referred to paragraph (a) has successfully completed the Canadian Commodity Supervisory Examination and the Canadian FuturesExamination.
(3) Despite subsection (2) and subject to compliance with securities legislation,17 a principal distributor may agree to act as principal distributor of a commoditypool and may trade in securities of a commodity pool if all trades are effected through a participating dealer that satisfies the requirements of subsection (2).
(4) In British Columbia, despite subsection (1) and paragraph (2)(b), the proficiency requirements set out in subsection (1) and paragraph (2)(b) must be met bysuccessfully completing the examination or course that the regulator in British Columbia specifies.18
5.2 Termination of Agreements - A commodity pool shall not enter into an agreement retaining any person or company to provide services to it unless theretainer is terminable by the commodity pool without penalty upon 60 days' written notice.19
PART 6 RIGHTS OF LIMITED PARTNERS
6.1 Rights of Limited Partners20
(1) The constating documents of a limited partnership pool shall provide that no meeting of securityholders to approve a matter referred to in section 5.1 of theMutual Fund National Instrument shall be called by the commodity pool if the holding of that meeting would expose securityholders that are limited partners toliability as general partners.
(2) Section 5.1 of the Mutual Fund National Instrument does not apply to a commodity pool in connection with an obligation to hold a meeting if the holding ofthat meeting would expose securityholders that are limited partners to liability as general partners.21
(3) The information circular prepared for a meeting required by section 5.1 of the Mutual Fund National Instrument shall contain an opinion of counsel that thecalling of the meeting and the voting on the matters to take place at the meeting will not expose securityholders that are limited partners to liability as generalpartners.22
PART 7 REDEMPTION OF SECURITIES OF A COMMODITY POOL23
7.1 Frequency of Redemptions - In addition to its rights under section 10.6 of the Mutual Fund National Instrument, a commodity pool may establish andimplement a policy providing that the commodity pool may suspend the right of securityholders to request that the commodity pool redeem their securities for aperiod up to six months after the date on which the receipt is issued for the initial prospectus of the commodity pool.24
7.2 Required Notice of Redemption - Despite section 10.3 of the Mutual Fund National Instrument, a commodity pool may establish and implement a policyrequiring that redemption orders be received up to two business days before the date on which the net asset value used in establishing the redemption price willbe calculated.25
7.3 Payment of Redemption Proceeds - The references in subsection 10.4(1) of the Mutual Fund National Instrument to "three business days" shall be read asreferences to "15 days" in relation to commodity pools.26
PART 8 CALCULATION OF NET ASSET VALUE
8.1 Non-Application - Subsections 13.1(1) and (2) of the Mutual Fund National Instrument do not apply to a commodity pool.27
8.2 Calculation of Net Asset Value - The net asset value of a commodity pool shall be calculated at least once each business day.28
PART 9 CONTINUOUS DISCLOSURE - FINANCIAL STATEMENTS29
9.1 Variation of Securities Legislation - The provisions of securities legislation that pertain to the filing, content and sending to securityholders, of financialstatements for mutual funds are varied for commodity pools that are subject to this Instrument to the extent described in this Part.30
9.2 Interim Financial Statements
(1) Instead of filing and delivering interim financial statements on a semi-annual basis, a commodity pool shall, within 60 days of the date to which they are madeup, file and deliver to each securityholder whose last address as shown on the books of the commodity pool is in the local jurisdiction, interim financialstatements
(a) if the commodity pool has not completed its first financial year, for the periods commencing with the beginning of that financial year and ending nine, six andthree months before the date on which that year ends; and
(b) if the commodity pool has completed its first financial year, for the periods beginning at the end of its last completed financial year and ending three, six andnine months after the last completed financial year, together with comparative statements to the end of each of the corresponding periods in the last completedfinancial year.31
(2) Despite paragraph (1)(a), a commodity pool is not required to prepare, file or deliver interim financial statements for a period that is less than three months inlength.
