Final National Instrument 81-105 (effective May 1, 1998)
Final National Instrument 81-105 (effective May 1, 1998)
NOTICE OF RULE AND POLICY UNDER
THE SECURITIES ACT
NATIONAL INSTRUMENT 81-105
AND COMPANION POLICY 81-105CP
MUTUAL FUND SALES PRACTICES
AND NOTICE OF REVOCATION OF
CANADIAN SECURITIES ADMINISTRATORS NOTICES
Notice of Rule
The Commission has, under section 143 of the Securities Act (the "Act"), made National Instrument 81-105 Mutual Fund Sales Practices (the "NationalInstrument") as a Rule under the Act, and has made Companion Policy 81-105CP Mutual Fund Sales Practices (the "Companion Policy") as a Policy under theAct.
The National Instrument and Companion Policy are both initiatives of the Canadian Securities Administrators (the "CSA"). The National Instrument has been, oris expected to be, adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario and Nova Scotia, a Commission regulation in Saskatchewan, and apolicy in all other jurisdictions represented by the CSA. The Companion Policy has been, or is expected to be, implemented as a policy in all of the jurisdictionsrepresented by the CSA.
The National Instrument and the material required by the Act to be delivered to the Minister of Finance were delivered on January 28, 1998. If the Minister doesnot approve the National Instrument, reject the National Instrument or return it to the Commission for further consideration by March 30, 1998, or if theMinister approves the National Instrument, the National Instrument will come into force, pursuant to section 10.1 of the National Instrument, on May 1, 1998.The Companion Policy will come into force on the date that the National Instrument comes into force.
The CSA published drafts of the National Instrument (the "Proposed National Instrument") and Companion Policy (the "Proposed Companion Policy") in July1997(1). The Proposed National Instrument and the Proposed Companion Policy were based upon and, in Ontario, amended and replaced proposed Rule 81-503Sales Practices Applicable to the Sale of Mutual Fund Securities and proposed Companion Policy 81-503CP which were released for comment by theCommission on August 30, 1996(2).
During the comment period on the proposed Ontario rule and policy, the Commission received submissions on these instruments from a broad range ofcommenters. The Notice of the Proposed National Instrument and the Proposed Companion Policy (the "July Ontario Notice") contained, in Ontario, a summaryof the comments received and the response of the CSA to those comments. During the comment period on the Proposed National Instrument and the ProposedCompanion Policy, which ended on September 30, 1997, the CSA received further submissions. The comments provided in these submissions were consideredand the final versions of the National Instrument and Companion Policy being published with this Notice reflect the decisions of the CSA in this regard.
Appendix A of this Notice lists the commenters on the Proposed National Instrument and Proposed Companion Policy and Appendix B provides a summary ofthe comments received and the response of the CSA.
Revocation of CSA Notices
Effective the date that the National Instrument comes into force, two CSA Notices entitled "Mutual Fund Sales Incentives" (CSA #93/1) and "Mutual FundSales Incentives - Point of Sale Disclosure Statement" (CSA #95/2) will be revoked. Those Notices deal with some of the same subject matter as the NationalInstrument and are superseded by the National Instrument.
Substance and Purpose of National Instrument
The National Instrument regulates the sales and business practices followed both by managers and principal distributors of publicly offered mutual funds, and byregistered dealers and their sales representatives in connection with the distribution of securities of publicly offered mutual funds. The National Instrument makesmandatory, on an industry-wide and on a national basis, restrictions on certain sales and business practices followed by participants in the mutual fund industry inCanada.
For additional information concerning the background of the National Instrument, reference should be made to the July Ontario Notice.
Substance and Purpose of Companion Policy
The Companion Policy emphasizes that the National Instrument establishes only minimum standards of conduct for industry participants. The Companion Policyis designed to provide a regulatory background and context for the National Instrument and to outline the CSA's general regulatory purpose in making theNational Instrument. The Companion Policy also provides guidance as to the CSA's interpretation of some provisions of the National Instrument and bringscertain matters to the attention of participants in the mutual fund industry.
Summary of Changes to National Instrument from Proposed National Instrument
This section describes changes made in the National Instrument from the Proposed National Instrument. For a detailed summary of the contents of the ProposedNational Instrument, reference should be made to the July Ontario Notice. As the changes to the National Instrument from the Proposed National Instrument arenot material, the National Instrument is not subject to a further comment period.
Section 2.3
Changes from the Proposed National Instrument
Section 2.3 of the Proposed National Instrument has been deleted from the National Instrument. Section 2.4 of the Companion Policy sets out the CSA's viewsin connection with indirect actions taken by industry participants to circumvent direct prohibitions under the Instrument. The CSA have made this change assection 2.3 of the Proposed National Instrument was viewed as a re-statement of existing principles of law and, as such, not necessary to state in rules of thevarious members of the CSA. The CSA have articulated their views in the Companion Policy that an attempt by an industry participant to effect indirectly anyaction that it is directly prohibited from doing under the National Instrument would be seen as a breach of the National Instrument.
Section 3.2
Section 3.2 of the National Instrument permits the payment of trailing commissions, subject to certain conditions contained in paragraphs 3.2(1)(a) through (d).Paragraph 3.2(1)(d) provides, among other things, that the rate of a trailing commission may not increase based upon increases in the amount or value ofsecurities of a mutual fund sold, or held in accounts of clients of a participating dealer. This paragraph would prevent mutual fund organizations from decliningto pay trailing commissions to a participating dealer if the amount or value of securities held in accounts of the participating dealer or its representatives werelower than a specified threshold.
Changes from the Proposed National Instrument
The CSA have added subsection 3.2(3) to the National Instrument in order to provide a limited transitional exception to the general provisions of section 3.2 inrespect of minimum asset thresholds. Subsection 3.2(3) permits a member of the organization of a mutual fund to decline to pay a trailing commission inconnection with securities of the mutual fund held in client accounts of a participating dealer in certain circumstances; namely, that the non-payment be consistentwith a policy concerning minimum asset thresholds established and followed by the mutual fund organization on July 1, 1997, and that the securities with respectto which no trailing commission is paid must have been acquired by the client of the dealer before the National Instrument came into force.
The CSA have added subsection 3.2(3) in order to ensure that the National Instrument does not retroactively disrupt existing arrangements between mutual fundorganizations and participating dealers respecting securities acquired before the National Instrument came into force.
Section 4.2
Subsection 4.2(1) of the National Instrument prohibits a principal distributor of proprietary funds that also acts as a participating dealer in the distribution of thirdparty sponsored mutual funds from paying incentives to its representatives that could cause the representatives to favour the proprietary funds over the thirdparty funds.
Changes from the Proposed National Instrument
The CSA have added subsection 4.2(2) to the National Instrument in order to clarify the operation of subsection 4.2(1). Subsection 4.2(2) sets out a limitedexception to subsection (1), in order to permit the compensation paid to a representative of a principal distributor to reflect commissions received by the principaldistributor from members of the organization of which it is a member, as well as from members of the organization of other mutual funds, provided that twoconditions are satisfied.
First, paragraph (a) requires that the compensation paid to a representative under the exception, as a percentage of the commission paid to the principaldistributor, must be the same for all mutual fund families, including the mutual fund family of the principal distributor. Second, paragraph (b) requires that thecommissions paid to the principal distributor of the mutual fund securities must not exceed the commissions provided to any other participating dealer inconnection with the distribution of those securities.
Sections 5.2 and 5.5
Section 5.2 of the National Instrument permits a member of a fund organization to provide a non-monetary benefit to a representative of a participating dealer byallowing him or her to attend a conference or seminar organized and presented by a member of the organization of a mutual fund, upon certain conditions.Section 5.5 of the National Instrument allows a mutual fund organization to pay, to a participating dealer, direct costs incurred by the participating dealer relatingto a conference or seminar that is organized and presented by the participating dealer for its representatives, upon certain conditions. Each of sections 5.2 and 5.5of the National Instrument impose a condition that the conferences or seminars to which those sections apply must be held in the geographic locations specifiedin the National Instrument.
Changes from the Proposed National Instrument
The Proposed National Instrument required that these conferences or seminars be held in Canada or the continental United States of America. Sections 5.2 and5.5 of the National Instrument have been amended to also permit these conferences or seminars to take place in a location where a portfolio adviser of the mutualfund carries on business if the primary purpose of the conference or seminar is the provision of educational information about the investments or activities of themutual fund carried on by that portfolio adviser. These amendments have been made to permit so-called portfolio manager "due diligence" conferences tocontinue to be offered or paid for by mutual fund organizations.
Section 5.4
Section 5.4 of the National Instrument permits a member of the organization of a mutual fund to pay to IFIC, the IDA, or their respective affiliates or associates,direct costs incurred by IFIC, the IDA, or their respective affiliates or associates relating to a conference or seminar organized by IFIC, the IDA, or theirrespective affiliates or associates, subject to certain conditions.
Changes from the Proposed National Instrument
The CSA have made two technical changes to section 5.4. First, the CSA have provided that section 5.4 does not override section 5.3, which permits mutualfund organizations to pay registration fees for conferences, seminars and courses. Second, the references contained in subsection 5.4(2) to IFIC and the IDAhave been extended to include their respective affiliates or associates.
Section 6.1
Section 6.1 of the National Instrument is designed to minimize the conflicts that may occur when a participating dealer acts as a broker in connection withportfolio transactions where that participating dealer has also distributed securities of that mutual fund. Subsection 6.1(3) requires that sharing of information,relating to portfolio transactions, between a member of the organization of a mutual fund and a participating dealer or a principal distributor occur through theindividuals designated by the participating dealer or principal distributor as their respective institutional representatives.
Changes from the Proposed National Instrument
The CSA have amended subsection 6.1(3) of the National Instrument to clarify that the prohibitions contained in that subsection are only directed at particulartrades. The subsection does not prevent the sharing of general information relating to, for example, trading history.
Section 7.1
Section 7.1 of the National Instrument provides that a participating dealer or its representatives may pay all or part of the redemption fees or commissions thatmay be payable by an investor in connection with a transfer from one mutual fund to another mutual fund if certain conditions are satisfied. One of theseconditions, contained in subsection 7.1(2), requires that the participating dealer or the representative, on behalf of the participating dealer, must provide theinvestor with written disclosure of both the redemption charges to which the investor will be subject in connection with the securities being acquired, and the taxconsequences of the applicable redemption, together with a description of the current redemption fees being paid by the participating dealer or the representative.
Changes from the Proposed National Instrument
Paragraphs 7.1(2)(a) and (b) have been amended to clarify that reasonable estimates of the amount of fee or commission paid by the participating dealer on theredemption, and of the redemption charges to which the investor will be subject, must be disclosed. These changes recognize that it may be impossible to providedisclosure of exact figures or amounts.
Section 7.3
Section 7.3 of the National Instrument prohibits a member of the organization of a mutual fund from making a charitable donation if the tax benefit associatedwith that donation would go to a participating dealer, an associate or affiliate of a participating dealer, or a representative of a participating dealer.
Changes from the Proposed National Instrument
Section 7.3 has been amended by the addition of subsection (2) to permit a member of the organization of a mutual fund to make charitable donations in favourof its affiliates on the basis that such intercorporate dealings generally do not raise regulatory concerns about inappropriate sales practices.
Section 8.1
Section 8.1 of the National Instrument requires that the prospectus of a mutual fund must contain complete disclosure of two categories of information containedin paragraphs (a) and (b). Paragraph (a) relates to the commissions paid, and paragraph (b) relates to the sales practices followed by the members of theorganization of the mutual fund.
Changes from the Proposed National Instrument
Paragraph 8.1(b) of the National Instrument now clarifies that a prospectus is only required to disclose the sales practices followed in connection with thedistribution of the mutual fund securities that are the subject of that prospectus.
Section 8.2
Section 8.2 of the National Instrument requires prospectus disclosure and separate written point of sale disclosure of any equity interest that may exist among amember of the organization of a mutual fund, a participating dealer, a representative of the participating dealer, or their associates.
Changes from the Proposed National Instrument
The prospectus disclosure requirements contained in subsection 8.2(1) have been amended in respect of equity interests held in a member of the organization of amutual fund that is not a reporting issuer whose securities are listed on a Canadian stock exchange. For disclosure concerning equity interests held in thosemembers, subsection 8.2(2) permits the equity interests of representatives and their associates to be expressed in aggregate, provided disclosure is also made ofany representative and his or her associates that hold more than five percent of the applicable class of securities.
Subsections 8.2(3), (4) and (5) have been added to the National Instrument for clarification purposes to replace subsection 8.2(3) of the Proposed NationalInstrument. Those subsections continue to require that a participating dealer, and the representative acting on a trade, provide a purchaser with a disclosuredocument if the participating dealer, representatives of the participating dealer or the particular representative involved in the trade (with their associates) have anequity interest in a member of the organization of the mutual fund or if a member of that organization has an equity interest in the participating dealer.
Part 10
Part 10 of the National Instrument is new, and, provides that the National Instrument will come into effect on May 1, 1998 and provides a transition period forprospectus disclosure. If a receipt has been obtained for the prospectus or simplified prospectus of a mutual fund before the date that the National Instrumentcomes into force, that prospectus or simplified prospectus is not required to comply with the disclosure requirements contained in the National Instrument. As aresult, a prospectus is not required to be amended; compliance with these specific disclosure requirements may be delayed until the next renewal of theprospectus. Issuers, of course, remain responsible for ensuring at all times that their prospectuses contain full, true and plain disclosure of all material factsrelating to the relevant securities and must comply with the existing requirements for disclosure related to sales practices and incentives.
Summary of Changes to the Companion Policy from the Proposed Companion Policy
This section describes the changes made in the Final Companion Policy from the Proposed Companion Policy. For a detailed summary of the ProposedCompanion Policy, reference should be made to the July Ontario Notice. As the changes to the Companion Policy from the Proposed Companion Policy are notmaterial, the Companion Policy is not subject to a further comment period.
Section 2.1
Section 2.1 of the Companion Policy describes the background to the National Instrument.
Changes from the Proposed Companion Policy
Subsection 2.1(2) to the Companion Policy has been added to describe the 1991 IFIC Report and the 1991 IFIC Code, the latter of which included restrictionson locations for conferences or seminars similar to those now included in the National Instrument, as well as enhanced disclosure requirements. This additionprovides additional background to the regulation of mutual fund sales practices.
Section 2.3
Section 2.3 of the Companion Policy describes the application of the National Instrument to the sales practices followed by industry participants in connectionwith the sale of securities of labour-sponsored venture capital corporations ("LSVCCs"). It clarifies that most members of the CSA, other than the securitiesregulatory authorities in Quebec, consider LSVCCs to be mutual funds and regulate them as such. Accordingly, the rules set out in the National Instrument applyto LSVCCs. In Manitoba, LSVCCs are considered not to be mutual funds; however the Manitoba Securities Commission will issue a local instrument makingLSVCCs subject to the National Instrument. However, the relevant members of the CSA will consider an application to exempt an LSVCC from the operation ofsection 2.1 of the National Instrument in order to permit the LSVCC to pay permitted sales incentives out of fund assets, on the basis that the operational andlegal structure of the LSVCC is such that it cannot comply with section 2.1 of the National Instrument.
Changes from the Proposed Companion Policy
Section 2.3 is new.
Section 2.4
Section 2.4 of the Companion Policy discusses the CSA's views on the use of indirect means to circumvent the National Instrument.
Changes from the Proposed Companion Policy
Section 2.4 of the Companion Policy has been expanded somewhat from section 4.4 of the Proposed Companion Policy to recognize that section 2.3 of theProposed National Instrument has been deleted from the National Instrument for the reasons outlined above. The substance of section 2.4 of the CompanionPolicy has not been changed from section 4.4 of the Proposed Companion Policy.
Part 5
Part 5 of the Companion Policy clarifies certain matters provided for in Part 3 of the National Instrument. Section 5.1 of the Companion Policy contains adiscussion on disclosure of the method of calculation for sales and trailing commissions and section 5.3 contains a discussion of trailing commission thresholds.
