Notice of Rule: OSC Rule - 33-502 - Exceptions To Conflict Rules In The Sale of Mutual Fund Securities

 

NOTICE OF RULE 33-502
UNDER THE SECURITIES ACT
EXCEPTIONS TO CONFLICT RULES
IN THE SALE OF MUTUAL FUND SECURITIES

 

The Commission is publishing in today's Bulletin Rule 33-502 Exceptions To ConflictRules In The Sale Of Mutual Fund Securities and a Notice respecting the Rule. The Rulewas made by the Commission on July 28, 1998.

The Notices and the amendments to the Rules are published in Chapter 5 of the Bulletin.

NOTICE OF RULE 33-502
EXCEPTIONS TO CONFLICT RULES
IN THE SALE OF MUTUAL FUND SECURITIES

Notice of Rule

The Commission has, under section 143 of the Securities Act (the "Act"), made Rule 33-502 Exceptions to Conflict Rules in the Saleof Mutual Fund Securities (the "Rule").

The Rule and the material required by the Act be delivered to the Minister of Finance were delivered on July 29, 1998. If the Minister does notapprove the Rule, reject the Rule or return it to the Commission for further consideration, the Rule will come into force on October 12, 1998. Ifthe Minister approves of the Rule, the Rule will come into force fifteen days after it is approved.

Substance and Purpose of Proposed Rule and Changes

The substance and purpose of the Rule are to provide exemptions to the conflict of interest requirements set out in Part XIII of the Regulation(the "Regulation") under the Securities Act (the "Act") for fully registered dealers for the trading of securities ofassociated mutual funds that is equivalent to the relief provided to mutual fund dealers under subsection 230(2) of the Regulation and toexempt registrants from the prohibitions in subsection 224(1) of the Regulation in respect of the distribution of mutual fund securities.

The Rule is derived from the Blanket Order (the "Blanket Order") In the Matter of Mutual Fund Securities (1991), 14 OSCB 3763 (the"Prior Rule"), now a rule, that it replaces.

Part XIII of the Regulation was implemented in 1987 as part of the amendments to the Regulation opening up the ownership of the securitiesindustry to broader domestic and non-resident ownership.

The Part XIII provisions regulate the conflicts of interest that may arise, or that may appear to arise, as a result, among other things, of theownership of registrants by financial institutions. In the context of the sale of mutual fund securities:

Subsection 230(2) of the Regulation exempts mutual fund dealers from the application of sections 223 to 228 of the Regulation.

Section 223 of the Regulation requires a registrant to prepare, and file with the Commission, a statement of conflict policies. The proposedRule exempts fully registered dealers from this requirement for the sale of associated mutual fund securities.

Section 224 of the Regulation requires disclosure in offering documents of relationships between a dealer and the issuer of securities andthat there be an independent co-underwriter on prospectus offerings if the issuer is related or connected to the dealer.

The Rule carries forward and expands the Prior Rule by also providing relief from the disclosure obligations of paragraph 224(1)(a) of theRegulation. This part of the Rule was originally intended to be dealt with in proposed Multi-Jurisdictional Instrument 33-105 UnderwritingConflicts, which was published for comment on February 6, 1998. Pending finalization of Multi-Jurisdictional Instrument 33-105, Rule 33-502provides relief from the whole of subsection 224(1) of the Regulation.

Section 225 of the Regulation prohibits trading by dealers to or from customers of securities of issuers that are related or connected to thedealer, unless disclosure is made to the customer, the customer is a dealer or related to the dealer, or the trade is a distribution other than froma control person. Since there is no secondary market for mutual fund securities, no further exemption is required.

Section 226 of the Regulation requires trade confirmations containing disclosure about the dealer's relationship with the issuer of thesecurities to which the confirmation relates to be delivered by the dealer to the customer. The proposed Rule provides an exemption to thisrequirement.

Section 227 of the Regulation contains restrictions on advising in relation to securities of a related or connected issuer of the registrantunless certain disclosure is made to the customer. As the proposed Rule relates to trading activities only, no exemption is provided under theproposed Rule to the requirements of section 227 as it relates only to advising activity.

