Commission Approval of Rule: OSC Rule - 46-501 - Self-Directed Registered Education Savings Plans

NOTICE OF RULE 46-501 UNDER THE SECURITIES ACT
SELF-DIRECTED REGISTERED EDUCATION SAVINGS PLANS
Notice of Rule

The Commission has, under section 143 of the Securities Act (the "Act"), made Rule 46-501 Self-Directed Registered Education Savings Plans (the "Rule").

The Rule and the material required by the Act to be delivered to the Minister of Finance were delivered on April 11, 1997. If the Minister does not approve theRule, reject the Rule or return it to the Commission for further consideration, the Rule will come into force on June 25, 1997. If the Minister approves the Rule,the Rule will come into force 15 days after it is approved.

Substance and Purpose of Rule

The purpose of the Rule is to provide relief from the registration and prospectus requirements of the Act for trades in securities that are self-directed registerededucation savings plans ("self-directed RESP's" or "plans").

The Rule is derived from the Blanket Ruling (the "Blanket Ruling") In the Matter of Self-Directed Registered Education Savings Plans (1992), 15 OSCB 613.The Blanket Ruling became a deemed rule of the same name (the "Deemed Rule"), which was revoked on March 1, 1997 and replaced by a Rule In the Matter ofSelf-Directed Registered Education Savings Plans (the "Replacement Rule"), notice of which was provided in (1997), 20 OSCB 1220. The Replacement Ruleexpires on the earlier of the date on which the Rule comes into force and July 1, 1998.

The need for relief arises because the definition of a "security" in subsection 1(1) of the Act includes any document constituting evidence of an interest in ascholarship or educational plan or trust. An application form entered into by a person for the purpose of establishing a self-directed RESP under the Income TaxAct (Canada) (the "Tax Act") is, therefore, a security within the meaning of the Act. The acceptance of a signed application form by the plan is therefore a tradein securities in Ontario and the offering of the plan an act in furtherance of a trade.

Under section 146.1(2)(e) of the Tax Act, as it formerly read, in order for a self-directed RESP to be accepted for registration by the Minister of NationalRevenue for Canada, the plan was required to be substantially similar to a type of plan described in or annexed to a prospectus filed with one or more of theCanadian Securities Administrators. Because of the operation of subsection 1(1) of the Act and section 146.1(2)(3) of the Tax Act, self-directed RESP's weretreated as being a security and prospectuses were filed to describe the plan in each jurisdiction where the plan was offered, other than the Province of Quebec,which did not consider plans to be a type of investment to which the Securities Act (Quebec) applied.

The prospectus requirement in the Tax Act was eliminated in February 1990 for plans not otherwise required by applicable Canadian securities legislation to file aprospectus with Canadian Securities Administrators. The Commission subsequently received applications for exemptive relief under section 74(1) of the Actfrom the provisions of section 53 of the Act as it applied to plans. On October 22, 1990, the Commission granted a blanket ruling (the "Original Ruling")exempting trades in securities that were self-directed RESP's from the prospectus requirements of the Act. The Original Ruling was granted in order to bring theAct into conformity with the treatment of self-directed RESP's by Revenue Canada and because the Commission was of the view that most of the prospectusdisclosure items were inapplicable to a self-directed RESP. Those disclosure items that were applicable could be included in or accompany the application formsetting out the terms and conditions of the plan, and this requirement is now found as part of section 2.2 of the Rule.

The Original Ruling provided relief from the prospectus requirements of the Act only. The notice accompanying publication of the Original Ruling stated thatthe Commission would consider applications for relief from the registration requirements in the Act from a registrant that was registered under the Act in acategory of dealer that would not permit it to sell a self-directed RESP.

