Commission Approval of Amendment: OSC Rule - 32-503 - Registration and Prospectus Exemption for Trades by Financial Intermediaries in Mutual Fund Securities to Corporate Sponsored Plans

 

NOTICE OF AMENDMENT TO RULE 32-503

UNDER THE SECURITIES ACT

REGISTRATION AND PROSPECTUS EXEMPTION FOR TRADES

BY FINANCIAL INTERMEDIARIES IN MUTUAL FUND

SECURITIES TO CORPORATE SPONSORED PLANS

Notice of Amendment

The Commission has, under section 143 of the Securities Act (the "Act"), amended Rule 32-503 Registration and Prospectus Exemption for Trades by FinancialIntermediaries in Mutual Fund Securities to Corporate Sponsored Plans (the "Amendment").

The Amendment and the material required by the Act to be delivered to the Minister of Finance were delivered on February 11, 1998. If the Minister does notapprove the Amendment, reject the Amendment or return it to the Commission for further consideration, the Amendment will come into force on April 27, 1998.If the Minister does approve the Amendment, the Amendment will come into force 15 days after it is approved.

Concurrently with making the Amendment to Rule 32-503, the Commission has amended subsection 206(1) of the Regulation to the Act. See "Regulations to beAmended" below.

Substance and Purpose of Amendment

Rule 32-503 Registration and Prospectus Exemption for Trades by Financial Intermediaries in Mutual Fund Securities to Corporate Sponsored Plans (the"Rule") was published in the Ontario Securities Commission Bulletin on December 20, 1996 ((1996), 19 OSCB 6923). The Rule provides relief from theregistration and prospectus requirements of the Act for certain trades up to and including March 31, 1998. The purpose of the amendment is (i) to remove the"sunset" date of March 31, 1998 so that the registration and prospectus relief provided by the Rule will not be time limited and (ii) to add the prospectus andregistration exemption currently contained in paragraph 14(g) and paragraph 151(a) of the Regulation to the Rule.

Summary of Amendment

The Rule came into effect on January 1, 1997 and carried forward the relief contained in a deemed rule of the Commission In the Matter of Certain Amendmentsto Regulation 1015 of the Revised Regulations of Ontario 1990 Made Under the Securities Act (1994), 17 OSCB 5517. Section 1.1 of the Rule provides that upto and including March 31, 1998, section 25 of the Act does not apply to a trade by a financial intermediary in the security of a mutual fund sold to certaincorporate sponsored plans or certain "pooled fund" mutual fund securities.

Section 1.2 of the Rule provides that up to and including March 31, 1998 the prospectus requirements of the Act do not apply to a trade in those mutual fundsecurities.

The Commission proposes to amend the Rule by deleting the "sunset" date of March 31, 1998 and deleting Part 2 of the Rule which contains the effective date ofJanuary 1, 1997. If the amendments are made, there will be no time limitation on the relief provided in the Rule. The Commission also proposes to replaceparagraphs 1.1(a) and 1.2(a) with new paragraphs that carry forward the existing relief for trades by a financial intermediary in the security of a mutual fund soldto certain corporate sponsored plans, but also add the relief currently found in paragraphs 14(g) and 151(a) of the Regulation for similar trades.

Comments

The Commission received two comments on the proposed Rule: one from The Canada Trust Company dated January 30, 1998 and the other from the CanadianBankers Association dated February 5, 1998. The law firm of Borden & Elliot submitted a comment for a client that wishes to remain anonymous, by letter datedJanuary 14, 1998 on proposed Rule 45-501 Exempt Distributions. As that comment letter referred to existing Rule 32-503 Registration and ProspectusExemption for Trades by Financial Intermediaries in Mutual Fund Securities to Corporate Sponsored Plans, the Commission will address the points raised in thatletter that relate to Rule 32-503.

1. Canada Trust

Canada Trust supported the elimination of the sunset date in the proposed Rule. They were of the view that regulation of financial intermediaries in this area wasinappropriate at this time. The proposed Rule would eliminate unnecessary and costly regulation.

2. Canadian Bankers Association

The Canadian Bankers Association supported the initiative on the basis that it would eliminate unnecessary and costly regulation. They also expressed the viewthat imposing prospectus and registration requirements on financial intermediaries for the trades contemplated by the proposed rule would be inappropriate.

