Securities Law & Instruments

 



COMPANION POLICY 81-102CP
TO NATIONAL INSTRUMENT 81-102 - MUTUAL FUNDS

PART 1 PURPOSE
1.1 Purpose
PART 2 COMMENTS ON DEFINITIONS CONTAINED
IN THE INSTRUMENT

2.1 "cash equivalent"
2.2 "clearing corporation"
2.3 "guaranteed mortgage"
2.4 "hedging"
2.5 "illiquid asset"
2.6 "investor fees"
2.7 "manager"
2.8 "performance data"
2.9 "public medium"
2.10 "restricted security"
2.11 "sales communication"
2.12 "specified derivative"
2.13 "standardized future"
PART 3 INVESTMENTS
3.1 Evidences of Indebtedness of Foreign Governments
and Supranational Agencies
3.2 Instalments of Purchase Price
3.3 Purchase of Evidences of Indebtedness
3.4 Securities Repurchase and Reverse Repurchase Agreements
PART 4 USE OF PERMITTED DERIVATIVES
4.1 Exercising Options on Futures
4.2 Registration Matters
4.3 Swap Agreements
4.4 Leveraging
PART 5 SECURITYHOLDER MATTERS
5.1 Meetings of Securityholders
5.2 Limited Liability
PART 6 APPROVALS FOR CERTAIN CHANGES
6.1 Integrity and Competence of Mutual Fund Management Groups
6.2 Mergers and Conversions of Mutual Funds
6.3 Regulatory Approval for Reorganizations
6.4 Sales Communication Issues
PART 7 CUSTODIANSHIP OF PORTFOLIO ASSETS
7.1 Standard of Care
7.2 Book-Based System
PART 8 CONTRACTUAL PLANS
8.1 Contractual Plans
PART 9 SALES AND REDEMPTIONS OF SECURITIES
9.1 General
9.2 Receipt of Orders
9.3 Coverage of Losses
PART 10 PROHIBITED REPRESENTATIONS AND SALES COMMUNICATIONS
10.1 Misleading Sales Communications
10.2 Other Provisions
PART 11 PROSPECTUS DISCLOSURE REQUIREMENTS
11.1 Derivatives Disclosure
11.2 Management Fee Rebate Programs
11.3 Eligibility Opinions
PART 12 PROCESSING OF SEASONED PROSPECTUSES
12.1 Processing of Seasoned Prospectuses
PART 13 EXEMPTIONS AND APPROVALS
13.1 Exemptions and Approvals
13.2 Need for Multiple or Separate Applications
13.3 Exemptions under Prior Policies
13.4 Waivers and Orders concerning "Fund of Funds"


COMPANION POLICY 81-102CP TO NATIONAL INSTRUMENT 81-102 - MUTUAL 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 Instrument81-102 Mutual 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 mutual funds, or persons performingservices for mutual funds, adopt to ensure compliance with the Instrument;

(c) discussion of circumstances in which the Canadian securities regulatory authorities have granted relief from particular requirements of National PolicyStatement 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 "cash equivalent" - The definition of "cash equivalent" includes certain evidences of indebtedness of Canadian financial institutions. This would includebanker's acceptances.

2.2 "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.

2.3 "guaranteed mortgage" - A mortgage insured under the National Housing Act (Canada) or similar provincial statutes is a "guaranteed mortgage" for thepurposes of the Instrument.1

2.4 "hedging"

(1) One component of the definition of "hedging" is the requirement that hedging transactions have a "high degree of negative correlation between changes inthe value of the position or positions being hedged and the instrument or instruments with which the position or positions are hedged". The Canadian securitiesregulatory authorities are of the view that there need not be complete congruence between the hedging instrument or instruments and the position or positionsbeing 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 fluctuationsin the price of the two.

(2) Paragraph (b) of the definition has been included to ensure that cross-currency hedging continues to be permitted under the Instrument. Cross-currencyhedging is the substitution of currency risk associated with one currency for currency risk associated with another currency, if neither currency is a currency inwhich the mutual fund determines its net asset value and the aggregate amount of currency risk to which the mutual fund is exposed is not increased by thesubstitution. Cross-currency hedging is to be distinguished from currency hedging, as that term is ordinarily used. "Ordinary" currency hedging, in the contextof mutual funds, would involve the replacing of the mutual fund's exposure to a "non-net asset value" currency with exposure to a currency in which the mutualfund calculates its net asset value. That type of currency hedging is subject to paragraph (a) of the definition.

