Notice and Final Rule: OSC Rule - 32-501 - Direct Purchase Plans

Notice of Rule

The Commission has, under section 143 of the Securities Act (the "Act"), made Rule 32-501 Direct Purchase Plans (the "Rule").

The Rule and the material required by the Act to be delivered to the Minister of Finance were delivered on July 27, 2001. If the Minister does not approve the Rule, reject the Rule or return it to the Commission for further consideration, the Rule will come into force on October 10, 2001. If the Minister approves the Rule, the Rule will come into force 15 days after it is approved.

The Rule was published for comment on November 17, 2000. During the comment period, which expired on February 16, 2001, the Commission received 28 submissions. The names of the commenters providing the submissions, a summary of their comments and the responses of the Commission are contained in Appendix A to this Notice. The Commission thanks all commenters for providing their comments on the Rule. The Commission has considered the comments and does not believe any amendments are required. Copies of the comment letters may be viewed at the office of Micromedia, 20 Victoria Street, Toronto, Ontario, (416) 312-5211 or (800) 387-2689.

Substance and Purpose of Rule

The Rule will establish a regime that will permit reporting issuers to establish direct purchase plans in Ontario under which an issuer may issue securities directly to investors without the need to sell those securities through a registrant. The Rule would establish safeguards around the use of such plans that the Commission believes will provide appropriate protection for investors in respect both of the administration of the Plans and the promotion of securities offered under direct purchase plans.

Summary of Rule

Part 1

Section 1.1 contains the definitions used in the Rule.

The key definition is that of "direct purchase plan", which is defined as

"an arrangement operated by or on behalf of a reporting issuer under which a person or company is permitted to purchase securities of the reporting issuer's own issue

(a) directly from the reporting issuer; or

(b) a marketplace through an administrator of the direct purchase plan;".

This definition restricts the ambit of the Rule to "issuer sponsored plans" because it requires that a plan be "operated by or on behalf of a reporting issuer", which is not the case with bank sponsored plans. The definition also permits trades to be made under a plan either from the treasury of the issuer or on the secondary market.

The definition of "administrator" refers to the entity that administers the plan for the relevant reporting issuer. This is often the transfer agent of the issuer, and will typically be the same organization that administers dividend reinvestment plans for issuers; however, the definition also includes issuers, for plans administered directly by the relevant issuer.

The definitions of "plan advertisement" and "promotional activities" are used in Part 4 of the Rule, which regulates the manner in which a direct purchase plan may be promoted. The definition of "public medium" is used in the definition of "plan advertisement".

Part 2

Section 2.1 provides the regulatory relief necessary to permit the operation of direct purchase plans, namely relief from the registration requirements of section 25 of the Act to permit trades to be made other than by a registrant. The Commission has imposed three conditions to the relief. First, the administrator of the direct purchase plan must comply with Part 3 of the Rule in connection with the plan. Second, the investor must be provided with a free-standing investor disclosure statement that contains the information described in section 4.2 of the Rule. This disclosure document, together with a prospectus, should provide investors with adequate information about both the issuer and the securities being purchased, and the risks associated with direct purchase plans, to permit them to make informed investment decisions relating to their purchase through such plans. Third, for a trade of a security from treasury of the issuer, the investor must be provided with a prospectus relating to the plan.

Part 3

Part 3 contains a number of operational safeguards designed to ensure the operational integrity of direct purchase plans. The provisions require the segregation of funds used for investment in direct purchase plans, the segregation of securities issued under direct purchase plans, and that the administrators of the plans maintain proper bonding and insurance and record keeping, and provide investors with statements of account, in relation to such plans. These provisions are designed to replicate the requirements of the Regulations that impose similar obligations on registered dealers. Section 3.6 exempts from the bonding and insurance, record keeping and statement of account requirements banks and trust corporations, and other entities that are subject to substantially similar obligations under their governing legislation. The Commission understands that banks and trust corporations are subject to such obligations.

Part 4

Part 4 regulates the promotion of direct purchase plans.

Section 4.1 provides that no person or company may engage in promotional activities concerning a direct purchase plan, unless permitted by subsections (2) or (3). Subsection (2) allows the use of advertisements for direct purchase plans that contain only information about the operation of a direct purchase plan and information about how to obtain a prospectus relating to a direct purchase plan.

Subsection (3) provides that no person or company, other than a registrant, shall provide any investment advice or recommendations in connection with the purchase of securities under a direct purchase plan.

