Securities Law & Instruments

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CSA NOTICE AND REQUEST FOR COMMENT

Proposed Amendments to
National Instrument 81-102 Mutual Funds
Companion Policy 81-102CP Mutual Funds and
Related Consequential Amendments

and

Other Matters Concerning
National Instrument 81-104 Commodity Pools and
Securities Lending, Repurchases and Reverse Repurchases by Investment Funds



Table of Contents

MODERNIZATION OF

INVESTMENT FUND PRODUCT REGULATION

(PHASE 2)

CSA Notice and Request for Comments

Annex A: Specific Questions of the CSA Relating to the Proposed 81-102 Amendments

Annex B: Specific Questions of the CSA Relating to the Alternative Funds Framework in NI 81-104

Annex C: Specific Questions of the CSA Relating to Securities Lending, Repurchases and Reverse Repurchases by Investment Funds

Annex D: Summary of Public Comments on Phase 2 Proposals for the Modernization Project

Annex E: Proposed Amendments to National Instrument 81-102 Mutual Funds and Companion Policy 81-102CP Mutual Funds

Schedule E-1: Proposed Amendments to National Instrument 81-102 Mutual Funds

Schedule E-2: Blackline Showing Proposed Amendments to National Instrument 81-102 Mutual Funds

Schedule E-3: Blackline Showing Proposed Changes to Companion Policy 81-102CP to National Instrument 81-102 Mutual Funds

Annex F: Proposed Amendments to National Instrument 41-101 General Prospectus Requirements

Annex G: Proposed Amendments to National Instrument 81-106 Investment Fund Continuous Disclosure

Annex H: Proposed Amendments to National Instrument 81-107 Independent Review Committee for Investment Funds and Commentary in National Instrument 81-107 Independent Review Committee for Investment Funds

Schedule H-1: Proposed Amendments to National Instrument 81-107 Independent Review Committee for Investment Funds

Schedule H-2: Proposed Changes to Commentary in National Instrument 81-107 Independent Review Committee for Investment Funds

Annex I: Proposed Amendments to Specified Instruments (Change in Name of National Instrument 81-102 Mutual Funds)

Annex J: Proposed Changes to Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations

Annex K: Proposed Changes to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions

Annex L: Local Matters

 

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CSA Notice and Request for Comments

CSA NOTICE AND REQUEST FOR COMMENT

Proposed Amendments to

National Instrument 81-102 Mutual Funds

Companion Policy 81-102CP Mutual Funds and

Related Consequential Amendments

and

Other Matters Concerning

National Instrument 81-104 Commodity Pools and

Securities Lending, Repurchases and Reverse Repurchases by Investment Funds

March 27, 2013

Introduction

The Canadian Securities Administrators (the CSA or we) are publishing for a 90-day comment period proposed amendments to National Instrument 81-102 Mutual Funds (NI 81-102) (the Proposed 81-102 Amendments, as set out in Annex E) to introduce core operational requirements for publicly offered non-redeemable investment funds, other than scholarship plans.{1} As described below, some of the Proposed 81-102 Amendments relate to mutual funds. We are also publishing for comment proposed changes to Companion Policy 81-102CP to National Instrument 81-102 Mutual Funds (81-102CP) (the Proposed 81-102CP Changes).

Related consequential amendments set out in Annexes F to K are also being published for comment:

• to reflect the proposed change in the name of NI 81-102; and

• to update National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2).

The proposed rule amendments described above are collectively referred to in this Notice as the Proposed Amendments. The Proposed Amendments, together with the Proposed 81-102CP Changes, are referred to as the "Proposed Provisions". The Proposed Provisions, together with the proposals relating to National Instrument 81-104 Commodity Pools (NI 81-104) and securities lending, repurchases and reverse repurchases described below, represent the first stage in Phase 2 of the CSA's implementation of the Modernization of Investment Fund Product Regulation Project (the Modernization Project).

In addition to the Proposed 81-102 Amendments, the Modernization Project also involves the creation of a more comprehensive alternative fund framework, to be effected through amendments to NI 81-104, that would operate in conjunction with the Proposed 81-102 Amendments. The framework would govern investment funds that invest in assets, or use investment strategies, that would not be permitted by the Proposed 81-102 Amendments. The framework is intended to create a more consistent, fair and functional regulatory regime across the spectrum of publicly offered investment fund products. We are seeking feedback on the appropriate parameters for the alternative fund framework.

The Modernization Project also includes the enhancement of the disclosure requirements relating to securities lending, repurchases and reverse repurchases by investment funds. We are also seeking feedback on how disclosure pertaining to these activities should be enhanced.

Background

The mandate of the Modernization Project is to review the product regulation of publicly offered investment funds and to consider whether our current regulatory approach sufficiently addresses product and market developments in the Canadian investment fund industry, and continues to adequately protect investors. The types of investment funds covered by the Modernization Project are publicly offered mutual funds (including exchange-traded mutual funds) and non-redeemable investment funds. The Project is being carried out in phases.

(i) Phase 1

In Phase 1, the CSA focused primarily on publicly offered mutual funds in amending NI 81-102, National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and other investment fund rules to codify exemptive relief that had been frequently granted in recognition of market and product developments. As well, we made amendments to keep pace with developing global standards in mutual fund product regulation, notably, introducing maturity restrictions and liquidity requirements for money market mutual funds. The Phase 1 amendments came into force on April 30, 2012, except for the provisions relating to money market funds, which came into force on October 30, 2012.

(ii) Phase 2

The CSA's objective in Phase 2 is to identify and address any market efficiency, investor protection or fairness issues that arise out of the differing regulatory regimes that apply to different types of publicly offered investment funds. In May 2011, we published CSA Staff Notice 81-322 Status Report on the Implementation of the Modernization of Investment Fund Product Regulation Project and Request for Comment on Phase 2 Proposals (Staff Notice 81-322) to set out a two-staged approach to Phase 2 and to seek comment on our proposed approach.

First Stage of Phase 2

In the first stage of Phase 2, now underway, we are focusing on implementing an operational rule for non-redeemable investment funds. Historically, operational requirements have not been applied to non-redeemable investment funds although, like mutual funds, they are subject to the continuous disclosure and fund governance requirements set out in NI 81-106 and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), respectively.

While non-redeemable investment funds are not new to the investment fund product landscape, their structure and characteristics have evolved along with the investment fund industry. Non-redeemable investment funds now use diverse investment strategies and provide investors with exposure to a variety of assets. In a time of increasing product innovation, we indicated in Staff Notice 81-322 that a staged approach will allow us to focus first on strengthening investor protection and addressing fairness issues arising out of the lack of an operational rule for non-redeemable investment funds. As well, introducing an operational rule for non-redeemable investment funds will level the playing field among non-redeemable investment funds, conventional mutual funds and exchange-traded mutual funds, providing a more consistent framework within which these funds can compete with each other.

In Staff Notice 81-322, we indicated that we were considering the adoption of core restrictions and other operational requirements, analogous to those in NI 81-102, for non-redeemable investment funds. These requirements could include, for example, certain conflicts of interest provisions and securityholder and regulatory approvals for fundamental changes to a non-redeemable investment fund and its management. In addition, we sought feedback on whether there were other restrictions and operational requirements that would be appropriate for non-redeemable investment funds and whether investment restrictions similar to those in Part 2 of NI 81-102 should apply to non-redeemable investment funds. We also sought feedback on a stand-alone operational rule for non-redeemable investment funds and the advantages and disadvantages of this approach.

Key Feedback Received on Staff Notice 81-322

In the feedback we received on Staff Notice 81-322, many commenters expressed the view that investment restrictions similar to those contained in Part 2 of NI 81-102 should not be adopted for non-redeemable investment funds because the primary distinction between mutual funds and non-redeemable investment funds is the flexibility to use alternative investment strategies to provide investors with exposure to different asset classes and innovative techniques. We were told this distinction is beneficial to investors and should not be eliminated. We have observed, however, that non-redeemable investment funds use a range of investment strategies that involve different levels and types of risks. Many non-redeemable investment funds invest using more conventional investment strategies similar to those used by mutual funds governed by NI 81-102. Others invest beyond the limits set out in NI 81-102.

While the CSA recognize that non-redeemable investment funds differ from mutual funds in certain key aspects, we do not agree that the differences provide a sufficient policy basis to support the absence of any investment restrictions for publicly offered non-redeemable investment funds. Accordingly, we are proposing to include non-redeemable investment funds in the restrictions and practices in NI 81-102 that, in our view, represent fundamental requirements for all publicly offered investment funds.

We think that many of the investment restrictions in Part 2 of NI 81-102 represent fundamental requirements, as the restrictions:

• establish parameters for investment funds to meet the expectations of retail investors who invest in pooled investment products;{2}

• prohibit activities that are inconsistent with the fundamental characteristics of investment funds as passive investment vehicles;{3} or

• reflect prudent fund management practices.{4}

We recognize, however, that certain investment restrictions in Part 2 of NI 81-102 may need to be modified for non-redeemable investment funds because of the differences discussed below.

Taking into account the feedback on Staff Notice 81-322, we accept that investors may benefit from a wider array of investment choices. The CSA wish to preserve the flexibility for non-redeemable investment funds to provide investors with access to alternative investment strategies. Accordingly, concurrently with the Proposed 81-102 Amendments, we are considering how to redesign NI 81-104 to expand the instrument to include both mutual funds and non-redeemable investment funds that wish to use alternative investment strategies that would go beyond the parameters of NI 81-102 (these investment funds are referred to as "alternative funds"). See "Modernization Project -- Alternative Funds Framework" below.

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We anticipate finalizing certain aspects of the Proposed 81-102 Amendments in advance of others. These include the proposed conflicts of interest provisions, securityholder and regulatory approval requirements, and custodianship requirements. Other aspects, particularly certain proposed investment restrictions that are interrelated with NI 81-104, will require more time to consider and evaluate. We expect these components to be considered in conjuction with any related amendments to NI 81-104 and to come into force contemporaneously at a later date.

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More detailed responses to the comments on Staff Notice 81-322 are in Annex D of this Notice.

Second Stage of Phase 2

In the final stage of this initiative, the CSA will review the investment restrictions applicable to mutual funds in Part 2 of NI 81-102 to assess if any changes should be made in light of market and product developments.

Substance and Purpose of the Proposed Provisions

The Proposed 81-102 Amendments introduce core operational requirements for non-redeemable investment funds, analogous to those applicable to mutual funds in NI 81-102. They will provide baseline protections for investors, regardless of whether they purchase an investment fund product structured as a mutual fund or a non-redeemable investment fund. They will also mitigate the potential for regulatory arbitrage within the current investment fund regulatory regime by levelling the playing field among non-redeemable investment funds, conventional mutual funds and exchange-traded mutual funds and providing a more consistent regulatory framework for comparable investment products.

The Proposed 81-102 Amendments, together with amendments to NI 81-104 required in the design of an alternative funds framework, are expected to provide sufficient flexibility for mutual funds and non-redeemable investment funds to give investors access to alternative investment strategies, and to help investors differentiate amongst the various types of publicly offered investment fund products. These amendments are expected to contribute to more efficient capital markets by providing greater certainty and consistency for investment funds and their managers regarding the regulatory framework that they must follow.

The CSA, in the context of the Modernization Project, also seek to keep pace with developing global standards by enhancing the disclosure requirements relating to securities lending, repurchase and reverse repurchase transactions by investment funds.{5}

The other components of the Proposed Amendments, as well as the Proposed 81-102CP Changes, are consequential to the Proposed 81-102 Amendments.

Summary of Proposed Amendments

The proposed operational requirements for non-redeemable investment funds in the Proposed 81-102 Amendments parallel many requirements applicable to mutual funds in NI 81-102. The CSA are of the view that many of the requirements in NI 81-102 provide core protections for investors that invest in investment funds and should not be limited only to mutual fund investors. Accordingly, we propose that similar provisions apply to non-redeemable investment fu nds. In some instances, we have proposed alternative requirements that recognize the differences between non-redeemable investment funds and mutual funds.

(i) Similarities and Differences between Mutual Funds and Non-Redeemable Investment Funds

Non-redeemable investment funds are similar to mutual funds in many ways. Under securities legislation, the primary purpose of both types of investment funds is to invest money provided by their securityholders. Both types of investment funds offer the benefits of pooled investment and portfolio management services to the public.

However, the CSA recognize that non-redeemable investment funds differ from mutual funds and, in particular, conventional mutual funds, in certain key aspects. Unlike conventional mutual funds, non-redeemable investment funds do not offer unlimited securities on a continuous basis and they do not redeem their securities at net asset value (NAV) on a regular basis. Instead, non-redeemable investment funds typically issue a fixed number of securities in an initial public offering,{6} following which the securities are generally listed and trade on an exchange at market prices which may be at a premium or discount to NAV. Many non-redeemable investment funds also give investors the right to redeem their securities annually at a price based on the NAV of the securities,{7} while others have a fixed life. Finally, while conventional mutual funds are primarily distributed by mutual fund dealers, non-redeemable investment funds are generally only distributed by investment dealers in the underwriting syndicate for the funds' public offering.

The key elements of the Proposed Amendments are outlined below. A consolidated list of the specific issues in the Proposed 81-102 Amendments on which we seek comment is set out in Annex A.

(ii) Investment Restrictions

As noted above, we think that many of the investment restrictions in Part 2 of NI 81-102 represent fundamental requirements that should apply to non-redeemable investment funds. In our review of the investment restrictions adopted by existing non-redeemable investment funds, we have observed that many non-redeemable investment funds have adopted several of the restrictions in Part 2 in their constating documents. We think that certain of the investment restrictions in Part 2 of NI 81-102 that impose constraints designed to limit risks for retail investors also represent prevailing industry best practices for investment funds that invest using conventional investment strategies.{8} Accordingly, we propose that those restrictions in Part 2 also apply to non-redeemable investment funds that invest using conventional investment strategies. Extending Part 2 to include these non-redeemable investment funds will result in the same regulatory protections for investors of all investment funds using conventional strategies, regardless of whether the fund is structured as a mutual fund or a non-redeemable investment fund.

We propose not to apply certain provisions in Part 2 of NI 81-102 to non-redeemable investment funds where differences between mutual funds and non-redeemable investment funds provide a basis for different requirements. Instead, we propose alternative provisions that recognize the differences and we propose limits that act as prudent safeguards.

Concentration Restriction

Many existing non-redeemable investment funds have adopted a concentration restriction that requires them to limit their investment in an issuer to an amount equal to 10% of NAV at the time of purchase, similar to the concentration restriction in section 2.1 of NI 81-102. Based on this prevailing practice, it appears that a 10% concentration limit is considered an industry best practice in providing a minimum level of diversification.

Therefore, we are proposing that a concentration restriction be adopted for non-redeemable investment funds, based on section 2.1 of NI 81-102. We also propose that the definition of "fixed portfolio ETF" in NI 81-102 be amended to permit a non-redeemable investment fund that has a fundamental investment objective of holding and maintaining a fixed portfolio of publicly traded equity securities of issuers named in their prospectus to exceed the 10% concentration restriction in section 2.1 of NI 81-102. We seek comment on whether a 10% concentration restriction is appropriate for non-redeemable investment funds and, if not, why a higher issuer concentration restriction would be appropriate for non-redeemable investment funds. We are also considering whether "alternative funds" governed by NI 81-104 should be permitted to have a more generous concentration restriction than in section 2.1 of NI 81-102. See "Modernization Project -- Alternative Funds Framework" below.

Investments in Physical Commodities

We are proposing to limit investments by a non-redeemable investment fund in physical commodities and specified derivatives the underlying interests of which are physical commodities to, in the aggregate, an amount equal to 10% of NAV at the time of purchase. This limit is similar to the limit imposed in recent orders that granted exemptive relief to mutual funds to permit them to make these types of investments. Non-redeemable investment funds that wish to focus on physical commodities or derivatives that provide exposure to physical commodities may choose to be "alternative funds" regulated under NI 81-104. See "Modernization Project -- Alternative Funds Framework" below.

Investments in Illiquid Assets

We are proposing that non-redeemable investment funds be permitted to invest a larger portion of their assets in illiquid assets than mutual funds. We note that, unlike mutual funds, non-redeemable investment funds generally do not offer regular redemptions based on NAV. Rather, most of them primarily offer liquidity through listing their securities on an exchange. We seek comment on the limit on illiquid asset investments that would be appropriate for non-redeemable investment funds.

Borrowing

We are proposing that non-redeemable investment funds be permitted to borrow cash up to an amount equal to 30% of NAV. The 30% borrowing limit generally reflects the current practice of the majority of existing non-redeemable investment funds, which limit their cash borrowings to an amount that is between 10% to 33% of NAV.

We also think that requiring borrowing from a lender that is licensed to carry on a lending business could provide additional monitoring and controls over a non-redeemable investment fund's cash borrowings that are based on the investment strategies and financial condition of the specific fund. We are proposing that non-redeemable investment funds borrow from a "Canadian financial institution" (as defined in National Instrument 14-101 Definitions), as we have observed that existing non-redeemable investment funds generally borrow from Schedule I or II banks. We seek comment on whether this requirement for non-redeemable investment fund borrowings is appropriate. We are also considering whether non-redeemable investment funds that are "alternative funds" regulated under NI 81-104 should be permitted to borrow more than 30% of NAV. See "Modernization Project -- Alternative Funds Framework" below.

We also note that under the Proposed 81-102 Amendments, non-redeemable investment funds would be able to create leverage only through cash borrowings. Non-redeemable investment funds that wish to create leverage through the use of specified derivatives (as defined in NI 81-102) or short selling may choose to be "alternative funds" regulated under NI 81-104. See "Modernization Project -- Alternative Funds Framework" below.

Investments in Mortgages

We are proposing that there be no limit on a publicly offered non-redeemable investment fund's investments in guaranteed mortgages (as defined in NI 81-102). We are also proposing that mortgage investments by these types of funds be restricted to guaranteed mortgages. The CSA are of the view that mortgages that are not fully and unconditionally guaranteed by a government or government agency ("non-guaranteed mortgages") may not be appropriate investments for publicly offered investment funds.{9}

We have observed that there is currently a limited number of existing publicly offered non-redeemable investment funds that have investment objectives of investing in non-guaranteed mortgages. We therefore are proposing a 24 month transition period for the application of the restriction in proposed paragraph 2.3(2)(b), to give these types of funds time either to divest their holdings of non-guaranteed mortgages (which would trigger a change in investment objective if the fund's investment objectives state that the fund will be investing in non-guaranteed mortgages) or to transition into the regulatory regime for issuers that are not investment funds. We are seeking comment on the impact of the proposed restriction on non-guaranteed mortgage investments and the appropriate length of the transition period. We are also seeking comment on alternatives to a transition period, such as a grandfathering provision, and the impact of this alternative.

Fund-of-Fund Structures

We are proposing that non-redeemable investment funds be required to follow the requirements in subsection 2.5(2) of NI 81-102 when investing in mutual funds. We also propose that non-redeemable investment funds not be permitted to invest in other non-redeemable investment funds. Otherwise, a non-redeemable investment fund could have portfolio exposure that is greater than 130% of its NAV if it invests in an underlying non-redeemable investment fund that leverages its portfolio through cash borrowings. The CSA have also observed that non-redeemable investment funds generally do not seek to invest in other non-redeemable investment funds. Non-redeemable investment funds that wish to use greater leverage may choose to be "alternative funds" regulated under NI 81-104. See "Modernization Project -- Alternative Funds Framework" below.

We also seek feedback on the application of proposed paragraphs 2.5(2)(a) and (c) of NI 81-102 to certain non-redeemable investment funds that use a fund-of-fund structure involving an underlying mutual fund.

Securities Lending, Repurchases and Reverse Repurchases

We think that non-redeemable investment funds should engage in securities lending, repurchases and reverse repurchases on the same basis as mutual funds. Therefore, we are generally proposing that the framework applicable to securities lending, repurchases and reverse repurchases by mutual funds apply to non-redeemable investment funds. We also propose to amend paragraphs 2.12(1)12 and 2.13(1)11 of NI 81-102 such that the aggregate market value of securities loaned under securities lending transactions or sold in repurchase transactions by an investment fund may not exceed an amount equal to 50% of the fund's NAV.

Paragraphs 2.12(1)12 and 2.13(1)11 currently state that the aggregate market value of the securities loaned under securities lending transactions or sold in repurchase transactions may not exceed 50% of the fund's total assets, not including the collateral held by the fund for the loaned securities and the cash held by the fund for the sold securities. The proposed amendments to paragraph 2.12(1)12 and 2.13(1)11 would mean that non-redeemable investment funds, which are proposed to be permitted to borrow cash up to an amount equal to 30% of their NAV, may not include any borrowed cash (or portfolio assets purchased with borrowed cash) in calculating the maximum market value of their securities that may be loaned under securities lending transactions or sold in repurchase transactions. For mutual funds, the CSA consider that the impact of this proposed amendment would be minimal as mutual funds are generally not permitted to be leveraged and their liabilities are generally not significant relative to their total assets.

(iii) New Non-Redeemable Investment Funds

Seed Capital

As noted above, non-redeemable investment funds typically raise sufficient funds for investment purposes by issuing a fixed number of securities in their initial public offering, instead of engaging in a continuous distribution of securities. Because of the differences in capital raising models of mutual funds and non-redeemable investment funds, the CSA do not think that the seed capital and minimum subscription requirements in sections 3.1 and 3.2 of NI 81-102 should apply to non-redeemable investment funds.

Organizational Costs

Proposed subsection 3.3(3) of NI 81-102 prohibits the costs of organizing a new non-redeemable investment fund from being borne by the fund. Currently, managers that launch non-redeemable investment funds do not pay any of the organizational costs; instead, the costs are paid out of the proceeds of the initial public offering of the non-redeemable investment fund. On the other hand, managers that launch mutual funds must pay the costs of establishing new mutual funds and then recoup the costs through the ongoing management fee charged to the fund. The CSA recognize that non-redeemable investment funds undertake an initial public offering that raises a fixed amount of money in a limited amount of time, rather than offering securities on a continuous basis. While this has historically accounted for the difference in organizational cost payment models between non-redeemable investment funds and mutual funds, the CSA think it is important to examine the application of proposed subsection 3.3(3) of NI 81-102 to non-redeemable investment funds.

Both investors and managers benefit from managers establishing investment funds that are sustainable in the long term. However, the financial risk of launching a non-redeemable investment fund that may not be sustainable appears to be borne only by investors if all of the organizational costs are paid out of the proceeds of the initial public offering. Therefore, requiring managers to pay the organizational costs of a new non-redeemable investment fund could be perceived to further align the interests of managers with those of investors.

Another potential benefit of the proposed provision is that it may increase the efficiency of non-redeemable investment fund launches. The proposed provision could further strengthen the manager's interest in minimizing organizational costs to reduce its initial outlay, resulting in cost efficiencies when launching new funds. Also, as certain organizational costs are fixed, it appears to the CSA that launching a larger fund may be more cost efficient than launching multiple smaller funds, which may have the potential disadvantages of higher per unit operational costs and lower secondary market liquidity.

Finally, the introduction of a requirement for the manager to pay the organizational costs of launching a new non-redeemable investment fund will level the playing field between mutual fund managers and non-redeemable investment fund managers and may discourage arbitrage opportunities. The CSA have observed several instances where managers launch mutual funds without paying any organizational costs by creating a non-redeemable investment fund and then converting it into a mutual fund after a short period of time.

We recognize that if managers are required to pay organizational costs, managers that cannot finance the organizational costs would not be able to launch new non-redeemable investment funds. As well, smaller non-redeemable investment funds may not be launched. We seek comment on the potential impact and the benefits and costs of proposed subsection 3.3(3) for non-redeemable investment funds. In addition, we seek comment on whether the different capital raising model followed by non-redeemable investment funds may support the fund continuing to pay some of the organizational costs out of the proceeds of the initial public offering of the fund and whether there are specific components of organizational costs that are more appropriately borne by the non-redeemable investment fund and components that are more appropriately borne by the manager.

(iv) Conflicts of Interest

We are proposing to apply the conflicts of interest provisions in Part 4 of NI 81-102 to non-redeemable investment funds. The introduction of these provisions will extend key protections to non-redeemable investment fund investors. This proposal received broad support from commenters that provided feedback to Staff Notice 81-322.

(v) Fundamental Changes

We think that non-redeemable investment fund investors should have similar protections and rights as mutual fund investors relating to fundamental changes to their funds. Therefore, we are proposing to apply the provisions in Part 5 of NI 81-102 to non-redeemable investment funds.

Securityholder and Regulatory Approval Requirements

The CSA have observed that the constating documents of many non-redeemable investment funds incorporate investor voting rights that are similar to those in Part 5 of NI 81-102. However, these rights are not consistently provided by each non-redeemable investment fund offered to the public. Codifying these requirements will give all investors consistent and guaranteed voting rights on important changes that impact the fund or its management.

We propose to re-draft the requirement to obtain regulatory approval for a change in control of the manager for greater clarity and move it from subsection 5.5(2) to proposed paragraph 5.5(1)(a.1) of NI 81-102. While this will be a new requirement for non-redeemable investment funds, there are no substantive changes for mutual funds from the re-draft.

Proposed New Securityholder Approval Requirements

In addition to the existing requirements in Part 5, the CSA also propose that prior securityholder approval be obtained to implement a change to the nature of an investment fund. Specifically, prior securityholder approval is proposed to be required to implement any change that would convert a mutual fund into a non-redeemable investment fund, convert a non-redeemable investment fund into a mutual fund, or convert an investment fund into an issuer that is not an investment fund. In addition, the costs and expenses to implement the change (which include the costs of obtaining securityholder approval and, if applicable, the costs of filing a simplified prospectus to commence a continuous distribution) may not be borne by the investment fund.

We are proposing a limited exemption from the proposed securityholder approval requirement for a non-redeemable investment fund that is structured from inception to convert to a mutual fund upon the occurrence of a specified event. Conditions for this proposed exemption include prospectus and sales communication disclosure of the conversion and securityholder notice prior to the conversion.

The CSA also propose an exemption to the securityholder and regulatory approval requirements for fund mergers involving specialized non-redeemable investment funds that have a limited life and that do not list or trade their securities on a secondary market. These non-redeemable investment funds are typically organized as limited partnerships and have the investment objective of providing returns through tax-assisted investments in "flow-through" shares issued by resource companies. Investors must remain invested in the funds to realize the tax benefits of their investment, with liquidity provided at the termination of the fund through a distribution of the net proceeds or a reorganization with a mutual fund under which assets are transferred on a tax-deferred basis to the mutual fund in exchange for securities issued by the mutual fund. Given the unique structure and purpose of these non-redeemable investment funds, the CSA propose that these funds be exempted from securityholder and regulatory approval requirements if they are effecting a rollover into a mutual fund, provided that certain requirements, including prospectus disclosure requirements, are met.

Proposed New Conditions for Pre-Approved Fund Mergers

In addition to the current conditions in subsection 5.6(1) of NI 81-102, the CSA propose that, as a condition to effect a merger of a non-redeemable investment fund with another investment fund without securityholder or regulatory approval, the non-redeemable investment fund offer to redeem its securities at their NAV at a date that is before the effective date of the merger. In our view, the ability to exit the fund at NAV helps to mitigate the need for securityholder approval.

The CSA also propose that a merger be effected at NAV as a condition for the merger to proceed without securityholder or regulatory approval. This condition helps to mitigate conflicts of interest where funds under common management are merged. The TSX Company Manual contains a similar condition for fund mergers to be implemented without securityholder approval.

Termination of Non-Redeemable Investment Funds

Proposed section 5.8.1 of NI 81-102 requires that non-redeemable investment funds terminate no earlier than 15 days and no later than 30 days after filing a press release to disclose the intended termination. This provision is intended to give investors sufficient time to consider the consequences of the termination and also require that money be repaid promptly to investors if a fund is terminating, as any secondary market liquidity can be expected to decline significantly after the termination of the fund is disclosed.

(vi) Custodianship Requirements

Custodianship requirements for non-redeemable investment funds that parallel the requirements for mutual funds in Part 6 of NI 81-102 currently exist in Part 14 of NI 41-101. We propose to update the drafting in Part 6 of NI 81-102 based on the drafting in NI 41-101, and apply the updated NI 81-102 requirements to non-redeemable investment funds. There are no substantive changes to the custodian requirements for any investment funds, other than requiring all non-redeemable investment funds, rather than only those that file a prospectus under NI 41-101, to comply with the custodianship requirements. Part 14 of NI 41-101 will remain in order to maintain the custodianship requirements for scholarship plans.

(vii) Incentive Fees

We propose that restrictions on non-redeemable investment funds paying incentive fees apply in a similar manner as for mutual funds. Part 7 of NI 81-102 sets parameters for incentive fees to be charged appropriately with reference to a relevant benchmark, which we think should apply to all investment funds that use similar investment strategies. A non-redeemable investment fund that invests using alternative investment strategies permitted under NI 81-104 may choose to be an "alternative fund" regulated under NI 81-104 and pay incentive fees in accordance with that instrument. See "Modernization Project -- Alternative Funds Framework" below.

(viii) Sales of Securities

The CSA do not propose to apply the provisions in Part 9 of NI 81-102 to non-redeemable investment funds because of the differences in the distribution models between non-redeemable investment funds and mutual funds. However, we are proposing to introduce subsections 9.3(2) and (3) to require that issuances of non-redeemable investment fund securities not cause dilution to existing securityholders. These subsections parallel the requirement that mutual fund securities be issued at NAV. We seek comment on whether proposed subsections 9.3(2) and (3) achieve the purpose of preventing dilutive issuances while taking into account how new securities are distributed.

(ix) Warrant Offerings

Proposed new Part 9.1 of NI 81-102 prohibits an investment fund from issuing warrants, rights or other specified derivatives the underlying interest of which is a security of the investment fund. In recent years, the CSA have observed non-redeemable investment funds issuing warrants that could potentially dilute the value of the securities held by investors who do not exercise the warrants. Steps to mitigate dilution, such as selling the warrants on the secondary market, may be ineffective or not sufficient to compensate investors who do not exercise their warrants for the loss of the value of their securities. As warrants are automatically issued to securityholders, warrants may also appear to be coercive, with securityholders obligated to make an additional investment or face the risk of dilution.

We think that investors in a non-redeemable investment fund may not expect the costs of warrant issuances to be part of their investment bargain; specifically, investors do not generally expect that the fund they invest in will seek additional capital from them after they have made the initial investment, or that they will have to incur costs for the fund to raise additional capital. The CSA are of the view that a restriction on warrant issuances will not unduly limit the ability of an investment fund to raise additional money. A manager that wishes to raise additional money for its fund may file a prospectus to issue new securities, provided that the issuance is not dilutive to existing securityholders.

(x) Redemptions

The CSA do not propose to apply many of the provisions in Part 10 of NI 81-102 to non-redeemable investment funds because of the differences in redemption models between these funds and mutual funds. However, we propose similar requirements for non-redeemable investment funds that offer annual redemptions based on NAV or more regular redemptions at market value. We are proposing that:

• like mutual funds, non-redeemable investment funds that offer redemptions send investors an annual reminder of the procedures for exercising redemptions;

• non-redeemable investment funds pay redemption proceeds promptly; specifically, no more than 15 business days after the redemption is effected;

• non-redeemable investment funds not redeem securities at an amount that is greater than the NAV of the security on the redemption date, to avoid dilution to remaining securityholders; and

• non-redeemable investment funds that offer redemptions be permitted to suspend redemptions if the requirements in section 10.6 of NI 81-102 are met.

Many existing non-redeemable investment funds offer redemptions of their securities based on NAV once a year. The CSA have taken the view that investment funds that offer redemptions based on NAV no more than once a year are non-redeemable investment funds. We seek comment on whether to reconsider this position.

(xi) Commingling of Cash

The CSA are proposing to amend Part 11 of NI 81-102 so that the provisions relating to the holding of monies from sales and redemptions in a trust account will apply to non-redeemable investment funds. The Proposed 81-102 Amendments would also permit cash received in respect of sales and redemptions of all investment fund securities to be held in one account.

(xii) Sales Communications

We are proposing to apply the provisions in Part 15 of NI 81-102 to sales communications of non-redeemable investment funds, with modifications that recognize differences between mutual funds and non-redeemable investment funds. The proposed requirements in Part 15 do not impact the restrictions applicable during the waiting period and the period between the issuance of the receipt for the final prospectus and the closing of the prospectus offering.

We are proposing to amend section 15.6 of NI 81-102 such that a mutual fund that was converted from a non-redeemable investment fund must, if it wishes to present performance data, present past performance data for the period when it existed as a non-redeemable investment fund. This is consistent with the continuous disclosure requirements in NI 81-106, as well as exemptive relief that has been granted to such funds.

(xiii) Naming Convention for Investment Funds

We are considering whether "alternative funds" regulated under NI 81-104 should be required to include the words "Alternative Fund" in their name to clearly differentiate "alternative funds" from investment funds subject only to NI 81-102. See "Modernization Project -- Alternative Funds Framework" below. We seek comment on whether investment funds that are subject only to NI 81-102 should also be required to include specific identifiers in their name that would identify them as investment funds that use the conventional investment strategies permitted in NI 81-102.

(xiv) Other Provisions relating to Non-Redeemable Investment Funds

We are proposing that non-redeemable investment funds set record dates in accordance with Part 14 of NI 81-102, except that if a non-redeemable investment fund lists its securities on an exchange, it may follow the rules of the applicable exchange regarding record dates.

We also propose that non-redeemable investment funds maintain and make available securityholder records in accordance with Part 18 of NI 81-102.

(xv) Transition Period for Certain Proposed Provisions relating to Non-Redeemable Investment Funds

As noted above, we anticipate that some aspects of the Proposed 81-102 Amendments, specifically, the proposed core operational requirements for non-redeemable investment funds other than certain provisions in Part 2 of NI 81-102, will come into force in advance of other aspects. We expect that the introduction of certain investment restrictions in Part 2 of NI 81-102 and their interrelation with NI 81-104 will take more time to consider and evaluate. Given their interconnectedness, we expect that these components will be considered together and come into effect contemporaneously at a later date.

Currently, the CSA propose an 18 month transition period for existing non-redeemable investment funds to comply with the investment restrictions in proposed amended sections 2.2, 2.3,{10}2.4 and 2.5 of NI 81-102 to give existing funds sufficient time to align their portfolios with the new requirements. Any new non-redeemable investment funds established after the coming-into-force date of the Proposed 81-102 Amendments pertaining to these sections would be required to comply with the investment restrictions in Part 2 of the amended NI 81-102 immediately. We seek comment on the transition period and alternatives to a transition period.

We are also proposing an 18 month transition period for compliance with Part 7 of NI 81-102, and a 6 month transition period for existing non-redeemable investment funds to continue to use sales communications (other than advertisements) that were prepared prior to the coming-into-force date of the Proposed 81-102 Amendments pertaining to Part 15 of NI 81-102.

(xvi) Related Consequential Amendments

Amendments to NI 41-101 and Form 41-101F2

Where a non-redeemable investment fund is structured to convert into a mutual fund upon the occurrence of a specified event, we propose to amend Form 41-101F2 to require specific prospectus disclosure of the conversion.

We also propose to require specific prospectus disclosure of investments in physical commodities. If an investment fund invests in physical commodities, proposed Item 6.1(7) of Form 41-101F2 will require certain disclosure under the "Investment Strategies" heading, including the types of commodities the fund may purchase, whether the commodity exposure is in the form of investments in physical commodities or investments through specified derivatives the underlying interest of which are physical commodities, and how the fund will use its investment in physical commodities to achieve its investment objectives.

Many non-redeemable investment funds redeem their securities by reference to NAV annually, with the redemption proceeds being equal to the NAV per security less certain costs that may be deducted from the NAV per security. In response to the feedback received on Staff Notice 81-322, we propose to amend Item 15 of Form 41-101F2 to require disclosure of any costs or other fees that may be deducted from the NAV per security to clarify what amount will be received upon redemption.

We propose to repeal Item 21.2 of Form 41-101F2 to reflect the proposed restrictions on borrowing by non-redeemable investment funds. As proposed subparagraph 2.6(a)(i.1) of NI 81-102 would restrict cash borrowings to loans from a Canadian financial institution (as defined in National Instrument 14-101 Definitions), non-redeemable investment funds would not be permitted to issue debt securities to the public.

We also propose to repeal Items 21.3 and 27 of Form 41-101F2 to reflect the proposed prohibition on investment funds offering warrants or specified derivatives the underlying interest of which are securities of the investment fund.

Finally, we propose to delete references to "subsidiaries" of investment funds in Form 41-101F2 as these references would not be consistent with proposed amended section 2.2 of NI 81-102.

Other Consequential Amendments

We propose minor consequential amendments to NI 81-106, NI 81-107 and its commentary, and the national instruments and policies in Annexes I to K to reflect proposed changes in certain definitions in NI 81-102 to encompass non-redeemable investment funds and to reflect the change in the name of NI 81-102 from "National Instrument 81-102 Mutual Funds" to "National Instrument 81-102 Investment Funds".

(xvii) Proposed 81-102 Amendments that Impact Mutual Funds

While Phase 2 focuses on introducing operational requirements for non-redeemable investment funds, there are provisions in the Proposed 81-102 Amendments that would impact mutual funds, in addition to our consideration of additional requirements relating to securities lending, repurchases and reverse repurchases by investment funds in Annex C and our proposals to redesign NI 81-104 described below. These provisions are:

• proposed amended sections 2.11 and 2.17 will require an exchange-traded mutual fund that is not in continuous distribution to issue a news release if the fund intends to begin using specified derivatives, short selling and entering into securities lending, repurchases and reverse repurchases transactions;

• proposed amended paragraphs 2.12(1)12 and 2.13(1)11 will limit the amount of securities loaned or sold in repurchase transactions by a mutual fund to 50% of NAV, rather than 50% of total assets, excluding the collateral delivered to the fund (see "(ii) Investment Restrictions -- Securities Lending, Repurchases and Reverse Repurchases" above);

• subsection 3.3(2) is proposed to be repealed, as the rationale for introducing proposed subsection 3.3(3) for non-redeemable investment funds also applies to exchange-traded mutual funds that are not in continuous distribution (see "(iii) New Non-Redeemable Investment Funds -- Organizational Costs" above);

• proposed amended paragraph 5.1(1)(g) will broaden the securityholder approval requirements to require securityholder approval for a merger of a mutual fund with any issuer, rather than a merger with another mutual fund;

• proposed new paragraph 5.1(1)(h) will require that a mutual fund that wishes to implement a change that restructures the fund into a non-redeemable investment fund or an issuer that is not an investment fund to obtain prior securityholder approval, with the fund prohibited from bearing the costs of the restructuring;

• proposed new paragraph 5.6(1)(k) will include a new condition that the consideration offered to securityholders of an investment fund for a merger have a value that is equal to the NAV of the fund if the merger is to be effected without prior securityholder or regulatory approval;

• subsection 5.6(2) is proposed to be repealed, as NI 81-106 requires that the auditor's report that accompanies financial statements of an investment fund not contain a reservation;

• proposed section 9.1 will prohibit the issuance of warrants and similar instruments by all investment funds;

• proposed subsections 9.3(2) and (3) will apply to an exchange-traded mutual fund that is not in continuous distribution to prevent dilutive issuances of securities;

• proposed subsections 10.4(1.3) and 10.6(2) will require an exchange-traded mutual fund that is not in continuous distribution to pay redemption proceeds no more than 15 business days after the redemption is effected, unless the redemptions of the fund have been suspended in accordance with the requirements in section 10.6; and

• proposed amendments to Part 11 will permit cash received in respect of sales and redemptions of all investment fund securities (and not only mutual fund securities) to be held in one trust account.

We are also considering requirements for investment funds governed only by NI 81-102 to include specific identifiers in their name (see "(xiii) Naming Convention for Investment Funds" above).

Adoption Procedures

We expect the Proposed Amendments to be incorporated as part of rules in each of British Columbia, Alberta, Manitoba, Ontario, Nova Scotia, Prince Edward Island, New Brunswick, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut, and incorporated as part of commission regulations in Saskatchewan and regulations in Québec. The Proposed 81-102CP Changes are expected to be adopted as part of policies in each of the CSA jurisdictions.

Alternatives Considered to the Proposed Amendments

The alternative to the Proposed Amendments would be not to cover non-redeemable investment funds in NI 81-102 and thus maintain the status quo.

Not proceeding with the Proposed Amendments would continue to permit non-redeemable investment funds to operate without a set of core operational requirements, such as certain conflicts of interest prohibitions, securityholder and regulatory approval requirements for fundamental changes and custodianship requirements. We think this alternative would not be appropriate in view of the investor protection and fairness concerns arising from the lack of baseline protections for investors of non-redeemable investment funds. Without the Proposed Amendments, there would also be less certainty and consistency for non-redeemable investment funds and their managers regarding the operational requirements that they must follow.

Anticipated Costs and Benefits of the Proposed Amendments

We think the Proposed Amendments strike the right balance between protecting investors and fostering fair and efficient capital markets. The Proposed Amendments will benefit investors and the capital markets by creating a more consistent, fair and functional regulatory regime across the spectrum of investment fund products.

Core operational requirements for non-redeemable investment funds and a more comprehensive regulatory framework for alternative funds will increase the efficiency for the investment fund industry by enabling them to offer products in a more timely fashion, as the requirements applicable to all publicly offered investment funds will be more clearly delineated for managers, investors and the market generally. We also think that the Proposed Amendments will level the playing field for all investment funds.

The CSA are of the view that the Proposed Amendments will not create substantial costs for investment funds, their managers or securityholders. Many of the Proposed Amendments codify prevailing investment parameters and limits within the non-redeemable investment fund industry. Our review of existing non-redeemable investment funds indicates that a majority of non-redeemable investment funds already follow investment restrictions that are comparable to the proposed investment restrictions in NI 81-102. Further, many managers either manage various types of investment fund products (including mutual funds subject to NI 81-102) or have already established the necessary infrastructure to monitor compliance with the investment restrictions included in the constating documents of their funds. Therefore, these managers are already equipped to monitor compliance with any additional investment restrictions.

Introducing fundamental investor rights and protections may involve additional costs for non-redeemable investment funds, their managers or their securityholders. We think that the costs associated with providing investors with fundamental rights and protections are proportionate and do not outweigh the benefits. Areas where there may be a cost burden include:

• the proposal to prohibit a non-redeemable investment fund or its securityholders from paying the organizational costs of a new non-redeemable investment fund may require managers to finance the organizational costs of new funds. Managers could reconsider how they charge fees to their funds or securityholders if they pay the costs of launching a new fund;

• the proposed application of the securityholder voting requirements in Part 5 of NI 81-102 to non-redeemable investment funds may result in additional costs. Similar to our view on the importance of providing mutual fund investors with the right to vote on fundamental changes, we think that Part 5 provides important protection for investors of non-redeemable investment funds that would outweigh the associated costs. We also do not expect managers to implement fundamental changes on a frequent basis; and

• the proposed prohibition on warrant issuances to protect existing investors of an investment fund from dilutive offerings may result in increased costs if managers have to look for other ways of increasing their assets under management. We expect that managers will raise additional money through offerings of new securities of the fund, rather than through warrant offerings. As managers may still raise additional money through new offerings, we think that this prohibition does not represent an undue restriction on managers and that the investor protection benefits from this proposed prohibition outweigh the costs.

Overall, we think the potential benefits of the Proposed Amendments are proportionate to their costs. We seek feedback on whether you agree or disagree with our perspective on the cost burden of the Proposed Amendments, as well as your views on the cost burden of implementing other elements of the Modernization Project, including the proposed reform of NI 81-104 described below. Specific quantitative data in support of your views in this context would be particularly helpful.

Modernization Project -- Alternative Funds Framework

Together with the CSA's introduction of core operational requirements for publicly offered non-redeemable investment funds, we are considering amendments to NI 81-104 to include both mutual funds and non-redeemable investment funds that focus on alternative asset classes or use alternative investment strategies not permitted by proposed amended NI 81-102.

Currently, NI 81-104 sets forth a regulatory framework that applies only to specialized mutual funds that are commodity pools by exempting them from certain restrictions in NI 81-102. A redesign of NI 81-104 to include both mutual funds and non-redeemable investment funds is intended to preserve the flexibility for non-redeemable investment funds to use alternative investment strategies that may not be permissible under the Proposed 81-102 Amendments, and at the same time, create a more comprehensive regulatory framework in NI 81-104 for alternative funds (both mutual funds and non-redeemable investment funds). Any amendments to NI 81-104 will also seek to help investors more effectively differentiate between investment funds that use alternative investment strategies from investment funds that use more conventional investment strategies.

As part of our review of NI 81-104, we are examining the current exemptions from NI 81-102 that are contained in NI 81-104 to determine whether each exemption should remain and what, if any, new exemptions should be added. We are also considering new disclosure requirements in the prospectus, continuous disclosure and sales communications for investment funds that wish to use the alternative investment strategies in NI 81-104 and whether there is a need for additional proficiency requirements for the sale of alternative fund securities.

We have set out below the key elements of a proposed regulatory framework in NI 81-104 on which we seek feedback. This will inform the rule-making relating to NI 81-104 and the proposed investment restrictions in NI 81-102, as the two frameworks are intended to work in conjunction with each other to allow a wide variety of investment funds to be offered to the public. After reviewing your feedback, we will publish proposed amendments to NI 81-104 for comment. Based on the feedback received, we may also publish for comment modifications to certain of the Proposed 81-102 Amendments that interact with proposed amendments to NI 81-104.

Feedback is welcome on all aspects of the proposed regulatory framework in NI 81-104 being considered by the CSA. A consolidated list of the specific issues on which we seek feedback is set out in Annex B.

(i) Definition of "Alternative Fund"

The CSA contemplate that NI 81-104 would apply to

• an "alternative fund" to which NI 81-102 applies, and

• a person or company in respect of an alternative fund to which NI 81-104 applies.

The CSA are considering replacing the term "commodity pool" in NI 81-104 with "alternative fund", a term that we think will better describe the types of investment objectives or strategies that characterize the investment funds that would be subject to the amended NI 81-104. Alternative funds will be permitted to invest in certain asset classes and use certain strategies not permitted by NI 81-102 by virtue of exemptions from NI 81-102 that will be contained in NI 81-104. We seek feedback on the use of the term "alternative fund" and whether it accurately describes the types of funds that would be expected to be captured by NI 81-104.

The current definition of "commodity pool" in NI 81-104 refers to a mutual fund that has adopted fundamental investment objectives that permit it to use or invest in specified derivatives or physical commodities in a manner not permitted by NI 81-102. The CSA are considering defining an "alternative fund" as an investment fund that, in its initial prospectus, states that it is an alternative fund in response to Item 1.3(1) of Form 41-101F2. Both mutual funds and non-redeemable investment funds could be alternative funds if they satisfy the definition.

(ii) Investment Restrictions

Concentration Restriction

To allow investment funds greater flexibility to engage in alternative investment strategies, we are considering permitting alternative funds to invest a larger percentage of their NAV in securities of a single issuer than the proposed 10% restriction in NI 81-102. Depending on the comments received on the Proposed 81-102 Amendments, non-redeemable investment funds may become subject to a higher concentration restriction than 10% under NI 81-102, and this may impact the concentration restriction under NI 81-104. See "Summary of Proposed Amendments" above. We seek feedback on the types of investment strategies an alternative fund may engage in that would require a fund's investment in an issuer to exceed the current 10% concentration restriction in NI 81-102.

Also, given that we anticipate alternative funds having more leveraged exposure than investment funds that invest within the limits in NI 81-102, we are considering whether the concentration measurement in section 2.1 of NI 81-102 based on the net asset value is a sufficient measurement to provide information about the concentration of an alternative fund's portfolio. We seek feedback on whether there are other ways that would better describe the level of concentration of an alternative fund portfolio.

Investments in Physical Commodities

The CSA are considering maintaining the current exemptions from paragraphs 2.3(d), (e), (f), (g) and (h) of NI 81-102 in NI 81-104. We think that NI 81-104 should similarly permit alternative funds structured as non-redeemable investment funds to invest in physical commodities and specified derivatives linked to physical commodities in the same way as commodity pools currently do today. The CSA expect that investment funds that primarily focus on investing in physical commodities through direct holdings or through specified derivatives would be alternative funds subject to NI 81-104.

Currently, there are mutual funds that have received exemptive relief from NI 81-102 to be "precious metals funds" because their fundamental investment objectives provide that they invest primarily in gold, silver or platinum. We do not expect these funds to be impacted by our consideration of proposed amendments to NI 81-104.

Fund-of-Fund Structures

Generally, we are considering permitting an alternative fund to invest in underlying investment funds (including underlying alternative funds) subject to similar conditions applicable to fund-of-fund investments in section 2.5 of NI 81-102.

The application of paragraphs 2.5(2)(a) and (c) of NI 81-102 to alternative funds would mean that an alternative fund that wishes to use a fund-of-fund structure may invest only in underlying mutual funds that are reporting issuers in the same jurisdictions as the alternative fund. The CSA are not at this time contemplating the inclusion of an exemption from paragraphs 2.5(2)(a) and (c) in NI 81-104 to permit alternative funds to invest in underlying funds that are not reporting issuers. We are of the view that fund-of-fund structures that involve investing in underlying investment funds that are not reporting issuers in the same jurisdictions as the alternative fund (e.g., underlying funds that are foreign investment funds or Canadian-based investment funds that are offered under prospectus exemptions) are more appropriately addressed through discretionary exemptive relief for each specific structure proposed to be offered.

Borrowing

The CSA are considering whether alternative funds should be permitted to borrow cash beyond the proposed 30% limit for non-redeemable investment funds in NI 81-102. If alternative funds are permitted to borrow a greater amount of cash, we are considering a limit that would not exceed 50% of NAV at the time of borrowing. We seek feedback on whether alternative funds that are structured as mutual funds and those that are structured as non-redeemable investment funds should have different borrowing restrictions in NI 81-104, in light of a mutual fund's need to fund regular redemptions.

Short Selling

The CSA are considering permitting alternative funds to sell securities short beyond the limits in NI 81-102 to provide these funds with more flexibility to use long/short strategies. We are considering limiting the aggregate market value of all securities of an issuer that may be sold short by an alternative fund to 10% of the NAV of the fund, calculated at the time of the short sale. As well, we are considering restricting the aggregate market value of all securities that may be sold short by an alternative fund to 40% of the NAV of the fund, calculated at the time of a short sale. These limits would be similar to those imposed in orders that granted exemptive relief to commodity pools to permit them to short sell. We are also considering including an exemption in NI 81-104 from the short selling conditions in subsections 2.6.1(2) and (3) of NI 81-102, which require funds to hold cash cover and prohibit the use of short sale proceeds to purchase securities other than securities that qualify as cash cover. We seek feedback on whether alternative funds should be permitted to short sell on this basis.

Use of Derivatives

We contemplate maintaining the current exemption from sections 2.8 and 2.11 of NI 81-102 in NI 81-104 to permit alternative funds to create leverage through using specified derivatives. This exemption would apply to both mutual funds and non-redeemable investment funds that are alternative funds.

Leveraged Daily Tracking Alternative Funds

In recent years, the CSA have observed offerings of investment funds (Leveraged Daily Tracking Alternative Funds) that seek to provide daily investment returns that are up to two times the daily positive or inverse return of an underlying interest (e.g., an index, commodity price, interest rate or exchange rate) that they track. When held for periods longer than one day, the return of these funds may differ from the multiple or inverse multiple of the return of the relevant underlying interest over the longer period. These differences may be inconsistent with investor expectations.

The CSA are considering introducing a restriction on alternative funds from providing returns of more than two times the existing daily positive or inverse return of an underlying interest. We also seek feedback on issues relating to the marketing of Leveraged Daily Tracking Alternative Funds, as well as issues relating to the proficiency of individual dealing representatives who sell securities of Leveraged Daily Tracking Alternative Funds and dealer supervision of trades in securities of these funds.

Counterparty Credit Exposure

We are considering whether the exemption from subsections 2.7(4) and (5) of NI 81-102 (the Counterparty Exposure Exemption) in NI 81-104 should be repealed. The repeal of the Counterparty Exposure Exemption will restrict an alternative fund from having a mark-to-market exposure under its specified derivatives positions with any one counterparty other than an acceptable clearing corporation or a clearing corporation that settles transactions made on a futures exchange listed in Appendix A to NI 81-102 (the Clearing Corporation Exception), which exceeds, for a period of 30 days or more, 10% of the NAV of the alternative fund. The existing Clearing Corporation Exception in subsection 2.7(4) of NI 81-102 would permit alternative funds to continue to use investment strategies based on standardized futures.

Repealing the Counterparty Exposure Exemption would be intended to reduce the risk of exposure to a single counterparty, particularly in connection with illiquid over-the-counter (OTC) derivatives. Where an alternative fund's exposure to a counterparty constitutes a significant amount of the fund's NAV, we think that the risks associated with such exposure, particularly the credit risk of the counterparty, may materially alter the nature and risk profile of the fund.

We also note that large counterparty exposures through OTC derivatives may be inconsistent with the restrictions on investments in illiquid assets, as NI 81-104 does not exempt commodity pools from the restriction in section 2.4 of NI 81-102.

We seek feedback on the impact of this approach to existing commodity pools that may be relying on the Counterparty Exposure Exemption and whether the repeal of this exemption would appropriately mitigate the risks of counterparty exposure, or whether there are other ways to achieve the desired outcome.

Total Leverage Limit

Limit

The CSA are considering introducing a total leverage limit for alternative funds in NI 81-104. Alternative funds may employ leverage through a number of ways including borrowing, short selling and derivatives transactions; also, they may obtain leveraged exposure through investing in underlying funds that employ leverage. Although the provisions relating to each investment strategy may specify limits for each strategy, we are considering creating a single cap on the total amount of leverage an alternative fund may create through leveraged investment strategies. The cap would include the leverage obtained through investing in underlying funds that employ leverage.

We are considering a total leverage limit for alternative funds of 3:1, based on the leverage calculation method currently specified in Form 41-101F2. The proposed 3:1 limit would be required to be respected by an alternative fund at all times, and not only at the time of entering into a transaction that creates leverage. We seek feedback on this proposed limit and whether the total leverage limit should be the same for mutual funds and non-redeemable investment funds, having regard to a mutual fund's need to fund regular redemptions.

Leverage Measurement Methods

Form 41-101F2 currently requires the maximum leverage an investment fund may use to be disclosed as a ratio of total long positions (including leveraged positions) plus total short positions divided by the net assets of the investment fund. This calculation has the benefit of presenting a single number that may be readily understood by retail investors. The drawback to this measure is that it may not fully express the nature of the leverage applicable to an alternative fund, as leverage created through different means may have different impact. For example, a leveraged position created through using standardized futures may be closed quickly by entering into an offsetting position, while leverage created through borrowing may be more difficult to reduce. Leverage through purchasing a call option differs from leverage through a long position in a forward contract since the former does not create future payment obligations. Other aspects of particular investment strategies may also complicate the calculation of leverage.

We are considering whether there are other methods of measuring leverage and invite feedback on this.

Other Investment Restrictions for Alternative Funds

Other than the investment restrictions discussed above, the CSA seek feedback on whether there are additional investment strategies that NI 81-104 should permit or restrict for alternative funds.

