Staff Notice: Backward Pricing Issue

BACKWARD PRICING ISSUE

General

In recent months, the issue of backward pricing has arisen in connection with the distribution reinvestment plans (the "DRIPs") of certain unconventional mutualfunds and closed-end investment trusts (collectively, the "Investment Funds"). The DRIPs provide, in certain circumstances, for the purchase by the plan agent oftreasury units at a price equal to the net asset value ("NAV") per unit established on a date that would be least 15 business days prior to the date on which theunits are actually issued. The CSA Chairs discussed this issue due to the importance of the general prohibition against backward pricing for mutual funds. Ingeneral, backward pricing raises significant regulatory concerns such as fundamental issues of fairness and potential dilution.In the context of the DRIPs of theInvestment Funds in question, it was concluded that the backward pricing mechanism does not give rise to the regulatory concerns noted. However, the CSAChairs stressed the importance of ensuring that the exceptions to the backward pricing prohibition do not expand over time, and the need to clearly articulate therationale for permitting any deviation from such prohibition in any given fact situation.Middlefield High Income TrustThe OSC most recently considered thebackward pricing issue in the context of the application of Middlefield High Income Trust ("Middlefield") for discretionary relief from the registration andprospectus requirements of the Securities Act in connection with its DRIP. The Commission granted relief in a ruling made on May 14, 1997, which is alsopublished in this issue of the OSC Bulletin.Notwithstanding that Middlefield's DRIP has a backward pricing mechanism, discretionary relief was granted becauseof its particular circumstances. It is a closed-end investment trust whose unitholders have no ability to redeem their units, or to purchase treasury units (otherthan pursuant to the DRIP, through the plan agent). The timing of purchases of treasury units by the plan agent is fixed, so that there is no opportunity for theplan agent or any unitholder to speculate on changes in NAV over a period of time. Middlefield is an income fund and, as such, its NAV per unit is less volatilecompared to that of an equity fund. The amount of the quarterly distributions that would be available for reinvestment under the DRIP is small relative to theunitholders' equity in Middlefield, and an even smaller portion of that amount may be invested in treasury units. Accordingly, the potential for dilution, if any,will be insignificant. The DRIP is open to participation by all unitholders. Any unitholder who has concerns about the potential dilution can avoid it by electing toparticipate in the DRIP.Staff will continue to monitor the issue of backward pricing in future financings. Issuers and their advisers are encouraged to discuss withstaff, on a pre-filing basis, any proposed financing that includes an element of backward pricing, particularly where such financing does not come within theparameters accepted by the Commission to date