Section 4.2 provides that an issuer or plan administrator shall provide to any person or company purchasing securities through a direct purchase plan a disclosure statement; the section provides the text of the disclosure statement and is designed to emphasize to the investor that no investment advice is being made in connection with any investment under a direct purchase plan and that the investor is responsible for the investment decisions. This statement must be provided before the investor enters into a binding agreement of purchase and sale relating to a plan; this would typically take place when the investor joins the plan and makes an initial subscription.

Part 5

Section 5.1 provides that the Director may grant an exemption to the Rule, in whole or in part, subject to such conditions or restriction as may be imposed in the exemption.

Text of Rule

The text of the Rule follows.

August 3, 2001.

APPENDIX A

LIST OF COMMENTERS AND SUMMARY OF COMMENTS RECEIVED AND RESPONSES OF THE ONTARIO SECURITIES COMMISSION

LIST OF COMMENTERS

1. Ralph and Pat Burns

2. Canadian Advocacy Council of the Association for Investment Management and Research

3. Canadian Investor Relations Institute

4. Mr. Glen Corbett

5. Anthony Del Core

6. Emera Inc.

7. Ed Engel

8. Dale Ennis

9. Robert Finch

10. Louis-P. Fortier

11. Randy Gates

12. Robert Gibb

13. Bill Gray

14. Orysio Horos

15. Sushil Jain

16. Jane Johnson

17. Alex Kobelak

18. Roger Lange

19. Robert MacKenzie

20. Peter Marshall

21. Mike Mullen

22. Rick Nyman

23. Tomoko Reinberg

24. Eric Rendl

25. Security Transfer Association of Canada

26. Small Investor Protection Association

27. David W. Stanley

28. Joe Ursano

SUMMARY OF COMMENTS RECEIVED AND RESPONSES OF THE ONTARIO SECURITIES COMMISSION

1. GENERAL COMMENTS

All of the submissions received favoured the Rule. The commenters cited a variety of possible benefits of the Rule. One of the commenters indicated that the Rule could prove to be beneficial for the thousands of people who are striving to build their retirement nest eggs as the ease of use and low dollar increments needed would allow many investors to participate. Another commenter felt that the Rule would provide greater control to investors over their assets. Benefits such as enabling small investors to accumulate diversified holdings and utilize dollar cost averaging by regular purchases and/or dividend re-investment were also cited by a commenter. Two commenters maintained that the Rule would streamline the process of enrolling in company sponsored DRIP and Share Purchase Plan programs and attract more companies into these types of programs. Other commenters believed that the Rule would allow investors to purchase shares in companies that previously they could not buy due to the fact they could not afford the fees or board lots required by brokers. Finally, one commenter stated that direct purchase plans allow investors to acquire small quantities or fractional shares at a lower cost, which in turn enables issuers to broaden their shareholder base, increase consumer loyalty and have access to capital at a lower cost.

2. SPECIFIC COMMENTS

(a) Account Statements

Section 3.5 of the Rule provides that the administrator of a direct purchase plan shall send to each investor in the plan, statements of account referred to in subsections 123(1) to (4) of the Regulation. These provisions require that a statement of account be sent to each client at the end of each month in which the client has effected a transaction and where the client has not effected a transaction, the dealer is required to send a statement of account not less than quarterly.

One commenter recommended that the account statement requirements be relaxed to permit a minimum of quarterly reporting and remove the requirement to provide monthly statements if activity took place in an account during the month. The commenter justified this recommendation by pointing out that this process would be identical to the current approach used in dividend reinvestment plans and that as electronic communication becomes more widely used it is likely that plan administrators will develop electronic account access which will provide immediate account information to investors.

RESPONSE:

The Commission's position has historically been that account statements are required monthly where there is activity taking place in an account during the month. The Commission sees no reason why its position should change in context of direct purchase plans. Moreover, the development of electronic account access should reduce the cost of making such information available.

(b) Minimum Quality Standard Safeguards

One commenter believes that direct purchase plans offer an avenue that will benefit small investors provided the regulators ensure that some do not take advantage to promote worthless shares in this manner. This commenter suggested that safeguards must be provided to prevent a situation developing similar to the experience with the penny stock dealers, where securities with relatively little inherent value were sold to investors.

Similarly, another commenter felt that the benefits derived from a direct purchase plan are dependent on whether an issuer has significant market capitalization as well as a relatively stable, long-term investment horizon. The commenter was concerned that the Rule, as written, may result in smaller, less capitalized issuers promoting unsuitable and speculative securities to uninformed retail investors. The commenter recommended that the Commission consider setting a minimum quality standard that would allow only certain issuers to offer direct purchase plans. The Commenter suggested some criteria that could be considered for such a minimum quality standard:

(i) Securities of issuers listed in a senior category on a recognized North American stock exchange;

(ii) Securities of issuer meeting option eligibility criteria;

(iii) Securities of exempt filers under TSE Rules; or

(iv) Issuers of investment grade debt securities.