(iii) New Alternative Funds

Seed Capital and Organizational Costs

The CSA are considering the requirements applicable to the launch of new alternative funds. We are considering adopting a model for alternative funds that is substantially similar to Part 3 of NI 81-102. We are considering a model under which sections 3.1 to 3.3 of NI 81-102 would apply to the launch of a new alternative fund that is a mutual fund, except that:

• the minimum amount specified in subsection 3.1(2) of NI 81-102 that must be received by the fund before redemptions may be processed would be raised from $500,000 to $5,000,000 for an alternative fund; and

• the manager of the alternative fund (or the persons or companies specified in subsection 3.1(1) of NI 81-102, who, together with the manager of the alternative fund, are referred to as "sponsors") would be required to provide seed capital of $150,000, instead of the $50,000 in seed capital currently required for commodity pools under section 3.2 of NI 81-104.

Under the proposed model, sponsors that launch new alternative funds that are non-redeemable investment funds would only have to comply with proposed amended section 3.3 of NI 81-102 (see "Summary of Proposed Amendments -- (iii) New Non-Redeemable Investment Funds").

On-going Investment by Sponsors

Subsection 3.2(2) of NI 81-104 restricts a commodity pool from redeeming securities unless the securities issued to sponsors remain outstanding and the sponsors maintain a $50,000 investment in the commodity pool.

In recent years, exemptive relief has been granted to permit sponsors of a commodity pool to withdraw their seed capital investment in the commodity pool, provided that:

• the commodity pool has received $5,000,000 in subscriptions from investors other than the sponsors; and

• if the value of the commodity pool units subscribed to by investors other than the sponsors drops below $5,000,000 for more than 30 consecutive days, the sponsors reinvest the seed capital amount and maintain that investment until the value of the commodity pool units subscribed to by investors other than the sponsors exceeds $5,000,000.

We are considering whether to eliminate the restriction in subsection 3.2(2) of NI 81-104 and permit sponsors to withdraw their seed capital investment in alternative funds, subject to the same conditions for the exemptive relief described above. We are also seeking feedback on whether sponsors should be required to maintain an on-going investment in alternative funds.

(iv) Proficiency

Currently, Part 4 of NI 81-104 requires mutual fund restricted individuals (as defined in NI 81-104) who sell commodity pool securities to have qualifications in addition to those for selling mutual fund securities. In particular, a mutual fund restricted individual may only trade in a security of a commodity pool if that individual meets the additional proficiency standards set out in subsection 4.1(1) of NI 81-104. Part 4 also imposes proficiency requirements for dealer supervision of trades in commodity pool securities.

Given the unique features that will characterize alternative funds such as the increased flexibility to create leverage and engage in potentially more complex strategies, the CSA are considering whether further proficiency requirements should apply to all individual dealing representatives who sell alternative fund securities. For example, these individuals could be required to have additional experience or to have passed additional courses. We seek feedback on whether and what additional proficiency requirements could apply.

(v) Enhanced Disclosure and Transparency

A key element of the CSA's proposal for a more robust framework for alternative funds is to provide clarity for investors and the market by more effectively differentiating between alternative funds and investment funds subject only to NI 81-102. To achieve this, we are considering the introduction of specific requirements relating to the naming, prospectus disclosure, sales communications, and continuous disclosure of alternative funds, as set out below.

Naming Convention

We are considering requiring all alternative funds to have the words "Alternative Fund" in their name. This requirement would apply to existing commodity pools and other investment funds that wish to gain access to the NI 81-104 framework, subject to a transition period. We seek feedback on whether there are identifiers other than including "Alternative Fund" in the name of the alternative fund that would achieve the same purpose. In addition, we are considering whether alternative funds that list and trade their securities on an exchange should be required to use trading symbols or a suffix to the symbol that would more readily identify the fund as an alternative fund.

Prospectus Disclosure

The CSA anticipate that alternative funds would file a prospectus using Form 41-101F2. To further differentiate alternative funds from conventional investment funds, the CSA are considering introducing a disclosure item in Form 41-101F2 that would require the inclusion of a prescribed text box in bold text in a specified font size on the cover page of the prospectus of an alternative fund, as follows:

This fund is an alternative fund. This fund may use investment strategies or invest in assets in a different manner than other investment funds. The risks of investing in this fund may differ significantly from the risks associated with other investment funds.

These brief statements do not disclose all the risks and other significant aspects of investing in this fund. You should carefully read this prospectus, including the description of the principal risk factors before you decide to invest.

In addition, we are considering requiring an alternative fund to disclose in its prospectus under the "Investment Strategies" heading how its investment strategies differ from those of a conventional investment fund under NI 81-102.

Finally, we are also considering prohibiting an alternative fund from being offered in the same prospectus document with investment funds that are not alternative funds.

Sales Communications

The CSA are considering introducing specific sales communication disclosure requirements to NI 81-104 to assist investors and market participants in distinguishing alternative funds from other types of investment funds. Similar to the text box disclosure on the cover page of the prospectus, we are considering a requirement for all sales communications for alternative funds to include a text box at the top of the first page of any sales communication or at the beginning of a sales communication that is not in printed form, with the following content:

This fund is an alternative fund. This fund may use investment strategies or invest in assets in a different manner than other investment funds. The risks of investing in this fund may differ significantly from the risks associated with other investment funds.

We are also considering prohibiting alternative funds from comparing themselves to other types of investment funds in their sales communications. The CSA have observed comparisons between commodity pools and mutual funds, for example, that do not present a fair and balanced picture of the respective benefits and risks associated with each type of fund.

Continuous Disclosure

As alternative funds will have more flexibility to generate leverage and engage in more complex strategies, the CSA are considering whether investors may benefit from more frequent financial reporting and tailored disclosure of how specific investment strategies have affected the returns of an alternative fund. Increased transparency could also help investors and their advisers monitor the risks of the funds they have chosen.

Monthly Website Disclosure

To supplement the existing quarterly information required under NI 81-106, we are considering requiring an alternative fund to disclose publicly on its or its fund manager's website, on a monthly basis (with an appropriate time lag for the manager to prepare the information), the largest monthly and annual NAV drawdowns of the alternative fund in the past five years, or since inception if the alternative fund has been in existence for less than five years.

We are also considering whether to require an alternative fund to disclose its maximum and average daily leverage amounts during the most recent 12 month period. These reports would be updated on a monthly basis (also with an appropriate time lag for the manager to update the information) and be posted on the fund's or its manager's website.

We seek feedback on whether the proposed monthly disclosure of NAV drawdown and leverage information for alternative funds will be useful to investors or the market generally. We also seek feedback on whether there is other information that could be provided regularly on an alternative fund's or its manager's website that would be meaningful for investors.

Semi-Annual and Annual Disclosure

In addition to the disclosure regarding borrowing under subsection 3.6(2) of NI 81-106, we are also considering amending the semi-annual and annual disclosure requirements in NI 81-106 to require tailored disclosure relating to an alternative fund's use of investment strategies that create leverage. For example, alternative funds could be required to disclose the maximum amount of leverage and the average amount of leverage used during the reporting period. The additional disclosure could also contain a qualitative explanation of how leverage was employed during the reporting period.

(vi) Transition

The CSA recognize that existing commodity pools, as well as non-redeemable investment funds that currently use investment strategies that may not be permitted under the Proposed 81-102 Amendments, may seek to become alternative funds under the new definition. We think that existing investment funds should disclose to their investors and the market their intent to become alternative funds under NI 81-104. We seek feedback on the steps that existing investment funds should take for transitioning into the alternative funds framework provided in the revised NI 81-104.

We anticipate that existing investment funds that wish to transition into the alternative funds framework will be given sufficient time to take the necessary steps to make the transition. We anticipate that there would be a transition period proposed for comment, the design of which will depend on feedback received on the requirements for transition.

Securities Lending, Repurchases and Reverse Repurchases by Investment Funds

In connection with our proposal to apply the framework for securities lending, repurchases and reverse repurchases in NI 81-102 to non-redeemable investment funds, we also reviewed the existing requirements in NI 81-102 and NI 81-106 relating to securities lending, repurchases and reverse repurchases in light of the recent international focus on these activities to examine whether the existing requirements continue to keep pace with international standards.{11} While we think that the current operational requirements are generally comparable to existing standards in other international jurisdictions, as a result of this review, we are considering additional rules to enhance the transparency of the returns, costs and risks of securities lending, repurchases and reverse repurchases by investment funds, particularly where conflicts of interest may arise in connection with these activities.

Please refer to Annex C for specific questions for which we seek feedback to inform our consideration of amendments to the requirements relating to securities lending, repurchases and reverse repurchases by investment funds.

We will also continue to monitor global regulatory developments relating to securities lending, repurchases and reverse repurchases by investment funds.

Local Matters

Annex L is being published in any local jurisdiction that is making related changes to local securities laws, including local notices or other policy instruments in that jurisdiction. It also includes any additional information that is relevant to that jurisdiction only.

Unpublished Materials

In developing the Proposed Provisions, we have not relied on any significant unpublished study, report or other written materials.

Request for Comments and Feedback

We are soliciting comment on the Proposed Amendments. As well, we are seeking feedback on the proposals being considered for an alternative fund regime under NI 81-104 and the proposals being considered in relation to securities lending, repurchases and reverse repurchases by investment funds. We have identified specific issues in Annexes A to C to this Notice.

We cannot keep submissions confidential because securities legislation in certain provinces requires publication of a summary of the written comments received during the comment period. All comments will be posted on the OSC website at www.osc.gov.on.ca.

Please submit your comments in writing on or before June 25, 2013. If you are not sending your comments by email, please send a CD containing the submissions (in Microsoft Word format).

Where to Send Your Comments

Address your submission to all of the CSA as follows:

British Columbia Securities Commission
Alberta Securities Commission
Financial and Consumer Affairs Authority of Saskatchewan
Manitoba Securities Commission
Ontario Securities Commission
Autorité des marchés financiers
New Brunswick Securities Commission
Superintendent of Securities, Department of Justice and Public Safety, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland and Labrador
Superintendent of Securities, Northwest Territories
Superintendent of Securities, Yukon
Superintendent of Securities, Nunavut

Please send your comments only to the addresses below. Your comments will be forwarded to the other CSA members.

The Secretary
Ontario Securities Commission
20 Queen Street West
19th Floor, Box 55
Toronto, Ontario M5H 3S8
Fax: 416-593-2318
Email: comments@osc.gov.on.ca
 
Me Anne-Marie Beaudoin
Corporate Secretary
Autorité des marchés financiers
800, square Victoria, 22e étage
C.P. 246, tour de la Bourse
Montréal (Québec) H4Z 1G3
Fax: 514-864-6381
Email: consultation-en-cours@lautorite.qc.ca

Questions

Please refer your questions to any of the following people:

Mostafa Asadi
Noreen Bent
Legal Counsel, Investment Funds Branch
Manager and Senior Legal Counsel
Ontario Securities Commission
Legal Services, Corporate Finance
416-593-8171
British Columbia Securities Commission
masadi@osc.gov.on.ca
604-899-6741
nbent@bcsc.bc.ca
 
Christopher Birchall
Bob Bouchard
Senior Securities Analyst
Director and Chief Administration Officer
Corporate Finance
Manitoba Securities Commission
British Columbia Securities Commission
204-945-2555
604-899-6722
Bob.Bouchard@gov.mb.ca
cbirchall@bcsc.bc.ca
 
Raymond Chan
Donna Gouthro
Manager, Investment Funds Branch
Securities Analyst
Ontario Securities Commission
Nova Scotia Securities Commission
416-593-8128
902-424-7277
rchan@osc.gov.on.ca
gouthrdm@gov.ns.ca
 
Pei-Ching Huang
George Hungerford
Senior Legal Counsel, Investment Funds Branch
Senior Legal Counsel, Legal Services, Corporate Finance
Ontario Securities Commission
British Columbia Securities Commission
416-593-8264
604-899-6690
phuang@osc.gov.on.ca
ghungerford@bcsc.bc.ca
 
Ian Kearsey
Ian Kerr
Legal Counsel, Investment Funds Branch
Senior Legal Counsel, Corporate Finance
Ontario Securities Commission
Alberta Securities Commission
416-593-2169
403-297-4225
ikearsey@osc.gov.on.ca
Ian.Kerr@asc.ca
 
Carina Kwan
Hugo Lacroix
Legal Counsel, Investment Funds Branch
Senior Analyst, Investment Funds Branch
Ontario Securities Commission
Autorité des marchés financiers
416-593-8052
514-395-0337, ext. 4476
ckwan@osc.gov.on.ca
hugo.lacroix@lautorite.qc.ca
 
Agnes Lau
Chantal Leclerc
Senior Advisor -- Technical & Projects, Corporate Finance
Lawyer / Senior policy advisor
Alberta Securities Commission
Autorité des marchés financiers
403-297-8049
514-395-0337, ext. 4463
Agnes.Lau@asc.ca
Chantal.Leclerc@lautorite.qc.ca

Contents of Annexes

The text of the Proposed Provisions is contained in the following annexes to this Notice and is available on the websites of members of the CSA:

Annex A:

Specific Questions of the CSA relating to the Proposed 81-102 Amendments

 

Annex B:

Specific Questions of the CSA relating to the Alternative Funds Framework in NI 81-104

 

Annex C:

Specific Questions of the CSA relating to Securities Lending, Repurchases and Reverse Repurchases by Investment Funds

 

Annex D:

Summary of Public Comments on Phase 2 Proposals for the Modernization Project

 

Annex E:

Proposed Amendments to National Instrument 81-102 Mutual Funds and Companion Policy 81-102CP Mutual Funds

 

 

 

Schedule E-1:

Proposed Amendments to National Instrument 81-102 Mutual Funds

 

 

Schedule E-2:

Blackline Showing Proposed Amendments to National Instrument 81-102 Mutual Funds

 

 

Schedule E-3:

Blackline Showing Proposed Changes to Companion Policy 81-102CP to National Instrument 81-102 Mutual Funds

 

Annex F:

Proposed Amendments to National Instrument 41-101 General Prospectus Requirements

 

Annex G:

Proposed Amendments to National Instrument 81-106 Investment Fund Continuous Disclosure

 

Annex H:

Proposed Amendments to National Instrument 81-107 Independent Review Committee for Investment Funds and Commentary in National Instrument 81-107 Independent Review Committee for Investment Funds

 

 

Schedule H-1:

Proposed Amendments to National Instrument 81-107 Independent Review Committee for Investment Funds

 

 

Schedule H-2:

Proposed Changes to Commentary in National Instrument 81-107 Independent Review Committee for Investment Funds

 

Annex I:

Proposed Amendments to Specified Instruments (Change in Name of National Instrument 81-102 Mutual Funds)

 

Annex J

Proposed Changes to Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations

 

Annex K

Proposed Changes to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions

 

Annex L:

Local Matters

{1} Scholarship plans are being considered by the CSA in a separate initiative. References to "non-redeemable investment funds" in this Notice do not include scholarship plans. In British Columbia, labour sponsored venture capital corporations registered under the Employee Investment Act (British Columbia) and venture capital corporations registered under the Small Business Venture Capital Act (British Columbia) would need to comply with NI 81-102 if the Proposed 81-102 Amendments are adopted. Annex L, published in British Columbia, describes how the changes would impact these funds.

{2} For example, diversification requirements for retail investors to benefit from greater diversification through investing in a fund as compared to investing on an individual account basis.

{3} For example, prohibitions on investing in real property or in issuers for the purpose of controlling them.

{4} For example, restrictions relating to securities lending, repurchases and reverse repurchases.

{5} See, for example: Financial Stability Board, Strengthening Oversight and Regulation of Shadow Banking -- A Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos (18 November 2012) online: <http://www.financialstabilityboard. org/publications/r_121118b.pdf>; European Securities and Markets Authority, Guidelines on ETFs and other UCITS issues -- Consultation on Recallability of Repo and Reverse Repo Arrangements (25 July 2012) online: <http://www.esma.europa.eu/system/files/2012-474.pdf>; International Organization of Securities Commissions, Principles for the Regulation of Exchange Traded Funds (March 2012) online: <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD376.pdf>.

{6} Non-redeemable investment funds are commonly referred to as "closed-end funds" because they issue a fixed number of securities rather than an unlimited number of securities on a continuous basis.

{7} The CSA generally take the view that where an investment fund redeems its securities based on NAV less frequently than once a year, the fund does not provide an "on demand" redemption feature and is therefore not a mutual fund subject to the requirements of NI 81-102. Please also see "Redemptions" below.

{8} For example, limits on short selling and cover requirements for derivative positions.

{9} For a discussion about the investments of mortgage investment entities, see CSA Staff Notice 31-323 Guidance Related to the Registration Obligations of Mortgage Investment Entities.

{10} Other than proposed paragraph 2.3(2)(b), for which a 24 month transition period is proposed.

{11} See note 5 above.

 

Annex A: Specific Questions of the CSA Relating to the Proposed 81-102 Amendments

ANNEX A

SPECIFIC QUESTIONS OF THE CSA

RELATING TO THE PROPOSED 81-102 AMENDMENTS

Annual Redemptions of Securities Based on NAV

1. Securities legislation defines a "mutual fund" as, among other things, an issuer whose securities entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest of the net assets of the issuer.

The CSA have historically taken the view that "on demand, or within a specified period after demand" in the definition of "mutual fund" means that the securities of the fund entitle the holders to request that their securities be redeemed by the fund more frequently than once a year. This view has permitted investment funds to redeem their securities once a year based on their NAV and still be considered non-redeemable investment funds. We seek feedback on whether the CSA should reconsider its present view and consider an investment fund to be a mutual fund if it offers any redemptions based on NAV.

Investment Restrictions

Concentration Restriction

2. Do you agree with the 10% issuer concentration restriction for non-redeemable investment funds set out in proposed amended section 2.1 of NI 81-102? If not, please provide reasons why non-redeemable investment funds should be permitted to have a higher concentration limit, and how non-redeemable investment funds would benefit from a higher limit. Please also propose a higher limit and provide reasons for the limit.

If NI 81-102 provides for a concentration limit that is greater than 10% for non-redeemable investment funds, should NI 81-104 provide an even higher concentration limit for non-redeemable investment funds that are alternative funds subject to NI 81-104? Or should the concentration limits be the same for non-redeemable investment funds in both NI 81-102 and NI 81-104? We invite feedback on the appropriate balance of the concentration limit in NI 81-102 for non-redeemable investment funds and the concentration limit for non-redeemable investment funds under the alternative funds framework in NI 81-104.

Investments in Illiquid Assets

3. As non-redeemable investment funds do not redeem their securities regularly based on NAV, the CSA propose that they be permitted to purchase and hold more illiquid assets than the levels currently permitted by subsections 2.4(1) to (3) of NI 81-102. However, we are concerned that a portfolio containing a significant amount of illiquid assets could lead to difficulties in valuing the NAV of the fund. It is critical that the NAV of an investment fund be accurately valued; for example, non-redeemable investment funds typically pay management and other fees based on the NAV of the fund, NAV is used to measure performance, and many non-redeemable investment funds offer annual redemptions based on NAV.

We have observed that many non-redeemable investment funds do not invest in a substantial amount of illiquid assets; in fact, the majority of non-redeemable investment funds, like mutual funds, hold minimal amounts of illiquid assets. Would the ability to purchase and hold more illiquid assets than the levels currently permitted by subsections 2.4(1) to (3) of NI 81-102 be beneficial for non-redeemable investment funds? What types of illiquid assets do non-redeemable investment funds wish to invest in, and why?

The CSA invite comment on the amount of illiquid assets that would be appropriate for non-redeemable investment funds to purchase and hold, and whether non-redeemable investment funds should be given more time than 90 days to divest illiquid assets (please refer to the mutual fund divestment requirements in subsections 2.4(2) and (3) of NI 81-102). Is there a minimum amount of liquid assets that non-redeemable investment funds should be required to hold to meet ongoing liquidity needs (e.g., to pay management fees and operational expenses)? Should the limit on illiquid asset investments be different for non-redeemable investment funds that do not offer any redemptions and non-redeemable investment funds that offer annual redemptions?

Borrowing

4. We seek comment on whether the proposed requirement for non-redeemable investment funds to borrow from a "Canadian financial institution" is appropriate. For example, if the majority of an investment fund's assets are held outside Canada because it focuses on investing in foreign securities, should there be more flexibility to borrow from lenders other than those that are "Canadian financial institutions"? If so, what conditions should the other lenders have to meet?

Investments in Mortgages

5. We invite comment on the impact of the proposed restriction on investments in non-guaranteed mortgages for publicly offered non-redeemable investment funds. We also seek feedback on the transition period for the proposed restriction. If you consider that a transition period longer than 24 months is required, please explain why. Alternatively, if you think that a grandfathering provision is warranted to exempt these types of funds from the application of the proposed restriction on investments in non-guaranteed mortgages, please comment on the impact such a provision could have on fairness to new market participants and investor understanding.

Fund-of-Fund Structures

6. Certain non-redeemable investment funds (top funds) use a forward agreement to obtain exposure to an underlying mutual fund that is not subject to NI 81-102. The underlying mutual fund in this fund-of-fund structure is established solely for the purpose of facilitating the investments of the top fund and it invests in accordance with the restrictions adopted by the top fund.

Under the Proposed 81-102 Amendments, an underlying mutual fund in a fund-of-fund structure would be required to be subject to NI 81-102. The investment restrictions in NI 81-102 applicable to mutual funds are generally more restrictive than the proposed investment restrictions for non-redeemable investment funds. The CSA are considering measures to enable top funds that are non-redeemable investment funds to continue to use the fund-of-fund structure described in the preceding paragraph, such that the underlying mutual fund may continue to invest in accordance with the investment restrictions applicable to the top fund. We seek comment on whether a carve-out from proposed paragraph 2.5(2)(a) of NI 81-102 would be effective for this purpose and if so, what conditions should attach to the use of the carve-out. Are there appropriate alternative measures to enable an underlying fund that is a mutual fund to follow the investment restrictions applicable to the top fund (a non-redeemable investment fund)?

7. Currently, many managers of non-redeemable investment funds that invest using the fund-of-fund structure described in question 6 have only filed prospectuses for the underlying fund in Ontario and/or Québec even though the prospectuses for the top fund (the non-redeemable investment fund) were filed in all of the jurisdictions of Canada.

Under proposed amended paragraph 2.5(2)(c) of NI 81-102, the underlying fund must be a reporting issuer in all the jurisdictions in which the non-redeemable investment fund is a reporting issuer. This is intended to prevent an indirect distribution of the securities of the underlying fund in jurisdictions where the underlying fund has not filed a prospectus and to ensure that the local jurisdiction has authority over both the top fund and the underlying fund. Should proposed amended paragraph 2.5(2)(c) apply to non-redeemable investment funds that use a fund-of-fund structure? If not, why not? What other parameters could be used to address the CSA's objectives?

Organizational Costs of New Non-Redeemable Investment Funds

8. We seek comment on the impact and the benefits and costs of proposed subsection 3.3(3) of NI 81-102. Are there other parameters that could be developed that would achieve benefits similar to the benefits from proposed subsection 3.3(3)? Please also comment on whether the capital raising model followed by non-redeemable investment funds could support the payment of some of the organizational costs out of the proceeds of the initial public offering. Are there specific components of organizational costs that are more appropriately borne by the non-redeemable investment fund and components that are more appropriately borne by the manager? Please provide information about these cost components and what fraction each component typically constitutes of the total organizational costs for launching a new fund, and explain why it is appropriate for the fund or the manager to pay the specific cost components.

Dilutive Issuances of Securities

9. The CSA propose to introduce subsection 9.3(2) to prevent issuances of securities that cause dilution to the NAV of other outstanding securities of a non-redeemable investment fund. Proposed subsection 9.3(3) recognizes that a non-redeemable investment fund that raises additional money from the public through a new issuance of securities must include the price of the securities in the prospectus. We invite comment on whether proposed subsections 9.3(2) and (3) achieve the purpose of preventing dilutive issuances while taking into account how new securities are distributed.

Naming Convention for Investment Funds

10. Please see question 13 in Annex B.

Transition Period for Investment Restrictions in Proposed Amended NI 81-102 and Alternatives

11. We are proposing that existing non-redeemable investment funds be required to comply with the investment restrictions in proposed amended sections 2.2, 2.3,{1} 2.4 and 2.5 of NI 81-102 18 months after the first coming-into-force date of the Proposed 81-102 Amendments pertaining to these sections. We invite feedback on whether the proposed transition period is sufficient. If not, please provide reasons for a longer transition period or provide alternatives to a transition period.

If you think that a grandfathering provision is warranted for existing non-redeemable investment funds, please comment on the scope of a grandfathering provision and explain why existing non-redeemable investment funds should not have to comply with specific sections in Part 2 of NI 81-102. Please also comment on the impact a grandfathering provision could have on fairness to new market participants and investor understanding.

Anticipated Costs of the Proposed Amendments and of Implementing the Alternative Funds Framework

12. Do you agree or disagree that the costs of the Proposed Amendments and the proposals relating to NI 81-104 are proportionate to the benefits? We seek specific data from non-redeemable investment funds and commodity pools on the anticipated costs and benefits of complying with the regulatory framework set out in the proposed amendments to NI 81-102 and the alternative funds regulatory framework being contemplated in NI 81-104.

{1} Other than proposed paragraph 2.3(2)(b). See question 5 above.

 

Annex B: Specific Questions of the CSA Relating to the Alternative Funds Framework in NI 81-104

ANNEX B

SPECIFIC QUESTIONS OF THE CSA

RELATING TO THE ALTERNATIVE FUNDS FRAMEWORK IN NI 81-104

Definition of "Alternative Fund"

1. Does the use of the term "alternative fund" appropriately describe the types of investment funds that should be captured by NI 81-104? If not, please propose other terms that better describe the types of investment funds that use investment strategies that should be permitted under a revised version of NI 81-104.

Investment Restrictions

Concentration Restriction

2. We seek feedback on the types of investment strategies an alternative fund may engage in that would require a fund's investment in an issuer to exceed the current 10% concentration restriction in proposed amended NI 81-102. If you think that the concentration restriction under NI 81-104 should be higher than the current 10% issuer concentration limit in NI 81-102, please provide feedback on what an appropriate concentration restriction would be for alternative funds. See also question 2 in Annex A.

3. Given that we anticipate alternative funds having more leveraged exposure than is permissible under NI 81-102, should we consider other measurements for an alternative fund's concentration? Should issuer concentration for alternative funds be based on the total notional exposure of the fund? We seek feedback on this and other measurements that would better describe the level of concentration in an alternative fund portfolio.

Borrowing

4. Should alternative funds that are structured as mutual funds and alternative funds that are structured as non-redeemable investment funds have different borrowing restrictions in NI 81-104? Would a mutual fund's need to fund regular redemptions mean that the amount of leverage through cash borrowings could increase rapidly and cause difficulties in maintaining the 3:1 total leverage limit we are considering?

Short Selling

5. Should NI 81-104 include exemptions from subsections 2.6.1(2) and (3) of NI 81-102 to permit the creation of leverage through short selling and increase flexibility for alternative funds to engage in long/short strategies?

Leveraged Daily Tracking Alternative Funds

6. Are there specific issues relating to the marketing of Leveraged Daily Tracking Alternative Funds that the CSA should consider? Are there specific issues relating to the proficiency of individual dealing representatives who sell Leveraged Daily Tracking Alternative Fund securities and dealer supervision of trades in Leveraged Daily Tracking Alternative Fund securities that the CSA should consider?

Counterparty Credit Exposure

7. We seek feedback on the impact to existing commodity pools that are relying on the Counterparty Exposure Exemption if this exemption in NI 81-104 were to be repealed.

Would repealing the Counterparty Exposure Exemption sufficiently mitigate the risk of exposure to a single counterparty, particularly in connection with illiquid OTC derivatives? Are there other ways we should consider to mitigate counterparty risk; for example, by requiring the posting of collateral by the counterparty? If so, what requirements should apply to the use of collateral? If an alternative fund receives collateral from a counterparty to a specified derivatives transaction, should the collateral be considered in determining the alternative fund's exposure to the counterparty?

Total Leverage Limit

8. Do you agree with a total leverage limit for alternative funds of 3:1 based on the leverage calculation method currently specified in Item 6.1 of Form 41-101F2? If not, what should the total leverage limit of an alternative fund be, and why? Should the total leverage limit be lower for mutual funds that are alternative funds because of the need to fund regular redemptions?

9. What other leverage measurement methods could be used to inform investors of the amount of leverage used by alternative funds, other than the method currently specified in Item 6.1 of Form 41-101F2? Please also explain why the alternative leverage measurements you propose provide investors with a better understanding of the amount of leverage used by alternative funds.

Other Investment Restrictions for Alternative Funds

10. Are there other specific investment strategies that NI 81-104 should permit or restrict?

On-going Investment by Sponsors

11. Should the sponsors of an alternative fund be permitted to withdraw their seed capital investment in the alternative fund if the fund reaches a sufficient size? Or should the sponsors be required to maintain an investment in the alternative fund? We invite feedback on why sponsors should be required to maintain an on-going investment in an alternative fund and the amount of on-going investment that would be appropriate.

Proficiency

12. Should additional proficiency requirements for all individual dealing representatives who sell securities of alternative funds be introduced? If yes, please provide specific examples of the courses or experience that should apply. If no, please explain.

Enhanced Disclosure and Transparency

Naming Convention

13. Would requiring an alternative fund to include the words "Alternative Fund" in its name achieve the purpose of distinguishing alternative funds from other investment funds for investors and the market? If not, please propose other ways to facilitate the ready identification of alternative funds.

In addition, would requiring investment funds governed only by NI 81-102 to include specific words (e.g., "Conventional Fund") in their name further this purpose? If not, why not? Would the diversity of investment funds that are governed only by NI 81-102 and their different risk levels impede the creation of a uniform descriptor for such funds?

Monthly Website Disclosure

14. We seek feedback on whether there are any impediments for an alternative fund to disclose on its or its manager's website on a monthly basis (with appropriate time lag for the manager to prepare the information) the fund's largest monthly NAV drawdown for the past five years and the maximum and average daily leverage employed during the most recent 12 month period. We further invite feedback on whether this information will be useful to investors or the market generally.

Is there other information that could be provided regularly on the website of the alternative fund or its manager that would be meaningful for investors or for the market?

Transition

15. How should the disclosure of an existing investment fund's intent to transition into the alternative fund regime in NI 81-104 be made? For example, should investors be provided with written notice or would a press release be sufficient? In addition to disclosing their intent to transition into the alternative fund regime, what other measures should be required for existing investment funds to transition into the alternative fund regime?

Costs and Benefits of Implementing Alternative Funds Framework

16. Please see question 12 in Annex A.

 

Annex C: Specific Questions of the CSA Relating to Securities Lending, Repurchases and Reverse Repurchases by Investment Funds

ANNEX C

SPECIFIC QUESTIONS OF THE CSA

RELATING TO SECURITIES LENDING, REPURCHASES AND

REVERSE REPURCHASES BY INVESTMENT FUNDS

The CSA are considering measures to enhance the transparency of the benefits, costs and risks of securities lending, repurchase and reverse repurchase transactions conducted by investment funds. We seek feedback on the following issues.

The CSA understand that it is common practice for securities lending agents to be compensated through receiving a share of the revenue generated from lending securities, repurchases and, if a lending agent is used, reverse repurchases. We also understand that some managers have established revenue-sharing arrangements under which revenue is shared between the investment fund and a lending agent related to the manager or between the investment fund and the manager. As the investment fund bears all the risks from securities lending, repurchases and reverse repurchases, the CSA are of the view that the revenue from engaging in these activities, after the payment of costs for conducting the activities, should be received only by the investment fund.

Currently, depending on the terms of the securities lending agreement, the financial statements of an investment fund that engages in securities lending may disclose the revenue from securities lending net of the lending agent's share. Further, in such cases, the amount paid to the lending agent does not appear in the financial statements as a cost of conducting the activities.

While the amount of revenue generated by securities lending and repurchases may be relatively small, the CSA are of the view that because mutual funds (and, under the Proposed 81-102 Amendments, all investment funds) may lend, or sell in repurchase transactions, up to 50% of total assets,{1} information about the returns, costs and risks of securities lending and repurchase activity is relevant to investors.

The CSA think that it is important for investors to understand the returns from securities lending and how such revenue has contributed to the performance of the investment funds. We also think it is important for investors to be aware of the costs, the profitability and the scope of an investment fund's securities lending activities, so that they can assess the efficiency of the lending. Transparency of the revenue and cost is particularly important if the investment fund uses a lending agent that is related to the manager, which may give rise to conflicts of interest. Further, if the related lending agent shares in the revenue from securities lending, the manager could market its funds to investors as having a management fee that is lower than it would otherwise be, without investors being aware of the additional compensation paid to the affiliated lending agent through the revenue sharing arrangement.

Accordingly, we are considering measures to enhance the transparency of the benefits from securities lending and the costs paid to earn the returns. We are of the view that disclosure of the gross returns from, and the costs of, securities lending would provide additional transparency.

We seek feedback on approaches that would achieve the outcome of providing disclosure of the gross returns and the costs of securities lending.

1. Are there other costs of conducting securities lending, other than the fee paid to the lending agent?

2. What approaches could the CSA consider to ensure that the financial statements of an investment fund disclose the revenue from securities lending inclusive of the share paid to the agent? What approaches could the CSA consider to ensure that the financial statements of an investment fund disclose the costs of securities lending?

3. What approaches could the CSA consider to ensure that the costs of securities lending are included in either the management expense ratio or the trading expense ratio of the investment fund?

4. We think that the disclosure of the returns and the costs of repurchases should be the same as the disclosure of securities lending, since both activities are substantively similar. Should the same type of disclosure for reverse repurchases be provided? Should the returns and costs of securities lending and repurchases be aggregated, rather than disclosed separately?

5. In order to provide investors with transparency on the profitability and scope of an investment fund's securities lending and repurchase activities, the CSA are considering requiring the following additional disclosure, in the investment fund's management reports of fund performance, regarding such activities:

• The average daily aggregate dollar value of securities lent (or sold in repurchase transactions) obtained by

(i) adding together the aggregate dollar value of portfolio securities that were lent (or sold) in the securities lending (or repurchase) transactions of the investment fund that are outstanding as at the end of each day during the financial year or interim period; and

(ii) dividing the amount obtained under (i) by the number of days during the financial year or interim period.

• The percentage profitability of securities lending (or repurchase transactions) obtained by

(i) dividing the revenue from securities lending (or repurchase) transactions during the financial year or interim period by the average daily aggregate dollar value of securities lent (or sold in repurchase transactions); and

(ii) multiplying the amount obtained under (i) by 100.

• The percentage return from securities lending (or repurchase transactions) obtained by

(i) dividing the securities lending (or repurchase) revenue by the average net asset value of the investment fund during the financial year or interim period; and

(ii) multiplying the amount obtained under (i) by 100.

• The percentage of net asset value lent (or sold) obtained by

(i) dividing the average daily aggregate dollar value of securities lent (or sold in repurchase transactions) by the average net asset value of the investment fund during the financial year or interim period; and

(ii) multiplying the amount obtained under (i) by 100.

• The maximum amount of securities lent (and sold in repurchase transactions) in any day during the financial year or interim period, both as a dollar amount and as a percentage of net asset value on that date.

Do you agree that these disclosure items are useful in increasing transparency regarding the profitability and scope of a fund's securities lending and repurchases? Are any of these items less useful to investors, in light of the costs to the investment fund of calculating and disclosing them?

6. Are there any other measurements regarding securities lending, repurchases or reverse repurchases that would provide useful information to investors in addition to, or in lieu of, the items described in question 5?

7. Items 3.4 and 19 of Form 41-101F2, Item 5 of Part A and Item 4 of Part B of Form 81-101F1, and Item 10 of Form 81-101F2 require disclosure in an investment fund's prospectus or annual information form (AIF), as applicable, regarding certain service providers to the fund. The CSA are considering adding the agent in respect of securities lending, repurchases and, if applicable, reverse repurchases to the list of service providers detailed in these Items. Another outcome of adding the agent to these Items would be that the agent's relationship to the manager would also be disclosed in the prospectus or AIF, so that investors can assess whether amounts are being paid to entities affiliated with the manager in connection with the investment fund's securities lending, repurchase or reverse repurchase activities. Is this disclosure useful? Should any additional details regarding the agent be provided in an investment fund's prospectus or AIF?

8. We understand that investment funds may seek different indemnities from their lending agent, which provide varying degrees of protection from losses that could arise from securities lending. Would disclosure of the indemnities obtained by an investment fund from its lending agent in the AIF or prospectus of the investment fund be useful for investors in assessing the risks from securities lending?

9. Generally, investment funds do not file the agreements that they enter into with their lending agent on SEDAR. Currently, these agreements are not listed in the AIF under Item 16 of Form 81-101F2 or the prospectus under Item 31 of Form 41-101F2. Should these agreements be required to be included as material contracts and filed on SEDAR?

{1} The CSA are proposing to change the limit on the amount of securities loaned, or sold in repurchases, by all investment funds from 50% of total assets (excluding collateral delivered to the fund) to 50% of NAV. See "Summary of Proposed Amendments -- (ii) Investment Restrictions -- Securities Lending, Repurchases and Reverse Repurchases".

 

Annex D: Summary of Public Comments on Phase 2 Proposals for the Modernization Project

ANNEX D

SUMMARY OF PUBLIC COMMENTS ON

PHASE 2 PROPOSALS FOR THE MODERNIZATION PROJECT

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Part I -- Background

Summary of Comments

On May 26, 2011, the Canadian Securities Administrators (CSA) published CSA Staff Notice 81-322 Status Report on the Implementation of the Modernization of Investment Fund Product Regulation Project and Request for Comment on Phase 2 Proposals to provide an update on the implementation of the Modernization of Investment Fund Product Regulation Project (the Modernization Project). In addition to providing an update on the status of finalizing Phase 1 of the Modernization Project, the CSA set out its proposed approach to Phase 2. The proposal included proceeding with Phase 2 of the Modernization Project in stages: first, developing a stand-alone operational rule for non-redeemable investment funds that would adopt certain core restrictions and operational requirements analogous to those in NI 81-102 (NI 81-102 or the Instrument) for mutual funds; and second, re-examining the investment restrictions applicable to open-end mutual funds and exchange-traded mutual funds under Part 2 of NI 81-102 to assess what, if any, changes should be made in recognition of market and product developments.

The CSA sought feedback from investors and industry stakeholders on the CSA's proposal to focus next on developing an operational rule for non-redeemable investment funds as part of a staged approach to proceeding with the Modernization Project. The comment period expired on July 25, 2011. We received submissions from 8 commenters, which are listed in Part III.

We have considered all comments received and have made some changes to the proposed approach in response to the comments. We wish to thank all those who took the time to comment. The comments we received, and our responses, are summarized below.

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Part II -- Comments on Phase 2 Proposals for the Modernization Project

 

Question

Comments

Responses

 

1. Do you agree with our view that certain consistent, core investor protection requirements should apply equally to all types of publicly offered investment funds?

All of the commenters agreed that certain consistent rules and core investor protection requirements should apply equally to all publicly offered investment funds, including non-redeemable investment funds. Several commenters noted that the rules and restrictions identified in the notice (i.e., conflict of interest restrictions, securityholder and regulatory approval requirements and custodianship requirements) represent industry standards and best practices with which most managers of non-redeemable investment funds already comply. We were also told that investor protection rules and requirements should generally be harmonized unless there are policy reasons that support the limited application of certain protections. One commenter remarked that disclosure alone is an insufficient regulatory tool.

The CSA are committed to applying consistent rules and core investor protection requirements to all publicly offered investment funds. In addition to the core investor protection requirements identified in the notice, namely, conflict of interest provisions, securityholder and regulatory approval requirements, and custodianship requirements, we have reviewed each of the rules and restrictions in NI 81-102 to determine whether they are key operational requirements that provide a foundation for a base level of protection for investors. We considered whether there are investor protection issues that would support applying other requirements, such as investment restrictions, restrictions on the payment of organizational costs, and sales communications presentation requirements, equally to non-redeemable investment funds, or whether there are policy reasons to limit their application to mutual funds only.

 

 

One commenter added that retail investors are often unaware of the nuances between different types of investment funds and their associated regulatory protections. This commenter expressed that it is essential that all available retail investment funds have basic investor protection requirements and that proposed regulatory requirements cover existing as well as future product types.

After reviewing the comments received and carrying out the above review, we propose that generally, the same rules and restrictions should apply to all publicly offered investment funds except where distinctive features of conventional mutual funds or non-redeemable investment funds justify a difference in treatment. For example, the CSA think the different distribution models and redemption features may justify different restrictions on borrowing, illiquid assets, and requirements for the sale of investment fund securities.

 

 

One commenter also suggested that in addition to making certain core investor protection requirements uniform across all publicly offered investment funds, there should be specific, stricter rules designed for certain types of funds (particularly complex and/or structured investment products) to ensure unsuitable products are not sold or made available to investors.

Along with our proposed amendments to NI 81-102 to apply operational requirements to non-redeemable investment funds, we are considering how to redesign the current regulatory regime under National Instrument 81-104 Commodity Pools (NI 81-104) so that it could apply to both mutual funds and non-redeemable investment funds that wish to use investment strategies that would go beyond the parameters of NI 81-102. The CSA have observed that many non-redeemable investment funds invest within the limits permitted for mutual funds in NI 81-102 (i.e., they use more conventional investment strategies), while others make extensive use of strategies not permitted by NI 81-102 (referred to as alternative investment strategies). We think it is important to provide clarity for investors and the market by more effectively differentiating between conventional investment funds (whether they are structured as mutual funds or non-redeemable investment funds) and investment funds that use more complex investment strategies such as leveraged derivative strategies that are not permitted in NI 81-102 (referred to as alternative funds). In that regard, we are seeking feedback on elements of a regulatory framework for alternative funds that would be governed by NI 81-104, including disclosure requirements, naming conventions, and potential additional proficiency requirements for alternative funds. See Annex B.

 

 

We were asked to ensure that we take into account the entire regulatory landscape, including the interrelationship of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, National Instrument 81-106 Investment Fund Continuous Disclosure, and National Instrument 81-107 Independent Review Committee for Investment Funds, when developing further rules for non-redeemable investment funds. One commenter noted that as non-redeemable investment funds are subject to these instruments, they already operate under securities regulations and industry standards that are more stringent than other investment options available to retail investors such as direct investments in stocks and bonds, segregated funds and linked notes, where equivalent regulations do not currently exist. This commenter urged us to consider that by introducing new regulations for non-redeemable investment funds, the CSA may unintentionally exacerbate, rather than reduce the potential for regulatory arbitrage. As such, any new regulations should also be considered in the larger context of all investment options available to retail investors.

Our proposed amendments aim to address arbitrage opportunities between different types of investment funds, which the CSA believe result from the differing regulatory regimes for mutual funds and non-redeemable investment funds. We continue to be of the view that all publicly offered investment funds should be treated more fairly and consistently, as both mutual funds and non-redeemable investment funds offer investors the benefits of pooled investing and portfolio management services.

 

 

 

 

It is outside the scope of this project to consider similar requirements for other types of investment products. We also think it would be beneficial for non-redeemable investment funds to be subject to key operational requirements as soon as possible. The CSA disagree that the proposed requirements for non-redeemable investment funds would result in investors being sold other types of investment products. We would expect dealers to continue to recommend non-redeemable investment funds where they present a suitable investment option for investors.

 

 

Another commenter added that we should be mindful of not simply mapping over rules currently applied to conventional mutual funds without considering the fundamental differences between these forms of investment funds. Considerations should include differences in redemption features, distribution models, leveragability, liquidity, and whether units are traded at net asset value (NAV).

The CSA agree that certain provisions should not apply equally to non-redeemable investment funds based on their unique features. We have considered the differences between conventional mutual funds and non-redeemable investment funds and proposed allowances to accommodate the unique features of non-redeemable investment funds. See the proposed amendments.

 

2. Do you agree with our approach to develop a stand-alone operational rule for non-redeemable investment funds? If not, what approach would you propose? What are the advantages and disadvantages of this approach?

Two commenters expressed their support for developing a stand-alone operational rule for non-redeemable investment funds. These commenters believe that the advantages of this approach include:

After reviewing the comments received, the CSA have decided to amend NI 81-102 to include non-redeemable investment funds in applicable provisions of NI 81-102, rather than to create a stand-alone rule for non-redeemable investment funds. Under this approach, NI 81-102 will impose key operational requirements for all publicly offered investment funds, and where appropriate, will provide for exemptions for non-redeemable investment funds.

 

 

focused regulation of non-redeemable investment funds;

 

 

 

clarity to fund managers as to what rules apply, since all regulation will be from a single source;

 

 

 

that a stand-alone rule will be the best mechanism for "borrowing" other important regulatory protections from NI 81-102.

 

 

 

One commenter noted that a disadvantage of the stand-alone rule approach would be that it may result in a larger number of stand-alone rules for investment funds, rather than a single "trunk" of basic operational rules. This allows a greater potential for funds or products to slip through the cracks between each of the stand-alone rules and escape necessary regulation.

Similar to the current structure of NI 81-104, the revised version of NI 81-104 we are contemplating will exempt alternative funds from certain provisions of NI 81-102, such as the limits on derivatives use and investing in physical commodities. We are also contemplating, however, that other requirements specific to alternative funds would apply, such as naming conventions and specific disclosure requirements. Please see Annex B.

 

 

One commenter recommended that any such stand-alone operational rule supersede all existing positions expressed by the CSA in notices or other publications regarding non-redeemable investment funds, for example OSC Staff Notice 81-711 Closed-End Investment Fund Conversions to Open-End Mutual Funds.

In the course of the CSA's review of the provisions in NI 81-102 that may be relevant to the operations of a non-redeemable investment fund, the CSA have observed that many of the requirements in the Instrument are base level protections, including certain investment restrictions, conflicts prohibitions, voting rights for fundamental changes, and sales communications presentation requirements. It was also observed that the majority of non-redeemable investment funds already follow a substantial portion of NI 81-102, as many of the provisions reflect fund management best practices.

 

 

Three commenters, on the other hand, proposed that instead of having a stand-alone operational rule for non-redeemable investment funds, we introduce a universal operational rule that applies to all publicly offered investment funds including mutual funds and non-redeemable investment funds. Under this approach, the various categories of investment funds would be distinguished and the provisions that apply to each category would be clearly identified. Further, the universal operational rule could be supplemented with certain specific rules that only apply to non-redeemable investment funds.

Accordingly, the CSA are of the view that a single operational rule for all investment funds is a better approach to ensure the regulatory framework is more consistent, fair and functional for all types of investment funds. We accept the commenters' submissions regarding the advantages of a single operational rule.

 

 

These commenters believe that the advantages of this approach include:

The CSA are seeking comment on whether to reconsider its current policy position of classifying an investment fund as a non-redeemable investment fund if it does not offer redemptions at NAV more than once a year. See Annex A.

 

 

user-friendliness for industry participants such as lawyers, accountants and investment fund managers who advise or manage numerous types of investment funds;

In light of new proposed requirements for non-redeemable investment funds, we will consider withdrawing OSC Staff Notice 81-711 Closed-End Investment Fund Conversions to Open-End Mutual Funds.

 

 

consistency in the interpretation and application of the core investor protection requirements that will apply to all investment funds;

 

 

 

simplification of the rule amendment process by reducing the need to make conforming changes across two or more rules;

 

 

 

automatic application of the rule to any new category of publicly offered investment fund which may develop in the future;

 

 

 

continuing the single rule approach for regulating all publicly offered investment funds, for example, taken in NI 81-106 and NI 31-103, which have been successful; and

 

 

 

the prevention of regulatory arbitrage by issuers.

 

 

 

It was suggested by one commenter that although a single rule for all investment funds is preferable, if the CSA intend to limit the regulation of non-redeemable investment funds to the initial rules and restrictions identified in the notice and not extend it to other aspects of NI 81-102 in the future, then a separate stand-alone rule may be best.

 

 

 

This commenter also suggested that the rule, whether stand-alone or universal, clarify our policy regarding when a fund is considered a non-redeemable investment fund rather than a conventional open-end mutual fund.

 

 

3. We seek feedback on the initial restrictions and operational requirements we have identified for non-redeemable investment funds. If you disagree, what restrictions and operational requirements would be appropriate for non-redeemable investment funds and why? If you think no requirements are needed, please explain why.

Generally, all commenters agreed that the initial restrictions and operational requirements we identified for non-redeemable investment funds are core investor protections that should be codified. Some commenters, however, identified several issues regarding the current requirements that apply to conventional mutual funds and requested that we focus on rationalizing these provisions before we extend them to non-redeemable investment funds.

We propose to apply many of the core requirements in NI 81-102 to non-redeemable investment funds in their current form. The CSA will not at this time make any substantial amendments to the Instrument that would affect mutual funds. We will consider whether specific provisions in NI 81-102 should be amended in the next stage of the Modernization Project.

 

 

Conflict of Interest Provisions

 

 

One commenter noted the importance of extending the self-dealing requirements to non-redeemable investment funds because while there is a mechanism under NI 81-107 for the independent review of conflict of interest matters by a fund's independent review committee (IRC), NI 81-107 is not sufficient in ensuring that non-redeemable investment fund managers will appropriately deal with conflicts, since the onus rests with the manager to identify the conflict in the first place and present it to the IRC for its review.

Pursuant to the proposed amendments, Part 4 will apply to non-redeemable investment funds to prohibit the same self-dealing transactions and investments in related entities in which mutual funds are currently prohibited from engaging.

 

 

Two commenters expressed significant concerns regarding the complexity of the current conflicts of interest regime, which includes the securities regulations of many provinces, NI 81-102, NI 81-107 and NI 31-103. This has resulted in a compliance maze where a single transaction often must consider multiple conflict of interest regulations (and on occasion, seek multiple discretionary exemptions) that ultimately address the same issue. These commenters urged us not to extend this complexity to non-redeemable investment funds, and encouraged us to instead rationalize the myriad of existing conflict of interest regulations for all investment funds.

We currently do not propose any substantial amendments to the conflicts of interest requirements under NI 31-103 or NI 81-107. We will consider rationalizing the conflicts of interest regime in the context of future amendments to NI 81-107.

 

 

One commenter expressed support for extending the following restrictions to non-redeemable investment funds (subject to the provisions in NI 81-107):

Under the proposed amendments, a non-redeemable investment fund will be subject to all the prohibitions in Part 4, including the purchase of securities of certain related issuers and the purchase of securities of an issuer within 60 days after that class of securities is distributed by a dealer related to the fund's manager.

 

 

purchases by funds of securities of related issuers (e.g., sections 111(2)(a) and 111(2)(c) of the Securities Act (Ontario));

 

 

 

purchases by funds of securities of an issuer within 60 days after that class of securities is distributed by a dealer related to the fund's manager (e.g., section 4.1(1) of NI 81-102).

 

 

 

This same commenter suggested that it is not necessary to extend the following restrictions to non-redeemable investment funds:

We propose to apply the fund-of-fund requirements in section 2.5 to non-redeemable investment funds investing in mutual funds so that conflict of interest requirements that may apply in the context of a fund-of-fund investment would not apply if the requirements of section 2.5 are complied with.

 

 

fund-of-fund investing where a fund is held substantially by related funds (e.g., section 111(2)(b) of the Securities Act (Ontario)), since principles of fund-of-fund investing adopted by NI 81-102 are already observed by non-redeemable investment funds in accordance with industry practice, and non-redeemable investment funds are by definition prohibited from investing for the purpose of exercising control of an issuer;

Although certain prohibitions in Part 4 are also provided for in other instruments, the CSA are not considering the rationalization of the different conflicts of interest provisions at this time. As noted above, we will consider rationalizing the conflicts of interest regime in the context of future amendments to NI 81-107.

 

 

purchases of an issuer in which a responsible person of the fund is a partner, director, or officer (e.g., section 4.1(2) of NI 81-102), since this prohibition is already in NI 31-103; and

 

 

 

trades of securities with related persons as principal (e.g., section 4.2 of NI 81-102), since this prohibition is already in NI 31-103.

 

 

 

Another commenter expressed concerns with the governance structure, transparency and accountability of the IRC model and the role played by the IRC in dealing with conflict of interest matters. This commenter recommended that we reconsider the IRC model across the spectrum of publicly offered investment funds.

The review of the IRC model under NI 81-107 is not within the scope of the Modernization Project.

 

 

This same commenter, however, generally agreed that Part 4 of NI 81-102 was a useful model in regulating conflicts of interest. In particular, this commenter believes that the liability and indemnification provisions in section 4.4 of NI 81-102 should be included in any proposed rule, as it is a basic investor protection measure to prevent placing investors at risk for the negligence of service providers.

As noted in the response above, section 4.4 will apply to non-redeemable investment funds pursuant to the proposed amendments.

 

 

Securityholder and regulatory approval requirements

 

 

Most commenters agreed that investors in non-redeemable investment funds should be entitled to vote on certain fundamental changes to the fund. Some further noted that current industry practice, as well as related corporate or listing requirements, already provide such entitlements.

Pursuant to the proposed amendments, Part 5 will apply to non-redeemable investment funds so that investors of non-redeemable investment funds will have the same statutory rights as mutual fund investors to vote on fundamental changes to the fund.

 

 

One commenter would support the fundamental changes that require unitholder approval to include a change to the fund's fundamental investment objective only if fund managers of non-redeemable investment funds retain their current flexibility to articulate the fund's investment objective in a manner that the manager considers most suitable. In particular, this commenter does not think the requirement that conventional mutual funds disclose in their investment objectives the types of securities or key investment strategies the fund intends to invest in or utilize should be extended to non-redeemable investment funds.

We propose to apply the securityholder approval requirement in NI 81-102 for a change of investment objective by the non-redeemable investment fund. Form 41-101F2 currently requires a non-redeemable investment fund to disclose in its investment objective the type or types of securities the investment fund will primarily invest in, as well as any investment strategy that is an essential aspect of the investment fund. This requirement is similar to the requirement for mutual funds in Form 81-101F1. We do not propose to change these requirements, as we think all investment funds should articulate their investment objectives with the same degree of specificity.

 

 

One commenter remarked that Part 5 of NI 81-102 is an ideal model to adopt for non-redeemable investment funds. This commenter believes that voting rights for fund investors are key elements of investor protection and provide a check and balance on fund governance for significant transactions of the fund. In particular, this commenter would support a provision that requires fund managers rather than investors to bear the costs associated with reorganizing funds.

We agree that Part 5 should be adopted for non-redeemable investment funds. We propose to apply substantially all the securityholder approval requirements to non-redeemable investment funds other than in limited circumstances. We also propose to add an additional requirement that prior securityholder approval be obtained where there is a change in the nature of the fund, i.e., from a non-redeemable investment fund to a mutual fund, from a mutual fund to a non-redeemable investment fund, or from an investment fund to an issuer that is not an investment fund. The merger pre-approval requirements applicable to mutual funds, including that mutual funds not bear the costs of the reorganization, are proposed to also apply to reorganizations of non-redeemable investment funds. We also propose to prohibit an investment fund from paying the costs of restructuring the fund. Given that reorganizations and restructurings permit managers to retain the fund's assets under management, these transactions are beneficial to managers and managers should accordingly bear the costs of these transactions.

 

 

One commenter asked us to consider the realities of investment fund securityholder meetings and the current level of investor behaviour. Since most investors are passive, we were encouraged to consider less costly alternatives to holding securityholder meetings such as enhanced disclosure and advance notice of proposed changes, as well as the role played by the IRC.

We have proposed alternatives to the securityholder approval requirement, for example, obtaining IRC approval in cases where securityholders will not experience a significant impact from a fund merger, but we do not propose any amendments to the securityholder approval regime generally. We think it serves as an important check and balance on implementing fundamental changes to the fund.

 

 

Another commenter noted, however, that even though many retail investors may not exercise their right to vote, it is significant that the voting rights outlined in NI 81-102 entitle them to receive a management information circular outlining the proposed change and that unitholders have an opportunity to vote.

The CSA agree with the importance of providing sufficient disclosure to investors of fundamental changes made to the investment fund. We do not propose to remove any such requirements.