2.5 "illiquid asset" - A portfolio asset of a mutual fund that meets the definition of "illiquid asset" will be an illiquid asset even if a person or company, includingthe manager or the portfolio adviser of a mutual fund or a director or officer of the manager or portfolio adviser of a mutual fund or any of their respectiveassociates or affiliates, has agreed to purchase the asset from the mutual fund. That type of agreement does not affect the words of the definition, which define"illiquid asset" in terms of whether that asset may be readily disposed of through market facilities on which public quotations in common use are widely available.

2.6 "investor fees" - The Canadian securities regulatory authorities are of the view that the definition of "investor fees" would include all contingent or deferredsales charges, distribution fees, administration fees and account set-up or closing charges.2

2.7 "manager" - A "manager" under the Instrument would not include a person or company whose duties are limited to acting as the portfolio adviser of themutual fund.3

2.8 "performance data" - The term "performance data" includes data on an aspect of the investment performance of a mutual fund or an asset allocation service.This could include data concerning return, volatility or yield. The Canadian securities regulatory authorities note that the term "performance data" would notinclude a rating prepared by an independent organization reflecting the credit quality, rather than performance, of a mutual fund's portfolio or participating fundsof the asset allocation service.4

2.9 "public medium" - An advertisement is defined in the Instrument to mean, among other things, a sales communication that is published or designed for use onor through a "public medium". The Canadian securities regulatory authorities interpret the term "public medium" to include print, television, radio, taperecordings, video tapes, computer disks, the Internet, displays, signs, billboards, motion pictures and telephones.

2.10 "restricted security" - A special warrant is a form of restricted security and, accordingly, the provisions of the Instrument applying to restricted securitiesapply to special warrants. A mutual fund is, however, required by subsection 2.1(4) of the Instrument to assume the exercise of special warrants in calculating itsholdings in connection with a restriction contained in paragraphs 2.1(1)(a) or (b) of the Instrument, because the nature of a special warrant is such that there is ahigh degree of likelihood that it will be exercised shortly after its issuance, after the prospectus relating to the underlying security has been filed.

2.11 "sales communication"

(1) The term "sales communication" refers to communications to securityholders of a mutual fund and to persons or companies not securityholders if the purposeof the communication is to induce the purchase of securities of the mutual fund. A sales communication therefore does not include a communication solelybetween a mutual fund or its promoter, manager, principal distributor or portfolio adviser and a participating dealer, or between the principal distributor or aparticipating dealer and its registered salespersons, that is indicated to be internal or confidential and that is not designed to be passed on by any principaldistributor, participating dealer or registered salesperson to any securityholder of, or potential investor in, the mutual fund. In the view of the Canadian securitiesregulatory authorities, if a communication of that type is so passed on by the principal distributor, participating dealer or registered salesperson, thecommunication would be a sales communication made by the party passing on the communication if the recipient of the communication was a securityholder ofthe mutual fund or if the intent of the principal distributor, participating dealer or registered salesperson in passing on the communication was to induce thepurchase of securities of the mutual fund.5

(2) The term "sales communication" is defined in the Instrument such that the communication need not be in writing and includes any oral communication. TheCanadian securities regulatory authorities are of the view that the rules in the Instrument pertaining to sales communications would apply to statements made atan investor conference to securityholders or to others to induce the purchase of securities of the mutual fund.

(3) The Canadian securities regulatory authorities are of the view that "image advertisements" that are intended to promote a corporate identity or the expertiseof a mutual fund manager fall outside the definition of "sales communication". However, an advertisement or other communication that refers to a specificmutual fund or funds or promotes any particular investment portfolio or strategy would be a sales communication and therefore be required to include warningsof the type now described in section 15.6 of the Instrument.6

2.12 "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 derivedfrom or based upon an underlying interest. Certain instruments, agreements or securities that would otherwise be specified derivatives within the meaning of thedefinition 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 bythat lead-in language but that is not considered to be a derivative in any normal commercial sense of that term. The Canadian securities regulatory authoritiesconsider conventional floating rate debt, securities of a mutual fund or commodity pool, non-redeemable securities of an investment fund, American depositaryreceipts and instalment receipts to be within this category and will not treat those instruments as a specified derivative in administering the Instrument.

2.13 "standardized future" - The definition of a "standardized future" refers to agreements 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 andAlberta). The term "standardized future" is used in the Instrument to refer to these types of contracts, but to avoid conflicting with existing local definitions.

