Headnote
National Policy 11-203 – relief granted certain disclosure and consent requirements of section 8.2 of National Instrument 81-105 Mutual Fund Sales Practices – some units issued by Filer purchased by sales representatives of participating dealers pursuant to private placement - NI 81-105 triggers certain disclosure and consent requirements relating to ‘equity interests’ held by sales representatives, including requirement to continuously update disclosure and consent - compliance with updating requirements can be administratively burdensome with limited additional benefit to investors – disclosure and consent requirements in NI 81-105 modified to allow evergreen disclosure of aggregate holdings up to a stated maximum percentage to reduce the need for continuous updates but still provide key disclosure to investors – participating dealers wishing to rely on exemption must agree to abide by terms and conditions of decision document, including requirement for written policies and procedures for compliance with modified disclosure requirements.
Applicable Legislative Provisions
National Instrument 81-105 Mutual Fund Sales Practices, sections 8.2 and 9.1.
December 18, 2009
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the “Jurisdiction”)
AND
IN THE MATER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF NEXGEN FINANCIAL LIMITED PARTNERSHIP (the “Filer”)
AND
THE NEXGEN MUTUAL FUNDS (the “Funds”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Funds and certain dealers and their sales representatives (defined below as the Participating Dealers and the Dealer Representatives) from specified requirements in section 8.2 of National Instrument 81-105 Mutual Fund Sales Practises (NI 81-105), on the terms and conditions in this Decision (the Exemption Sought).
Under the Process for Exemption Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta and Quebec.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-105 have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is a limited partnership formed under the laws of the Province of Ontario having its head office in Toronto, Ontario.
The Filer is the manager of the Funds. Accordingly, the Filer is a “member of the organization” of the Funds within the meaning of NI 81-105. Neither the Filer nor the Funds is in default of the securities legislation of any Jurisdiction (as defined below).
The Funds are qualified for sale in the Provinces of British Columbia, Alberta, Ontario and Quebec (collectively the Jurisdictions) pursuant to a simplified prospectus and annual information form dated May 15, 2009 and are distributed through independent dealers in the Jurisdictions, which dealers are considered “participating dealers” (Participating Dealers) of the Funds within the meaning of National Instrument 81-102 Mutual Funds (NI 81-102).
On December 9, 2009, the Filer completed a private placement (the Private Placement) of approximately 1.5 million of its priority common units (Units) at a price of $10 per Unit pursuant to an offering memorandum, which represents approximately 31% of the Filer’s issued and outstanding voting securities.
In early to mid-2010, the Filer intends to file in a non-offering preliminary and final prospectus with the Ontario Securities Commission which, subject to the issuance of a final receipt, will cause the Filer to become a reporting issuer in the province of Ontario. The Filer also intends to list the Units for trading on a stock exchange in Canada within two years of the closing of the Private Placement.
To the best of the Filer’s knowledge, sales representatives (Dealer Representatives) of various Participating Dealers collectively purchased approximately 118,000 Units. This represents approximately 2.5% of the Filer’s issued and outstanding voting securities.
Purchases by individual Dealer Representatives were limited to no more than 1.5% of the Units issued under the Private Placement, which represents approximately 0.5% of the Filer’s issued and outstanding voting securities.
The compensation provided to the Participating Dealers, as described in the simplified prospectus of the Funds, will be the same whether or not a Dealer Representative of such Participating Dealer has purchased Units under the Private Placement.
Neither the Filer nor any other member of the organization of the Funds will provide any incentive (whether express or implied) to any Dealer Representative or to a Participating Dealer to encourage Dealer Representatives or Participating Dealers to recommend the Funds to their clients rather than mutual funds managed by persons other than the Filer, except as permitted by NI 81-105.
Since the Filer does not have securities listed on a Canadian stock exchange, any purchases of Units by a Dealer Representative would represent an ‘equity interest’ (an Equity Interest) in the Filer for the purposes of that definition under NI 81-105.