 

 

This same commenter expressed the view that non-redeemable investment funds should not be required to obtain regulatory approval of fundamental changes if securityholder approval had been obtained. This commenter believes that the additional cost and time required to obtain regulatory approval would not provide significant additional benefits to securityholders.

We do not propose any amendments to the regulatory approval requirements at this time.

 

 

Another commenter, on the other hand, had concerns with the exemptions set out in NI 81-102 that permit significant reorganizations of funds without prior regulatory approval. This commenter believes that all fundamental transactions could benefit by being reviewed by the regulatory authorities.

See response above.

 

 

Custodianship requirements

 

 

Most commenters agreed that the segregation and security of investment fund assets is a paramount concern for investors and that these requirements should extend to all non-redeemable investment funds. It was also noted that it would make sense to move these requirements that are currently set out in a prospectus disclosure rule (NI 41-101) to an operational rule, as the requirements may have been overlooked by some industry participants who may expect NI 41-101 to relate mainly to prospectus content.

Pursuant to the proposed amendments, Part 6 of NI 81-102 will apply to non-redeemable investment funds. Part 14 of NI 41-101 will no longer apply to these funds.

 

 

One commenter suggested that the current rule in NI 41-101 is too restrictive for non-redeemable investment funds because these funds often have investment mandates that require their assets to be deposited with a prime broker rather than a custodian. As well, the requirement that the custodian be a Canadian financial institution limits price competition between service providers. We were asked to amend these requirements so that non-redeemable investment funds may deposit assets with prime brokers in accordance with industry practice and permit funds to access a broader universe of available custodians.

The CSA do not propose any substantive amendments to the custodianship requirements at this time.

 

4. Are there other investor protection principles and/or requirements of NI 81-102 which the CSA should consider for non-redeemable investment funds at this time? If so, please explain.

One commenter believed that rules and requirements beyond those identified by the CSA were not necessary, while a few commenters proposed additional investor protection principles that should be considered.

As noted above, the CSA believe there are key operational requirements in NI 81-102 in addition to the core protections identified in the notice that would provide a base level of protection for investors in non-redeemable investment funds. Imposing similar operational requirements would also level the playing field for all investment funds, providing a more consistent framework within which they can compete with each other.

 

 

Sales Communications

 

 

Three commenters believed the regulation of sales communications to be a key value in promoting investor confidence and investor protection and recommended that we consider adopting an equivalent to Part 15 of NI 81-102 that applies to non-redeemable investment funds. These provisions would provide certainty as to what type of disclosure is permissible and would ensure that marketing materials prepared for non-redeemable investment funds contain relevant information and do not include misleading or unsubstantiated claims. One commenter remarked, however, that these restrictions should not prevent non-redeemable investment funds from providing meaningful disclosure regarding new investment strategies or products which do not have a proven history or track record, provided that there is legitimate evidentiary support for such disclosure.

We propose to apply Part 15 to non-redeemable investment fund sales communications. The CSA are of the view that the sales communications requirements provide guidelines for investment funds to ensure that disclosure is relevant, consistent, and not misleading. The sales communication presentation requirements also ensure that disclosure of certain information such as performance data is standardized so that investors can make meaningful comparisons among similar investment funds.

 

 

 

 

The requirements of Part 15 do not specifically prohibit disclosure regarding new investment strategies or products which do not have a proven history or track record. However, similar to mutual funds, we propose that sales communications for non-redeemable investment funds that present performance data present performance data based on actual historical performance, and not on hypothetical or back-tested data.

 

 

Redemption of Securities of a Mutual Fund

 

 

One commenter recommended that we adopt a requirement for non-redeemable investment funds to provide greater transparency to investors regarding the calculation of proceeds payable upon redemption of investment fund securities, particularly for investment funds that pay redemption proceeds that are less than the NAV per unit of the fund.

We propose to make a consequential amendment to Form 41-101F2 that requires a non-redeemable investment fund to disclose in its prospectus the amount, or the maximum amount or percentage that may be deducted from the net asset value per security, if the proceeds payable upon redemption of a fund's securities are based on the NAV per security. See proposed amendments to Form 41-101F2.

 

 

This commenter also suggested that we adopt rules similar to Part 10 of NI 81-102 that require funds to have adequate procedures for processing redemption requests in a fair and timely manner and to suspend redemptions only when it is commercially reasonable to do so. This commenter added that most non-redeemable investment funds already comply with these provisions since they reflect industry best practices.

We also propose to apply certain provisions in Part 10 to ensure fair and timely administration of redemption requests and to limit when a non-redeemable investment fund may suspend redemptions. Similar to mutual funds, non-redeemable investment funds will be required to mail a notice to securityholders annually, reminding investors of their redemption rights and how they may be exercised. See proposed amendments to Part 10.

 

 

Another commenter urged us to address the gradual trend within the investment fund industry to make redemption options less and less attractive to investors of non-redeemable investment funds, especially because these investors already face thin markets for selling their units. This commenter suggested that where a redemption feature is part of a non-redeemable investment fund, we limit the allowable fraction of NAV at which non-redeemable investment funds may redeem units to no less than 95% of NAV.

We do not propose any requirements relating to the amount of redemption proceeds at this time. As mentioned above, we are requiring a non-redeemable investment fund to disclose in its prospectus the maximum amount of any costs or other fees that may be deducted from the net asset value per security when securities are redeemed, so that the amount received by an investor will be clarified.

 

 

Disclosure requirements

 

 

A few commenters expressed support for the adoption of point-of-sale delivery and disclosure requirements for non-redeemable investment funds.

The adoption of a point-of-sale disclosure regime for non-redeemable investment funds is not within the scope of the Modernization Project.

 

 

One commenter recommended that non-redeemable investment funds be required to provide plain language disclosure as to how proceeds will be utilized.

Non-redeemable investment funds are required under Form 41-101F2 to disclose the principal purposes for which the net proceeds will be used by the investment fund and to disclose their fundamental investment objectives and the strategies used to invest the money received from the public. The Form also requires that disclosure in the prospectus be understandable to readers and presented in an easy-to-read format, as well as comply with plain language principles.

 

 

Conversions

 

 

One commenter requested that we consider adopting rules for the conversion of non-redeemable investment funds to open-end mutual funds.

Under the proposed amendments, a non-redeemable investment fund will have to obtain securityholder approval before increasing the frequency of redemptions and converting into a mutual fund. If the fund manager proposes to merge the non-redeemable investment fund with a mutual fund such that securityholders of the non-redeemable investment fund become securityholders of the mutual fund, prior approval of the securityholders of the non-redeemable investment fund must be obtained, unless the merger meets specified criteria in proposed subsection 5.3(2) of NI 81-102. A non-redeemable investment fund that has a built-in conversion feature that triggers regular redemptions based on NAV may be exempt from the securityholder approval requirement if it meets specified criteria, including prospectus disclosure of the event that will cause it to convert into a mutual fund. See proposed amendments to Part 5.

 

 

Principles that should not be adopted for non-redeemable investment funds

 

 

One commenter identified several provisions in NI 81-102 that would not be appropriate for non-redeemable investment funds due to their different investment strategies and distribution models:

The CSA agree that the specific requirements identified under Parts 3, 9, and 12 would not be applicable for non-redeemable investment funds. The CSA disagree, however, that the provisions under Parts 7, 11 and 14 should not apply to non-redeemable investment funds.

 

 

seed capital requirements for establishing new mutual funds, since non-redeemable investment funds are generally distributed by a syndicate of dealers pursuant to a "best efforts" agency agreement (Sections 3.1 and 3.2 of NI 81-102);

The CSA are of the view that the provisions in Part 7 represent a fair basis for the payment of incentive fees. Since the CSA propose to apply comparable investment restrictions to non-redeemable investment funds that use conventional investment strategies, we are of the view that similar rules should apply to the payment of incentive fees by non-redeemable investment funds. As noted above, the CSA propose that investment funds that use alternative investment strategies be regulated under an amended NI 81-104, which allows for a wider range of incentive fee arrangements.

 

 

restrictions on incentive and performance fees paid to fund managers, since the ability to enter all sorts of fee arrangements may encourage innovation of non-redeemable investment funds, so long as clear disclosure is provided in their prospectuses and continuous disclosure documents (Part 7 of NI 81-102);

While the CSA recognize that dealers of non-redeemable investment funds will be exempt from the requirements in Part 11 because they are members of IIROC, the CSA note that the provisions in Part 11 also apply to service providers of funds who receive cash on behalf of the investment fund for investment or redemption purposes. As the requirements in Part 11 ensure that investor cash is appropriately segregated, we are of the view that there is no policy rationale to support applying the requirements to service providers of mutual funds, but not to service providers of non-redeemable investment funds. See proposed amendments to Part 11.

 

 

rules regarding the sale of fund securities as they relate to the sale of mutual funds, since non-redeemable investment funds are generally distributed by a syndicate of Investment Industry Regulatory Organization of Canada (IIROC) dealers who are already subject to rules governing the sales process (Part 9 of NI 81-102);

The CSA are of the view that the record date requirements in Part 14 should apply to non-redeemable investment funds on a similar basis as mutual funds, as there is no policy rationale to support different treatment. Currently, the record date requirements only apply to conventional mutual funds and not to exchange-traded mutual funds because exchanges impose rules on listed issuers in respect of setting record dates. Similarly, we propose to provide an exemption for non-redeemable investment funds that list their securities on an exchange. See proposed amendments to Part 14.

 

 

commingling of cash restrictions, since IIROC dealers generally distributing securities of non-redeemable investment funds are already subject to rules governing the commingling of cash (Part 11 of NI 81-102);

 

 

 

compliance reports other than in relation to compliance with redemption requirements, since Parts 9 and 11 are not applicable to non-redeemable investment funds (Part 12 of NI 81-102); and

 

 

 

record date requirements, since non-redeemable investment funds should have the flexibility to determine appropriate record dates for establishing the rights of securityholders to receive distributions, provided that the process for making these determinations is clearly disclosed in their prospectuses and continuous disclosure documents (Part 14 of NI 81-102).

 

 

5. In addition to the initial requirements the CSA has identified for non-redeemable investment funds, we are considering the possibility of imposing certain investment restrictions, similar to those set out under Part 2 of NI 81-102. Please identify those core investment restrictions that, in your view, should apply to these funds and explain why. If you think no investment restrictions are needed, please explain why.

Most commenters generally agreed that investment restrictions similar to Part 2 of NI 81-102 should not be adopted for non-redeemable investment funds because the flexibility to implement alternative investment strategies in order to provide investors with exposure to different asset classes and innovative techniques is the primary distinction between conventional mutual funds and non-redeemable investment funds. These commenters feel that this distinction is beneficial to investors and should not be collapsed.

The CSA are of the view that a number of the investment restrictions in Part 2 are core investment restrictions that aim to promote prudent management (for example, limiting counterparty risks under derivatives contracts) or define the fundamental characteristics of investment funds (for example, the control restrictions in section 2.2).

 

 

Some commenters stressed that the liquidity and diversification requirements imposed on public mutual funds should not also apply to non-redeemable investment funds. This is because investors of non-redeemable investment funds generally have access to daily liquidity by trading their securities over a stock exchange and receive sufficient information regarding the NAV of the fund through various forms of disclosure. Further, requiring diversification to mitigate investment risks and volatility of the alternative investment strategies adopted by non-redeemable investment funds would be inconsistent with the purpose of investing in these funds.

We are also of the view that investment restrictions should apply in order to: (i) clarify the types of investments or investment strategies that the CSA do not view to be consistent with the passive investment nature of an investment fund; and (ii) more clearly delineate the types of investment strategies the fund is engaging in.

 

 

We were asked by one commenter to recognize the reliance placed by non-redeemable investment fund investors on the financial advisors and dealing representatives who sell these funds. These representatives are employed by full-service dealers that are members of the IIROC, and must satisfy higher proficiency requirements in order to understand the features of such funds and recommend them in suitable circumstances.

However, we recognize that certain of the investment restrictions in Part 2 of NI 81-102 could be modified because of the differences in offering models, liquidity for securityholders, and distribution channels. For example, we seek comment on whether different issuer concentration limits and illiquid asset limits could apply for non-redeemable investment funds. See Annex A.

 

 

A few commenters suggested that the additional investment risks and volatility associated with the investment strategies of non-redeemable investment funds could be addressed through disclosure. For example, one commenter suggested that any point-of-sale documents distributed by a non-redeemable investment fund disclose how the investment strategies of the fund differ from the investment restrictions set out in Part 2 of NI 81-102.

We have observed that there is a wide spectrum of non-redeemable investment funds, ranging from non-redeemable investment funds that invest in a similar manner as conventional mutual funds within the restrictions of NI 81-102 and non-redeemable investment funds that engage in more complex investment strategies. Non-redeemable investment funds may currently operate with a wide range of investment strategies with potentially very different levels of risk and complexity, but are all sold through the same distribution channel and subject to the same disclosure requirements. The CSA think it is important that investors can readily differentiate between investment funds that use conventional investment strategies set out in Part 2 of NI 81-102 and alternative funds that use investment strategies and invest in asset classes that are not permitted in NI 81-102.

 

 

One commenter urged us to consider investment restrictions for non-redeemable investment funds at the same time as any review of investment restrictions for open-end mutual funds. Specifically, any proposal to impose investment restrictions on non-redeemable investment funds should be deferred to Stage 2 of Phase 2 of the Modernization Project.

In order to continue to provide flexibility for non-redeemable investment funds to use alternative investment strategies, we are considering how to redesign NI 81-104 so that it will encompass both mutual funds and non-redeemable investment funds that wish to utilize alternative investment strategies.

 

 

 

 

We agree that one way to address the additional investment risks and volatility associated with alternative investment strategies is through increased transparency. We are contemplating that a fund be permitted to have more flexibility in utilizing alternative investment strategies if it complies with the contemplated regulatory framework in NI 81-104, which would include enhanced disclosure requirements to help inform investors about the differences in investment restrictions and the potential for increased complexity and higher degrees of risk associated with investing in alternative funds. We also invite comment on the proficiency requirements for the sale of alternative fund securities.

 

 

 

 

In the next stage of the Modernization Project, the CSA plan to review the investment restrictions in Part 2 for mutual funds.

 

 

One commenter proposed that investment restrictions for non-redeemable investment funds be limited to the investment restrictions set out in sections 2.12 to 2.17 of Part 2 of NI 81-102. These requirements on securities lending, repurchase and reverse repurchase transactions, in particular requirements regarding documentation, supervision, controls and records, reflect industry best practices and would not be unduly restrictive on the transactions.

We propose to apply sections 2.12 to 2.17 to non-redeemable investment funds.

 

 

Another commenter recommended that we impose an anti-tiering provision on non-redeemable investment funds. This commenter expressed concerns regarding the potential tiering of fees that could result from fund-of-fund arrangements, as well as the replacement of one fund manager's judgment with another, which does not provide any additional benefit to the investor. This commenter, however, would exclude money market funds, index participation units or other static, low-fee funds from such anti-tiering provision.

The CSA propose that similar to mutual funds, non-redeemable investment funds investing in underlying mutual funds be prohibited from the duplication of fees in fund-of-fund structures.

 

 

Another commenter noted that while some investment restrictions should apply to non-redeemable investment funds including scholarship plans, the current investment restrictions that apply specifically to the subset of scholarship plans are far too restrictive and work to the detriment of plan holders.

The proposed amendments for non-redeemable investment funds do not affect scholarship plans. Amendments for scholarship plans are outside the scope of the Modernization Project.

 

6. What do you foresee as the anticipated cost burdens in complying with the initial restrictions and operational requirements we are proposing for non-redeemable investment funds? Specifically, we request data from the investment fund industry and service providers on the anticipated costs of complying with the Phase 2 proposals.

One commenter noted that they would not be in a position to comment on the cost burden associated with the initial proposals until they have an opportunity to review the extent of changes under consideration.

The CSA have considered the anticipated costs and benefits of the proposed amendments to NI 81-102 to impose operational requirements on non-redeemable investment funds. We invite further comments on the costs associated with the proposed amendments. We think that the proposed amendments, together with a reformed NI 81-104 framework, will continue to permit fund managers to create alternatives to conventional mutual funds.

 

 

Several other commenters believed that the cost burden associated with the compliance of non-redeemable investment funds with the initial proposed restrictions and operational requirements would only be incremental and therefore not significant since these funds are already subject to the same requirements as conventional mutual funds under NI 81-106 and NI 81-107.

 

 

 

 

One of these commenters also noted that any principal costs may be non-monetary, as additional regulations will hinder the ability of investors to access Canadian-based investment fund alternatives to conventional mutual funds.

 

 

Other suggestions for Phase 2

We also received several suggestions from commenters regarding other issues to address in Phase 2 of the Modernization Project. These recommendations include:

We thank all commenters for suggestions on additional issues to consider in Phase 2 of the Modernization Project.

 

 

modernization of the regulation of mortgage funds, as National Policy No. 29 has not been re-considered by the CSA since the coming into force of NI 81-102;

We have reconsidered the exemption to the rule preventing the reimbursement of organizational costs for exchange-traded mutual funds not in continuous distribution. The CSA propose to apply section 3.3 to all investment funds. We think imposing organizational costs on all fund managers could further align a manager's interest with those of investors and, at the same time, level the playing field for mutual fund and non-redeemable fund managers and discourage arbitrage opportunities. See proposed amendments to Part 3.

 

 

reconsideration of National Policy No. 15 and the regulation of scholarship plans, and how this regulation would fit into the regulation of non-redeemable investment funds;

We may consider some of the other suggested changes in the next stage of the Modernization Project. At this time, we will continue to consider requests for exemptive relief from NI 81-102 on a case-by-case basis.

 

 

greater access by mutual funds to investments in physical commodities, especially through commodity-based exchange-traded funds and derivatives, to allow investors to benefit from preservation of capital, greater performance in inflationary environments, and improved portfolio diversification;

Some of the issues identified, including the regulation of scholarship plans, promotion and sales of investment funds, and exempt markets, are outside the scope of the Modernization Project.

 

 

review of derivatives requirements, as several requirements that apply to specified derivatives require greater guidance (for example, terms such as "a high degree of negative correlation" found in the definition of "hedge" in NI 81-102 lead to inconsistent interpretations in the industry);

 

 

 

reconsideration of the definition of "illiquid asset" in NI 81-102, as the current definition may not necessarily address a mutual fund's need to fund redemptions on demand (e.g., one commenter believes that the current definition captures securities that are in fact liquid, and amendments should be made so that the definition contemplates not only the type of security held, but also the size of each security position in a fund and trading volumes in the market);

 

 

 

increased flexibility for fund-of-fund structures, particularly involving multi-layered structures, Canadian pooled funds, and non-Canadian investment funds, to increase diversification opportunities and improve cost efficiency for investment funds;

 

 

 

reforms in the promotion and sales of investment funds;

 

 

 

 

reconsideration of exemptions to the rules preventing the reimbursement of organizational costs for all non-redeemable investment funds, as there may be price discrimination issues between initial and subsequent investors; and

 

 

 

implementation of a "Clients First Model", a principle requiring industry participants to put the best interests of their clients first, which would require further tightening of rules related to conflicts of interest, advertising and marketing of investment funds, exempt markets and accredited investors, and the training of exempt market dealers.

 

 

Other general comments

One commenter asked us to consider establishing an ongoing process for reviewing NI 81-102, soliciting industry comments and amending NI 81-102 on a more frequent basis to ensure that the regulatory framework evolves and keeps pace with product innovations, evolving capital markets and the needs of investors.

Noted.

 

 

A few commenters noted that the Modernization Project should not be allowed to delay other important initiatives of the CSA, including the final stages of implementing the point-of-sale disclosure project.

Noted.

- - - - - - - - - - - - - - - - - - - -

Part III -- List of commenters

Commenters

Borden Ladner Gervais LLP

Canadian Foundation for Advancement of Investor Rights (FAIR)

Fasken Martineau DuMoulin LLP

Fidelity Investments Canada ULC

IGM Financial Inc.

Kenmar & Associates

Periscope Capital Inc.

RESP Dealers Association of Canada

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Schedule E-1: Proposed Amendments to National Instrument 81-102 Mutual Funds

ANNEX E

SCHEDULE E-1

PROPOSED AMENDMENTS TO

NATIONAL INSTRUMENT 81-102 MUTUAL FUNDS

1. National Instrument 81-102 Mutual Funds is amended by this Instrument.

2. The title is amended by replacing "Mutual Funds" with "Investment Funds".

3. Section 1.1 is amended

(a) in the definition of "approved credit rating" by replacing "mutual fund" with "investment fund",

(b) in the definition of "borrowing agent" by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(c) in the definition of "cash cover" by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(d) in the definition of "clone fund" by replacing "a mutual fund" with "an investment fund" and by replacing "another mutual fund" with "another investment fund",

(e) in the definition of "currency cross hedge" by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(f) by replacing the definition of "custodian" with the following:

"custodian" means the institution appointed by an investment fund to hold portfolio assets of the investment fund in accordance with Part 6; ,

(g) by adding the following definition:

"dealer managed investment fund" means an investment fund the portfolio adviser of which is a dealer manager; ,

(h) in the definition of "debt-like security" by replacing "a mutual fund" with "an investment fund", by replacing "the mutual fund" with "the investment fund" wherever it occurs, and by replacing "percent" with "%",

(i) by repealing the definition of "fixed portfolio ETF",

(j) by adding the following definition:

"fixed portfolio fund" means an exchange-traded mutual fund not in continuous distribution, or a non-redeemable investment fund, that

(a) has fundamental investment objectives which include holding and maintaining a fixed portfolio of publicly traded equity securities of one or more issuers the names of which are disclosed in its prospectus, and

(b) trades securities referred to in paragraph (a) only in the circumstances disclosed in its prospectus;,

(k) in the definition of "floating rate evidence of indebtedness" by replacing paragraph (b) with the following:

(b) the evidence of indebtedness is issued, or fully and unconditionally guaranteed as to principal and interest, by any of the following:

(i) the government of Canada or the government of a jurisdiction of Canada;

(ii) the government of the United States of America, the government of one of the states of the United States of America, the government of another sovereign state or a permitted supranational agency, if, in each case, the evidence of indebtedness has an approved credit rating;,

(l) in the definition of "fundamental investment objectives" by replacing "a mutual fund" with "an investment fund", by replacing "the mutual fund" with "the investment fund" wherever it occurs, and by replacing "other mutual funds" with "other investment funds",

(m) in the definition of "illiquid asset" by replacing "the mutual fund" with "the investment fund" wherever it occurs and by replacing "a mutual fund" with "an investment fund",

(n) by adding the following definitions:

"investment fund conflict of interest investment restrictions" means any provisions of securities legislation that

(a) prohibit an investment fund from knowingly making or holding an investment in any person or company who is a substantial security holder, as defined in securities legislation, of the investment fund, its management company, manager or distribution company;

(b) prohibit an investment fund from knowingly making or holding an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder, as defined in securities legislation;

(c) prohibit an investment fund from knowingly making or holding an investment in an issuer in which any person or company who is a substantial security holder of the investment fund, its management company, manager or distribution company, has a significant interest, as defined in securities legislation;

(d) prohibit an investment fund, a responsible person as defined in securities legislation, a portfolio adviser or a registered person acting under a management contract from knowingly causing any investment portfolio managed by it, or an investment fund, to invest in, or prohibit an investment fund from investing in, any issuer in which a responsible person, as defined in securities legislation, is an officer or director unless the specific fact is disclosed to the investment fund, securityholder or client, and where securities legislation requires it, the written consent of the client to the investment is obtained before the purchase;

(e) prohibit an investment fund, a responsible person as defined in securities legislation, or a portfolio adviser from knowingly causing any investment portfolio managed by it to purchase or sell, or prohibit an investment fund from purchasing or selling, the securities of any issuer from or to the account of a responsible person, as defined in securities legislation, an associate of a responsible person or the portfolio adviser; and

(f) prohibit a portfolio adviser or a registered person acting under a management contract from subscribing to or buying securities on behalf of an investment fund, where his or her own interest might distort his or her judgment, unless the specific fact is disclosed to the client and the written consent of the client to the investment is obtained before the subscription or purchase;

"investment fund conflict of interest reporting requirements" means any provisions of securities legislation that require the filing of a report with the securities regulatory authority in prescribed form that discloses every transaction of purchase or sale of portfolio assets between the investment fund and specified related persons or companies; ,

(o) by replacing the definition of "investor fees" with the following:

"investor fees" means, in connection with the purchase, conversion, holding, transfer or redemption of securities of an investment fund, all fees, charges and expenses that are or may become payable by a securityholder of the investment fund to,

(a) in the case of a mutual fund, a member of the organization of the mutual fund other than a member of the organization acting solely as a participating dealer, or

(b) in the case of a non-redeemable investment fund, the manager of the non-redeemable investment fund; ,

(p) in the definition of "long position" by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(q) in the definition of "management expense ratio" by replacing "a mutual fund" with "an investment fund",

(r) by replacing the definition of "manager" with the following:

"manager" means an investment fund manager; ,

(s) by repealing the definitions of "mutual fund conflict of interest investment restrictions" and "mutual fund conflict of interest reporting requirements",

(t) in the following definitions by replacing "a mutual fund" with "an investment fund":

(i) "non-resident sub-adviser";

(ii) "performance data",

(u) in the definition of "portfolio adviser" by replacing "mutual fund" with "investment fund" wherever it occurs,

(v) in the following definitions by replacing "a mutual fund" with "an investment fund":

(i) "portfolio asset";

(ii) "public quotation",

(w) in the definition of "purchase" by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund",

(x) by repealing the definition of "redemption payment date",

(y) in the definition of "report to securityholders" by replacing "a mutual fund" with "an investment fund",

(z) in the definition of "restricted security" by replacing "mutual fund" with "investment fund" and by replacing "mutual fund's" with "investment fund's",

(aa) in the definition of "sales communication" by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(bb) by adding the following definition:

"scholarship plan" has the meaning ascribed to that term in section 1.1 of National Instrument 81-106 Investment Fund Continuous Disclosure; ,

(cc) in the definition of "short position" by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(dd) in the definition of "specified dealer" by deleting "or" at the end of paragraph (a),

(ee) in the definition of "sub-custodian" by replacing "a mutual fund" with "an investment fund", by replacing "the mutual fund" with "the investment fund" wherever it occurs, and by replacing "section 6.1" with "Part 6", and

(ff) in the definition of "underlying market exposure" by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund".

4.

(1) Section 1.2 is amended

(a) by renumbering it as subsection 1.2(1),

(b) by replacing "; and" with "," at the end of paragraph (a),

(c) by adding the following paragraph immediately after paragraph (a):

(a.1) a non-redeemable investment fund that is a reporting issuer, and , and

(d) in paragraph (b) by replacing "a mutual fund" with "an investment fund" and by replacing "paragraph (a)" with "paragraphs (a) and (a.1)".

(2) Section 1.2, as amended by subsection (1), is amended by adding the following subsection:

(2) Despite subsection (1), this Instrument does not apply to a scholarship plan. .

5. Section 1.3 is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "separate mutual fund" with "separate investment fund", and

(c) by replacing "A mutual fund" with "An investment fund".

6.

(1) Section 2.1 is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "percent" with "%" wherever it occurs,

(d) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(e) in paragraph (2)(e) by replacing "ETF" with "fund",

(f) in subsection (3) by replacing "a mutual fund's" with "an investment fund's", and

(g) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

7. Section 2.2 is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(d) by replacing "percent" with "%", and

(e) by replacing "a mutual fund" with "an investment fund" wherever it occurs.

8.

(1) Section 2.3 is amended

(a) by renumbering it as subsection 2.3(1),

(b) by replacing "shall" with "must", and

(c) by replacing "percent" with "%" wherever it occurs.

(2) Section 2.3, as amended by subsection (1), is amended by adding the following subsections:

(2) A non-redeemable investment fund must not

(a) purchase real property;

(b) purchase a mortgage, other than a guaranteed mortgage;

(c) purchase a gold certificate, other than a permitted gold certificate;

(d) purchase a physical commodity or a permitted gold certificate or purchase, sell or use a specified derivative the underlying interest of which is a physical commodity or a permitted gold certificate if, immediately after the purchase, sale or use, the non-redeemable investment fund's holdings of physical commodities and permitted gold certificates would exceed an amount equal to 10% of its net asset value;

(e) purchase, sell or use a specified derivative other than in compliance with sections 2.7 to 2.11; or

(f) purchase an interest in a loan syndication or loan participation if the purchase would require the non-redeemable investment fund to assume any responsibilities in administering the loan in relation to the borrower.

(3) In determining a non-redeemable investment fund's holdings of physical commodities and permitted gold certificates for the purposes of paragraph (2)(d), the non-redeemable investment fund must

(a) for each long position and short position in a specified derivative that is held, consider that it holds directly the equivalent quantity of the underlying interest of that specified derivative; and

(b) aggregate each holding determined in accordance with paragraph (a). .

9. Section 2.4 is amended

(a) by replacing "A mutual fund" with "An investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "percent" with "%" wherever it occurs,

(d) by replacing "a mutual fund" with "an investment fund", and

(e) by replacing "the mutual fund" with "the investment fund".

10.

(1) Subsection 2.5(1) is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "another mutual fund" with "another investment fund", and

(c) by replacing "other mutual fund" with "other investment fund" wherever it occurs.

(2) Subsection 2.5(2) is amended

(a) by replacing "A mutual fund shall" with "An investment fund must",

(b) by replacing "another mutual fund" with "another investment fund",

(c) by replacing paragraph (a) with the following:

(a) the other investment fund is a mutual fund that is subject to this Instrument and,

(i) if the investment fund is a mutual fund, the other investment fund offers or has offered securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure,

(ii) if the investment fund is a non-redeemable investment fund, the other investment fund is not a commodity pool as defined in National Instrument 81-104 Commodity Pools, ,

(d) by replacing "other mutual fund" with "other investment fund" wherever it occurs,

(e) by replacing "other mutual funds" with "other investment funds", and

(f) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

(3) Subsection 2.5(3) is amended

(a) by replacing "a mutual fund" with "an investment fund", and

(b) in paragraph (b) by replacing "mutual fund" with "investment fund" wherever it occurs.

(4) Subsection 2.5(4) is amended

(a) by replacing "other mutual fund" with "other investment fund", and

(b) by replacing "a mutual fund" with "an investment fund".

(5) Subsection 2.5(5) is amended by replacing "a mutual fund" with "an investment fund".

(6) Subsection 2.5(6) is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing"another mutual fund" with "another investment fund",

(c) by replacing "shall" with "must",

(d) by replacing "other mutual fund" with "other investment fund", and

(e) by replacing "the mutual fund" with "the investment fund".

(7) Subsection 2.5(7) is amended

(a) by replacing "The mutual fund" with "The investment fund",

(b) by replacing "the mutual fund" with "the investment fund",

(c) by replacing "a mutual fund" with "an investment fund", and

(d) by replacing "another mutual fund" with "another investment fund".

11. Section 2.6 is amended

(a) by replacing "A mutual fund shall not" with "An investment fund must not",

(b) in paragraph (a) by replacing subparagraph (i) with the following:

(i) in the case of a mutual fund, the transaction is a temporary measure to accommodate requests for the redemption of securities of the mutual fund while the mutual fund effects an orderly liquidation of portfolio assets, or to permit the mutual fund to settle portfolio transactions and, after giving effect to all transactions undertaken under this subparagraph, the outstanding amount of all borrowings of the mutual fund does not exceed 5% of its net asset value at the time of the borrowing,

(i.1) in the case of a non-redeemable investment fund, the cash is borrowed from a Canadian financial institution and the outstanding amount of all borrowings of the investment fund does not exceed 30% of its net asset value at the time of the borrowing, ,

(c) in subparagraph (a)(ii) by replacing "mutual fund" with "investment fund" and by replacing "made" with "provided",

(d) in paragraph (a) by adding the following subparagraph immediately after subparagraph (ii):

(ii.1) in the case of a non-redeemable investment fund, the security interest is required to enable the non-redeemable investment fund to effect cash borrowings under subparagraph (i.1), is provided in accordance with industry practice for the loan and relates only to obligations arising under the loan, ,

(e) in subparagraph (a)(iii) by replacing "mutual fund" with "investment fund", and

(f) in paragraph (d) by replacing "mutual fund" with "investment fund".

12. Section 2.6.1 is amended

(a) by replacing "A mutual fund" with "An investment fund" wherever it occurs, and

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

13. Section 2.7 is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(d) by replacing "shall" with "must" wherever it occurs, and

(e) by replacing "percent" with "%".

14. Section 2.8 is amended

(a) by replacing "A mutual fund" with "An investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "percent" with "%", and

(d) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

15. Section 2.9 is amended by replacing "a mutual fund" with "an investment fund".

16. Section 2.10 is amended

(a) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(c) by replacing "shall" with "must" wherever it occurs, and

(d) by replacing "A mutual fund" with "An investment fund" wherever it occurs.

17.

(1) Subsection 2.11(1) is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "a mutual fund" with "an investment fund",

(c) by adding "," before "unless",

(d) by replacing paragraph (a) with the following:

(a) in the case of a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, its prospectus contains the disclosure required for a mutual fund intending to engage in the activity;

(a.1) in the case of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund, the investment fund issues a news release that contains both of the following:

(i) the disclosure required in a prospectus for an exchange-traded mutual fund that is not in continuous distribution, or a non-redeemable investment fund, intending to engage in the activity;

(ii) the date on which the activity is intended to begin; and , and

(e) in paragraph (b) by replacing "mutual fund" with "investment fund", and by replacing "required for mutual funds intending to engage in the activity" with "referred to in paragraph (a) or (a.1), as applicable".

(2) Subsection 2.11(2) is amended by adding ", other than an exchange-traded mutual fund that is not in continuous distribution," after "A mutual fund".

(3) Section 2.11 is amended by adding the following subsection:

(3) Paragraphs (1)(a.1) and (b) do not apply to an exchange-traded mutual fund that is not in continuous distribution, or a non-redeemable investment fund, if each prospectus of the investment fund since its inception has contained the disclosure referred to in paragraph (1)(a.1).

18. Section 2.12 is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(c) by replacing "percent" with "%" wherever it occurs,

(d) by replacing "The mutual fund" with "The investment fund",

(e) by replacing item 12 of subsection (1) with the following:

12. Immediately after the investment fund enters into the transaction, the aggregate market value of all securities loaned by the investment fund in securities lending transactions and not yet returned to it or sold by the investment fund in repurchase transactions under section 2.13 and not yet repurchased does not exceed 50% of the net asset value of the investment fund.,

(f) by replacing "A mutual fund" with "An investment fund" wherever it occurs, and

(g) by replacing "shall" with "must" wherever it occurs.

19. Section 2.13 is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(c) by replacing "percent" with "%" wherever it occurs,

(d) by replacing item 11 of subsection (1) with the following:

11. Immediately after the investment fund enters into the transaction, the aggregate market value of all securities loaned by the investment fund in securities lending transactions under section 2.12 and not yet returned to it or sold by the investment fund in repurchase transactions and not yet repurchased does not exceed 50% of the net asset value of the investment fund., and

(e) by replacing "A mutual fund" with "An investment fund".

20. Section 2.14 is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(c) by replacing "percent" with "%" wherever it occurs.

21. Section 2.15 is amended

(a) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(d) in paragraph (4)(c) by replacing "the mutual fund's" with "the investment fund's".

22. Section 2.16 is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(d) by replacing "a mutual fund" with "an investment fund".

23.

(1) Subsection 2.17(1) is amended

(a) by replacing "A mutual fund shall" with "An investment fund must",

(b) by adding "," before "unless",

(c) by replacing paragraph (a) with the following:

(a) in the case of a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, its prospectus contains the disclosure required for mutual funds entering into those types of transactions;

(a.1) in the case of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund, the investment fund issues a news release that contains both of the following:

(i) the disclosure required in a prospectus for an exchange-traded mutual fund that is not in continuous distribution, or a non-redeemable investment fund, entering into those types of transactions;

(ii) the date on which the investment fund intends to begin entering into those types of transactions; and , and

(e) in paragraph (b) by replacing "the mutual fund" with "the investment fund" and by replacing "required for mutual funds entering into those types of transactions" with "referred to in paragraph (a) or (a.1), as applicable".

(2) Subsection 2.17(3) is amended by adding "to a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution," after "does not apply".

(3) Section 2.17 is amended by adding the following subsection:

(4) Paragraphs (1)(a.1) and (b) do not apply to an exchange-traded mutual fund that is not in continuous distribution, or a non-redeemable investment fund, if each prospectus of the investment fund since its inception contains the disclosure referred to in paragraph (1)(a.1). .

24. Section 2.18 is amended by adding the following subsection:

(3) A non-redeemable investment fund must not describe itself as a "money market fund". .

25. Section 3.1 is amended by replacing "No person or company shall" with "A person or company must not".

26. The following provisions are amended by replacing "shall" with "must":

(a) subsection 3.1(2);

(b) section 3.2.

27. Section 3.3 is amended

(a) by replacing "shall" with "may",

(b) by repealing subsection (2), and

(c) by adding the following subsection:

(3) None of the costs of incorporation, formation or initial organization of a non-redeemable investment fund, or of the preparation and filing of the initial preliminary prospectus and initial prospectus of the non-redeemable investment fund or documents that must be filed concurrently with the initial preliminary prospectus or initial prospectus, may be borne by the non-redeemable investment fund or its securityholders. .

28. Section 4.1 is amended

(a) by replacing "mutual fund" with "investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs, and

(c) in subsection (1) by replacing "five percent" with "5%".

29. Section 4.2 is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "shall" with "must",

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(d) by replacing "a mutual fund" with "an investment fund".

30. Section 4.3 is amended

(a) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(b) in subsection (1) by adding ":" after "is",

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(d) by replacing "another mutual fund" with "another investment fund" wherever it occurs.

31. Section 4.4 is amended

(a) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(d) by replacing "A mutual fund" with "An investment fund" wherever it occurs, and

(e) in subsection (5) by adding "any of the following:" after "by" and by deleting "or" at the end of paragraph (a).

32.

(1) Section 5.1 is amended

(a) by renumbering it as subsection 5.1(1),

(b) by replacing "a mutual fund" with "an investment fund",

(c) by adding "the occurrence of each of the following:" after "before",

(d) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(e) by replacing "another mutual fund" with "another issuer" wherever it occurs,

(f) by replacing "other mutual fund" with "other issuer" wherever it occurs,

(g) by deleting "or" at the end of subparagraph (f)(ii), and

(h) by adding the following paragraph:

(h) the investment fund implements a change that restructures the investment fund from

(i) a non-redeemable investment fund into a mutual fund;

(ii) a mutual fund into a non-redeemable investment fund; or

(iii) an investment fund into an issuer that is not an investment fund..

(2) Section 5.1, as amended by subsection (1), is amended by adding the following subsection:

(2) An investment fund must not bear any of the costs or expenses associated with a change referred to in subparagraphs (1)(h)(i), (ii) or (iii). .

33. Section 5.2 is amended

(a) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(b) by replacing "section 5.1" with "subsection 5.1(1)" wherever it occurs,

(c) by replacing "shall" with "must" wherever it occurs, and

(d) by replacing "a mutual fund" with "an investment fund" wherever it occurs.

34.

(1) Subsection 5.3(1) is amended

(a) by replacing "section 5.1" with "subsection 5.1(1)",

(b) by replacing "a mutual fund" with "an investment fund",

(c) by replacing "paragraphs 5.1(a)" with "paragraphs 5.1(1)(a)" wherever it occurs, and

(d) in paragraph (a) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

(2) Subsection 5.3(2) is replaced with the following:

(2) Despite subsection 5.1(1), the approval of securityholders of an investment fund is not required to be obtained for a change referred to in paragraph 5.1(1)(f) if either of the following paragraphs apply:

(a) all of the following apply:

(i) the independent review committee of the investment fund has approved the change under subsection 5.2(2) of NI 81-107;

(ii) the investment fund is being reorganized with, or its assets are being transferred to, another investment fund to which this Instrument and NI 81-107 apply and that is managed by the manager, or an affiliate of the manager, of the investment fund;

(iii) the reorganization or transfer of assets of the investment fund complies with the criteria in paragraphs 5.6(1)(a), (b), (c), (d), (g), (h), (i), (j) and (k);

(iv) the prospectus of the investment fund discloses that, although the approval of securityholders may not be obtained before making the change, securityholders will be sent a written notice at least 60 days before the effective date of the change;

(v) the notice referred to in subparagraph (iv) to securityholders is sent 60 days before the effective date of the change;

(b) all of the following apply:

(i) the investment fund is a non-redeemable investment fund that is being reorganized with, or its assets are being transferred to, a mutual fund that is

(A) a mutual fund to which this Instrument and NI 81-107 apply,

(B) managed by the manager, or an affiliate of the manager, of the investment fund,

(C) not in default of any requirement of securities legislation, and

(D) a reporting issuer in the local jurisdiction and has a current prospectus in the local jurisdiction;

(ii) the transaction is a tax-deferred transaction under subsection 85(1) of the ITA;

(iii) the securities of the investment fund do not give securityholders of the investment fund the right to request that the investment fund redeem the securities;

(iv) there is no market through which securityholders of the investment fund may sell securities of the investment fund during the existence of the investment fund;

(v) the prospectus of the investment fund discloses that

(A) securityholders of the investment fund, other than the manager, promoter or an affiliate of the manager or promoter, will cease to be securityholders of the investment fund within 30 months following the completion of the initial public offering by the investment fund, and

(B) the investment fund will, within 30 months following the completion of the initial public offering by the investment fund, undertake a reorganization with, or transfer its assets to, a mutual fund that is managed by the manager of the investment fund or by an affiliate of the manager of the investment fund;

(vi) the mutual fund bears none of the costs and expenses associated with the transaction;

(vii) the reorganization or transfer of assets of the investment fund complies with subparagraphs 5.3(2)(a)(i), (iv) and (v) and paragraphs 5.6(1)(d) and (k)..

(3) Section 5.3 is amended by adding the following subsection:

(3) Despite subsection 5.1(1), the approval of securityholders of an investment fund is not required to be obtained for a change referred to in subparagraph 5.1(1)(h)(i) if all of the following conditions apply:

(a) the prospectus of the investment fund contains a description of the change and the event that will cause the change to occur;

(b) the prospectus of the investment fund discloses that, although the approval of securityholders will not be obtained before making the change, securityholders will be sent a written notice at least 60 days before the effective date of the change;

(c) the notice referred to in paragraph (b) is sent 60 days before the effective date of the change;

(d) each sales communication of the investment fund discloses that

(i) if the event that causes the change occurs, the investment fund will become a mutual fund,

(ii) if applicable, the investment strategies of the investment fund will change after the investment fund becomes a mutual fund,

(iii) if applicable, the securities of the investment fund will not be listed on the stock exchange on which they trade as a result of the change, and

(iv) additional information regarding the change is available in the prospectus of the investment fund..

35. Section 5.3.1 is amended

(a) by replacing "mutual fund" with "investment fund" wherever it occurs, and

(b) by replacing "may" with "must".

36. Section 5.4 is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "section 5.1" with "subsection 5.1(1)",

(c) by replacing "shall" with "must" wherever it occurs,

(d) by replacing "paragraphs 5.1(a)" with "paragraphs 5.1(1)(a)",

(e) by replacing "the mutual fund" with "the investment fund", and

(f) by replacing "the mutual fund's" with "the investment fund's".

37. Section 5.5 is amended

(a) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(b) in subsection (1) by adding the following paragraph after paragraph (a):

(a.1) a change in the control of the manager of an investment fund is made; ,

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(d) by replacing "another mutual fund" with "another issuer", and

(e) by repealing subsection (2).

38.

(1) Subsection 5.6(1) is replaced with the following:

5.6 Pre-Approved Reorganizations and Transfers - (1) Despite subsection 5.5(1), the approval of the securities regulatory authority or regulator is not required to implement a transaction referred to in paragraph 5.5(1)(b) if all of the following paragraphs apply:

(a) the investment fund is being reorganized with, or its assets are being transferred to, another investment fund to which this Instrument applies and that

(i) is managed by the manager, or an affiliate of the manager, of the investment fund,

(ii) a reasonable person would consider to have substantially similar fundamental investment objectives, valuation procedures and fee structure as the investment fund,

(iii) is not in default of any requirement of securities legislation,

(iv) is a reporting issuer in the local jurisdiction and, if the other investment fund is a mutual fund, that mutual fund also has a current prospectus in the local jurisdiction;

(b) the transaction is a "qualifying exchange" within the meaning of section 132.2 of the ITA or is a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA;

(c) the transaction contemplates the wind-up of the investment fund as soon as reasonably possible following the transaction;

(d) the portfolio assets of the investment fund to be acquired by the other investment fund as part of the transaction

(i) may be acquired by the other investment fund in compliance with this Instrument, and

(ii) are acceptable to the portfolio adviser of the other investment fund and consistent with the other investment fund's fundamental investment objectives;

(e) the transaction is approved

(i) by the securityholders of the investment fund in accordance with paragraph 5.1(1)(f), unless subsection 5.3(2) applies, and

(ii) if required, by the securityholders of the other investment fund in accordance with paragraph 5.1(1)(g);

(f) the materials sent to securityholders of the investment fund in connection with the approval under paragraph 5.1(1)(f) include

(i) a circular that, in addition to other requirements prescribed by law, describes the proposed transaction, the investment fund into which the investment fund will be reorganized, the income tax considerations for the investment funds participating in the transaction and their securityholders, and, if the investment fund is a corporation and the transaction involves its shareholders becoming securityholders of an investment fund that is established as a trust, a description of the material differences between being a shareholder of a corporation and being a securityholder of a trust,

(ii) if the other investment fund is a mutual fund, the current prospectus or the most recently filed fund facts document, and

(iii) a statement that securityholders may obtain all of the following documents in respect of the reorganized investment fund at no cost by contacting the reorganized investment fund at an address or telephone number specified in the statement, or by accessing the documents at a website address specified in the statement:

(A) if the reorganized investment fund is a mutual fund, the current prospectus;

(B) the most recently filed annual information form, if one has been filed;

(C) if applicable, the most recently filed fund facts document;

(D) the most recently filed annual and interim financial statements;

(E) the most recently filed annual and interim management reports of fund performance;

(g) the investment fund has complied with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure in connection with the making of the decision to proceed with the transaction by the board of directors of the manager of the investment fund or of the investment fund;

(h) the investment funds participating in the transaction bear none of the costs and expenses associated with the transaction;

(i) if the investment fund is a mutual fund, securityholders of the investment fund continue to have the right to redeem securities of the investment fund up to the close of business on the business day immediately before the effective date of the transaction;

(j) if the investment fund is a non-redeemable investment fund, all of the following apply:

(i) the investment fund issues and files a news release that discloses the transaction;

(ii) securityholders of the investment fund may redeem securities of the investment fund at a date that is after the date of the news release referred to in subparagraph (i) and before the effective date of the reorganization or transfer of assets;

(iii) the securities submitted for redemption in accordance with subparagraph (ii) are redeemed at a price equal to their net asset value per security on the redemption date;

(k) the consideration offered to securityholders of the investment fund for the transaction has a value that is equal to the net asset value of the investment fund..

(1.1) Despite subsection 5.5(1), the approval of the securities regulatory authority or regulator is not required to implement a transaction referred to in paragraph 5.5(1)(b) if all the conditions in paragraph 5.3(2)(b) are satisfied and the independent review committee of the mutual fund involved in the transaction has approved the transaction in accordance with subsection 5.2(2) of NI 81-107..

(2) Subsection 5.6(2) is repealed.

39.

(1) Subsection 5.7(1) is amended

(a) by replacing "shall" with "must",

(b) by replacing "subsection 5.5(2)" with "(a.1)",

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(d) in subparagraph (b)(ii) by replacing "each of the mutual funds" with "the investment fund and the other issuer", and

(e) by replacing subparagraph (b)(iii) with the following:

(iii) a description of the differences between, as applicable, the fundamental investment objectives, investment strategies, valuation procedures and fee structure of the investment fund and the other issuer and any other material differences between the investment fund and the other issuer, and .

(2) Subsection 5.7(2) is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "shall" with "must",

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(d) by replacing "situate" with "situated".

(3) Subsection 5.7(3) is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(c) by replacing "situate" with "situated".

40. Section 5.8 is amended

(a) in subsection (1) by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(b) in subsection (2) by replacing "shall" with "may", and

(c) in subsection (3) by replacing "shall" with "must".

41. The Instrument is amended by adding the following section:

5.8.1 Termination of Non-Redeemable Investment Fund -- (1) A non-redeemable investment fund must not terminate unless the investment fund issues and files a news release that discloses the termination.

(2) A non-redeemable investment fund must be terminated no earlier than 15 days and no later than 30 days after the filing of the news release referred to in subsection (1).

(3) Subsections (1) and (2) do not apply to a non-redeemable investment fund that ceases to continue under a transaction referred to in paragraph 5.1(1)(f)..

42. Section 5.9 is amended by replacing "mutual fund" with "investment fund" wherever it occurs.

43. Section 6.1 is amended

(a) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(d) in subsection (3) by deleting ", for each appointment,",

(e) by replacing paragraph (3)(a) with the following:

(a) where the appointment is by the custodian, the investment fund gives written consent to each appointment,

(a.1) where the appointment is by a sub-custodian, the investment fund and the custodian of the investment fund give written consent to each appointment, ,

(f) in paragraph (3)(b) by replacing "a person or company" with "an entity" and by replacing ";" with ",",

(g) in paragraph (3)(c) by replacing ";" with ",",

(h) in subsection (4) by replacing "paragraph (3)(a)" with "paragraphs (3)(a) and (a.1)" and by replacing "persons or companies" with "entities", and

(i) in subsection (5) by replacing "each person or company that is appointed sub-custodian" with "all entities that are appointed sub-custodians".

44. Section 6.2 is amended by replacing it with the following:

6.2 Entities Qualified to Act as Custodian or Sub-Custodian for Assets Held in Canada -- If portfolio assets are held in Canada by a custodian or sub-custodian, the custodian or sub-custodian must be one of the following:

1. A bank listed in Schedule I, II or III of the Bank Act (Canada).

2. A trust company that is incorporated under the laws of Canada or a jurisdiction and licensed or registered under the laws of Canada or a jurisdiction, and that has equity, as reported in its most recent audited financial statements, of not less than $10,000,000.

3. A company that is incorporated under the laws of Canada or of a jurisdiction, and that is an affiliate of a bank or trust company referred to in paragraph 1 or 2, if

(a) the company has equity, as reported in its most recent audited financial statements that have been made public, of not less than $10,000,000; or

(b) the bank or trust company has assumed responsibility for all of the custodial obligations of the company for that investment fund. .

45. Section 6.3 is amended by replacing it with the following:

6.3 Entities Qualified to Act as Sub-Custodian for Assets Held outside Canada -- If portfolio assets are held outside of Canada by a sub-custodian, the sub-custodian must be one of the following:

1. An entity referred to in section 6.2.

2. An entity that

(a) is incorporated or organized under the laws of a country, or a political subdivision of a country, other than Canada;

(b) is regulated as a banking institution or trust company by the government, or an agency of the government, of the country under whose laws it is incorporated or organized or a political subdivision of that country; and

(c) has equity, as reported in its most recent audited financial statements, of not less than the equivalent of $100,000,000.

3. An affiliate of an entity referred to in paragraph 1 or 2 if

(a) the affiliate has equity, as reported in its most recent audited financial statements that have been made public, of not less than the equivalent of $100,000,000; or

(b) the entity referred to in paragraph 1 or 2 has assumed responsibility for all of the custodial obligations of the affiliate for that investment fund. .

46. Section 6.4 is amended

(a) by replacing subsection (1) with the following:

(1) All custodian agreements and sub-custodian agreements of an investment fund must provide for

(a) the location of portfolio assets,

(b) any appointment of a sub-custodian,

(c) a list of all sub-custodians,

(d) the method of holding portfolio assets,

(e) the standard of care and responsibility for loss, and

(f) review and compliance reports.,

(b) in subsection (2) by replacing "a mutual fund shall" with "an investment fund must" and by replacing "the mutual fund" with "the investment fund",

(c) by adding the following subsection immediately after subsection (2):

(2.1) The provisions of an agreement referred to under subsections (1) or (2) must comply with the requirements of this Part., and

(d) by replacing subsection (3) with the following:

(3) A custodian agreement or sub-custodian agreement concerning the portfolio assets of an investment fund must not

(a) provide for the creation of any security interest on the portfolio assets of the investment fund except for a good faith claim for payment of the fees and expenses of the custodian or a sub-custodian for acting in that capacity or to secure the obligations of the investment fund to repay borrowings by the investment fund from the custodian or a sub-custodian for the purpose of settling portfolio transactions; or

(b) contain a provision that would require the payment of a fee to the custodian or a sub-custodian for the transfer of the beneficial ownership of portfolio assets of the investment fund, other than for safekeeping and administrative services in connection with acting as custodian or sub-custodian. .

47. Section 6.5 is amended by replacing it with the following:

6.5 Holding of Portfolio Assets and Payment of Fees -- (1) Except as provided in subsections (2) and (3) and sections 6.8, 6.8.1 and 6.9, portfolio assets of an investment fund not registered in the name of the investment fund must be registered in the name of the custodian or a sub-custodian of the investment fund or any of their respective nominees with an account number or other designation in the records of the custodian sufficient to show that the beneficial ownership of the portfolio assets is vested in the investment fund.

(2) The custodian or a sub-custodian of an investment fund or an applicable nominee must segregate portfolio assets issued in bearer form to show that the beneficial ownership of the property is vested in the investment fund.

(3) The custodian or a sub-custodian of an investment fund may deposit portfolio assets of the investment fund with a depository, or a clearing agency, that operates a book-based system.

(4) The custodian or a sub-custodian of an investment fund arranging for the deposit of portfolio assets of the investment fund with, and their delivery to, a depository, or clearing agency, that operates a book-based system must ensure that the records of any of the applicable participants in that book-based system or the custodian contain an account number or other designation sufficient to show that the beneficial ownership of the portfolio assets is vested in the investment fund.

(5) An investment fund must not pay a fee to the custodian or a sub-custodian for the transfer of beneficial ownership of portfolio assets of the investment fund other than for safekeeping and administrative services in connection with acting as custodian or sub-custodian. .

48. Section 6.6 is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(c) by replacing "shall" with "must" wherever it occurs,

(d) by replacing "A mutual fund" with "An investment fund" wherever it occurs, and

(e) in subsections (3) and (4) by replacing "a custodian or sub-custodian" with "the custodian or a sub-custodian".

49. Section 6.7 is amended

(a) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(d) in subsection (2) by replacing "not more than" with "within", and

(f) by replacing paragraph (2)(c) with the following:

(c) whether, to the best of the knowledge and belief of the custodian, each sub-custodian is an entity that satisfies section 6.2 or 6.3, as applicable. .

50. Section 6.8 is amended

(a) by replacing "A mutual fund" with "An investment fund" wherever it occurs,

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(c) by replacing subsection (4) with the following:

(4) The agreement by which portfolio assets are deposited in accordance with subsection (1), (2) or (3) must require the person or company holding the portfolio assets to ensure that its records show that the investment fund is the beneficial owner of the portfolio assets. .

51. Section 6.8.1 is amended

(a) by replacing "the mutual fund's" with "the investment fund's",

(b) by replacing "a mutual fund" with "an investment fund",

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(d) by replacing "A mutual fund" with "An investment fund" wherever it occurs.

52. Section 6.9 is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "institution" with "entity", and

(c) by replacing "the mutual fund" with "the investment fund" .