PART 3 INVESTMENTS

3.1 Evidences of Indebtedness of Foreign Governments and Supranational Agencies

(1) Paragraph 2.1(1)(a) of the Instrument prohibits mutual funds from purchasing a security of any issuer, other than a government security, if, immediately afterthe purchase, more than 10 percent of the net assets of the mutual fund, taken at market value at the time of the purchase, would be invested in the securities ofthat issuer. The term "government security" is defined in the Instrument as an evidence of indebtedness that is issued, or fully and unconditionally guaranteed asto 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 ofinternational bond funds in order to permit those mutual funds to pursue their investment objectives with greater flexibility.

(3) The Canadian securities regulatory authorities will continue to consider applications for relief from paragraph 2.1(1)(a) of the Instrument if the mutual fundmaking the application demonstrates that the relief will better enable the mutual fund to meet its investment objectives. This relief will ordinarily be restricted tointernational bond funds.

(4) The relief from paragraph 2.04(1)(a) of NP39, which is replaced by paragraph 2.1(1)(a) of the Instrument, that has been provided to a mutual fund hasgenerally been limited to the following:

1. The mutual fund has been permitted to invest up to 20 percent of its net assets, taken at market value at the time of purchase, in evidences of indebtedness ofany one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other thanthe Government of Canada or the government of a jurisdiction or the government of the United States of America and are rated "AA" by Standard & Poor's, orhave an equivalent rating by one or more other approved credit rating organizations, and

2. The mutual fund has been permitted to invest up to 35 percent of its net assets, taken at market value at the time of purchase, in evidences of indebtedness ofany 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 oneor more other approved credit rating organizations.

It is noted that the relief provided in paragraphs 1 and 2 cannot be combined for one issuer in a way that would permit a mutual fund to exceed the 35 percentlimit for a "AAA" issuer or the 20 percent limit for a "AA" issuer.

(5) Despite subsection (4), the relief from paragraph 2.04(1)(a) of NP39, which is replaced by paragraph 2.1(1)(a) of the Instrument, provided to a mutual fundwhose securities are a registered investment under the ITA or whose securities are not, and are described in the current prospectus or simplified prospectus ofthe mutual fund as not being, foreign property under the ITA has generally been restricted to allowing the mutual fund to invest no more than 20 percent of itsnet assets, taken at market value at the time of purchase, in securities issued by issuers described in subsection (4) if the securities of those issuers are foreignproperty under the ITA to the mutual fund.

(6) The relief has also generally been provided on the condition that

(a) the securities that may be purchased under the relief referred to in subsections (4) and (5) are traded on a mature and liquid market;

(b) the acquisition of the evidences of indebtedness by the mutual fund is consistent with its investment objectives;

(c) the prospectus or simplified prospectus of the mutual fund discloses the additional risks associated with the concentration of the net assets of the mutual fundin 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, includingforeign exchange risks, of investing in the country in which that issuer is located; and

(d) the prospectus or simplified prospectus of the mutual fund gives details of the relief provided by the Canadian securities regulatory authorities, including theconditions imposed and the type of securities covered by the exemption.

3.2 Instalments of Purchase Price - Paragraph 2.2(d) of the Instrument prohibits a mutual fund from purchasing a security, other than a permitted derivative, thatby its terms may require the mutual fund to make a contribution in addition to the payment of the purchase price. This prohibition does not extend to thepurchase 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 firstinstalment is made.7

3.3 Purchase of Evidences of Indebtedness - Paragraph 2.2(f) of the Instrument prohibits a mutual fund from lending money or a portfolio asset other thanmoney. The Canadian securities regulatory authorities are of the view that the purchase of an evidence of indebtedness, such as a bond or debenture, or thepurchase of a preferred share that is treated as debt for accounting purposes, does not constitute the lending of money or a portfolio asset.8

3.4 Securities Repurchase and Reverse Repurchase Agreements - The Canadian securities regulatory authorities are of the view that securities repurchaseagreements are prohibited under paragraph 2.2(f) of the Instrument as constituting, in effect, the lending of portfolio assets and that reverse repurchaseagreements are prohibited under paragraph 2.2(a) of the Instrument as constituting, in effect, the borrowing of money.

