Proposed Rule and Notice: OSC Rule - 45-504 - Prospectus Exemptions for Distributions of Securities to Portfolio Advisors on Behalf of Fully Managed Accounts
Proposed Rule and Notice: OSC Rule - 45-504 - Prospectus Exemptions for Distributions of Securities to Portfolio Advisors on Behalf of Fully Managed Accounts
NOTICE OF PROPOSED RULE 45-504 UNDER THE SECURITIES ACT
PROSPECTUS EXEMPTION FOR DISTRIBUTIONS
OF SECURITIES TO PORTFOLIO ADVISERS ON BEHALF
OF FULLY MANAGED ACCOUNTS
Substance and Purpose of Proposed Rule
The purpose of the proposed Rule is to provide relief from the prospectus requirements of the Securities Act (the "Act") for the distribution from treasury or by a"control person" of securities, other than securities of a mutual fund or non-redeemable investment fund, to managed accounts where a portfolio adviser makesthe investment decision on behalf of the managed account. A managed account is defined in the proposed Rule as "an investment portfolio account of a clientunder which the portfolio adviser to the account makes all investment decisions for the account and has absolute discretion to trade in securities of the accountwithout requiring the client's express consent to a transaction". A portfolio adviser is defined in the proposed Rule as a portfolio manager, or a broker orinvestment dealer exempted from registration as an adviser under subsection 148(1) of the Regulation if that broker or investment dealer is not exempt from theby-laws or regulations of The Toronto Stock Exchange or the Investment Dealers' Association of Canada referred to in that subsection.
The proposed Rule also imposes resale restrictions on the first trade in securities acquired in reliance on the proposed Rule and provides relief from theregistration requirements of the Act for the first trade in securities between certain managed accounts.
Background
Over the past several years, the Commission has seen a dramatic increase in the number of applications for relief from the prospectus requirements of the Actwhere, as part of an international or domestic offering, issuers or selling securityholders wish to be able to sell securities to portfolio advisers on behalf of theirmanaged accounts and the aggregate acquisition cost for the securities purchased for each managed account is less than $150,000. Often, these orders are soughtin the context of an international offering because the amount of securities available for distribution in Canada is limited, and the amount available for purchaseby individual managed accounts is less than $150,000. Applications requesting relief for specific issuances of securities have been granted by the Commissionsubject to certain conditions, including the condition that the aggregate acquisition cost of the securities purchased by the portfolio adviser on behalf of all themanaged accounts is not less than $150,000 and that each managed account, at the time of the purchase of the securities holds assets having an aggregate netasset value or an aggregate acquisition cost of not less than $150,000. The proposed Rule generally provides the relief granted by the Commission in individualsection 74 rulings, but goes substantially further in that it does not require that the thresholds referred to in the previous sentence be satisfied for the relief underthe proposed Rule to be available.
Summary of Proposed Rule
Subsection 2.1(1) of the proposed Rule provides relief from the prospectus requirements of the Act for the distribution of securities to a managed account. Thedistribution must either be a distribution from treasury or a "control person distribution" (a trade described in clause (c) of the definition of "distribution" insubsection 1(1) of the Act). Subsection 2.1(2) provides that the exemption in subsection 2.1(1) is not available either for the distribution of securities of a mutualfund or non-redeemable investment fund or, if an offering memorandum is delivered in connection with the distribution, unless the managed account is given acontractual right of action. The requirement to provide a contractual right of action will not apply if the distribution to the managed account is made inaccordance with the terms of proposed Rule 71-501 International Offerings By Private Placement in Ontario. Proposed Rule 71-501 will continue the reliefavailable under the Rule entitled In the Matter of Certain International Offerings by Private Placement in Ontario (1997), 20 OSCB 1219 (formerly a BlanketRuling) and will exempt a seller of securities from the requirement to provide a contractual right of action in the circumstances contemplated in that rule,including the insertion of appropriate legends in the offering memorandum.