53. Section 7.1 is amended

(a) by replacing "A mutual fund shall" with "An investment fund must",

(b) by replacing "no securities of a mutual fund shall" with "securities of an investment fund must not", and

(c) by replacing "the mutual fund" with "the investment fund", wherever it occurs.

54. Section 7.2 is amended

(a) by replacing "a mutual fund" with "an investment fund", and

(b) by replacing "separate mutual fund" with "separate investment fund".

55. Section 8.1 is amended by replacing "shall" with "may".

56. Section 9.0.1 is replaced with the following:

9.0.1 Application -- This Part, other than subsections 9.3(2) and (3), does not apply to an exchange-traded mutual fund that is not in continuous distribution. .

57. Section 9.1 is amended by replacing "shall" with "must" wherever it occurs.

58.

(1) Section 9.3 is amended

(a) by renumbering it as subsection 9.3(1), and

(b) by replacing "shall" with "must".

(2) Section 9.3, as amended by subsection (1), is amended by adding the following subsections:

(2) The issue price of a security of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund must not be a price that is less than the net asset value per security of that class, or series of a class, determined on the date of issuance.

(3) Despite subsection (2), if the securities of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund are distributed under a prospectus, the issue price of each security must not,

(a) as far as reasonably practicable, be a price that causes dilution of the net asset value of other outstanding securities of the investment fund; and

(b) be a price that is less than the net asset value per security of that class, or series of a class, determined on the date that is one business day before the date of the prospectus. .

59. Section 9.4 is amended by replacing "shall" with "must" wherever it occurs.

60. The Instrument is amended by adding the following Part:

Part 9.1 -- WARRANTS AND SPECIFIED DERIVATIVES

9.1.1 Issuance of Warrants or Specified Derivatives -- An investment fund must not issue conventional warrants or rights, or a specified derivative the underlying interest of which is a security of the investment fund. .

61.

(1) Subsection 10.1(1) is amended

(a) by replacing "No mutual fund" with "An investment fund",

(b) by replacing "shall" with "must not", and

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

(2) Subsection 10.1(2) is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "the mutual fund" with "the investment fund",

(c) by adding "by the following times:" after "delivered", and

(d) by replacing paragraph (a) with the following:

(a) in the case of a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, by the time of delivery of a redemption order to an order receipt office of the mutual fund;

(a.1) in the case of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund, by the time of delivery of a redemption order; .

(3) Subsection 10.1(3) is amended by replacing it with the following:

(3) A manager of an investment fund must provide to securityholders of the investment fund at least annually a statement containing the following:

(a) a description of the requirements referred to in subsection (1);

(b) a description of the requirements established by the investment fund under subsection (2);

(c) a detailed reference to all documentation required for redemption of securities of the investment fund;

(d) detailed instructions on the manner in which documentation is to be delivered to participating dealers, the investment fund, or person or company providing services to the investment fund to which a redemption order may be made;

(e) a description of all other procedural or communication requirements;

(f) an explanation of the consequences of failing to meet timing requirements. .

62. Section 10.2 is amended by replacing "shall" with "must" wherever it occurs.

63. Section 10.3 is amended

(a) by replacing "shall" with "must", and

(b) by adding the following subsection:

(4) The redemption price of a security of a non-redeemable investment fund must not be a price that is more than the net asset value of the security determined on a redemption date specified in the prospectus or annual information form of the investment fund. .

64. Section 10.4 is amended

(a) by replacing subsection (1.1) with the following:

(1.1) Despite subsection (1), an exchange-traded mutual fund that is not in continuous distribution must pay the redemption proceeds for securities that are the subject of a redemption order no later than 15 business days after the valuation date on which the redemption price was established.

(1.2) A non-redeemable investment fund must pay the redemption proceeds for securities that are the subject of a redemption order no later than 15 business days after the valuation date on which the redemption price was established. ,

(b) in subsection (3) by replacing "A mutual fund" with "An investment fund", and

(c) in subsection (5) by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund" wherever it occurs.

65. Section 10.5 is amended by replacing "shall" with "must" wherever it occurs.

66. Section 10.6 is amended

(a) by replacing "A mutual fund" with "An investment fund" wherever it occurs,

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(c) in subsection (2) by adding ", (1.1) or (1.2)" after "subsection 10.4(1)", and

(d) in subsection (3) by replacing "shall" with "must" .

67.

(1) Subsection 11.1(1) is amended by replacing it with the following:

11.1 Principal Distributors and Service Providers -- (1) Cash received by a principal distributor of a mutual fund, by a person or company providing services to the mutual fund or the principal distributor, or by a person or company providing services to a non-redeemable investment fund, for investment in, or on the redemption of, securities of the investment fund, or on the distribution of assets of the investment fund, until disbursed as permitted by subsection (3),

(a) must be accounted for separately and be deposited in a trust account or trust accounts established and maintained in accordance with the requirements of section 11.3; and

(b) may be commingled only with cash received by the principal distributor or service provider for the sale or on the redemption of other investment fund securities. .

(2) Subsection 11.1(2) is amended

(a) by replacing "distributor or person" with "distributor, a person", and

(b) by replacing "shall" with ", or a person or company providing services to the non-redeemable investment fund, must".

(3) Subsection 11.1(3) is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "for the purpose of" with "for any of the following purposes:",

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(d) by deleting "or" at the end of paragraph (b).

(4) Subsection 11.1(4) is amended

(a) by replacing "shall" with "must",

(b) by replacing "the mutual funds" with "the investment funds", and

(c) by replacing "a mutual fund" with "an investment fund".

(5) Subsection 11.1(5) is amended

(a) by replacing "a mutual fund" with "an investment fund", and

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

68. Section 11.2 is amended by replacing "shall" with "must" wherever it occurs.

69. Section 11.3 is amended

(a) by replacing "dealer, or a person" with "dealer, a person",

(b) by adding "or a person or company providing services to an investment fund," before "that deposits cash",

(c) by replacing "shall" with "must",

(d) in subparagraph (a)(iii) by replacing "dealer or of a person" with "dealer, of a person" and by adding "or of a person or company providing services to the investment fund," before "and", and

(e) in subparagraph (a)(iv) by replacing "dealer, or of a person" with "dealer, of a person" and by adding "or of a person or company providing services to the investment fund;" at the end of the subparagraph.

70. Section 11.4 is amended by replacing "shall" with "must".

71. Section 11.5 is amended

(a) by replacing "The mutual fund" with "The investment fund",

(b) by replacing "shall" with "must", and

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

72. Section 12.1 is amended by replacing "shall" with "must" wherever it occurs.

73. Section 14.0.1 is replaced with the following:

14.0.1 Application -- This Part does not apply to

(a) an exchange-traded mutual fund, or

(b) a non-redeemable investment fund if its securities are listed or quoted on an exchange. .

74. Section 14.1 is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(c) by replacing "shall" with "must".

75. Section 15.1 is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "may" with "must", and

(c) by deleting "only".

76. Section 15.2 is amended

(a) in subsection (1) by replacing "no sales communication shall" with "a sales communication must not",

(b) in paragraph (1)(b) by adding ", as applicable," after "fund facts document" and by replacing "a mutual fund" with "an investment fund", and

(c) in subsection (2) by replacing "shall" with "must" .

77. Section 15.3 is amended

(a) by replacing "shall" with "must" wherever it occurs,

(b) in subsection (1) by replacing "a mutual fund" with "an investment fund",

(c) in subsection (2) by replacing "15.6(a)" with "15.6(1)(a)",

(d) by adding the following subsection immediately after subsection (2):

(2.1) A sales communication for a non-redeemable investment fund that is prohibited by paragraph 15.6(1)(a) from disclosing performance data must not provide performance data for any benchmark or investment other than a non-redeemable investment fund under common management with the non-redeemable investment fund to which the sales communication pertains. ,

(e) in subsection (5) by replacing "a mutual fund" with "an investment fund" and by replacing "the mutual fund" with "the investment fund",

(f) in subsection (6) by deleting ", either under National Policy Statement No. 39 or", and

(g) in subsection (7) by replacing "mutual fund" with "investment fund".

78.

(1) Subsection 15.4(1) is amended

(a) by replacing "shall" with "must", and

(b) by deleting "principal distributor or participating".

(2) Subsection 15.4(2) is amended

(a) by replacing "shall" with "must", and

(b) by replacing "mutual fund" with "investment fund" wherever it occurs.

(3) Subsection 15.4(3) is amended by replacing "shall" with "must".

(4) Section 15.4 is amended by adding the following subsection immediately after subsection (3):

(3.1) A sales communication, other than a report to securityholders, of a non-redeemable investment fund that does not contain performance data must contain a warning in substantially the following words:

[If the securities of the non-redeemable investment fund are listed or quoted on an exchange or other market, state the following:] "You will usually pay brokerage fees to your dealer if you purchase or sell [units or shares] of the investment fund on [state the exchange or other market on which the securities of the investment fund are listed or quoted]. If the [units or shares] are purchased or sold on [state the exchange or other market], investors may pay more than the current net asset value when buying [units or shares] of the investment fund and may receive less than the current net asset value when selling them."

[State the following in all cases:] "There are ongoing fees and expenses associated with owning [units or shares] of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.". .

(5) The following subsections are amended by replacing "shall" with "must":

(a) subsection 15.4(4);

(b) subsection 15.4(5);

(c) subsection 15.4(6).

(6) Section 15.4 is amended by adding the following subsection immediately after subsection (6):

(6.1) A sales communication, other than a report to securityholders, of a non-redeemable investment fund that contains performance data must contain a warning in substantially the following words:

[If the securities of the non-redeemable investment fund are listed or quoted on an exchange or other market, state the following:] "You will usually pay brokerage fees to your dealer if you purchase or sell [units or shares] of the investment fund on [state the exchange or other market on which the securities of the investment fund are listed or quoted]. If the [units or shares] are purchased or sold on [state the exchange or other market], investors may pay more than the current net asset value when buying [units or shares] of the investment fund and may receive less than the current net asset value when selling them."

[State the following in all cases:] "There are ongoing fees and expenses associated with owning [units or shares] of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. The indicated rate[s] of return is [are] the historical annual compounded total return[s] including changes in [share or unit] value and reinvestment of all [dividends or distributions] and does [do] not take into account [state the following, as applicable:] [certain fees such as redemption fees or optional charges or] income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.". .

(7) The following subsections are amended by replacing "shall" with "must":

(a) subsection 15.4(7);

(b) subsection 15.4(8);

(c) subsection 15.4(9).

(8) Subsection 15.4(10) is amended

(a) by replacing "a mutual fund" with "an investment fund",

(b) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(c) by replacing "shall" with "must".

(9) Subsection 15.4(11) is amended by replacing "shall" with "must".

79. Section 15.5 is amended

(a) in subsection (1) by replacing "No person or company shall" with "A person or company must not", and

(b) by replacing "shall" with "must" wherever it occurs.

80.

(1) Section 15.6 is amended

(a) by renumbering it as subsection 15.6(1),

(b) by replacing "No sales communication pertaining to a mutual fund" with "A sales communication pertaining to an investment fund",

(c) by replacing "shall" with "must not",

(d) by replacing "the mutual fund or asset allocation service unless" with "the investment fund or asset allocation service unless all of the following paragraphs apply:",

(e) in paragraph (a) by replacing "either" with "one of the following subparagraphs applies:",

(f) by replacing subparagraph (a)(i) with the following:

(i) in the case of a mutual fund,

(A) the mutual fund has distributed securities under a prospectus in a jurisdiction for 12 consecutive months; or

(B) the mutual fund previously existed as a non-redeemable investment fund and has been a reporting issuer in a jurisdiction for a period of at least 12 consecutive months;,

(i.1) in the case of a non-redeemable investment fund, the non-redeemable investment fund has been a reporting issuer in a jurisdiction for at least 12 consecutive months;

(i.2) in the case of an asset allocation service, the asset allocation service has been operated for at least 12 consecutive months and has invested only in participating funds each of which has distributed securities under a prospectus in a jurisdiction for at least 12 consecutive months; ,

(g) by replacing subparagraph (a)(ii) with the following:

(ii) if the sales communication pertains to an investment fund or asset allocation service that does not satisfy subparagraph (a)(i), (i.1), or (i.2), the sales communication is sent only to

(A) securityholders of the investment fund or participants in the asset allocation service, or

(B) securityholders of an investment fund or participants in an asset allocation service under common management with the investment fund or asset allocation service; ,

(h) in paragraph (b) by replacing "also contains" with "includes" and by replacing "mutual fund" with "investment fund",

(i) by deleting "and" at the end of paragraph (c), and

(j) by replacing paragraph (d) with the following:

(d) except as permitted by subsection 15.3(3), the sales communication does not contain performance data for a period that is

(i) in the case of a mutual fund, before the time when the mutual fund offered its securities under a prospectus,

(ii) in the case of a non-redeemable investment fund, before the non-redeemable investment fund was a reporting issuer, or

(iii) before the asset allocation service commenced operation. .

(2) Section 15.6, as amended by subsection (1), is amended by adding the following subsection:

(2) Despite subparagraph (1)(d)(i), a sales communication pertaining to a mutual fund referred to in clause (1)(a)(i)(B) that contains performance data of the mutual fund must include performance data for the period that the fund existed as a non-redeemable investment fund and was a reporting issuer. .

81. Section 15.7 is amended by replacing "shall" with "must".

82. The Instrument is amended by adding the following section immediately after section 15.7:

15.7.1 Advertisements for Non-Redeemable Investment Funds -- An advertisement for a non-redeemable investment fund must not compare the performance of the non-redeemable investment fund with any benchmark or investment other than the following:

(a) one or more non-redeemable investment funds that are under common management or administration with the non-redeemable investment fund to which the advertisement pertains;

(b) one or more non-redeemable investment funds that have fundamental investment objectives that a reasonable person would consider similar to the non-redeemable investment fund to which the advertisement pertains;

(c) an index. .

83.

(1) Subsection 15.8(2) is amended

(a) by replacing "asset allocation service or to a mutual fund" with "asset allocation service, or to an investment fund",

(b) by replacing "may" with ", must not",

(c) by replacing "only if" with "unless",

(d) by replacing paragraph (a) with the following:

(a) to the extent applicable, the standard performance data has been calculated for the 10, 5, 3 and one year periods;

(a.1) in the case of a mutual fund that has been offering securities by way of prospectus for more than one and less than 10 years, the standard performance data has been calculated for the period since the inception of the mutual fund;

(a.2) in the case of a non-redeemable investment fund that has been a reporting issuer for more than one and less than 10 years, the standard performance data has been calculated for the period since the inception of the non-redeemable investment fund; and , and

(e) in paragraph (b) by replacing "paragraph (a)" with "paragraphs (a), (a.1) and (a.2)".

(2) Subsection 15.8(3) is amended

(a) by replacing "may" with "must not",

(b) by replacing "only if" with "unless",

(c) by replacing paragraph (a) with the following:

(a) to the extent applicable, the standard performance data has been calculated for the 10, 5, 3 and one year periods;

(a.1) in the case of a mutual fund that has been offering securities by way of prospectus for more than one and less than 10 years, the standard performance data has been calculated for the period since the inception of the mutual fund;

(a.2) in the case of a non-redeemable investment fund that has been a reporting issuer for more than one and less than 10 years, the standard performance data has been calculated for the period since the inception of the non-redeemable investment fund; and , and

(d) in paragraph (b) by replacing "paragraph (a)" with "paragraphs (a), (a.1) and (a.2)".

(3) Subsection 15.8(4) is amended by replacing "shall" with "must".

84. Section 15.9 is amended

(a) by replacing "the mutual fund" with "the investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs,

(c) by replacing "a mutual fund" with "an investment fund",

(d) by replacing "another mutual fund" with "another investment fund", and

(e) by replacing "other mutual fund" with "other investment fund".

85. Section 15.10 is amended

(a) by replacing "a mutual fund" with "an investment fund" wherever it occurs,

(b) by replacing "shall" with "must" wherever it occurs,

(c) in subsection (1) by replacing "section" with "Part",

(d) in subsection (2) by replacing the definition of "standard performance data" with the following:

"standard performance data" means, as calculated in each case in accordance with this Part,

(a) for a money market fund

(i) the current yield, or

(ii) the current yield and effective yield, if the effective yield is reported in a type size that is at least equal to that of the current yield, and

(b) for any investment fund other than a money market fund, the total return; , and

(e) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

86. Section 15.11 is amended

(a) by replacing "shall" with "must" wherever it occurs,

(b) by replacing "a mutual fund" with "an investment fund",

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs, and

(d) by replacing item 6 of subsection (1) with the following:

6. In the case of a mutual fund, a complete redemption occurs at the end of the performance measurement period so that the ending redeemable value includes elements of return that have been accrued but not yet paid to securityholders.

7. In the case of a non-redeemable investment fund, a complete redemption occurs at the net asset value of one security at the end of the performance measurement period so that the ending redeemable value includes elements of return that have been accrued but not yet paid to securityholders. .

87. Section 15.12 is amended by replacing "shall" with "must".

88. Section 15.13 is amended

(a) in subsection (1) by replacing "mutual fund shall" with "investment fund must", and

(b) by replacing subsection (2) with the following:

(2) A communication by an investment fund or asset allocation service, its promoter, manager, portfolio adviser, principal distributor, participating dealer or a person providing services to the investment fund or asset allocation service must not describe the investment fund as a commodity pool or as a vehicle for investors to participate in the speculative trading of, or leveraged investment in, derivatives, unless the investment fund is a commodity pool as defined in National Instrument 81-104 Commodity Pools..

89. Section 15.14 is amended

(a) by replacing "a mutual fund" with "an investment fund", and

(b) by replacing "shall" with "must" wherever it occurs.

90. Section 18.1 is amended

(a) by replacing "A mutual fund" with "An investment fund",

(b) by replacing "shall" with "must", and

(c) by replacing "the mutual fund" with "the investment fund" wherever it occurs.

91. Section 18.2 is amended

(a) by replacing subsection (1) with the following:

(1) An investment fund that is not a corporation must make, or cause to be made, the records referred to in section 18.1 available for inspection, free of charge, during normal business hours at its principal or head office by a securityholder or a representative of a securityholder, if the securityholder has agreed in writing that the information contained in the register will not be used by the securityholder for any purpose other than

(a) in the case of a mutual fund, attempting to influence the voting of securityholders of the mutual fund or a matter relating to the relationships among the mutual fund, the members of the organization of the mutual fund, and the securityholders, partners, directors and officers of those entities, or

(b) in the case of a non-redeemable investment fund, attempting to influence the voting of securityholders of the non-redeemable investment fund or a matter relating to the relationships among the non-redeemable investment fund, the manager and portfolio adviser of the non-redeemable investment fund and any of their affiliates, and the securityholders, partners, directors and officers of those entities. , and

(b) in subsection (2) by replacing "A mutual fund shall" with "An investment fund must" and by replacing "the mutual fund" with "the investment fund" wherever it occurs.

92. Section 19.2 is amended by replacing "shall" with "must".

93. Section 20.2 is repealed.

94. Section 20.3 is repealed.

95. Section 20.5 is repealed.

96. Appendix C is amended

(a) by replacing "British Columbia" with "All Jurisdictions",

(b) by replacing " s. 81 of the Securities Rules (British Columbia)" with "s. 13.6 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations",

(c) by deleting "New Brunswick" and "s. 13.2 of Local Rule 31-501 Registration Requirements", and

(d) by deleting "Nova Scotia" and "s. 67 of the General Securities Rules".

97.

(1) Subject to subsections (2) to (4), this Instrument comes into force on •.

(2) For a non-redeemable investment fund that has filed a prospectus on or before •, sections 7 to 10, 53 and 54 of this Instrument come into force on the day that is 18 months after the day referred to in subsection (1).

(3) Despite any requirements to the contrary in this Instrument, sales communications, other than advertisements, that were printed before • may be used until the day that is six months after the day referred to in subsection (1).

(4) Subsection 61(3) of this Instrument comes into force at the beginning of the first calendar year beginning after the day referred to in subsection (1).

 

Schedule E-2: Blackline Showing Proposed Amendments to National Instrument 81-102 Mutual Funds

ANNEX E

SCHEDULE E-2

BLACKLINE SHOWING PROPOSED AMENDMENTS TO

NATIONAL INSTRUMENT 81-102 MUTUAL FUNDS

NATIONAL INSTRUMENT 81-102

MUTUALINVESTMENT FUNDS

PART 1 -- DEFINITIONS AND APPLICATION

1.1 Definitions -- In this Instrument

"acceptable clearing corporation" means a clearing corporation that is an acceptable clearing corporation under the Joint Regulatory Financial Questionnaire and Report;

"advertisement" means a sales communication that is published or designed for use on or through a public medium;

"approved credit rating" means, for a security or instrument, a rating at or above one of the following rating categories issued by an approved credit rating organization for that security or instrument or a category that replaces one of the following rating categories if

(a) there has been no announcement by the approved credit rating organization of which the mutualinvestment fund or its manager is or reasonably should be aware that the rating of the security or instrument to which the approved credit rating was given may be down-graded to a rating category that would not be an approved credit rating, and

(b) no approved credit rating organization has rated the security or instrument in a rating category that is not an approved credit rating:

Approved Credit Rating Organization

Commercial Paper/Short Term Debt

Long Term Debt

 

Dominion Bond Rating Service Limited

R-1 (low)

A

 

Fitch Ratings

F1

A

 

Moody's Investors Service

P-1

A2

 

Standard & Poor's

A-1(Low)

A

 

 

"approved credit rating organization" means Dominion Bond Rating Service Limited, Fitch Ratings, Moody's Investors Service, Standard & Poor's and any of their respective successors;

"asset allocation service" means an administrative service under which the investment of a person or company is allocated, in whole or in part, among mutual funds to which this Instrument applies and reallocated among those mutual funds and, if applicable, other assets according to an asset allocation strategy;

"book-based system" means a system for the central handling of securities or equivalent book-based entries under which all securities of a class or series deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery;

"borrowing agent" means any of the following:

(a) a custodian or sub-custodian that holds assets in connection with a short sale of securities by a mutualan investment fund;

(b) a qualified dealer from whom a mutualan investment fund borrows securities in order to sell them short;

"cash cover" means any of the following assets of a mutualan investment fund that are held by the mutualinvestment fund, have not been allocated for specific purposes and are available to satisfy all or part of the obligations arising from a position in specified derivatives held by the mutualinvestment fund or from a short sale of securities made by the mutualinvestment fund:

(a) cash;

(b) cash equivalents;

(c) synthetic cash;

(d) receivables of the mutualinvestment fund arising from the disposition of portfolio assets, net of payables arising from the acquisition of portfolio assets;

(e) securities purchased by the mutualinvestment fund in a reverse repurchase transaction under section 2.14, to the extent of the cash paid for those securities by the mutualinvestment fund;

(f) each evidence of indebtedness that has a remaining term to maturity of 365 days or less and an approved credit rating;

(g) each floating rate evidence of indebtedness if

(i) the floating interest rate of the indebtedness is reset no later than every 185 days, and

(ii) the principal amount of the indebtedness will continue to have a market value of approximately par at the time of each change in the rate to be paid to the holders of the evidence of indebtedness;

(h) securities issued by a money market fund;

"cash equivalent" means an evidence of indebtedness that has a remaining term to maturity of 365 days or less and that is issued, or fully and unconditionally guaranteed as to principal and interest, by

(a) the government of Canada or the government of a jurisdiction,

(b) the government of the United States of America, the government of one of the states of the United States of America, the government of another sovereign state or a permitted supranational agency, if, in each case, the evidence of indebtedness has an approved credit rating, or

(c) a Canadian financial institution, or a financial institution that is not incorporated or organized under the laws of Canada or of a jurisdiction if, in either case, evidences of indebtedness of that issuer or guarantor that are rated as short term debt by an approved credit rating organization have an approved credit rating;

"clearing corporation" means an organization through which trades in options or standardized futures are cleared and settled;

"clearing corporation option" means an option, other than an option on futures, issued by a clearing corporation;

"clone fund" means a mutualan investment fund that has adopted a fundamental investment objective to track the performance of another mutualinvestment fund;

"conventional convertible security" means a security of an issuer that is, according to its terms, convertible into, or exchangeable for, other securities of the issuer, or of an affiliate of the issuer;

"conventional floating rate debt instrument" means an evidence of indebtedness of which the interest obligations are based upon a benchmark commonly used in commercial lending arrangements;

"conventional warrant or right" means a security of an issuer, other than a clearing corporation, that gives the holder the right to purchase securities of the issuer or of an affiliate of the issuer;

"currency cross hedge" means the substitution by a mutualan investment fund of a risk to one currency for a risk to another currency, if neither currency is a currency in which the mutualinvestment fund determines its net asset value per security and the aggregate amount of currency risk to which the mutualinvestment fund is exposed is not increased by the substitution;

"custodian" means the institution appointed by a mutualan investment fund to act as custodian of thehold portfolio assets of the mutual fund;investment fund in accordance with Part 6;

"dealer managed investment fund" means an investment fund the portfolio adviser of which is a dealer manager;

"dealer managed mutual fund" means a mutual fund the portfolio adviser of which is a dealer manager;

"dealer manager" means

(a) a specified dealer that acts as a portfolio adviser,

(b) a portfolio adviser in which a specified dealer, or a partner, director, officer, salesperson or principal shareholder of a specified dealer, directly or indirectly owns of record or beneficially, or exercises control or direction over, securities carrying more than 10 percent of the total votes attaching to securities of the portfolio adviser, or

(c) a partner, director or officer of a portfolio adviser referred to in paragraph (b);

"debt-like security" means a security purchased by a mutualan investment fund, other than a conventional convertible security or a conventional floating rate debt instrument, that evidences an indebtedness of the issuer if

(a) either

(i) the amount of principal, interest or principal and interest to be paid to the holder is linked in whole or in part by a formula to the appreciation or depreciation in the market price, value or level of one or more underlying interests on a predetermined date or dates, or

(ii) the security provides the holder with a right to convert or exchange the security into or for the underlying interest or to purchase the underlying interest, and

(b) on the date of acquisition by the mutualinvestment fund, the percentage of the purchase price attributable to the component of the security that is not linked to an underlying interest is less than 80 percent% of the purchase price paid by the mutualinvestment fund;

"delta" means the positive or negative number that is a measure of the change in market value of an option relative to changes in the value of the underlying interest of the option;

"equivalent debt" means, in relation to an option, swap, forward contract or debt-like security, an evidence of indebtedness of approximately the same term as, or a longer term than, the remaining term to maturity of the option, swap, contract or debt-like security and that ranks equally with, or subordinate to, the claim for payment that may arise under the option, swap, contract or debt-like security;

"fixed portfolio ETFfund" means an exchange-traded mutual fund not in continuous distribution, or a non-redeemable investment fund, that

(a) has fundamental investment objectives which include holding and maintaining a fixed portfolio of publicly traded equity securities of one or more issuers the names of which are disclosed in its prospectus, and

(b) trades securities referred to in paragraph (a) only in the circumstances disclosed in its prospectus;

"floating rate evidence of indebtedness" means an evidence of indebtedness that has a floating rate of interest determined over the term of the obligation by reference to a commonly used benchmark interest rate and that satisfies any of the following:

(a) if the evidence of indebtedness was issued by a person or company other than a government or a permitted supranational agency, it has an approved credit rating;

(b) if the evidence of indebtedness wasis issued by a government or a permitted supranational agency, it has its principal and interest, or fully and unconditionally guaranteed as to principal and interest, by any of the following:

(i) the government of Canada or the government of a jurisdiction of Canada;

(ii) the government of the United States of America, the government of one of the states of the United States of America, the government of another sovereign state or a permitted supranational agency, if, in each case, the evidence of indebtedness has an approved credit rating;

"forward contract" means an agreement, not entered into with, or traded on, a stock exchange or futures exchange or cleared by a clearing corporation, to do one or more of the following on terms or at a price established by or determinable by reference to the agreement and at or by a time in the future established by or determinable by reference to the agreement:

1. Make or take delivery of the underlying interest of the agreement.

2. Settle in cash instead of delivery;

"fundamental investment objectives" means the investment objectives of a mutualan investment fund that define both the fundamental nature of the mutualinvestment fund and the fundamental investment features of the mutualinvestment fund that distinguish it from other mutualinvestment funds;

"futures exchange" means an association or organization operated to provide the facilities necessary for the trading of standardized futures;

"government security" means an evidence of indebtedness issued, or fully and unconditionally guaranteed as to principal and interest, by any of the government of Canada, the government of a jurisdiction or the government of the United States of America;

"guaranteed mortgage" means a mortgage fully and unconditionally guaranteed, or insured, by the government of Canada, by the government of a jurisdiction or by an agency of any of those governments or by a corporation approved by the Office of the Superintendent of Financial Institutions to offer its services to the public in Canada as an insurer of mortgages;

"hedging" means the entering into of a transaction, or a series of transactions, and the maintaining of the position or positions resulting from the transaction or series of transactions

(a) if

(i) the intended effect of the transaction, or the intended cumulative effect of the series of transactions, is to offset or reduce a specific risk associated with all or a portion of an existing investment or position or group of investments or positions,

(ii) the transaction or series of transactions results in a high degree of negative correlation between changes in the value of the investment or position, or group of investments or positions, being hedged and changes in the value of the instrument or instruments with which the investment or position is hedged, and

(iii) there are reasonable grounds to believe that the transaction or series of transactions no more than offset the effect of price changes in the investment or position, or group of investments or positions, being hedged, or

(b) if the transaction, or series of transactions, is a currency cross hedge;

"IIROC" means the Investment Industry Regulatory Organization of Canada;

"illiquid asset" means

(a) a portfolio asset that cannot be readily disposed of through market facilities on which public quotations in common use are widely available at an amount that at least approximates the amount at which the portfolio asset is valued in calculating the net asset value per security of the mutualinvestment fund, or

(b) a restricted security held by a mutualan investment fund, the resale of which is prohibited by a representation, undertaking or agreement by the mutualinvestment fund or by the predecessor in title of the mutualinvestment fund;

"independent review committee" means the independent review committee of the investment fund established under National Instrument 81-107 Independent Review Committee for Investment Funds;

"index mutual fund" means a mutual fund that has adopted fundamental investment objectives that require the mutual fund to

(a) hold the securities that are included in a permitted index or permitted indices of the mutual fund in substantially the same proportion as those securities are reflected in that permitted index or those permitted indices, or

(b) invest in a manner that causes the mutual fund to replicate the performance of that permitted index or those permitted indices;

"index participation unit" means a security traded on a stock exchange in Canada or the United States and issued by an issuer the only purpose of which is to

(a) hold the securities that are included in a specified widely quoted market index in substantially the same proportion as those securities are reflected in that index, or

(b) invest in a manner that causes the issuer to replicate the performance of that index;

"investment fund conflict of interest investment restrictions" means any provisions of securities legislation that

(a) prohibit an investment fund from knowingly making or holding an investment in any person or company who is a substantial security holder, as defined in securities legislation, of the investment fund, its management company, manager or distribution company;

(b) prohibit an investment fund from knowingly making or holding an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder, as defined in securities legislation;

(c) prohibit an investment fund from knowingly making or holding an investment in an issuer in which any person or company who is a substantial security holder of the investment fund, its management company, manager or distribution company, has a significant interest, as defined in securities legislation;

(d) prohibit an investment fund, a responsible person as defined in securities legislation, a portfolio adviser or a registered person acting under a management contract from knowingly causing any investment portfolio managed by it, or an investment fund, to invest in, or prohibit an investment fund from investing in, any issuer in which a responsible person, as defined in securities legislation, is an officer or director unless the specific fact is disclosed to the investment fund, securityholder or client, and where securities legislation requires it, the written consent of the client to the investment is obtained before the purchase;

(e) prohibit an investment fund, a responsible person as defined in securities legislation, or a portfolio adviser from knowingly causing any investment portfolio managed by it to purchase or sell, or prohibit an investment fund from purchasing or selling, the securities of any issuer from or to the account of a responsible person, as defined in securities legislation, an associate of a responsible person or the portfolio adviser; and

(f) prohibit a portfolio adviser or a registered person acting under a management contract from subscribing to or buying securities on behalf of an investment fund, where his or her own interest might distort his or her judgment, unless the specific fact is disclosed to the client and the written consent of the client to the investment is obtained before the subscription or purchase;

"investment fund conflict of interest reporting requirements" means any provisions of securities legislation that require the filing of a report with the securities regulatory authority in prescribed form that discloses every transaction of purchase or sale of portfolio assets between the investment fund and specified related persons or companies;

"investor fees" means, in connection with the purchase, conversion, holding, transfer or redemption of securities of a mutualan investment fund, all fees, charges and expenses that are or may become payable by a securityholder of the mutual fund toinvestment fund to,

(a) in the case of a mutual fund, a member of the organization of the mutual fund other than a member of the organization acting solely as a participating dealer, or

(b) in the case of a non-redeemable investment fund, the manager of the non-redeemable investment fund;

"Joint Regulatory Financial Questionnaire and Report" means the Joint Regulatory Financial Questionnaire and Report of various Canadian SROs on the date that this Instrument comes into force and every successor to the form that does not materially lessen the criteria for an entity to be recognized as an "acceptable clearing corporation";

"long position" means a position held by a mutualan investment fund that, for

(a) an option, entitles the mutualinvestment fund to elect to purchase, sell, receive or deliver the underlying interest or, instead, pay or receive cash,

(b) a standardized future or forward contract, obliges the mutualinvestment fund to accept delivery of the underlying interest or, instead, pay or receive cash,

(c) a call option on futures, entitles the mutualinvestment fund to elect to assume a long position in standardized futures,

(d) a put option on futures, entitles the mutualinvestment fund to elect to assume a short position in standardized futures, and

(e) a swap, obliges the mutualinvestment fund to accept delivery of the underlying interest or receive cash;

"management expense ratio" means the ratio, expressed as a percentage, of the expenses of a mutualan investment fund to its average net asset value, calculated in accordance with Part 15 of National Instrument 81-106 Investment Fund Continuous Disclosure;

"manager" means a person or company that directs the business, operations and affairs of a mutual fundan investment fund manager;

"manager-prescribed number of units" means, in relation to an exchange-traded mutual fund that is in continuous distribution, the number of units determined by the manager from time to time for the purposes of subscription orders, exchanges, redemptions or for other purposes;

"material change" has the meaning ascribed to that term in National Instrument 81-106 Investment Fund Continuous Disclosure;

"member of the organization" has the meaning ascribed to that term in National Instrument 81-105 Mutual Fund Sales Practices;

"MFDA" means the Mutual Fund Dealers Association of Canada;

"money market fund" means a mutual fund that invests its assets in accordance with section 2.18;

"mortgage" includes a hypothec or security that creates a charge on real property in order to secure a debt;

"mutual fund conflict of interest investment restrictions" means the provisions of securities legislation that

(a) prohibit a mutual fund from knowingly making or holding an investment in any person or company who is a substantial security holder, as defined in securities legislation, of the mutual fund, its management company, manager or distribution company;

(b) prohibit a mutual fund from knowingly making or holding an investment in any person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder, as defined in securities legislation;

(c) prohibit a mutual fund from knowingly making or holding an investment in an issuer in which any person or company who is a substantial security holder of the mutual fund, its management company, manager or distribution company, has a significant interest, as defined in securities legislation;

(d) prohibit a mutual fund, a responsible person as defined in securities legislation, a portfolio adviser or a registered person acting under a management contract from knowingly causing any investment portfolio managed by it, or a mutual fund, to invest in, or prohibit a mutual fund from investing in, any issuer in which a responsible person, as defined in securities legislation, is an officer or director unless the specific fact is disclosed to the mutual fund, securityholder or client, and where securities legislation requires it, the written consent of the client to the investment is obtained before the purchase;

(e) prohibit a mutual fund, a responsible person as defined in securities legislation, or a portfolio adviser knowingly causing any investment portfolio managed by it to purchase or sell, or prohibit a mutual fund from purchasing or selling, the securities of any issuer from or to the account of a responsible person, as defined in securities legislation, an associate of a responsible person or the portfolio adviser; and

(f) prohibit a portfolio adviser or a registered person acting under a management contract from subscribing to or buying securities on behalf of a mutual fund, where his or her own interest might distort his or her judgment, unless the specific fact is disclosed to the client and the written consent of the client to the investment is obtained before the subscription or purchase;

"mutual fund conflict of interest reporting requirements" means the provisions of securities legislation that require the filing of a report with the securities regulatory authority in prescribed form that discloses every transaction of purchase or sale of portfolio assets between the mutual fund and specified related persons or companies;

"mutual fund rating entity" means an entity

(a) that rates or ranks the performance of mutual funds or asset allocation services through an objective methodology that is

(i) based on quantitative performance measurements,

(ii) applied consistently to all mutual funds or asset allocation services rated or ranked by it, and

(iii) disclosed to the public on the entity's website,

(b) that is not a member of the organization of any mutual fund, and

(c) whose services to assign a rating or ranking to any mutual fund or asset allocation service are not procured by the promoter, manager, portfolio adviser, principal distributor or participating dealer of any mutual fund or asset allocation service, or any of their affiliates;

"net asset value" means the value of the total assets of the investment fund less the value of the total liabilities of the investment fund, as at a specific date, determined in accordance with Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure;

"NI 81-107" means National Instrument 81-107 Independent Review Committee for Investment Funds;

"non-resident sub-adviser" means a person or company providing portfolio management advice

(a) whose principal place of business is outside of Canada,

(b) that advises a portfolio adviser to a mutualan investment fund, and

(c) that is not registered under securities legislation in the jurisdiction in which the portfolio adviser that it advises is located;

"option" means an agreement that provides the holder with the right, but not the obligation, to do one or more of the following on terms or at a price established by or determinable by reference to the agreement at or by a time established by the agreement:

1. Receive an amount of cash determinable by reference to a specified quantity of the underlying interest of the option.

2. Purchase a specified quantity of the underlying interest of the option.

3. Sell a specified quantity of the underlying interest of the option;

"option on futures" means an option the underlying interest of which is a standardized future;

"order receipt office" means, for a mutual fund

(a) the principal office of the mutual fund,

(b) the principal office of the principal distributor of the mutual fund, or

(c) a location to which a purchase order or redemption order for securities of the mutual fund is required or permitted by the mutual fund to be delivered by participating dealers or the principal distributor of the mutual fund;

"overall rating or ranking" means a rating or ranking of a mutual fund or asset allocation service that is calculated from standard performance data for one or more performance measurement periods, which includes the longest period for which the mutual fund or asset allocation service is required under securities legislation to calculate standard performance data, other than the period since the inception of the mutual fund;

"participating dealer" means a dealer other than the principal distributor that distributes securities of a mutual fund;

"participating fund" means a mutual fund in which an asset allocation service permits investment;

"performance data" means a rating, ranking, quotation, discussion or analysis regarding an aspect of the investment performance of a mutualan investment fund, an asset allocation service, a security, an index or a benchmark;

"permitted gold certificate" means a certificate representing gold if the gold is

(a) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate,

(b) of a minimum fineness of 995 parts per 1,000,

(c) held in Canada,

(d) in the form of either bars or wafers, and

(e) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a jurisdiction;

"permitted index" means, in relation to a mutual fund, a market index that is

(a) both

(i) administered by an organization that is not affiliated with any of the mutual fund, its manager, its portfolio adviser or its principal distributor, and

(ii) available to persons or companies other than the mutual fund, or

(b) widely recognized and used;

"permitted supranational agency" means the African Development Bank, the Asian Development Bank, the Caribbean Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Inter-American Development Bank, the International Bank for Reconstruction and Development and the International Finance Corporation;

"physical commodity", means, in an original or processed state, an agricultural product, forest product, product of the sea, mineral, metal, hydrocarbon fuel product, precious stone or other gem;

"portfolio adviser" means a person or company that provides investment advice or portfolio management services under a contract with the mutualinvestment fund or with the manager of the mutualinvestment fund;

"portfolio asset" means an asset of a mutualan investment fund;

"pricing date" means, for the sale of a security of a mutual fund, the date on which the net asset value per security of the mutual fund is calculated for the purpose of determining the price at which that security is to be issued;

"principal distributor" means a person or company through whom securities of a mutual fund are distributed under an arrangement with the mutual fund or its manager that provides

(a) an exclusive right to distribute the securities of the mutual fund in a particular area, or

(b) a feature that gives or is intended to give the person or company a material competitive advantage over others in the distribution of the securities of the mutual fund;

"public quotation" includes, for the purposes of calculating the amount of illiquid assets held by a mutualan investment fund, any quotation of a price for a fixed income security made through the inter-dealer bond market;

"purchase" means, in connection with an acquisition of a portfolio asset by a mutualan investment fund, an acquisition that is the result of a decision made and action taken by the mutualinvestment fund;

"qualified security" means

(a) an evidence of indebtedness that is issued, or fully and unconditionally guaranteed as to principal and interest, by

(i) the government of Canada or the government of a jurisdiction,

(ii) the government of the United States of America, the government of one of the states of the United States of America, the government of another sovereign state, or a permitted supranational agency, if, in each case, the evidence of indebtedness has an approved credit rating, or

(iii) a Canadian financial institution or a financial institution that is not incorporated or organized under the laws of Canada or of a jurisdiction if, in either case, evidences of indebtedness of that issuer or guarantor that are rated as short term debt by an approved credit rating organization have an approved credit rating, or

(b) commercial paper that has a term to maturity of 365 days or less and an approved credit rating and that was issued by a person or company other than a government or permitted supranational agency;

"redemption payment date" means, in relation to an exchange-traded mutual fund that is not in continuous distribution, a date specified in the prospectus or annual information form of the exchange-traded mutual fund on which redemption proceeds are paid;

"report to securityholders" means a report that includes annual or interim financial statements, or an annual or interim management report of fund performance, and that is delivered to securityholders of a mutualan investment fund;

"restricted security" means a security, other than a specified derivative, the resale of which is restricted or limited by a representation, undertaking or agreement by the mutualinvestment fund or by the mutualinvestment fund's predecessor in title, or by law;

"sales communication" means a communication relating to, and by, a mutualan investment fund or asset allocation service, its promoter, manager, portfolio adviser, principal distributor, a participating dealer or a person or company providing services to any of them, that

(a) is made

(i) to a securityholder of the mutualinvestment fund or participant in the asset allocation service, or

(ii) to a person or company that is not a securityholder of the mutualinvestment fund or participant in the asset allocation service, to induce the purchase of securities of the mutualinvestment fund or the use of the asset allocation service, and

(b) is not contained in any of the following documents of the mutualinvestment fund:

1. A prospectus or preliminary or pro forma prospectus.

2. An annual information form or preliminary or pro forma annual information form.

2.1 A fund facts document or preliminary or pro forma fund facts document.

3. Financial statements, including the notes to the financial statements and the auditor's report on the financial statements.

4. A trade confirmation.

5. A statement of account.

6. Annual or interim management report of fund performance;

"scholarship plan" has the meaning ascribed to that term in section 1.1 of National Instrument 81-106 Investment Fund Continuous Disclosure;

"short position" means a position held by a mutualan investment fund that, for

(a) an option, obliges the mutualinvestment fund, at the election of another, to purchase, sell, receive or deliver the underlying interest, or, instead, pay or receive cash,

(b) a standardized future or forward contract, obliges the mutualinvestment fund, at the election of another, to deliver the underlying interest or, instead, pay or receive cash,

(c) a call option on futures, obliges the mutualinvestment fund, at the election of another, to assume a short position in standardized futures, and

(d) a put option on futures, obliges the mutualinvestment fund, at the election of another, to assume a long position in standardized futures;

"special warrant" means a security that, by its terms or the terms of an accompanying contractual obligation, entitles or requires the holder to acquire another security without payment of material additional consideration and obliges the issuer of the special warrant or the other security to undertake efforts to file a prospectus to qualify the distribution of the other security;

"specified asset-backed security" means a security that

(a) is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time, and any rights or assets designed to assure the servicing or timely distribution of proceeds to securityholders, and

(b) by its terms entitles an investor in that security to a return of the investment of that investor at or by a time established by or determinable by reference to an agreement, except as a result of losses incurred on, or the non-performance of, the financial assets;

"specified dealer" means a dealer other than a dealer whose activities as a dealer are restricted by the terms of its registration to one or both of

(a) acting solely in respect of mutual fund securities, or

(b) acting solely in respect of transactions in which a person or company registered in the category of exempt market dealer in a jurisdiction is permitted to engage;

"specified derivative" means an instrument, agreement or security, the market price, value or payment obligations of which are derived from, referenced to or based on an underlying interest, other than

(a) a conventional convertible security,

(b) a specified asset-backed security,

(c) an index participation unit,

(d) a government or corporate strip bond,

(e) a capital, equity dividend or income share of a subdivided equity or fixed income security,

(f) a conventional warrant or right, or

(g) a special warrant;

"standardized future" means an agreement traded on a futures exchange pursuant to standardized conditions contained in the by-laws, rules or regulations of the futures exchange, and cleared by a clearing corporation, to do one or more of the following at a price established by or determinable by reference to the agreement and at or by a time established by or determinable by reference to the agreement:

1. Make or take delivery of the underlying interest of the agreement.

2. Settle the obligation in cash instead of delivery of the underlying interest;

"sub-custodian" means, for a mutualan investment fund, an entity that has been appointed to hold portfolio assets of the mutualinvestment fund in accordance with section 6.1Part 6 by either the custodian or a sub-custodian of the mutualinvestment fund;

"swap" means an agreement that provides for

(a) an exchange of principal amounts,

(b) the obligation to make, and the right to receive, cash payments based upon the value, level or price, or on relative changes or movements of the value, level or price, of one or more underlying interests, which payments may be netted against each other, or

(c) the right or obligation to make, and the right or obligation to receive, physical delivery of an underlying interest instead of the cash payments referred to in paragraph (b);

"synthetic cash" means a position that in aggregate provides the holder with the economic equivalent of the return on a banker's acceptance accepted by a bank listed in Schedule I of the Bank Act (Canada) and that consists of

(a) a long position in a portfolio of shares and a short position in a standardized future of which the underlying interest consists of a stock index, if

(i) there is a high degree of positive correlation between changes in the value of the portfolio of shares and changes in the value of the stock index, and

(ii) the ratio between the value of the portfolio of shares and the standardized future is such that, for any change in the value of one, a change of similar magnitude occurs in the value of the other,

(b) a long position in the evidences of indebtedness issued, or fully and unconditionally guaranteed as to principal and interest, by any of the government of Canada or the government of a jurisdiction and a short position in a standardized future of which the underlying interest consists of evidences of indebtedness of the same issuer and same term to maturity, if

(i) there is a high degree of positive correlation between changes in the value of the portfolio of evidences of indebtedness and changes in the value of the standardized future, and

(ii) the ratio between the value of the evidences of indebtedness and the standardized future is such that, for any change in the value of one, a change of similar magnitude occurs in the value of the other; or

(c) a long position in securities of an issuer and a short position in a standardized future of which the underlying interest is securities of that issuer, if the ratio between the value of the securities of that issuer and the position in the standardized future is such that, for any change in the value of one, a change of similar magnitude occurs in the value of the other;

"underlying interest" means, for a specified derivative, the security, commodity, financial instrument, currency, interest rate, foreign exchange rate, economic indicator, index, basket, agreement, benchmark or any other reference, interest or variable, and, if applicable, the relationship between any of the foregoing, from, to or on which the market price, value or payment obligation of the specified derivative is derived, referenced or based; and

"underlying market exposure" means, for a position of a mutualan investment fund in

(a) an option, the quantity of the underlying interest of the option position multiplied by the market value of one unit of the underlying interest, multiplied, in turn, by the delta of the option,

(b) a standardized future or forward contract, the quantity of the underlying interest of the position multiplied by the current market value of one unit of the underlying interest; or

(c) a swap, the underlying market exposure, as calculated under paragraph (b), for the long position of the mutualinvestment fund in the swap.

1.2 Application -- (1) This Instrument applies only to

(a) a mutual fund that offers or has offered securities under a prospectus for so long as the mutual fund remains a reporting issuer; and,

(a.1) a non-redeemable investment fund that is a reporting issuer, and

(b) a person or company in respect of activities pertaining to a mutualan investment fund referred to in paragraph (a)paragraphs (a) and (a.1) or pertaining to the filing of a prospectus to which subsection 3.1(1) applies.

(2) Despite subsection (1), this Instrument does not apply to a scholarship plan.

1.3 Interpretation -- (1) Each section, part, class or series of a class of securities of a mutualan investment fund that is referable to a separate portfolio of assets is considered to be a separate mutualinvestment fund for purposes of this Instrument.

(2) A mutualAn investment fund that renews or extends a securities lending, repurchase or reverse repurchase transaction is entering into a securities lending, repurchase or reverse repurchase agreement for the purposes of section 2.12, 2.13 or 2.14.

(3) [Repealed]

PART 2 -- INVESTMENTS

2.1 Concentration Restriction -- (1) A mutualAn investment fund shallmust not purchase a security of an issuer, enter into a specified derivatives transaction or purchase index participation units if, immediately after the transaction, more than 10 percent% of its net asset value would be invested in securities of any issuer.

(2) Subsection (1) does not apply to the purchase of any of the following:

(a) a government security;

(b) a security issued by a clearing corporation;

(c) a security issued by a mutualan investment fund if the purchase is made in accordance with the requirements of section 2.5;

(d) an index participation unit that is a security of a mutualan investment fund;

(e) an equity security if the purchase is made by a fixed portfolio ETFfund in accordance with its investment objectives.

(3) In determining a mutualan investment fund's compliance with the restrictions contained in this section, the mutualinvestment fund shallmust, for each long position in a specified derivative that is held by the mutualinvestment fund for purposes other than hedging and for each index participation unit held by the mutualinvestment fund, consider that it holds directly the underlying interest of that specified derivative or its proportionate share of the securities held by the issuer of the index participation unit.

(4) Despite subsection (3), the mutualinvestment fund shallmust not include in the determination referred to in subsection (3) a security or instrument that is a component of, but that represents less than 10 percent% of

(a) a stock or bond index that is the underlying interest of a specified derivative; or

(b) the securities held by the issuer of an index participation unit.

(5) Despite subsection (1), an index mutual fund, the name of which includes the word "index", may, in order to satisfy its fundamental investment objectives, purchase a security, enter into a specified derivatives transaction or purchase index participation units if its prospectus contains the disclosure referred to in subsection (5) of Item 6 and subsection (5) of Item 9 of Part B of Form 81-101F1 Contents of Simplified Prospectus.

2.2 Control Restrictions -- (1) A mutualAn investment fund shallmust not

(a) purchase a security of an issuer if, immediately after the purchase, the mutualinvestment fund would hold securities representing more than 10 percent% of

(i) the votes attaching to the outstanding voting securities of that issuer; or

(ii) the outstanding equity securities of that issuer; or

(b) purchase a security for the purpose of exercising control over or management of the issuer of the security.

(1.1) Subsection (1) does not apply to the purchase of any of the following:

(a) a security issued by a mutualan investment fund if the purchase is made in accordance with section 2.5;

(b) an index participation unit that is a security of a mutualan investment fund.

(2) If a mutualan investment fund acquires a security of an issuer other than as the result of a purchase, and the acquisition results in the mutualinvestment fund exceeding the limits described in paragraph (1)(a), the mutualinvestment fund shallmust as quickly as is commercially reasonable, and in any event no later than 90 days after the acquisition, reduce its holdings of those securities so that it does not hold securities exceeding those limits.

(3) In determining its compliance with the restrictions contained in this section, a mutualan investment fund shallmust

(a) assume the conversion of special warrants held by it; and

(b) consider that it holds directly the underlying securities represented by any American depositary receipts held by it.

2.3 Restrictions Concerning Types of Investments -- (1) A mutual fund shallmust not

(a) purchase real property;

(b) purchase a mortgage, other than a guaranteed mortgage;

(c) purchase a guaranteed mortgage if, immediately after the purchase, more than 10 percent% of its net asset value would be made up of guaranteed mortgages;

(d) purchase a gold certificate, other than a permitted gold certificate;

(e) purchase gold or a permitted gold certificate if, immediately after the purchase, more than 10 percent% of its net asset value would be made up of gold and permitted gold certificates;

(f) except to the extent permitted by paragraphs (d) and (e), purchase a physical commodity;

(g) purchase, sell or use a specified derivative other than in compliance with sections 2.7 to 2.11;

(h) purchase, sell or use a specified derivative the underlying interest of which is

(i) a physical commodity other than gold, or

(ii) a specified derivative of which the underlying interest is a physical commodity other than gold; or

(i) purchase an interest in a loan syndication or loan participation if the purchase would require the mutual fund to assume any responsibilities in administering the loan in relation to the borrower.

(2) A non-redeemable investment fund must not

(a) purchase real property;

(b) purchase a mortgage, other than a guaranteed mortgage;

(c) purchase a gold certificate, other than a permitted gold certificate;

(d) purchase a physical commodity or a permitted gold certificate or purchase, sell or use a specified derivative the underlying interest of which is a physical commodity or a permitted gold certificate if, immediately after the purchase, sale or use, the non-redeemable investment fund's holdings of physical commodities and permitted gold certificates would exceed an amount equal to 10% of its net asset value;

(e) purchase, sell or use a specified derivative other than in compliance with sections 2.7 to 2.11; or

(f) purchase an interest in a loan syndication or loan participation if the purchase would require the non-redeemable investment fund to assume any responsibilities in administering the loan in relation to the borrower.

(3) In determining a non-redeemable investment fund's holdings of physical commodities and permitted gold certificates for the purposes of paragraph (2)(d), the non-redeemable investment fund must

(a) for each long position and short position in a specified derivative that is held, consider that it holds directly the equivalent quantity of the underlying interest of that specified derivative; and

(b) aggregate each holding determined in accordance with paragraph (a).

2.4 Restrictions Concerning Illiquid Assets - (1) A mutualAn investment fund shallmust not purchase an illiquid asset if, immediately after the purchase, more than 10 percent% of its net asset value would be made up of illiquid assets.

(2) A mutualAn investment fund shallmust not have invested, for a period of 90 days or more, more than 15 percent% of its net asset value in illiquid assets.

(3) If more than 15 percent% of the net asset value of a mutualan investment fund is made up of illiquid assets, the mutualinvestment fund shallmust, as quickly as is commercially reasonable, take all necessary steps to reduce the percentage of its net asset value made up of illiquid assets to 15 percent% or less.

2.5 Investments in Other MutualInvestment Funds -- (1) For the purposes of this section, a mutualan investment fund is considered to be holding a security of another mutualinvestment fund if

(a) it holds securities issued by the other mutualinvestment fund, or

(b) it is maintaining a position in a specified derivative for which the underlying interest is a security of the other mutualinvestment fund.

(2) A mutualAn investment fund shallmust not purchase or hold a security of another mutualinvestment fund unless,

(a) the other investment fund is a mutual fund that is subject to this Instrument and,

(i) if the investment fund is a mutual fund, the other investment fund offers or has offered securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure,

(ii) if the investment fund is a non-redeemable investment fund, the other investment fund is not a commodity pool as defined in National Instrument 81-104 Commodity Pools,

(b) at the time of the purchase of that security, the other mutualinvestment fund holds no more than 10% of its net asset value in securities of other mutualinvestment funds,

(c) the mutualinvestment fund and the other mutualinvestment fund are reporting issuers in the local jurisdiction,

(d) no management fees or incentive fees are payable by the mutualinvestment fund that, to a reasonable person, would duplicate a fee payable by the other mutualinvestment fund for the same service,

(e) no sales fees or redemption fees are payable by the mutualinvestment fund in relation to its purchases or redemptions of the securities of the other mutualinvestment fund if the other mutualinvestment fund is managed by the manager or an affiliate or associate of the manager of the mutualinvestment fund, and

(f) no sales fees or redemption fees are payable by the mutualinvestment fund in relation to its purchases or redemptions of securities of the other mutualinvestment fund that, to a reasonable person, would duplicate a fee payable by an investor in the mutualinvestment fund.