9.3 Income Statements - In addition to the matters required by the securities legislation pertaining to mutual funds, the income statement forming part of theinterim 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 pool engaged 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 during the period.32
PART 10 PROSPECTUS DISCLOSURE
10.1 Non-Application - Section 16.1 of the Mutual Fund National Instrument does not apply to a commodity pool.33
10.2 Front Page Disclosure - The front page of a preliminary prospectus and prospectus of a commodity pool shall prominently
(a) contain the following statement or words to like effect in bold print:
" You should carefully consider whether your financial condition permits you to participate in the [commodity pool]. You may lose a substantial portion or evenall 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 be substantial. You should consider carefully whether such trading issuitable for you in light of your financial condition. In considering whether to participate in the [commodity pool], you should be aware that trading [nature ofinstruments] can quickly lead to large losses as well as gains. Such trading losses can sharply reduce the net asset value of the [commodity pool] andconsequently the value of your interest in the [commodity pool]. Also, market conditions may make it difficult or impossible for the [commodity pool] toliquidate a position.
The [commodity pool] is subject to certain conflicts of interest and the securities of the [commodity pool] are [highly] speculative and involve a high degree ofrisk.
The [commodity pool] will be subject to the charges payable by it as described in this prospectus that must be offset by revenues and trading gains before aninvestor is entitled to a return on his or her investment. It may be necessary for the [commodity pool] to make substantial trading profits to avoid depletion orexhaustion of its assets and before an investor is entitled to a return on his or her investment.";
(b) contain, for the initial prospectus of a commodity pool, the following statements or words to like effect in bold print:
" The [commodity pool] is newly organized. The success of the [commodity pool] will depend upon a number of conditions that are beyond the control of the[commodity pool]. There is a substantial risk that the goals of the [commodity pool] will not be met.";
(c) contain, if the promoter, manager, or a portfolio adviser of the commodity pool, has not had a similar involvement with any other commodity pool, thefollowing statement or words to like effect in bold print:
" The [promoter], [manager] [and/or] [portfolio adviser] of the [commodity pool] has not previously operated any other publicly offered commodity pools [ortraded other accounts].";
(d) contain, if the commodity pool will execute trades outside of Canada, the following statements or words to like effect in bold print:
" 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 therules of a foreign market.
Neither any of the Canadian securities regulatory authorities nor any Canadian exchange regulates activities of any foreign markets, including the execution,delivery and clearing of transactions, or has the power to compel enforcement of the rule of a foreign market or any applicable foreign laws. Generally, theforeign transaction will be governed by applicable foreign law. This is true even if the foreign market is formally linked to a Canadian market so that a positiontaken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country inwhich the transaction occurs.
For these reasons, customers who trade [nature of instrument to be traded by the commodity pool] may not be afforded certain of the protective measuresprovided by Canadian futures legislation and the rules of Canadian exchanges. In particular, funds received from customers for transactions may not be providedthe same protection as funds received in respect of transactions on Canadian exchanges.";
(e) contain, immediately after the statements required by paragraphs (a), (b), (c), and (d), the following statements or words to like effect in bold print:
" These brief statements cannot disclose all the risks and other significant aspects of investing in the [commodity pool]. You should therefore carefully study thisprospectus, including a description of the principal risk factors at page [page number], before you decide in invest in the [commodity pool.]";34
(f) if applicable, disclose that the tax consequences to the commodity pool or its securityholders are not certain; and
(g) disclose that the commodity pool is a mutual fund but that certain provisions of the national instruments or rules designed to protect investors who purchasesecurities of mutual funds do not apply.35
10.3 Prospectus Disclosure - The preliminary prospectus and prospectus of a commodity pool shall
(a) disclose the investment objectives and strategy of the commodity pool, and how specified derivatives are or will be used in connection with those objectivesand that strategy;
(b) disclose any limitation on the use of specified derivatives by the commodity pool contained in the constating documents, or forming part of the investmentobjectives or strategy of the commodity pool;