Subsection 2.2 of the proposed Rule provides that a managed account may trade a security acquired by a managed account under the exemption contained insubsection 2.1(1) or from another managed account in the circumstance described in clause (iv) below only if (i) the first trade is made under a prospectus forwhich a receipt has been obtained from the Director, (ii) the first trade is made under an exemption in Ontario securities law from section 53 of the Act, (iii)certain conditions are satisfied, including that the hold period (as defined in the proposed Rule) has elapsed from the later of the date of the acquisition of thesecurity acquired under the exemption by the managed account first purchasing the security and the date the issuer of the security became a reporting issuer, or(iv) the first trade is made between managed accounts managed by the same portfolio adviser. The reference in clause (iii) to the managed account firstpurchasing the security makes it clear that a managed account subsequently purchasing the securities can tack on the period the securities have been held byprevious managed accounts for the purposes of determining whether the hold period has elapsed.
Subsection 2.3 of the proposed Rule provides that a managed account may trade an underlying security acquired directly or indirectly as a result of acquiringsecurities under the exemption in subsection 2.1(1) or from another managed account in the circumstances described in clause (iv) above or acquired in thecircumstances described in clause (iv) below only if (i) the first trade is made under a prospectus for which a receipt has been obtained from the Director, (ii) thefirst trade is made under an exemption in Ontario securities law from section 53 of the Act, (iii) certain conditions are satisfied, including that the hold period (asdefined in the proposed Rule) has elapsed from the later of the date of the acquisition of the security acquired under the exemption by the managed account firstpurchasing the security and the date the issuer of the underlying security became a reporting issuer, or (iv) the first trade is made between managed accountsmanaged by the same portfolio adviser. Section 2.3 allows for the "tacking" of hold periods based on the period of time the security acquired under theexemption in subsection 2.1(1) has been held, but also prevents a conversion or exchange under clause 72(1)(f)(iii) and an exit from the "closed system" undersubsection 72(5).
First trade relief for trades outside Ontario has generally been contained in section 74 rulings of this nature issued by the Commission. The Commission hasamended proposed Rule 72-501 Prospectus Exemption For First Trade in Certain Securities Over a Market Outside Ontario (1997), 20 OSCB 2053 to providefirst trade relief outside Ontario on the conditions set out in that proposed Rule for securities acquired in a distribution exempt from section 53 of the Act orunder a provision in a rule that prohibits a trade of the security except on certain conditions. As a result of the proposed amendment, securities acquired undersection 2.1, 2.2 or 2.3, for the purposes of Ontario securities law, can be traded outside Ontario if the conditions in proposed Rule 72-501 are satisfied.
Section 2.4 of the proposed Rule provides relief from the registration requirements of the Act for trades between managed accounts.
Finally, section 2.5 of the proposed Rule requires certain reports to be filed and fees to be paid in connection with certain trades referred to in the proposed Rule.
The Commission specifically invites comment on the matters discussed below. Interested parties are also invited to comment on whether any alternatives notidentified in this Notice should be considered instead of the approach described in this Notice and reflected in the proposed Rule.
Definition of Portfolio Adviser
Relief has historically been granted to advisers registered under the Act in the category of portfolio managers. Since the ruling granted In the Matter of Wellcomeplc and Wood Gundy Inc. (1992), 15 OSCB 3647, relief has also been extended to brokers or investment dealers exempted from registration as an adviser undersubsection 148(1) of the Regulation. The rationale for this extension is that, to the extent that brokers and investment dealers exercise the same functions asportfolio managers and are subject to by-laws of The Toronto Stock Exchange or Investment Dealers' Association of Canada that govern their activities andimpose standards and conditions on them that are considered equivalent to the requirements and conditions of registration for portfolio managers, it appearsappropriate for relief to be granted to them.
The Commission considered restricting the exemption in the proposed Rule to those persons or companies registered as a portfolio manager but decided toextend the exemption to those persons or companies exempt from registration under subsection 148(1) provided that those persons or companies are not exemptfrom the by-laws or regulations of The Toronto Stock Exchange or the Investment Dealers' Association of Canada referred to in subsection 148(1). In extendingthe exemption, the Commission took note of the fact that the by-laws of The Toronto Stock Exchange and the regulations of The Investment Dealers'Association of Canada contain provisions similar to section 118 of the Act (subsection 8.34(14) of The Toronto Stock Exchange By-laws and section 1300.16 ofthe Regulation of the Investment Dealers' Association of Canada). The Commission also noted that those persons or companies will be subject to proposed Rule31-505 Conditions of Registration (1996), 19 OSCB 4773, which incorporates sections 221 and 222 of the Regulation.