The commenter believed that such a standard would ensure that securities sold under direct purchase plans are appropriate long-term investments and would provide important safeguards for the individual investor who may not be fully aware of potential risks in direct purchase plans.

RESPONSE:

Section 2.1 of the Rule requires the issuer or the plan administrator to provide a prospectus to purchasers for a trade of a security from treasury of the issuer. Also, since the issuers are all reporting issuers, a continuous disclosure record will exist for each issuer. The provision of a prospectus and the availability of the continuous disclosure record ensures full disclosure and therefore the Commission sees no reason to implement additional requirements with respect to those issuers that may use direct purchase plans.

(c) Bank/Agent Sponsored Plans

The Commission requested comments on whether the Rule should be broadened to provide necessary exemptive relief to permit the operation of bank/agent sponsored plans. One commenter responded, recommending that the Rule should not be amended at the present time to accommodate bank/agent sponsored plans. The commenter pointed out that with such plans, the issuer has minimal involvement with the plan and this proves difficult to create a prospectus. The commenter maintained that since the OSC believes that the use of a prospectus is fundamental to the operation of issuer sponsored plans and would expect that prospectuses would be required of a bank/agent sponsored plan, the commenter feared that dealing with this regulatory issue could impair the swift implementation of this rule and therefore recommended that this option not be considered at the present time.

RESPONSE:

The Commission agrees. The Commission will consider extending the Rule to bank/agent sponsored plans at a later date if appropriate.

(d) National Initiative

One commenter encouraged the Commission to work with the Canadian Securities Administrators (the "CSA") to ultimately ensure that a national instrument permitting direct purchase plans is in place across Canada. However the commenter urged the Commission to continue to implement the Rule and not hold up implementation pending any possible CSA initiative. Four commenters who reside in other provinces wrote to express their support and encouragement for the adoption of the rule in both Ontario and other provinces. RESPONSE:

The Commission agrees that the Rule should proceed in Ontario, but the Commission will work with the CSA to encourage a national initiative.

(e) Share Purchase Limits

One commenter suggested that, if there is a concern that direct purchase plans would be abused by frequent traders, any initial purchase be limited to 1 to 10 shares only and that larger subsequent purchases be restricted to the Share Purchase Plans that usually complement DRIP programmes.

RESPONSE:

There has been no evidence that the plans will be used as suggested and therefore the Commission does not believe the Rule requires amendment to limit the number of shares purchased.

ONTARIO SECURITIES COMMISSION RULE

RULE 32-501

DIRECT PURCHASE PLANS

TABLE OF CONTENTS

PART 1 DEFINITIONS AND INTERPRETATION

1.1 Definitions

PART 2 EXEMPTION FOR TRADES UNDER A DIRECT PURCHASE PLAN

2.1 Exemption for Trades Under a Direct Purchase Plan

PART 3 OPERATIONAL SAFEGUARDS

3.1 Segregation of Funds

3.2 Segregation of Securities

3.3 Bonding and Insurance

3.4 Record Keeping

3.5 Statements of Account

3.6 Exemption for Regulated Institutions

PART 4 ADVERTISING AND DISCLOSURE REQUIREMENTS

4.1 Advertising Requirements

4.2 Disclosure Statement

PART 5 EXEMPTION

5.1 Exemption

ONTARIO SECURITIES COMMISSION RULE

RULE 32-501

DIRECT PURCHASE PLANS

PART 1 DEFINITIONS AND INTERPRETATION

1.1 Definitions - In this Rule

"administrator" means, for a direct purchase plan,

(a) a trustee, a custodian or an administrator of the direct purchase plan, or

(b) if the reporting issuer administers the direct purchase plan itself, the reporting issuer;

"direct purchase plan" means an arrangement operated by or on behalf of a reporting issuer under which a person or company is permitted to purchase securities of the reporting issuer's own issue

(a) directly from the treasury of the reporting issuer, or

(b) on a marketplace through the administrator of the direct purchase plan;

"plan advertisement" means a communication that is published or designed for use on or through a public medium for the purpose of disseminating information about a direct purchase plan;

"promotional activities" means any activities or communications intended to induce the purchase of securities through a particular direct purchase plan; and

"public medium" includes announcements, newspaper, television or radio advertisements, circulars, notices, investor fairs, and Internet Web sites.