(c) disclose the risks associated with the use or intended use by the commodity pool of specified derivatives, and the policies and practices of the commoditypool to manage those risks;36
(d) disclose any conflicts of interest between the commodity pool and any promoter, manager, adviser, dealer, broker or any of their respective associates oraffiliates or any of the officers, directors or partners of any of the foregoing and the steps that will be taken to alleviate any real or potential conflicts of interest;
(e) disclose if the commodity pool pays higher than competitive commission rates for commodity brokerage transactions, and, if so, the reasons for doing so;37
(f) disclose if the commodity pool will be wound up without the approval of securityholders if the net asset value per security falls below a certain predeterminedlevel, and, if so, the level at which this will occur;38
(g) disclose
(i) the total return39 of the commodity pool for the three most recently completed financial years, or such shorter period as it has been in existence, and
(ii) if the commodity pool has a history of less than three financial years, disclose the total return of the portfolio adviser and the manager for other commoditypools for which the portfolio adviser or manager, as the case may be, has acted in that capacity for the portion of the previous three financial years before thedate of inception of the commodity pool;40
(h) include a statement that similar performances to the performances disclosed under paragraph (g) cannot be assured;41
(i) if a portfolio adviser of the commodity pool acts as portfolio adviser to other commodity pools, disclose whether the proposed fees charged by the portfolioadviser to the commodity pool are higher or lower than those charged to other pools that are advised by the portfolio adviser, together with any informationconcerning brokerage charges to those other pools that the commodity pool considers relevant;42
(j) describe the financial reporting that is required of the commodity pool;
(k) in addition to the front page disclosure required by paragraph 10.2(g), disclose that certain of the rules designed to protect investors who purchase securitiesof mutual funds do not apply to the commodity pool, together with a discussion of the implications of this;
(l) describe the redemption procedures and requirements of the commodity pool, making specific reference to the adoption of any policies established under thisInstrument or the Mutual Fund National Instrument;
(m) disclose, in the "Risk Factor" section of the prospectus, any information or facts that may bear on the securityholder's assessment of risk associated with theinvestment in the commodity pool, including the risk associated with those commodity pools structured as trusts that purchasers of the securities offered maybecome liable to make an additional contribution beyond the price of the security43; and
(n) disclose the details of the compliance of the commodity pool with the requirements of section 3.2 of this Instrument.44
10.4 Financial Statements - A preliminary prospectus and prospectus of a commodity pool shall contain the financial statements of the commodity pool, preparedin accordance with Part 9, for the time periods that are required by the securities legislation applicable to issuers other than mutual funds.45
PART 11 EXEMPTION
11.1 Exemption
(1) The regulator46 or the securities regulatory authority47 may grant an exemption to this Instrument, in whole or in part, subject to such conditions orrestrictions as may be imposed in the exemption.
(2) Despite subsection (1), in Ontario, only the regulator may grant such an exemption.
11.2 Evidence of Exemption or Approval48 - Without limiting the manner in which an exemption under section 11.1 may be evidenced, the issuance by theregulator of a receipt for a prospectus or an amendment to a prospectus is evidence of the granting of the exemption if
(a) the prospectus or the amendment to the prospectus discloses details of the matters to which the exemption relates and discloses that an exemption has beenobtained in connection with those matters;
(b) the person or company that sought the exemption delivered to the regulator, with the preliminary or pro forma prospectus, or at least ten days before theissuance of the receipt in the case of an amendment
(i) a letter or memorandum describing the matters relating to the exemption and indicating why consideration should be given to the granting of the exemption,and
(ii) a draft of a prospectus or amendment to a prospectus disclosing the matters referred to in paragraph (a); and
(c) the regulator has not sent written notice to the contrary to the person or company that sought the exemption or approval before, or concurrent with, theissuance of the receipt.
PART 12 TRANSITIONAL
12.1 Effective Date - This Instrument comes into force on ..49
12.2 Prospectus Disclosure - The prospectus of a commodity pool for which a receipt is obtained before the date that this Instrument comes into force is notrequired to comply with the disclosure requirements of this Instrument.50
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.