Comment is sought on the appropriateness of the definition of portfolio adviser under the proposed Rule.
Imposition of Threshold Amounts as a Condition to the Granting of the Exemption
As discussed above, rulings granted by the Commission for specific issuances of securities require that the portfolio adviser purchase securities in amounts ofover $150,000 and that the managed account have assets of over $150,000. One alternative that the Commission considered was to include both thresholds asconditions in the proposed Rule. Another alternative considered was not to impose a threshold amount on the portfolio adviser, but to require that the managedaccount have assets of over $150,000.
Ultimately, the Commission rejected the imposition of any monetary threshold on the basis that the portfolio adviser has the necessary sophistication to make aninvestment decision without a prospectus and in the context of a discretionary managed account, it is the portfolio adviser making the investment decision onbehalf of the client. Therefore, the amount invested by the portfolio adviser and the amount held in the account by the client are not relevant for purposes of theproposed Rule and no monetary thresholds need be imposed on the client or the portfolio adviser. In that regard, the Commission also took into accountsubsection 72(2) of the Act, which provides that a trust corporation registered under the Loan and Trust Corporations Act shall be deemed to be acting asprincipal when it trades as trustee or as agent for accounts fully managed by it.(1)
Portfolio Adviser Purchasing as Principal
While the proposed Rule is premised on the portfolio adviser having the necessary sophistication to make an investment decision without a prospectus andwithout the imposition of monetary thresholds, the Commission notes that under Ontario securities law, there is no prospectus exemption for a portfolio managerpurchasing as principal.
In that regard, the Commission notes that Bill 115, An Act to reduce red tape by amending or repealing certain statutes administered by the Ministry of Financeand by making complementary amendments to other statutes, proposes an amendment to clause 72(1)(a) of the Act to provide a prospectus exemption for adealer registered in the category of broker, investment dealer or securities dealer.
Scope of Exemption
The exemption in the proposed Rule is limited to distributions from treasury or "control person distributions". This limitation prevents a portfolio adviser frompurchasing as principal under a prospectus exemption and later distributing the securities to managed accounts. This approach would be consistent with theprinciple underlying section 118 of the Act which prohibits a portfolio manager from causing any investment portfolio managed by it to purchase or sell thesecurities of any issuer from or to the portfolio manager and with National Policy No. 39 Mutual Funds (applicable to prospectus qualified mutual funds), whichcurrently restricts principal transactions between portfolio managers and mutual funds.
Contractual Right of Action
Subsection 2.1(2) provides that the prospectus exemption in subsection 2.1(1) is not available if an offering memorandum is delivered in connection with thedistribution, unless the managed account is given a contractual right of action. This requirement to provide a contractual right of action will not apply if thedistribution to each of the managed accounts is made in accordance with the terms of proposed Rule 71-501 International Offerings By Private Placement inOntario.
This requirement has not previously appeared in individual rulings of this type granted by the Commission. In determining whether the requirement to provide acontractual right of action should be a condition to the proposed Rule, the Commission considered two arguments. First, if the rationale for eliminating themonetary thresholds is that the portfolio adviser is a sophisticated investor like those in clause 72(1)(a) of the Act, then the requirement to provide a contractualright of action should not be imposed since one is not required to be provided where reliance is placed on the exemption in clause 72(1)(a). The opposingargument is that a contractual right of action should be required to be provided to managed accounts because it is still the accounts that are purchasing asprincipal and they should not be negatively impacted as compared to a purchaser purchasing under clause 72(1)(d) because the investment decision is being madeby a portfolio adviser. Ultimately, the Commission preferred the second argument and included the requirement for a contractual right of action in the proposedRule in order to ensure consistency of treatment as between investors acquiring securities in managed accounts and investors acquiring securities directly underprivate placements.
The proposed Rule makes it clear that the contractual right of action must be provided to or for the benefit of the managed account and not the portfolio adviserdespite the fact that the managed account is relying on a portfolio adviser to make the investment decision, on the basis that the right of action should be affordedto the party that would actually suffer damages in the event of a misrepresentation in the offering memorandum.