PART 4 USE OF PERMITTED DERIVATIVES

4.1 Exercising Options on Futures - Paragraphs 2.3(2)(d) and (e) of the Instrument prohibit a mutual fund from, among other things, opening and maintaining aposition in a standardized future except under the conditions referred to in those paragraphs. Opening and maintaining a position in a standardized future couldbe effected through the exercise by a mutual fund of an option on futures. Therefore, it should be noted that a mutual fund cannot exercise an option on futuresand assume a position in a standardized future unless the applicable provisions of paragraphs 2.3(2)(d) or (e) is satisfied.9

4.2 Registration Matters - The Canadian securities regulatory authorities remind industry participants of the following requirements:

1. A mutual fund may only invest in or use clearing corporation options and over-the-counter options if the portfolio adviser advising with respect to theseinvestments

(a) is permitted, either by virtue of registration as an adviser under the securities legislation or commodity futures legislation of the jurisdiction in which theportfolio adviser is providing the advice or an exemption from the requirement to be registered, to provide that advice to the mutual fund under the laws of thatjurisdiction, and

(b) has satisfied all applicable option proficiency requirements of that jurisdiction; ordinarily, this will involve completion of the Canadian Options Course.10

2. A mutual fund may only invest in or use futures and options on futures if the portfolio adviser advising with respect to these investments or uses is registeredas an adviser under the securities or commodity futures legislation of the jurisdiction in which the portfolio adviser is providing the advice, if this registration isrequired in that jurisdiction, and meets the proficiency requirements for advising with respect to futures and options on futures in the jurisdiction.11

3. A portfolio adviser of a mutual fund that receives advice from a non-resident adviser in compliance with subsection 2.3(8) of the Instrument is not relievedfrom the registration requirements described in subsections (1) and (2).

4.3 Swap Agreements - Although a swap agreement is not a permitted derivative under the Instrument, and therefore may not be entered into by mutual funds,the Canadian securities regulatory authorities note that the use of a series of forward contracts to achieve the economic equivalent of a swap is permitted underthe Instrument.

4.4 Leveraging - The Instrument is designed to prevent the use of permitted derivatives for the purpose of leveraging the assets of the mutual fund. Thedefinition of "hedging" prohibits leveraging with permitted derivatives used for hedging purposes. The provisions of subsection 2.3(2) restrict leveraging withpermitted derivatives used for non-hedging purposes.

PART 5 SECURITYHOLDER MATTERS

5.1 Meetings of Securityholders - Subsection 5.4(1) of the Instrument imposes a requirement that meetings of securityholders of a mutual fund called for thepurpose of considering any of the matters referred to in section 5.1 must be called on notice of at least 21 days. Industry participants are reminded that theprovisions of National Policy Statement No. 41, or any instrument replacing it, apply to any meetings of securityholders of mutual funds and that thoseprovisions may require that a longer period of notice be given.

5.2 Limited Liability

(1) Mutual funds generally are structured in a manner that ensures that investors are not exposed to the risk of loss of an amount more than an originalinvestment. The CSA consider this a very important and essential attribute of funds.

(2) Mutual funds structured as corporations do not raise pressing liability problems because of the limited liability regime of corporate statutes.

(3) Mutual funds structured as limited partnerships may raise some concerns about the loss of limited liability if limited partners participate in the management orcontrol of the partnership. The CSA have included a provision in National Instrument 81-104 Commodity Pools that requires each commodity pool to obtaincounsel's opinion, at appropriate times, that the rights, or exercise of the rights, provided to investors in Section 5.1 of the Instrument do not expose investors togreater liability than the amount of their investment in the commodity pool. Because commodity pools present different risks to investors than mutual funds, thatprovision has not been included in the Instrument. However, mutual funds structured as limited partnerships should consider this issue and be prepared toprovide similar assurances to the Canadian securities regulatory authorities in respect of any concerns that may arise in a particular situation over the possibleloss of limited liability status for limited partners of the mutual fund.

PART 6 APPROVALS FOR CERTAIN CHANGES

6.1 Integrity and Competence of Mutual Fund Management Groups

(1) Paragraph 5.5(1)(a) of the Instrument requires that the prior approval of the Canadian securities regulatory authorities be obtained for certain changes in themanager of a mutual fund. Subsection (4) contemplates similar approval to a change in control of a manager.

(2) In connection with each of these approvals, applicants are required by section 5.6 to provide information to the Canadian securities regulatory authoritiesconcerning the integrity and experience of the persons or companies that will be involved in, or control, the management of the mutual fund after the proposedtransaction.

(3) The Canadian securities regulatory authorities would generally consider it helpful in their assessment of the integrity and experience of the proposed newmanagement group that will manage a mutual fund after a change in manager if the application set out, among any other information the applicant wishes toprovide

(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% 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% of the outstandingsecurities of the proposed manager,

(iii) each director and officer of the proposed manager, and

(iv) each proposed director, officer or individual trustee of the mutual fund.

