Annotated Ontario Securities Legislation, 19th edition, 2000 with Annotations

Abstract

The CSA has issued Staff Notice No. 81-306 relating to the disclosure by mutual funds of changes in the calculation of management expense ratios ("MERs"). Section 16.1 of National Instrument 81-102 (Mutual Funds), which came into force on February 1, 2000, changes the method of calculation of MERs for mutual funds and has the effect of requiring mutual funds to re-calculate MERs for financial periods that ended before the National Instrument came into force. After the National Instrument was published in final form in November 1999, the CSA received submissions from the Investment Funds Institute of Canada and fund companies to the effect that calculating MERs for financial periods that ended before February 1, 2000 in accordance with section 16.1 would be very difficult, if not impossible, given the lack of data. In accordance with these submissions, the CSA published, on January 28, 2000, a series of amendments to the National Instrument to provide that restatement of MERs in accordance with section 16.1 is not mandatory for financial periods of mutual funds that ended before February 1, 2000 (proposed section 16.3). Funds would have the option of restating MERs for prior periods in accordance with the National Instrument or disclosing MERs for those periods as calculated in accordance with securities legislation in force as at January 31, 2000. Proposed revisions to section 20.3 of the National Instrument will clarify that the National Instrument does not apply to reports to securityholders that include only financial statements that relate to financial periods that ended before the National Instrument came into force.

In the January 28, 2000 Notice accompanying the proposed amendments, the CSA outlined that they are examining the implications of the proposed rule amendment in the context of Canadian generally accepted accounting principles ("GAAP") and mutual fund financial statement presentation. CSA staff propose to recommend that the CSA amend the Companion Policy to provide guidance to mutual funds on the need to disclose the effect of a change to the calculation of MER when the MER for prior periods is not restated. In the interim, the CSA has published a Staff Notice to provide guidance.

This completely revised edition offers the full text of the Ontario Securities Act, Regulations, Rules, National Instruments and Policy Statements. Also included are the CSA notices, OSC notices, OSC blanket orders and rulings and much more. Plus, a detailed Table of Contents, Tables of Concordance and a Topical Index to assist in navigating through the material -- for only $59.95.

Rene Sorrell and his team at McCarthy Tetrault provide extensive annotations to present the complete picture of the Ontario securities regulatory scheme, linking the Securities Act to related material in the Regulations, Rules, Policies, notices and communiques.

Annotated Ontario Securities Legislation, 19th edition, 2000 will be available at the end of May 2000. For more information, please contact your CCH Customer Satisfaction Representative at 1-800-268-4522 (in Toronto [phone]).

CSA Provides Relief from Suitability Obligations

On April 10, 2000, the CSA announced that relief from suitability obligations will be granted on an application basis to dealers who only provide trade execution services for their clients. Several conditions, however, will be imposed on dealers to whom this relief will be available in order to safeguard the interests of investors. These conditions include:

- the dealer must operate as a legal entity or business unit that limits activities so that no advice or recommendations will be given regarding the purchase or sale of any security;

- the separate legal entity or business unit must, at a minimum, have separate letterhead, accounts, registered representatives, registered investment representatives, registered trading officers and account documentation;

- the dealer must not compensate individuals on the basis of transactional values; and

- the dealer must receive from the client a written informed acknowledgement that no advice or recommendation will be given by the dealer and that no determination of suitability will be made for any purchase or sale of a security through the legal entity or business unit.

The CSA has expressed a commitment to work with the Investment Dealers Association to explore ways in which similar relief would be available to other categories of dealers while still safeguarding the interests of investors.

Disclosure by Mutual Funds of Changes in the Calculation of the Management Expense Ratio

The CSA has issued Staff Notice No. 81-306 relating to the disclosure by mutual funds of changes in the calculation of management expense ratios ("MERs"). Section 16.1 of National Instrument 81-102 (Mutual Funds), which came into force on February 1, 2000, changes the method of calculation of MERs for mutual funds and has the effect of requiring mutual funds to re-calculate MERs for financial periods that ended before the National Instrument came into force. After the National Instrument was published in final form in November 1999, the CSA received submissions from the Investment Funds Institute of Canada and fund companies to the effect that calculating MERs for financial periods that ended before February 1, 2000 in accordance with section 16.1 would be very difficult, if not impossible, given the lack of data. In accordance with these submissions, the CSA published, on January 28, 2000, a series of amendments to the National Instrument to provide that restatement of MERs in accordance with section 16.1 is not mandatory for financial periods of mutual funds that ended before February 1, 2000 (proposed section 16.3). Funds would have the option of restating MERs for prior periods in accordance with the National Instrument or disclosing MERs for those periods as calculated in accordance with securities legislation in force as at January 31, 2000. Proposed revisions to section 20.3 of the National Instrument will clarify that the National Instrument does not apply to reports to securityholders that include only financial statements that relate to financial periods that ended before the National Instrument came into force.

In the January 28, 2000 Notice accompanying the proposed amendments, the CSA outlined that they are examining the implications of the proposed rule amendment in the context of Canadian generally accepted accounting principles ("GAAP") and mutual fund financial statement presentation. CSA staff propose to recommend that the CSA amend the Companion Policy to provide guidance to mutual funds on the need to disclose the effect of a change to the calculation of MER when the MER for prior periods is not restated. In the interim, the CSA has published a Staff Notice to provide guidance.

The Staff Notice states the CSA staff are of the view that the change in the method of calculating the MER of a mutual fund required by the National Instrument should be treated in a manner that is similar to a change in accounting policy under section 1506 of the CICA Handbook. Under Canadian GAAP, a change in accounting policy requires a retroactive restatement of the financial information for all periods shown. The CICA Handbook acknowledges that there may be circumstances where the data needed to restate the financial information is not reasonably determinable. Proposed section 16.3 permits a mutual fund to follow the guidance set out in the CICA Handbook without violating the National Instrument.

The Staff Notice states that if a mutual fund retroactively restates its MER for the five years required to be shown in its financial statements and simplified prospectus, the mutual fund should describe this restatement in the first such documents released in which the restated amounts are reported. If a mutual fund does not restate its MER for prior periods because, based on its specific facts and circumstances, the information required to do so is not reasonably determinable, the MER for all financial periods ending after February 1, 2000 must be calculated in accordance with the National Instrument. The mutual fund must also disclose:

- that the method of calculating the MER has changed, specifying for which periods the MER has been calculated in accordance with the change;

- that the mutual fund has not restated the MER for specified prior periods;

- the impact the change would have had if the mutual fund had restated the MER for the specified prior periods. For example, would the MER have increased or decreased if the MER had been restated? If possible, an estimate should be provided of the increase or decrease if the MER had been restated; and

- a description of the main differences between a MER calculated in accordance with the National Instrument and one calculated in accordance with National Policy 39.

The disclosure outlined above should be provided for all periods presented until such time as all MERs presented are calculated in accordance with the National Instrument.

This Staff Notice has been included in Volume 1 of the Canadian Securities Law Reporter at [Symbol Not Transcribed]82-806.