The Commission is considering an amendment to paragraph (b) of the definition of "contractual right of action" in Rule 14-501 Definitions to, among otherthings, make the contractual right of action available against the seller of the securities, whether it be the issuer, selling securityholder or both. The Commission isalso considering extending the period for exercising the contractual right of action.
Comment is sought on the appropriateness of imposing a contractual right of action.
Future-Oriented Financial Information
The Commission considered whether proposed National Instrument 52-101 Future-Oriented Financial Information (the successor to National Policy StatementNo. 48 Future-Oriented Financial Information ("NP48")) should apply to an offering memorandum used in connection with a distribution under the proposedRule. The Commission determined that it should not. Given that the relief in the proposed Rule is premised on the portfolio adviser being a sophisticatedinvestor, the Commission felt that the portfolio advisor did not need the protection provided by proposed National Instrument 52-101 in making the investmentdecision on behalf of the managed account. Providing this relief is consistent with waivers from the provisions of NP48 respecting the use of future-orientedfinancial information that have been provided in the past. The Commission notes that if the future-oriented financial information contains a misrepresentation,than the managed account will have a contractual right of action.
Comment is sought on the appropriateness of not having National Instrument 52-101 apply when the exemption in the proposed Rule is relied upon.
First Trades Between Managed Accounts
Rulings granted by the Commission allowed for first trades between managed accounts managed by the same portfolio adviser, provided that each was amanaged account managed by the portfolio adviser at the time of the initial purchase of the securities and participated in the initial purchase. The proposed Ruledoes not require that the managed account have been a managed account at the time of the initial purchase and participated in the initial purchase. This changewas made because of the removal of the restriction that the managed account have assets of at least $150,000. If reliance is being placed on the portfoliomanager in making the investment decision, then it is not necessary to require that the managed account have been a managed account at the time of the initialpurchase and participated in the initial purchase.
Comment is sought on the appropriateness of removing this requirement.
The limitation in the exemption in section 2.1 to distributions from treasury or "control person distributions" does not allow a managed account to tradesecurities to a managed account of another portfolio adviser unless a prospectus has been receipted or the requisite hold periods have elapsed. The Commissioninvites comments on this restriction.
Impact on Public Offerings and Retail Investors
The proposed Rule would effectively enable issuers to offer their securities on an exempt basis to managed account clients. The Commission seeks comment onthe market impact of the proposed Rule. Does the proposed Rule adequately address any investor protection issues that may arise as a result of lessening some ofthe restrictions in this area?
Authority for the Proposed Rule
The following sections of the Act provide the Commission with authority to make the proposed Rule. Paragraph 143(1)8 of the Act authorizes the Commissionto make rules that, among other things, provide for exemptions from the registration requirements of the Act. Paragraph 143(1)11 of the Act authorizes theCommission to make rules regulating the listing or trading of publicly traded securities including requiring reporting of trades and quotations. Paragraph143(1)13 of the Act authorizes the Commission to make rules regulating trading or advising in securities to prevent trading or advising that is fraudulent,manipulative, deceptive or unfairly detrimental to investors. Paragraph 143(1)20 of the Act authorizes the Commission to make rules that, among other things,provide for exemptions from the prospectus requirements of the Act. Paragraph 143(1)43 authorizes the Commission to make rules prescribing the fees payableto the Commission including those for filing and trades in securities.
Alternatives Considered
The alternative to the proposed Rule was not to promulgate a rule of general application but, rather, for the Commission to continue to deal with applications fordiscretionary relief on a case-by-case basis. In the interests of market efficiency as well as operational efficiency in terms of the deployment of staff resources atthe Commission, the Commission has chosen to proceed with the proposed Rule. If the proposed Rule is enacted, all market participants that are able to satisfythe conditions of the proposed Rule will be able to rely on the relief afforded under the proposed Rule without the cost and administrative inconvenience ofhaving to apply for individual rulings and orders from the Commission.
Unpublished Materials
In proposing this Rule, the Commission has not relied on any significant unpublished study, report or other material.
Anticipated Costs and Benefits
Generally, the costs imposed by the proposed Rule result from the Rule mandating reporting requirements and filing fees for sellers of securities under the Rule.