(4) The Canadian securities regulatory authorities would generally consider it helpful if the information relating to the persons and companies referred to inparagraph (3)(b) included

(a) for a company

(i) its name, registered address and principal business activity, and

(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 managementgroup of the mutual 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'sexperience 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 mutual 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 themutual fund, and if so, disclosing the names of the reporting issuers and their business purpose, with a particular emphasis on relationships between the individualand other mutual 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 relationshipwith the management group of the mutual fund, and

(ix) a description of the individual's relationships to the proposed manager and other service providers to the mutual fund.

(5) The Canadian securities regulatory authorities would generally consider it helpful in their assessment of the integrity and experience of the persons orcompanies that will manage a mutual fund after a change of control of the manager, if the application set out, among any other information that applicant wishesto provide, a description of

(a) the proposed corporate ownership of the manager of the mutual fund after the proposed transaction, indicating for each proposed direct or indirectshareholder of the manager of the mutual fund the information about that shareholder referred to in subsection (4);

(b) the proposed officers and directors of the manager of the mutual fund, of the mutual fund and of each of the proposed controlling shareholders of the mutualfund, 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 mutual fund, of the mutual fund and of each of the proposedcontrolling shareholders of the mutual 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 otherservice provider to the mutual fund.

6.2 Mergers and Conversions of Mutual Funds

(1) Subsection 5.5(2) of the Instrument provides that mergers or conversions of mutual funds may be carried out on the conditions described in that subsectionwithout prior approval of the Canadian securities regulatory authorities. The Canadian securities regulatory authorities consider that the types of transactionscontemplated by subsection 5.5(2) of the Instrument when carried out in accordance with the conditions of that subsection address the fundamental regulatoryconcerns raised by mergers and conversions of mutual funds. Subsection 5.5(2) is designed to facilitate consolidations of mutual funds within fund families thathave similar investment objectives and strategies and that are operated in a consistent and similar fashion. Since subsection 5.5(2) will be unavailable unless themutual funds involved in the transaction have substantially similar investment objectives and strategies and are operated in a substantially similar fashion, theCanadian securities regulatory authorities do not expect that the portfolios of the consolidating funds will be required to be realigned to any great extent before amerger. If realignment is necessary, the Canadian securities regulatory authorities point out that paragraph 5.5(2)(h) requires all costs and expenses associatedwith the transaction to be borne by the manager of the mutual fund. Brokerage commissions payable as a result of any portfolio realignment necessary to carryout the transaction would be, in the view of the Canadian securities regulatory authorities, costs and expenses associated with the transaction.

(2) The Canadian securities regulatory authorities also point out that, despite subsection 5.5(2) of the Instrument, approval for certain transactions may berequired by section 277 and subsections 283(1) and 283(2) of the Regulations to the Securities Act (Quebec).

6.3 Regulatory Approval for Reorganizations - Paragraph 5.6(b) of the Instrument requires certain details to be provided in respect of an application forregulatory approval required by paragraph 5.5(1)(b) that is not automatically approved under subsection 5.5(2). The Canadian securities regulatory authoritieswill be reviewing this sort of proposed transaction to ensure that adequate disclosure of the differences between the funds participating in the proposedtransaction is given to securityholders of the mutual fund that will be merged, reorganized or amalgamated with another mutual fund. In that regard, theCanadian securities regulatory authorities will consider the rights of the securityholders of the merging, reorganizing or amalgamating fund to redeem or transfersecurities without charge if they do not agree with the proposed transaction. If a mutual fund is proposed to be merged, amalgamated or reorganized with amutual fund that has a net asset value that is smaller than the net asset value of the terminating mutual fund, the Canadian securities regulatory authorities willconsider the implications of the proposed transaction on the smaller continuing mutual fund, including future financial disclosure of that mutual fund and whetherdisclosure of the proposed transaction should be given to the securityholders of that mutual fund. The Canadian securities regulatory authorities will alsoconsider the relative performance histories of the merging funds and whether the past historical performance of the terminating fund is material information forthe new and existing securityholders of the continuing fund.

6.4 Sales Communication Issues

(1) Part 15 of the Instrument, among other things, prohibits misleading sales communications relating to mutual funds. As discussed in section 10.1 of thisPolicy, whether a particular description, representation, illustration or other statement in a sales communication is misleading depends upon an evaluation of thecontext in which it is made.

(2) In the context of transactions referred to in paragraph 5.5(1)(b), consideration should be given as to whether a sales communication for the surviving orcontinuing mutual fund should contain the performance history of the mutual funds involved in the transaction. The Canadian securities regulatory authoritieswill consider this issue, particularly in circumstances where there are material differences between the mutual funds participating in the transaction or where thesurviving or continuing mutual fund had a net asset value that was significantly smaller than the terminating fund immediately before the effective date of thetransaction. In such circumstances, the continuing fund may be significantly altered such that its pre-merger performance history would be misleading and notrelevant to a consideration of its future performance.