Section 228 of the Regulation prohibits registrants from recommending that securities of an issuer that is related or connected to theregistrant be sold, purchased or held, unless disclosure of the relationship of the registrant to the issuer is made to the customer. Theproposed Rule provides an exemption to this requirement.

In 1991, the Commission issued the Blanket Order which became the Prior Rule. This exempted brokers, investment dealers and securitiesdealers from the provisions of Part XIII applicable to trading activity in mutual fund securities in the same manner as mutual fund dealers areexempted by subsection 230(2) of the Regulation, provided the issuer of the mutual fund securities is managed by an affiliate of the dealer.The Rule carries forward the Prior Rule and expands it to refer to all distributions of mutual fund securities.

Summary of Proposed Rule

The Rule exempts fully registered dealers from the provisions of Part XIII of the Regulation that require dealers to make disclosure to investorsby way of a statement of conflict policies or in their trade confirmations, advertising or recommendations for associated mutual fund securities.Under the Rule, mutual fund securities are associated with the dealer if the fund is dealer managed by the dealer or an affiliate of the dealermanager. A dealer managed mutual fund is a mutual fund that has as its portfolio adviser:

(i) a dealer;

(ii) a portfolio adviser that is at least 10% owned by a dealer or a partner, director, officer, salesperson or principal shareholder (10 percentholder) of a dealer; or

(iii) a partner, director or officer of a portfolio adviser 10 percent of the securities of which are owned by a dealer or a partner, director, officer,salesperson or principal shareholder (10 percent holder) of a dealer.

To rely on this Part of the Rule, the dealer must send a notice to the Director of its intent to rely on the Rule and the Director must not object tothe proposed reliance on that Part of the Rule within 15 days. The Rule provides that the Director shall only object if the names of the dealerand the issuer of the associated mutual fund securities are not sufficiently similar to disclose their relationship.

The Rule carries forward and expands the exemption in the Prior Rule from the prohibition from acting as an underwriter or selling groupmember for certain distributions unless certain disclosure is made in a prospectus or other offering document and there are independent co-underwriters on prospectus distributions. The Rule provides an exemption from both aspects to all registrants in respect of distributions ofmutual fund securities.

Written Comments Received by the Commission

The Commission did not receive any comments on the Rule as proposed.

Text of Amendments to Regulation

The Regulation is amended as follows:

1. (1) Subsection 223(1) of the Regulation is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991),14 OSCB 3763" in the first and second lines and substituting "Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual FundSecurities".

(2) Subsection 223(2) of the Regulation is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991), 14OSCB 3763" in the first and second lines and substituting "Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual FundSecurities".

(3) Subsection 223(3) is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991), 14 OSCB 3763"in the first and second lines and substituting "Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual Fund Securities".

(4) Subsection 223(4) is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991), 14 OSCB 3763"in the first and second lines and substituting "Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual Fund Securities".

(5) Subsections (1), (2), (3) and (4) come into force on the day Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual Fund Securitiescomes into force.

2. (1) Subsection 224(1) of the Regulation is amended by deleting the first four words and substituting "Except as otherwise provided inRule 33-502 Exceptions to Conflict Rules in the Sale of Mutual Fund Securities and".

(2) Clause 224(1)(b) of the Regulation is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991), 14OSCB 3763" in the first and second lines.

(3) Subsections (1) and (2) come into force on the day Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual Fund Securities comesinto force.

3. (1) Subsection 226(1) of the Regulation is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991),14 OSCB 3763" in the first and second lines and substituting "Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual FundSecurities".

(2) Subsection 226(2) of the Regulation is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991), 14OSCB 3763" in the first and second lines and substituting "Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual FundSecurities".

(3) Subsections (1) and (2) come into force on the day Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual Fund Securities comesinto force.

4. (1) Subsection 228(1) of the Regulation is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991),14 OSCB 3763" in the first and second lines and substituting "Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual FundSecurities".

(2) Subsection 228(3) of the Regulation is amended by striking out "the Rule entitled 'In the Matter of Mutual Fund Securities' (1991), 14OSCB 3763" in the first and second lines and substituting "Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual FundSecurities".

(3) Subsections (1) and (2) come into force on the day Rule 33-502 Exceptions to Conflict Rules in the Sale of Mutual Fund Securities comesinto force.

Text of Rule

The text of the Rule follows.

DATED: July 31, 1998.