Changes from the Proposed Companion Policy
The CSA have added section 5.1 to the Companion Policy to clarify that the requirement to disclose the methods of calculation of commissions contained in Part3 of the National Instrument may be satisfied through disclosure of a general nature.
Subsections 5.3(3), (4) and (5) have been added to the Companion Policy to describe the transitional exemption provided by subsection 3.2(3) of the NationalInstrument in connection with minimum asset thresholds for payment of trailing commissions.
The CSA have added subsection 5.3(6) to the Companion Policy to describe the views of the CSA respecting internal compensation systems of participatingdealers that impose, in effect, an asset or sales threshold to be achieved by representatives in order to receive a commission paid by a mutual fund organization inrespect of mutual fund sales.
The CSA have added subsection 5.3(7) to the Companion Policy to emphasize that there is nothing in the National Instrument that requires a mutual fundorganization to pay the same rate of commission to all participating dealers selling the securities of that mutual fund's family.
Section 6.1
Section 6.1 of the Companion Policy was published as footnote 31 to the Proposed National Instrument, and has been moved into the Companion Policy. Thissection emphasizes that the National Instrument permits different payments to be made by participating dealers to their representatives for different mutual funds,provided that the difference in payments results from different commissions received by the participating dealer from the mutual fund organization.
Changes from the Proposed Companion Policy
Section 6.1 is new.
Section 7.2
Section 7.2 of the Companion Policy was published as section 6.2 of the Proposed Companion Policy. It emphasizes that section 5.1 of the National Instrumentpermits only certain "cooperative" marketing, in connection with a sales communication, investor conference or investor seminar. Section 7.2 also emphasizesthat section 5.1 of the National Instrument is not designed to enable participating dealers to recoup their general marketing costs from mutual fund organizations.
Changes from the Proposed Companion Policy
Subsection 7.2(2) has been added to the Companion Policy to clarify the position of the CSA relating to the receipts or invoices required to be provided underparagraph 5.1(c) of the National Instrument for the associated direct costs permitted to be paid by a member of the organization of a mutual fund. Subsection7.2(2) clarifies that a participating dealer need not require head office approval or dealings for these receipts and invoices and may establish procedures to dealwith these receipts or invoices at a local office level. Subsection 7.2(2) also clarifies that participating dealers may direct fund companies to pay permittedco-operative marketing monies directly to suppliers or service providers.
Subsection 7.2(3) has been added to the Companion Policy to clarify that the written disclosure required under paragraph 5.1(e) of the National Instrumentwould be satisfied if there is sufficient detail to indicate that a clearly-identified party has paid a portion of the costs of a sales communication, investorconference or investor seminar.
Section 7.3
Section 7.3 of the Companion Policy describes the views of the CSA concerning section 5.2 of the National Instrument. Subsection 7.3(2) of the CompanionPolicy provides clarification as to the position of the CSA regarding the selection of representatives of a participating dealer to attend a mutual fund sponsoredconference under section 5.2 of the National Instrument.
Changes from the Proposed Companion Policy
Subsection 7.3(2) of the Companion Policy is new. Subsection 6.3(2) of the Proposed Companion Policy, being a discussion relating to invitations for guests to amutual fund sponsored conference under section 5.2 of the National Instrument has been deleted. Subsection 7.3(2) of the Companion Policy clarifies thatsection 5.2 of the National Instrument does not prevent mutual fund organizations from organizing events that are tailored to the interests of particular categoriesof representatives and from informing participating dealers as to the nature of such events.
Section 7.5
Section 7.5 of the Companion Policy elaborates on the meaning of the word "location" used in subparagraphs 5.2(c)(iii) and 5.5(e)(iii) of the NationalInstrument. It emphasizes that those subparagraphs permit "due diligence" trips to the immediate locale where a portfolio adviser of a mutual fund carries onbusiness.
Changes from the Proposed Companion Policy
Section 7.5 of the Companion Policy is new and results from the changes made to sections 5.2 and 5.5 of the National Instrument concerning the geographiclocation for conferences and seminars permitted by those sections.
Section 8.1
Section 8.1 of the Companion Policy contains the views of the CSA on the designation of institutional representatives for the purposes of Part 6 of the NationalInstrument.
Changes from the Proposed Companion Policy
Section 8.1 of the Companion Policy was published as section 7.1 of the Proposed Companion Policy. Subsection 8.1(2) has been added to the CompanionPolicy to clarify that the CSA recognize the legitimacy of certain types of information sharing between a member of the organization of a mutual fund and aparticipating dealer or a principal distributor.
Part 9
Part 9 has been added to the Companion Policy to address several points in relation to Part 7 of the National Instrument.
Section 9.1 clarifies that the tax disclosure required to be provided under subsection 7.1(2) of the National Instrument will be satisfied by disclosure of a generalnature.
Subsection 9.2(1) clarifies that "products or services" referred to in paragraph 7.4(b) of the National Instrument includes the opening of an account.
Subsection 9.2(2) provides a discussion regarding the ambit of section 7.4 of the National Instrument, which governs tied selling practices. Subsection 9.2(2)emphasizes that section 7.4 is not intended to interfere with legitimate "relationship pricing" where a customer obtains more favourable terms or conditionsthrough the purchase of mutual fund securities. Subsection 9.2(2) clarifies that section 7.4 is directed at situations where a customer is denied services he or shewould otherwise be able to obtain, but for the fact that the customer did not purchase mutual fund securities.
Changes from the Proposed Companion Policy
Part 9 is new.
Section 10.1
Section 10.1 of the Companion Policy discusses the disclosure required to be provided in a prospectus of a mutual fund in connection with equity interests heldby participating dealers and their representatives in members of the organization of the mutual fund. It reminds industry participants that "equity interest" isdefined in the National Instrument and has a different meaning depending on whether the relevant member of the organization of a mutual fund is a reportingissuer whose securities are listed on a Canadian stock exchange or not. Section 10.1 also indicates what action the CSA expect mutual funds to take inattempting to compile the required information.
Changes from the Proposed Companion Policy
Section 10.1 is new.
National Instrument and Companion Policy
The texts of the National Instrument and Companion Policy follow.
Text of Revocation of CSA Notices
The text of the revocation of the CSA Notices described in this Notice is as follows:
"The CSA Notices entitled "Mutual Fund Sales Incentives" (CSA #93/1) and "Mutual Fund Sales Incentives - Point of Sale Disclosure Statement" (CSA #95/2)are revoked effective the date that National Instrument 81-105 Mutual Fund Sales Practices comes into force."
DATED: February 6, 1998.
APPENDIX A
LIST OF COMMENTERS ON
PROPOSED NATIONAL INSTRUMENT 81-105 AND
COMPANION POLICY 81-105CP
1. AGF Management Limited
2. The Association of Labour Sponsored Investment Funds
3. Berkshire Investment Group Inc.
4. Canadian Bankers Association
5. Crocus Investment Fund
6. Dynamic Mutual Funds (letter endorsed by C.I. Mutual Funds and AGF Management Limited)
7. Fidelity Investments Canada Limited
8. Fogler, Rubinoff, on behalf of Assante Capital Management Inc., Equion Securities Canada Limited, Equion Financial Limited, Brightside Financial ServicesInc., DataPlan Securities Limited, Fenlon Financial Inc. and Loring Ward Investment Counsel Limited
9. Global Strategy Investment Funds
10. Independent Mutual Fund Dealers, being Ross Dixon Financial Services Limited, Associated Financial Planners, Balanced Planning, Brightside Financial,CMG/World Source, DPM Financial, Equion, Financial Concept Group, FPC Investments Inc., Keybase Financial Group, Money Concepts Group, The RogersGroup, Trillenium Investor Services, TWC Financial Corporation, The Investment Centre
11. Investment Dealers Association of Canada
12. The Investment Funds Institute of Canada
13. Investors Group Inc.
14. Mr. Joseph W.A. Killoran
15. Mackenzie Financial Corporation
16. Manulife Securities International Ltd.
17. Pacific Capital Management Ltd.
18. Ross Dixon Financial Services Limited
19. Scotia Securities Inc.
20. Stratégie GBS Courtier en fonds d'investissement
21. Trimark Investment Management Inc.
22. The VenGrowth Investment Fund Inc.
23. Working Opportunity Fund
APPENDIX B
SUMMARY OF COMMENTS RECEIVED ON
PROPOSED NATIONAL INSTRUMENT 81-105 AND
PROPOSED COMPANION POLICY 81-105CP AND
RESPONSE OF THE CANADIAN SECURITIES ADMINISTRATORS
- INTRODUCTION
In August 1996, the Ontario Securities Commission (the "Ontario Commission") released for public comment proposed Rule 81-503 Sales Practices Applicableto the Sale of Mutual Fund Securities (the "Ontario Draft Rule"), together with proposed Companion Policy 81-503CP (the "Ontario Draft Policy"). Both theOntario Draft Rule and the Ontario Draft Policy were replaced in July 1997 by proposed National Instrument 81-105 Mutual Fund Sales Practices (the"Proposed National Instrument") and its proposed Companion Policy 81-105CP (the "Proposed Companion Policy"). The Canadian Securities Regulators("CSA") released the Proposed National Instrument and the Proposed Companion Policy for public comment on July 25, 1997.
During the comment period on the Ontario Draft Rule and the Ontario Draft Policy, which ended on November 29, 1996, the Ontario Commission received 39submissions from 40 commenters. The Notice of the Proposed National Instrument and the Proposed Companion Policy contained, in Ontario, a summary of thecomments received on the Ontario Draft Rule and the Ontario Draft Policy and the response of the CSA to such comments (the "July Ontario Notice").(3)
During the comment period on the Proposed National Instrument and the Proposed Companion Policy, which ended on September 30, 1997, the CSA received23 submissions from 43 commenters.(4) The commenters can be grouped as follows:
Mutual Fund Distributors and
Financial Planners 23
Individuals 1
Trade Associations 4
Mutual Fund Management Companies 12
Labour Sponsored Venture
Capital Corporations 3(5)
TOTAL 43
The four trade associations listed, being The Investment Funds Institute of Canada ("IFIC"), the Investment Dealers Association of Canada (the "IDA"), theCanadian Bankers Association (the "CBA") and The Association of Labour Sponsored Investment Funds (the "LSIF Association"), each made submissions inrespect of the Proposed National Instrument and the Proposed Companion Policy on behalf of their respective members.
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; the office ofthe British Columbia Securities Commission, 1100-865 Hornby Street, Vancouver, British Columbia (604) 899-6500; the office of the Alberta SecuritiesCommission, 10025 Jasper Avenue, Edmonton, Alberta (403) 427-5201; and the office of the Commission des valeurs mobilières du Québec, Stock ExchangeTower, 800 Victoria Square, 17th Floor, Montréal, Québec.
The CSA have considered the comments received on the Proposed National Instrument and the Proposed Companion Policy in conjunction with makingNational Instrument 81-105 Mutual Fund Sales Practices (the "National Instrument") and Companion Policy 81-105CP Mutual Fund Sales Practices (the"Companion Policy"). The CSA thank all commenters for providing their comments on the Proposed National Instrument and the Proposed Companion Policy.The nature of the comments received indicates the care and thought given by industry participants to the issues addressed by the Proposed National Instrumentand the comments have been very helpful to the CSA in making the National Instrument and the Companion Policy.
The following is a summary of the comments received, together with the CSA's responses and, where applicable, the changes adopted by the CSA. As thechanges to the Proposed National Instrument and the Proposed Companion Policy were not material, the National Instrument and the Companion Policy are notsubject to a further comment period.
- GENERAL COMMENTS
Most commenters on the Proposed National Instrument and the Proposed Companion Policy commented on specific provisions in these instruments and made nocomments that applied generally.
However, each of IFIC, the CBA and the IDA commented that members were appreciative of the changes to the Ontario Draft Rule the CSA made with theProposed National Instrument. In addition, these trade associations commended the CSA for agreeing to make a national rule to regulate mutual fund salespractices in a fashion consistent with the IFIC Code and the Ontario Draft Rule. IFIC noted that the Proposed National Instrument and the Proposed CompanionPolicy were "in many ways, significantly closer" to the IFIC Code provisions and indicated its members' satisfaction with the responsiveness of the CSA to theissues raised by IFIC in connection with its comments on the Ontario Draft Rule and Ontario Draft Policy. The IDA made a similar comment, as did the CBA.
IFIC urged the CSA to proceed quickly to resolve any remaining issues with a view to adopting a final national instrument in time for the 1998 RRSP salesseason. The CBA on the other hand indicated that they would like to see further discussion on the points they raised in their comment letter prior to a finalnational instrument being adopted. Staff of the Ontario Commission and representatives of the CBA have met to discuss the CBA's comments and the CSA haveagreed to outline their views in respect of tied selling practices in the Companion Policy to provide more of a context for and explanation of section 7.4 of theNational Instrument.
As outlined in the Notice of the National Instrument and the Companion Policy, each member of the CSA has made, or expects to make, the National Instrumentas a rule or a policy in their jurisdiction (depending whether they have rule-making powers) and the Companion Policy as a policy in their jurisdiction. Subject toreceiving applicable ministerial approvals where needed, the National Instrument and the Companion Policy are expected to come into force in all jurisdictions onMay 1, 1998.
One individual commenter reiterated the comments made in his submissions on the Ontario Draft Rule and urged the CSA to ensure that there is "zero tolerance"for any "undisclosed independent advice skewing sales incentives and/or asset retention inducements". This commenter's central concern relates to his belief thatthe present "transaction/commission based" mutual fund industry "lacks the investment advice, financial planning and investment management disclosure systemsthat are needed to elevate mutual fund sellers on the scales of respect, trust and integrity that our society accords doctors, teachers and clergy". The CSA are ofthe view that by making the National Instrument and the Companion Policy, the CSA are indeed illustrating that there will be "zero tolerance" of improper salespractices in the mutual fund industry. The National Instrument and the Companion Policy, when coupled with appropriate compliance and enforcement measuresby the CSA, will be very significant in ensuring that investors' interests are at the forefront of actions of industry participants.
III. COMMENTS ON PROVISIONS OF PROPOSED NATIONAL INSTRUMENT
Part 1 - Definitions, Interpretation and Application
Section 1.1 - definition of "member of the organization"
One commenter noted, as it had in its submission on the Ontario Draft Rule, that the term "member of the organization" was not intuitively easy to comprehendand suggested it be changed. The name of the term has not been changed; the CSA are not persuaded that any of the proposed alternatives, or any other possiblealternative, is any more intuitive than "member of the organization".
Section 1.2 - Interpretation
One commenter recommended, as it had in its submission on the Ontario Draft Rule, that the Proposed National Instrument be amended to define all relevantterms in the rule, rather than cross-referring to the meaning of terms defined in other instruments. The CSA have not changed the National Instrument in thisregard; to duplicate terms defined in NP39 would make the National Instrument unwieldy and more difficult to read. The approach used is also in conformitywith the approach adopted for other national instruments.
Section 1.3 - Application
The labour sponsored venture capital corporation ("LSVCC") commenters primarily argued that the Proposed National Instrument should be amended to exemptLSVCCs from the operation of section 2.1 of the Proposed National Instrument. The LSIF Association restricted its comments to the potential effect on theLSVCC community of section 2.1 and purposefully did not address other aspects of the Proposed National Instrument, leaving it up to individual LSVCCs to socomment. The LSIF Association stated that, other than in respect of the application of section 2.1 of the Proposed National Instrument, "the fundamentalobjectives of the National Instrument, being the introduction of limitations on specific marketing and sales practices, can be fully embraced by the laboursponsored investment fund industry".