(3) The Canadian securities regulatory authorities are of the view that it is inappropriate and misleading for a mutual fund that is continuing following a mergerto prepare and use pro forma performance information or financial statements that purport to show the combined performance of the two funds during a periodbefore their actual merger. The Canadian securities regulatory authorities are of the view that such pro forma information is hypothetical, involving the makingof many assumptions that could affect the results.

PART 7 CUSTODIANSHIP OF PORTFOLIO ASSETS

7.1 Standard of Care - The standard of care prescribed by section 6.6 of the Instrument is a minimum standard only.

7.2 Book-Based System

(1) Subsection 6.5(3) of the Instrument provides that a custodian or sub-custodian of a mutual fund may arrange for the deposit of portfolio assets of the mutualfund with, and their delivery to, a depository or clearing agency that is authorized to operate a book-based system. Such depositories or clearing agenciesinclude The Canadian Depository For Securities Limited, the Depository Trust Company or any other domestic or foreign depository or clearing agency that isincorporated or organized under the laws of a country or a political subdivision of a country and is duly authorized to operate a book-based system in thatcountry or political subdivision or is duly authorized to operate a transnational book- based system.12

(2) A depository or clearing agency that operates a book-based system used by a mutual fund is not considered to be a custodian or sub-custodian of the mutualfund.

PART 8 CONTRACTUAL PLANS

8.1 Contractual Plans - Industry participants are reminded that the term "contractual plan" used in Part 8 of the Instrument is a defined term in the Canadiansecurities legislation of most jurisdictions, and that contractual plans as so defined are not the same as automatic or periodic investment plans. The distinguishingfeature 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 9 SALES AND REDEMPTIONS OF SECURITIES

9.1 General - Parts 9, 10 and 11 of the Instrument are intended to ensure that

(a) investors' money is received by a mutual fund promptly;

(b) the opportunity for loss of an investors' money before investment in the mutual fund is minimized; and

(c) the mutual fund receives all interest that accrues on money during the periods between delivery of the money by an investor until investment in the mutualfund, in the case of the purchase of mutual fund securities, or between payment of the money by the mutual fund until receipt by the investor, in the case ofredemptions.13

9.2 Receipt of Orders

(1) A principal distributor or participating dealer of a mutual fund should endeavour, to the extent possible, to receive money to be invested in the mutual fund atthe time the order to which they pertain is placed.14

(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 bythe mutual fund in respect of the redemption including, without limitation, any written request for redemption that may be required by the mutual fund, dulycompleted and executed, and any certificates representing the mutual fund securities to be redeemed, so that all required documentation is available at the timethe redemption order is transmitted to the mutual fund or to its principal distributor for transmittal to the mutual fund.15

9.3 Coverage of Losses

(1) Subsection 9.4(6) of the Instrument provides that certain dealers may be required to compensate a mutual fund for a loss suffered as the result of a failedsettlement of a purchase of securities of the mutual fund. Similarly, subsection 10.5(3) of the Instrument provides that certain dealers may be required tocompensate a mutual fund for a loss suffered as the result of a redemption that could not completed due to the failure to satisfy the requirements of the mutualfund concerning redemptions to be satisfied.

(2) The Canadian securities regulatory authorities have not carried forward into the Instrument the provisions contained in NP39 relating to a dealer's ability torecover from their clients or other dealers any amounts that they were required to pay to a mutual fund. If dealers wish to provide for such rights they shouldmake the appropriate provisions in the contractual arrangements that they enter into with their clients or other dealers.16

PART 10 PROHIBITED REPRESENTATIONS AND SALES COMMUNICATIONS

10.1 Misleading Sales Communications

(1) Part 15 of the Instrument, among other things, prohibits misleading sales communications relating to mutual funds and asset allocation services. Whether aparticular description, representation, illustration or other statement in a sales communication is misleading depends upon an evaluation of the context in which itis made. The following list sets forth some of the circumstances, in the view of the Canadian securities regulatory authorities, in which a sales communicationwould 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 notmisleading.

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 investmentthat 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 aboutpossible 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 pastinvestment performance or portrayals of past performance.