(3) Paragraphs (2)(a) and (c) do not apply if the security

(a) is an index participation unit issued by a mutualan investment fund, or

(b) is issued by another mutualinvestment fund established with the approval of the government of a foreign jurisdiction and the only means by which the foreign jurisdiction permits investment in the securities of issuers of that foreign jurisdiction is through that type of mutualinvestment fund.

(4) Paragraph (2)(b) does not apply if the other mutualinvestment fund

(a) is a clone fund, or

(b) in accordance with this section purchases or holds securities

(i) of a money market fund, or

(ii) that are index participation units issued by a mutualan investment fund.

(5) Paragraphs (2)(e) and (f) do not apply to brokerage fees incurred for the purchase or sale of an index participation unit issued by a mutualan investment fund.

(6) A mutualAn investment fund that holds securities of another mutualinvestment fund that is managed by the same manager or an affiliate or associate of the manager

(a) shallmust not vote any of those securities, and

(b) may, if the manager so chooses, arrange for all of the securities it holds of the other mutualinvestment fund to be voted by the beneficial holders of securities of the mutualinvestment fund.

(7) The mutualinvestment fund conflict of interest investment restrictions and the mutualinvestment fund conflict of interest reporting requirements do not apply to a mutualan investment fund which purchases or holds securities of another mutualinvestment fund if the purchase or holding is made in accordance with this section.

2.6 Investment Practices -- A mutualAn investment fund shallmust not

(a) borrow cash or provide a security interest over any of its portfolio assets unless

(i) in the case of a mutual fund, the transaction is a temporary measure to accommodate requests for the redemption of securities of the mutual fund while the mutual fund effects an orderly liquidation of portfolio assets, or to permit the mutual fund to settle portfolio transactions and, after giving effect to all transactions undertaken under this subparagraph, the outstanding amount of all borrowings of the mutual fund does not exceed five percent5% of its net asset value at the time of the borrowing,

(i.1) in the case of a non-redeemable investment fund, the cash is borrowed from a Canadian financial institution and the outstanding amount of all borrowings of the investment fund does not exceed 30% of its net asset value at the time of the borrowing,

(ii) the security interest is required to enable the mutualinvestment fund to effect a specified derivative transaction or short sale of securities under this Instrument, is madeprovided in accordance with industry practice for that type of transaction and relates only to obligations arising under the particular specified derivatives transaction or short sale,

(ii.1) in the case of a non-redeemable investment fund, the security interest is required to enable the non-redeemable investment fund to effect cash borrowings under subparagraph (i.1), is provided in accordance with industry practice for the loan and relates only to obligations arising under the loan,

(iii) the security interest secures a claim for the fees and expenses of the custodian or a sub-custodian of the mutualinvestment fund for services rendered in that capacity as permitted by subsection 6.4(3), or

(iv) in the case of an exchange-traded mutual fund that is not in continuous distribution, the transaction is to finance the acquisition of its portfolio securities and the outstanding amount of all borrowings is repaid on the closing of its initial public offering;

(b) purchase securities on margin, unless permitted by section 2.7 or 2.8;

(c) sell securities short other than in compliance with section 2.6.1, unless permitted by section 2.7 or 2.8;

(d) purchase a security, other than a specified derivative, that by its terms may require the mutualinvestment fund to make a contribution in addition to the payment of the purchase price;

(e) engage in the business of underwriting, or marketing to the public, securities of any other issuer;

(f) lend cash or portfolio assets other than cash;

(g) guarantee securities or obligations of a person or company; or

(h) purchase securities other than through market facilities through which these securities are normally bought and sold unless the purchase price approximates the prevailing market price or the parties are at arm's length in connection with the transaction.

2.6.1 Short Sales -- (1) A mutualAn investment fund may sell a security short if

(a) the security sold short is sold for cash;

(b) the security sold short is not any of the following:

(i) security that the mutualinvestment fund is otherwise not permitted by securities legislation to purchase at the time of the short sale transaction;

(ii) an illiquid asset;

(iii) security of an investment fund other than an index participation unit; and

(c) at the time the mutualinvestment fund sells the security short

(i) the mutualinvestment fund has borrowed or arranged to borrow from a borrowing agent the security that is to be sold under the short sale;

(ii) the aggregate market value of all securities of the issuer of the securities sold short by the mutualinvestment fund does not exceed 5% of the net asset value of the mutualinvestment fund; and

(iii) the aggregate market value of all securities sold short by the mutualinvestment fund does not exceed 20% of the net asset value of the mutualinvestment fund.

(2) A mutualAn investment fund that sells securities short must hold cash cover in an amount that, together with portfolio assets deposited with borrowing agents as security in connection with short sales of securities by the mutualinvestment fund, is at least 150% of the aggregate market value of all securities sold short by the mutualinvestment fund on a daily mark-to-market basis.

(3) A mutualAn investment fund must not use the cash from a short sale to enter into a long position in a security, other than a security that qualifies as cash cover.

2.7 Transactions in Specified Derivatives for Hedging and Non-hedging Purposes -- (1) A mutualAn investment fund must not purchase an option or a debt-like security or enter into a swap or a forward contract unless, at the time of the transaction, any of the following apply:

(a) in the case of an option, the option is a clearing corporation option;

(b) the option, debt-like security, swap or contract, has an approved credit rating;

(c) the equivalent debt of the counterparty, or of a person or company that has fully and unconditionally guaranteed the obligations of the counterparty in respect of the option, debt-like security, swap or contract, has an approved credit rating.

(2) If the credit rating of an option that is not a clearing corporation option, the credit rating of a debt-like security, swap or forward contract, or the credit rating of the equivalent debt of the writer or guarantor of the option, debt-like security, swap or contract, falls below the level of approved credit rating while the option, debt-like security, swap or contract is held by a mutualan investment fund, the mutualinvestment fund shallmust take the steps that are reasonably required to close out its position in the option, debt-like security, swap or contract in an orderly and timely fashion.

(3) Despite any other provisions contained in this Part, a mutualan investment fund may enter into a trade to close out all or part of a position in a specified derivative, in which case the cash cover held to cover the underlying market exposure of the part of the position that is closed out may be released.

(4) The mark-to-market value of the exposure of a mutualan investment fund under its specified derivatives positions with any one counterparty other than an acceptable clearing corporation or a clearing corporation that clears and settles transactions made on a futures exchange listed in Appendix A, calculated in accordance with subsection (5), shallmust not exceed, for a period of 30 days or more, 10 percent% of the net asset value of the mutualinvestment fund.

(5) The mark-to-market value of specified derivatives positions of a mutualan investment fund with any one counterparty shallmust be, for the purposes of subsection (4),

(a) if the mutualinvestment fund has an agreement with the counterparty that provides for netting or the right of set-off, the net mark-to-market value of the specified derivatives positions of the mutualinvestment fund; and

(b) in all other cases, the aggregated mark-to-market value of the specified derivative positions of the mutualinvestment fund.

2.8 Transactions in Specified Derivatives for Purposes Other than Hedging -- (1) A mutualAn investment fund shallmust not

(a) purchase a debt-like security that has an options component or an option, unless, immediately after the purchase, not more than 10 percent% of its net asset value would be made up of those instruments held for purposes other than hedging;

(b) write a call option, or have outstanding a written call option, that is not an option on futures unless, as long as the position remains open, the mutualinvestment fund holds

(i) an equivalent quantity of the underlying interest of the option,

(ii) a right or obligation, exercisable at any time that the option is exercisable, to acquire an equivalent quantity of the underlying interest of the option, and cash cover that, together with margin on account for the position, is not less than the amount, if any, by which the strike price of the right or obligation to acquire the underlying interest exceeds the strike price of the option, or

(iii) a combination of the positions referred to in subparagraphs (i) and (ii) that is sufficient, without recourse to other assets of the mutualinvestment fund, to enable the mutualinvestment fund to satisfy its obligations to deliver the underlying interest of the option;

(c) write a put option, or have outstanding a written put option, that is not an option on futures, unless, as long as the position remains open, the mutualinvestment fund holds

(i) a right or obligation, exercisable at any time that the option is exercisable, to sell an equivalent quantity of the underlying interest of the option, and cash cover in an amount that, together with margin on account for the position, is not less than the amount, if any, by which the strike price of the option exceeds the strike price of the right or obligation to sell the underlying interest,

(ii) cash cover that, together with margin on account for the option position, is not less than the strike price of the option, or

(iii) a combination of the positions referred to in subparagraphs (i) and (ii) that is sufficient, without recourse to other assets of the mutualinvestment fund, to enable the mutualinvestment fund to acquire the underlying interest of the option;

(d) open or maintain a long position in a debt-like security that has a component that is a long position in a forward contract, or in a standardized future or forward contract, unless the mutualinvestment fund holds cash cover in an amount that, together with margin on account for the specified derivative and the market value of the specified derivative, is not less than, on a daily mark-to-market basis, the underlying market exposure of the specified derivative;

(e) open or maintain a short position in a standardized future or forward contract, unless the mutualinvestment fund holds

(i) an equivalent quantity of the underlying interest of the future or contract,

(ii) a right or obligation to acquire an equivalent quantity of the underlying interest of the future or contract and cash cover that together with margin on account for the position is not less than the amount, if any, by which the strike price of the right or obligation to acquire the underlying interest exceeds the forward price of the contract, or

(iii) a combination of the positions referred to in subparagraphs (i) and (ii) that is sufficient, without recourse to other assets of the mutualinvestment fund, to enable the mutualinvestment fund to deliver the underlying interest of the future or contract; or

(f) enter into, or maintain, a swap position unless

(i) for periods when the mutualinvestment fund would be entitled to receive payments under the swap, the mutualinvestment fund holds cash cover in an amount that, together with margin on account for the swap and the market value of the swap, is not less than, on a daily mark-to-market basis, the underlying market exposure of the swap; and

(ii) for periods when the mutualinvestment fund would be required to make payments under the swap, the mutualinvestment fund holds

(A) an equivalent quantity of the underlying interest of the swap,

(B) a right or obligation to acquire an equivalent quantity of the underlying interest of the swap and cash cover that, together with margin on account for the position, is not less than the aggregate amount of the obligations of the mutualinvestment fund under the swap, or

(C) a combination of the positions referred to in clauses (A) and (B) that is sufficient, without recourse to other assets of the mutualinvestment fund, to enable the mutualinvestment fund to satisfy its obligations under the swap.

(2) A mutualAn investment fund shallmust treat any synthetic cash position on any date as providing the cash cover equal to the notional principal value of a banker's acceptance then being accepted by a bank listed in Schedule I of the Bank Act (Canada) that would produce the same annualized return as the synthetic cash position is then producing.

2.9 Transactions in Specified Derivatives for Hedging Purposes -- Sections 2.1, 2.2, 2.4 and 2.8 do not apply to the use of specified derivatives by a mutualan investment fund for hedging purposes.

2.10 Adviser Requirements -- (1) If a portfolio adviser of a mutualan investment fund receives advice from a non-resident sub-adviser concerning the use of options or standardized futures by the mutualinvestment fund, the mutualinvestment fund shallmust not invest in or use options or standardized futures unless

(a) the obligations and duties of the non-resident sub-adviser are set out in a written agreement with the portfolio adviser; and

(b) the portfolio adviser contractually agrees with the mutualinvestment fund to be responsible for any loss that arises out of the failure of the non-resident sub-adviser

(i) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the mutualinvestment fund, and

(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.

(2) A mutualAn investment fund shallmust not relieve a portfolio adviser of the mutualinvestment fund from liability for loss for which the portfolio adviser has assumed responsibility under paragraph (1)(b) that arises out of the failure of the relevant non-resident sub-adviser

(a) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the mutualinvestment fund, or

(b) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.

(3) Despite subsection 4.4(3), a mutualan investment fund may indemnify a portfolio adviser against legal fees, judgments and amounts paid in settlement, actually and reasonably incurred by that person or company in connection with services provided by a non-resident sub-adviser for which the portfolio adviser has assumed responsibility under paragraph (1)(b), only if

(a) those fees, judgments and amounts were not incurred as a result of a breach of the standard of care described in subsection (1) or (2); and

(b) the mutualinvestment fund has reasonable grounds to believe that the action or inaction that caused the payment of the fees, judgments and amounts paid in settlement was in the best interests of the mutualinvestment fund.

(4) A mutualAn investment fund shallmust not incur the cost of any portion of liability insurance that insures a person or company for a liability except to the extent that the person or company may be indemnified for that liability under this section.

2.11 Commencement of Use of Specified Derivatives and Short Selling by a Mutualan Investment Fund - (1) A mutualAn investment fund that has not used specified derivatives must not begin using specified derivatives, and a mutualan investment fund that has not sold a security short in accordance with section 2.6.1 must not sell a security short, unless

(a) in the case of a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, its prospectus contains the disclosure required for a mutual fund intending to engage in the activity; and

(a.1) in the case of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund, the investment fund issues a news release that contains both of the following:

(i) the disclosure required in a prospectus for an exchange-traded mutual fund that is not in continuous distribution, or a non-redeemable investment fund, intending to engage in the activity;

(ii) the date on which the activity is intended to begin; and

(b) the mutualinvestment fund has provided to its securityholders, not less than 60 days before it begins the intended activity, written notice that discloses its intent to engage in the activity and the disclosure required for mutual funds intending to engage in the activity.referred to in paragraph (a) or (a.1), as applicable.

(2) A mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, is not required to provide the notice referred to in paragraph (1)(b) if each prospectus of the mutual fund since its inception has contained the disclosure referred to in paragraph (1)(a).

(3) Paragraphs (1)(a.1) and (b) do not apply to an exchange-traded mutual fund that is not in continuous distribution, or a non-redeemable investment fund, if each prospectus of the investment fund since its inception has contained the disclosure referred to in paragraph (1)(a.1).

2.12 Securities Loans -- (1) Despite any other provision of this Instrument, a mutualan investment fund may enter into a securities lending transaction as lender if the following conditions are satisfied for the transaction:

1. The transaction is administered and supervised in the manner required by sections 2.15 and 2.16.

2. The transaction is made under a written agreement that implements the requirements of this section.

3. Securities are loaned by the mutualinvestment fund in exchange for collateral.

4. The securities transferred, either by the mutualinvestment fund or to the mutualinvestment fund as collateral, as part of the transaction are immediately available for good delivery under applicable legislation.

5. The collateral to be delivered to the mutualinvestment fund at the beginning of the transaction

(a) is received by the mutualinvestment fund either before or at the same time as it delivers the loaned securities; and

(b) has a market value equal to at least 102 percent% of the market value of the loaned securities.

6. The collateral to be delivered to the mutualinvestment fund is one or more of

(a) cash;

(b) qualified securities;

(c) securities that are immediately convertible into, or exchangeable for, securities of the same issuer, class or type, and the same term, if applicable, as the securities that are being loaned by the mutualinvestment fund, and in at least the same number as those loaned by the mutualinvestment fund; or

(d) irrevocable letters of credit issued by a Canadian financial institution that is not the counterparty, or an affiliate of the counterparty, of the mutualinvestment fund in the transaction, if evidences of indebtedness of the Canadian financial institution that are rated as short term debt by an approved credit rating organization have an approved credit rating.

7. The collateral and loaned securities are marked to market on each business day, and the amount of collateral in the possession of the mutualinvestment fund is adjusted on each business day to ensure that the market value of collateral maintained by the mutualinvestment fund in connection with the transaction is at least 102 percent% of the market value of the loaned securities.

8. If an event of default by a borrower occurs, the mutualinvestment fund, in addition to any other remedy available under the agreement or applicable law, has the right under the agreement to retain and dispose of the collateral to the extent necessary to satisfy its claims under the agreement.

9. The borrower is required to pay promptly to the mutualinvestment fund amounts equal to and as compensation for all dividends and interest paid, and all distributions made, on the loaned securities during the term of the transaction.

10. The transaction is a "securities lending arrangement" under section 260 of the ITA.

11. The mutualinvestment fund is entitled to terminate the transaction at any time and recall the loaned securities within the normal and customary settlement period for securities lending transactions in the market in which the securities are lent.

12. Immediately after the mutualinvestment fund enters into the transaction, the aggregate market value of all securities loaned by the mutualinvestment fund in securities lending transactions and not yet returned to it or sold by the mutualinvestment fund in repurchase transactions under section 2.13 and not yet repurchased does not exceed 50 percent% of the total assetsnet asset value of the mutualinvestment fund, and for such purposes collateral held by the mutual fund for the loaned securities and cash held by the mutual fund for the sold securities shall not be included in total assets.

(2) A mutualAn investment fund may hold all cash delivered to it as the collateral in a securities lending transaction or may use the cash to purchase

(a) qualified securities having a remaining term to maturity no longer than 90 days;

(b) securities under a reverse repurchase agreement permitted by section 2.14; or

(c) a combination of the securities referred to in paragraphs (a) and (b).

(3) A mutualAn investment fund, during the term of a securities lending transaction, shallmust hold all, and shallmust not invest or dispose of any, non-cash collateral delivered to it as collateral in the transaction.

2.13 Repurchase Transactions -- (1) Despite any other provision of this Instrument, a mutualan investment fund may enter into a repurchase transaction if the following conditions are satisfied for the transaction:

1. The transaction is administered and supervised in the manner required by sections 2.15 and 2.16.

2. The transaction is made under a written agreement that implements the requirements of this section.

3. Securities are sold for cash by the mutualinvestment fund, with the mutualinvestment fund assuming an obligation to repurchase the securities for cash.

4. The securities transferred by the mutualinvestment fund as part of the transaction are immediately available for good delivery under applicable legislation.

5. The cash to be delivered to the mutualinvestment fund at the beginning of the transaction

(a) is received by the mutualinvestment fund either before or at the same time as it delivers the sold securities; and

(b) is in an amount equal to at least 102 percent% of the market value of the sold securities.

6. The sold securities are marked to market on each business day, and the amount of sale proceeds in the possession of the mutualinvestment fund is adjusted on each business day to ensure that the amount of cash maintained by the mutualinvestment fund in connection with the transaction is at least 102 percent% of the market value of the sold securities.

7. If an event of default by a purchaser occurs, the mutualinvestment fund, in addition to any other remedy available under the agreement or applicable law, has the right under the agreement to retain or dispose of the sale proceeds delivered to it by the purchaser to the extent necessary to satisfy its claims under the agreement.

8. The purchaser of the securities is required to pay promptly to the mutualinvestment fund amounts equal to and as compensation for all dividends and interest paid, and all distributions made, on the sold securities during the term of the transaction.

9. The transaction is a "securities lending arrangement" under section 260 of the ITA.

10. The term of the repurchase agreement, before any extension or renewal that requires the consent of both the mutualinvestment fund and the purchaser, is not more than 30 days.

11. Immediately after the mutualinvestment fund enters into the transaction, the aggregate market value of all securities loaned by the mutualinvestment fund in securities lending transactions under section 2.12 and not yet returned to it or sold by the mutualinvestment fund in repurchase transactions and not yet repurchased does not exceed 50 percent% of the total assetsnet asset value of the mutualinvestment fund, and for such purposes collateral held by the mutual fund for the loaned securities and the cash held by the mutual fund for the sold securities shall not be included in total assets.

(2) A mutualAn investment fund may hold cash delivered to it as consideration for sold securities in a repurchase transaction or may use the cash to purchase

(a) qualified securities having a remaining term to maturity no longer than 30 days;

(b) securities under a reverse repurchase agreement permitted by section 2.14; or

(c) a combination of the securities referred to in paragraphs (a) and (b).

2.14 Reverse Repurchase Transactions -- (1) Despite any other provision of this Instrument, a mutualan investment fund may enter into a reverse repurchase transaction if the following conditions are satisfied for the transaction:

1. The transaction is administered and supervised in the manner required by sections 2.15 and 2.16.

2. The transaction is made under a written agreement that implements the requirements of this section.

3. Qualified securities are purchased for cash by the mutualinvestment fund, with the mutualinvestment fund assuming the obligation to resell them for cash.

4. The securities transferred as part of the transaction are immediately available for good delivery under applicable legislation.

5. The securities to be delivered to the mutualinvestment fund at the beginning of the transaction

(a) are received by the mutualinvestment fund either before or at the same time as it delivers the cash used by it to purchase those securities; and

(b) have a market value equal to at least 102 percent% of the cash paid for the securities by the mutualinvestment fund.

6. The purchased securities are marked to market on each business day, and either the amount of cash paid for the purchased securities or the amount of purchased securities in the possession of the seller or the mutualinvestment fund is adjusted on each business day to ensure that the market value of purchased securities held by the mutualinvestment fund in connection with the transaction is not less than 102 percent% of the cash paid by the mutualinvestment fund.

7. If an event of default by a seller occurs, the mutualinvestment fund, in addition to any other remedy available in the agreement or applicable law, has the right under the agreement to retain or dispose of the purchased securities delivered to it by the seller to the extent necessary to satisfy its claims under the agreement.

8. The transaction is a "securities lending arrangement" under section 260 of the ITA.

9. The term of the reverse repurchase agreement, before any extension or renewal that requires the consent of both the seller and the mutualinvestment fund, is not more than 30 days.

2.15 Agent for Securities Lending, Repurchase and Reverse Repurchase Transactions -- (1) The manager of a mutualan investment fund shallmust appoint an agent or agents to act on behalf of the mutualinvestment fund in administering the securities lending and repurchase transactions entered into by the mutualinvestment fund.

(2) The manager of a mutualan investment fund may appoint an agent or agents to act on behalf of the mutualinvestment fund to administer the reverse repurchase transactions entered into by the mutualinvestment fund.

(3) The custodian or a sub-custodian of the mutualinvestment fund shallmust be the agent appointed under subsection (1) or (2).

(4) The manager of a mutualan investment fund shallmust not authorize an agent to enter into a securities lending, repurchase or, if applicable, reverse repurchase transactions on behalf of the mutualinvestment fund until the agent enters into a written agreement with the manager and the mutualinvestment fund in which

(a) the mutualinvestment fund and the manager provide instructions to the agent on the parameters to be followed in entering into the type of transactions to which the agreement pertains;

(b) the agent agrees to comply with this Instrument, accepts the standard of care referred to in subsection (5) and agrees to ensure that all transactions entered into by it on behalf of the mutualinvestment fund will comply with this Instrument; and

(c) the agent agrees to provide to the mutualinvestment fund and the manager regular, comprehensive and timely reports summarizing the mutualinvestment fund's securities lending, repurchase and reverse repurchase transactions, as applicable.

(5) An agent appointed under this section, in administering the securities lending, repurchase and, if applicable, reverse repurchase transactions of the mutualinvestment fund shallmust exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.

2.16 Controls and Records -- (1) A mutualAn investment fund shallmust not enter into transactions under sections 2.12, 2.13 or 2.14 unless,

(a) for transactions to be entered into through an agent appointed under section 2.15, the manager has reasonable grounds to believe that the agent has established and maintains appropriate internal controls and procedures and records; and

(b) for reverse repurchase transactions directly entered into by the mutualinvestment fund without an agent, the manager has established and maintains appropriate internal controls, procedures and records.

(2) The internal controls, procedures and records referred to in subsection (1) shallmust include

(a) a list of approved borrowers, purchasers and sellers based on generally accepted creditworthiness standards;

(b) as applicable, transaction and credit limits for each counterparty; and

(c) collateral diversification standards.

(3) The manager of a mutualan investment fund shallmust, on a periodic basis not less frequently than annually,

(a) review the agreements with any agent appointed under section 2.15 to determine if the agreements are in compliance with this Instrument;

(b) review the internal controls described in subsection (2) to ensure their continued adequacy and appropriateness;

(c) make reasonable enquiries as to whether the agent is administering the securities lending, repurchase or reverse repurchase transactions of the mutualinvestment fund in a competent and responsible manner, in conformity with the requirements of this Instrument and in conformity with the agreement between the agent, the manager and the mutualinvestment fund entered into under subsection 2.15(4);

(d) review the terms of any agreement between the mutualinvestment fund and an agent entered into under subsection 2.15(4) in order to determine if the instructions provided to the agent in connection with the securities lending, repurchase or reverse repurchase transactions of the mutualinvestment fund continue to be appropriate; and

(e) make or cause to be made any changes that may be necessary to ensure that

(i) the agreements with agents are in compliance with this Instrument,

(ii) the internal controls described in subsection (2) are adequate and appropriate,

(iii) the securities lending, repurchase or reverse repurchase transactions of the mutualinvestment fund are administered in the manner described in paragraph (c), and

(iv) the terms of each agreement between the mutualinvestment fund and an agent entered into under subsection 2.15(4) are appropriate.

2.17 Commencement of Securities Lending, Repurchase and Reverse Repurchase Transactions by a Mutualan Investment Fund - (1) A mutualAn investment fund shallmust not enter into securities lending, repurchase or reverse repurchase transactions, unless

(a) in the case of a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, its prospectus contains the disclosure required for mutual funds entering into those types of transactions; and

(a.1) in the case of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund, the investment fund issues a news release that contains both of the following:

(i) the disclosure required in a prospectus for an exchange-traded mutual fund that is not in continuous distribution, or a non-redeemable investment fund, entering into those types of transactions;

(ii) the date on which the investment fund intends to begin entering into those types of transactions; and

(b) the mutualinvestment fund has provided to its securityholders, not less than 60 days before it begins entering into those types of transactions, written notice that discloses its intent to begin entering into those types of transactions and the disclosure required for mutual funds entering into those types of transactions.referred to in paragraph (a) or (a.1), as applicable.

(2) Paragraph (1)(b) does not apply to a mutual fund that has entered into reverse repurchase agreements as permitted by a decision of the securities regulatory authority or regulator.

(3) Paragraph (1)(b) does not apply to a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, if each prospectus of the mutual fund since its inception contains the disclosure referred to in paragraph (1)(a).

(4) Paragraphs (1)(a.1) and (b) do not apply to an exchange-traded mutual fund that is not in continuous distribution, or a non-redeemable investment fund, if each prospectus of the investment fund since its inception contains the disclosure referred to in paragraph (1)(a.1).

2.18 Money Market Fund -- (1) A mutual fund must not describe itself as a "money market fund" in its prospectus, a continuous disclosure document or a sales communication unless

(a) it has all of its assets invested in one or more of the following:

(i) cash,

(ii) cash equivalents,

(iii) an evidence of indebtedness that has a remaining term to maturity of 365 days or less and an approved credit rating,

(iv) a floating rate evidence of indebtedness if

(A) the floating interest rate of the indebtedness is reset no later than every 185 days, and

(B) the principal amount of the indebtedness will continue to have a market value of approximately par at the time of each change in the rate to be paid to the holders of the evidence of indebtedness, or

(v) securities issued by one or more money market funds,

(b) it has a portfolio of assets, excluding a security described in subparagraph (a)(v), with a dollar-weighted average term to maturity not exceeding

(i) 180 days, and

(ii) 90 days when calculated on the basis that the term of a floating rate obligation is the period remaining to the date of the next rate setting,

(c) not less than 95% of its assets invested in accordance with paragraph (a) are denominated in a currency in which the net asset value per security of the mutual fund is calculated, and

(d) it has not less than

(i) 5% of its assets invested in cash or readily convertible into cash within one day, and

(ii) 15% of its assets invested in cash or readily convertible into cash within one week.

(2) Despite any other provision of this Instrument, a mutual fund that describes itself as a "money market fund" must not use a specified derivative or sell securities short.

(3) A non-redeemable investment fund must not describe itself as a "money market fund".

PART 3 -- NEW MUTUALINVESTMENT FUNDS

3.1 Initial Investment in a New Mutual Fund -- (1) NoA person or company shallmust not file a prospectus for a newly established mutual fund unless

(a) an investment of at least $150,000 in securities of the mutual fund has been made, and those securities are beneficially owned, before the time of filing by

(i) the manager, a portfolio adviser, a promoter or a sponsor of the mutual fund,

(ii) the partners, directors, officers or securityholders of any of the manager, a portfolio adviser, a promoter or a sponsor of the mutual fund, or

(iii) a combination of the persons or companies referred to subparagraphs (i) and (ii); or

(b) the prospectus of the mutual fund states that the mutual fund will not issue securities other than those referred to in paragraph (a) unless subscriptions aggregating not less than $500,000 have been received by the mutual fund from investors other than the persons and companies referred to in paragraph (a) and accepted by the mutual fund.

(2) A mutual fund shallmust not redeem a security issued upon an investment in the mutual fund referred to in paragraph (1)(a) until $500,000 has been received from persons or companies other than the persons and companies referred to in paragraph (1)(a).

3.2 Prohibition Against Distribution -- If a prospectus of a mutual fund contains the disclosure described in paragraph 3.1(1)(b), the mutual fund shallmust not distribute any securities unless the subscriptions described in that disclosure, together with payment for the securities subscribed for, have been received.

3.3 Prohibition Against Reimbursement of Organization Costs - (1) None of the costs of incorporation, formation or initial organization of a mutual fund, or of the preparation and filing of any of the preliminary prospectus, preliminary annual information form, preliminary fund facts document, initial prospectus, annual information form or fund facts document of the mutual fund shallmay be borne by the mutual fund or its securityholders.

(2) Subsection (1) does not apply to an exchange-traded mutual fund unless the fund is in continuous distribution.

(2) [Repealed]

(3) None of the costs of incorporation, formation or initial organization of a non-redeemable investment fund, or of the preparation and filing of the initial preliminary prospectus and initial prospectus of the non-redeemable investment fund or documents that must be filed concurrently with the initial preliminary prospectus or initial prospectus, may be borne by the non-redeemable investment fund or its securityholders.

PART 4 -- CONFLICTS OF INTEREST

4.1 Prohibited Investments -- (1) A dealer managed mutualinvestment fund shallmust not knowingly make an investment in a class of securities of an issuer during, or for 60 days after, the period in which the dealer manager of the mutualinvestment fund, or an associate or affiliate of the dealer manager of the mutualinvestment fund, acts as an underwriter in the distribution of securities of that class of securities, except as a member of the selling group distributing five percent 5% or less of the securities underwritten.

(2) A dealer managed mutualinvestment fund shallmust not knowingly make an investment in a class of securities of an issuer of which a partner, director, officer or employee of the dealer manager of the mutualinvestment fund, or a partner, director, officer or employee of an affiliate or associate of the dealer manager, is a partner, director or officer, unless the partner, director, officer or employee

(a) does not participate in the formulation of investment decisions made on behalf of the dealer managed mutualinvestment fund;

(b) does not have access before implementation to information concerning investment decisions made on behalf of the dealer managed mutualinvestment fund; and

(c) does not influence, other than through research, statistical and other reports generally available to clients, the investment decisions made on behalf of the dealer managed mutualinvestment fund.

(3) Subsections (1) and (2) do not apply to an investment in a class of securities issued or fully and unconditionally guaranteed by the government of Canada or the government of a jurisdiction.

(4) Subsection (1) does not apply to an investment in a class of securities of an issuer if, at the time of each investment

(a) the independent review committee of the dealer managed mutualinvestment fund has approved the transaction under subsection 5.2(2) of NI 81-107;

(b) in a class of debt securities of an issuer other than a class of securities referred to in subsection (3), the security has been given, and continues to have, an approved rating by an approved credit rating organization;

(c) in any other class of securities of an issuer,

(i) the distribution of the class of equity securities is made by prospectus filed with one or more securities regulatory authorities or regulators in Canada, and

(ii) during the 60 day period referred to in subsection (1) the investment is made on an exchange on which the class of equity securities of the issuer is listed and traded; and

(d) no later than the time the dealer managed mutualinvestment fund files its annual financial statements, the manager of the dealer managed mutualinvestment fund files the particulars of each investment made by the dealer managed mutualinvestment fund during its most recently completed financial year.

(4.1) In paragraph (4)(b), "approved rating" has the meaning ascribed to it in National Instrument 44-101 -- Short Form Prospectus Distributions.

(5) The corresponding provisions contained in securities legislation referred to in Appendix C do not apply with respect to an investment in a class of securities of an issuer referred to in subsection (4) if the investment is made in accordance with that subsection.

4.2 Self-Dealing -- (1) A mutualAn investment fund shallmust not purchase a security from, sell a security to, or enter into a securities lending, repurchase or reverse repurchase transaction under section 2.12, 2.13 or 2.14 with, any of the following persons or companies:

1. The manager, portfolio adviser or trustee of the mutualinvestment fund.

2. A partner, director or officer of the mutualinvestment fund or of the manager, portfolio adviser or trustee of the mutualinvestment fund.

3. An associate or affiliate of a person or company referred to in paragraph 1 or 2.

4. A person or company, having fewer than 100 securityholders of record, of which a partner, director or officer of the mutualinvestment fund or a partner, director or officer of the manager or portfolio adviser of the mutualinvestment fund is a partner, director, officer or securityholder.

(2) Subsection (1) applies in the case of a sale of a security to, or a purchase of a security from, a mutualan investment fund only if the person or company that would be selling to, or purchasing from, the mutualinvestment fund would be doing so as principal.

4.3 Exception -- (1) Section 4.2 does not apply to a purchase or sale of a security by a mutualan investment fund if the price payable for the security is:

(a) not more than the ask price of the security as reported by any available public quotation in common use, in the case of a purchase by the mutualinvestment fund; or

(b) not less than the bid price of the security as reported by any available public quotation in common use, in the case of a sale by the mutualinvestment fund.

(2) Section 4.2 does not apply to a purchase or sale of a class of debt securities by a mutualan investment fund from, or to, another mutualinvestment fund managed by the same manager or an affiliate of the manager, if, at the time of the transaction

(a) the mutualinvestment fund is purchasing from, or selling to, another mutualinvestment fund to which NI 81-107 applies;

(b) the independent review committee of the mutualinvestment fund has approved the transaction under subsection 5.2(2) of NI 81-107; and

(c) the transaction complies with subsection 6.1(2) of NI 81-107.

4.4 Liability and Indemnification -- (1) An agreement or declaration of trust by which a person or company acts as manager of a mutualan investment fund shallmust provide that the manager is responsible for any loss that arises out of the failure of the manager, or of any person or company retained by the manager or the mutualinvestment fund to discharge any of the manager's responsibilities to the mutualinvestment fund,

(a) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the mutualinvestment fund, and

(b) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.

(2) A mutualAn investment fund shallmust not relieve the manager of the mutualinvestment fund from liability for loss that arises out of the failure of the manager, or of any person retained by the manager or the mutualinvestment fund to discharge any of the manager's responsibilities to the mutualinvestment fund,

(a) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the mutualinvestment fund, or

(b) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.

(3) A mutualAn investment fund may indemnify a person or company providing services to it against legal fees, judgments and amounts paid in settlement, actually and reasonably incurred by that person or company in connection with services provided by that person or company to the mutualinvestment fund, if

(a) those fees, judgments and amounts were not incurred as a result of a breach of the standard of care described in subsection (1) or (2); and

(b) the mutualinvestment fund has reasonable grounds to believe that the action or inaction that caused the payment of the fees, judgments and amounts paid in settlement was in the best interests of the mutualinvestment fund.

(4) A mutualAn investment fund shallmust not incur the cost of any portion of liability insurance that insures a person or company for a liability except to the extent that the person or company may be indemnified for that liability under this section.

(5) This section does not apply to any losses to a mutualan investment fund or securityholder arising out of an action or inaction by any of the following:

(a) a director of the mutualinvestment fund; or

(b) a custodian or sub-custodian of the mutualinvestment fund, except as set out in subsection (6).

(6) This section applies to any losses to a mutualan investment fund or securityholder arising out of an action or inaction by a custodian or sub-custodian acting as agent of the mutualinvestment fund in administering the securities lending, repurchase or reverse repurchase transactions of the mutualinvestment fund.

PART 5 -- FUNDAMENTAL CHANGES

5.1 Matters Requiring Securityholder Approval -- (1) The prior approval of the securityholders of a mutualan investment fund, given as provided in section 5.2, is required before the occurrence of each of the following:

(a) the basis of the calculation of a fee or expense that is charged to the mutualinvestment fund or directly to its securityholders by the mutualinvestment fund or its manager in connection with the holding of securities of the mutualinvestment fund is changed in a way that could result in an increase in charges to the mutualinvestment fund or to its securityholders;

(a.1) a fee or expense, to be charged to the mutualinvestment fund or directly to its securityholders by the mutualinvestment fund or its manager in connection with the holding of securities of the mutualinvestment fund that could result in an increase in charges to the mutualinvestment fund or to its securityholders, is introduced;

(b) the manager of the mutualinvestment fund is changed, unless the new manager is an affiliate of the current manager;

(c) the fundamental investment objectives of the mutualinvestment fund are changed;

(d) [Repealed]

(e) the mutualinvestment fund decreases the frequency of the calculation of its net asset value per security;

(f) the mutualinvestment fund undertakes a reorganization with, or transfers its assets to, another mutual fundissuer, if

(i) the mutualinvestment fund ceases to continue after the reorganization or transfer of assets, and

(ii) the transaction results in the securityholders of the mutualinvestment fund becoming securityholders in the other mutual fundissuer; or

(g) the mutualinvestment fund undertakes a reorganization with, or acquires assets from, another mutual fundissuer, if

(i) the mutualinvestment fund continues after the reorganization or acquisition of assets,

(ii) the transaction results in the securityholders of the other mutual fund issuer becoming securityholders in the mutualinvestment fund, and

(iii) the transaction would be a material change to the mutualinvestment fund.;

(h) the investment fund implements a change that restructures the investment fund from

(i) a non-redeemable investment fund into a mutual fund;

(ii) a mutual fund into a non-redeemable investment fund; or

(iii) an investment fund into an issuer that is not an investment fund.

(2) An investment fund must not bear any of the costs or expenses associated with a change referred to in subparagraphs (1)(h)(i), (ii) or (iii).

5.2 Approval of Securityholders -- (1) Unless a greater majority is required by the constating documents of the mutualinvestment fund, the laws applicable to the mutualinvestment fund or an applicable agreement, the approval of the securityholders of the mutualinvestment fund to a matter referred to in sectionsubsection 5.1(1) shallmust be given by a resolution passed by at least a majority of the votes cast at a meeting of the securityholders of the mutualinvestment fund duly called and held to consider the matter.

(2) Despite subsection (1), the holders of securities of a class or series of a class of securities of a mutualan investment fund shallmust vote separately as a class or series of a class on a matter referred to in sectionsubsection 5.1(1) if that class or series of a class is affected by the action referred to in sectionsubsection 5.1(1) in a manner different from holders of securities of other classes or series of a class.

(3) Despite sectionsubsection 5.1(1) and subsections (1) and (2), if the constating documents of the mutualinvestment fund so provide, the holders of securities of a class or series of a class of securities of a mutualan investment fund shallmust not be entitled to vote on a matter referred to in sectionsubsection 5.1(1) if they, as holders of the class or series of a class, are not affected by the action referred to in section 5.1.subsection 5.1(1).

5.3 Circumstances in Which Approval of Securityholders Not Required - (1) Despite section 5.1,subsection 5.1(1), the approval of securityholders of a mutualan investment fund is not required to be obtained for a change referred to in paragraphs 5.1(1)(a) and (a.1)

(a) if

(i) the mutualinvestment fund is at arm's length to the person or company charging the fee or expense to the mutualinvestment fund referred to in paragraphs 5.1(1)( a) and (a.1),

(ii) the prospectus of the mutualinvestment fund discloses that, although the approval of securityholders will not be obtained before making the changes, securityholders will be sent a written notice at least 60 days before the effective date of the change that is to be made that could result in an increase in charges to the mutualinvestment fund, and

(iii) the notice referred to in subparagraph (ii) is actually sent 60 days before the effective date of the change; or

(b) if

(i) the mutual fund is permitted by this Instrument to be described as a "no-load" fund,

(ii) the prospectus of the mutual fund discloses that securityholders will be sent a written notice at least 60 days before the effective date of a change that is to be made that could result in an increase in charges to the mutual fund, and

(iii) the notice referred to in subparagraph (ii) is actually sent 60 days before the effective date of the change.

(2) Despite section 5.1,subsection 5.1(1), the approval of securityholders of a mutualan investment fund is not required to be obtained for a change referred to in paragraph 5.1(1)(f) if either of the following paragraphs apply:

(a) all of the following apply:

(i) the independent review committee of the mutualinvestment fund has approved the change under subsection 5.2(2) of NI 81-107;

( bii) the mutualinvestment fund is being reorganized with, or its assets are being transferred to, another mutualinvestment fund to which this Instrument and NI 81-107 apply and that is managed by the manager, or an affiliate of the manager, of the mutualinvestment fund;

( ciii) the reorganization or transfer of assets of the mutualinvestment fund complies with the criteria in paragraphs 5.6(1)(a), (b), (c), (d), (g), (h) and, (i), (j) and subsection 5.6(2)(k);

( div) the prospectus of the mutualinvestment fund discloses that, although the approval of securityholders may not be obtained before making the change, securityholders will be sent a written notice at least 60 days before the effective date of the change; and

( ev) the notice referred to in paragraph (d) subparagraph (iv) to securityholders is sent 60 days before the effective date of the change.;

(b) all of the following apply:

(i) the investment fund is a non-redeemable investment fund that is being reorganized with, or its assets are being transferred to, a mutual fund that is

(A) a mutual fund to which this Instrument and NI 81-107 apply,

(B) managed by the manager, or an affiliate of the manager, of the investment fund,

(C) not in default of any requirement of securities legislation, and

(D) a reporting issuer in the local jurisdiction and has a current prospectus in the local jurisdiction;

(ii) the transaction is a tax-deferred transaction under subsection 85(1) of the ITA;

(iii) the securities of the investment fund do not give securityholders of the investment fund the right to request that the investment fund redeem the securities;

(iv) there is no market through which securityholders of the investment fund may sell securities of the investment fund during the existence of the investment fund;

(v) the prospectus of the investment fund discloses that

(A) securityholders of the investment fund, other than the manager, promoter or an affiliate of the manager or promoter, will cease to be securityholders of the investment fund within 30 months following the completion of the initial public offering by the investment fund, and

(B) the investment fund will, within 30 months following the completion of the initial public offering by the investment fund, undertake a reorganization with, or transfer its assets to, a mutual fund that is managed by the manager of the investment fund or by an affiliate of the manager of the investment fund;

(vi) the mutual fund bears none of the costs and expenses associated with the transaction;

(vii) the reorganization or transfer of assets of the investment fund complies with subparagraphs 5.3(2)(a)(i), (iv) and (v) and paragraphs 5.6(1)(d) and (k).

(3) Despite subsection 5.1(1), the approval of securityholders of an investment fund is not required to be obtained for a change referred to in subparagraph 5.1(1)(h)(i) if all of the following conditions apply:

(a) the prospectus of the investment fund contains a description of the change and the event that will cause the change to occur;

(b) the prospectus of the investment fund discloses that, although the approval of securityholders will not be obtained before making the change, securityholders will be sent a written notice at least 60 days before the effective date of the change;

(c) the notice referred to in paragraph (b) is sent 60 days before the effective date of the change;

(d) each sales communication of the investment fund discloses that

(i) if the event that causes the change occurs, the investment fund will become a mutual fund,

(ii) if applicable, the investment strategies of the investment fund will change after the investment fund becomes a mutual fund,

(iii) if applicable, the securities of the investment fund will not be listed on the stock exchange on which they trade as a result of the change, and

(iv) additional information regarding the change is available in the prospectus of the investment fund.

5.3.1 Change of Auditor of the MutualInvestment Fund -- The auditor of the mutualinvestment fund maymust not be changed unless

(a) the independent review committee of the mutualinvestment fund has approved the change of auditor under subsection 5.2(2) of NI 81-107;

(b) the prospectus of the mutualinvestment fund discloses that, although the approval of securityholders will not be obtained before making the change, securityholders will be sent a written notice at least 60 days before the effective date of the change, and

(c) the notice referred to in paragraph (b) to securityholders is sent 60 days before the effective date of the change.

5.4 Formalities Concerning Meetings of Securityholders -- (1) A meeting of securityholders of a mutualan investment fund called to consider any matter referred to in sectionsubsection 5.1(1) shall must be called on written notice sent not less than 21 days before the date of the meeting.

(2) The notice referred to in subsection (1) shallmust contain or be accompanied by a statement that includes

(a) a description of the change or transaction proposed to be made or entered into and, if the matter is one referred to in paragraphs 5.1(1)(a) or (a.1), the effect that the change would have had on the management expense ratio of the mutualinvestment fund had the change been in force throughout the mutualinvestment fund's last completed financial year;

(b) the date of the proposed implementation of the change or transaction; and

(c) all other information and documents necessary to comply with the applicable proxy solicitation requirements of securities legislation for the meeting.

5.5 Approval of Securities Regulatory Authority - (1) The approval of the securities regulatory authority or regulator is required before

(a) the manager of a mutualan investment fund is changed, unless the new manager is an affiliate of the current manager;

(a.1) a change in the control of the manager of an investment fund is made;

(b) a reorganization or transfer of assets of a mutualan investment fund is implemented, if the transaction will result in the securityholders of the mutualinvestment fund becoming securityholders in another mutual fundissuer;

(c) a change of the custodian of a mutualan investment fund is implemented, if there has been or will be, in connection with the proposed change, a change of the type referred to in paragraph (a); or

(d) a mutualan investment fund suspends, other than under section 10.6, the rights of securityholders to request that the mutualinvestment fund redeem their securities.

(2) No person or company, or affiliate or associate of that person or company, may act as manager of a mutual fund if that person or company, or an affiliate or associate of that person or company, has acquired control of a manager of the mutual fund unless the approval of the securities regulatory authority or regulator has been obtained for the change in control.

(2) [Repealed]

(3) Despite subsection (1), in Ontario only the regulator may grant an approval referred to in subsection (1).

5.6 Pre-Approved Reorganizations and Transfers - (1) Despite subsection 5.5(1), the approval of the securities regulatory authority or regulator is not required to implement a transaction referred to in paragraph 5.5(1)(b) if all of the following paragraphs apply:

(a) the mutualinvestment fund is being reorganized with, or its assets are being transferred to, another mutualinvestment fund to which this Instrument applies and that

(i) is managed by the manager, or an affiliate of the manager, of the mutualinvestment fund,

(ii) a reasonable person would consider to have substantially similar fundamental investment objectives, valuation procedures and fee structure as the mutualinvestment fund,

(iii) is not in default of any requirement of securities legislation, and

(iv) is a reporting issuer in the local jurisdiction and, if the other investment fund is a mutual fund, that mutual fund also has a current prospectus in the local jurisdiction;

(b) the transaction is a "qualifying exchange" within the meaning of section 132.2 of the ITA or is a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA;

(c) the transaction contemplates the wind-up of the mutualinvestment fund as soon as reasonably possible following the transaction;

(d) the portfolio assets of the mutualinvestment fund to be acquired by the other mutualinvestment fund as part of the transaction

(i) may be acquired by the other mutualinvestment fund in compliance with this Instrument, and

(ii) are acceptable to the portfolio adviser of the other mutualinvestment fund and consistent with the other mutualinvestment fund's fundamental investment objectives;

(e) the transaction is approved

(i) by the securityholders of the mutualinvestment fund in accordance with paragraph 5.1(1)(f), unless subsection 5.3(2) applies, and

(ii) if required, by the securityholders of the other mutualinvestment fund in accordance with paragraph 5.1(1)(g);

(f) the materials sent to securityholders of the mutualinvestment fund in connection with the approval under paragraph 5.1(1)(f) include

(i) a circular that, in addition to other requirements prescribed by law, describes the proposed transaction, the mutualinvestment fund into which the mutualinvestment fund will be reorganized, the income tax considerations for the mutualinvestment funds participating in the transaction and their securityholders, and, if the mutualinvestment fund is a corporation and the transaction involves its shareholders becoming securityholders of a mutualan investment fund that is established as a trust, a description of the material differences between being a shareholder of a corporation and being a securityholder of a trust,

(ii) if the other investment fund is a mutual fund, the current prospectus or the most recently filed fund facts document;, and

(iii) a statement that securityholders may obtain all of the following documents in respect of the reorganized mutual fund, at no cost a prospectus, an annual information form, the most recently filed fund facts document, the most recent annual and interim financial statements, and the most recent management report of fund performance that have been made public,investment fund at no cost by contacting the reorganized mutualinvestment fund at an address or telephone number specified in the statement, or by accessing the documents at a website address specified in the statement;:

(A) if the reorganized investment fund is a mutual fund, the current prospectus;

(B) the most recently filed annual information form, if one has been filed;

(C) if applicable, the most recently filed fund facts document;

(D) the most recently filed annual and interim financial statements;

(E) the most recently filed annual and interim management reports of fund performance;

(g) the mutualinvestment fund has complied with Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure in connection with the making of the decision to proceed with the transaction by the board of directors of the manager of the mutualinvestment fund or of the mutualinvestment fund;

(h) the mutualinvestment funds participating in the transaction bear none of the costs and expenses associated with the transaction; and

(i) if the investment fund is a mutual fund, securityholders of the mutualinvestment fund continue to have the right to redeem securities of the mutualinvestment fund up to the close of business on the business day immediately before the effective date of the transaction.;

(j) if the investment fund is a non-redeemable investment fund, all of the following apply:

(i) the investment fund issues and files a news release that discloses the transaction;

(ii) securityholders of the investment fund may redeem securities of the investment fund at a date that is after the date of the news release referred to in subparagraph (i) and before the effective date of the reorganization or transfer of assets;

(iii) the securities submitted for redemption in accordance with subparagraph (ii) are redeemed at a price equal to their net asset value per security on the redemption date;

(k) the consideration offered to securityholders of the investment fund for the transaction has a value that is equal to the net asset value of the investment fund.

(1.1) Despite subsection 5.5(1), the approval of the securities regulatory authority or regulator is not required to implement a transaction referred to in paragraph 5.5(1)(b) if all the conditions in paragraph 5.3(2)(b) are satisfied and the independent review committee of the mutual fund involved in the transaction has approved the transaction in accordance with subsection 5.2(2) of NI 81-107.

(2) A mutual fund that has continued after a transaction described in paragraph 5.5(1)(b) shall, if the audit report accompanying its audited financial statements for its first completed financial year after the transaction contains a reservation in respect of the value of the portfolio assets acquired by the mutual fund in the transaction, send a copy of those financial statements to each person or company that was a securityholder of a mutual fund that was terminated as a result of the transaction and that is not a securityholder of the mutual fund.

(2) [Repealed]

5.7 Applications -- (1) An application for an approval required under section 5.5 shallmust contain,

(a) if the application is required by paragraph 5.5(1)(a) or subsection 5.5(2) (a.1),

(i) details of the proposed transaction,

(ii) details of the proposed new manager or the person or company proposing to acquire control of the manager,

(iii) as applicable, the names, residence addresses and birthdates of

(A) all proposed new partners, directors or officers of the manager,

(B) all partners, directors or officers of the person or company proposing to acquire control of the manager,

(C) any proposed new individual trustee of the mutualinvestment fund, and

(D) any new directors or officers of the mutualinvestment fund,

(iv) all information necessary to permit the securities regulatory authority to conduct security checks on the individuals referred to in subparagraph (iii),

(v) sufficient information to establish the integrity and experience of the persons or companies referred to in subparagraphs (ii) and (iii), and

(vi) details of how the proposed transaction will affect the management and administration of the mutualinvestment fund;

(b) if the application is required by paragraph 5.5(1)(b),

(i) details of the proposed transaction,

(ii) details of the total annual returns of each of the mutual fundsthe investment fund and the other issuer for each of the previous five years,

(iii) a description of the differences between, as applicable, the fundamental investment objectives, investment strategies, valuation procedures and fee structure of each of the mutual fundsthe investment fund and the other issuer and any other material differences between the mutual fundsinvestment fund and the other issuer, and

(iv) a description of those elements of the proposed transaction that make section 5.6 inapplicable;

(c) if the application is required by paragraph 5.5(1)(c), sufficient information to establish that the proposed custodial arrangements will be in compliance with Part 6;

(d) if the application relates to a matter that would constitute a material change for the mutualinvestment fund, a draft amendment to the prospectus and, if applicable, to the fund facts document of the mutualinvestment fund reflecting the change; and

(e) if the matter is one that requires the approval of securityholders, confirmation that the approval has been obtained or will be obtained before the change is implemented.

(2) A mutualAn investment fund that applies for an approval under paragraph 5.5(1)(d) shallmust

(a) make that application to the securities regulatory authority or regulator in the jurisdiction in which the head office or registered office of the mutualinvestment fund is situatesituated; and

(b) concurrently file a copy of the application so made with the securities regulatory authority or the regulator in the local jurisdiction if the head office or registered office of the mutualinvestment fund is not situated in the local jurisdiction.

(3) A mutualAn investment fund that has complied with subsection (2) in the local jurisdiction may suspend the right of securityholders to request that the mutualinvestment fund redeem their securities if

(a) the securities regulatory authority or regulator in the jurisdiction in which the head office or registered office of the mutualinvestment fund is situatesituated has granted approval to the application made under paragraph (2)(a); and

(b) the securities regulatory authority or regulator in the local jurisdiction has not notified the mutualinvestment fund, by the close of business on the business day immediately following the day on which the copy of the application referred to in paragraph (2)(b) was received, either that

(i) the securities regulatory authority or regulator has refused to grant approval to the application, or

(ii) this subsection may not be relied upon by the mutualinvestment fund in the local jurisdiction.

5.8 Matters Requiring Notice -- (1) No person or company that is a manager of a mutualan investment fund may continue to act as manager of the mutualinvestment fund following a direct or indirect change of control of the person or company unless

(a) notice of the change of control was given to all securityholders of the mutualinvestment fund at least 60 days before the change; and

(b) the notice referred to in paragraph (a) contains the information that would be required by law to be provided to securityholders if securityholder approval of the change were required to be obtained.

(2) No mutual fund shallmay terminate unless notice of the termination is given to all securityholders of the mutual fund at least 60 days before termination.

(3) The manager of a mutual fund that has terminated shallmust give notice of the termination to the securities regulatory authority within 30 days of the termination.

5.8.1 Termination of Non-Redeemable Investment Fund -- (1) A non-redeemable investment fund must not terminate unless the investment fund issues and files a news release that discloses the termination.

(2) A non-redeemable investment fund must be terminated no earlier than 15 days and no later than 30 days after the filing of the news release referred to in subsection (1).

(3) Subsections (1) and (2) do not apply to a non-redeemable investment fund that ceases to continue under a transaction referred to in paragraph 5.1(1)(f).

5.9 Relief from Certain Regulatory Requirements -- (1) The mutualinvestment fund conflict of interest investment restrictions and the mutualinvestment fund conflict of interest reporting requirements do not apply to a transaction referred to in paragraph 5.5(1)(b) if the approval of the securities regulatory authority or regulator has been given to the transaction.

(2) The mutualinvestment fund conflict of interest investment restrictions and the mutualinvestment fund conflict of interest reporting requirements do not apply to a transaction described in section 5.6.

PART 6 -- CUSTODIANSHIP OF PORTFOLIO ASSETS

6.1 General -- (1) Except as provided in sections 6.8, 6.8.1 and 6.9, all portfolio assets of a mutualan investment fund shallmust be held under the custodianship of one custodian that satisfies the requirements of section 6.2.

(2) Except as provided in subsection 6.5(3) and sections 6.8, 6.8.1 and 6.9, portfolio assets of a mutualan investment fund shallmust be held

(a) in Canada by the custodian or a sub-custodian of the mutualinvestment fund; or

(b) outside Canada by the custodian or a sub-custodian of the mutualinvestment fund, if appropriate to facilitate portfolio transactions of the mutualinvestment fund outside Canada.