The benefit provided by the proposed Rule to market participants is the ability to trade securities in the circumstances contemplated in the proposed Rule whereprospectus exemptions are not otherwise available and without the need to file a specific application for relief.
The Commission is of the view that the benefits of the proposed Rule justify the costs.
Comments
Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by September 29, 1997 will be considered.
Submissions should be made in duplicate to:
Daniel P. Iggers, SecretaryOntario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario
M5H 3S8
A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As the Securities Act requires that asummary of written comments received during the comment period be published, confidentiality of submissions received cannot be maintained.
Questions may be referred to:Susan Wolburgh Jenah
Filings Team Manager,
Market Operations
Ontario Securities Commission
(416) 593-8245
Proposed Rule
The text of the proposed Rule follows, together with footnotes that are not part of the proposed Rule but have been included to provide background andexplanation.
DATED: June 27, 1997.
PROSPECTUS EXEMPTION FOR
DISTRIBUTIONS OF SECURITIES TO PORTFOLIO ADVISERS
ON BEHALF OF FULLY MANAGED ACCOUNTS
TABLE OF CONTENTS
1.1 Definitions
1.2 Interpretation
PART 2 DISTRIBUTION OF SECURITIES TO PORTFOLIO ADVISERS ON BEHALF OF MANAGED ACCOUNTS
2.1 Prospectus Exemption
2.2 Restriction on First Trade in Securities
2.3 Restrictions on First Trade in an Underlying Security
2.4 Registration Exemption for Certain First Trades
2.5 Filing Requirements and Payment of Fees
PROSPECTUS EXEMPTION FOR
DISTRIBUTIONS OF SECURITIES TO PORTFOLIO ADVISERS
ON BEHALF OF FULLY MANAGED ACCOUNTS
PART 1 DEFINITIONS AND INTERPRETATION(2)
1.1 Definitions - In this Rule
"hold period" means that period of either six, 12 or 18 months that would be applicable to a security, in the case of section 2.2, or an underlying security, in thecase of section 2.3, if the security or underlying security had been acquired under an exemption referred to in subsection 72(4) of the Act;
"managed account" means an investment portfolio account of a client under which the portfolio adviser to the account makes all investment decisions for theaccount and has absolute discretion to trade in securities of the account without requiring the client's express consent to a transaction;
"portfolio adviser" means
(a) a portfolio manager; or
(b) a broker(3) or investment dealer(4) exempted from registration as an adviser under subsection 148(1) of the Regulation if that broker or investment dealer isnot exempt from the by-laws or regulations of The Toronto Stock Exchange or the Investment Dealers' Association of Canada referred to in that subsection(5),(6);and
"underlying security" means
(a) a security that is issued or transferred in accordance with the terms of a security acquired under the exemption in subsection 2.1(1); or
(b) any other security issued or transferred as a result of the conversion or exchange, directly or indirectly, of the first security referred to in clause (a) or asecurity referred to in this clause.(7)
1.2 Interpretation - The term "special relationship", when used in reference to a person or company in a special relationship with a reporting issuer, shall beinterpreted in accordance with subsection 76(5) of the Act.
PART 2 DISTRIBUTION OF SECURITIES TO PORTFOLIO ADVISERS ON BEHALF OF MANAGED ACCOUNTS
2.1 Prospectus Exemption(8)
(1) Section 53 of the Act does not apply to a distribution of securities to a managed account if
(a) the securities being distributed are securities that have not previously been issued, or
(b) the distribution is a control person distribution.(9)
(2) The exemption contained in subsection (1) is not available
(a) for the distribution of securities of a mutual fund or non-redeemable investment fund;(10)
or
(b) if an offering memorandum(11) is delivered in connection with the distribution, unless the managed account is given a contractual right of action(12) and thecontractual right of action is described in the offering memorandum.(13),(14)
(3) The contractual right of action referred to in paragraph 2.1(2)(b) may be made subject to defences equivalent to defences available under subsection 130(2)of the Act.