3. A statement about the characteristics or attributes of a mutual 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 todiscussion of any risks or associated limitations;

(b) it makes exaggerated or unsubstantiated claims about management skill or techniques, characteristics of the mutual fund or asset allocation service, aninvestment in securities issued by the fund or recommended by the service, services offered by the fund, the service or their respective manager, or effects ofgovernment supervision; or

(c) it makes unwarranted or incompletely explained comparisons to other investment vehicles or indices.17

(2) Performance data information may be misleading even if it complies technically with the requirements of the Instrument. For instance, paragraphs 15.4(1)(j)and (k) of the Instrument contain requirements that the standard performance data for mutual funds given in sales communications be for prescribed periodsfalling within prescribed amounts of time before the date of the appearance or use of the advertisement or first date of publication of any other salescommunication. That standard performance data may be misleading if it does not adequately reflect intervening events occurring after the prescribed period. Anexample of such an intervening event would be, in the case of money market funds, a substantial decline in interest rates after the prescribed period.18

(3) An advertisement that presents information in a manner that distorts information contained in the preliminary prospectus or prospectus of a mutual fund orthat includes a visual image that provides a misleading impression will normally be considered to be misleading.19

(4) Any discussion of the income tax implications of an investment in a mutual fund security should be balanced with a discussion of any other material aspects ofthe offering.

10.2 Other Provisions

(1) Paragraph 15.5(1)2 of the Instrument refers to "fees and charges related to specific optional services". These fees include transfer fees and fees and chargesfor registered education savings plans, registered retirement savings plans, registered retirement income funds, pre-authorized investment plans, systematicwithdrawal plans and contractual plans.20

(2) Paragraph 15.5(1)5 of the Instrument requires that no non-recurring fees and charges that are payable by some or all securityholders and no recurring feesand charges that are payable by some but not all securityholders be assumed in calculating standard performance data. Examples of the non-recurring type offees and charges are front-end sales commissions and contingent deferred sales charges, and examples of the recurring types of fees and charges are the annualfees paid by purchasers who purchased on a contingent deferred charge basis.21

(3) Paragraphs 15.5(1)2 and 15.5(2)2 of the Instrument require that no fees and charges related to optional services be assumed in calculating standardperformance data. Examples of these fees and charges include transfer fees, except in the case of an asset allocation service, and fees and charges for registeredretirement savings plans, registered retirement income funds, registered education savings plans, pre-authorized investment plans and systematic withdrawalplans.22

PART 11 PROSPECTUS DISCLOSURE REQUIREMENTS

11.1 Derivatives Disclosure - Section 16.1 of the Instrument requires a mutual fund to provide disclosure in its prospectus regarding its use of permittedderivatives and, among other things, its policies and practices to manage the risks associated with permitted derivative use. The Canadian securities regulatoryauthorities believe that the disclosure should outline in a general way the overall system and policy in place. In particular, the Canadian securities regulatoryauthorities expect that the disclosure will include disclosure of

(a) whether there are written policies and procedures in place that set out the objectives and goals for permitted derivatives trading and the risk managementprocedures applicable to permitted derivatives trading;

(b) who is responsible for setting and reviewing the policies and procedures, how often are the policies and procedures reviewed, and the extent and nature of theinvolvement of the board of directors or trustee in the risk management process;

(c) whether there are trading limits or other controls on permitted derivative trading in place and who is responsible for authorizing the trading and placing limitsor other controls on the trading;

(d) whether there are individuals or groups that monitor the risks independent of those who trade; and

(e) whether risk measurement procedures or simulations are used to test the portfolio under stress conditions.

11.2 Management Fee Rebate Programs - Section 17.2 of the Instrument requires a mutual fund to provide disclosure of all details of any management fee rebateprogram that it offers or intends to offer, in its prospectus or simplified prospectus. Examples of the details could include

(a) who pays the management fee;

(b) whether a reduced fee is paid at the relevant time or whether the full fee is paid at that time with a repayment of a portion of the management fee to follow ata later date;

(c) who funds the reduction or repayment of management fees, when the reduction or repayment is made and whether it is made in cash or in securities of themutual fund;

(d) whether the differing management fees are negotiable or calculated in accordance with a fixed schedule;

(e) if the management fees are negotiable, the factors or criteria relevant to the negotiations and, if there is a fixed management fee schedule, the scheduletogether with a brief explanation of how the schedule works;

(f) whether the differing management fees payable are based on the number or value of the securities of the mutual fund purchased during a specified period orthe number or value of the securities of the mutual fund held at a particular time; and

(g) any other factors that could affect the quantum of the management fees payable.