One LSVCC commenter, although its submission primarily relates to section 2.1 of the Proposed National Instrument, made submissions that the CSAconsidered to be general comments on whether the National Instrument can be properly applied to LSVCCs. The response to these comments is noted:
(1) Comment - In Ontario, Part XIV of the Regulation made under the Securities Act (Ontario) (the "LSIF Regulations"), which exempts LSVCCs from certainspecified policies and practices of the Ontario Commission as they relate to mutual funds, when coupled with certain sections of the Labour Sponsored VentureCapital Corporations Act, 1992 (Ontario) (now the Community Small Business Investment Funds Act) (the "LSIF Act") means that the Ontario Commission hasno authority to regulate the sales practices of LSVCCs. The Ontario government in making the regulations and by enacting the legislation recognized that,although LSVCCs were mutual funds, they were sufficiently specialized and different that they should not be subjected to much of the securities regulationapplicable to mutual funds.
Response - The Ontario Commission is of the view that the LSIF Regulations do not remove its ability to regulate the sales practices followed by LSVCCs andby participating dealers selling securities of LSVCCs. Nothing in the LSIF Act conflicts with the National Instrument and LSVCCs are not exempted by the LSIFRegulations from having to comply with the regulation covered by the National Instrument. In particular, the National Instrument is not regulation concerningthe "pricing, sale or redemption of securities of mutual funds"(6). Other than the securities regulatory authorities of Manitoba and Quebec, the other members ofthe CSA consider that nothing in their legislation or other regulations, exempts LSVCCs from the application of the National Instrument. The securitiesregulatory authorities in Manitoba and Quebec do not consider LSVCCs to be mutual funds in their respective jurisdictions although Manitoba intends to issue alocal instrument that makes LSVCCs in Manitoba subject to the Instrument.
(2) Comment - The Ontario Commission did not properly follow rule-making procedures in proposing that the Proposed National Instrument apply to LSVCCs.LSVCCs did not comment on the Ontario Draft Rule because they were not aware that the Ontario Draft Rule was intended to apply to LSVCCs; neither theNotice to the Ontario Draft Rule nor any provision of the Ontario Draft Rule mentioned its applicability to LSVCCs. LSVCCs were justified in believing that theOntario Draft Rule would not apply to them (despite the statements in the Ontario Draft Rule and the Notice to the Ontario Draft Rule that it applied to allpublicly offered mutual funds) due to the LSIF Regulations and by certain sections of the LSIF Act.
Response - The Ontario Commission notes that the Ontario Draft Rule clearly applied to all publicly offered mutual funds and that apart from the specificexemptions provided for in the LSIF Regulation and the application of the LSIF Act, the Ontario Commission and staff have consistently taken the position thatLSVCCs are mutual funds subject to applicable mutual fund regulation. By stating that the Ontario Draft Rule applied to publicly offered mutual funds, theOntario Commission put all such investment vehicles, including LSVCCs, on notice as to the proposed rules.
Part 2 - General
Section 2.1 - Restrictions on Payments or Provision of Benefits
The LSIF Association and the other LSVCC commenters urged the CSA to exempt LSVCCs from the application of section 2.1 which prohibits mutual fundsfrom paying out of fund assets the enumerated distribution costs. These commenters noted that the application of this section would cause severe disruption tothe operations of LSVCCs in that they would have to seek other methods of compensating participating dealers. Certain LSVCCs are "internally managed" anddo not have a third party manager or administrator that could bear these costs. These LSVCCs would find it impossible to alter their structure so as to complywith the rule. Those LSVCCs that have third party managers or administrators may find the rule equally disruptive since such managers or administrators wouldno doubt be obliged to raise management fees charged to the LSVCCs to cover the extra expense. Increasing management fees requires shareholder approval,which would take time, money and effort to seek and would not necessarily be obtained. The LSVCCs also emphasized the specialized and unique naturerecognized by the applicable provincial legislatures and their legislative purpose behind the establishment of the various LSVCC programs. Section 2.1 of theProposed National Instrument would be contrary to this legislative purpose, by, in effect, prohibiting the current legal and organizational structure for LSVCCs.
These commenters also made the comments noted under section 1.3 in connection with their objection to section 2.1 of the Proposed National Instrument.
The CSA have taken the above-noted comments into consideration and do not wish to unduly disrupt the current operations of LSVCCs. However, rather thanamending the National Instrument to provide a general exemption from section 2.1 for LSVCCs, the applicable members of the CSA that regulate LSVCCs asmutual funds, will consider granting an exemption to an LSVCC from the applicability of section 2.1, such exemption to take effect on the coming into force ofthe National Instrument. Any exemption granted will be granted on the condition that the other provisions of the National Instrument will be fully complied with.
Section 2.3 of the Companion Policy reiterates the applicability of the National Instrument to LSVCCs.
Part 3 - Permitted Compensation
Section 3.1 - Commissions
The CBA commented that the requirement to disclose the "method of calculation" of commissions should be deleted. The CBA was of the view that thisrequirement would result in disclosure of sensitive competitive information that would not be relevant information for investors. This provision was neverintended to require disclosure of the nature described by the CBA. The CSA have amended the Companion Policy in response to this comment to describe theCSA's expectations for disclosure of the method of calculation of commissions.
Section 3.2 - Trailing Commissions
The CBA made the same comment regarding disclosure of "method of calculation" of trailing commissions; the amendment to the Companion Policy describesthe CSA's expectations regarding this disclosure for trailing commissions.
Five commenters who are mutual fund managers reiterated the comments made on the Ontario Draft Rule in respect of the lack of a $100,000 asset threshold forpayment of trailing commissions as is permitted by the IFIC Code. Neither IFIC nor the IDA repeated the comments concerning this issue made in theirsubmissions on the Ontario Draft Rule.
The five commenters again urged the CSA to reconsider the decision not to permit fund companies to impose a minimum asset threshold. These commentersmade arguments similar to those made in connection with the Ontario Draft Rule. The comments made and the response of the CSA to those comments aresummarized in the July Ontario Notice.
The commenters on the Proposed National Instrument emphasized four points that are in addition to, or an expansion on, the comments made on the OntarioDraft Rule.
(1) Smaller fund companies will be most affected by the rule, as proposed, for two reasons. The total dollar cost of having to increase the amount of trailingcommissions paid out will impact smaller fund managers to a greater extent. In addition, a dealer representative tends to have smaller aggregate client accountswith a smaller fund manager and, as such, the trailing commissions paid by the fund manager to the representative's dealer firm will be smaller and will tend notto be paid to the representative by the dealer due to the "grid system" for representative compensation maintained by dealer firms.
(2) The "grid system" for representative compensation maintained by dealer firms means that the trailing commissions paid to dealer firms by fund companies willnot be passed on to the representatives if those commissions are below a specified dollar amount. Accordingly an asset/sales threshold, in effect, exists at thedealer firm level.
(3) Fund companies pay trailing commissions to compensate representatives for the costs incurred by such representatives in providing on-going service to theirclients in connection with the clients' investments in the mutual funds managed by the fund companies. If the trailing commissions are not being passed on torepresentatives by the dealer firms, then the representatives are not being compensated for providing these services. Because of the effect of the compensationsystems in place in dealer firms, prohibiting an asset threshold for trailing commissions at the fund company level means that dealer firms will receive extracompensation from fund companies without providing any corresponding services, and representatives will not receive compensation intended to reimburse themfor their costs incurred in providing services.
(4) At an asset threshold of $100,000, the trailing commissions presently paid are so nominal that representatives are unlikely to sell purely to reach the thresholdand the commissions will not likely bias the advice given.
The CSA have carefully considered the comments made on this issue and have not changed their views or the reasons for their views from those articulated in theJuly Ontario Notice. However, the CSA wish to make known their concerns about compensation practices of participating dealers setting asset or salesthresholds for their representatives. Subsection 5.3(6) of the Companion Policy deals with these concerns.
Notwithstanding the CSA's decision to not change section 3.2 of the National Instrument to permit minimum asset thresholds, the CSA have changed theNational Instrument in response to a comment made on the Proposed National Instrument that was not made on the Ontario Draft Rule. The CSA also havechanged the Companion Policy to clarify the CSA's views in the area of trailing commissions in response to two commenters' questions that were not askedthrough the comments made on the Ontario Draft Rule.
Subsection 3.2(3) of the National Instrument and subsections 5.3(3),(4) and (5) of the Companion Policy are new and respond to the concerns raised in asubmission by a fund manager, which was formally endorsed by two other fund managers. These fund managers asked the CSA to clarify that the trailingcommissions rules contemplated by section 3.2 of the Proposed National Instrument were to apply only to trailing commissions paid on mutual fund securitiespurchased after the effective date of the National Instrument. The commenters indicated that not to clarify the effective date of these new rules would result inambiguity as to whether this regulation was intended to have retroactive effect and "thereby create a deferred commission". The commenters argued that"retroactivity would be unduly harmful to mutual fund managers". As outlined in subsection 5.3(3) of the Companion Policy, the CSA consider that the rulesproposed in section 3.2 of the Proposed National Instrument were not intended to retroactively affect existing compensation arrangements between mutual fundorganizations and participating dealers with respect to securities acquired before the effective date of the National Instrument. Prior to the effective date of theNational Instrument, participating dealers and their representatives and fund companies agreed to certain compensation arrangements. The CSA consider that nojustification exists for the National Instrument to disrupt these contractual arrangements that were entered into prior to the effective date of the NationalInstrument. Accordingly, subsection 3.2(3) of the National Instrument is designed to provide a limited transitional exception to the general requirements ofsection 3.2 of the National Instrument. The CSA note, as outlined in subsection 5.3(5) of the Companion Policy, that, of course, the National Instrument doesnot require fund companies to maintain asset thresholds in respect of trailing commissions payable on assets acquired prior to the effective date of the NationalInstrument.
Two commenters asked whether the CSA intended that fund managers be required to pay the same trailing commission to all participating dealers. The CSA arenot regulating commission payments in this way, and have added subsection 5.3(7) to the Companion Policy to clarify this matter. Another commenter askedwhether section 3.2 of the Proposed National Instrument permitted fund companies to make payments to different participating dealers at different times. Section3.2 clearly permits different payment times, so long as the method of calculation and the time periods are the same for all participating dealers. The CSA considerthat section 3.2 of the National Instrument is clear in this regard and have not included a discussion on this matter in the Companion Policy.
Part 4 - Internal Dealer Incentive Practices
Section 4.1 - Participating Dealers' Practices
The IDA supported the change made by the CSA to section 4.1 of the Proposed National Instrument through the inclusion of subsection 4.1(2). However, theIDA requested that subsection 4.1(2) of the Proposed National Instrument be redrafted to conform to the explanation for this subsection contained in footnote31 to the Proposed National Instrument. The CSA consider that subsection 4.1(2) is clear, but have added section 6.1 to the Companion Policy in order that theexplanatory commentary contained in the former footnote 31 be continued in the formal regulatory instruments.
Section 4.2 - Principal Distributors' Practices
Several commenters commented that an exception similar to subsection 4.1(2) should be added to section 4.2 of the Proposed National Instrument. Thecommenters noted that the section should permit a principal distributor to pay its own sales force in a way that recognizes that other fund companies will paydifferent commissions. As stated in the July Ontario Notice, the CSA are of the view that the inherent conflicts of interest raised by a dealer selling proprietaryfunds as well as third party funds is best managed through a reasonable restriction on that dealer providing incentives to a representative that may cause thatrepresentative to make inappropriate recommendations. However, the CSA accept that further clarification is necessary to this section to explain what the CSAconsiders to be a reasonable restriction. The CSA also accept that an exception similar to subsection 4.1(2) of the National Instrument is necessary. The changesmade to this section in the National Instrument respond to these comments and clarify the CSA's intentions.
Part 5 - Marketing and Educational Practices
Section 5.1 - Cooperative Marketing Practices
A group of fifteen independent mutual fund dealers requested the CSA in a collective submission to remove section 5.1 of the Proposed National Instrument andsubstitute a rule that would permit a so-called "dealer development allowance" to be paid to participating dealers by fund companies.
The independent mutual fund dealers argued that ensuring compliance with section 5.1 will be costly for dealers and managers alike and that regulators will notbe able to monitor or enforce compliance. These commenters asked that the CSA mandate a prescribed maximum amount that could be paid by fund managers asa dealer development allowance. Dealers would not be restricted in how they used the monies paid under a dealer development allowance. An alternative rule ofthis nature would be simple to understand and administer and compliance would be easier to monitor.
The IDA also voiced its concerns with section 5.1 and the practice of payment of cooperative marketing expenses by fund companies. The IDA indicated that"the IDA has consistently taken the view that the practice of co-operative marketing in support of mutual fund distribution should be discontinued. In the interestof a level playing field, the industry has not taken unilateral action on this issue, and believes that such a rule should only come into force at a time when it willapply to all parties. It is the Association's preference that co-operative marketing practices be entirely prohibited".
As outlined in the July Ontario Notice, the CSA continued the Ontario Commission's approach of regulating sales practices as much as possible in a fashionconsistent with the IFIC Code. The CSA noted in the July Ontario Notice that Commissioner Glorianne Stromberg recommended a complete prohibition on thepractice of cooperative marketing. Had the CSA not made a decision to make rules regulating cooperative marketing practices consistent with the IFIC Codeapproach to the sales practice, the CSA may have proposed different rules. At this time however, the CSA are not prepared to prohibit cooperative marketingpractices or to provide for a CSA prescribed dealer development allowance in lieu thereof.
IFIC asked the CSA to amend section 5.1 of the Proposed National Instrument to permit representatives to seek reimbursement of marketing costs covered bythe section directly from fund companies, subject to appropriate monitoring by the dealer firms. IFIC suggested that since it is "standard industry practice" forrepresentatives to pay marketing costs directly, the representatives should be able to seek reimbursement from fund companies directly. The CSA have not madethis change. Ensuring separation between representatives and fund companies so that appropriate monitoring and supervision of representatives can bemaintained and so that representatives are not inappropriately influenced through the provision of sales incentives by fund companies is a central and fundamentalprinciple that runs throughout the National Instrument.
The CSA have added two interpretative provisions to the Companion Policy in response to comments from the IDA and from IFIC, both in respect ofcooperative marketing.
The IDA asked for clarification of paragraph 5.1(c) of the Proposed National Instrument and for assurance that a participating dealer could set up non-headoffice level monitoring of cooperative marketing claims. Subsection 7.2(2) of the Companion Policy states that the CSA consider that paragraph 5.1(c) of theNational Instrument does not require a participating dealer to set up head office level procedures to deal with cooperative marketing requests. Subsection 7.2(2)of the Companion Policy also responds to a comment contained in the IDA submission in that the CSA will not object to participating dealers directing fundcompanies to pay otherwise permitted cooperative marketing expenses directly to suppliers of participating dealers. The IDA also asked that the CSA mandatethe use of a certain industry developed form in connection with cooperative marketing expenses. The CSA have not mandated this use of a form; instead, theCSA expect that the industry will take whatever steps, including the use of appropriate forms, participants feel necessary to ensure compliance with section 5.1of the National Instrument.
IFIC asked for clarification of what the CSA would consider appropriate compliance with the requirement in paragraph 5.1(e) of the National Instrument todisclose, in writing, the identity of those paying for a sales communication or investor seminar. Subsection 7.3(3) of the Companion Policy articulates the CSA'sview that the requirement to make written disclosure of the identity of those paying for a sales communication or the costs of an investor seminar is not metthrough the mere insertion of a fund company logo; the disclosure should clearly identify names and state that those named entities are paying for a portion of thecosts.
Section 5.2 - Mutual Fund Sponsored Conferences
Several commenters recommended changes to paragraphs 5.2(b) and (c) of the Proposed National Instrument.
IFIC and one other commenter asked that paragraph 5.2(b) of the Proposed National Instrument be deleted as an unnecessary restriction that does not recognizelegitimate business relationships between fund companies and dealer representatives. These commenters suggested that the rule, as drafted, could mean that fundcompanies would find themselves holding educational conferences for uninterested or inappropriate dealer representatives. Paragraph 5.2(b) of the NationalInstrument carries forward a central theme of the National Instrument, namely that fund companies deal with dealer firms and not directly with representatives;the CSA have not amended the National Instrument in this regard. However, the CSA have added subsection 7.3(2) to the Companion Policy. This subsectiondescribes that paragraph 5.2(b) of the National Instrument would not prevent fund companies from organizing events that are tailored to the interests ofparticular categories of representatives and advising the dealer of the nature of those events. Identifying or contacting specific representatives would not bepermitted.