(3) The custodian or a sub-custodian of a mutualan investment fund may appoint one or more sub-custodians to hold portfolio assets of the mutualinvestment fund, if, for each appointment,

(a) written consent towhere the appointment is by the custodian, the investment fund gives written consent to each appointment,

(a.1) where the appointment has been providedis by a sub-custodian, the mutualinvestment fund and, if the appointment is by a sub-custodian, the custodian of the mutual fund;investment fund give written consent to each appointment,

(b) the sub-custodian that is to be appointed is a person or companyan entity described in section 6.2 or 6.3, as applicable;,

(c) the arrangements under which a sub-custodian is appointed are such that the mutualinvestment fund may enforce rights directly, or require the custodian or a sub-custodian to enforce rights on behalf of the mutualinvestment fund, to the portfolio assets held by the appointed sub-custodian;, and

(d) the appointment is otherwise in compliance with this Instrument.

(4) The written consent referred to in paragraphparagraphs (3)(a) and (a.1) may be in the form of a general consent, contained in the agreement governing the relationship between the mutualinvestment fund and the custodian, or the custodian and the sub-custodian, to the appointment of persons or companiesentities that are part of an international network of sub-custodians within the organization of the appointed custodian or sub-custodian.

(5) A custodian or sub-custodian shallmust provide to the mutualinvestment fund a list of each person or companyall entities that isare appointed sub- custodiancustodians under a general consent referred to in subsection (4).

(6) Despite any other provisions of this Part, the manager of a mutualan investment fund shallmust not act as custodian or sub-custodian of the mutualinvestment fund.

6.2 Entities Qualified to Act as Custodian or Sub-Custodian for Assets Held in Canada -- (1) TheIf portfolio assets are held in Canada by a custodian of a mutual fund, and a sub-custodian of a mutual fund that is to hold portfolio assets of the mutual fund in Canada, shallor sub-custodian, the custodian or sub-custodian must be one of the following:

1. A bank listed in Schedule I, II or III of the Bank Act (Canada).

2. A trust company that is incorporated under the laws of Canada or a jurisdiction and licensed or registered under the laws of Canada or a jurisdiction, and that has shareholders' equity, as reported in its most recent audited financial statements, of not less than $10,000,000.

3. A company that is incorporated under the laws of Canada or of a jurisdiction, and that is an affiliate of a bank or trust company referred to in paragraph 1 or 2, if

(a) the company has shareholders' equity, as reported in its most recent audited financial statements that have been made public, of not less than $10,000,000; or

(b) the bank or trust company has assumed responsibility for all of the custodial obligations of the company in respect of for that mutualinvestment fund.

6.3 Entities Qualified to Act as Sub-Custodian for Assets Held outside Canada -- A sub-custodian of a mutual fund that is to holdIf portfolio assets of the mutual fundare held outside of Canada shallby a sub-custodian, the sub-custodian must be one of the following:

1. An entity referred to in section 6.2.

2. An entity that

(a) is incorporated or organized under the laws of a country, or a political subdivision of a country, other than Canada;

(b) is regulated as a banking institution or trust company by the government, or an agency of the government, of the country under whose laws it is incorporated or organized or a political subdivision of that country; and

(c) has shareholders' equity, as reported in its most recent audited financial statements, of not less than the equivalent of $100,000,000.

3. An affiliate of an entity referred to in paragraph 1 or 2 if

(a) the affiliate has shareholders' equity, as reported in its most recent audited financial statements that have been made public, of not less than the equivalent of $100,000,000; or

(b) the entity referred to in paragraph 1 or 2 has assumed responsibility for all of the custodial obligations of the affiliate in respect offor that mutualinvestment fund.

6.4 Contents of Custodian and Sub-Custodian Agreements -- (1) All custodian agreements and sub-custodian agreements of a mutualan investment fund shallmust provide for matters relating to

(a) the requirements concerning the location of portfolio assets contained in subsection 6.1(2);,

(b) theany appointment of a sub-custodian required by subsection 6.1(3);,

(c) the requirements concerning listsa list of all sub-custodians contained in subsection 6.1(5);,

(d) the method of holding portfolio assets required by section 6.5 and subsection 6.8(4);,

(e) the standard of care and responsibility for loss required by section 6.6;, and

(f) the review and compliance reports required by section 6.7..

(2) A sub-custodian agreement concerning the portfolio assets of a mutualan investment fund shallmust provide for the safekeeping of portfolio assets on terms consistent with the custodian agreement of the mutualinvestment fund.

(2.1) The provisions of an agreement referred to under subsections (1) or (2) must comply with the requirements of this Part.

(3) NoA custodian agreement or sub-custodian agreement concerning the portfolio assets of a mutualan investment fund shallmust not

(a) provide for the creation of any security interest on the portfolio assets of the mutualinvestment fund except for a good faith claim for payment of the fees and expenses of the custodian or a sub-custodian for acting in that capacity or to secure the obligations of the mutualinvestment fund to repay borrowings by the mutualinvestment fund from athe custodian or a sub-custodian for the purpose of settling portfolio transactions; or

(b) contain a provision that would require the payment of a fee to the custodian or a sub-custodian for the transfer of the beneficial ownership of portfolio assets of the mutualinvestment fund, other than for safekeeping and administrative services in connection with acting as custodian or sub-custodian.

6.5 Holding of Portfolio Assets and Payment of Fees -- (1) Except as provided in subsections (2) and (3) and sections 6.8, 6.8.1 and 6.9, portfolio assets of a mutualan investment fund not registered in the name of the mutualinvestment fund shallmust be registered in the name of the custodian or a sub-custodian of the mutualinvestment fund or any of their respective nominees with an account number or other designation in the records of the custodian sufficient to show that the beneficial ownership of the portfolio assets is vested in the mutualinvestment fund.

(2) Portfolio assets of a mutual fund issued in bearer form shall be designated or segregated by theThe custodian or a sub-custodian of the mutualan investment fund or thean applicable nominee so asmust segregate portfolio assets issued in bearer form to show that the beneficial ownership of the property is vested in the mutualinvestment fund.

(3) AThe custodian or a sub-custodian of a mutualan investment fund may deposit portfolio assets of the mutualinvestment fund with a depository, or a clearing agency, that operates a book-based system.

(4) The custodian or a sub-custodian of a mutualan investment fund arranging for the deposit of portfolio assets of the mutualinvestment fund with, and their delivery to, a depository, or clearing agency, that operates a book-based system shallmust ensure that the records of any of the applicable participants in that book-based system or the custodian contain an account number or other designation sufficient to show that the beneficial ownership of the portfolio assets is vested in the mutualinvestment fund.

(5) A mutualAn investment fund shallmust not pay a fee to athe custodian or a sub-custodian for the transfer of beneficial ownership of portfolio assets of the mutualinvestment fund other than for safekeeping and administrative services in connection with acting as custodian or sub-custodian.

6.6 Standard of Care -- (1) The custodian and each sub-custodian of a mutualan investment fund, in carrying out their duties concerning the safekeeping of, and dealing with, the portfolio assets of the mutualinvestment fund, shallmust exercise

(a) the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances; or

(b) at least the same degree of care as they exercise with respect to their own property of a similar kind, if this is a higher degree of care than the degree of care referred to in paragraph (a).

(2) A mutualAn investment fund shallmust not relieve the custodian or a sub-custodian of the mutualinvestment fund from liability to the mutualinvestment fund or to a securityholder of the mutualinvestment fund for loss that arises out of the failure of the custodian or sub-custodian to exercise the standard of care imposed by subsection (1).

(3) A mutualAn investment fund may indemnify athe custodian or a sub-custodian against legal fees, judgments and amounts paid in settlement, actually and reasonably incurred by that entity in connection with custodial or sub-custodial services provided by that entity to the mutualinvestment fund, if those fees, judgments and amounts were not incurred as a result of a breach of the standard of care described in subsection (1).

(4) A mutualAn investment fund shallmust not incur the cost of any portion of liability insurance that insures athe custodian or a sub-custodian for a liability, except to the extent that the custodian or sub-custodian may be indemnified for that liability under this section.

6.7 Review and Compliance Reports -- (1) The custodian of a mutualan investment fund shallmust, on a periodic basis not less frequently than annually,

(a) review the custodian agreement and all sub-custodian agreements of the mutualinvestment fund to determine if those agreements are in compliance with this Part;

(b) make reasonable enquiries as to whether each sub-custodian satisfies the applicable requirements of section 6.2 or 6.3; and

(c) make or cause to be made any changes that may be necessary to ensure that

(i) the custodian and sub-custodian agreements are in compliance with this Part; and

(ii) all sub-custodians of the mutualinvestment fund satisfy the applicable requirements of section 6.2 or 6.3.

(2) The custodian of a mutualan investment fund shall, not more thanmust, within 60 days after the end of each financial year of the mutualinvestment fund, advise the mutualinvestment fund in writing

(a) of the names and addresses of all sub-custodians of the mutualinvestment fund;

(b) whether the custodian and sub-custodian agreements are in compliance with this Part; and

(c) whether, to the best of the knowledge and belief of the custodian, each sub-custodian is an entity that satisfies the applicable requirements of section 6.2 or 6.3, as applicable.

(3) A copy of the report referred to in subsection (2) shallmust be delivered by or on behalf of the mutualinvestment fund to the securities regulatory authority within 30 days after the filing of the annual financial statements of the mutualinvestment fund.

6.8 Custodial Provisions relating to Derivatives and Securities Lending, Repurchase and Reverse Repurchase Agreements -- (1) A mutualAn investment fund may deposit portfolio assets as margin for transactions in Canada involving clearing corporation options, options on futures or standardized futures with a dealer that is a member of an SRO that is a participating member of CIPF if the amount of margin deposited does not, when aggregated with the amount of margin already held by the dealer on behalf of the mutualinvestment fund, exceed 10 percent of the net asset value of the mutualinvestment fund as at the time of deposit.

(2) A mutualAn investment fund may deposit portfolio assets with a dealer as margin for transactions outside Canada involving clearing corporation options, options on futures or standardized futures if

(a) in the case of standardized futures and options on futures, the dealer is a member of a futures exchange or, in the case of clearing corporation options, is a member of a stock exchange, and, as a result in either case, is subject to a regulatory audit;

(b) the dealer has a net worth, determined from its most recent audited financial statements that have been made public, in excess of the equivalent of $50 million; and

(c) the amount of margin deposited does not, when aggregated with the amount of margin already held by the dealer on behalf of the mutualinvestment fund, exceed 10 percent of the net asset value of the mutualinvestment fund as at the time of deposit.

(3) A mutualAn investment fund may deposit with its counterparty portfolio assets over which it has granted a security interest in connection with a particular specified derivatives transaction.

(4) The agreement by which portfolio assets of a mutual fund are deposited in accordance with subsection (1), (2) or (3) shallmust require the person or company holding the portfolio assets of the mutual fund so deposited to ensure that its records show that that mutualthe investment fund is the beneficial owner of the portfolio assets.

(5) A mutualAn investment fund may deliver portfolio assets to a person or company in satisfaction of its obligations under a securities lending, repurchase or reverse purchase agreement that complies with this Instrument if the collateral, cash proceeds or purchased securities that are delivered to the mutualinvestment fund in connection with the transaction are held under the custodianship of the custodian or a sub-custodian of the mutualinvestment fund in compliance with this Part.

6.8.1 Custodial Provisions relating to Short Sales -- (1) Except where the borrowing agent is the mutualinvestment fund's custodian or sub-custodian, if a mutualan investment fund deposits portfolio assets with a borrowing agent as security in connection with a short sale of securities, the market value of portfolio assets deposited with the borrowing agent must not, when aggregated with the market value of portfolio assets already held by the borrowing agent as security for outstanding short sales of securities by the mutualinvestment fund, exceed 10% of the net asset value of the mutualinvestment fund at the time of deposit.

(2) A mutualAn investment fund must not deposit portfolio assets as security in connection with a short sale of securities with a dealer in Canada unless the dealer is a registered dealer and is a member of IIROC.

(3) A mutualAn investment fund must not deposit portfolio assets as security in connection with a short sale of securities with a dealer outside of Canada unless that dealer

(a) is a member of a stock exchange and is subject to a regulatory audit; and

(b) has a net worth, determined from its most recent audited financial statements that have been made public, in excess of the equivalent of $50 million.

6.9 Separate Account for Paying Expenses -- (1) A mutualAn investment fund may deposit cash in Canada with an institutionentity referred to in paragraph 1 or 2 of section 6.2 to facilitate the payment of regular operating expenses of the mutualinvestment fund.

PART 7 -- INCENTIVE FEES

7.1 Incentive Fees -- A mutualAn investment fund shallmust not pay, or enter into arrangements that would require it to pay, and no securities of a mutualan investment fund shallmust not be sold on the basis that an investor would be required to pay, a fee that is determined by the performance of the mutualinvestment fund, unless

(a) the fee is calculated with reference to a benchmark or index that

(i) reflects the market sectors in which the mutualinvestment fund invests according to its fundamental investment objectives,

(ii) is available to persons or companies other than the mutualinvestment fund and persons providing services to it, and

(iii) is a total return benchmark or index;

(b) the payment of the fee is based upon a comparison of the cumulative total return of the mutualinvestment fund against the cumulative total percentage increase or decrease of the benchmark or index for the period that began immediately after the last period for which the performance fee was paid; and

(c) the method of calculation of the fee and details of the composition of the benchmark or index are described in the prospectus of the mutualinvestment fund.

7.2 Multiple Portfolio Advisers -- Section 7.1 applies to fees payable to a portfolio adviser of a mutualan investment fund that has more than one portfolio adviser, if the fees are calculated on the basis of the performance of the portfolio assets under management by that portfolio adviser, as if those portfolio assets were a separate mutualinvestment fund.

PART 8 -- CONTRACTUAL PLANS

8.1 Contractual Plans -- No securities of a mutual fund shallmay be sold by way of a contractual plan unless

(a) the contractual plan was established, and its terms described in a prospectus that was filed with the securities regulatory authority, before the date that this Instrument came into force;

(b) there have been no changes made to the contractual plan or the rights of securityholders under the contractual plan since the date that this Instrument came into force; and

(c) the contractual plan has continued to be operated in the same manner after the date that this Instrument came into force as it was on that date.

PART 9 -- SALE OF SECURITIES OF A MUTUALAN INVESTMENT FUND

9.0.1 Application -- This Part, other than subsections 9.3(2) and (3), does not apply to an exchange-traded mutual fund unless the fundthat is not in continuous distribution.

9.1 Transmission and Receipt of Purchase Orders -- (0.1) This section does not apply to an exchange-traded mutual fund.

(1) Each purchase order for securities of a mutual fund received by a participating dealer at a location that is not its principal office shallmust, on the day the order is received, be sent by same day or next day courier, same day or next day priority post, telephone or electronic means, without charge to the person or company placing the order or to the mutual fund, to the principal office of the participating dealer or a person or company providing services to the participating dealer.

(2) Each purchase order for securities of a mutual fund received by a participating dealer at its principal office, a person or company providing services to the participating dealer, or by the principal distributor of the mutual fund at a location that is not an order receipt office of the mutual fund shallmust, on the day the order is received, be sent by same day or next day courier, same day or next day priority post, telephone or electronic means, without charge to the person or company placing the order or to the mutual fund, to an order receipt office of the mutual fund.

(3) Despite subsections (1) and (2), a purchase order for securities of a mutual fund received at a location referred to in those subsections after normal business hours on a business day, or on a day that is not a business day, may be sent, in the manner and to the place required by those subsections, on the next business day.

(4) A participating dealer, a principal distributor or a person or company providing services to the participating dealer or principal distributor, that sends purchase orders electronically may

(a) specify a time on a business day by which a purchase order must be received in order that it be sent electronically on that business day; and

(b) despite subsections (1) and (2), send electronically on the next business day a purchase order received after the time specified under paragraph (a).

(5) A mutual fund is deemed to have received a purchase order for securities of the mutual fund when the order is received at an order receipt office of the mutual fund.

(6) Despite subsection (5), a mutual fund may provide that a purchase order for securities of the mutual fund received at an order receipt office of the mutual fund after a specified time on a business day, or on a day that is not a business day, will be considered to be received by the mutual fund on the next business day following the day of actual receipt.

(7) A principal distributor or participating dealer shallmust ensure that a copy of each purchase order received in a jurisdiction is sent, by the time it is sent to the order receipt office of the mutual fund under subsection (2), to a person responsible for the supervision of trades made on behalf of clients for the principal distributor or participating dealer in the jurisdiction.

9.2 Acceptance of Purchase Orders -- A mutual fund may reject a purchase order for the purchase of securities of the mutual fund if

(a) the rejection of the order is made no later than one business day after receipt by the mutual fund of the order;

(b) on rejection of the order, all cash received with the order is refunded immediately; and

(c) the prospectus of the mutual fund states that the right to reject a purchase order for securities of the mutual fund is reserved and reflects the requirements of paragraphs (a) and (b).

9.3 Issue Price of Securities -- (1) The issue price of a security of a mutual fund to which a purchase order pertains shallmust be the net asset value per security of that class, or series of a class, next determined after the receipt by the mutual fund of the order.

(2) The issue price of a security of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund must not be a price that is less than the net asset value per security of that class, or series of a class, determined on the date of issuance.

(3) Despite subsection (2), if the securities of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund are distributed under a prospectus, the issue price of each security must not,

(a) as far as reasonably practicable, be a price that causes dilution of the net asset value of other outstanding securities of the investment fund; and

(b) be a price that is less than the net asset value per security of that class, or series of a class, determined on the date that is one business day before the date of the prospectus.

9.4 Delivery of Funds and Settlement -- (1) A principal distributor, a participating dealer, or a person or company providing services to the principal distributor or participating dealer shallmust forward any cash or securities received for payment of the issue price of securities of a mutual fund to an order receipt office of the mutual fund so that the cash or securities arrive at the order receipt office as soon as practicable and in any event no later than the third business day after the pricing date.

(2) Payment of the issue price of securities of a mutual fund must be made to the mutual fund on or before the third business day after the pricing date for the securities by using any or a combination of the following methods of payment:

(a) by paying cash in a currency in which the net asset value per security of the mutual fund is calculated;

(b) by making good delivery of securities if

(i) the mutual fund would at the time of payment be permitted to purchase those securities,

(ii) the securities are acceptable to the portfolio adviser of the mutual fund and consistent with the mutual fund's investment objectives, and

(iii) the value of the securities is at least equal to the issue price of the securities of the mutual fund for which they are payment, valued as if the securities were portfolio assets of the mutual fund.

(3) [Repealed]

(4) If payment of the issue price of the securities of a mutual fund to which a purchase order pertains is not made on or before the third business day after the pricing date or if the mutual fund has been paid the issue price by a cheque or method of payment that is subsequently not honoured,

(a) the mutual fund shallmust redeem the securities to which the purchase order pertains as if it had received an order for the redemption of the securities on the fourth business day after the pricing date or on the day on which the mutual fund first knows that the method of payment will not be honoured; and

(b) the amount of the redemption proceeds derived from the redemption shallmust be applied to reduce the amount owing to the mutual fund on the purchase of the securities and any banking costs incurred by the mutual fund in connection with the dishonoured cheque.

(5) If the amount of the redemption proceeds referred to in subsection (4) exceeds the aggregate of issue price of the securities and any banking costs incurred by the mutual fund in connection with the dishonoured cheque, the difference shallmust belong to the mutual fund.

(6) If the amount of the redemption proceeds referred to in subsection (4) is less than the issue price of the securities and any banking costs incurred by the mutual fund in connection with the dishonoured cheque,

(a) if the mutual fund has a principal distributor, the principal distributor shallmust pay, immediately upon notification by the mutual fund, to the mutual fund the amount of the deficiency; or

(b) if the mutual fund does not have a principal distributor, the participating dealer that delivered the relevant purchase order to the mutual fund shallmust pay immediately, upon notification by the mutual fund, to the mutual fund the amount of the deficiency.

PART 9.1 -- WARRANTS AND SPECIFIED DERIVATIVES

9.1.1 Issuance of Warrants or Specified Derivatives -- An investment fund must not issue conventional warrants or rights, or a specified derivative the underlying interest of which is a security of the investment fund.

PART 10 -- REDEMPTION OF SECURITIES OF A MUTUALAN INVESTMENT FUND

10.1 Requirements for Redemptions -- (1) No mutualAn investment fund shallmust not pay redemption proceeds unless

(a) if the security of the mutualinvestment fund to be redeemed is represented by a certificate, the mutualinvestment fund has received the certificate or appropriate indemnities in connection with a lost certificate; and

(b) either

(i) the mutualinvestment fund has received a written redemption order, duly completed and executed by or on behalf of the securityholder, or

(ii) the mutualinvestment fund permits the making of redemption orders by telephone or electronic means by, or on behalf of, a securityholder who has made prior arrangements with the mutualinvestment fund in that regard and the relevant redemption order is made in compliance with those arrangements.

(2) A mutualAn investment fund may establish reasonable requirements applicable to securityholders who wish to have the mutualinvestment fund redeem securities, not contrary to this Instrument, as to procedures to be followed and documents to be delivered by the following times:

(a) in the case of a mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, by the time of delivery of a redemption order to an order receipt office of the mutual fund; or

(a.1) in the case of an exchange-traded mutual fund that is not in continuous distribution or a non-redeemable investment fund, by the time of delivery of a redemption order;

(b) by the time of payment of redemption proceeds.

(3) TheA manager of an investment fund shallmust provide to securityholders of a mutualthe investment fund at least annually a statement outlining thecontaining the following:

(a) a description of the requirements referred to in subsection (1) and;

(b) a description of the requirements established by the mutualinvestment fund under subsection (2) , and containing;

(a)(c) a detailed reference to all documentation required for redemption of securities of the mutualinvestment fund;

(b)(d) detailed instructions on the manner in which documentation is to be delivered to participating dealers or the mutual fund;, the investment fund, or person or company providing services to the investment fund to which a redemption order may be made;

(c)(e) a description of all other procedural or communication requirements; and

(d)(f) an explanation of the consequences of failing to meet timing requirements.

(4) The statement referred to in subsection (3) is not required to be separately provided, in any year, if the requirements are described in any document that is sent to all securityholders in that year.

10.2 Transmission and Receipt of Redemption Orders -- (0.1) This section does not apply to an exchange-traded mutual fund.

(1) Each redemption order for securities of a mutual fund received by a participating dealer at a location that is not its principal office shallmust, on the day the order is received, be sent by same day or next day courier, same day or next day priority post, telephone or electronic means, without charge to the relevant securityholder or to the mutual fund, to the principal office of the participating dealer or a person or company providing services to the participating dealer.

(2) Each redemption order for securities of a mutual fund received by a participating dealer at its principal office, by the principal distributor of the mutual fund at a location that is not an order receipt office of the mutual fund, or a person or company providing services to the participating dealer or principal distributor shallmust, on the day the order is received, be sent by same day or next day courier, same day or next day priority post, telephone or electronic means, without charge to the relevant securityholder or to the mutual fund, to an order receipt office of the mutual fund.

(3) Despite subsections (1) and (2), a redemption order for securities of a mutual fund received at a location referred to in those subsections after normal business hours on a business day, or on a day that is not a business day, may be sent, in the manner and to the place required by those subsections, on the next business day.

(4) A participating dealer, a principal distributor, or a person or company providing services to the participating dealer or principal distributor, that sends redemption orders electronically may

(a) specify a time on a business day by which a redemption order must be received in order that it be sent electronically on that business day; and

(b) despite subsections (1) and (2), send electronically on the next business day a redemption order received after the time specified under paragraph (a).

(5) A mutual fund is deemed to have received a redemption order for securities of the mutual fund when the order is received at an order receipt office of the mutual fund or all requirements of the mutual fund established under paragraph 10.1(2)(a) have been satisfied, whichever is later.

(6) If a mutual fund determines that its requirements established under paragraph 10.1(2)(a) have not been satisfied, the mutual fund shallmust notify the securityholder making the redemption order, by the close of business on the business day after the date of the delivery to the mutual fund of the incomplete redemption order, that its requirements established under paragraph 10.1(2)(a) have not been satisfied and shallmust specify procedures still to be followed or the documents still to be delivered by that securityholder.

(7) Despite subsection (5), a mutual fund may provide that orders for the redemption of securities that are received at an order receipt office of the mutual fund after a specified time on a business day, or on a day that is not a business day, will be considered to be received by the mutual fund on the next business day following the day of actual receipt.

10.3 Redemption Price of Securities -- (1) The redemption price of a security of a mutual fund to which a redemption order pertains shallmust be the net asset value per security of that class, or series of a class, next determined after the receipt by the mutual fund of the order.

(2) Despite subsection (1), the redemption price of a security of an exchange-traded mutual fund that is not in continuous distribution may be a price that is less than the net asset value of the security and that is determined on a date specified in the exchange-traded mutual fund's prospectus or annual information form.

(3) Despite subsection (1), the redemption price of a security of an exchange-traded mutual fund that is in continuous distribution may, if a securityholder redeems fewer than the manager-prescribed number of units, be a price that is computed by reference to the closing price of the security on the stock exchange on which the security is listed and posted for trading, next determined after the receipt by the exchange-traded mutual fund of the redemption order.

(4) The redemption price of a security of a non-redeemable investment fund must not be a price that is more than the net asset value of the security determined on a redemption date specified in the prospectus or annual information form of the investment fund.

10.4 Payment of Redemption Proceeds -- (1) Subject to subsection 10.1(1) and to compliance with any requirements established by the mutual fund under paragraph 10.1(2)(b), a mutual fund must pay the redemption proceeds for securities that are the subject of a redemption order

(a) within three business days after the date of calculation of the net asset value per security used in establishing the redemption price; or

(b) if payment of the redemption proceeds was not made at the time referred to in paragraph (a) because a requirement established under paragraph 10.1(2)(b) or a requirement of subsection 10.1(1) had not been satisfied, within three business days of

(i) the satisfaction of the relevant requirement, or

(ii) the decision by the mutual fund to waive the requirement, if the requirement was a requirement established under paragraph 10.1(2)(b).

(1.1) Despite subsection (1), an exchange-traded mutual fund that is not in continuous distribution must pay the redemption proceeds for securities that are the subject of a redemption order no later than the redemption payment date that next follows15 business days after the valuation date on which the redemption price was established.

(1.2) A non-redeemable investment fund must pay the redemption proceeds for securities that are the subject of a redemption order no later than 15 business days after the valuation date on which the redemption price was established.

(2) The redemption proceeds for a redeemed security, less any applicable investor fees, must be paid to or to the order of the securityholder of the security.

(3) A mutualAn investment fund must pay the redemption proceeds for a redeemed security by using any or a combination of the following methods of payment:

(a) by paying cash in the currency in which the net asset value per security of the redeemed security was calculated;

(b) with the prior written consent of the securityholder for a redemption other than an exchange of a manager-prescribed number of units, by making good delivery to the securityholder of portfolio assets, the value of which is equal to the amount at which those portfolio assets were valued in calculating the net asset value per security used to establish the redemption price.

(4) [Repealed].

(5) If the redemption proceeds for a redeemed security are paid in currency, a mutualan investment fund is deemed to have made payment

(a) when the mutualinvestment fund, its manager or principal distributor mails a cheque or transmits funds in the required amount to or to the order of the securityholder of the securities; or

(b) if the securityholder has requested that redemption proceeds be delivered in a currency other than that permitted in subsection (3), when the mutualinvestment fund delivers the redemption proceeds to the manager or principal distributor of the mutualinvestment fund for conversion into that currency and delivery forthwith to the securityholder.

10.5 Failure to Complete Redemption Order -- (1) If a requirement of a mutual fund referred to in subsection 10.1(1) or established under paragraph 10.1(2)(b) has not been satisfied on or before the close of business on the tenth business day after the date of the redemption of the relevant securities, and, in the case of a requirement established under paragraph 10.1(2)(b), the mutual fund does not waive satisfaction of the requirement, the mutual fund shallmust

(a) issue, to the person or company that immediately before the redemption held the securities that were redeemed, a number of securities equal to the number of securities that were redeemed, as if the mutual fund had received from the person or company on the tenth business day after the redemption, and accepted immediately before the close of business on the tenth business day after the redemption, an order for the purchase of that number of securities; and

(b) apply the amount of the redemption proceeds to the payment of the issue price of the securities.

(2) If the amount of the issue price of the securities referred to in subsection (1) is less than the redemption proceeds, the difference shallmust belong to the mutual fund.

(3) If the amount of the issue price of the securities referred to in subsection (1) exceeds the redemption proceeds

(a) if the mutual fund has a principal distributor, the principal distributor shallmust pay immediately to the mutual fund the amount of the deficiency;

(b) if the mutual fund does not have a principal distributor, the participating dealer that delivered the relevant redemption order to the mutual fund shallmust pay immediately to the mutual fund the amount of the deficiency; or

(c) if the mutual fund has no principal distributor and no dealer delivered the relevant redemption order to the mutual fund, the manager of the mutual fund shallmust pay immediately to the mutual fund the amount of the deficiency.

10.6 Suspension of Redemptions -- (1) A mutualAn investment fund may suspend the right of securityholders to request that the mutualinvestment fund redeem its securities for the whole or any part of a period during which either of the following occurs:

(a) normal trading is suspended on a stock exchange, options exchange or futures exchange within or outside Canada on which securities are listed and posted for trading, or on which specified derivatives are traded, if those securities or specified derivatives represent more than 50% by value, or underlying market exposure, of the total assets of the mutualinvestment fund without allowance for liabilities and if those securities or specified derivatives are not traded on any other exchange that represents a reasonably practical alternative for the mutualinvestment fund;

(b) in the case of a clone fund, the mutualinvestment fund whose performance it tracks has suspended redemptions.

(2) A mutualAn investment fund that has an obligation to pay the redemption proceeds for securities that have been redeemed in accordance with subsection 10.4(1), (1.1) or (1.2) may postpone payment during a period in which the right of securityholders to request redemption of their securities is suspended, whether that suspension was made under subsection (1) or pursuant to an approval of the securities regulatory authority.

(3) A mutualAn investment fund shallmust not accept a purchase order for securities of the mutualinvestment fund during a period in which it is exercising rights under subsection (1) or at a time in which it is relying on an approval of the securities regulatory authorities contemplated by paragraph 5.5(1)(d).

PART 11 -- COMMINGLING OF CASH

11.1 Principal Distributors and Service Providers -- (1) Cash received by a principal distributor of a mutual fund, or by a person or company providing services to the mutual fund or the principal distributor, or by a person or company providing services to a non-redeemable investment fund, for investment in, or on the redemption of, securities of the mutualinvestment fund, or on the distribution of assets of the mutualinvestment fund, until disbursed as permitted by subsection (3),

(a) shallmust be accounted for separately and be deposited in a trust account or trust accounts established and maintained in accordance with the requirements of section 11.3; and

(b) may be commingled only with cash received by the principal distributor or service provider for the sale or on the redemption of other mutualinvestment fund securities.

(2) Except as permitted by subsection (3), the principal distributor or, a person or company providing services to the mutual fund or principal distributor shall, or a person or company providing services to the non-redeemable investment fund, must not use any of the cash referred to in subsection (1) to finance its own or any other operations in any way.

(3) The principal distributor or person or company providing services to a mutualan investment fund or principal distributor may withdraw cash from a trust account referred to in paragraph (1)(a) for any of the purpose offollowing purposes:

(a) remitting to the mutualinvestment fund the amount or, if subsection (5) applies, the net amount, to be invested in the securities of the mutualinvestment fund;

(b) remitting to the relevant persons or companies redemption or distribution proceeds being paid on behalf of the mutualinvestment fund; or

(c) paying fees, charges and expenses that are payable by an investor in connection with the purchase, conversion, holding, transfer or redemption of securities of the mutualinvestment fund.

(4) All interest earned on cash held in a trust account referred to in paragraph (1)(a) shallmust be paid to securityholders or to each of the mutualinvestment funds to which the trust account pertains, pro rata based on cash flow,

(a) no less frequently than monthly if the amount owing to a mutualan investment fund or to a securityholder is $10 or more; and

(b) no less frequently than once a year.

(5) When making payments to a mutualan investment fund, the principal distributor or service provider may offset the proceeds of redemption of securities of the mutualinvestment fund or amounts held for distributions to be paid on behalf of the mutualinvestment fund held in the trust account against amounts held in the trust account for investment in the mutualinvestment fund.

11.2 Participating Dealers -- (1) Cash received by a participating dealer, or by a person or company providing services to a participating dealer, for investment in, or on the redemption of, securities of a mutual fund, or on the distribution of assets of a mutual fund, until disbursed as permitted by subsection (3)

(a) shallmust be accounted for separately and shallmust be deposited in a trust account or trust accounts established and maintained in accordance with section 11.3; and

(b) may be commingled only with cash received by the participating dealer or service provider for the sale or on the redemption of other mutual fund securities.

(2) Except as permitted by subsection (3), the participating dealer or person or company providing services to the participating dealer shallmust not use any of the cash referred to in subsection (1) to finance its own or any other operations in any way.

(3) A participating dealer or person or company providing services to the participating dealer may withdraw cash from a trust account referred to in paragraph (1)(a) for the purpose of

(a) remitting to the mutual fund or the principal distributor of the mutual fund the amount or, if subsection (5) applies, the net amount, to be invested in the securities of the mutual fund;

(b) remitting to the relevant persons or companies redemption or distribution proceeds being paid on behalf of the mutual fund; or

(c) paying fees, charges and expenses that are payable by an investor in connection with the purchase, conversion, holding, transfer or redemption of securities of the mutual fund.

(4) All interest earned on cash held in a trust account referred to in paragraph (1)(a) shallmust be paid to securityholders or to each of the mutual funds to which the trust account pertains, pro rata based on cash flow,

(a) no less frequently than monthly if the amount owing to a mutual fund or to a securityholder is $10 or more; and

(b) no less frequently than once a year.

(5) When making payments to a mutual fund, a participating dealer or service provider may offset the proceeds of redemption of securities of the mutual fund and amounts held for distributions to be paid on behalf of a mutual fund held in the trust account against amounts held in the trust account for investment in the mutual fund.

(6) A participating dealer or person providing services to the participating dealer shallmust permit the mutual fund and the principal distributor, through their respective auditors or other designated representatives, to examine the books and records of the participating dealer to verify the compliance with this section of the participating dealer or person providing services.

11.3 Trust Accounts -- A principal distributor or participating dealer, or a person or company providing services to the principal distributor or participating dealer, or a person or company providing services to an investment fund, that deposits cash into a trust account in accordance with section 11.1 or 11.2 shallmust

(a) advise, in writing, the financial institution with which the account is opened at the time of the opening of the account and annually thereafter, that

(i) the account is established for the purpose of holding client funds in trust,

(ii) the account is to be labelled by the financial institution as a "trust account",

(iii) the account is not to be accessed by any person other than authorized representatives of the principal distributor or participating dealer or, of a person or company providing services to the principal distributor or participating dealer,or of a person or company providing services to the investment fund, and

(iv) the cash in the trust account may not be used to cover shortfalls in any accounts of the principal distributor or participating dealer, or of a person or company providing services to the principal distributor or participating dealer,or of a person or company providing services to the investment fund;

(b) ensure that the trust account bears interest at rates equivalent to comparable accounts of the financial institution; and

(c) ensure that any charges against the trust account are not paid or reimbursed out of the trust account.

11.4 Exemption -- (1) Sections 11.1 and 11.2 do not apply to a member of IIROC.

(1.1) Except in Québec, sections 11.1 and 11.2 do not apply to a member of the MFDA.

(1.2) In Québec, sections 11.1 and 11.2 do not apply to a mutual fund dealer.

(2) A participating dealer that is a member of an SRO referred to in subsection (1) or (1.1) or, in Québec, that is a mutual fund dealer, shallmust permit the mutual fund and the principal distributor, through their respective auditors or other designated representatives, to examine the books and records of the participating dealer to verify the participating dealer's compliance with the requirements of its association or exchange, or the requirements applicable to the mutual fund dealer under the regulations in Québec, that relate to the commingling of cash.

11.5 Right of Inspection -- The mutualinvestment fund, its trustee, manager and principal distributor shallmust ensure that all contractual arrangements made between any of them and any person or company providing services to the mutualinvestment fund permit the representatives of the mutualinvestment fund, its manager and trustee to examine the books and records of those persons or companies in order to monitor compliance with this Instrument.

PART 12 -- COMPLIANCE REPORTS

12.1 Compliance Reports -- (1) A mutual fund, other than an exchange-traded mutual fund that is not in continuous distribution, that does not have a principal distributor shallmust complete and file, within 140 days after the financial year end of the mutual fund

(a) a report in the form contained in Appendix B-1 describing compliance by the mutual fund during that financial year with the applicable requirements of Parts 9, 10 and 11; and

(b) a report by the auditor of the mutual fund, in the form contained in Appendix B-1, concerning the report referred to in paragraph (a).

(2) The principal distributor of a mutual fund shallmust complete and file, within 90 days after the financial year end of the principal distributor

(a) a report in the form contained in Appendix B-2 describing compliance by the principal distributor during that financial year with the applicable requirements of Parts 9, 10 and 11; and

(b) a report by the auditor of the principal distributor or by the auditor of the mutual fund, in the form contained in Appendix B-2, concerning the report referred to in paragraph (a).

(3) Each participating dealer that distributes securities of a mutual fund in a financial year of the participating dealer shallmust complete and file, within 90 days after the end of that financial year

(a) a report in the form contained in Appendix B-3 describing compliance by the participating dealer during that financial year with the applicable requirements of Parts 9, 10 and 11 in connection with its distribution of securities of all mutual funds in that financial year; and

(b) a report by the auditor of the participating dealer, in the form contained in Appendix B-3, concerning the report referred to in paragraph (a).

(4) Subsections (2) and (3) do not apply to a member of IIROC.

(4.1) Except in Québec, subsections (2) and (3) do not apply to a member of the MFDA.

(4.2) In Québec, subsections (2) and (3) do not apply to a mutual fund dealer.

PART 13 -- CALCULATION OF NET ASSET VALUE PER SECURITY [Repealed]

PART 14 -- RECORD DATE

14.0.1 Application -- This Part does not apply to

(a) an exchange-traded mutual fund, or

(b) a non-redeemable investment fund if its securities are listed or quoted on an exchange.

14.1 Record Date -- The record date for determining the right of securityholders of a mutualan investment fund to receive a dividend or distribution by the mutualinvestment fund shallmust be one of

(a) the day on which the net asset value per security is determined for the purpose of calculating the amount of the payment of the dividend or distribution;

(b) the last day on which the net asset value per security of the mutualinvestment fund was calculated before the day referred to in paragraph (a); or

(c) if the day referred to in paragraph (b) is not a business day, the last day on which the net asset value per security of the mutualinvestment fund was calculated before the day referred to in paragraph (b).

PART 15 -- SALES COMMUNICATIONS AND PROHIBITED REPRESENTATIONS

15.1 Ability to Make Sales Communications -- Sales communications pertaining to a mutualan investment fund maymust be made by a person or company only in accordance with this Part.

15.2 Sales Communications -- General Requirements -- (1) Despite any other provision of this Part, noa sales communication shallmust not

(a) be untrue or misleading; or

(b) include a statement that conflicts with information that is contained in the preliminary prospectus, the preliminary annual information form, the preliminary fund facts document, the prospectus, the annual information form or the fund facts document, as applicable,

(i) of a mutualan investment fund, or

(ii) in which an asset allocation service is described.

(2) All performance data or disclosure specifically required by this Instrument and contained in a written sales communication shallmust be at least as large as 10-point type.

15.3 Prohibited Disclosure in Sales Communications -- (1) A sales communication shallmust not compare the performance of a mutualan investment fund or asset allocation service with the performance or change of any benchmark or investment unless

(a) it includes all facts that, if disclosed, would be likely to alter materially the conclusions reasonably drawn or implied by the comparison;

(b) it presents data for each subject of the comparison for the same period or periods;

(c) it explains clearly any factors necessary to make the comparison fair and not misleading; and

(d) in the case of a comparison with a benchmark

(i) the benchmark existed and was widely recognized and available during the period for which the comparison is made, or

(ii) the benchmark did not exist for all or part of the period, but a reconstruction or calculation of what the benchmark would have been during that period, calculated on a basis consistent with its current basis of calculation, is widely recognized and available.

(2) A sales communication for a mutual fund or asset allocation service that is prohibited by paragraph 15.6( a 1)(a) from disclosing performance data shallmust not provide performance data for any benchmark or investment other than a mutual fund or asset allocation service under common management with the mutual fund or asset allocation service to which the sales communication pertains.

(2.1) A sales communication for a non-redeemable investment fund that is prohibited by paragraph 15.6(1)(a) from disclosing performance data must not provide performance data for any benchmark or investment other than a non-redeemable investment fund under common management with the non-redeemable investment fund to which the sales communication pertains.

(3) Despite subsection (2), a sales communication for an index mutual fund may provide performance data for the index on which the investments of the mutual fund are based if the index complies with the requirements for benchmarks contained in paragraph (1)(d).

(4) A sales communication must not refer to a performance rating or ranking of a mutual fund or asset allocation service unless

(a) the rating or ranking is prepared by a mutual fund rating entity;

(b) standard performance data is provided for any mutual fund or asset allocation service for which a performance rating or ranking is given;

(c) the rating or ranking is provided for each period for which standard performance data is required to be given, except the period since the inception of the mutual fund;

(d) the rating or ranking is based on a published category of mutual funds that

(i) provides a reasonable basis for evaluating the performance of the mutual fund or asset allocation service, and

(ii) is not established or maintained by a member of the organization of the mutual fund or asset allocation service;

(e) the sales communication contains the following disclosure:

(i) the name of the category within which the mutual fund or asset allocation service is rated or ranked, including the name of the organization that maintains the category,

(ii) the number of mutual funds in the applicable category for each period of standard performance data required under paragraph (c),

(iii) the name of the mutual fund rating entity that provided the rating or ranking,

(iv) the length of the period or the first day of the period on which the rating or ranking is based, and its ending date,

(v) a statement that the rating or ranking is subject to change every month,

(vi) the criteria on which the rating or ranking is based, and

(vii) if the rating or ranking consists of a symbol rather than a number, the meaning of the symbol, and

(f) the rating or ranking is to the same calendar month end that is

(i) not more than 45 days before the date of the appearance or use of the advertisement in which it is included, and

(ii) not more than three months before the date of first publication of any other sales communication in which it is included.

(4.1) Despite paragraph (4)(c), a sales communication may refer to an overall rating or ranking of a mutual fund or asset allocation service in addition to each rating or ranking required under paragraph (4)(c) if the sales communication otherwise complies with the requirements of subsection (4).

(5) A sales communication shallmust not refer to a credit rating of securities of a mutualan investment fund unless

(a) the rating is current and was prepared by an approved credit rating organization;

(b) there has been no announcement by the approved credit rating organization of which the mutualinvestment fund or its manager is or ought to be aware that the credit rating of the securities may be down-graded; and

(c) no approved credit rating organization is currently rating the securities at a lower level.

(6) A sales communication shallmust not refer to a mutual fund as, or imply that it is, a money fund, cash fund or money market fund unless, at the time the sales communication is used and for each period for which money market fund standard performance data is provided, the mutual fund is and was a money market fund , either under National Policy Statement No. 39 or under this Instrument.

(7) A sales communication shallmust not state or imply that a registered retirement savings plan, registered retirement income fund or registered education savings plan in itself, rather than the mutualinvestment fund to which the sales communication relates, is an investment.

15.4 Required Disclosure and Warnings in Sales Communications -- (1) A written sales communication shallmust

(a) bear the name of the principal distributor or participating dealer that distributed the sales communication; and

(b) if the sales communication is not an advertisement, contain the date of first publication of the sales communication.

(2) A sales communication that includes a rate of return or a mathematical table illustrating the potential effect of a compound rate of return shallmust contain a statement in substantially the following words:

"[The rate of return or mathematical table shown] is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of [the mutualinvestment fund or asset allocation service] or returns on investment [in the mutualinvestment fund or from the use of the asset allocation service].".

(3) A sales communication, other than a report to securityholders, of a mutual fund that is not a money market fund and that does not contain performance data shallmust contain a warning in substantially the following words:

"Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.".

(3.1) A sales communication, other than a report to securityholders, of a non-redeemable investment fund that does not contain performance data must contain a warning in substantially the following words:

[If the securities of the non-redeemable investment fund are listed or quoted on an exchange or other market, state the following:] "You will usually pay brokerage fees to your dealer if you purchase or sell [units or shares] of the investment fund on [state the exchange or other market on which the securities of the investment fund are listed or quoted]. If the [units or shares] are purchased or sold on [state the exchange or other market], investors may pay more than the current net asset value when buying [units or shares] of the investment fund and may receive less than the current net asset value when selling them."

[State the following in all cases:] "There are ongoing fees and expenses associated with owning [units or shares] of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.".

(4) A sales communication, other than a report to securityholders, of a money market fund that does not contain performance data shallmust contain a warning in substantially the following words:

"Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Past performance may not be repeated.".

(5) A sales communication for an asset allocation service that does not contain performance data shallmust contain a warning in substantially the following words:

"Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments and the use of an asset allocation service. Please read the prospectus of the mutual funds in which investment may be made under the asset allocation service before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.".

(6) A sales communication, other than a report to securityholders, of a mutual fund that is not a money market fund and that contains performance data shallmust contain a warning in substantially the following words:

"Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rate[s] of return is [are] the historical annual compounded total return[s] including changes in [share or unit] value and reinvestment of all [dividends or distributions] and does [do] not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.".

(6.1) A sales communication, other than a report to securityholders, of a non-redeemable investment fund that contains performance data must contain a warning in substantially the following words:

[If the securities of the non-redeemable investment fund are listed or quoted on an exchange or other market, state the following:] "You will usually pay brokerage fees to your dealer if you purchase or sell [units or shares] of the investment fund on [state the exchange or other market on which the securities of the investment fund are listed or quoted]. If the [units or shares] are purchased or sold on [state the exchange or other market], investors may pay more than the current net asset value when buying [units or shares] of the investment fund and may receive less than the current net asset value when selling them."

[State the following in all cases:] "There are ongoing fees and expenses associated with owning [units or shares] of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. The indicated rate[s] of return is [are] the historical annual compounded total return[s] including changes in [share or unit] value and reinvestment of all [dividends or distributions] and does [do] not take into account [state the following, as applicable:] [certain fees such as redemption fees or optional charges or] income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.".

(7) A sales communication, other than a report to securityholders, of a money market fund that contains performance data shallmust contain

(a) a warning in substantially the following words:

"Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Past performance may not be repeated."; and

(b) a statement in substantially the following words, immediately following the performance data:

"This is an annualized historical yield based on the seven day period ended on [date] [annualized in the case of effective yield by compounding the seven day return] and does not represent an actual one year return.".

(8) A sales communication for an asset allocation service that contains performance data shallmust contain a warning in substantially the following words:

"Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments and the use of an asset allocation service. Please read the prospectus of the mutual funds in which investment may be made under the asset allocation service before investing. The indicated rate[s] of return is [are] the historical annual compounded total return[s] assuming the investment strategy recommended by the asset allocation service is used and after deduction of the fees and charges in respect of the service. The return[s] is [are] based on the historical annual compounded total returns of the participating funds including changes in [share] [unit] value and reinvestment of all [dividends or distributions] and does [do] not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder in respect of a participating fund that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.".

(9) A sales communication distributed after the issue of a receipt for a preliminary prospectus of the mutual fund described in the sales communication but before the issue of a receipt for its prospectus shallmust contain a warning in substantially the following words:

"A preliminary prospectus relating to the fund has been filed with certain Canadian securities commissions or similar authorities. You cannot buy [units] [shares] of the fund until the relevant securities commissions or similar authorities issue receipts for the prospectus of the fund.".

(10) A sales communication for a mutualan investment fund or asset allocation service that purports to arrange a guarantee or insurance in order to protect all or some of the principal amount of an investment in the mutualinvestment fund or asset allocation service shallmust

(a) identify the person or company providing the guarantee or insurance;

(b) provide the material terms of the guarantee or insurance, including the maturity date of the guarantee or insurance;

(c) if applicable, state that the guarantee or insurance does not apply to the amount of any redemptions before the maturity date of the guarantee or before the death of the securityholder and that redemptions before that date would be based on the net asset value per security of the mutualinvestment fund at the time; and

(d) modify any other disclosure required by this section appropriately.

(11) The warnings referred to in this section shallmust be communicated in a manner that a reasonable person would consider clear and easily understood at the same time as, and through the medium by which, the related sales communication is communicated.

15.5 Disclosure Regarding Distribution Fees -- (1) NoA person or company shallmust not describe a mutual fund in a sales communication as a "no-load fund" or use words of like effect if on a purchase or redemption of securities of the mutual fund investor fees are payable by an investor or if any fees, charges or expenses are payable by an investor to a participating dealer of the mutual fund named in the sales communication, other than

(a) fees and charges related to specific optional services;

(b) for a mutual fund that is not a money market fund, redemption fees on the redemption of securities of the mutual fund that are redeemed within 90 days after the purchase of the securities, if the existence of the fees is disclosed in the sales communication, or in the prospectus of the mutual fund; or

(c) costs that are payable only on the set-up or closing of a securityholder's account and that reflect the administrative costs of establishing or closing the account, if the existence of the costs is disclosed in the sales communication, or in the prospectus of the mutual fund.

(2) If a sales communication describes a mutual fund as "no-load" or uses words to like effect, the sales communication shallmust

(a) indicate the principal distributor or a participating dealer through which an investor may purchase the mutual fund on a no-load basis;

(b) disclose that management fees and operating expenses are paid by the mutual fund; and

(c) disclose the existence of any trailing commissions paid by a member of the organization of the mutual fund.

(3) A sales communication containing a reference to the existence or absence of fees or charges, other than the disclosure required by section 15.4 or a reference to the term "no-load", shallmust disclose the types of fees and charges that exist.

(4) The rate of sales charges or commissions for the sale of securities of a mutual fund or the use of an asset allocation service shallmust be expressed in a sales communication as a percentage of the amount paid by the purchaser and as a percentage of the net amount invested if a reference is made to sales charges or commissions.

15.6 Performance Data -- General Requirements -- No(1) A sales communication pertaining to a mutualan investment fund or asset allocation service shallmust not contain performance data of the mutualinvestment fund or asset allocation service unless all of the following paragraphs apply:

(a) either one of the following subparagraphs applies:

(i) in the case of a mutual fund,

(A) the mutual fund has distributed securities under a prospectus in a jurisdiction for 12 consecutive months ,; or

(B) the mutual fund previously existed as a non-redeemable investment fund and has been a reporting issuer in a jurisdiction for a period of at least 12 consecutive months;

(i.1) in the case of a non-redeemable investment fund, the non-redeemable investment fund has been a reporting issuer in a jurisdiction for at least 12 consecutive months;

(i.2) in the case of an asset allocation service, the asset allocation service has been operated for at least 12 consecutive months and has invested only in participating funds each of which has distributed securities under a prospectus in a jurisdiction for at least 12 consecutive months , or;

(ii) if the sales communication pertains to a mutualan investment fund or asset allocation service that does not satisfy the requirements of subparagraph (a)(i), (i.1), or (i.2), the sales communication is sent only to

(A) securityholders of the mutualinvestment fund or participants in the asset allocation service, or

(B) securityholders of a mutualan investment fund or participants in an asset allocation service under common management with the mutualinvestment fund or asset allocation service;

(b) the sales communication also containsincludes standard performance data of the mutualinvestment fund or asset allocation service and, in the case of a written sales communication, the standard performance data is presented in type size that is equal to or larger than that used to present the other performance data;

(c) the performance data reflects or includes references to all elements of return; and

(d) except as permitted by subsection 15.3(3), the sales communication does not contain performance data for a period that is

(i) in the case of a mutual fund, before the time when the mutual fund offered its securities under a prospectus,

(ii) in the case of a non-redeemable investment fund, before the non-redeemable investment fund was a reporting issuer, or

(iii) before the asset allocation service commenced operation.

(2) Despite subparagraph (1)(d)(i), a sales communication pertaining to a mutual fund referred to in clause (1)(a)(i)(B) that contains performance data of the mutual fund must include performance data for the period that the fund existed as a non-redeemable investment fund and was a reporting issuer.

15.7 Advertisements -- An advertisement for a mutual fund or asset allocation service shallmust not compare the performance of the mutual fund or asset allocation service with any benchmark or investment other than

(a) one or more mutual funds or asset allocation services that are under common management or administration with the mutual fund or asset allocation service to which the advertisement pertains;

(b) one or more mutual funds or asset allocation services that have fundamental investment objectives that a reasonable person would consider similar to the mutual fund or asset allocation service to which the advertisement pertains; or

(c) an index.

15.7.1 Advertisements for Non-Redeemable Investment Funds -- An advertisement for a non-redeemable investment fund must not compare the performance of the non-redeemable investment fund with any benchmark or investment other than the following:

(a) one or more non-redeemable investment funds that are under common management or administration with the non-redeemable investment fund to which the advertisement pertains;

(b) one or more non-redeemable investment funds that have fundamental investment objectives that a reasonable person would consider similar to the non-redeemable investment fund to which the advertisement pertains;

(c) an index.

15.8 Performance Measurement Periods Covered by Performance Data -- (1) A sales communication, other than a report to securityholders, that relates to a money market fund may provide standard performance data only if

(a) the standard performance data has been calculated for the most recent seven day period for which it is practicable to calculate, taking into account publication deadlines; and

(b) the seven day period does not start more than 45 days before the date of the appearance use or publication of the sales communication.

(2) A sales communication, other than a report to securityholders, that relates to an asset allocation service, or to a mutualan investment fund other than a money market fund, maymust not provide standard performance data only ifunless

(a) to the extent applicable, the standard performance data has been calculated for the 10, five, three5, 3 and one year periods and;

(a.1) in the period since the inceptioncase of thea mutual fund if the mutual fundthat has been offering securities by way of prospectus for more than one and less than 10 years, the standard performance data has been calculated for the period since the inception of the mutual fund;

(a.2) in the case of a non-redeemable investment fund that has been a reporting issuer for more than one and less than 10 years, the standard performance data has been calculated for the period since the inception of the non-redeemable investment fund; and

(b) the periods referred to in paragraphparagraphs (a), (a.1) and (a.2) end on the same calendar month end that is

(i) not more than 45 days before the date of the appearance or use of the advertisement in which it is included, and

(ii) not more than three months before the date of first publication of any other sales communication in which it is included.

(3) A report to securityholders maymust not contain standard performance data only ifunless

(a) to the extent applicable, the standard performance data has been calculated for the 10, five, three5, 3 and one year periods and;

(a.1) in the period since the inceptioncase of thea mutual fund if the mutual fundthat has been offering securities by way of prospectus for more than one and less than 10 years, the standard performance data has been calculated for the period since the inception of the mutual fund;

(a.2) in the case of a non-redeemable investment fund that has been a reporting issuer for more than one and less than 10 years, the standard performance data has been calculated for the period since the inception of the non-redeemable investment fund; and

(b) the periods referred to in paragraphparagraphs (a), (a.1) and (a.2) end on the day as of which the balance sheet of the financial statements contained in the report to securityholders was prepared.

(4) A sales communication shallmust clearly identify the periods for which performance data is calculated.