2.2 Restriction on First Trade in Securities - A managed account may trade a security acquired by it under the exemption contained in subsection 2.1(1) orfrom another managed account in the circumstances described in paragraph (d) only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from the Director;
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;
(c) if
(i) at the time of the trade, the issuer of the security is a reporting issuer,
(ii) in the case of a managed account that is in a special relationship with the reporting issuer, the managed account has reasonable grounds to believe that thereporting issuer(15) is not in default under the Act or the regulations,
(iii) the hold period has elapsed from the later of the date of the acquisition of the security acquired under the exemption in subsection 2.1(1) by the managedaccount first purchasing the security(16) and the date the issuer of the security became a reporting issuer, and
(iv) no unusual effort is made to prepare the market or to create a demand for the security and no extraordinary commission or consideration is paid for thetrade; or
(d) if the first trade is made between managed accounts managed by the same portfolio adviser(17),(18).
2.3 Restrictions on First Trade in an Underlying Security(19) - A managed account may trade an underlying security acquired by it directly or indirectly as aresult of acquiring securities under the exemption in subsection 2.1(1), or from another managed account in the circumstances described in paragraph 2.2(1)(d)or in the circumstances described in paragraph (d) only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from the Director;
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;
(c) if
(i) at the time of the trade, the issuer of the underlying security is a reporting issuer,
(ii) in the case of a managed account that is in a special relationship with the reporting issuer, the managed account has reasonable grounds to believe that thereporting issuer is not in default under the Act or the regulations,
(iii) the hold period has elapsed from the later of the date of the acquisition of the security acquired under the exemption in subsection 2.1(1) by the managedaccount first purchasing the security and the date the issuer of the underlying security became a reporting issuer, and
(iv) no unusual effort is made to prepare the market or create a demand for the security and no extraordinary commission or consideration is paid for the trade;or
(d) if the first trade is made between managed accounts managed by the same portfolio adviser.
2.4 Registration Exemption for Certain First Trades - Section 25 of the Act does not apply to a trade described in paragraph 2.2(d) or 2.3(d).(20)
2.5 Filing Requirements and Payment of Fees
(1) Within 10 days following a trade in reliance on the exemption in subsection 2.1(1), the seller of the securities shall file a report for the trade prepared inaccordance with Form 20 to the Regulation or any form that replaces that Form, and concurrently with the filing of the report pay the fee that would be payableunder the regulations for the filing of that Form or any replacement form(21).
(2) Within 10 days following a trade referred to in paragraph 2.2(c) or 2.3(c), the portfolio adviser, on behalf of the selling managed account, shall file a reportfor the trade prepared in accordance with Form 21 to the Regulation or any form that replaces that Form, and concurrently with the filing of the report pay thefee that would be payable under the regulations for the filing of that Form(22) or any replacement form.
(3) Within 10 days following a trade referred to in paragraph 2.2(d) or 2.3(d), the portfolio adviser, on behalf of the selling managed account, shall file a reportfor the trade that includes substantially the same information as is required in a report prepared in accordance with Form 20 to the Regulation or any form thatreplaces that Form, and concurrently with the filing of the report pay the minimum fee that would be payable under the regulations for the filing of that Form orany replacement form.(23)
Footnotes
1. This provision when read together with subclause 72(1)(a)(ii) of the Act has the effect of exempting all distributions to accounts managed by a trustcompany, regardless of the acquisition cost of the securities. The first predecessor to the current subsection 72(2) of the Act appeared in the SecuritiesAmendment Act, 1971, S.O. 1971, c.31, s.13(1) and provided that: "For the purposes of subsection 1, a trust company registered under The Loan and TrustCorporations Act shall be deemed to be acting as principal when it trades as trustee for accounts fully managed by it." This amendment was the result ofrecommendations made in the Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors by BusinessCombinations and Private Placements (February, 1970, Department of Financial and Commercial Affairs; the "Merger Report"). There was no discussion in theMerger Report as to why trust companies should be treated differently under the legislation than other institutional or exempt purchasers. In 1978, thepredecessor to subsection 72(2) was further amended to deem a trust company to be acting as principal not only when trading as trustee but also when trading asagent for accounts fully managed by it (see The Securities Act, 1978, c.47, ss. 34(3) and 71(2)). The trust company exemption and the deeming provision havenot been amended since 1978. The proposed Rule extends to portfolio advisers the same treatment afforded to trust companies under the Act.