3. Borden & Elliot Client

The commenter's primary concern was with the applicability of the existing statutory provisions and rules to the distribution of pooled funds to individualparticipants in the various types of employer sponsored group savings plans. The commenter suggested that the Commission provide guidance on the followingareas:

1) is the exemption in paragraph 1.2(a) of Rule 32-503 available if the employer/sponsor retains a dealer or other service provider to deal directly withemployee/plan participants on the sponsor's behalf;

2) how the practice in some contracts between plan sponsors and service providers of expressly disclaiming any agency relationship between the sponsor and service provider fits with the exemption; (thedisclaimer is included to try to insulate the sponsor from liability for the actions of the service provider.);

3) whether the exemptions in the Rule are intended to be limited to only financial institutions or are intended to be more widely available;

4) how the words in subparagraph 1.2(a)(ii) (formerly clause 14(g) of the Regulation) "the decision to purchase a security is not made by or at the direction ofthe employee" are to be interpreted; in the commenter's view, some market participants appear to take the position that the decision is not made by or at thedirection of the employee in cases where the employer has pre-determined a limited range of investment options even though the employee must make the finaldetermination about which of the available investment alternatives he or she will invest in; and

5) whether the exemption is intended to provide broad relief to permit pooled funds to be offered to the full range of employer sponsored group savings plans.

The Commission has chosen not to adopt the suggestions of the commenter. The intention of the Commission in amending the proposed Rule is to remove thesunset date of March 31, 1998, but to otherwise codify the existing registration and prospectus exemptions in the Rule and paragraph 14(g) of the Regulation.This area is a complex one and the Commission does not want to approach it "piece meal". The Commission intends to address this area as its resources allow.

Regulations to be Amended

The Commission has by regulation, amended subsection 206(1) of the Regulation to the Act by deleting the reference to the deemed rule and another deemedrule replaced by Rule 32-502 Registration Exemption for Certain Trades by Financial Intermediaries so that the following words of subsection 206(1) will bedeleted:

"Except as otherwise provided in the Rules entitled "In the Matter of Certain Amendments to Regulation 1015 of the Revised Regulations of Ontario, 1990made under the Securities Act" (1994), 17 OSCB 5516 and "In the Matter of Certain Amendments to Regulation 1015 of the Revised Regulations of Ontario,1990 made under the Securities Act" (1994), 17 OSCB 5517,".

The Commission has also by regulation revoked paragraph 14(g) and section 15 of the Regulation. Section 15 is not necessary given the wording of theproposed Rule.

The regulations are subject to the approval of the Minister of Finance and will not be effective before the Rule comes into force.

Text of Amendment

The text of the amendment follows.

DATED: February 13, 1998.

AMENDMENT TO ONTARIO SECURITIES COMMISSION RULES

RULE 32-503

REGISTRATION AND PROSPECTUS EXEMPTION FOR TRADES

BY FINANCIAL INTERMEDIARIES IN MUTUAL FUND

SECURITIES TO CORPORATE SPONSORED PLANS

1.1 Amendments - Rule 32-503 Registration and Prospectus Exemption for Trades by Financial Intermediaries in Mutual Fund Securities to CorporateSponsored Plans is amended by

(a) deleting the words in section 1.1 "Up to and including March 31, 1998,";

(b) deleting paragraph (a) of section 1.1 and replacing it with the following:

"(a) a security of a mutual fund, if the security is sold to a pension plan, deferred profit sharing plan, retirement savings plan or other similar capital accumulationplan maintained by the sponsor of the plan for its employees, and

(i) the employees deal only with the sponsor in respect of their participation in the plan and the purchase of the security by the plan, or

(ii) the decision to purchase the security is not made by or at the direction of the employee, or";

(c) deleting the words in section 1.2 "Up to and including March 31, 1998,";

(d) deleting paragraph (a) of section 1.2 and replacing it with the following:

"(a) a security of a mutual fund, if the security is sold to a pension plan, deferred profit sharing plan, retirement savings plan or other similar capital accumulationplan maintained by the sponsor of the plan for its employees, and

(i) the employees deal only with the sponsor in respect of their participation in the plan and the purchase of the security by the plan, or

(ii) the decision to purchase the security is not made by or at the direction of the employee, or"; and

(e) deleting Part 2 of the Rule.