Several commenters disagreed with the restriction on the geographic location of mutual fund sponsored conferences contained in paragraph 5.2(c) of theProposed National Instrument. Two commenters asked that the restriction be deleted entirely and argued that if the other restrictions provided for in section 5.2were adhered to the location of the conference would be irrelevant and neutral. On the other hand, two commenters, including IFIC, acknowledged the CSA'sconcern about the locale for mutual fund sponsored conferences, even where, as required by section 5.2, mutual fund companies are not paying any of the travelor accommodation costs of representatives. One commenter noted that it supported the principal that fund companies should not host conferences in exoticlocales such as Hawaii and the Caribbean. IFIC acknowledged that "there may be a legitimate concern in preventing trips to exotic destinations chosen solelybecause they are out of the normal routine".
Commenters, including IFIC, asked that if the restriction were not deleted entirely, exceptions should be provided in the National Instrument for so-called "duediligence" trips organized by fund managers to international locations, either to permit representatives to review the operations of third party portfolio managersat that location or to experience international markets first-hand.
The CSA have accepted IFIC's and the other commenters' recommendation that the National Instrument permit fund managers to organize due diligence trips tointernational locations where a fund's portfolio adviser is located and carries out the portfolio management for the fund. Subparagraph 5.2(c)(iii) of the NationalInstrument has been added as a limited exception to the general restriction on the location for such conferences. The CSA are not prepared at this time to permitmore wide-ranging due diligence trips to international locations whereby fund managers would allow representatives to be exposed to the international capitalmarkets as requested by one commenter. Section 7.5 of the Companion Policy has been added to clarify the CSA's view on the meaning of the word "location" asused in the above noted limited exception.
One commenter asked for clarification whether the CSA consider Alaska to form part of the continental United States. The CSA are of the view that it does.
Section 5.3 - Third Party Sponsored Educational Events
IFIC, and one other commenter, noted an apparent inconsistency between the permission given fund companies in section 5.3 of the Proposed NationalInstrument to pay the registration fees incurred by dealers or their representatives in taking educational courses and the prohibition contained in subsection 5.4(1)of the Proposed National Instrument against fund companies paying costs incurred in connection with seminars, conferences and courses organized by IFIC, theIDA or other trade association. The CSA did not intend this result and accordingly have amended section 5.4(1) of the National Instrument to give precedence tothe rule contained in section 5.3 of the National Instrument.
IFIC also asked that section 5.4 of the Proposed National Instrument be amended to permit industry participants to pay for the costs incurred by IFIC affiliates inconnection with the provision of seminars and conferences. The CSA have so amended section 5.4 in the National Instrument and have included a similaramendment to permit industry participants to pay the costs incurred by IDA affiliates.
Section 5.5 - Participating Dealer Sponsored Events
Two comments were made regarding the restriction on the geographic location for dealer sponsored events contained in paragraph 5.5(e) of the ProposedNational Instrument. IFIC made the same comments as noted above under the summary of comments made on section 5.2 of the Proposed National Instrument.The other commenter urged that the location restriction be removed in favour of a per person dollar limit for the costs of organizing a conference. Thecommenter noted that it could be more expensive and involve longer travel time to travel to resorts located in the continental United States than locations in theCaribbean and Mexico. The commenter suggested that the restriction could be viewed as an unauthorized interference with international trade or as contrary tothe North American Free Trade Agreement.
The CSA are not regulating all conferences held by a dealer for its own representatives; but only those conferences where the dealer is seeking monetarycontributions from fund companies. The CSA consider that section 5.5 of the National Instrument is an appropriate restriction on the ability of Canadian dealersto seek reimbursement from Canadian mutual fund companies for their costs of holding conferences for their Canadian based representatives. The CSA are notmaking rules that infringe upon international trade or that prevent free trade between the signatories to the North American Free Trade Agreement.
The CSA analysis outlined above concerning the need for a geographic restriction for mutual fund sponsored conferences is applicable to the geographic locationrestriction for participating dealer sponsored conferences. The CSA have made the same limited exception as described above to permit dealers to seekreimbursement (subject to the percentage limits set out in paragraphs 5.5(b) and (c) of the National Instrument) from fund companies in respect of due diligencetrips to international locations where fund portfolio advisers are located.
Section 5.6 - Promotional Items and Business Promotion Activities
One individual commenter again urged the CSA, as he did in his submissions on the Ontario Draft Rule, to restrict the provision of promotional items andpromotional activities by fund companies, noting that these items and activities constitute "investorism integrity abusing mutual fund sales incentive/assetretention enhancing inducements". The commenter suggested that the CSA review the Canadian Medical Association's Code of Ethics and its 1994 PolicySummary entitled "Physicians and the Pharmaceutical Industry" before finalizing the Proposed National Instrument and in particular before adopting section 5.6of the Proposed National Instrument. The commenter gave an example of a particular fund company's "asset retention inducement" he believed was inappropriateand was made available to representatives in 1996. As outlined in the July Ontario Notice, the CSA continue to be of the view that the regulatory approach setout in section 5.6 of the National Instrument is appropriate for the mutual fund industry at this time but will monitor sales practices in this regard.
Part 6 - Portfolio Transactions
Section 6.1 - Reciprocal Commissions and Portfolio Transactions
IFIC again asked, as it did in its submission on the Ontario Draft Rule, that section 6.1 of the Proposed National Instrument be amended to contemplatepermission for fund companies and dealers to carry out "necessary communications" concerning portfolio transactions. The CSA have not amended section 6.1of the National Instrument in this regard, but have added subsection 8.1(2) to the Companion Policy to ensure that the CSA's views in connection with thiscomment as set out in the July Ontario Notice are carried forward into the formal regulatory instruments.
Part 7 - Other Sales Practices
Section 7.1 - Commission Rebates
IFIC again asked, as it did in its submission on the Ontario Draft Rule, that the obligation to obtain a client's written consent before an applicable redemption ofsecurities as required by subsection 7.1(1) of the Proposed National Instrument be deleted. It noted that clients tend to resist having to provide written consent totransactions. The CSA have not deleted this requirement; written consent is essential in ensuring that a client understands the implications of the applicableredemption transaction.
One commenter pointed out the "logical impossibility" of disclosing the precise amount of redemption fees being paid for and to be paid upon redemption of thesecurities being acquired, prior to the purchase taking place. The CSA have amended subsection 7.1(2) of the National Instrument to require disclosure of areasonable estimate of these amounts. The CSA have also included section 9.1 of the Companion Policy in response to this commenter's request for anexplanation as to the CSA's expectations for the tax disclosure required to be given under subsection 7.1 (2) of the National Instrument.
IFIC's submission as well as two submissions from mutual fund dealers urged the CSA to delete the restrictions contained in section 7.1 of the Proposed NationalInstrument on a participating dealer and its representatives paying a commission rebate to a client where the participating dealer is a member of the organizationof a mutual fund and the client is switching into a fund within the mutual fund family of that fund organization. These commenters argued that the restriction isnot reflective of reality and unfairly imposes a financial burden upon clients who wish to switch to the sponsored products from other mutual fund products. Onecommenter suggested that the rule be changed to restrict sales by representatives on a commission rebated basis to certain defined limits. The other commentersuggested the rule be changed to permit commission rebates by representatives without restriction, so long as the representative is not being reimbursed for thepayment by the related fund organization. This commenter's submission is largely based upon the assumption that a representative is largely uninfluenced by hisor her related fund organization whether or not to recommend a sponsored product over a third party sponsored product and to decide whether or not to offer acommission rebate to a client.
The CSA continue to have policy concerns about members of a fund organization, including dealer and representative members of that fund organization,providing an incentive to a client by way of a commission rebate, to switch investments into sponsored products. Subsection 7.1(3) of the National Instrumentprohibits a fund organization from directly making these commission rebates; the CSA see no difference in the policy rationale for such a prohibition when thecommission rebate is being made, not by the fund organization directly, but by a representative or a participating dealer that is a member of that fundorganization. Notwithstanding the arguments made in the above submissions, the CSA are of the view that it is not unrealistic to assume that a participatingdealer and its representative may be influenced by the related fund organization to recommend switches to sponsored products. The CSA wish to remove anypotential for concern that investors will agree to such a switch due to the financial incentive represented by a commission rebate when the switch is notnecessarily in the client's best interests.
The CSA have not changed section 7.1 to accommodate these submissions, but point out they will consider granting relief to provide an exemption for anyindustry participant that demonstrates that its operations are such that the policy concerns articulated above are minimized.
One commenter stated that section 7.1 should not prohibit a representative from paying a rebate on a redemption when the client is liquidating his portfoliowithout buying any other mutual fund securities. The CSA note that section 7.1 will not prohibit the payment of a rebate on such redemptions as section 7.1 onlyapplies on redemptions occurring in connection with the purchase of other mutual fund securities.
Section 7.3 - Charitable Donations
The CBA asked that section 7.3 of the Proposed National Instrument be amended to permit charitable donations between affiliates, as is permitted by section 7.2of the Proposed National Instrument in connection with the provision of financial assistance. The CSA have amended section 7.3 of the National Instrument torespond to this comment in order not to interfere with intercorporate funding issues that do not raise regulatory concerns about inappropriate sales practices.
Section 7.4 - Tied Selling
The CBA and one other financial institution affiliate mutual fund manager commented on section 7.4 of the Proposed National Instrument. The CBA asked thatthe CSA "withhold" the effective date of section 7.4 in order to facilitate further discussions between the CSA and the industry on this section. The CBA notedthat in their view, a legislative approach to tied selling (in the nature of section 7.4) should only be considered where there is clear evidence of continuinginvestor protection problems with tied selling practices and where industry developed solutions do not work. It pointed out that it was working on an industrystatement on tied selling and a program of self-regulation in response to a federal government proposal to amend the Bank Act to regulate loan-making practicesof financial institutions. The CBA and the other commenter also noted that they were very concerned about the meaning of the words "or on terms that appear tobe a reasonable person to be a condition" contained in section 7.4 of the Proposed National Instrument. The commenters were of the view that this test was"unworkable" in practice and failed to provide certainty to persons packaging products for customers.
The CSA have added section 9.2 of the Companion Policy to describe their views on the nature of the tied selling activities being regulated by section 7.4 of theNational Instrument. This section is provided to give guidance to industry participants as to the CSA's intentions regarding the scope of section 7.4. This sectioncarries forward the CSA's views described in the July Ontario Notice that the CSA accept legitimate "relationship pricing", but that the CSA remain concernedabout the potential for coercion in connection with the provision of services related to the sale of mutual fund securities. Staff of the Ontario Commissiondiscussed this approach with representatives of the CBA. Although the CBA has not altered its primary position, namely that section 7.4 should be removed fromthe National Instrument, it confirmed the usefulness of an explanation as to the CSA's views in the Companion Policy.
Part 8 - Prospectus and Point of Sale Disclosure
Section 8.1 - Disclosure of Sales Practices
The CBA, IFIC and another commenter asked that the CSA clarify the expectations as to the disclosure to be provided under section 8.1 of the ProposedNational Instrument. In particular these commenters asked for clarification that the requirement to include a "complete description" in a mutual fund's prospectusof compensation payable and sales practices followed would not necessitate disclosure concerning the compensation payable by parties other than the mutualfund's fund organization or the sales practices followed by the mutual fund's fund organization in respect of other securities. Section 8.1 of the NationalInstrument is clearly intended to require disclosure of compensation payable and sales practices followed by a mutual fund's fund family in connection with thedistribution of that fund's securities. The CSA have added appropriate clarifying words to section 8.1 in the National Instrument to ensure that the scope of thissection is properly understood.
IFIC and the CBA again asked that the National Instrument contain transitional provisions so that fund companies would not be immediately required to amendprospectuses to comply with section 8.1 of the National Instrument. The CSA appreciate the concerns raised, and although they are of the view that the requireddisclosure is important and is in large part now being provided in fund prospectuses, have added section 10.2 to the National Instrument to respond to thiscomment.
Section 8.2 - Disclosure of Equity Interests
One commenter outlined the extreme difficulty its organization would be subject to if section 8.2 of the Proposed National Instrument remained as drafted havingregard to the fact that over 300 individual representatives associated with that organization have equity interests (as defined) in members of the organization ofthe relevant mutual fund family. The CSA have re-considered the objectives for the disclosure contemplated by subsection 8.2(1) of the National Instrument andhave amended that section to require disclosure of equity interests held by representatives of participating dealers in members of a fund organization that are notpublic companies on a collective basis and not individually. A mutual fund is required, however, to disclose the equity interests held by any representative thatholds more than 5 percent of the outstanding shares of a non-public member of a fund organization. The CSA have not changed the requirement that anindividual representative must disclose his or her equity interest in a member of the organization of a mutual fund in the disclosure document contemplated to beprovided to purchasers under subsection 8.2(3) of the National Instrument.
Section 10.1 of the Companion Policy has been added to further clarify the disclosure requirements of section 8.2 of the National Instrument.
Section 8.3 - Disclosure Requirements If No Prospectus or Simplified Prospectus
IFIC again recommended, as it did in its submission on the Ontario Draft Rule, that section 8.3 of the Proposed National Instrument be deleted. IFIC noted thatit could not see the policy rationale for requiring disclosure of sales practices for mutual fund securities being distributed under a prospectus exemption,particularly when arguably more important information is not required to be disclosed under applicable securities legislation. The CSA have retained section 8.3in the National Instrument. The potential for conflicts of interest associated with the sales practices used in exempt mutual fund transactions is sufficiently seriousand in reality no different from public transactions (that is, those carried out under a prospectus) that the requirement for the disclosure provided for in thissection remains appropriate.
IV. COMMENTS ON PROVISIONS OF THE PROPOSED COMPANION POLICY
Part 2 - General Discussion of the Instrument
Section 2.1 - Background
IFIC asked that the chronology of events described in section 2.1 of the Proposed Companion Policy refer to the 1991 code of sales practices developed by IFIC.The CSA have included this reference in section 2.1 of the Companion Policy.
Section 2.2 - General Purpose of the Instrument
IFIC asked that paragraph 2.2(2)(b) of the Proposed Companion Policy be redrafted to read "a participating dealer and its representatives have a primaryobligation to act in the best interests of the clients". The CSA have made this drafting change.
Part 4 - Discussion of Certain Aspects of Part 2 of the Instrument
Section 4.2 - Non-Monetary Benefits
IFIC asked that the word "normal" be deleted from subsection 4.2(3) of the Proposed Companion Policy. The CSA have made this drafting change.
IFIC also asked that subsection 4.2(5) of the Proposed Companion Policy be deleted. IFIC argued that fund companies should be able to provide dealerseducational software in any form. IFIC pointed out that it was "incongruous" that the Proposed National Instrument permits fund companies to pay theregistration fees incurred by dealers in connection with the attendance of representatives at educational courses, but the CSA does not permit educationalsoftware to be given to dealers. The CSA have not made this change. Software that does not fall within the parameters described in subsections 4.2(4) and (6) ofthe Companion Policy, and could not be considered a business promotional item of minimal value in accordance with section 5.6 of the National Instrument,would likely be a non-monetary benefit and therefore not permitted under the National Instrument.