Between October 1990 and February 1992, when the Blanket Ruling was published, the Commission received a number of applications for relief from mutualfund and financial intermediary dealers so as to permit those registrants to sell self- directed RESP's without further registration requirements being imposedupon them. Staff were of the view that if the self-directed RESP sold to a person was restricted to holding only those types of securities that the mutual funddealer or financial intermediary dealer would be permitted to trade to that person directly, the public interest would not require any additional registrations to beobtained by the registrant. This condition is now found in section 2.1 of the Rule.

Summary of Rule

Section 2.1 of the Rule provides a registration exemption, for a trade in a security that is a self-directed RESP, to mutual fund dealers or financial intermediariesand their respective salespersons, partners and officers and, in the case of a financial intermediary, employees, if the terms of the self-directed RESP restrict thesecurities that may be held under the plan to securities in which the person or company who traded the plan is permitted to trade.

Section 2.2 provides a prospectus exemption for a trade in a security that is a self-directed RESP if certain prescribed disclosure is provided, in the applicationform or in accompanying materials, to the person establishing the plan.

Summary of Written Comments Received by the Commission

A draft of the Rule was published for comment in the Ontario Securities Commission Bulletin on August 30, 1996 ((1996), 19 OSCB 4780). The Commissionreceived no written submissions with respect to the Rule.

The Rule does not vary in any significant way from the proposed Rule published for comment. Certain minor drafting changes have been made to providedrafting consistency with other rules and Part 3 of the proposed Rule, which dealt with the revocation of the Blanket Ruling, has been deleted. It is notnecessary that the Rule revoke the Blanket Ruling (which became the Deemed Rule) since it expired on March 1, 1997 in accordance with the provisions of theAct. The Replacement Rule, which replaced the Deemed Rule, will expire, by its terms, when this Rule comes into force, and so it is also unnecessary for theRule to provide for the revocation of the Replacement Rule.

Text of Rule

The text of the Rule follows.

DATED: April 18, 1997 ______________________.

 

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ONTARIO SECURITIES COMMISSION

RULE 46-501 - SELF-DIRECTED REGISTERED EDUCATION SAVINGS PLANS

 

PART 1 DEFINITIONS

1.1 Definitions - In this Rule

"Minister of National Revenue" means the Minister of National Revenue for Canada;

"self-directed RESP" means an RESP

(a) that is structured so that contributions by a subscriber to the plan are deposited directly into an account in the name of the subscriber, and

(b) under which the subscriber maintains control and direction over the plan that enables the subscriber to direct how the assets of the plan are to be held,invested or reinvested subject to compliance with the ITA; and

"subscriber" means a person who signs an application form for a self-directed RESP and makes a contribution under that self-directed RESP.

PART 2 REGISTRATION AND PROSPECTUS EXEMPTIONS

2.1 Registration Exemption - Section 25 of the Act does not apply to a trade in a self-directed RESP if

(a) the trade is made by

(i) a mutual fund dealer or a person registered as a salesperson, partner or officer of a mutual fund dealer and who is acting on behalf of that mutual fund dealer,or

(ii) a financial intermediary or a person who is an officer, salesperson or employee of a financial intermediary and who is acting on behalf of that financialintermediary; and

(b) the self-directed RESP restricts its investments in securities to securities in which the person or company who traded the self-directed RESP is permitted totrade.

2.2 Prospectus Exemption - Section 53 of the Act does not apply to a trade in a self-directed RESP if the application form provided to a subscriber for purposesof establishing the self-directed RESP includes, or is accompanied by, a copy of the provisions of the self-directed RESP and any additional documentation thatmay be necessary to provide disclosure of the following:

1. The income tax consequences of investing in a self-directed RESP.

2. The responsibilities of the trustee under the self-directed RESP.

3. The refund provisions.

4. The types of investments in which the assets of the self-directed RESP may be invested or reinvested.

5. The persons who may be designated as, and the procedures for designation of, a beneficiary under the self-directed RESP.

6. The nature of any payments that may be made by the self-directed RESP to a beneficiary under the self-directed RESP.

7. Any fees and charges associated with participation in the self-directed RESP.