PART 2 EXEMPTION FOR TRADES UNDER A DIRECT PURCHASE PLAN

2.1 Exemption for Trades Under a Direct Purchase Plan - Section 25 of the Act does not apply to a trade by an issuer or an administrator of the issuer in a security of the issuer's own issue under a direct purchase plan of the issuer if the following conditions are met:

1. The administrator of the plan satisfies the requirements of sections 3.1 and 3.2 in connection with the plan, and, if applicable, the requirements of sections 3.3, 3.4 and 3.5.

2. For a trade of a security from treasury of the issuer,

(a) the issuer or the administrator of the plan, unless it has previously done so, sends by prepaid mail or delivers to the purchaser the latest prospectus relating to the plan and any amendment to the prospectus filed either before the purchaser enters into an agreement of purchase and sale resulting from the order or subscription or not later than midnight on the second day, excluding Saturday, Sundays and holidays, after entering into such agreement; and

(b) the issuer provides to the purchaser, in the prospectus, the right to withdraw from the purchase analogous to the rights of a purchaser, and subject to the conditions, contained in section 71 of the Act.

3. An investor disclosure statement containing the information described in section 4.2 has been provided to the purchaser of the security in accordance with subsection 4.2(2).

PART 3 OPERATIONAL SAFEGUARDS

3.1 Segregation of Funds - All funds received by the administrator for investment through the direct purchase plan shall be deposited promptly into a segregated bank account with a Canadian financial institution, and used only to purchase securities under the direct purchase plan or to pay fees associated with the direct purchase plan.

3.2 Segregation of Securities

(1) All securities issued under a direct purchase plan held on behalf of purchasers by the administrator shall be

(a) maintained in a separate account directly in the names of the purchasers, or in the name of the administrator, and allocated to each purchaser on a register maintained by the administrator; and

(b) kept separate from any other securities held by the administrator.

(2) For securities deposited with a depository or clearing agency that operates a book-based system, the administrator shall ensure that the applicable participants in the book-based system or the administrator contain a designation sufficient to show that the beneficial ownership of the securities is vested in the purchasers under the direct purchase plan.

3.3 Bonding and Insurance - An administrator of a direct purchase plan shall maintain bonding or insurance, by means of a broker's blanket bond, in an amount of not less than $25,000.

3.4 Record Keeping - An administrator of a direct purchase plan shall maintain books and records necessary to record properly all transactions involving the direct purchase plan, and in doing so shall keep the records referred to in subsection 113(3) of the Regulation.

3.5 Statements of Account - The administrator of a direct purchase plan shall send to each investor in the direct purchase plan the statements of account referred to in subsections 123(1) to (4) of the Regulation.

3.6 Exemption for Regulated Institutions - Sections 3.3, 3.4 and 3.5 do not apply to an administrator of a direct purchase plan that is an institution that is subject to requirements under its governing legislation that are substantially similar to those contained in sections 3.3, 3.4 and 3.5.

PART 4 ADVERTISING AND DISCLOSURE REQUIREMENTS

4.1 Advertising Requirements

(1) No person or company may engage in promotional activities concerning a direct purchase plan, except as permitted in subsections (2) or (3).

(2) A person or company may place or distribute plan advertisements relating to a direct purchase plan that describe only

(a) the existence and availability of the direct purchase plan;

(b) the name of the reporting issuer whose securities are distributed under the direct purchase plan, and a brief description of the business carried on by the reporting issuer;

(c) the securities to be issued under the direct purchase plan;

(d) a description of how the direct purchase plan operates; and

(e) information about how a person or company may obtain a copy of the prospectus for the direct purchase plan.

(3) No person or company, other than a person or company that is registered under the Act, shall provide any investment advice or recommendations in connection with the purchase of securities under a direct purchase plan.

4.2 Disclosure Statement

(1) An issuer or plan administrator shall provide to any person or company purchasing securities through a direct purchase plan the following disclosure:

"Securities sold through the [name of issuer] direct purchase plan are sold under a rule of the Ontario Securities Commission that permits these sales without the involvement of a registered broker or dealer. A person or company making such a purchase therefore receives no investment advice concerning the purchase, does not have the benefit of the assistance of a broker or dealer and is solely responsible for assessing the appropriateness of the investment for himself, herself or itself. A person or company that wishes to receive investment advice in connection with the direct purchase plan should contact his, her or its broker or dealer."

(2) The disclosure required by subsection (1) shall be contained in a separate document given to the purchaser before he, she or it enters into a binding agreement of purchase and sale for securities under a direct purchase plan.

PART 5 EXEMPTION

5.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictions as may be imposed in the exemption.