Part 6 - Marketing and Educational Practices [now Part 7 of the Companion Policy]
Section 6.3 - Mutual Fund Sponsored Conferences [now section 7.3 of the Companion Policy]
Two commenters urged the CSA to delete subsection 6.3(2) of the Proposed Companion Policy. Subsection 6.3(2) of the Proposed Companion Policy wasintended to remind fund companies that section 5.2 of the Proposed National Instrument did not permit a fund company to invite a guest of a representative to amutual fund sponsored conference. The CSA have deleted this provision from the Companion Policy, on the basis that section 5.2 of the National Instrumentrequires attendees at fund sponsored conferences to pay their own travel, accommodation and personal incidental expenses. Section 5.2 of the NationalInstrument does not permit fund organizations to directly invite representatives or guests of representatives. The CSA considers that attendees at mutual fundconferences should be free to travel with their guests, provided that no costs associated with guest travel are paid for by the fund organizations. A discussion inthe Companion Policy as to the CSA's views on guests of attendees is not necessary.
NATIONAL INSTRUMENT 81-105
MUTUAL FUND SALES PRACTICES
PART TITLE
PART 1 DEFINITIONS, INTERPRETATION AND APPLICATION
1.1 Definitions
1.2 Interpretation
1.3 Application
PART 2 GENERAL
2.1 Restrictions on Payments or Provision of Benefits
2.2 Restrictions on Solicitation and Acceptance of Payments or Benefits
2.3 Application of Instrument to Some Participating Dealers or Representatives
PART 3 PERMITTED COMPENSATION
3.1 Commissions
3.2 Trailing Commissions
PART 4 INTERNAL DEALER INCENTIVE PRACTICES
4.1 Participating Dealers' Practices
4.2 Principal Distributors' Practices
PART 5 MARKETING AND EDUCATIONAL PRACTICES
5.1 Cooperative Marketing Practices
5.2 Mutual Fund Sponsored Conferences
5.3 Third Party Sponsored Educational Events
5.4 Industry Association Sponsored Events
5.5 Participating Dealer Sponsored Events
5.6 Promotional Items and Business Promotion Activities
PART 6 PORTFOLIO TRANSACTIONS
6.1 Reciprocal Commissions and Portfolio Transactions
6.2 Obligations of Participating Dealers Executing Portfolio Transactions
PART 7 OTHER SALES PRACTICES
7.1 Commission Rebates
7.2 Financial Assistance
7.3 Charitable Donations
7.4 Tied Selling
PART 8 PROSPECTUS AND POINT OF SALE DISCLOSURE
8.1 Disclosure of Sales Practices
8.2 Disclosure of Equity Interests
8.3 Disclosure Requirements If No Prospectus or Simplified Prospectus
PART 9 EXEMPTION
9.1 Exemption
PART 10 TRANSITIONAL
10.1 Effective Date
10.2 Prospectus Disclosure
NATIONAL INSTRUMENT 81-105
MUTUAL FUND SALES PRACTICES
PART 1 DEFINITIONS, INTERPRETATION AND APPLICATION
1.1 Definitions - In this Instrument
"direct costs" means reasonable, out-of-pocket costs and expenses directly attributable to
(a) the production and presentation of a sales communication referred to in Part 5, or
(b) the presentation and organization of a conference or seminar referred to in Part 5, other than any travel, accommodation or personal incidental expensesassociated with the attendance of an individual at the conference or seminar;
"equity interest" means, in relation to an issuer
(a) if the issuer is a reporting issuer in any jurisdiction and its securities are listed on a Canadian stock exchange, the direct or indirect ownership of securitiesrepresenting more than ten percent of any class of voting securities, equity securities or partnership units of the issuer, or
(b) for all other issuers, the direct or indirect ownership of a voting security, equity security or partnership unit of the issuer;
"equity security" means a security of an issuer that carries a residual right to participate in the earnings of the issuer and, upon the liquidation or winding up ofthe issuer, in the distribution of its assets;
"IDA" means the Investment Dealers Association of Canada;
"IFIC" means The Investment Funds Institute of Canada;
"member of the organization" means, for a mutual fund
(a) the manager of the mutual fund,
(b) the principal distributor of the mutual fund,
(c) the portfolio adviser of the mutual fund,
(d) an affiliate of any of the persons or companies referred to in paragraph (a), (b) or (c), or
(e) a person or company that is organized by a member of the organization of the mutual fund as a vehicle to fund payment of commissions to participatingdealers and that has a right to arrange for the distribution of the securities of the mutual fund;
"mutual fund family" means two or more mutual funds that have
(a) the same manager, or
(b) managers that are affiliates of each other; and
"representative" means, for a participating dealer,
(a) a partner, director, officer, salesperson or employee of the participating dealer, and
(b) any company through which a person referred to in paragraph (a) carries on activities in connection with services provided to the participating dealer.
1.2 Interpretation - Terms defined in National Policy Statement No. 39, or in a successor instrument to that policy statement, and used in this Instrument havethe respective meanings ascribed to them in National Policy Statement No. 39 or the successor instrument, whichever is in force.
1.3 Application - This Instrument applies to
(a) a distribution of securities of a mutual fund that offers or has offered securities under a prospectus or simplified prospectus for so long as the mutual fundremains a reporting issuer; and
(b) a person or company in respect of activities pertaining to a mutual fund referred to in paragraph (a).
PART 2 GENERAL
2.1 Restrictions on Payments or Provision of Benefits
(1) No member of the organization of a mutual fund and no mutual fund shall, in connection with the distribution of securities of the mutual fund
(a) make a payment of money to a participating dealer or a representative of a participating dealer;
(b) provide a non-monetary benefit to a participating dealer or a representative of a participating dealer; or
(c) pay for or make reimbursement of a cost or expense incurred or to be incurred by a participating dealer or a representative of a participating dealer.
(2) Despite subsection (1), a member of the organization of a mutual fund may
(a) make a payment of money or provide a non-monetary benefit to a participating dealer, or pay for or make reimbursement of a cost or expense incurred or tobe incurred by a participating dealer or its representatives, if permitted by Part 3 or 5; and
(b) provide a non-monetary benefit to a representative of a participating dealer, if permitted by Part 5.
(3) A member of the organization of a mutual fund shall not, and shall not represent that it may, make a payment, provide a non-monetary benefit or pay for ormake reimbursement of a cost or expense otherwise permitted by subsection (2) that is conditional on
(a) the sale of a particular amount or value of securities of one or more mutual funds by a participating dealer or a representative; or
(b) a particular amount or value of securities of one or more mutual funds being held in accounts of clients of a participating dealer or a representative.
2.2 Restrictions on Solicitation and Acceptance of Payments or Benefits
(1) No participating dealer and no representative of a participating dealer shall solicit or accept from a mutual fund or a member of the organization of the mutualfund, in connection with the distribution of securities of the mutual fund, the payment of money, the provision of a non-monetary benefit or payment orreimbursement for a cost or expense incurred or to be incurred by the participating dealer or representatives of the participating dealer.
(2) Despite subsection (1),
(a) a participating dealer may solicit and accept a payment of money, provision of a non-monetary benefit or payment or reimbursement for a cost or expenseincurred or to be incurred by it or its representatives from a member of the organization of the mutual fund, if the member is permitted by Part 3 or 5 to make thepayment, provide the benefit or make the payment or reimbursement; and
(b) a representative of a participating dealer may accept the provision of a non-monetary benefit from a member of the organization of the mutual fund, if themember is permitted by Part 5 to provide the benefit.
2.3 Application of Instrument to Some Participating Dealers or Representatives
(1) Nothing in this Instrument prohibits a person or company that is both a member of the organization of a mutual fund and a participating dealer of a mutualfund in a different mutual fund family from undertaking any activity, if
(a) the activity is undertaken in the person or company's capacity as a participating dealer of the mutual fund of which it is a participating dealer, and not in itscapacity as a member of the organization of the mutual fund of which it is a member; and
(b) a participating dealer is not prohibited by this Instrument from undertaking that activity.
(2) Nothing in this Instrument prohibits a representative of a participating dealer that is also a member of the organization of a mutual fund from soliciting oraccepting any payment, non-monetary benefit or reimbursement otherwise permitted by this Instrument from the participating dealer, if the payment, provision ofthe non-monetary benefit or reimbursement is made in the participating dealer's capacity as a participating dealer and not in its capacity as a member of theorganization of a mutual fund.
PART 3 PERMITTED COMPENSATION
3.1 Commissions - A member of the organization of a mutual fund may pay to a participating dealer a commission in money for the distribution of a security ofthe mutual fund made through the participating dealer, if
(a) the obligation to make the payment arises at the time of the trade;
(b) the prospectus or simplified prospectus of the mutual fund discloses the range of rates of commissions that may be paid and the method of calculation used indetermining the amount of those commissions; and
(c) the rate of the commission does not increase
(i) based on increases in the amount or value of securities of the mutual fund sold, or of mutual funds in the same mutual fund family as the mutual fund sold, orof any or all of the foregoing,
(ii) based on increases in the amount or value of securities of the mutual fund, or of mutual funds in the same mutual fund family as the mutual fund, or of any orall of the foregoing, held in accounts of clients of the participating dealer, or
(iii) for a particular period of the year in which the commission is paid or earned.
3.2 Trailing Commissions
(1) A member of the organization of a mutual fund may pay to a participating dealer a trailing commission in money that is based upon the aggregate value ofsecurities of the mutual fund held in accounts of clients of the participating dealer as at a particular time or during a particular period, if
(a) the obligation to make the payment arises after the time of the trade;
(b) the prospectus or simplified prospectus of the mutual fund discloses the range of rates of trailing commissions that may be paid and the method of calculationand relevant times or time periods used in determining the amount of those trailing commissions;
(c) the method and time of calculation of the trailing commission and the relevant times or time periods used in determining the amount of the trailingcommission are the same for all participating dealers of the mutual fund; and
(d) the rate of the trailing commission does not increase
(i) based on increases in the amount or value of securities of the mutual fund sold, or of mutual funds in the same mutual fund family as the mutual fund sold, orof any or all of the foregoing,
(ii) based on increases in the amount or value of securities of the mutual fund, or of mutual funds in the same mutual fund family as the mutual fund, or of any orall of the foregoing, held in accounts of clients of the participating dealer, or
(iii) for a particular period of the year in which the trailing commission is paid or earned.
(2) A member of the organization of a mutual fund may establish policies and practices concerning the timing of payments of trailing commissions so long as alltrailing commissions are paid within one year from the date earned.
(3) Despite subsection (1), a member of the organization of a mutual fund may decline to pay a trailing commission to a participating dealer in connection withsecurities of the mutual fund held in the accounts of clients of the participating dealer if
(a) the securities in respect of which no trailing commission is paid were acquired by those clients before the date that this Instrument came into force;
(b) the amount of securities held in the accounts of those clients is below a threshold specified in the policy referred to in paragraph (c); and
(c) the non-payment of the trailing commission is in conformity with a policy of the member of the organization of the mutual fund that was in place and wasfollowed on July 1, 1997.
PART 4 INTERNAL DEALER INCENTIVE PRACTICES
4.1 Participating Dealers' Practices
(1) No participating dealer shall provide an incentive to any of its representatives to recommend mutual funds of one mutual fund family over mutual funds ofanother mutual fund family.
(2) Despite subsection (1), the compensation paid to a representative of a participating dealer by the participating dealer may reflect commissions received by theparticipating dealer from members of the organizations of mutual funds, so long as the compensation paid to a representative for the securities of a mutual fundsold or held, as a percentage of the commission paid to the participating dealer, is the same for all mutual fund families.
4.2 Principal Distributors' Practices
(1) A principal distributor of a mutual fund that is also a participating dealer of another mutual fund shall not provide an incentive for any of its representatives torecommend a mutual fund of which it is a principal distributor over a mutual fund of which it is a participating dealer.
(2) Despite subsection (1), the compensation paid to a representative of a principal distributor by the principal distributor may reflect commissions received bythe principal distributor from members of the organization of which it is a member and members of organizations of other mutual funds if
(a) the compensation paid to a representative for the securities of a mutual fund sold or held, as a percentage of the commission paid to the principal distributor,is the same for all mutual fund families, including the mutual fund family of the principal distributor; and
(b) the commissions paid to the principal distributor in connection with the distribution of securities of a mutual fund of which it is a principal distributor are notin excess of the commissions provided to any participating dealer in connection with the distribution of those securities.
PART 5 MARKETING AND EDUCATIONAL PRACTICES
5.1 Cooperative Marketing Practices - A member of the organization of a mutual fund may pay, to a participating dealer, direct costs incurred by theparticipating dealer relating to a sales communication, investor conference or investor seminar prepared or presented by the participating dealer, if
(a) the primary purpose of the sales communication, investor conference or investor seminar is to promote, or provide educational information concerning, themutual fund, the mutual fund family of which the mutual fund is a member or mutual funds generally;
(b) in the case of an investor conference or investor seminar, the conference or seminar is presented by the participating dealer to investors or potential investorsof the mutual fund, another mutual fund in the same mutual fund family, or of mutual funds generally;
(c) the participating dealer provides invoices for, or receipts evidencing payment of, the direct costs to be paid by a member of the organization of the mutualfund;
(d) the aggregate direct costs of the sales communication, investor conference or investor seminar paid by all members of organizations of mutual funds do notexceed 50 percent of the total direct costs incurred by the participating dealer; and
(e) the sales communication discloses, or persons attending the investor conference or investor seminar are informed in writing of, the identity of all partiespaying for a portion of the costs of the sales communication, investor conference or investor seminar.
5.2 Mutual Fund Sponsored Conferences - A member of the organization of a mutual fund may provide a non-monetary benefit to a representative of aparticipating dealer by allowing him or her to attend a conference or seminar organized and presented by members of the organization of the mutual fund, if
(a) the primary purpose of the conference or seminar is the provision of educational information about financial planning, investing in securities, mutual fundindustry matters, the mutual fund, the mutual fund family of which the mutual fund is a member or mutual funds generally;
(b) the selection of the representatives of the participating dealer to attend the conference or seminar is made exclusively by the participating dealer, uninfluencedby any member of the organization of the mutual fund;
(c) the conference or seminar is held in
(i) Canada,
(ii) the continental United States of America, or
(iii) a location where a portfolio adviser of the mutual fund carries on business, if the primary purpose of the conference or seminar is the provision ofeducational information about the investments or activities of the mutual fund carried on by that portfolio adviser;
(d) no member of the organization of the mutual fund pays any travel, accommodation or personal incidental expenses associated with the attendance of therepresentative at the conference or seminar; and
(e) the costs relating to the organization and presentation of the conference or seminar are reasonable having regard to the purpose of the conference or seminar.
5.3 Third Party Sponsored Educational Events - A member of the organization of a mutual fund may, for a conference, seminar or course that is organizedand presented by a person or company that is not a member of the organization of the mutual fund or a participating dealer, pay the registration fees of arepresentative of a participating dealer for the conference, seminar or course, if
(a) the primary purpose of the conference, seminar or course is the provision of educational information about financial planning, investing in securities, mutualfund industry matters or mutual funds generally;
(b) the participating dealer provides invoices for or receipts evidencing payment of the registration fees to be paid by a member of the organization of the mutualfund;
(c) the selection of the representatives of the participating dealer to attend the conference, seminar or course is made exclusively by the participating dealer,uninfluenced by any member of the organization of the mutual fund; and
(d) the conference, seminar or course is held in Canada or the continental United States of America.
5.4 Industry Association Sponsored Events
(1) Except as permitted by section 5.3 or subsection (2), no member of the organization of a mutual fund may pay money, provide non-monetary benefits or payor reimburse costs or expenses relating to a conference, seminar or course that is organized and presented by IFIC, the IDA or another trade or industryassociation.
(2) A member of the organization of a mutual fund may pay, to IFIC, the IDA or their respective affiliates or associates, direct costs incurred by IFIC, the IDAor their respective affiliates or associates relating to a conference or seminar organized and presented by IFIC, the IDA or their respective affiliates or associates,if
(a) the primary purpose of the conference or seminar is the provision of educational information about financial planning, investing in securities, mutual fundindustry matters or mutual funds generally;
(b) the members of the organization of mutual funds in a mutual fund family in aggregate pay not more than 10 percent of the total direct costs incurred by IFIC,the IDA or their respective affiliates or associates for the organization and presentation of the conference or seminar;
(c) the selection of the representatives of a participating dealer to attend the conference or seminar is made exclusively by the participating dealer, uninfluencedby any member of the organization of the mutual fund; and
(d) the conference or seminar is held in Canada or the continental United States of America.