15.9 Changes affecting Performance Data -- (1) If, during or after a performance measurement period of performance data contained in a sales communication, there have been changes in the business, operations or affairs of the mutualinvestment fund or asset allocation service to which the sales communication pertains that could have materially affected the performance of the mutualinvestment fund or asset allocation service, the sales communication shallmust contain

(a) summary disclosure of the changes, and of how those changes could have affected the performance had those changes been in effect throughout the performance measurement period; and

(b) for a money market fund that during the performance measurement period did not pay or accrue the full amount of any fees and charges of the type described under paragraph 15.11(1)1, disclosure of the difference between the full amounts and the amounts actually charged, expressed as an annualized percentage on a basis comparable to current yield.

(2) If a mutualan investment fund has, in the last 10 years, undertaken a reorganization with, or acquired assets from, another mutualinvestment fund in a transaction that was a material change for the mutualinvestment fund or would have been a material change for the mutualinvestment fund had this Instrument been in force at the time of the transaction, then, in any sales communication of the mutualinvestment fund,

(a) the mutualinvestment fund shallmust provide summary disclosure of the transaction;

(b) the mutualinvestment fund may include its performance data covering any part of a period before the transaction only if it also includes the performance data for the other fund for the same periods;

(c) the mutualinvestment fund shallmust not include its performance data for any part of a period after the transaction unless

(i) 12 months have passed since the transaction, or

(ii) the mutualinvestment fund includes in the sales communication the performance data for itself and the other mutualinvestment fund referred to in paragraph (b); and

(d) the mutualinvestment fund shallmust not include any performance data for any period that is composed of both time before and after the transaction.

15.10 Formula for Calculating Standard Performance Data -- (1) The standard performance data of a mutualan investment fund shallmust be calculated in accordance with this sectionPart.

(2) In this Part

"current yield" means the yield of a money market fund expressed as a percentage and determined by applying the following formula:

current yield = [seven day return × 365/7] × 100;

"effective yield" means the yield of a money market fund expressed as a percentage and determined by applying the following formula:

effective yield = [(seven day return + 1)365/7 - 1] × 100;

"seven day return" means the income yield of an account of a securityholder in a money market fund that is calculated by

(a) determining the net change, exclusive of new subscriptions other than from the reinvestment of distributions or proceeds of redemption of securities of the money market fund, in the value of the account,

(b) subtracting all fees and charges of the type referred to in paragraph 15.11(1)3 for the seven day period, and

(c) dividing the result by the value of the account at the beginning of the seven day period;

"standard performance data" means, as calculated in each case in accordance with this Part,

(a) for a money market fund

(i) the current yield, or

(ii) the current yield and effective yield, if the effective yield is reported in a type size that is at least equal to that of the current yield, and

(b) for any mutual investment fund other than a money market fund, the total return calculated in each case in accordance with this section; and

"total return" means the annual compounded rate of return for a mutualan investment fund for a period that would equate the initial value to the redeemable value at the end of the period, expressed as a percentage, and determined by applying the following formula:

total return = [(redeemable value/initial value)(1/N) - 1] × 100

where

N = the length of the performance measurement period in years, with a minimum value of 1.

(3) If there are fees and charges of the type described in paragraph 15.11(1)1 relevant to the calculation of redeemable value and initial value of the securities of a mutualan investment fund, the redeemable value and initial value of securities of a mutualan investment fund shallmust be the net asset value of one unit or share of the mutualinvestment fund at the beginning or at the end of the performance measurement period, minus the amount of those fees and charges calculated by applying the assumptions referred to in that paragraph to a hypothetical securityholder account.

(4) If there are no fees and charges of the type described in paragraph 15.11(1)1 relevant to a calculation of total return, the calculation of total return for a mutualan investment fund may assume a hypothetical investment of one security of the mutualinvestment fund and be calculated as follows:

(a) "initial value" means the net asset value of one unit or share of a mutualan investment fund at the beginning of the performance measurement period; and

(b) "redeemable value" =

R × (1 + D1/P1) × (1 + D2/P2) × (1 + D3/P3) . . . × (1 + Dn/Pn)

where

R = the net asset value of one unit or security of the mutualinvestment fund at the end of the performance measurement period,

D = the dividend or distribution amount per security of the mutualinvestment fund at the time of each distribution,

P = the dividend or distribution reinvestment price per security of the mutualinvestment fund at the time of each distribution, and

n = the number of dividends or distributions during the performance measurement period.

(5) Standard performance data of an asset allocation service shallmust be based upon the standard performance data of its participating funds.

(6) Performance data

(a) for a mutualan investment fund other than a money market fund shallmust be calculated to the nearest one-tenth of one percent; and

(b) for a money market fund shallmust be calculated to the nearest one-hundredth of one percent.

15.11 Assumptions for Calculating Standard Performance Data -- (1) The following assumptions shallmust be made in the calculation of standard performance data of a mutualan investment fund:

1. Recurring fees and charges that are payable by all securityholders

(a) are accrued or paid in proportion to the length of the performance measurement period;

(b) if structured in a manner that would result in the performance information being dependent on the size of an investment, are calculated on the basis of an investment equal to the greater of $10,000 or the minimum amount that may be invested; and

(c) if fully negotiable, are calculated on the basis of the average fees paid by accounts of the size referred to in paragraph (b).

2. There are no fees and charges related to specific optional services.

3. All fees and charges payable by the mutualinvestment fund are accrued or paid.

4. Dividends or distributions by the mutualinvestment fund are reinvested in the mutualinvestment fund at the net asset value per security of the mutualinvestment fund on the reinvestment dates during the performance measurement period.

5. There are no non-recurring fees and charges that are payable by some or all securityholders and no recurring fees and charges that are payable by some but not all securityholders.

6. AIn the case of a mutual fund, a complete redemption occurs at the end of the performance measurement period so that the ending redeemable value includes elements of return that have been accrued but not yet paid to securityholders.

7. In the case of a non-redeemable investment fund, a complete redemption occurs at the net asset value of one security at the end of the performance measurement period so that the ending redeemable value includes elements of return that have been accrued but not yet paid to securityholders.

(2) The following assumptions shallmust be made in the calculation of standard performance data of an asset allocation service:

1. Fees and charges that are payable by participants in the asset allocation service

(a) are accrued or paid in proportion to the length of the performance measurement period;

(b) if structured in a manner that would result in the performance information being dependent on the size of an investment, are calculated on the basis of an investment equal to the greater of $10,000 or the minimum amount that may be invested; and

(c) if fully negotiable, are calculated on the basis of the average fees paid by accounts of the size referred to in paragraph (b).

2. There are no fees and charges related to specific optional services.

3. The investment strategy recommended by the asset allocation service is utilized for the performance measurement period.

4. Transfer fees are

(a) accrued or paid;

(b) if structured in a manner that would result in the performance information being dependent on the size of an investment, calculated on the basis of an account equal to the greater of $10,000 or the minimum amount that may be invested; and

(c) if the fees and charges are fully negotiable, calculated on the basis of the average fees paid by an account of the size referred to in paragraph (b).

5. A complete redemption occurs at the end of the performance measurement period so that the ending redeemable value includes elements of return that have been accrued but not yet paid to securityholders.

(3) The calculation of standard performance data shallmust be based on actual historical performance and the fees and charges payable by the mutualinvestment fund and securityholders, or the asset allocation service and participants, in effect during the performance measurement period.

15.12 Sales Communications During the Waiting Period -- If a sales communication is used after the issue of a receipt for a preliminary prospectus of the mutual fund described in the sales communication but before the issue of a receipt for its prospectus, the sales communication shallmust state only

(a) whether the security represents a share in a corporation or an interest in a non-corporate entity;

(b) the name of the mutual fund and its manager;

(c) the fundamental investment objectives of the mutual fund;

(d) without giving details, whether the security is or will be a qualified investment for a registered retirement savings plan, registered retirement income fund or registered education savings plan or qualifies or will qualify the holder for special tax treatment; and

(e) any additional information permitted by securities legislation.

15.13 Prohibited Representations -- (1) Securities issued by an unincorporated mutualinvestment fund shallmust be described by a term that is not and does not include the word "shares".

(2) NoA communication by a mutualan investment fund or asset allocation service, its promoter, manager, portfolio adviser, principal distributor, participating dealer or a person providing services to the mutualinvestment fund or asset allocation service shallmust not describe a mutualthe investment fund as a commodity pool or as a vehicle for investors to participate in the speculative trading of, or leveraged investment in, derivatives, unless the mutualinvestment fund is a commodity pool as defined in National Instrument 81- 101 Mutual Fund Prospectus Disclosure.104 Commodity Pools.

15.14 Sales Communication -- Multi-Class MutualInvestment Funds -- A sales communication for a mutualan investment fund that distributes different classes or series of securities that are referable to the same portfolio shallmust not contain performance data unless the sales communication complies with the following requirements:

1. The sales communication clearly specifies the class or series of security to which any performance data contained in the sales communication relates.

2. If the sales communication refers to more than one class or series of security and provides performance data for any one class or series, the sales communication shallmust provide performance data for each class or series of security referred to in the sales communication and shallmust clearly explain the reasons for different performance data among the classes or series.

3. A sales communication for a new class or series of security and an existing class or series of security shallmust not contain performance data for the existing class or series unless the sales communication clearly explains any differences between the new class or series and the existing class or series that could affect performance.

PART 16 -- CALCULATION OF MANAGEMENT EXPENSE RATIO [Repealed]

PART 17 -- FINANCIAL STATEMENT REQUIREMENTS [Repealed]

PART 18 -- SECURITYHOLDER RECORDS

18.1 Maintenance of Records -- A mutualAn investment fund that is not a corporation shallmust maintain, or cause to be maintained, up to date records of

(a) the names and latest known addresses of each securityholder of the mutualinvestment fund;

(b) the number and class or series of a class of securities held by each securityholder of the mutualinvestment fund; and

(c) the date and details of each issue and redemption of securities, and each distribution, of the mutualinvestment fund.

18.2 Availability of Records -- (1) A mutualAn investment fund that is not a corporation shallmust make, or cause to be made, the records referred to in section 18.1 available for inspection, free of charge, during normal business hours at its principal or head office by a securityholder or a representative of a securityholder, if the securityholder has agreed in writing that the information contained in the register will not be used by the securityholder for any purpose other than

(a) in the case of a mutual fund, attempting to influence the voting of securityholders of the mutual fund or a matter relating to the relationships among the mutual fund, the members of the organization of the mutual fund, and the securityholders, partners, directors and officers of those entities, or

(b) in the case of a non-redeemable investment fund, attempting to influence the voting of securityholders of the non-redeemable investment fund or a matter relating to the relationships among the non-redeemable investment fund, the manager and portfolio adviser of the non-redeemable investment fund and any of their affiliates, and the securityholders, partners, directors and officers of those entities.

(2) A mutualAn investment fund shallmust, upon written request by a securityholder of the mutualinvestment fund, provide, or cause to be provided, to the securityholder a copy of the records referred to in paragraphs 18.1(a) and (b) if the securityholder

(a) has agreed in writing that the information contained in the register will not be used by the securityholder for any purpose other than attempting to influence the voting of securityholders of the mutualinvestment fund or a matter relating to the administration of the mutualinvestment fund; and

(b) has paid a reasonable fee to the mutualinvestment fund that does not exceed the reasonable costs to the mutualinvestment fund of providing the copy of the register.

PART 19 -- EXEMPTIONS AND APPROVALS

19.1 Exemption -- (1) The regulator or securities regulatory authority may grant an exemption from this Instrument, in whole or in part, subject to such conditions or restrictions as may be imposed in the exemption.

(2) Despite subsection (1), in Ontario only the regulator may grant such an exemption.

19.2 Exemption or Approval under Prior Policy -- (1) A mutual fund that has obtained, from the regulator or securities regulatory authority, an exemption or waiver from, or approval under, a provision of National Policy Statement No. 39 before this Instrument came into force is exempt from any substantially similar provision of this Instrument, if any, on the same conditions, if any, as are contained in the earlier exemption or approval, unless the regulator or securities regulatory authority has revoked that exemption or waiver under authority provided to it in securities legislation.

(2) Despite Part 7, a mutual fund that has obtained, from the regulator or securities regulatory authority, approval under National Policy Statement No. 39 to pay incentive fees may continue to pay incentive fees on the terms of that approval if disclosure of the method of calculation of the fees and details of the composition of the benchmark or index used in calculating the fees are described in the prospectus of the mutual fund.

(3) A mutual fund that intends to rely upon subsection (1) shallmust, at the time of the first filing of its pro forma prospectus after this Instrument comes into force, send to the regulator a letter or memorandum containing

(a) a brief description of the nature of the exemption from, or approval under, National Policy Statement No. 39 previously obtained; and

(b) the provision in the Instrument that is substantially similar to the provision in National Policy Statement No. 39 from or under which the exemption or approval was previously obtained.

19.3 Revocation of Exemptions -- (1) A mutual fund that has obtained an exemption or waiver from, or approval under, National Policy Statement No. 39 or this Instrument before December 31, 2003, that relates to a mutual fund investing in other mutual funds, may no longer rely on the exemption, waiver or approval as of December 31, 2004;

(2) In British Columbia, subsection (1) does not apply.

PART 20 -- TRANSITIONAL

20.1 Effective Date -- This Instrument comes into force on February 1, 2000.

20.2 Sales Communications -- Sales communications, other than advertisements, that were printed before December 31, 1999 may be used until August 1, 2000, despite any requirements in this Instrument.

20.2 [Repealed]

20.3 Reports to Securityholders -- This Instrument does not apply to reports to securityholders

(a) printed before February 1, 2000; or

(b) that include only financial statements that relate to financial periods that ended before February 1, 2000.

20.3 [Repealed]

20.4 Mortgage Funds -- Paragraphs 2.3(b) and (c) do not apply to a mutual fund that has adopted fundamental investment objectives to permit it to invest in mortgages in accordance with National Policy Statement No. 29 if

(a) a National Instrument replacing National Policy Statement No. 29 has not come into force;

(b) the mutual fund was established, and has a prospectus for which a receipt was issued, before the date that this Instrument came into force; and

(c) the mutual fund complies with National Policy Statement No. 29.

20.5 Delayed Coming into Force -- (1) Despite section 20.1, subsection 4.4(1) does not come into force until August 1, 2000.

(2) Despite section 20.1, the following provisions of this Instrument do not come into force until February 1, 2001:

1. Subsection 2.4(2).

2. Subsection 2.7(4).

3. Subsection 6.4(1).

4. Subsection 6.8(4).

20.5 [Repealed]

 

APPENDIX A -- FUTURES EXCHANGES FOR THE PURPOSE OF

SUBSECTION 2.7(4) -- DERIVATIVE COUNTERPARTY EXPOSURE LIMITS

Futures Exchanges

Australia
Sydney Futures Exchange
Australian Financial Futures Market
 
Austria
Osterreichische Termin-und Option Borse (OTOB -- The Austrian Options and Futures Exchange)
 
Belgium
Belfox CV (Belgium Futures and Options Exchange)
 
Brazil
Bolsa Brasileira de Futuros
Bolsa de Mercadorias & Futuros
Bolsa de Valores de Rio de Janeiro
 
Canada
The Winnipeg Commodity Exchange
The Toronto Futures Exchange
The Montreal Exchange
 
Denmark
Kobenhavus Fondsbors (Copenhagen Stock Exchange)
Garenti fonden for Dankse Optioner og Futures (Guarantee Fund for Danish Options and Futures)
Futop (Copenhagen Stock Exchange)
 
Finland
Helsinki Stock Exchange
Oy Suomen Optiopörssi (Finnish Options Exchange)
Suomen Optionmeklarit Oy (Finnish Options Market)
 
France
Marché à terme international de France S.A. (MATIF S.A.)
Marché des option négociables à Paris (MUNCP)
 
Germany
DTB Deutsche Terminbörse GmbH
EUREX
 
Hong Kong
Hong Kong Futures Exchange Limited
 
Ireland
Irish Futures and Options Exchange
 
Italy
Milan Italiano Futures Exchange
 
Japan
Osaka Shoken Torihikisho (Osaka Securities Exchange)
The Tokyo Commodity Exchange for Industry
The Tokyo International Financial Futures Exchange
Tokyo Grain Exchange
Tokyo Stock Exchange
 
Netherlands
AEX Options & Futures Exchange
EOE-Optiebeurs (European Options Exchange)
Financiele Termijnmarkt Amsterdam N.V.
 
New Zealand
New Zealand Futures and Options Exchange
 
Norway
Oslo Stock Exchange
 
Philippines
Manila International Futures Exchange
 
Portugal
Bosa de Derivatives de Porto
 
Singapore
Singapore Commodity Exchange (SICOM)
Singapore International Monetary Exchange Limited (SIMEX)
 
Spain
Meff Renta Fija
Meff Renta Variable
 
Sweden
OM Stockholm Fondkommission AB
 
Switzerland
EUREX
 
United Kingdom
International Petroleum Exchange (IPE)
London International Financial Futures and Options Exchange (LIFFE)
London Metal Exchange (LME)
OM London
 
United States
Chicago Board of Options Exchange (CBOE)
Chicago Board of Trade (CBOT)
Chicago Mercantile Exchange (CME)
Commodity Exchange, Inc. (COMEX)
Financial Instrument Exchange (Finex) a division of the New York Cotton Exchange
Board of Trade of Kansas City, Missouri, Inc.
Mid-America Commodity Exchange
Minneapolis Grain Exchange (MGE)
New York Futures Exchange, Inc. (NYFE)
New York Mercantile Exchange (NYMECX)
New York Board of Trade (NYBOT)
Pacific Stock Exchange
Philadelphia Board of Trade (PBOT)
Twin Cities Board of Trade

 

APPENDIX B-1 -- COMPLIANCE REPORT

TO:

[The appropriate securities regulatory authorities]

 

FROM:

[Name of mutual fund]

 

RE:

Compliance Report on National Instrument 81-102

 

 

For the year ended [insert date]

We hereby confirm that we have complied with the applicable requirements of Parts 9, 10 and 11 of National Instrument 81-102 for the year ended [insert date]

[except as follows:] [list exceptions, if any].

[NAME of mutual fund]

................................... Signature
 
................................... Name and office of the person executing this report
 
................................... Date

 

APPENDIX B-1 -- AUDIT REPORT

TO:

[The appropriate securities regulatory authorities]

 

RE:

Compliance Report on National Instrument 81-102 For the year ended [insert date]

We have audited [name of mutual fund]'s report made under section 12.1 of National Instrument 81-102 regarding its compliance for the year ended [insert date] with the applicable requirements of Parts 9, 10 and 11 of that National Instrument. Compliance with these requirements is the responsibility of the management of [name of mutual fund] (the "Fund"). Our responsibility is to express an opinion on management's compliance report based on our audit.

We conducted our audit in accordance with the standards for assurance engagements established by The Canadian Institute of Chartered Accountants. Those standards require that we plan and perform an audit to obtain reasonable assurance as a basis for our opinion. Such an audit includes examining, on a test basis, evidence supporting the assertions in management's compliance report.

In our opinion, the Fund's report presents fairly, in all material respects, the Fund's compliance for the year ended [insert date] with the applicable requirements of Parts 9, 10 and 11 of National Instrument 81-102.

This report is provided solely for the purpose of assisting the securities regulatory authority [ies] to which it is addressed in discharging its [their] responsibilities and should not be used for any other purpose.

City

Date

Chartered Accountants

 

APPENDIX B-2 -- COMPLIANCE REPORT

TO:

[The appropriate securities regulatory authorities]

 

FROM:

[Name of principal distributor] (the "Distributor")

 

RE:

Compliance Report on National Instrument 81-102 For the year ended [insert date]

 

FOR:

[Name(s) of the mutual fund (the "Fund[s]")]

We hereby confirm that we have complied with the applicable requirements of Parts 9, 10 and 11 of National Instrument 81-102 in respect of the Fund[s] for the year ended [insert date] [except as follows:] [list exceptions, if any].

[NAME of the Distributor]

................................... Signature
 
................................... Name and office of the person executing this report
 
................................... Date

 

APPENDIX B-2 -- AUDIT REPORT

TO:

[The appropriate securities regulatory authorities]

 

RE:

Compliance Report on National Instrument 81-102 For the year ended [insert date]

We have audited [name of principal distributor]'s report made under section 12.1 of National Instrument 81-102 regarding its compliance for the year ended [insert date] with the applicable requirements of Parts 9, 10 and 11 of that National Instrument in respect of the [name of mutual funds] (the "Funds"). Compliance with these requirements is the responsibility of the management of [name of principal distributor] (the "Company"). Our responsibility is to express an opinion on management's compliance report based on our audit.

We conducted our audit in accordance with the standards for assurance engagements established by The Canadian Institute of Chartered Accountants. Those standards require that we plan and perform an audit to obtain reasonable assurance as a basis for our opinion. Such an audit includes examining, on a test basis, evidence supporting the assertions in management's compliance report.

In our opinion, the Company's report presents fairly, in all material respects, the Company's compliance for the year ended [insert date] with the applicable requirements of Parts 9, 10 and 11 of National Instrument 81-102 in respect of the Funds.

This report is provided solely for the purpose of assisting the securities regulatory authority [ies] to which it is addressed in discharging its [their] responsibilities and should not be used for any other purpose.

City

Date

Chartered Accountants

 

APPENDIX B-3 -- COMPLIANCE REPORT

TO:

[The appropriate securities regulatory authorities]

 

FROM:

[Name of participating dealer] (the "Distributor")

 

RE:

Compliance Report on National Instrument 81-102 For the year ended [insert date]

We hereby confirm that we have sold mutual fund securities to which National Instrument 81-102 is applicable. In connection with our activities in distributing these securities, we have complied with the applicable requirements of Parts 9, 10 and 11 of National Instrument 81-102 for the year ended [insert date] [except as follows:] [list exceptions, if any].

[NAME of the Distributor]

................................... Signature
 
................................... Name and office of the person executing this report
 
................................... Date

 

APPENDIX B-3 -- AUDIT REPORT

TO:

[The appropriate securities regulatory authorities]

 

RE:

Compliance Report on National Instrument 81-102 For the year ended [insert date]

We have audited [name of participating dealer]'s report made under section 12.1 of National Instrument 81-102 regarding its compliance for the year ended [insert date] with the applicable requirements of Parts 9, 10 and 11 of that National Instrument in respect of sales of mutual fund securities. Compliance with these requirements is the responsibility of the management of [name of participating dealer] (the "Company"). Our responsibility is to express an opinion on management's compliance report based on our audit.

We conducted our audit in accordance with the standards for assurance engagements established by The Canadian Institute of Chartered Accountants. Those standards require that we plan and perform an audit to obtain reasonable assurance as a basis for our opinion. Such an audit includes examining, on a test basis, evidence supporting the assertions in management's compliance report.

In our opinion, the Company's report presents fairly, in all material respects, the Company's compliance for the year ended [insert date] with the applicable requirements of Parts 9, 10 and 11 of National Instrument 81-102 in respect of sales of mutual fund securities.

This report is provided solely for the purpose of assisting the securities regulatory authority [ies] to which it is addressed in discharging its [their] responsibilities and should not be used for any other purpose.

City

Date

Chartered Accountants

 

APPENDIX C -- PROVISIONS CONTAINED IN SECURITIES LEGISLATION

FOR THE PURPOSE OF SUBSECTION 4.1(5) -- PROHIBITED INVESTMENTS

JURISDICTION

SECURITIES LEGISLATION REFERENCE

 

British Columbia

s. 81 of the Securities Rules (British Columbia)

 

[UND]All Jurisdictions[/UND]

[UND]s. 13.6 of National Instrument 31-103 RegistrationRequirements, Exemptions and Ongoing Registrant Obligations[/UND]

 

Newfoundland and Labrador

s. 191 of Reg 805/96

 

New Brunswick

s. 13.2 of Local Rule 31-501 Registration Requirements

 

Nova Scotia

s. 67 of the General Securities Rules

 

Schedule E-3: Blackline Showing Proposed Changes to Companion Policy 81-102CP to National Instrument 81-102 Mutual Funds

ANNEX E

SCHEDULE E-3

BLACKLINE SHOWING PROPOSED CHANGES TO

COMPANION POLICY 81-102CP MUTUAL FUNDS

This Schedule shows, by way of blackline, changes to Companion Policy 81-102CP that are being published for comment. It is proposed that the changes become effective to coincide with the implementation of the amendments to National Instrument 81-102 Mutual Funds.

Companion Policy 81-102CP

to

National Instrument 81-102 MutualInvestment Funds

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 Instrument 81-102 MutualInvestment Funds (the "Instrument"), including

(a) the interpretation of various terms used in the Instrument;

(b) recommendations concerning the operating procedures that the Canadian securities regulatory authorities suggest that mutualinvestment funds subject to the Instrument, or persons performing services for mutualthe investment funds, adopt to ensure compliance with the Instrument;

(c) discussions of circumstances in which the Canadian securities regulatory authorities have granted relief from particular requirements of National Policy Statement No. 39 ("NP39"), the predecessor to the Instrument, and the conditions that those authorities imposed in granting that relief; and

(d) recommendations concerning applications for approvals required under, or relief from, provisions of the Instrument.

PART 2 COMMENTS ON DEFINITIONS CONTAINED IN THE INSTRUMENT

2.1 "asset allocation service" -- The definition of "asset allocation service" in the Instrument includes only specific administrative services in which an investment in mutual funds subject to the Instrument is an integral part. The Canadian securities regulatory authorities do not view this definition as including general investment services such as discretionary portfolio management that may, but are not required to, invest in mutual funds subject to this Instrument.

2.2 "cash equivalent" -- The definition of "cash equivalent" in the Instrument includes certain evidences of indebtedness of Canadian financial institutions. This includes banker's acceptances.

2.3 "clearing corporation" -- The definition of "clearing corporation" in the Instrument includes both incorporated and unincorporated organizations, which may, but need not, be part of an options or futures exchange.

2.4 "debt-like security" -- Paragraph (b) of the definition of "debt-like security" in the Instrument provides that the value of the component of an instrument that is not linked to the underlying interest of the instrument must account for less than 80 percent% of the aggregate value of the instrument in order that the instrument be considered a debt-like security. The Canadian securities regulatory authorities have structured this provision in this manner to emphasize what they consider the most appropriate manner to value these instruments. That is, one should first value the component of the instrument that is not linked to the underlying interest, as this is often much easier to value than the component that is linked to the underlying interest. The Canadian securities regulatory authorities recognize the valuation difficulties that can arise if one attempts to value, by itself, the component of an instrument that is linked to the underlying interest.

2.5 "fundamental investment objectives"

(1) The definition of "fundamental investment objectives" is relevant in connection with paragraph 5.1(1)(c) of the Instrument, which requires that the approval of securityholders of a mutualan investment fund be obtained before any change is made to the fundamental investment objectives of the mutualinvestment fund. The fundamental investment objectives of a mutualan investment fund are required to be disclosed in a simplified prospectus under Part B of Form 81-101F1 Contents of Simplified Prospectus or under the requirements of Form 41-101F2 Information Required in an Investment Fund Prospectus. The definition of "fundamental investment objectives" contained in the Instrument uses the language contained in the disclosure requirements of Part B of Form 81-101F1 and Form 41-101F2, and the definition should be read to include the matters that would have to be disclosed under the Item of Part B of the applicable form concerning "Fundamental Investment Objectives". Accordingly, any change to the mutualinvestment fund requiring a change to that disclosure would trigger the requirement for securityholder approval under paragraph 5.1(1)(c) of the Instrument.

(2) Part B of Form 81-101F1 setsand Form 41-101F2 set out, among other things, the obligation that a mutualan investment fund disclose in a simplified prospectus both its fundamental investment objectives and its investment strategies. The matters required to be disclosed under the Item of Part B of the applicable form relating to "Investment Strategies" are not "fundamental investment objectives" under the Instrument.

(3) Generally speaking, the "fundamental investment objectives" of a mutualan investment fund are those attributes that define its fundamental nature. For example, mutualinvestment funds that are guaranteed or insured, or that pursue a highly specific investment approach such as index funds or derivative funds, may be defined by those attributes. Often the manner in which a mutualan investment fund is marketed will provide evidence as to its fundamental nature; a mutualan investment fund whose advertisements emphasize, for instance, that investments are guaranteed likely will have the existence of a guarantee as a "fundamental investment objective".

(4) [Deleted]

(5) One component of the definition of "fundamental investment objectives" is that those objectives distinguish a mutualan investment fund from other mutualinvestment funds. This component does not imply that the fundamental investment objectives for each mutualinvestment fund must be unique. Two or more mutualinvestment funds can have identical fundamental investment objectives.

2.6 "guaranteed mortgage" -- A mortgage insured under the National Housing Act (Canada) or similar provincial statutes is a "guaranteed mortgage" for the purposes of the Instrument.

2.7 "hedging"

(1) One component of the definition of "hedging" is the requirement that hedging transactions result in a "high degree of negative correlation between changes in the value of the investment or position, or group of investments or positions, being hedged and changes in the value of the instrument or instruments with which the investment or position is hedged". The Canadian securities regulatory authorities are of the view that there need not be complete congruence between the hedging instrument or instruments and the position or positions being hedged if it is reasonable to regard the one as a hedging instrument for the other, taking into account the closeness of the relationship between fluctuations in the price of the two and the availability and pricing of hedging instruments.

(2) The definition of "hedging" includes a reference to the "maintaining" of the position resulting from a hedging transaction or series of hedging transactions. The inclusion of this component in the definition requires a mutualan investment fund to ensure that a transaction continues to offset specific risks of the mutualinvestment fund in order that the transaction be considered a "hedging" transaction under the Instrument; if the "hedging" position ceases to provide an offset to an existing risk of a mutualan investment fund, then that position is no longer a hedging position under the Instrument, and can be held by the mutualinvestment fund only in compliance with the specified derivatives rules of the Instrument that apply to non-hedging positions. The component of the definition that requires the "maintaining" of a hedge position does not mean that a mutualan investment fund is locked into a specified derivatives position; it simply means that the specified derivatives position must continue to satisfy the definition of "hedging" in order to receive hedging treatment under the Instrument.

(3) Paragraph (b) of the definition of "hedging" has been included to ensure that currency cross hedging continues to be permitted under the Instrument. Currency cross hedging is the substitution of currency risk associated with one currency for currency risk associated with another currency, if neither currency is a currency in which the mutualinvestment fund determines its net asset value per security and the aggregate amount of currency risk to which the mutualinvestment fund is exposed is not increased by the substitution. Currency cross hedging is to be distinguished from currency hedging, as that term is ordinarily used. Ordinary currency hedging, in the context of mutualinvestment funds, would involve replacing the mutualinvestment fund's exposure to a "non-net asset value" currency with exposure to a currency in which the mutualinvestment fund calculates its net asset value per security. That type of currency hedging is subject to paragraph (a) of the definition of "hedging".

2.8 "illiquid asset" -- A portfolio asset of a mutualan investment fund that meets the definition of "illiquid asset" will be an illiquid asset even if a person or company, including the manager or the portfolio adviser of a mutualan investment fund or a partner, director or officer of the manager or portfolio adviser of a mutualan investment fund or any of their respective associates or affiliates, has agreed to purchase the asset from the mutualinvestment fund. That type of agreement does not affect the words of the definition, which defines "illiquid asset" in terms of whether that asset cannot be readily disposed of through market facilities on which public quotations in common use are widely available.

2.9 "manager" -- The definition of "manager" under the Instrument only applies to the person or company that actually directs the business of the mutualinvestment fund, and does not apply to others, such as trustees, that do not actually carry out this function. Also, a "manager" would not include a person or company whose duties are limited to acting as a service provider to the mutualinvestment fund, such as a portfolio adviser.

2.10 "option" -- The definition of "option" includes warrants, whether or not the warrants are listed on a stock exchange or quoted on an over-the-counter market.

2.11 "performance data" -- The term "performance data" includes data on an aspect of the investment performance of a mutualan investment fund, an asset allocation service, security, index or benchmark. This could include data concerning return, volatility or yield. The Canadian securities regulatory authorities note that the term "performance data" would not include a rating prepared by an independent organization reflecting the credit quality, rather than the performance, of, for instance, a mutualan investment fund's portfolio or the participating funds of an asset allocation service.

2.12 "public medium" -- An "advertisement" is defined in the Instrument to mean a sales communication that is published or designed for use on or through a "public medium". The Canadian securities regulatory authorities interpret the term "public medium" to include print, television, radio, tape recordings, video tapes, computer disks, the Internet, displays, signs, billboards, motion pictures and telephones.

2.13 "purchase"

(1) The definition of a "purchase", in connection with the acquisition of a portfolio asset by a mutualan investment fund, means an acquisition that is the result of a decision made and action taken by the mutualinvestment fund.

(2) The Canadian securities regulatory authorities consider that the following types of transactions would generally be purchases of a security by a mutualan investment fund under the definition:

1. The mutualinvestment fund effects an ordinary purchase of the security, or, at its option, exercises, converts or exchanges a convertible security held by it.

2. The mutualinvestment fund receives the security as consideration for a security tendered by the mutualinvestment fund into a take-over bid.

3. The mutualinvestment fund receives the security as the result of a merger, amalgamation, plan of arrangement or other reorganization for which the mutualinvestment fund voted in favour.

4. The mutualinvestment fund receives the security as a result of the automatic exercise of an exchange or conversion right attached to another security held by the mutualinvestment fund in accordance with the terms of that other security or the exercise of that exchange or conversion right at the option of the mutualinvestment fund.

5.

a) The mutualinvestment fund has become legally entitled to dispose of the collateral held by it under a securities loan or repurchase agreement and to apply proceeds of realization to satisfy the obligations of the counterparty of the mutualinvestment fund under he transaction, and

b) sufficient time has passed after the event described in paragraph (a) to enable the mutualinvestment fund to sell the collateral in a manner that maintains an orderly market and that permits the preservation of the best value for the mutualinvestment fund.

(3) The Canadian securities regulatory authorities consider that the following types of transactions would generally not be purchases of a security by a mutualan investment fund under the definition:

1. The mutualinvestment fund receives the security as a result of a compulsory acquisition by an issuer following completion of a successful take-over bid.

2. The mutualinvestment fund receives the security as a result of a merger, amalgamation, plan of arrangement or other reorganization that the mutualinvestment fund voted against.

3. The mutualinvestment fund receives the security as the result of the exercise of an exchange or conversion right attached to a security held by the mutualinvestment fund made at the discretion of the issuer of the security held by the mutualinvestment fund.

4. The mutualinvestment fund declines to tender into an issuer bid, even though its decision is likely to result in an increase in its percentage holdings of a security beyond what the mutualinvestment fund would be permitted under the Instrument to purchase.

2.14 "restricted security" -- A special warrant is a form of restricted security and, accordingly, the provisions of the Instrument applying to restricted securities apply to special warrants.

2.15 "sales communication"

(1) The term "sales communication" refers to a communication to a securityholder of a mutualan investment fund and to a person or company that is not a securityholder if the purpose of the communication is to induce the purchase of securities of the mutualinvestment fund. A sales communication therefore does not include a communication solely between a mutualan investment fund or its promoter, manager, principal distributor or portfolio adviser and a participating dealer, or between the principal distributor or a participating dealer and its registered salespersons, that is indicated to be internal or confidential and that is not designed to be passed on by any principal distributor, participating dealer or registered salesperson to any securityholder of, or potential investor in, the mutualinvestment fund. In the view of the Canadian securities regulatory authorities, if a communication of that type were so passed on by the principal distributor, participating dealer or registered salesperson, the communication would be a sales communication made by the party passing on the communication if the recipient of the communication were a securityholder of the mutualinvestment fund or if the intent of the principal distributor, participating dealer or registered salesperson in passing on the communication were to induce the purchase of securities of the mutualinvestment fund.

(2) The term "sales communication" is defined in the Instrument such that the communication need not be in writing and includes any oral communication. The Canadian securities regulatory authorities are of the view that the requirements in the Instrument pertaining to sales communications would apply to statements made at an investor conference to securityholders or to others to induce the purchase of securities of the mutualinvestment fund.

(3) The Canadian securities regulatory authorities are of the view that image advertisements that are intended to promote a corporate identity or the expertise of a mutualan investment fund manager fall outside the definition of "sales communication". However, an advertisement or other communication that refers to a specific mutualinvestment fund or funds or promotes any particular investment portfolio or strategy would be a sales communication and therefore be required to include warnings of the type now described in section 15.4 of the Instrument.

(4) Paragraph (b) of the definition of a "sales communication" in the Instrument excludes sales communications contained in certain documents that the mutualinvestment fund is required to prepare, including audited or unaudited financial statements, statements of account and confirmations of trade. The Canadian securities regulatory authorities are of the view that if information is contained in these types of documents that is not required to be included by securities legislation, any such additional material is not excluded by paragraph (b) of the definition of sales communication and may, therefore, constitute a sales communication if the additional material otherwise falls within the definition of that term in the Instrument.

2.16 "specified derivative"

(1) The term "specified derivative" is defined to mean an instrument, agreement or security, the market price, value or payment obligations of which are derived from, referenced to or based on an underlying interest. Certain instruments, agreements or securities that would otherwise be specified derivatives within the meaning of the definition are then excluded from the definition for purposes of the Instrument.

(2) Because of the broad ambit of the lead-in language to the definition, it is impossible to list every instrument, agreement or security that might be caught by that lead-in language but that is not considered to be a derivative in any normal commercial sense of that term. The Canadian securities regulatory authorities consider conventional floating rate debt instruments, securities of a mutual fund or commodity pool, non-redeemable securities of an investment fund, American depositary receipts and instalment receipts generally to be within this category, and generally will not treat those instruments as specified derivatives in administering the Instrument.

(3) However, the Canadian securities regulatory authorities note that these general exclusions may not be applicable in cases in which a mutualan investment fund invests in one of the vehicles described in subsection (2) with the result that the mutualinvestment fund obtains or increases exposure to a particular underlying interest in excess of the limit set out in section 2.1 of the Instrument. In such circumstances, the Canadian securities regulatory authorities are likely to consider that instrument a specified derivative under the Instrument.

2.17 "standardized future" -- The definition of "standardized future" refers to an agreement traded on a futures exchange. This type of agreement is called a "futures contract" in the legislation of some jurisdictions, and an "exchange contract" in the legislation of some other jurisdictions (such as British Columbia and Alberta). The term "standardized future" is used in the Instrument to refer to these types of contracts, to avoid conflict with existing local definitions.

2.18 "swap" -- The Canadian securities regulatory authorities are of the view that the definition of a swap in the Instrument would include conventional interest rate and currency swaps, as well as equity swaps.

PART 3 INVESTMENTS

3.1 Evidences of Indebtedness of Foreign Governments and Supranational Agencies

(1) Section 2.1 of the Instrument prohibits mutualinvestment funds from purchasing a security of an issuer, other than a government security or a security issued by a clearing corporation if, immediately after the purchase, more than 10 percent% of their net asset value would be invested in securities of that issuer. The term "government security" is defined in the Instrument as an evidence of indebtedness that is issued, or fully and unconditionally guaranteed as to principal and interest, by any of the government of Canada, the government of a jurisdiction or the government of the United States of America.

(2) Before the Instrument came into force, the Canadian securities regulatory authorities granted relief from the predecessor provision of NP39 to a number of international bond funds in order to permit those mutual funds to pursue their fundamental investment objectives with greater flexibility.

(3) The Canadian securities regulatory authorities will continue to consider applications for relief from section 2.1 of the Instrument if the mutualinvestment fund making the application demonstrates that the relief will better enable the mutualinvestment fund to meet its fundamental investment objectives. This relief will ordinarily be restricted to international bond funds.

(4) The relief from paragraph 2.04(1)(a) of NP39, which is replaced by section 2.1 of the Instrument, that has been provided to a mutual fund has generally been limited to the following circumstances:

1. The mutual fund has been permitted to invest up to 20 percent% of its net asset value in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction or the government of the United States of America and are rated "AA" by Standard & Poor's, or have an equivalent rating by one or more other approved credit rating organizations.

2. The mutual fund has been permitted to invest up to 35 percent% of its net asset value in evidences of indebtedness of any one issuer, if those securities are issued by issuers described in paragraph 1 and are rated "AAA" by Standard & Poor's, or have an equivalent rating by one or more other approved credit rating organizations.

(5) It is noted that the relief described in paragraphs 3.1(4)1 and 2 cannot be combined for one issuer.

(6) [Deleted]

(7) The relief from paragraph 2.04(1)(a) of NP39, which is replaced by section 2.1 of the Instrument, has generally been provided only if

(a) the securities that may be purchased under the relief referred to in subsection (4) are traded on a mature and liquid market;

(b) the acquisition of the evidences of indebtedness by the mutual fund is consistent with its fundamental investment objectives;

(c) the prospectus or simplified prospectus of the mutual fund disclosed the additional risks associated with the concentration of the net asset value of the mutual fund in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the fund has so invested and the risks, including foreign exchange risks, of investing in the country in which that issuer is located; and

(d) the prospectus or simplified prospectus of the mutual fund gave details of the relief provided by the Canadian securities regulatory authorities, including the conditions imposed and the type of securities covered by the exemption.

3.2 Index Mutual Funds

(1) An "index mutual fund" is defined in section 1.1 of the Instrument as a mutual fund that has adopted fundamental investment objectives that require it to

(a) hold the securities that are included in a permitted index or permitted indices of the mutual fund in substantially the same proportion as those securities are reflected in that permitted index or permitted indices; or

(b) invest in a manner that causes the mutual fund to replicate the performance of that permitted index or those permitted indices.

(2) This definition includes only mutual funds whose entire portfolio is invested in accordance with one or more permitted indices. The CSA recognizesCanadian securities regulatory authorities recognize that there may be mutual funds that invest part of their portfolio in accordance with a permitted index or indices, with a remaining part of the portfolio being actively managed. Those mutual funds cannot avail themselves of the relief provided by subsection 2.1(5) of the Instrument, which provides relief from the "10 percent% rule" contained in subsection 2.1(1) of the Instrument, because they are not "index mutual funds". The CSACanadian securities regulatory authorities acknowledge that there may be circumstances in which the principles behind the relief contained in subsection 2.1(5) of the Instrument is also applicable to "partially-indexed" mutual funds. Therefore, the CSACanadian securities regulatory authorities will consider applications from those types of mutual funds for relief analogous to that provided by subsection 2.1(5) of the Instrument.

(3) It is noted that the manager of an index mutual fund may make a decision to base all or some of the investments of the mutual fund on a different permitted index than a permitted index previously used. This decision might be made for investment reasons or because that index no longer satisfies the definition of "permitted index" in the Instrument. It is noted that this decision by the manager will be considered by the Canadian securities regulatory authorities generally to constitute a change of fundamental investment objectives, thereby requiring securityholder approval under paragraph 5.1(1)(c) of the Instrument. In addition, this decision would also constitute a material change for the mutual fund, thereby requiring an amendment to the prospectus of the mutual fund and the issuing of a press release under Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure.

3.2.1 Control Restrictions -- An investment fund generally holds a passive stake in the businesses in which it invests; that is, an investment fund generally does not seek to obtain control of, or become involved in, the management of investee companies. This key restriction on the type of investment activities that may be undertaken by an investment fund is codified in section 2.2 of the Instrument. Exceptions to this are labour sponsored or venture capital funds, where some degree of involvement in the management of the investees is an integral part of the investment strategy.

In determining whether an investment fund exercises control over, or is involved in the management of, an investee company, the Canadian securities regulatory authorities will generally consider indicators, including the following:

(a) any right of the investment fund to appoint directors, or observers, of the board of the investee company;

(b) restrictions on the management, or approval or veto rights over decisions made by the management, of the investee company by the investment fund;

(c) any right of the investment fund to restrict the transfer of securities by other securityholders of the investee company.

The Canadian securities regulatory authorities will take the above factors into consideration when considering the nature of an investment fund's investment in an issuer to determine whether the investment fund is in compliance with section 2.2 of the Instrument. We will also refer to the applicable accounting standards in determining whether an investment fund is exercising control of an issuer.

3.3 Special Warrants -- A mutualAn investment fund is required by subsection 2.2(3) of the Instrument to assume the conversion of each special warrant it holds. This requirement is imposed because the nature of a special warrant is such that there is a high degree of likelihood that its conversion feature will be exercised shortly after its issuance, once a prospectus relating to the underlying security has been filed.

3.4 Investment in Other MutualInvestment Funds

(1) [Deleted]

(2) Subsection 2.5(7) of the Instrument provides that certain investment restrictions and reporting requirements do not apply to investments in other mutualinvestment funds made in accordance with section 2.5. In some cases, a mutualan investment fund's investments in other mutualinvestment funds will be exempt from the requirements of section 2.5 because of an exemption granted by the regulator or securities regulatory authority. In these cases, assuming the mutualinvestment fund complies with the terms of the exemption, its investments in other mutualinvestment funds would be considered to have been made in accordance with section 2.5. It is also noted that subsection 2.5(7) applies only with respect to a mutualan investment fund's investments in other mutualinvestment funds, and not for any other investment or transaction.

3.5 Instalments of Purchase Price -- Paragraph 2.6(d) of the Instrument prohibits a mutualan investment fund from purchasing a security, other than a specified derivative, that by its terms may require the mutualinvestment fund to make a contribution in addition to the payment of the purchase price. This prohibition does not extend to the purchase of securities that are paid for on an instalment basis in which the total purchase price and the amounts of all instalments are fixed at the time the first instalment is made.

3.6 Purchase of Evidences of Indebtedness -- Paragraph 2.6(f) of the Instrument prohibits a mutualan investment fund from lending either cash or a portfolio asset other than cash. The Canadian securities regulatory authorities are of the view that the purchase of an evidence of indebtedness, such as a bond or debenture, a loan participation or loan syndication as permitted by paragraph 2.3(1)(i) or (2)(f) of the Instrument, or the purchase of a preferred share that is treated as debt for accounting purposes, does not constitute the lending of cash or a portfolio asset.

3.7 Securities Lending, Repurchase and Reverse Repurchase Transactions

(1) Section 2.12, 2.13 and 2.14 of the Instrument each contains a number of conditions that must be satisfied in order that a mutualan investment fund may enter into a securities lending, repurchase or reverse repurchase transaction in compliance with the Instrument. It is expected that, in addition to satisfying these conditions, the manager on behalf of the mutualinvestment fund, in co-ordination with an agent, will ensure that the documentation evidencing these types of transactions contains customary provisions to protect the mutualinvestment fund and to document the transaction properly. Among other things, these provisions would normally include

(a) a definition of an "event of default" under the agreement, which would include failure to deliver cash or securities, or to promptly pay to the mutualinvestment fund amounts equal to dividends and interest paid, and distributions made, on loaned or sold securities, as required by the agreement;

(b) provisions giving non-defaulting parties rights of termination, rights to sell the collateral, rights to purchase identical securities to replace the loaned securities and legal rights of set-off in connection with their obligations if an event of default occurs; and

(c) provisions that deal with, if an event of default occurs, how the value of collateral or securities held by the non-defaulting party that is in excess of the amount owed by the defaulting party will be treated.

(2) Section 2.12, 2.13 and 2.14 of the Instrument each imposes a requirement that a mutualan investment fund that has entered into a securities lending, repurchase or reverse repurchase transaction hold cash or securities of at least 102 percent% of the market value of the securities or cash held by the mutualinvestment fund's counterparty under the transaction. It is noted that the 102 percent % requirement is a minimum requirement, and that it may be appropriate for the manager of a mutualan investment fund, or the agent acting on behalf of the mutualinvestment fund, to negotiate the holding of a greater amount of cash or securities if necessary to protect the interests of the mutualinvestment fund in a particular transaction, having regard to the level of risk for the mutualinvestment fund in the transaction. In addition, if the recognized best practices for a particular type of transaction in a particular market calls for a higher level of collateralization than 102% percent, it is expected that, absent special circumstances, the manager or the agent would ensure that its arrangements reflect the relevant best practices for that transaction.

(3) Paragraph 3 of subsection 2.12(1) of the Instrument refers to securities lending transactions in terms of securities that are "loaned" by a mutualan investment fund in exchange for collateral. Some securities lending transactions are documented so that title to the "loaned" securities is transferred from the "lender" to the "borrower". The Canadian securities regulatory authorities do not consider this fact as sufficient to disqualify those transactions as securities loan transactions within the meaning of the Instrument, so long as the transaction is in fact substantively a loan. References throughout the Instrument to "loaned" securities, and similar references, should be read to include securities "transferred" under a securities lending transaction.

(4) Paragraph 6 of subsection 2.12(1) permits the use of irrevocable letters of credit as collateral in securities lending transactions. The Canadian securities regulatory authorities believe that, at a minimum, the prudent use of letters of credit will involve the following arrangements:

(a) the mutualinvestment fund should be allowed to draw down any amount of the letter of credit at any time by presenting its sight draft and certifying that the borrower is in default of its obligations under the securities lending agreement, and the amount capable of being drawn down would represent the current market value of the outstanding loaned securities or the amount required to cure any other borrower default; and

(b) the letter of credit should be structured so that the lender may draw down, on the date immediately preceding its expiration date, an amount equal to the current market value of all outstanding loaned securities on that date.

(5) Paragraph 9 of subsection 2.12(1) and paragraph 8 of subsection 2.13(1) of the Instrument each provides that the agreement under which a mutualan investment fund enters into a securities lending or repurchase transaction include a provision requiring the mutualinvestment fund's counterparty to promptly pay to the mutualinvestment fund, among other things, distributions made on the securities loaned or sold in the transaction. In this context, the term "distributions" should be read broadly to include all payments or distributions of any type made on the underlying securities, including, without limitation, distributions of property, stock dividends, securities received as the result of splits, all rights to purchase additional securities and full or partial redemption proceeds. This extended meaning conforms to the meaning given the term "distributions" in several standard forms of securities loan agreements widely used in the securities lending and repurchase markets.

(6) Section 2.12, 2.13 and 2.14 of the Instrument make reference to the "delivery" and "holding" of securities or collateral by the mutualinvestment fund. The Canadian securities regulatory authorities note that these terms will include the delivery or holding by an agent for a mutualan investment fund. In addition, the Canadian securities regulatory authorities recognize that under ordinary market practice, agents pool collateral for securities lending/repurchase clients; this pooling of itself is not considered a violation of the Instrument.

(7) Section 2.12, 2.13 and 2.14 of the Instrument require that the securities involved in a securities lending, repurchase or reverse repurchase transaction be marked to market daily and adjusted as required daily. It is recognized that market practice often involves an agent marking to market a portfolio at the end of a business day, and effecting the necessary adjustments to a portfolio on the next business day. So long as each action occurs on each business day, as required by the Instrument, this market practice is not a breach of the Instrument.

(8) As noted in subsection (7), the Instrument requires the daily marking to market of the securities involved in a securities lending, repurchase or reverse repurchase transaction. The valuation principles used in this marking to market may be those generally used by the agent acting for the mutualinvestment fund, even if those principles deviate from the principles that are used by the mutualinvestment fund in valuing its portfolio assets for the purposes of calculating net asset value.

(9) Paragraph 6 of subsection 2.13(1) of the Instrument imposes a requirement concerning the delivery of sales proceeds to the mutualinvestment fund equal to 102 per cent% of the market value of the securities sold in the transaction. It is noted that accrued interest on the sold securities should be included in the calculation of the market value of those securities.

(10) Section 2.15 of the Instrument imposes the obligation on a manager of a mutualan investment fund to appoint an agent or agents to administer its securities lending and repurchase transactions, and makes optional the ability of a manager to appoint an agent or agents to administer its reverse repurchase transactions. A manager that appoints more than one agent to carry out these functions may allocate responsibility as it considers best. For instance, it may be appropriate that one agent be responsible for domestic transactions, with one or more agents responsible for offshore transactions. Managers should ensure that the various requirements of sections 2.15 and 2.16 of the Instrument are satisfied for all agents.

(11) It is noted that the responsibilities of an agent appointed under section 2.15 of the Instrument include all aspects of acting on behalf of a mutualan investment fund in connection with securities lending, repurchase or reverse repurchase agreements. This includes acting in connection with the reinvestment of collateral or securities held during the life of a transaction.

(12) Subsection 2.15(3) of the Instrument requires that an agent appointed by a mutualan investment fund to administer its securities lending, repurchase or reverse repurchase transactions shall be a custodian or sub-custodian of the mutualinvestment fund. It is noted that the provisions of Part 6 of the Instrument generally apply to the agent in connection with its activities relating to securities lending, repurchase or reverse repurchase transactions. The agent must have been appointed as custodian or sub-custodian in accordance with section 6.1, and must satisfy the other requirements of Part 6 in carrying out its responsibilities.

(13) Subsection 2.15( 54) of the Instrument provides that the manager of a mutualan investment fund shallmust not authorize an agent to enter into securities lending, repurchase or, if applicable, reverse repurchase transactions on behalf of the mutualinvestment fund unless there is a written agreement between the agent, the manager and the mutualinvestment fund that deals with certain prescribed matters. Subsection ( 54) requires that the manager and the mutualinvestment fund, in the agreement, provide instructions to the agent on the parameters to be followed in entering into the type of transaction to which the agreement pertains. The parameters would normally include

(a) details on the types of transactions that may be entered into by the mutualinvestment fund;

(b) types of portfolio assets of the mutualinvestment fund to be used in the transaction;

(c) specification of maximum transaction size, or aggregate amount of assets that may be committed to transactions at any one time;

(d) specification of permitted counterparties;

(e) any specific requirements regarding collateralization, including minimum requirements as to amount and diversification of collateralization, and details on the nature of the collateral that may be accepted by the mutualinvestment fund;

(f) directions and an outline of responsibilities for the reinvestment of cash collateral received by the mutualinvestment fund under the program to ensure that proper levels of liquidity are maintained at all times; and

(g) duties and obligations on the agent to take action to obtain payment by a borrower of any amounts owed by the borrower.

(14) The definition of "cash cover" contained in section 1.1 of the Instrument requires that the portfolio assets used for cash cover not be "allocated for specific purposes". Securities loaned by a mutualan investment fund in a securities lending transaction have been allocated for specific purposes and therefore cannot be used as cash cover by the mutualinvestment fund for its specified derivatives obligations.

(15) A mutualAn investment fund sometimes needs to vote securities held by it in order to protect its interests in connection with corporate transactions or developments relating to the issuers of the securities. The manager and the portfolio adviser of a mutualan investment fund, or the agent of the mutualinvestment fund administering a securities lending program on behalf of the mutualinvestment fund, should monitor corporate developments relating to securities that are loaned by the mutualinvestment fund in securities lending transactions, and take all necessary steps to ensure that the mutualinvestment fund can exercise a right to vote the securities when necessary. This may be done by way of a termination of a securities lending transaction and recall of loaned securities, as described in paragraph 11 of subsection 2.12(1) of the Instrument.

(16) As part of the prudent management of a securities lending, repurchase or reverse repurchase program, managers of mutualinvestment funds, together with their agents, should ensure that transfers of securities in connection with those programs are effected in a secure manner over an organized market or settlement system. For foreign securities, this may entail ensuring that securities are cleared through central depositories. MutualInvestment funds and their agents should pay close attention to settlement arrangements when entering into securities lending, repurchase and reverse repurchase transactions.

3.7.1 Money Market Funds -- Section 2.18 of the Instrument imposes daily and weekly liquidity requirements on money market funds. Specifically, money market funds must keep 5% of their assets invested in cash or readily convertible into cash within one day, and 15% of their assets invested in cash or readily convertible into cash within one week. Assets that are "readily convertible to cash" would generally be short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Such assets can be sold in the ordinary course of business within one business day (in the case of the daily liquidity requirement) or within five business days (in the case of the weekly liquidity requirement) at approximately the value ascribed to them by the money market fund. The CSACanadian securities regulatory authorities note that the securities do not have to mature within the one and five business day periods. For example, direct obligations of the Canadian or U.S. government, or of a provincial government, that mature after one or five business days but that can be readily converted to cash within one or five business days, would likely be eligible for the 5% and 15% liquidity requirements.

