Final Rule (effective February 20, 1998): OSC Rule - 45-504 - Prospectus Exemptions for Distributions of Securities to Portfolio Advisors on Behalf of Fully Managed Accounts

NOTICE OF FINAL RULE UNDER THE SECURITIES ACT

RULE 45-504

PROSPECTUS EXEMPTION FOR DISTRIBUTIONS OFSECURITIES TO

PORTFOLIO ADVISERS ON BEHALF OF FULLY MANAGEDACCOUNTS

On February 5, 1998 the Minister of Finance approved Rule 45-504: Prospectus Exemptionfor Distributions of Securities to Portfolio Advisers on behalf of Fully Managed Accounts(the "Rule"). The Rule will come into force on February 20, 1998.

The Rule is published in Chapter 5 of the Bulletin.

 

TABLE OF CONTENTS

PART 1 DEFINITIONS AND INTERPRETATION
1.1 Definitions
1.2 Interpretation
PART 2 DISTRIBUTION OF SECURITIES TO PORTFOLIO ADVISERS ON BEHALF OF MANAGEDACCOUNTS
2.1 Prospectus Exemption
2.2 Restriction on First Trade in Securities
2.3 Restrictions on First Trade in an Underlying Security
2.4 Registration Exemption for Certain First Trades
2.5 Filing Requirements and Payment of Fees

PART 1 DEFINITIONS AND INTERPRETATION

1.1 Definitions - In this Rule

"hold period" means that period of either six, 12 or 18 months that would beapplicable to a security, in the case of section 2.2, or an underlying security, in thecase of section 2.3, if the security or underlying security had been acquired under anexemption referred to in subsection 72(4) of the Act;

"managed account" means an investment portfolio account of a clientestablished in writing under which the portfolio adviser to the account makes investmentdecisions for the account and has full discretion to trade in securities of the accountwithout requiring the client's express consent to a transaction;

"portfolio adviser" means

(a) a portfolio manager; or

(b) a broker or investment dealer exempted from registration as an adviser undersubsection 148(1) of the Regulation if that broker or investment dealer is not exempt fromthe by-laws or regulations of The Toronto Stock Exchange or the Investment Dealers'Association of Canada referred to in that subsection; and

"underlying security" means

(a) a security that is issued or transferred in accordance with the terms of a securityacquired under the exemption in subsection 2.1(1); or

(b) any other security issued or transferred as a result of the conversion or exchange,directly or indirectly, of the first security referred to in clause (a) or a securityreferred to in this clause.

1.2 Interpretation - The term "special relationship", when used in referenceto a person or company in a special relationship with a reporting issuer, shall beinterpreted in accordance with subsection 76(5) of the Act.

PART 2 DISTRIBUTION OF SECURITIES TO PORTFOLIO ADVISERS ON BEHALF OF MANAGEDACCOUNTS

2.1 Prospectus Exemption

(1) Section 53 of the Act does not apply to a distribution of securities to a managedaccount if

(a) the securities being distributed are securities that have not previously beenissued; or

(b) the distribution is a control person distribution.

(2) The exemption contained in subsection (1) is not available

(a) for the distribution of securities of a mutual fund or non-redeemable investmentfund; or

(b) if an offering memorandum is delivered in connection with the distribution, unlessthe managed account is given a contractual right of action and the contractual right ofaction is described in the offering memorandum.

(3) The contractual right of action referred to in paragraph 2.1(2)(b) may be madesubject to defences equivalent to defences available under subsection 130(2) of the Act.

(4) The condition in paragraph 2.1(2)(b) does not apply if the conditions in paragraphsA, C, D and F of the Rule In the Matter of Certain International Offerings by PrivatePlacement in Ontario (1997), 20 OSCB 1219 are satisfied.

2.2 Restriction on First Trade in Securities - A managed account may trade a securityacquired by it under the exemption contained in subsection 2.1(1) or from another managedaccount in the circumstances described in paragraph (d) only

(a) if the first trade is made under a prospectus for which a receipt has been obtainedfrom the Director;

(b) if the first trade is made under an exemption in Ontario securities law fromsection 53 of the Act;

(c) if

(i) at the time of the trade, the issuer of the security is a reporting issuer,

(ii) in the case of a managed account that is in a special relationship with thereporting issuer, the managed account has reasonable grounds to believe that the reportingissuer is not in default under the Act or the regulations,

(iii) the hold period has elapsed from the later of the date of the acquisition of thesecurity acquired under the exemption in subsection 2.1(1) by the managed account firstpurchasing the security and the date the issuer of the security became a reporting issuer,

(iv) no unusual effort is made to prepare the market or to create a demand for thesecurity and no extraordinary commission or consideration is paid for the trade, and

(v) the trade is not a control person distribution; or

(d) if the first trade is made between managed accounts managed by the same portfolioadviser.

2.3 Restrictions on First Trade in an Underlying Security - A managed account may tradean underlying security acquired by it directly or indirectly as a result of acquiringsecurities under the exemption in subsection 2.1(1), or from another managed account inthe circumstances described in paragraph 2.2(1)(d) or in the circumstances described inparagraph (d) only

(a) if the first trade is made under a prospectus for which a receipt has been obtainedfrom the Director;

(b) if the first trade is made under an exemption in Ontario securities law fromsection 53 of the Act;

(c) if

(i) at the time of the trade, the issuer of the underlying security is a reportingissuer,

(ii) in the case of a managed account that is in a special relationship with thereporting issuer, the managed account has reasonable grounds to believe that the reportingissuer is not in default under the Act or the regulations,

(iii) the hold period has elapsed from the later of the date of the acquisition of thesecurity acquired under the exemption in subsection 2.1(1) by the managed account firstpurchasing the security and the date the issuer of the underlying security became areporting issuer, and

(iv) no unusual effort is made to prepare the market or create a demand for thesecurity and no extraordinary commission or consideration is paid for the trade, and

(v) the trade is not a control person distribution; or

(d) if the first trade is made between managed accounts managed by the same portfolioadviser.

2.4 Registration Exemption for Certain First Trades - Section 25 of the Act does notapply to a trade described in paragraph 2.2(d) or 2.3(d).

2.5 Filing Requirements and Payment of Fees

(1) Within 10 days following a trade in reliance on the exemption in subsection 2.1(1),the seller of the securities shall file a report for the trade prepared in accordance withForm 20 to the Regulation or any form that replaces that Form, and concurrently with thefiling of the report pay the fee that would be payable under the regulations for thefiling of that Form or any replacement form.

(2) Within 10 days following a trade referred to in paragraph 2.2(c) or 2.3(c), theportfolio adviser, on behalf of the selling managed account, shall file a report for thetrade prepared in accordance with Form 21 to the Regulation or any form that replaces thatForm, and concurrently with the filing of the report pay the fee that would be payableunder the regulations for the filing of that Form or any replacement form.

(3) Within 10 days following a trade referred to in paragraph 2.2(d) or 2.3(d), theportfolio adviser, on behalf of the selling managed account, shall file a report for thetrade that includes substantially the same information as is required in a report preparedin accordance with Form 20 to the Regulation or any form that replaces that Form, andconcurrently with the filing of the report pay the minimum fee that would be payable underthe regulations for the filing of that Form or any replacement form.