5.5 Participating Dealer Sponsored Events - A member of the organization of a mutual fund may pay, to a participating dealer, direct costs incurred by theparticipating dealer relating to a conference or seminar that is organized and presented by the participating dealer, and that is not an investor conference orinvestor seminar referred to in section 5.1, if
(a) the primary purpose of the conference or seminar is the provision of educational information about financial planning, investing in securities, mutual fundindustry matters, the mutual fund, the mutual fund family of which the mutual fund is a member or mutual funds generally;
(b) the members of the organization of mutual funds in a mutual fund family in aggregate pay not more than 10 percent of the total direct costs incurred by theparticipating dealer for the organization and presentation of the conference or seminar;
(c) the aggregate direct costs of the conference or seminar paid by all members of organizations of mutual funds do not exceed 66 percent of the total directcosts incurred by the participating dealer;
(d) the selection of the representatives of the participating dealer to attend the conference or seminar is made exclusively by the participating dealer, uninfluencedby any member of the organization of the mutual fund; and
(e) the conference or seminar is held in
(i) Canada,
(ii) the continental United States of America, or
(iii) a location where a portfolio adviser of the mutual fund carries on business, if the primary purpose of the conference or seminar is the provision ofeducational information about the investments or activities of the mutual fund carried on by that portfolio adviser.
5.6 Promotional Items and Business Promotion Activities - A member of the organization of a mutual fund may provide to a representative of a participatingdealer non-monetary benefits of a promotional nature and of minimal value, and a member of the organization of a mutual fund may engage in businesspromotion activities that result in a representative of a participating dealer receiving a non-monetary benefit if
(a) the provision of the benefits and activities is neither so extensive nor so frequent as to cause a reasonable person to question whether the provision of thebenefits or activities improperly influence the investment advice given by the representative to his or her clients; and
(b) in the case of business promotion activities, no member of the organization of the mutual fund pays the travel, accommodation or personal incidentalexpenses associated with the attendance of the representative at the activities.
PART 6 PORTFOLIO TRANSACTIONS
6.1 Reciprocal Commissions and Portfolio Transactions
(1) No member of the organization of a mutual fund shall influence or attempt to influence how, or if, a participating dealer will pay or allocate in a particularmanner to any representative all or part of a brokerage commission or of an amount representing the spread on a principal transaction arising from a portfoliotransaction of the mutual fund executed by the participating dealer.
(2) No member of the organization of a mutual fund shall direct a portfolio transaction of a mutual fund to a participating dealer or principal distributor of themutual fund except through individuals designated by the participating dealer or principal distributor as the institutional representatives of the participating dealeror principal distributor.
(3) No member of the organization of a mutual fund shall advise a representative of a participating dealer or a person or company employed by a principaldistributor, other than an individual referred to in subsection (2), of a portfolio transaction of the mutual fund to be directed to the participating dealer orprincipal distributor.
(4) No member of the organization of a mutual fund shall direct, or offer or agree to direct, a portfolio transaction of the mutual fund to a participating dealer orprincipal distributor as inducement or reward for the participating dealer or principal distributor selling or having sold securities of the mutual fund or maintainingor having maintained particular levels of securities of the mutual fund in accounts of clients.
(5) No participating dealer shall solicit or execute portfolio transactions of a mutual fund as inducement or reward for the participating dealer selling, or havingsold, securities of the mutual fund or maintaining, or having maintained, particular levels of securities of the mutual fund in accounts of clients.
6.2 Obligations of Participating Dealers Executing Portfolio Transactions -No participating dealer shall execute a portfolio transaction of a mutual fundunless it has been directed to the participating dealer through an individual designated by the participating dealer as an institutional representative of theparticipating dealer.
PART 7 OTHER SALES PRACTICES
7.1 Commission Rebates
(1) A participating dealer or representative of a participating dealer may pay all or part of a fee or commission payable by a securityholder on the redemption ofsecurities of a mutual fund that occurs in connection with the purchase by the securityholder of securities of a mutual fund in a different mutual fund family, onlyif
(a) the participating dealer, or a representative on behalf of the participating dealer, before taking any steps in connection with the redemption, provides thesecurityholder with written disclosure of the matters described in subsection (2) and obtains the written consent of the securityholder to the completion of theredemption; and
(b) the participating dealer is not a member of the organization of the mutual fund the securities of which are being acquired.
(2) The written disclosure referred to in subsection (1) shall include
(a) a reasonable estimate of the amount of the fee or commission being paid by the participating dealer on the redemption;
(b) a reasonable estimate of the amount of the redemption charges to which the securityholder will be subject in connection with the securities of the mutual fundbeing acquired, expressed both as dollar amounts and as percentages of the value of the securities being redeemed, and the times at which those charges wouldbe made; and
(c) the tax consequences of the redemption.
(3) No member of the organization of a mutual fund, other than a member that is also a participating dealer acting in compliance with subsection (1), shall pay toany person or company all or part of a fee or commission payable by a securityholder on the redemption of securities of another mutual fund that is not in thesame mutual fund family.
7.2 Financial Assistance
(1) No member of the organization of a mutual fund shall provide financial assistance to a participating dealer of the mutual fund, a representative of theparticipating dealer or their respective associates or affiliates.
(2) No participating dealer and no representative of a participating dealer of a mutual fund shall solicit or accept financial assistance from a member of theorganization of the mutual fund.
(3) Subsections (1) and (2) do not apply to financial assistance provided by
(a) a Canadian financial institution in the ordinary course of its business, if no conditions to the provision of the financial assistance promote the distribution ofsecurities of particular mutual funds; or
(b) affiliates.
7.3 Charitable Donations
(1) No member of the organization of a mutual fund shall make a charitable donation if the tax credit or deduction arising from the donation benefits aparticipating dealer, a representative of a participating dealer or a person or company that is an associate or affiliate of a participating dealer or of arepresentative of a participating dealer.
(2) Subsection (1) does not apply to a charitable donation made by a member of the organization of a mutual fund if the tax credit or deduction arising from thedonation benefits an affiliate of the member of the organization of the mutual fund.
7.4 Tied Selling - No person or company shall require another person or company
(a) to invest in securities of a particular mutual fund or mutual fund family, either as a condition or on terms that appear to a reasonable person to be a condition,of supplying or continuing to supply products or services; or
(b) to purchase or use any products or services, either as a condition or on terms that appear to a reasonable person to be a condition, of selling securities of aparticular mutual fund or mutual fund family.
PART 8 PROSPECTUS AND POINT OF SALE DISCLOSURE
8.1 Disclosure of Sales Practices
(1) A mutual fund shall provide in its prospectus or simplified prospectus a complete description of
(a) all compensation payable by members of the organization of the mutual fund to all principal distributors and participating dealers of the mutual fund; and
(b) the sales practices followed by the members of the organization of the mutual fund for distribution of securities of the mutual fund.
8.2 Disclosure of Equity Interests
(1) A mutual fund shall disclose in its prospectus or simplified prospectus the amount of any equity interest that
(a) a member of the organization of the mutual fund has in a participating dealer;
(b) a participating dealer and associates of the participating dealer, in aggregate, have in any member of the organization of the mutual fund; and
(c) a representative of a participating dealer and associates of the representative, in aggregate, have in any member of the organization of the mutual fund.
(2) If a member of the organization of a mutual fund is not a reporting issuer and the securities of the member are not listed on a Canadian stock exchange, themutual fund is not required to provide the disclosure required by paragraph (1)(c) if it discloses
(a) the aggregate equity interests held by all representatives of a participating dealer and their respective associates in the member of the organization of themutual fund; and
(b) the equity interests held by a representative of a participating dealer and associates of the representative if the representative and his or her associates havedirect or indirect ownership of securities representing more than five percent of any class of voting securities, equity securities or partnership units of the memberof the organization of the mutual fund.
(3) For each trade of a security of a mutual fund that is required to make any of the disclosure described in this section, a participating dealer shall deliver to thepurchaser a document that discloses the amount of any equity interest that
(a) a member of the organization of the mutual fund has in the participating dealer;
(b) the participating dealer and its associates, in aggregate, have in any member of the organization of the mutual fund;
(c) the representatives of the participating dealer and associates of those representatives, in aggregate, have in any member of the organization of the mutualfund; and
(d) the representative of the participating dealer that is acting on the trade, and associates of the representative, in aggregate, have in any member of theorganization of the mutual fund.
(4) No participating dealer shall complete a trade to which subsection (3) applies unless the participating dealer obtains the prior written consent of the purchaserto the completion of the trade after the purchaser has received the document required by subsection (3).
(5) A participating dealer is not required to comply with subsections (3) and (4) for a trade if the purchaser in the trade has already been provided with adocument under subsection (3) on a previous trade and the information contained in the document has not changed.
8.3 Disclosure Requirements If No Prospectus or Simplified Prospectus - A mutual fund that does not have a current prospectus or simplified prospectusshall prepare a document containing the information required by this Instrument to be provided in a prospectus or simplified prospectus and deliver, or cause tobe delivered, a copy of the document to each purchaser of securities of the mutual fund at or before the time of the applicable trade in securities of the mutualfund, other than a trade in connection with a dividend reinvestment plan of the mutual fund.
PART 9 EXEMPTION
9.1 Exemption
(1) The regulator or securities regulatory authority may grant an exemption to this Instrument, in whole or in part, subject to such conditions or restrictions asmay be imposed in the exemption.
(2) Despite subsection (1), in Ontario, only the securities regulatory authority may grant such an exemption.
PART 10 TRANSITIONAL
10.1 Effective Date - This Instrument comes into force on May 1, 1998.
10.2 Prospectus Disclosure - The prospectus of a mutual fund 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.
COMPANION POLICY 81-105CP TO NATIONAL INSTRUMENT 81-105
MUTUAL FUND SALES PRACTICESTABLE OF CONTENTS
PART TITLE
PART 1 PURPOSE
1.1 Purpose
PART 2 GENERAL DISCUSSION OF THE INSTRUMENT
2.1 Background
2.2 General Purpose of the Instrument
2.3 Application of the Instrument to Labour-Sponsored Venture Capital Corporations
2.4 Indirect Avoidance of the Instrument
PART 3 DEFINITION OF "REPRESENTATIVE"
3.1 Definition of "representative"
PART 4 DISCUSSION OF CERTAIN ASPECTS OF PART 2 OF THE INSTRUMENT
4.1 The phrase "in connection with the distribution of securities"
4.2 Non-Monetary Benefits
4.3 The phrase "pay for or make reimbursement of a cost or expense incurred or to be incurred by a participating dealer or a representative of a participatingdealer"
4.4 Exception for Some Participating Dealers and Representatives
PART 5 COMMISSIONS
5.1 Method of Calculation
5.2 Bonus Commissions
5.3 Trailing Commission Thresholds
PART 6 INTERNAL DEALER INCENTIVE PRACTICES
6.1 Internal Dealer Incentive Practices
PART 7 MARKETING AND EDUCATIONAL PRACTICES
7.1 Definition of "direct costs"
7.2 Cooperative Marketing Practices
7.3 Mutual Fund Sponsored Conferences
7.4 Third Party Sponsored Educational Events
7.5 Meaning of "Location"
7.6 Promotional Items and Business Promotion Activities
PART 8 RECIPROCAL COMMISSIONS AND PORTFOLIO TRANSACTIONS
8.1 Reciprocal Commissions and Portfolio Transactions
PART 9 OTHER SALES PRACTICES
9.1 Commission Rebates
9.2 Tied Selling
PART 10 DISCLOSURE REQUIREMENTS
10.1 Disclosure of Equity Interests
10.2 Disclosure Requirements
PART 11 EXEMPTIONS
11.1 Exemptions
COMPANION POLICY 81-105CP TO NATIONAL INSTRUMENT 81-105
MUTUAL FUND SALES PRACTICES
PART 1 PURPOSE
1.1 Purpose - The purpose of this Policy is to state the views of the Canadian securities regulatory authorities on various matters relating to National Instrument81-105 Mutual Fund Sales Practices (the "Instrument"), including
(a) a discussion of the general approach taken by the Canadian securities regulatory authorities in, and the general regulatory purpose for, the Instrument;
(b) the interpretation of various terms used in the Instrument; and
(c) examples of some of the matters described in the Instrument.
PART 2 GENERAL DISCUSSION OF THE INSTRUMENT
2.1 Background
(1) The Instrument has been adopted by the Canadian securities regulatory authorities as a response to the concern of many participants in the mutual fundindustry that the pre-existing regulatory strategy of reliance on prospectus disclosure of sales practices, coupled with the discipline imposed by competitivemarket forces, were not sufficient to discourage sales practices and compensation arrangements that gave rise to questions as to whether participating dealersand their representatives were being induced to sell mutual fund securities on the basis of the incentives they were receiving as opposed to what was suitable forand in the best interests of their clients.
(2) Mutual fund sales practices have been of interest and concern to the Canadian securities regulatory authorities and the mutual fund industry for a number ofyears. In August 1991, The Investment Funds Institute of Canada ("IFIC") issued its report on mutual fund sales incentives (the "1991 IFIC Report"). The 1991IFIC Report was followed by the release, in October 1991, of the IFIC Code of Conduct (the "1991 IFIC Code") dealing with sales incentives.
The 1991 IFIC Code required enhanced disclosure of sales incentives offered as compensation for sales of mutual fund securities and also required that investorsin mutual funds be provided with a separate "point-of-sale" disclosure statement advising investors of the sales incentives applicable to the purchase.
(3) A substantial review of the investment fund industry was undertaken by Ontario Securities Commission ("OSC") Commissioner Glorianne Stromberg at therequest of the OSC in February 1994. Her report "Regulatory Strategies for the Mid-'90s - Recommendations for Regulating Investment Funds in Canada", wasprepared for the Canadian Securities Administrators ("CSA") and released in January 1995.
(4) Commissioner Stromberg noted in her report that as a result of competitive pressures "questionable sales practices and incentives have become commonplacein the industry". She concluded that the regulatory strategy referred to in subsection (1) above would be an appropriate regulatory strategy if certainrecommended fundamental changes were made to the regulation of sales practices.(7)
(5) In response to Commissioner Stromberg's report, IFIC, after extensive industry consultation, released its recommendations for a Code of Sales Practices forthe Mutual Fund Industry dated March 29, 1996 (the "IFIC Code").(8) The IFIC Code stated in its preamble:
"The Draft Code is designed to establish the industry standard of conduct and to reflect its concern for investor protection. The sales practices suggested in theDraft Code are designed to align the interests of the principal parties to the transaction, i.e. the investor, fund manager and, where applicable, third party funddistributor firm and salesperson, and to encourage long term relationships among them. If implemented, the Draft Code would prohibit many sales practiceswhich could result in conflicts of interest between the interests of an investor and those of the distributor firm, its salespersons and a fund manager. IFIC believesthat it is important, in the case of sales practices permitted under the Draft Code, that there be full disclosure of the sales practice in order that an investor is fullyinformed of the circumstances surrounding investment in mutual funds".
(6) In the absence of a self-regulatory organization which could adopt the IFIC Code as a regulation applicable to all distributors of securities of mutual funds,IFIC recommended that the provisions of the IFIC Code be reflected in rules of the Canadian securities regulatory authorities. This request was endorsed by theInvestment Funds Steering Group.(9)
(7) The Instrument is based on, and in Ontario, is an amended version of, a proposed Ontario rule regarding mutual fund sales practices (the "Ontario DraftRule") published for comment in Ontario on August 30, 1996 at (1996), 19 OSCB 4734. The Ontario Draft Rule reflected the approach taken in the IFIC Codeand also reflected certain of the by-laws and rules of the IDA. This Instrument reflects the discussions of the Canadian securities regulatory authorities ofcomments received in Ontario in respect of the Ontario Draft Rule. The Canadian securities regulatory authorities have made the Instrument in order to makemandatory, on an industry-wide basis across Canada, restrictions on certain sales and business practices followed by participants in the mutual fund industry.