2. A proposed general definition rule, Rule 14-501 Definitions, has been adopted by the Commission, but has not yet come into force. It contains definitions ofcertain terms used in more than one rule. Rule 14-501 Definitions also provides, among other things, that terms used in a rule and defined in section 1 of theSecurities Act or subsection 1(2) of the Regulation will have the respective meaning given to them in the Securities Act or Regulation, as appropriate.
3. The term "broker" is defined in Rule 14-501 Definitions as "a person or company that is registered under the Act in the category of broker".
4. The term "investment dealer" is defined in Rule 14-501 Definitions as "a person or company that is registered under the Act in the category of investmentdealer".
5. The term "Regulation" is defined in Rule 14-501 Definitions. The definition is "'Regulation' means Regulation 1015 of the Revised Regulations of Ontario,1990, as amended."
6. The Rule uses the term "portfolio adviser" instead of "portfolio manager" as the term is broader than that of "portfolio manager" in that it also includescertain persons or companies exempt from registration.
7. The concept of an "underlying security" appears in section 2.3. See footnote 18 for an explanation of how that section operates.
8. Section 74 rulings previously issued by the Commission required as a condition to granting prospectus relief that if an account (referred to as a "specifiedmanaged account") purchased securities with an aggregate acquisition cost of less than $150,000
(i) the aggregate acquisition cost of the securities to all managed accounts managed by the portfolio adviser of the specified managed account would not be lessthan $150,000, and
(ii) each specified managed account managed by the portfolio adviser would, at the time of purchase of the securities, hold assets having an aggregate net assetvalue or an aggregate acquisition cost of not less than $150,000.
The Commission has decided to eliminate the conditions referred to in clauses (i) and (ii) on the basis that the portfolio adviser has the necessary sophistication tomake an investment decision without a prospectus and that in the context of a discretionary managed account, it is the portfolio adviser making the investmentdecision on behalf of the client. Therefore, the amount invested by the portfolio adviser and the amount held in the account by the client are not relevant forpurposes of the proposed Rule and no monetary thresholds need be imposed on the client or the portfolio adviser.
9. The restrictions in paragraphs (a) and (b) ensure that the proposed Rule can only be used to distribute treasury securities or securities held by a controlperson. The proposed Rule cannot be used by a portfolio adviser that purchases securities for its own account under a prospectus exemption and later wants tosell these to managed accounts. It can also not be used by the managed accounts of one portfolio adviser to sell to the managed accounts of another portfolioadviser. The term "control person distribution" is defined in Rule 14-501 Definitions as meaning a trade described in clause (c) of the definition of "distribution"in subsection 1(1) of the Act.
10. Paragraph (2)(a) provides that the Rule may not be relied on for the distribution of securities of a mutual fund or non-redeemable investment fund as theCommission is of the view that these types of securities should not be sold to or by portfolio advisers for allocation to accounts under the conditions contained inthis Rule, but sold by way of prospectus or prospectus exemption otherwise available under Ontario securities law. The Commission contemplates that separaterelief would be necessary to allow a portfolio manager to sell securities of "pooled funds" to accounts managed by it. That relief would likely contain differentrestrictive conditions than the conditions in this Rule.
It is contemplated that Rule 14-501 Definitions will be amended to define the term "non-redeemable investment fund" for the purposes of the Act, the regulationsand the rules. The contemplated definition is "an issuer
(a) whose primary purpose is to invest money provided by its securityholders;
(b) substantially all of the investments of which, other than cash, are in securities, derivatives, contracts or financial instruments;
(c) that does not invest for the purpose of exercising effective control, seeking to exercise effective control, or being actively involved in the management of theissuers in which it invests, other than other mutual funds or non-redeemable investment funds; and
(d) that is not a mutual fund".
11. The term "offering memorandum" is defined in Rule 14-501 Definitions. The definition is "a document purporting to describe the business and affairs of anissuer that has been prepared primarily for delivery to and review by a prospective purchaser so as to assist the prospective purchaser to make an investmentdecision for a security being sold in a distribution to which section 53 of the Act would apply but for the availability of one or more of the exemptions containedin clause 72(1)(c), (d) or (p) of the Act but does not include a document setting out current information about an issuer for the benefit of a prospective purchaserfamiliar with the issuer through prior investment or business contacts". This definition will be amended to also refer to this Rule.