11.3 Eligibility Opinions - A reference in a prospectus or simplified prospectus of a mutual fund to an opinion that the securities of the mutual fund are eligibleinvestments for pension funds, insurance companies, trust companies or loan companies governed by specified statutes could be misleading if the reference doesnot reflect that the securities of the mutual fund are being offered for sale on a continuous basis rather than being sold on the fixed date as at which the eligibilityopinion is given as well as any other relevant facts.23

PART 12 PROCESSING OF SEASONED PROSPECTUSES

12.1 Processing of Seasoned Prospectuses - The Canadian securities regulatory authorities find that their review of a simplified prospectus and annualinformation form of a mutual fund is expedited if a blacklined copy of the pro forma simplified prospectus and annual information form of the mutual fund isprovided, marked to show additions, deletions and other changes made from the preceding (final) simplified prospectus and annual information form of themutual fund, and if those documents are accompanied by a certificate of the person responsible for preparing those documents certifying that the blacklining isaccurate and complete.24

PART 13 EXEMPTIONS AND APPROVALS

13.1 Exemptions and Approvals

(1) The procedure to obtain, in more than one jurisdiction, an approval under, or exemption from, the Instrument is as follows:

(a) the applicant should file an application in writing simultaneously in all jurisdictions in which it requires an approval or exemption, together with the requireddraft disclosure document;

(b) the application should satisfy the requirements of section 20.2, any other specific requirements of the Instrument concerning the content of the applicationand any other applicable provisions of Canadian securities legislation;

(c) the application should indicate the name of the principal jurisdiction selected by the applicant for the purpose of dealing with the application and, if applicable,the prospectus filing and of each other jurisdiction where the application and, if applicable, the prospectus is being filed;

(d) the Canadian securities regulatory authority of the principal jurisdiction or the regulator in the principal jurisdiction will, on behalf of the applicant, contactthe Canadian securities regulatory authorities or regulators in the other jurisdictions in which the application has been made for their comments concerning theapplication and will forward all comments to the issuer;

(e) the applicant should respond in writing to all comments to the Canadian securities regulatory authority in the principal jurisdiction, which will forward theresponse to the Canadian securities regulatory authorities in the other jurisdictions and again coordinate comments; and

(f) if the Canadian securities regulatory authorities or regulators are prepared to approve the application, the principal jurisdiction will co-ordinate with theapplicant the appropriate manner in which the filing of a prospectus or simplified prospectus or an amendment to or an amended version of those documentsshould be made, if all requisite filings of documents were not made at the time of filing of the application.

(2) In order to enable the Canadian securities regulatory authorities to deal with applications on a timely basis, issuers are encouraged to file applicationssimultaneously in all jurisdictions in which they require an approval or an exemption.

13.2 Need for Multiple or Separate Applications

(1) The Canadian securities regulatory authorities note that a person or company that obtains an exemption from a provision of the Instrument need not applyagain 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 tothe granting of the exemption. This also applies to exemptions from NP39 granted before the Instrument; as provided in section 20.3 of the Instrument, it is notnecessary to obtain an exemption from the corresponding provision of the Instrument.

(2) It should be noted that the principle described in subsection (1) does not necessarily apply to applications required to be made under the Regulations to theSecurities Act (Quebec) for relief from provisions of those Regulations that are substantially similar to those contained in the Instrument. In that case, anapplication may be required with each refiling of a prospectus or simplified prospectus of a mutual fund.

(3) In Quebec, it may be necessary to apply separately for exemptions from Sections 277 to 293 of the Regulations to the Securities Act (Quebec) that duplicatethe matters discussed in the Instrument (e.g. investment restrictions).

13.3 Exemptions under Prior Policies

(1) Subsection 20.3(1) of the Instrument provides that a mutual fund that has obtained, from the regulatory or securities regulatory authority, an exemption froma 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 thesame 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 ofthe Instrument from the corresponding provision of NP39 should not lead to the conclusion that the provisions are not "substantially similar", if the generalpurpose of the provisions remain the same. For instance, even though some changes have been made in the Instrument, the Canadian securities regulatoryauthorities consider paragraph 2.1(1)(b) of the Instrument to be substantially similar to paragraph 2.04(1)(b) of NP39, in that the primary purpose of bothprovisions is to prohibit mutual funds from acquiring more than 10 percent of a class or series of a class of securities of an issuer.

13.4 Waivers and Orders concerning "Fund of Funds" - The CSA in a number of jurisdictions have provided waivers and orders from NP39 and securitieslegislation to permit "fund of funds" to exist and carry on investment activities not otherwise permitted by NP39 or securities legislation. Some of those waiversand orders contained "sunset" provisions that provided that they expired when legislation or a CSA policy or rule came into force that effectively provided for anew "fund of funds" regime. For greater certainty, the Canadian securities regulatory authorities note that the coming into force of the Instrument will nottrigger the "sunset" of those waivers and orders.