2.2 General Purpose of the Instrument
(1) The purpose of the Instrument is to ensure that the interests of investors remain uppermost in the actions of participants in the mutual fund industry by settingminimum standards of conduct to be followed by industry participants in their activities in distributing mutual fund securities. The minimum standards of conductestablished by the Instrument are designed to minimize the conflicts between the legitimate commercial goals of industry participants and the fundamentalobligations outlined in subsection (2) that are owed by industry participants towards investors.
(2) The Instrument prohibits certain sales practices and compensation arrangements that have developed and that the Canadian securities regulatory authoritiesconsider undermine, compromise or conflict with the following fundamental obligations of industry participants to their investor clients:
(a) investment recommendations should be made by a representative of a participating dealer to an investor based on the investor's investment objectives andcircumstances and must be suitable for that investor;
(b) a participating dealer and its representatives have a primary obligation to act in the best interests of clients;
(c) where an investor is relying on a participating dealer and a representative of a participating dealer to provide him or her with independent expertise and adviceregarding options for mutual fund or other investments, the participating dealer and the representative of the participating dealer have a fiduciary obligation notto compromise the provision of this expertise and advice;
(d) a participating dealer, as a registrant under securities legislation, is required to exercise adequate and appropriate supervision of its representatives who aredealing with clients to ensure compliance with all statutory and other legal obligations;
(e) members of the organization of a mutual fund providing management services to a mutual fund have an obligation to act honestly, in good faith and in thebest interests of the mutual fund and its securityholders; and
(f) full, true and plain disclosure of all material facts concerning a mutual fund, including the compensation paid to participating dealers and their representativesand other sales practices followed in connection with the distribution of mutual fund securities, is essential to ensure that investors understand the nature of theinvestments they are making and the impact of fees and charges on them.
(3) The Canadian securities regulatory authorities are aware that other sales practices or compensation arrangements could arise that also undermine orcompromise the focus of industry participants in complying with the fundamental obligations outlined in subsection (2). The Canadian securities regulatoryauthorities expect participants in the mutual fund industry to be and remain faithful to their fundamental obligations to the investing public, and not to allowpractices or arrangements to develop that threaten this high standard of conduct. In this context, the restrictions on sales practices articulated by the Instrumentshould be seen as the minimum standards that should be followed by industry participants in order to fulfil their fundamental obligations.
2.3 Application of the Instrument to Labour-Sponsored Venture Capital Corporations
(1) Labour-sponsored venture capital corporations ("LSVCCs") are investment vehicles existing under the Income Tax Act (Canada) and legislation of somejurisdictions. LSVCCs that are structured as mutual funds are regulated as mutual funds in a number of jurisdictions, including Ontario and British Columbia,subject to certain exemptions. LSVCCs are considered not to be mutual funds in Quebec under Quebec securities legislation. LSVCCs are also considered not tobe mutual funds in Manitoba; however, the Manitoba Securities Commission has issued a local instrument that makes LSVCCs in Manitoba subject to theInstrument.
(2) The Canadian securities regulatory authorities consider LSVCCs to be subject to the Instrument except in those jurisdictions in which LSVCCs areconsidered not to be mutual funds, in the case of Quebec, or have specifically been made subject to the Instrument, in the case of Manitoba.
(3) Section 2.1 of the Instrument prohibits a mutual fund from making a payment of money or providing a non-monetary benefit to a participating dealer or arepresentative of a participating dealer or paying for or making reimbursement of a cost or expense incurred or to be incurred by a participating dealer orrepresentative of a participating dealer. Under the Instrument, all such payments or actions must be made by members of the organization of a mutual fund, notthe mutual fund itself.
(4) Costs relating to the distribution of securities of LSVCCs are currently paid by the LSVCCs themselves for reasons related to the specialized organizationaland legal structure of LSVCCs. Therefore, the applicable Canadian securities regulatory authorities will entertain applications from LSVCCs for relief from theprovisions of the Instrument that prohibit mutual funds from making the payments or effecting the actions described in section 2.1 of the Instrument. The relief, ifgranted by the securities regulatory authority in a jurisdiction for an LSVCC, will permit the LSVCC to make those payments or take those actions, subject to allof the other requirements of the Instrument. Under such relief, the LSVCC, for example, would be permitted to pay trailing commissions directly to participatingdealers, but subject to the requirements of section 3.2 of the Instrument and any other condition imposed in connection with such relief.
2.4 Indirect Avoidance of the Instrument
(1) The Canadian securities regulatory authorities have in connection with the IFIC Code, on occasion, encountered creative ways in which arrangements havebeen structured that permit benefits to be provided by a mutual fund organization to a participating dealer in a manner that the Canadian securities authoritieswould regard as contrary to the clear spirit and intent of the IFIC Code.
(2) The Canadian securities regulatory authorities may examine arrangements that raise the suspicion of being structured to permit a party to do indirectly what itcannot do directly. The Canadian securities regulatory authorities regard the prohibitions contained in the Instrument as prohibitions against both direct andindirect actions in relation to the subject matter of the prohibition.
(3) For example, Part 2 of the Instrument contains the basic prohibitions of the Instrument against members of the organization of a mutual fund makingpayments, among other things, to participating dealers or their representatives in connection with the distribution of securities of the mutual fund. This provisionprohibits both the direct and indirect payment of money from mutual fund organizations to dealers, and the Canadian securities regulatory authorities will nothesitate to look through an arrangement in which, for example, a mutual fund organization paid money to a third party in connection with the distribution ofsecurities of the mutual fund, knowing that the money would flow back to the participating dealer.
(4) It is noted that the draft of the Instrument that was published for comment contained a prohibition against indirect action. The Canadian securities regulatoryauthorities note that that provision was deleted from the final version of the Instrument because, as a matter of legislative drafting, it was considered unnecessaryto be included in the Instrument. No inference should be taken from the deletion that the principle contained in that provision is inapplicable to the Instrument.
PART 3 DEFINITION OF "REPRESENTATIVE"
3.1 Definition of "representative"
(1) The definition of the term "representative" contained in section 1.1 of the Instrument includes a person who is registered in the category of partner, director,officer or salesperson of a participating dealer, even though the relationship of the person with the participating dealer may be one of independent contractor.The definition of the term "representative" also includes employees of a participating dealer, even if those employees are not registered with the securitiesregulatory authority.
(2) Paragraph (b) of the definition of "representative" includes personal holding companies of the persons referred to in paragraph (a) of the definition. TheCanadian securities regulatory authorities have included this paragraph to ensure that the provisions of the Instrument apply both to the persons who carry onactivities through personal holding companies and to the holding companies themselves.
PART 4 DISCUSSION OF CERTAIN ASPECTS OF PART 2 OF THE INSTRUMENT
4.1 The phrase "in connection with the distribution of securities" - The prohibitions and restrictions contained in sections 2.1 and 2.2 of the Instrumentrelate to actions taken "in connection with the distribution of securities" of a mutual fund. The Canadian securities regulatory authorities are of the view that thisphrase includes, without limitation, any activity done in furtherance of the sale, distribution or marketing of securities of mutual funds. This would includepromotional activities relating to the investment in securities or mutual funds generally, or educational activities concerning financial, investment or retirementplanning that could involve a discussion of the advantages and disadvantages of mutual fund investments. Any compensation or non-monetary benefits given tosolidify or promote a relationship between a member of the organization of a mutual fund and a participating dealer and its representatives would fall within thescope of these sections. The phrase should not be interpreted restrictively or narrowly.
4.2 Non-Monetary Benefits
(1) Part 2 of the Instrument contains restrictions and prohibitions on the provision of, among other things, non-monetary benefits to participating dealers andtheir representatives.
(2) The Canadian securities regulatory authorities are of the view that the term "non-monetary benefits" includes any goods, services or other benefits that couldbe provided to or received by a person or company and that could be perceived by that person as being of benefit, advantage or value to him, her or it. Thematters that are included in the term include, without limitation
(a) domestic or foreign trips, food, beverages and accommodation, regardless of whether these benefits are provided in connection with attendance at aconference or other event sponsored by a member of the organization of a mutual fund;
(b) entertainment, including the provision of tickets to concerts, theatre or sporting events, or the ability to participate in events such as golf tournaments;
(c) gifts and non-cash gratuities;
(d) invitations to educational seminars or conferences organized by members of the organization of a mutual fund;
(e) attendance at educational seminars, conferences or courses; and
(f) computer hardware, including networking hardware and general business software systems.
(3) The term "non-monetary benefits" does not include the goods and services that are provided by mutual fund organizations to participating dealers to facilitatethe marketing of securities of the mutual fund, such as brochures, educational material, supplies of prospectuses or simplified prospectuses and financialstatements.
(4) Some mutual fund organizations provide participating dealers with computer software that is designed to assist in determining which of the mutual funds ofthe organization are most appropriate for a client of the participating dealer, having regard to the investment objectives and financial condition of the client. TheCanadian securities regulatory authorities are of the view that the provision of this type of proprietary software is not a non-monetary benefit to the participatingdealer and is in the nature of marketing materials as referred to in subsection (3).
(5) However, the Canadian securities regulatory authorities consider that the provision of financial planning software of a more general nature, whetherproprietary to the mutual fund organization or not, would likely constitute a non-monetary benefit. In addition, other non-proprietary software that is provided tothe participating dealer would generally be considered to be a non-monetary benefit.
(6) The provision by a member of the organization of a mutual fund to a participating dealer of computer software, the only purpose of which is to facilitate theelectronic interface between the participating dealer and the members of the organization of the mutual fund, is not considered to be included in the term"non-monetary benefits".
4.3 The phrase "pay for or make reimbursement of a cost or expense incurred or to be incurred by a participating dealer or a representative of aparticipating dealer" - Section 2.1 of the Instrument contains restrictions and prohibitions on the ability of a mutual fund and a member of the organization of amutual fund to "pay for or make reimbursement of a cost or expense incurred or to be incurred by a participating dealer or a representative of a participatingdealer". Section 2.2 contains corresponding restrictions and prohibitions on the ability of a participating dealer and its representatives to solicit or accept suchpayments. The Canadian securities regulatory authorities are of the view that this phrase includes direct or indirect reimbursement of costs or expenses, anypayment that compensates a participating dealer or representative for such costs or expenses or any other method whereby the member of the organization of themutual fund directly or indirectly bears the costs or expenses incurred.
4.4 Exception for Some Participating Dealers and Representatives
(1) Section 2.3 of the Instrument provides that nothing in the Instrument prohibits a person or company that is both a member of the organization of a mutualfund and a participating dealer of a mutual fund in a different mutual fund family from undertaking any activity, if
(a) the activity is undertaken in the person or company's capacity as a participating dealer of the mutual fund of which it is a participating dealer, and not in itscapacity as a member of the organization of the mutual fund of which it is a member; and
(b) a participating dealer is not prohibited by the Instrument from undertaking that activity.
(2) That section is designed to respond to the fact that many registrants that are participating dealers will also be members of organizations of mutual funds; forexample, a dealer that is owned by a bank will likely be an affiliate of the manager or principal distributor of a mutual fund sponsored by that bank and thus be amember of the organization of that mutual fund.
(3) The Canadian securities regulatory authorities intend that a participating dealer that is also a member of the organization of a mutual fund will have thefreedom to operate as a participating dealer without concern over technically breaching the restrictions on members of the organizations of mutual fundscontained in the Instrument. Some examples of how section 2.3 of the Instrument would be relevant to certain actions, assuming that the conditions of section2.3 were satisfied, are as follows:
(a) a participating dealer that is also a member of the organization of a mutual fund would not be constrained in how it compensates its own representatives oremployees by the provisions of Part 2 of the Instrument;
(b) a participating dealer that is also a member of the organization of a mutual fund would not be limited by the operation of section 5.1 of the Instrument inpresenting an investor conference by the fact that the dealer may also be a member of the organization of the mutual fund;
(c) section 5.2 of the Instrument would not prevent a participating dealer that is also a member of the organization of a mutual fund from paying the travel,accommodation and personal incidental expenses for its own representatives to attend conferences sponsored by the mutual fund organization; and
(d) section 5.5 of the Instrument would not operate to subject a participating dealer to the limitations contained in that section if the dealer was sponsoring aconference for its own representatives; the dealer would be able to pay for its own costs even though technically, the dealer was a member of the organization ofa mutual fund.
(4) Similarly, by reason of subsection 2.3(2), the Instrument will not affect the ability of a representative of a participating dealer that is a member of theorganization of a mutual fund to receive compensation otherwise permitted by the Instrument from the participating dealer.
(5) The Canadian securities regulatory authorities note they would consider any action in which the relationship between a mutual fund organization and aparticipating dealer that was a member of the organization was used in an attempt to avoid the Instrument to be offensive to the Instrument.
PART 5 COMMISSIONS
5.1 Method of Calculation - Paragraphs 3.1(b) and 3.2(b) of the Instrument require the disclosure of the method of calculation used in determining the amountof sales commissions and trailing commissions. The Canadian securities regulatory authorities are of the view that this requirement will be satisfied withdisclosure of a general nature as to how those commissions are calculated; the authorities expect that this disclosure would describe, generally, that the amountof a commission is calculated through multiplying a specified rate of commission by some aggregate dollar amount of securities sold or held as at a specifiedtime.
5.2 Bonus Commissions - Subparagraphs 3.1(c)(iii) and 3.2(1)(d)(iii) of the Instrument prevent the payment of "bonus commissions", in which the rates ofcommissions paid or earned during a particular period of the year are higher than the rates of commissions paid or earned for any other time. This provisionshould not be read to prevent a mutual fund from changing its general commission rates at some time during a year. It is noted that in such circumstances, themutual fund should amend its prospectus or simplified prospectus to disclose the change in general commission rates applicable to sales of its securities.
5.3 Trailing Commission Thresholds
(1) The Canadian securities regulatory authorities note that the IFIC Code permits a mutual fund organization to pay, and a participating dealer to accept, trailingcommissions based on the assets in an individual representative's client accounts, on a representative by representative basis. The IFIC Code further provides thata mutual fund organization could establish a payment policy whereby no trailing commission would be paid to a participating dealer in respect of a particularrepresentative if the assets in the representative's client accounts did not exceed $100,000.
(2) The Canadian securities regulatory authorities consider that the effect of the rules established by subsection 2.1(3) and section 3.2 of the Instrument meanthat mutual fund organizations can no longer establish the minimum asset thresholds referred to in the IFIC Code. These sections require that the percentage thata trailing commission represents of the aggregate value of securities of a mutual fund held in accounts of clients of a participating dealer must be the same forthat participating dealer, regardless of the aggregate value of securities of the mutual fund in accounts of clients of the participating dealer at any time or theaggregate level of sales of securities of the mutual fund by the participating dealer.
(3) Subsection 3.2(3) of the Instrument provides a limited transitional exception to the general provisions of section 3.2 concerning minimum thresholds inrelation to trailing commissions. Subsection 3.2(3) permits a member of the organization of a mutual fund not to pay a trailing commission in respect of securitiesof the mutual fund held in accounts of clients of the participating dealer in certain circumstances; namely that the non-payment be consistent with a policyestablished and followed on July 1, 1997, and that the securities with respect to which no trailing commission is paid must have been acquired by those clientsbefore the date that the Instrument came into force. The rules established by section 3.2 are not intended to retroactively affect existing arrangements betweenmutual fund organizations and participating dealers respecting securities acquired before the Instrument came into force.
(4) The following examples are offered to illustrate the operation of subsection 3.2(3) of the Instrument. In each case, assume that a mutual fund organizationhad in place on July 1, 1997 a policy of not paying trailing commissions in respect of securities held in accounts of clients of a participating dealer, on arepresentative by representative basis, if the aggregate value of securities in those accounts was less than $100,000.