12. The term "contractual right of action" is defined in Rule 14-501 Definitions. The definition is "contractual right of action" means a right of action, against aperson or company, for rescission or damages that
(a) is available to an investor to whom an offering memorandum containing a misrepresentation is delivered by or on behalf of the seller of securities referred toin the memorandum,
(b) is exercisable on notice given to the person or company against whom the investor has the right of action not later than ninety days after payment is made forthe securities or after the initial payment, if a payment subsequent to the initial payment is made under a contractual commitment assumed before, or at the sametime as, the initial payment,
(c) reasonably corresponds to the rights provided in section 130 of the Act applicable to a prospectus, and
(d) is in addition to any other right or remedy available at law to the investor.
The requirement to provide a contractual right of action has been added in order to ensure consistency of treatment as between investors acquiring securities inmanaged accounts and investors acquiring securities directly under private placements. The Commission is considering an amendment to paragraph (b) to makethe contractual right of action available against the seller of the securities, whether it be the issuer, selling securityholder or both. The Commission is alsoconsidering extending the period for exercising the contractual right of action.
13. Proposed Rule 71-501 International Offerings By Private Placement In Ontario, which will replace the Rule of the Commission In the Matter of CertainInternational Offerings By Private Placement In Ontario (1997), 20 OSCB 1219, will provide that the contractual right of action requirement in this subsectionwill not apply if the offering is part of an international offering by a foreign issuer and the distribution is made in reliance on the proposed Rule.
14. Proposed National Instrument 52-101 Future-Oriented Financial Information will not apply to offering memoranda used under this Rule.
15. The words "in the case of a managed account that is in a special relationship with the reporting issuer, the managed account has reasonable grounds tobelieve that the reporting issuer" add the gloss in section 21 of the Regulation.
16. Managed accounts purchasing under the exemption in paragraph (d) can tack on the period the securities have been held by previous managed accounts forthe purposes of determining whether the hold period has elapsed.
17. Section 74 rulings previously issued by the Commission required as a condition to relief for trades between managed accounts that at the time of the firsttrade the purchasing managed account hold securities having an aggregate net value or aggregate acquisition cost of not less than $150,000. For the same reasonas described in note 7, the monetary threshold has been eliminated.
18. First trade relief for trades outside Ontario has generally been contained in section 74 rulings of this nature issued by the Commission. The Commission hasamended proposed Rule 72-501 Prospectus Exemption For First Trade in Certain Securities Over a Market Outside Ontario (1996), 19 OSCB 2954 to providefirst trade relief outside Ontario on the conditions set out in that proposed Rule for securities acquired in a distribution exempt from section 53 of the Act orunder a provision in a rule that prohibits a trade of the security except on certain conditions. The amended proposed Rule has been published at (1997), 20OSCB 2053. As a result of the proposed amendment, securities acquired under section 2.1, 2.2 or 2.3 can, for the purposes of Ontario securities law, be tradedoutside Ontario if the conditions in proposed Rule 72-501 are satisfied.
19. This section reflects section 23 of the Regulation and the Rule In the Matter of Certain Proposed Amendments (1997), 20 OSCB 1220 and In the Matterof Trades by Issuers upon Exercise of Certain Conversions or Exchange Rights (1997), 20 OSCB 1218. It prevents a conversion or exchange under subsection72(1)(f)(iii) and an exit from the "closed system" under subsection 72(5). However, it allows a managed account to "tack" on the period of time it or anothermanaged account has held a convertible security for hold period purposes. This section does not affect a trade by a "control person" as that trade is a distributionfor purposes of the Act and therefore subject to the prospectus requirements and prospectus exemptions in its own right.
20. Registration relief is provided for trades between managed accounts in the event that the portfolio manager is not registered as a dealer or a registrationexemption is otherwise not available.
21. Section 22 of Schedule 1 to the Regulations sets out the fees payable on the filing of a Form 20.
22. Section 25 of Schedule 1 to the Regulations requires a fee of $100.00 on the filing of a Form 21.
23. This is a reference to the fee of $100.00 that is currently required to be paid under the section 74 rulings granted by the Commission.