3.8 Prohibited Investments

(1) Subsection 4.1(4) of the Instrument permits a dealer managed mutualinvestment fund to make an investment otherwise prohibited by subsection 4.1(1) of the Instrument and the corresponding provisions in securities legislation referred to in Appendix C to NI 81-102the Instrument if the independent review committee of the dealer managed mutualinvestment fund has approved the transaction under subsection 5.2(2) of National Instrument 81-107 Independent Review Committee for Investment Funds ("NI 81-107"). The CSACanadian securities regulatory authorities expect the independent review committee may contemplate giving its approval as a standing instruction, as contemplated in section 5.4 of NI 81-107.

(2) Subsection 4.3(2)of the Instrument permits a mutualan investment fund to purchase a class of debt securities from, or sell a class of debt securities to, another mutualinvestment fund managed by the same manager or an affiliate of the manager where the price payable for the security is not publicly available, if the independent review committee of the mutualinvestment fund has approved the transaction under subsection 5.2(2) of NI 81-107 and the requirements in section 6.1 of NI 81-107 have been met. The CSACanadian securities regulatory authorities expect the independent review committee may contemplate giving its approval as a standing instruction, as contemplated in section 5.4 of NI 81-107.

(3) In providing its approval under paragraph 4.3(2) of the Instrument, the CSACanadian securities regulatory authorities expect the independent review committee to have satisfied itself that the price of the security is fair. It may do this by considering the price quoted on a marketplace (e.g., CanPx or TRACE), or by obtaining a quote from an independent, arm's-length purchaser or seller, immediately before the purchase or sale.

PART 4 USE OF SPECIFIED DERIVATIVES

4.1 Exercising Options on Futures -- Paragraphs 2.8(1)(d) and (e) of the Instrument prohibit a mutualan investment fund from, among other things, opening and maintaining a position in a standardized future except under the conditions referred to in those paragraphs. Opening and maintaining a position in a standardized future could be effected through the exercise by a mutualan investment fund of an option on futures. Therefore, it should be noted that a mutualan investment fund cannot exercise an option on futures and assume a position in a standardized future unless the applicable provisions of paragraphs 2.8(1)(d) or (e) are satisfied.

4.2 Registration Matters -- The Canadian securities regulatory authorities remind industry participants of the following requirements contained in securities legislation:

1. A mutualAn investment fund may only invest in or use clearing corporation options and over-the-counter options if the portfolio adviser advising with respect to these investments

(a) is permitted, either by virtue of registration as an adviser under the securities legislation or commodity futures legislation of the jurisdiction in which the portfolio adviser is providing the advice or an exemption from the requirement to be registered, to provide that advice to the mutualinvestment fund under the laws of that jurisdiction; and

(b) has satisfied all applicable option proficiency requirements of that jurisdiction which, ordinarily, will involve completion of the Canadian Options Course.

2. A mutualAn investment fund may invest in or use futures and options on futures only if the portfolio adviser advising with respect to these investments or uses is registered as an adviser under the securities or commodity futures legislation of the jurisdiction in which the portfolio adviser is providing the advice, if this registration is required in that jurisdiction, and meets the proficiency requirements for advising with respect to futures and options on futures in the jurisdiction.

3. A portfolio adviser of a mutualan investment fund that receives advice from a non-resident sub-adviser as contemplated by section 2.10 of the Instrument is not relieved from the registration requirements described in paragraphs 1 and 2.

4. In Ontario, a non-resident sub-adviser is required, under the commodity futures legislation of Ontario, to be registered in Ontario if it provides advice to another portfolio adviser of a mutualan investment fund in Ontario concerning the use of standardized futures by the mutualinvestment fund. Section 2.10 of the Instrument does not exempt the non-resident sub-adviser from this requirement. A non-resident sub-adviser should apply for an exemption in Ontario if it wishes to carry out the arrangements contemplated by section 2.10 without being registered in Ontario under that legislation.

4.3 Leveraging -- The Instrument is designed to prevent the use of specified derivatives for the purpose of leveraging the assets of the mutualinvestment fund. The definition of "hedging" prohibits leveraging with specified derivatives used for hedging purposes. The provisions of subsection 2.8(1) of the Instrument restrict leveraging with specified derivatives used for non-hedging purposes.

4.4 Cash Cover -- The definition of "cash cover" in the Instrument prescribes the securities or other portfolio assets that may be used to satisfy the cash cover requirements relating to specified derivatives positions of mutualinvestment funds required by Part 2 of the Instrument. The definition of "cash cover" includes various interest-bearing securities; the definition includes interest accrued on those securities, and so mutualinvestment funds are able to include accrued interest for purposes of cash cover calculations.

PART 4.1 REIMBURSEMENT OF ORGANIZATION COSTS

4.1.1 Prohibition Against Reimbursement of Organization Costs -- Section 3.3 of the Instrument prohibits an investment fund from paying the costs of the preparation and filing of the initial preliminary and final prospectus (and related documents) or the costs of incorporation, formation or initial organization. The Canadian securities regulatory authorities consider that the costs of incorporation, formation or initial organization of an investment fund referred to in section 3.3 of the Instrument include all costs incurred to establish an investment fund. These costs include, without limitation, the following:

(a) fees for listing the securities of the investment fund on an exchange;

(b) fees related to regulatory filings other than the preliminary or final prospectus and related documents, such as fees for filing any exemptive relief application;

(c) legal and accounting fees incurred for the incorporation or formation of the fund, as well as the legal fees incurred to draft the constating documents of the fund and material contracts for the operation of the fund;

(d) for an investment fund that is not in continuous distribution, transfer agent's fees related to the initial public offering of the investment fund;

(e) roadshow expenses and marketing costs related to the initial public offering of the investment fund; and

(f) printing and translation costs for the offering documents of the investment fund.

However, the Canadian securities regulatory authorities do not consider the agents' or underwriters' commission in connection with the initial public offering of an investment fund to be a cost of initial organization.

PART 5 LIABILITY AND INDEMNIFICATION

5.1 Liability and Indemnification

(1) Subsection 4.4(1) of the Instrument contains provisions that require that any agreement or declaration of trust under which a person or company acts as manager of a mutualan investment fund provide that the manager is responsible for any loss that arises out of the failure of it, and of any person or company retained by it or the mutualinvestment fund to discharge any of the manager's responsibilities to the mutualinvestment fund, to satisfy the standard of care referred to in that section. Subsection 4.4(2) of the Instrument provides that a mutualan investment fund shallmust not relieve the manager from that liability.

(2) The purpose of these provisions is to ensure that the manager remains responsible to the mutualinvestment fund and therefore indirectly to its securityholders for the duty of care that is imposed by the securities legislation of most jurisdictions, and to clarify that the manager is responsible to ensurefor ensuring that service providers perform to the level of that standard of care. The Instrument does not regulate the contractual relationships between the manager and service providers; whether a manager can seek indemnification from a service provider that fails to satisfy that standard of care is a contractual issue between those parties.

(3) Subsection 4.4(5) of the Instrument provides that section 4.4 does not apply to any losses to a mutualan investment fund or securityholder arising out of an action or inaction by a custodian or subcustodiansub-custodian or by a director of a mutualan investment fund. A separate liability regime is imposed, on custodians or sub-custodians by section 6.6 of the Instrument. Directors are subject to the liability regime imposed by the relevant corporate legislation.

5.2 Securities Lending, Repurchase and Reverse Repurchase Transactions

(1) As described in section 5.1, section 4.4 of the Instrument is designed to ensure that the manager of a mutualan investment fund is responsible for any loss that arises out of the failure of it, and of any person or company retained by it or the mutualinvestment fund to discharge any of the manager's responsibilities to the mutualinvestment fund, to satisfy the standard of care referred to in that section.

(2) The retention by a manager of an agent under section 2.15 of the Instrument to administer the mutualinvestment fund's securities lending, repurchase or reverse repurchase transactions does not relieve the manager from ultimate responsibility for the administration of those transactions in accordance with the Instrument and in conformity with the standard of care imposed on the manager by statute and required to be imposed on the agent in the relevant agreement by subsection 2.15(64) of the Instrument.

(3) Because the agent is required to be a custodian or sub-custodian of the mutualinvestment fund, its activities, as custodian or sub-custodian, are not within the responsibility of the manager of the mutualinvestment fund, as provided for in subsection 4.4(5) of the Instrument. However, the activities of the agent, in its role as administering the mutualinvestment funds' securities lending, repurchase or reverse repurchase transactions, are within the ultimate responsibility of the manager, as provided for in subsection 4.4(6) of the Instrument.

PART 6 SECURITYHOLDER MATTERS

6.1 Meetings of Securityholders - Subsection 5.4(1) of the Instrument imposes a requirement that a meeting of securityholders of a mutualan investment fund called for the purpose of considering any of the matters referred to in sectionsubsection 5.1(1) of the Instrument must be called on notice sent at least 21 days before the date of the meeting. Industry participants are reminded that the provisions of National Policy Statement No. 41,Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer, or a successor instrument, may apply to any meetings of securityholders of mutualinvestment funds and that those provisions may require that a longer period of notice be given.

6.2 Limited Liability

(1) MutualInvestment funds generally are structured in a manner that ensures that investors are not exposed to the risk of loss of an amount more than their original investment. This is a very important and essential attribute of mutualinvestment funds.

(2) MutualInvestment funds that are structured as corporations do not raise pressing liability problems because of the limited liability regime of corporate statutes.

(3) MutualInvestment funds that are structured as limited partnerships may raise some concerns about the loss of limited liability if limited partners participate in the management or control of the partnership. The Canadian securities regulatory authorities encourage managers of mutualinvestment funds that are structured as limited partnerships to consider this issue in connection with the holding of meetings of securityholders, even if required under sectionsubsection 5.1(1) of the Instrument. In addition, all managers of mutualinvestment funds that are structured as limited partnerships should consider whether disclosure and discussion of this issue should be included as a risk factor in prospectuses.

6.3 Calculation of Fees

(1) Paragraph 5.1(1)(a) of the Instrument requires securityholder approval before the basis of the calculation of a fee or expense that is charged to a mutualan investment fund is changed in a way that could result in an increase in charges to the mutualinvestment fund. The Canadian securities regulatory authorities note that the phrase "basis of the calculation" includes any increase in the rate at which a particular fee is charged to the mutualinvestment fund.

(2) The CSACanadian securities regulatory authorities are of the view that the requirement of subsectionparagraph 5.1(1)(a) would not apply in instances where the change to the basis of the calculation is the result of separate individual agreements between the manager of the mutualinvestment fund and individual securityholders of the mutualinvestment fund, and the resulting increase in charges is payable directly or indirectly by those individual securityholders only.

6.4. Fund Conversions

(1) For the purposes of subparagraphs 5.1(1)(h)(i), (ii) and (iii) of the Instrument, the Canadian securities regulatory authorities consider that any change that will restructure an investment fund from its original structure requires the prior approval of the securityholders of the investment fund. For example, a non-redeemable investment fund may be designed to convert into a mutual fund on a specified date, or it may be designed to convert into a mutual fund after a specified date if the securities of the investment fund have traded at a specified discount to their net asset value per security for more than a set period of time. In each case, when the event that triggers the conversion occurs, the redemption feature of the securities of the non-redeemable investment fund changes and the securities of the non-redeemable investment fund will typically become redeemable at their net asset value per security daily. This change in the redemption feature of the securities of the investment fund may not be implemented unless securityholder approval has been obtained under subparagraph 5.1(1)(h)(i) or the exemption in subsection 5.3(3) is being relied on. Another example of a change requiring securityholder approval is where an investment fund wishes to seek to obtain control, or become involved in the management, of companies in which it invests. This involvement in the management or control of investees is inconsistent with the activities of an investment fund and would therefore cause the investment fund to cease to be an investment fund. In such a situation, the investment fund would be required to obtain securityholder approval under subparagraph 5.1(1)(h)(iii) of the Instrument before it could become involved in the management of, or exercise control over, investee companies.

(2) For the purposes of subsection 5.1(2) of the Instrument, the Canadian securities regulatory authorities consider the costs and expenses associated with a change referred to in subparagraphs 5.1(1)(h)(i), (ii) and (iii) of the Instrument to include costs associated with the securityholder meeting to obtain approval of the change, the costs of preparing and filing a prospectus to commence continuous distribution of securities if the investment fund is converting from a non-redeemable investment fund to a mutual fund in continuous distribution and brokerage commissions payable as a result of any portfolio realignment necessary to carry out the transaction.

PART 7 CHANGES

7.1 Integrity and Competence of MutualInvestment Fund Management Groups

(1) Paragraph 5.5(1)(a) of the Instrument requires that the approval of the securities regulatory authority be obtained before the manager of a mutualan investment fund is changed. SubsectionParagraph 5.5(21)(a.1) of the Instrument contemplates similar approval to a change in control of a manager.

(2) In connection with each of these approvals, applicants are required by section 5.7 of the Instrument to provide information to the securities regulatory authority concerning the integrity and experience of the persons or companies that are proposed to be involved in, or control, the management of the mutualinvestment fund after the proposed transaction.

(3) The Canadian securities regulatory authorities would generally consider it helpful in their assessment of the integrity and experience of the proposed new management group that will manage a mutualan investment fund after a change in manager if the application set out, among any other information the applicant wishes to provide

(a) the name, registered address and principal business activity or the name, residential address and occupation or employment of

(i) if the proposed manager is not a public company, each beneficial owner of securities of each shareholder, partner or limited partner of the proposed manager, and

(ii) if the proposed manager is a public company, each beneficial owner of securities of each shareholder of the proposed manager that is the beneficial holder, directly or indirectly, of more than 10 percent of the outstanding securities of the proposed manager; and

(b) information concerning

(i) if the proposed manager is not a public company, each shareholder, partner or limited partner of the proposed manager,

(ii) if the proposed manager is a public company, each shareholder that is the beneficial holder, directly or indirectly, of more than 10 percent of the outstanding securities of the proposed manager,

(iii) each director and officer of the proposed manager, and

(iv) each proposed director, officer or individual trustee of the mutualinvestment fund.

(4) The Canadian securities regulatory authorities would generally consider it helpful if the information relating to the persons and companies referred to in paragraph (3)(b) included

(a) for a company

(i) its name, registered address and principal business activity,

(ii) the number of securities or partnership units of the proposed manager beneficially owned, directly or indirectly, and

(iii) particulars of any existing or potential conflicts of interest that may arise as a result of the activities of the company and its relationship with the management group of the mutualinvestment fund; and

(b) for an individual

(i) his or her name, birthdate and residential address,

(ii) his or her principal occupation or employment,

(iii) his or her principal occupations or employment during the five years before the date of the application, with a particular emphasis on the individual's experience in the financial services industry,

(iv) the individual's educational background, including information regarding courses successfully taken that relate to the financial services industry,

(v) his or her position and responsibilities with the proposed manager or the controlling shareholders of the proposed manager or the mutualinvestment fund,

(vi) whether he or she is, or within five years before the date of the application has been, a director, officer or promoter of any reporting issuer other than the mutualinvestment fund, and if so, disclosing the names of the reporting issuers and their business purpose, with a particular emphasis on relationships between the individual and other mutualinvestment funds,

(vii) the number of securities or partnership units of the proposed manager beneficially owned, directly or indirectly,

(viii) particulars of any existing or potential conflicts of interest that may arise as a result of the individual's outside business interests and his or her relationship with the management group of the mutualinvestment fund, and

(ix) a description of the individual's relationships to the proposed manager and other service providers to the mutualinvestment fund.

(5) The Canadian securities regulatory authorities would generally consider it helpful in their assessment of the integrity and experience of the persons or companies that are proposed to manage a mutualan investment fund after a change of control of the manager, if the application set out, among any other information that applicant wishes to provide, a description of

(a) the proposed corporate ownership of the manager of the mutualinvestment fund after the proposed transaction, indicating for each proposed direct or indirect shareholder of the manager of the mutualinvestment fund the information about that shareholder referred to in subsection (4);

(b) the proposed officers and directors of the manager of the mutualinvestment fund, of the mutualinvestment fund and of each of the proposed controlling shareholders of the mutualinvestment fund, indicating for each individual, the information about that individual referred to in subsection (4);

(c) any anticipated changes to be made to the officers and directors of the manager of the mutualinvestment fund, of the mutualinvestment fund and of each of the proposed controlling shareholders of the mutualinvestment fund that are not set out in paragraph (b); and

(d) the relationship of the members of the proposed controlling shareholders and the other members of the management group to the manager and any other service provider to the mutualinvestment fund.

7.2 Mergers and Conversions of Mutualof Investment Funds -- Subsection 5.6(1) of the Instrument provides that mergers or conversions of mutualof investment funds may be carried out on the conditions described in that subsection without prior approval of the securities regulatory authority. The Canadian securities regulatory authorities consider that the types of transactions contemplated by subsection 5.6(1) of the Instrument when carried out in accordance with the conditions of that subsection address the fundamental regulatory concerns raised by mergers and conversions of mutualof investment funds. Subsection 5.6(1) is designed to facilitate consolidations of mutualinvestment funds within fund families that have similar fundamental investment objectives and strategies and that are operated in a consistent and similar fashion. Since subsection 5.6(1) will be unavailable unless the mutualinvestment funds involved in the transaction have substantially similar fundamental investment objectives and strategies and are operated in a substantially similar fashion, the Canadian securities regulatory authorities do not expect that the portfolios of the consolidating funds will be required to be realigned to any great extent before a merger. If realignment is necessary, the Canadian securities regulatory authorities note that paragraph 5.6(1)(h) of the Instrument provides that none of the costs and expenses associated with the transaction may be borne by the mutualinvestment fund. Brokerage commissions payable as a result of any portfolio realignment necessary to carry out the transaction would, in the view of the Canadian securities regulatory authorities, be costs and expenses associated with the transaction.

7.3 Regulatory Approval for Reorganizations

(1) Paragraph 5.7(1)(b) of the Instrument requires certain details to be provided in respect of an application for regulatory approval required by paragraph 5.5(1)(b) that is not automatically approved under subsection 5.6(1). The Canadian securities regulatory authorities will be reviewing this type of proposed transaction, among other things, to ensure that adequate disclosure of the differences between the fundsissuers participating in the proposed transaction is given to securityholders of the mutualinvestment fund that will be merged, reorganized or amalgamated with another mutual fundissuer.

(2) If a mutualan investment fund is proposed to be merged, amalgamated or reorganized with a mutualan investment fund that has a net asset value that is smaller than the net asset value of the terminating mutualinvestment fund, the Canadian securities regulatory authorities will consider the implications of the proposed transaction on the smaller continuing mutualinvestment fund. The Canadian securities regulatory authorities believe that this type of transaction generally would constitute a material change for the smaller continuing mutualinvestment fund, thereby triggering the requirements of paragraph 5.1(1)(g) of the Instrument and Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure.

7.4 [Deleted]

7.5 Circumstances in Which Approval of Securityholders Not Required

(1) Subsection 5.3(2) of the Instrument provides that a mutualan investment fund's reorganization with, or transfer of assets to, another mutual fundissuer may be carried out on the conditions described in the subsectionparagraph 5.3(2)(a) or 5.3(2)(b) without the prior approval of the securityholders of the mutualinvestment fund.

(2) If the manager refers the change contemplated in subsection 5.3(2) to the mutualinvestment fund's independent review committee, and subsequently seeks the approval of the securityholders of the mutualinvestment fund, the CSACanadian securities regulatory authorities expect the manager to include a description of the independent review committee's determination in the written notice to securityholders referred to in section 5.4 of thisthe Instrument.

(3) The Canadian securities regulatory authorities expect the written notice referred to in subparagraphs 5.3(2)(a)(iv) and (v) of the Instrument to include, at a minimum, the expected date of the reorganization, the name of the other investment fund with which the investment fund will be reorganized, how a securityholder of the investment fund may obtain a copy of the other investment fund's fund facts, simplified prospectus or annual information form, as applicable, and a description of the determination of the investment fund's independent review committee with respect to the reorganization.

7.6 Change of Auditor -- Section 5.3.1 of the Instrument requires that the independent review committee of the mutualinvestment fund give its prior approval to the manager before the auditor of the mutualinvestment fund may be changed.

7.7 Connection to NI 81-107 -- There may be matters under sectionsubsection 5.1(1) of the Instrument that may also be a conflict of interest matter as defined in NI 81-107. The CSACanadian securities regulatory authorities expect any matter under sectionsubsection 5.1(1) subject to review by the independent review committee to be referred by the manager to the independent review committee before seeking the approval of securityholders of the mutualinvestment fund. The CSACanadian securities regulatory authorities further expect the manager to include a description of the independent review committee's determination in the written notice to securityholders referred to in subsection 5.4(2) of this Instrument.

7.8 Termination of a Non-Redeemable Investment Fund -- Section 5.8.1 of the Instrument requires a non-redeemable investment fund that is terminating to issue a press release announcing the termination. Investment funds for which the termination is a material change must also comply with the requirements of Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure.

PART 8 CUSTODIANSHIP OF PORTFOLIO ASSETS

8.1 Standard of Care -- The standard of care prescribed by section 6.6 of the Instrument is a minimum standard only. Similarly, the provisions of section 6.5 of the Instrument, designed to protect a mutualan investment fund from loss in the event of the insolvency of those holding its portfolio assets, are minimum requirements. The Canadian securities regulatory authorities are of the view that the requirements set out in section 6.5 may require custodians and sub-custodians to take such additional steps as may be necessary or desirable properly to protect the portfolio assets of the mutualinvestment fund in a foreign jurisdiction and to ensure that those portfolio assets are unavailable to satisfy the claims of creditors of the custodian or sub-custodian, having regard to creditor protection and bankruptcy legislation of any foreign jurisdiction in which portfolio assets of a mutualan investment fund may be located.

8.2 Book-Based System

(1) Subsection 6.5(3) of the Instrument provides that a custodian or sub-custodian of a mutualan investment fund may arrange for the deposit of portfolio assets of the mutualinvestment fund with a depository, or clearing agency, that operates a book-based system. Such depositories or clearing agencies include The Canadian Depository For Securities Limited, the Depository Trust Company or any other domestic or foreign depository or clearing agency that is incorporated or organized under the laws of a country or a political subdivision of a country and operates a book-based system in that country or political subdivision or operates a transnational book-based system.

(2) A depository or clearing agency that operates a book-based system used by a mutualan investment fund is not considered to be a custodian or sub-custodian of the mutualinvestment fund.

8.3 Compliance -- Paragraph 6.7(1)(c) of the Instrument requires the custodian of a mutualan investment fund to make any changes periodically that may be necessary to ensure that the custodian and sub-custodian agreements comply with Part 6, and that there is no sub-custodian of the mutualinvestment fund that does not satisfy the applicable requirements of sections 6.2 or 6.3. The Canadian securities regulatory authorities note that necessary changes to ensure this compliance could include a change of sub-custodian.

PART 9 CONTRACTUAL PLANS

9.1 Contractual Plans -- Industry participants are reminded that the term "contractual plan" used in Part 8 of the Instrument is a defined term in the securities legislation of most jurisdictions, and that contractual plans as so defined are not the same as automatic or periodic investment plans. The distinguishing feature of a contractual plan is that sales charges are not deducted at a constant rate as investments in mutual fund securities are made under the plan; rather, proportionately higher sales charges are deducted from the investments made during the first year, or in some plans the first two years.

PART 10 SALES AND REDEMPTIONS OF SECURITIES

10.1 General -- One of the purposes of Parts 9, 10 and 11 of the Instrument are intendedis to ensure that

(a) investors' cash is received by a mutualan investment fund promptly;

(b) the opportunity for loss of an investors' cash before investment in the mutualinvestment fund is minimized; and

(c) the mutualinvestment fund or the appropriate investor receives all interest that accrues on cash during the periods between delivery of the cash by an investor until investment in the mutualinvestment fund, in the case of the purchase of mutualinvestment fund securities, or between payment of the cash by the mutualinvestment fund until receipt by the investor, in the case of redemptions.

10.2 Interpretation

(1) The Instrument refers to "securityholders" of a mutualan investment fund in several provisions., most notably in Parts 9 and 10 when referring to purchase and redemption orders received by a mutual fund or a participating dealer or principal distributor from "securityholders".(2) MutualInvestment funds must keep a record of the holders of their securities. A mutualAn investment fund registers a holder of its securities on this record as requested by the person or company placing a purchase order or as subsequently requested by that registered securityholder. The Canadian securities regulatory authorities are of the view that a mutualan investment fund is entitled to rely on its register of holders of securities to determine the names of such holders and in its determination as to whom it is to take instructions from.

(32) Accordingly, when the Instrument refers to "securityholder" of a mutualan investment fund, it is referring to the securityholder registered as a holder of securities on the records of the mutualinvestment fund. If that registered securityholder is a participating dealer acting for its client, the mutualinvestment fund deals with and takes instructions from that participating dealer. The Instrument does not regulate the relationship between the participating dealer and its client for whom the participating dealer is acting as agent. The Canadian securities regulatory authorities note however, that the participating dealer should, as a matter of prudent business practice, obtain appropriate instructions, in writing, from its client when dealing with the client's beneficial holdings in a mutualan investment fund.

10.3 Receipt of Orders

(1) A principal distributor or participating dealer of a mutual fund should endeavour, to the extent possible, to receive cash to be invested in the mutual fund at the time the order to which they pertain is placed.

(2) A dealer receiving an order for redemption should, at the time of receipt of the investor's order, obtain from the investor all relevant documentation required by the mutual fund in respect of the redemption including, without limitation, any written request for redemption that may be required by the mutual fund, duly completed and executed, and any certificates representing the mutual fund securities to be redeemed, so that all required documentation is available at the time the redemption order is transmitted to the mutual fund or to its principal distributor for transmittal to the mutual fund.

10.4 Backward Pricing -- SectionsSubsections 9.3(1) and 10.3(1) of the Instrument provide that the issue price or the redemption price of a security of a mutual fund to which a purchase order or redemption order pertains shall be the net asset value per security, next determined after the receipt by the mutual fund of the relevant order. For clarification, the Canadian securities regulatory authorities emphasize that the issue price and redemption price cannot be based upon any net asset value per security calculated before receipt by the mutual fund of the relevant order.

10.5 Coverage of Losses

(1) Subsection 9.4(6) of the Instrument provides that certain participating dealers may be required to compensate a mutual fund for a loss suffered as the result of a failed settlement of a purchase of securities of the mutual fund. Similarly, subsection 10.5(3) of the Instrument provides that certain participating dealers may be required to compensate a mutual fund for a loss suffered as the result of a redemption that could not be completed due to the failure to satisfy the requirements of the mutual fund concerning redemptions.

(2) The Canadian securities regulatory authorities have not carried forward into the Instrument the provisions contained in NP39 relating to a participating dealer's ability to recover from their clients or other participating dealers any amounts that they were required to pay to a mutual fund. If participating dealers wish to provide for such rights they should make the appropriate provisions in the contractual arrangements that they enter into with their clients or other participating dealers.

10.6 Issue Price of Securities for Non-Redeemable Investment Funds -- Subsection 9.3(3) of the Instrument provides that the issue price of a security of a non-redeemable investment fund distributed under a prospectus must not, as far as reasonably practicable, be a price that causes dilution of the net asset value of other outstanding securities of the investment fund. The Canadian securities regulatory authorities have observed when an existing non-redeemable investment fund issues new securities under a prospectus, the issue price typically exceeds the net asset value per security on the day before the date of the prospectus, such that the net proceeds of the offering on a per unit basis is no less than the net asset value per security on the day before the date of the prospectus. The Canadian securities regulatory authorities do not consider this issue price to cause dilution to the net asset value of other outstanding securities of the investment fund.

PART 11 COMMINGLING OF CASH

11.1 Commingling of Cash

(1) Part 11 of the Instrument requires principal distributors and participating dealers to account separately for cash they may receive for the purchase of, or upon the redemption of, mutualinvestment fund securities. Those principal distributors and participating dealers are prohibited from commingling any cash so received with their other assets or with cash held for the purchase or upon the sale of securities of other types of securities. The Canadian securities regulatory authorities are of the view that this means that dealers may not deposit into the trust accounts established under Part 11 cash obtained from the purchase or sale of other types of securities such as guaranteed investment certificates, government treasury bills, segregated funds or bonds.

(2) Subsections 11.1(2) and 11.2(2) of the Instrument state that principal distributors and participating dealers, respectively, may not use any cash received for the investment in mutualinvestment fund securities to finance their own operations. The Canadian securities regulatory authorities are of the view that any costs associated with returned client cheques that did not have sufficient funds to cover a trade ("NSF cheques") are a cost of doing business and should be borne by the applicable principal distributor or participating dealer and should not be offset by interest income earned on the trust accounts established under Part 11 of the Instrument.

(3) No overdraft positions should arise in these trust accounts.

(4) Subsections 11.1(3) and 11.2(3) of the Instrument prescribe the circumstances under which a principal distributor or participating dealer, respectively, may withdraw funds from the trust accounts established under Part 11 of the Instrument. This would prevent the practice of "lapping". Lapping occurs as a result of the timing differences between trade date and settlement date, when cash of a mutualan investment fund client held for a trade which has not yet settled is used to settle a trade for another mutualinvestment fund client who has not provided adequate cash to cover the settlement of that other trade on the settlement date. The Canadian securities regulatory authorities view this practice as a violation of subsections 11.1(3) and 11.2(3) of the Instrument.

(5) Subsections 11.1(4) and 11.2(4) of the Instrument require that interest earned on cash held in the trust accounts established under Part 11 of the Instrument be paid to the applicable mutualinvestment fund or its securityholders "pro rata based on cash flow". The Canadian securities regulatory authorities are of the view that this requirement means, in effect, that the applicable mutualinvestment fund or securityholder should be paid the amount of interest that the mutualinvestment fund or securityholder would have received had the cash held in trust for that mutualinvestment fund or securityholder been the only cash held in that trust account.

(6) Paragraph 11.3(b) of the Instrument requires that trust accounts maintained in accordance with sections 11.1 or 11.2 of the Instrument bear interest "at rates equivalent to comparable accounts of the financial institution". A type of account that ordinarily pays zero interest may be used for trust accounts under sections 11.1 or 11.2 of the Instrument so long as zero interest is the rate of interest paid on that type of account for all depositors other than trust accounts.

PART 12 [Deleted]

PART 13 PROHIBITED REPRESENTATIONS AND SALES COMMUNICATIONS

13.1 Misleading Sales Communications

(1) Part 15 of the Instrument prohibits misleading sales communications relating to mutualinvestment funds and asset allocation services. Whether a particular description, representation, illustration or other statement in a sales communication is misleading depends upon an evaluation of the context in which it is made. The following list sets out some of the circumstances, in the view of the Canadian securities regulatory authorities, in which a sales communication would be misleading. No attempt has been made to enumerate all such circumstances since each sales communication must be assessed individually.

1. A statement would be misleading if it lacks explanations, qualifications, limitations or other statements necessary or appropriate to make the statement not misleading.

2. A representation about past or future investment performance would be misleading if it is

(a) a portrayal of past income, gain or growth of assets that conveys an impression of the net investment results achieved by an actual or hypothetical investment that is not justified under the circumstances;

(b) a representation about security of capital or expenses associated with an investment that is not justified under the circumstances or a representation about possible future gains or income; or

(c) a representation or presentation of past investment performance that implies that future gains or income may be inferred from or predicted based on past investment performance or portrayals of past performance.

3. A statement about the characteristics or attributes of a mutualan investment fund or an asset allocation service would be misleading if

(a) it concerns possible benefits connected with or resulting from services to be provided or methods of operation and does not give equal prominence to discussion of any risks or associated limitations;

(b) it makes exaggerated or unsubstantiated claims about management skill or techniques; characteristics of the mutualinvestment fund or asset allocation service; an investment in securities issued by the fund or recommended by the service; services offered by the fund, the service or their respective manager; or effects of government supervision; or

(c) it makes unwarranted or incompletely explained comparisons to other investment vehicles or indices.

4. A sales communication that quoted a third party source would be misleading if the quote were out of context and proper attribution of the source were not given.

(2) Performance data information may be misleading even if it complies technically with the requirements of the Instrument. For instance, subsections 15.8(1) and (2) of the Instrument contain requirements that the standard performance data for mutualinvestment funds given in sales communications be for prescribed periods falling within prescribed amounts of time before the date of the appearance or use of the advertisement or first date of publication of any other sales communication. That standard performance data may be misleading if it does not adequately reflect intervening events occurring after the prescribed period. An example of such an intervening event would be, in the case of money market funds, a substantial decline in interest rates after the prescribed period.

(3) An advertisement that presents information in a manner that distorts information contained in the preliminary prospectus or prospectus, or preliminary prospectus, preliminary fund facts document and preliminary annual information form or prospectus, fund facts document and annual information form, as applicable, of a mutualan investment fund or that includes a visual image that provides a misleading impression will be considered to be misleading.

(4) Any discussion of the income tax implications of an investment in a mutualan investment fund security should be balanced with a discussion of any other material aspects of the offering.

(5) Paragraph 15.2(1)(b) of the Instrument provides that sales communications must not include any statement that conflicts with information that is contained in, among other things and as applicable, a prospectus or fund facts document. The Canadian securities regulatory authorities are of the view that a sales communication that provides performance data in compliance with the requirements of Part 15 of the Instrument for time periods that differ from those shown in a prospectus, fund facts document or management report of fund performance does not violate the requirements of paragraph 15.2(1)(b) of the Instrument.

(6) Subsection 15.3(1) of the Instrument permits a mutualan investment fund or asset allocation service to compare its performance to, among other things, other types of investments or benchmarks on certain conditions. Examples of such other types of investments or benchmarks to which the performance of a mutualan investment fund or asset allocation service may be compared include consumer price indices; stock, bond or other types of indices; averages; returns payable on guaranteed investment certificates or other certificates of deposit; and returns from an investment in real estate.

(7) Paragraph 15.3(1)(c) of the Instrument requires that if the performance of a mutualan investment fund or asset allocation service is compared to that of another investment or benchmark, the comparison sets out clearly any factors necessary to ensure that the comparison is fair and not misleading. Such factors would include an explanation of any relevant differences between the mutualinvestment fund or asset allocation service and the investment or benchmark to which it is compared. Examples of such differences include any relevant differences in the guarantees of, or insurance on, the principal of or return from the investment or benchmark; fluctuations in principal, income or total return; any differing tax treatment; and, for a comparison to an index or average, any differences between the composition or calculation of the index or average and the investment portfolio of the mutualinvestment fund or asset allocation service.

13.2 Other Provisions

(1) Subsection 15.9(1) of the Instrument imposes certain disclosure requirements for sales communications in circumstances in which there was a change in the business, operations or affairs of a mutualan investment fund or asset allocation service during or after a performance measurement period of performance data contained in the sales communication that could have materially affected the performance of the mutualinvestment fund or asset allocation service. Examples of these changes are changes in the management, investment objectives, portfolio adviser, ownership of the manager, fees and charges, or of policies concerning the waiving or absorbing of fees and charges, of the mutualinvestment fund or asset allocation service; or of a change in the characterization of thea mutual fund as a money market fund. A reorganization or restructuring of an investment fund that results in a conversion of a non-redeemable investment fund into a mutual fund, or the conversion of a mutual fund into a non-redeemable investment fund, would also be an example of such a change.

(1.1) Subparagraph 15.6(1)(d)(i) of the Instrument prohibits a sales communication pertaining to a mutual fund from including performance data for a period that is before the time when the mutual fund offered its securities under a prospectus. Where the mutual fund has previously existed as a non-redeemable investment fund and has been a reporting issuer in a jurisdiction for a period of at least 12 consecutive months, either as a mutual fund or a non-redeemable investment fund, subsection 15.6(2) requires any sales communication that contains performance data of the mutual fund to include performance data for the period that the fund existed as a non-redeemable investment fund. The Canadian securities regulatory authorities are of the view that performance data pertaining to a mutual fund that has converted from a non-redeemable investment fund should include both the periods before and after the converting transaction, similar to the past performance information presented in the mutual fund's management report of fund performance. Performance data must not be included for any period before the time the non-redeemable investment fund was a reporting issuer.

(2) Paragraph 15.11(1)5 of the Instrument requires that no non-recurring fees and charges that are payable by some or all securityholders and no recurring fees and charges that are payable by some but not all securityholders be assumed in calculating standard performance data. Examples of non-recurring types of fees and charges are front-end sales commissions and contingent deferred sales charges, and examples of recurring types of fees and charges are the annual fees paid by purchasers who purchased on a contingent deferred charge basis.

(3) Paragraphs 15.11(1)2 and 15.11(2)2 of the Instrument require that no fees and charges related to optional services be assumed in calculating standard performance data. Examples of these fees and charges include transfer fees, except in the case of an asset allocation service, and fees and charges for registered retirement savings plans, registered retirement income funds, registered education savings plans, pre-authorized investment plans and systematic withdrawal plans.

(4) The Canadian securities regulatory authorities are of the view that it is inappropriate and misleading for a mutualan investment fund that is continuing following a merger to prepare and use pro forma performance information or financial statements that purport to show the combined performance of the two funds during a period before their actual merger. The Canadian securities regulatory authorities are of the view that such pro forma information is hypothetical, involving the making of many assumptions that could affect the results.

(5) Subsections 15.8(2) and (3) of the Instrument require disclosure of standard performance data of a mutual fund, in some circumstances, from "the inception of the mutual fund". It is noted that paragraph 15.6(1)(d) generally prohibits disclosure of performance data for a period that is before the time when the mutual fund offered its securities under a prospectus or before an asset allocation service commenced operation. Also, Instruction (1) to Item 5 of Part B of Form 81-101F1 Contents of Simplified Prospectus requires disclosure of the date on which a mutual fund's securities first became available to the public as the date on which the mutual fund "started". Therefore, consistent with these provisions, the words "inception of the mutual fund" in subsections 15.8(2) and (3) should be read as referring to the beginning of the distribution of the securities of the mutual fund under a prospectus of the mutual fund, and not from any previous time in which the mutual fund may have existed but did not offer its securities under a prospectus. If a mutual fund previously existed as a non-redeemable investment fund, the words "inception of the mutual fund" in subsections 15.8(2) and (3) should be read as referring to the date that the non-redeemable investment fund became a reporting issuer.

(6) Paragraph 15.6(1)(a) of the Instrument contains a prohibition against the inclusion of performance data for a mutual fund that has been distributing securities for less than 12 consecutive months. The creation of a new class or series of security of an existing mutual fund does not constitute the creation of a new mutual fund and therefore does not subject the mutual fund to the restrictions of paragraph 15.6(1)(a) unless the new class or series is referable to a new portfolio of assets.

(7) Section 15.14 of the Instrument contains the rules relating to sales communications for multiclass mutualinvestment funds. Those rules are applicable to a mutualan investment fund that has more than one class of securities that are referable to the same portfolio of assets. Section 15.14 does not deal directly with asset allocation services. It is possible that asset allocation services could offer multiple "classes"; the Canadian securities regulatory authorities recommend that any sales communications for those services generally respect the principles of section 15.14 in order to ensure that those sales communications not be misleading.

(8) The Canadian securities regulatory authorities believe that the use of hypothetical or pro forma performance data for new classes of securities of a multi-class mutualinvestment fund would generally be misleading.

13.3 Sales Communications of Non-Redeemable Investment Funds During the Waiting Period and the Distribution Period -- The Canadian securities regulatory authorities remind non-redeemable investment funds of the restrictions contained in securities legislation relating to the distribution of material and advertising and marketing in connection with a prospectus offering during the waiting period and during the distribution period following the issuance of a receipt for the final prospectus. Part 15 of the Instrument does not vary any of the restrictions imposed during these periods.

PART 14 [Deleted]

PART 15 SECURITYHOLDER RECORDS

15.1 Securityholder Records

(1) Section 18.1 of the Instrument requires the maintenance of securityholder records, including past records, relating to the issue and redemption of securities and distributions of the mutualinvestment fund. Section 18.1 does not require that these records need be held indefinitely. It is up to the particular mutualinvestment fund, having regard to prudent business practice and any applicable statutory limitation periods, to decide how long it wishes to retain old records.

(2) The Canadian securities regulatory authorities are of the view that the requirements in section 18.1 to maintain securityholder records may be satisfied if the investment fund maintains up to date records of registered securityholders. Each investment fund may decide whether it wishes to maintain records of beneficial securityholders.

PART 16 EXEMPTIONS AND APPROVALS

16.1 Need for Multiple or Separate Applications -- The Canadian securities regulatory authorities note that a person or company that obtains an exemption from a provision of the Instrument need not apply again for the same exemption at the time of each prospectus or simplified prospectus refiling unless there has been some change in an important fact relating to the granting of the exemption. This also applies to exemptions from NP39 granted before the Instrument; as provided in section 19.2 of the Instrument, it is not necessary to obtain an exemption from the corresponding provision of the Instrument.

16.2 Exemptions under Prior Policies

(1) Subsection 19.2(1) of the Instrument provides that a mutual fund that has obtained, from the regulatory or securities regulatory authority, an exemption from a provision of NP 39 before the Instrument came into force is granted an exemption from any substantially similar provision of the Instrument, if any, on the same conditions, if any, contained in the earlier exemption.

(2) The Canadian securities regulatory authorities are of the view that the fact that a number of small amendments have been made to many of the provisions of the Instrument from the corresponding provision of NP39 should not lead to the conclusion that the provisions are not "substantially similar", if the general purpose of the provisions remain the same. For instance, even though some changes have been made in the Instrument, the Canadian securities regulatory authorities consider paragraph 2.2(1)(a) of the Instrument to be substantially similar to paragraph 2.04(1)(b) of NP39, in that the primary purpose of both provisions is to prohibit mutual funds from acquiring securities of an issuer sufficient to permit the mutual fund to control or significantly influence the control of that issuer.

(3) The CSACanadian securities regulatory authorities are of the view that the new provisions of the Instrument relating to mutual funds investing in other mutual funds introduced on December 31, 2003 are not "substantially similar" to those of the Instrument which they replace.

16.3 Waivers and Orders concerning "Fund of Funds"

(1) The CSACanadian securities regulatory authorities in a number of jurisdictions have provided waivers and orders from NP39 and securities legislation to permit "fund of funds" to exist and carry on investment activities not otherwise permitted by NP39 or securities legislation. Some of those waivers and orders contained "sunset" provisions that provided that they expired when legislation or a CSA policy or rule of the Canadian securities regulatory authorities came into force that effectively provided for a new "fund of funds" regime. For greater certainty, the Canadian securities regulatory authorities note that the coming into force of the Instrument will not trigger the "sunset" of those waivers and orders.

(2) For greater certainty, note that the coming into force of National Instrument 81-102 did not trigger the "sunset" of those waivers and orders. However, the coming into force of section 19.3 of the Instrument will effectively cause those waivers and orders to expire one year after its coming into force.

 

Annex F: Proposed Amendments to National Instrument 41-101 General Prospectus Requirements

ANNEX F

PROPOSED AMENDMENTS TO

NATIONAL INSTRUMENT 41-101 GENERAL PROSPECTUS REQUIREMENTS

1. National Instrument 41-101 General Prospectus Requirements is amended by this Instrument.

2. Section 1.1 is amended by replacing the definition of "NI 81-102" with the following:

"NI 81-102" means National Instrument 81-102 Investment Funds;.

3. Subsection 14.8.1(1) is amended by deleting "except that each reference in that definition to "a mutual fund" must be read as "an investment fund"".

4. General Instruction (8) of Form 41-101F2 is repealed.

5. Item 1.3(1) of Form 41-101F2 is amended by deleting ", including any options or warrants,".

6. Item 1.4(5) of Form 41-101F2 is repealed.

7. Subsection (2) of the Instructions under Item 1.4 of Form 41-101F2 is repealed.

8. Form 41-101F2 is amended by adding the following immediately after Item 1.8(1):

1.8.1 -- Conversion of the Investment Fund

If the investment fund is a non-redeemable investment fund that intends to convert into a mutual fund, by undertaking a transaction that results in the securityholders of the investment fund becoming securityholders in a mutual fund or implementing a change that restructures the investment fund into a mutual fund, state this fact and, if applicable, the date on which the conversion is expected to occur. If applicable, state that the investment strategies of the investment fund will change after it becomes a mutual fund. Include a cross-reference to the section in the prospectus where disclosure regarding the conversion is provided..

9. Form 41-101F2 is amended by adding the following immediately after Item 4.1:

4.2 -- Conversion of the Investment Fund

If the investment fund is a non-redeemable investment fund that intends to convert into a mutual fund, by undertaking a transaction that results in the securityholders of the investment fund becoming securityholders in a mutual fund or implementing a change that restructures the investment fund into a mutual fund,

(a) describe under the sub-heading "Conversion of the Fund"

(i) how the investment fund will implement the conversion,

(ii) the event or events that will trigger the conversion and, if applicable, the date on which the conversion is expected to occur,

(iii) the class or series of securities that securityholders of the investment fund will hold after the conversion,

(iv) how the investment strategies of the investment fund will differ after it becomes a mutual fund,

(v) any approvals that will be required in order to implement the conversion, and

(vi) any other change that is expected to occur as a result of the conversion, and

(b) if applicable, state under the sub-heading "Conversion of the Fund" that the securities of the investment fund will not be listed on the stock exchange on which they trade as a result of the conversion and describe how securityholders may dispose of the securities of the investment fund after the conversion..

10. Item 6.1 of Form 41-101F2 is amended by adding the following subsection:

(7) If the investment fund intends to invest in physical commodities,

(a) state whether the investment fund may purchase physical commodities or use specified derivatives the underlying interest of which is a physical commodity, and

(b) briefly describe

(i) how physical commodities are or will be used in conjunction with other securities to achieve the investment fund's investment objectives,

(ii) the types of physical commodities the investment fund expects to invest in, and

(iii) the limits of the investment fund's use of physical commodities..

11. Item 14.1 of Form 41-101F2 is amended by replacing subsection (2) with the following:

(2) Describe how the issue price of the securities of the investment fund is determined..

12.

(1) Item 15.1 of Form 41-101F2 is amended by renumbering it as subsection 15.1(1).

(2) Item 15.1 of Form 41-101F2, as amended by subsection (1), is amended by adding the following paragraphs immediately after paragraph (a):

(a.1) the dates on which securities of the investment fund will be redeemed,

(a.2) the dates on which payment of the proceeds of redemption will be made by the investment fund, .

(3) Item 15.1 of Form 41-101F2, as amended by subsection (1), is amended by adding the following subsection:

(2) If the redemption proceeds are computed by reference to the net asset value per security and amounts may be deducted from the net asset value per security, describe each amount that may be deducted and the entity each amount is paid to. If there is a maximum amount or percentage that may be deducted from the net asset value per security, disclose that amount or percentage..

13. Item 19.1(1)(c) of Form 41-101F2 is amended by deleting "or any of its subsidiaries".

14. Item 19.9(1) of Form 41-101F2 is amended

(a) by deleting "or of a subsidiary of the investment fund",

(b) by deleting "or any of its subsidiaries",

(c) by deleting "or from a subsidiary of the investment fund",

(d) by deleting "or a subsidiary of the investment fund", and

(e) by deleting "or by a subsidiary of the investment fund".

15. Items 21.2 and 21.3 of Form 41-101F2 are repealed.

16. Item 25.8 of Form 41-101F2 is amended by adding "and NI 81-102" after "the Instrument".

17. Item 27 of Form 41-101F2 is repealed.

18. Subsection (5) of the Instructions under Item 29.2 of Form 41-101F2 is amended by deleting "or its subsidiaries".

19. Item 39.4 is amended by deleting "or a subsidiary of the investment fund".

20. This Instrument comes into force on •.

 

Annex G: Proposed Amendments to National Instrument 81-106 Investment Fund Continuous Disclosure

ANNEX G

PROPOSED AMENDMENTS TO

NATIONAL INSTRUMENT 81-106 INVESTMENT FUND CONTINUOUS DISCLOSURE

1. National Instrument 81-106 Investment Fund Continuous Disclosure is amended by this Instrument.

2. Section 1.3 is amended

(a) by replacing subsection (2) with the following:

(2) Terms defined in National Instrument 81-102 Investment Funds and National Instrument 81-104 Commodity Pools and used in this Instrument have the respective meanings ascribed to them in those Instruments., and

(b) by adding the following subsection:

(3) Terms defined in National Instrument 81-105 Mutual Fund Sales Practices and used in this Instrument have the respective meanings ascribed to them in that Instrument except that the references in those definitions to "mutual fund" must be read as references to "investment fund". .

3. Subsection 3.5(1) is amended by replacing "National Instrument 81-102 Mutual Funds" with " National Instrument 81-102 Investment Funds".

4. Subsection 14.2(2) is amended by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102 Investment Funds".

5. Subsection 18.6(1) is amended by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102 Investment Funds".

6. Form 81-106F1 is amended by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102 Investment Funds".

7. This Instrument comes into force on •.

 

Schedule H-1: Proposed Amendments to National Instrument 81-107 Independent Review Committee for Investment Funds

ANNEX H

SCHEDULE H-1

PROPOSED AMENDMENTS TO

NATIONAL INSTRUMENT 81-107

INDEPENDENT REVIEW COMMITTEE FOR INVESTMENT FUNDS

1. National Instrument 81-107 Independent Review Committee for Investment Funds is amended by this Instrument.

2. In the following provisions "National Instrument 81-102 Mutual Funds" is replaced with "National Instrument 81-102 Investment Funds":

(a) subsection 3.10(6);

(b) paragraph 5.2(1)(a);

(c) paragraph 5.2(1)(c).

3. Subsection 6.2(2) is amended

(a) by replacing "mutual fund conflict of interest investment restrictions" with "investment fund conflict of interest investment restrictions", and

(b) by replacing "a mutual fund" with "an investment fund".

4. Subsection 6.2(3) is amended

(a) by replacing "mutual fund conflict of interest investment restrictions" with "investment fund conflict of interest investment restrictions", and

(b) by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102 Investment Funds" .

5. Appendix A -- Conflict of Interest or Self-Dealing Provisions is amended by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102 Investment Funds".

6. This Instrument comes into force on •.

 

Schedule H-2: Proposed Changes to Commentary in National Instrument 81-107 Independent Review Committee for Investment Funds

ANNEX H

SCHEDULE H-2

PROPOSED CHANGES TO COMMENTARY IN

NATIONAL INSTRUMENT 81-107

INDEPENDENT REVIEW COMMITTEE FOR INVESTMENT FUNDS

Note: In most jurisdictions, commentary on National Instrument 81-107 Independent Review Committee for Investment Funds is contained in that Instrument.

1. The changes proposed to Commentary in National Instrument 81-107 Independent Review Committee for Investment Funds are set out in this Schedule.

2. Commentary 4 to section 5.1 is changed by replacing "National Instrument 81-102 Mutual Funds" with "NI 81-102".

3. This change becomes effective on •.

 

Annex I: Proposed Amendments to Specified Instruments (Change in Name of National Instrument 81-102 Mutual Funds)

ANNEX I

PROPOSED AMENDMENTS TO SPECIFIED INSTRUMENTS

(CHANGE IN NAME OF NATIONAL INSTRUMENT 81-102 MUTUAL FUNDS)

1. National Instrument 24-101 Institutional Trade Matching and Settlement, National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, National Instrument 33-109 Registration Information, National Instrument 44-102 Shelf Distributions, National Instrument 45-106 Prospectus and Registration Exemptions, National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, National Instrument 81-101 Mutual Fund Prospectus Disclosure, and National Instrument 81-105 Mutual Fund Sales Practices (the "National Instruments") are amended by this Instrument.

2. The National Instruments named in section 1 are amended

(a) by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102Investment Funds" wherever it occurs,

(b) by replacing "National Instrument 81-102 -- Mutual Funds" with "National Instrument 81-102 Investment Funds" wherever it occurs, and

(c) by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102Investment Funds" wherever it occurs.

3. This Instrument comes into force on •.

 

Annex J: Proposed Changes to Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations

ANNEX J

PROPOSED CHANGES TO

COMPANION POLICY 31-103CP REGISTRATION REQUIREMENTS,

EXEMPTIONS AND ONGOING REGISTRANT OBLIGATIONS

1. The changes proposed to Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations are set out in this Annex.

2. Appendix B -- Terms not defined in NI 31-103 or this Companion Policy is changed by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102 Investment Funds".

3. These changes become effective on •.

 

Annex K: Proposed Changes to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions

ANNEX K

PROPOSED CHANGES TO

NATIONAL POLICY 11-203 PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

1. The changes proposed to National Policy 11-203 Process For Exemptive Relief Applications In Multiple Jurisdictions are set out in this Annex.

2. Section 5.5 is changed by replacing "National Instrument 81-102 Mutual Funds" with "National Instrument 81-102 Investment Funds".

3. These changes become effective on •.

 

Annex L: Local Matters

ANNEX L

LOCAL MATTERS

Authority for the Proposals under the Modernization Project

The following provisions of the Securities Act (Ontario) (the Act) provide the Ontario Securities Commission (the Commission) with the authority to adopt the proposals under the Modernization Project:

Paragraph 143(1)(10) authorizes the Commission to make rules prescribing requirements in respect of the books, records and other documents required by subsection 19(1) to be kept by market participants, including the form in which and the period for which the books, records and other documents are to be kept.

Paragraph 143(1)(22) authorizes the Commission to make rules prescribing requirements in respect of the preparation and dissemination and other use, by reporting issuers, of documents providing for continuous disclosure that are in addition to the requirements under the Act, including requirements in respect of an annual report, an annual information form, and supplemental analysis of financial statements.

Paragraph 143(1)24 authorizes the Commission to make rules requiring issuers to comply with Part XVIII (Continuous Disclosure) of the Act or rules made under paragraph 143(1)22.

Paragraph 143(1)25 authorizes the Commission to prescribe requirements in respect of financial accounting, reporting and auditing.

Paragraph 143(1)31 authorizes the Commission to make rules regulating investment funds and the distribution and trading of the securities of investment funds.

Paragraph 143(1)31(i) authorizes the Commission to make rules varying Part XV (Prospectuses -- Distribution) or Part XVIII (Continuous Disclosure) by prescribing additional disclosure requirements in respect of investment funds and requiring or permitting the use of particular forms or types of additional offering or other documents in connection with the funds.

Paragraph 143(1)31(ii) authorizes the Commission to prescribe permitted investment policy and investment practices for investment funds and prohibiting or restricting investments or investment practices for investment funds.

Paragraph 143(1)31(iii) authorizes the Commission to prescribe requirements governing the custodianship of assets of investment funds.

Paragraph 143(1)31(iv) authorizes the Commission to prescribe minimum initial capital requirements for investment funds making a distribution and to prohibit or restrict the reimbursement of costs in connection with the organization of a fund.

Paragraph 143(1)31(v) authorizes the Commission to prescribe matters affecting investment funds that require the approval of security holders of the fund, the Commission or the Director, including, in the case of security holders, the level of approval.

Paragraph 143(1)31(vii) authorizes the Commission to prescribe requirements in respect of the content and use of sales literature, sales communications or advertising relating to investment funds or the securities of investment funds.

Paragraph 143(1)31(xi) authorizes the Commission to make rules prescribing procedures applicable to investment funds, registrants and any other person or company in respect of sales and redemptions of investment fund securities.

Paragraph 143(1)35 authorizes the Commission to make rules regulating or varying the Act in respect of derivatives, including prescribing requirements that apply to investment funds.

Paragraph 143(1)39 authorizes the Commission to make rules requiring or respecting the form and content of all documents required under or governed by the Act, including preliminary prospectuses, prospectuses, interim financial reports and financial statements.