(a) At some time after the Instrument came into force, securities in client accounts totalled $75,000 in value, of which $50,000 were acquired before theInstrument came into force, and $25,000 were acquired after the Instrument came into force. The mutual fund organization is entitled under the Instrument todecline to pay a trailing commission in respect of the $50,000 value of securities acquired before the Instrument came into force, but must pay a trailingcommission on the $25,000 value of securities acquired after the Instrument came into force; and
(b) At some time after the Instrument came into force, securities in client accounts totalled $125,000 in value, of which $50,000 were acquired before theInstrument came into force, and $75,000 were acquired after the Instrument came into force. The mutual fund organization is required to pay trailingcommissions on the $75,000 worth of the securities acquired after the Instrument came into force. Also, since the $100,000 threshold established under thepolicy of the organization in place on July 1, 1997 was exceeded, the mutual fund organization would pay a trailing commission on all $125,000 value ofsecurities held in the accounts.
(5) The Canadian securities regulatory authorities note that mutual fund organizations are not required to continue to maintain those policies of not payingtrailing commissions in the circumstances described in subsections (3) and (4). As provided in paragraph 3.2(3)(c) of the Instrument, any non-payment of atrailing commission under section 3.2 must be in conformity with the pre-established policy of the mutual fund organization.
(6) The Instrument is intended to remove the conflicts inherent in representatives seeking to achieve specific asset and sales thresholds in order to receivecompensation in respect of mutual fund sales. An internal compensation system of a participating dealer whereby a representative is not paid any portion of acommission that is less than a specified dollar amount could be viewed as imposing indirectly an asset and sales threshold for that representative. The Canadiansecurities regulatory authorities are concerned that the internal compensation systems of participating dealers not impose, in effect, an asset or sales threshold tobe achieved by representatives in order to receive a commission paid by a mutual fund organization in respect of mutual fund sales.
(7) The Canadian securities regulatory authorities have received questions as to whether a mutual fund organization is required to pay the same rate ofcommission, inclusive of trailing commissions, to all participating dealers that sell the securities of the mutual fund organization's mutual fund family. TheCanadian securities regulatory authorities note that the Instrument does not require the same rate of commission to be paid. However, the Canadian securitiesregulatory authorities would consider that the rules set out in Part 3 of the Instrument prohibiting mutual fund organizations from setting minimum asset andsales thresholds in respect of commission payments would be offended if a mutual fund organization established a practice of only paying participating dealerscommissions, or higher rates of commissions, if these dealers met a specified asset or sales threshold.
PART 6 INTERNAL DEALER INCENTIVE PRACTICES
6.1 Internal Dealer Incentive Practices - Sections 4.1 and 4.2 of the Instrument permit different payments to be made by participating dealers to theirrepresentatives for different mutual funds if the difference in payments is a result of the different commissions received by the dealer from mutual fundorganizations. The Canadian securities regulatory authorities recognize that different mutual fund organizations may pay different levels of commissions todealers and that there is no compelling reason to prevent those differentials from flowing through to the representatives.
PART 7 MARKETING AND EDUCATIONAL PRACTICES
7.1 Definition of "direct costs"
(1) The phrase "out-of-pocket" costs and expenses, used in the definition of "direct costs" contained in section 1.1 of the Instrument, does not include internalsalary and overhead costs associated with the efforts of the participating dealer relating to the applicable sales communication or event. The definition of "directcosts" specifically excludes any costs incurred by a participating dealer for travel, accommodation or personal incidental expenses associated with the attendanceof individuals at applicable events. The Canadian securities regulatory authorities are of the view that those types of expenses form part of the cost of doingbusiness for the participating dealer and may not be borne by mutual fund organizations.
(2) Part 5 of the Instrument permits a member of the organization of a mutual fund to pay direct costs incurred by a participating dealer relating to certain salescommunications or events on the conditions indicated, which include, in some circumstances, a condition that the participating dealer provide invoices or receiptsfor the costs to be paid by the member. The Canadian securities regulatory authorities expect members of organizations of mutual funds to exercise reasonablediligence to ensure that the direct costs indicated on invoices or receipts received from participating dealers represent direct costs that are reasonable in thecircumstances. The Canadian securities regulatory authorities also expect participating dealers to exercise reasonable diligence to ensure that the direct costsindicated on invoices or receipts delivered to members of organizations of mutual funds represent direct costs incurred by the participating dealer.
7.2 Cooperative Marketing Practices
(1) Section 5.1 of the Instrument is designed to permit some cooperative marketing between mutual fund organizations and participating dealers, within theparameters set out in that section. The Canadian securities regulatory authorities are aware that participating dealers conduct certain marketing on behalf ofmutual fund organizations and accordingly have permitted a limited sharing of the costs of sales communications and investor conferences and seminars that areorganized and presented by participating dealers on the conditions contained in section 5.1. Section 5.1, however, does not permit a participating dealer toreceive compensation or reimbursement from a mutual fund organization for its general marketing expenses, such as, for example, costs associated with clientappreciation events or general client mailings or sales communications that relate generally to the business or operations of the participating dealer. Those costsmay not be borne by mutual fund organizations.
(2) Paragraph 5.1(c) of the Instrument requires a participating dealer to provide invoices for, or receipts evidencing payment of, the direct costs permitted undersection 5.1 to be paid by a member of the organization of the mutual fund. The Canadian securities regulatory authorities are of the view that a participatingdealer may establish procedures to facilitate the efficient payment or reimbursement of these costs, and note the following in that regard.
(a) It is not necessary that the reimbursement of these costs be processed by the head office of a participating dealer; participating dealers may deal with mutualfund organizations at an appropriately local office level. However, the Canadian securities regulatory authorities emphasize that the Instrument makes adistinction between actions taken by a "participating dealer" and by a "representative". Paragraph 5.1(c) of the Instrument requires a participating dealer toprovide the invoices and receipts to the mutual fund organization, and this action cannot be taken directly by representatives of the participating dealer;
(b) The Canadian securities regulatory authorities would not object to participating dealers directing mutual fund organizations to pay suppliers or serviceproviders directly, so long as the payment is otherwise permitted to be made under section 5.1 of the Instrument. There is no need for the mutual fundorganization to pay the participating dealer the relevant amount of the costs, who then must pay the supplier.
(3) Paragraph 5.1(e) of the Instrument requires written disclosure of the identity of the parties paying for a portion of the costs of a sales communication,investor conference or investor seminar. The Canadian securities regulatory authorities consider that this disclosure should be in sufficient detail to make clearthat a clearly-identified party has paid a portion of the costs. As a result, the mere display of a party's logo would be considered insufficient disclosure bothbecause the display may not adequately identify the party or make clear that the party has paid some of the costs of the event.
7.3 Mutual Fund Sponsored Conferences
(1) Section 5.2 of the Instrument requires that the costs relating to the organization and presentation of a conference or seminar described in that section bereasonable, having regard to the purpose of the conference or seminar. The Canadian securities regulatory authorities are of the view that "reasonable" costs inthis context could include the provision of food and beverages for attendees at the conference or seminar, the provision of conference or seminar materials andthe payment or waiver of registration fees at the conference or seminar. The term "reasonable" costs would not include gifts or entertainment provided toattendees other than as permitted by section 5.6 of the Instrument.
(2) Section 5.2 of the Instrument requires that the selection of the representatives of a participating dealer to attend a mutual fund sponsored conference orseminar is to be made exclusively by the participating dealer, uninfluenced by the mutual fund organization. The Canadian securities regulatory authorities notethat the restriction does not prevent mutual fund organizations from organizing events that are tailored to the interests of particular categories of representatives,and advising the participating dealers of the nature of those events. So, for instance, a mutual fund organization would be free to organize events designed forjunior representatives in which entry-level information concerning mutual funds was provided; the organization could advise the participating dealers that itwould be appropriate that junior representatives attend. Identifying specific representatives would not constitute compliance with section 5.2 of the Instrument.
7.4 Third Party Sponsored Educational Events - Section 5.3 of the Instrument permits a member of the organization of a mutual fund to pay the registrationfees of a representative of a participating dealer for a third party sponsored educational event referred to in that section. The term "registration fees" should beread with its ordinary meaning and should not be read to include travel, accommodation or other incidental costs associated with the attendance of therepresentative at the event.
7.5 Meaning of "Location" - Subparagraphs 5.2(c)(iii) and 5.5(e)(iii) of the Instrument permit the events to which sections 5.2 and 5.5 apply to take place in alocation where a portfolio adviser of a mutual fund carries on business, subject to the condition contained in these subparagraphs. The Canadian securitiesregulatory authorities note that the term "location" will be interpreted by them to mean the city or immediate locale where the portfolio adviser carries onbusiness. The Canadian securities authorities will regard as abusive any attempt to construe the term "location" in an excessively wide manner. So, for example,for a portfolio adviser carrying on business from an office in London, England, "location" means London or the immediate vicinity; it does not mean England, theBritish Isles or Europe.
7.6 Promotional Items and Business Promotion Activities
(1) Section 5.6 of the Instrument permits the provision of "non-monetary benefits of a promotional nature" of minimal value. Examples of this type of benefitinclude reminder advertising such as pens, calendars, t-shirts, hats, coffee mugs, paperweights and golf balls.
(2) Section 5.6 of the Instrument permits a member of the organization of a mutual fund family to engage in reasonable business promotion activities. Examplesof such activities include occasional meals or drinks, tickets to sporting events, concerts or the theatre or the ability to participate in events such as golftournaments and other comparable entertainment.
PART 8 RECIPROCAL COMMISSIONS AND PORTFOLIO TRANSACTIONS
8.1 Reciprocal Commissions and Portfolio Transactions
(1) Part 6 of the Instrument is designed to ensure that "best execution" practices are followed in making brokerage arrangements for mutual funds. It limits theconnection between a participating dealer's distribution activities in respect of a mutual fund and its activities in carrying out portfolio transactions for the mutualfund. In this regard, subsection 6.1(2) and section 6.2 of the Instrument require that portfolio transactions for a mutual fund are to be carried out only through arepresentative of a participating dealer who has been designated as an institutional representative by that participating dealer. The Canadian securities regulatoryauthorities expect that industry participants will not attempt to circumvent the intent of the Instrument by designating persons as institutional representatives toundertake portfolio transactions for mutual fund organizations if those persons have little or no other dealings with institutional accounts.
(2) The Canadian securities regulatory authorities recognize that certain types of information sharing between a member of the organization of a mutual fund anda participating dealer or a principal distributor are legitimate. For example, disclosure of trading history to a participating dealer while negotiating commissionrates for future trades would not offend subsection 6.1(3) of the Instrument.
PART 9 OTHER SALES PRACTICES
9.1 Commission Rebates - Subsection 7.1(2) of the Instrument requires disclosure of the tax consequences of a redemption. The Canadian securities regulatoryauthorities expect that this disclosure will be of a general nature, showing the tax effects of a redemption for taxpayers at different marginal rates.
9.2 Tied Selling
(1) The Canadian securities regulatory authorities note that the "products or services" referred to in paragraph 7.4(b) of the Instrument include the opening of anaccount.
(2) The Canadian securities regulatory authorities made section 7.4 of the Instrument in response to a similar provision in the IFIC Code, but also as a result oftheir concern that certain industry participants could use their ability to provide services (such as making loans) to investors and use undue influence to require orotherwise improperly require or coerce such investors to acquire mutual fund securities as a condition of providing these services. The Canadian securitiesregulatory authorities are aware that certain industry participants offer financial incentives or advantages to certain clients; the practice of offering these financialincentives or advantages is commonly referred to as "relationship pricing". Section 7.4 is not intended to prohibit so-called "relationship pricing" or otherbeneficial selling arrangements similar to relationship pricing. For example, the Canadian securities regulatory authorities would consider that section 7.4 was notoffended if a financial institution offered to make a loan to a customer on more favourable terms or conditions than the financial institution would otherwise offerto the customer, if as a condition to obtaining the favourable terms or conditions, the customer acquired securities of mutual funds sponsored by the financialinstitution. Section 7.4 would be offended, however, if the financial institution refused to make a loan to that customer unless the customer acquired securities ofmutual funds sponsored by the financial institution in circumstances, for example, where the customer otherwise met the financial institution's criteria for makingloans.
PART 10 DISCLOSURE REQUIREMENTS
10.1 Disclosure of Equity Interests - Section 8.2 of the Instrument requires a mutual fund to disclose equity interests held by participating dealers and theirrepresentatives in members of the organization of the mutual fund. The Canadian securities regulatory authorities note that the term "equity interest" is a definedterm and has a different meaning depending on whether the relevant member of the organization of a mutual fund is a reporting issuer whose securities are listedon a Canadian stock exchange or not. For example, for a member of an organization that is a reporting issuer whose securities are listed on a Canadian stockexchange, the threshold for disclosure of an equity holding by a participating dealer or a representative of a participating dealer is 10 percent of any class ofsecurities of that member. The Canadian securities regulatory authorities expect the mutual fund to use its reasonable best efforts to seek the relevant informationfrom a member of the organization of the mutual fund that is a reporting issuer whose securities are listed on a Canadian stock exchange. The Canadian securitiesregulatory authorities would not object to a mutual fund organization disclosing that the information disclosed in the prospectus is to the best of its knowledge.
10.2 Disclosure Requirements - Section 8.3 of the Instrument sets out the disclosure requirements for distributions of securities of a mutual fund subject to theInstrument that are made under an exemption from the prospectus requirements of the securities legislation and in circumstances in which the mutual fund doesnot have a current prospectus or simplified prospectus available to be delivered to the purchaser of the securities of the mutual fund.
PART 11 EXEMPTIONS
11.1 Exemptions
(1) The procedure to obtain, in more than one jurisdiction, an exemption from the Instrument is as follows:
(a) the applicant should file an application in writing simultaneously in all jurisdictions in which it requires an exemption;
(b) the application should indicate the name of the principal jurisdiction selected by the applicant for the purpose of dealing with the application and, if applicable,any related prospectus filing and of each other jurisdiction where the application and, if applicable, a related prospectus is being filed;
(c) the Canadian securities regulatory authority of the principal jurisdiction or the regulator in the principal jurisdiction will, on behalf of the applicant, contactthe Canadian securities regulatory authorities or regulators in the other jurisdictions in which the application has been made for their comments concerning theapplication and will forward all comments to the issuer; and
(d) the applicant should respond in writing to all comments to the Canadian securities regulatory authority in the principal jurisdiction, which will forward theresponse to the Canadian securities regulatory authorities in the other jurisdictions and again coordinate comments.
(2) In order to enable the Canadian securities regulatory authorities to deal with applications on a timely basis, issuers are encouraged to file applicationssimultaneously in all jurisdictions in which they require an approval or an exemption.
1. 0 In Ontario, at (1997) 20 OSCB 3879.
2. 0 (1996), 19 OSCB 4727.
3. 0 See the Request for Comments published in the Bulletin of the Ontario Securities Commission at (1997) 20 OSCB 3879.
4. 0 Certain submissions were sent in on behalf of several parties.
5. 0 The submission from The Association of Labour Sponsored Investment Funds has been grouped as a trade association comment. Sixteen labour sponsoredventure capital corporations are members of that association.
6. 0 Section 240 of the Regulation made under the Securities Act (Ontario).
7. 0 "Regulatory Strategies for the Mid-'90s - Recommendations for Regulating Investment Funds in Canada" prepared by Glorianne Stromberg for theCanadian Securities Administrators, January 1995, at page 44.
8. 0 "Recommendations for a Code of Sales Practices for the Mutual Fund Industry" released by IFIC on March 29, 1996. The IFIC Code was published inOntario at (1996), 19 OSCB 2170.
9. 0 The Investment Funds Steering Group was established in June 1995 by the Canadian Securities Administrators to consider the recommendations containedin Commissioner Stromberg's report. The Investment Funds Steering Group delivered its final report, "The Stromberg Report - An Industry Perspective", to theCanadian Securities Administrators in November 1996.