Accordingly, absent the Exemption Sought, section 8.2 of NI 81-105 would require that:
(a) the simplified prospectus of the Funds disclose:
(i) the aggregate amount of Units held by a Participating Dealer and associates of the Participating Dealer; and
(ii) the aggregate amount of Units held by all Dealer Representatives of a Participating Dealer and associates of those Dealer Representatives;
(b) for each trade of a security of a Fund, the Participating Dealer acting in respect of the trade must deliver a document (the Disclosure Document) to the purchaser that discloses:
(i) the aggregate amount of Units held by the Participating Dealer and its associates;
(ii) the aggregate amount of Units held by the Dealer Representatives of the Participating Dealer and associates of those Dealer Representatives; and
(iii) the aggregate amount of Units held by the particular Dealer Representative acting on the trade, and associates of that Dealer Representative;
(c) in addition to the Disclosure Document required under (b) above, the Participating Dealer must obtain the purchaser’s consent to the trade prior to the completion of the trade and after the purchase has received the Disclosure Document.
(collectively referred to as the Equity Disclosure and Consent Requirements)
Section 8.2 of NI 81-105 would also require that the disclosure and consents described in paragraph 11 above be updated if there any changes in the Equity Interests in the Filer previously disclosed.
The Filer believes that the Equity Disclosure and Consent Requirements as they apply to the Filer could lead to an undue regulatory burden on the Funds, the Participating Dealers and the Dealer Representatives, whether those Dealer Representatives have purchased Units or not.
The Equity Disclosure and Consent Requirements could require the Filer to amend the simplified prospectus each time a Dealer Representative purchases a single Unit of the Filer, which can be costly and difficult to track.
For the Participating Dealers, so long as one of its Dealer Representatives acquires a single Unit of the Filer, the Participating Dealer will have to ensure that all of its Dealer Representatives (including those that have not purchased Units), located across the Jurisdictions, have Disclosure Documents with precise, up to date information on Equity Interests in the Filer held by those Dealer Representatives, to provide to purchasers and must ensure that they have obtained purchaser consents, prior to acting on any trade in securities of the Funds. The Disclosure Document and the consents would then have to be updated for each subsequent trade in securities of the Funds, in the event that any Dealer Representative purchases a single Unit of the Filer.
Given that the Filer intends to become a reporting issuer in 2010 and its Units will be freely tradeable (subject to resale provisions in applicable securities legislation), compliance with the Equity Disclosure and Consent Requirements, particularly the requirements to continuously update the disclosure with each change in Equity Interests could prove challenging and costly from a compliance standpoint for the Filer and the Participating Dealers going forward, without any corresponding benefit to investors from such continuously updated disclosure and consent.
Allowing the disclosure made for the purposes of the Equity Disclosure and Consent Requirements to be as evergreen as possible while maintaining the key elements of the disclosure in the manner contemplated in this Decision would reduce the administrative burden to the Filer, the Participating Dealers and Dealer Representatives, thereby ensuring greater compliance.
Investors will not be prejudiced as they will still be provided with accurate disclosure of Equity Interests in the Filer held by Dealer Representatives, and will still have to provide consent for a first trade in the securities of a Fund, in the manner contemplated in the Equity Disclosure and Consent Requirements. They will also remain in a position to evaluate and analyze any potential conflict of interest resulting from the Equity Interest in the Filer held by their Dealer Representative.
Accordingly, the Filer is requesting the Exemption Sought such that it would permit:
(a) More aggregated, and less technically precise, but, from the Filer’s point of view, equally meaningful disclosure about the Equity Interests of Dealer Representatives, be given by Participating Dealers and Dealer Representatives. If a Dealer Representative trades in a security of a Fund and that Dealer Representative has an Equity Interest in the Filer, then the Dealer Representative will provide a Disclosure Document to their client, disclosing that:
(i) the Dealer Representatives of the Participating Dealer and their associates, in aggregate, hold no more than a stated percentage of the securities of the Filer;
(ii) the Dealer Representative and his or her associates, in aggregate, who is acting on the trade holds no more than a stated percentage of the securities of the Filer; and
(iii) the aggregated percentage Equity Interest of the Dealer Representatives of the Participating Dealer is disclosed on the Filer’s website, and the website address will be provided.
(b) If the branch manager of the Dealer Representatives is also a Dealer Representative, then any Dealer Representatives who report to that branch manager must provide clients with a Disclosure Document similar to (a) above, but modified to reflect the fact that the branch manager is the Dealer Representative.
(c) The Participating Dealers and Dealer Representatives would be responsible for choosing a percentage number that is accurate, but one that will not change regularly so that constant updating of the Disclosure Documents and renewals of any applicable client consents will not be necessary.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
- Within 90 days from the closing date of the Private Placement the simplified prospectus of the Funds contains disclosure that describes:
(a) the names of any Participating Dealers who have Dealer Representatives that hold Units of the Filer and the fact that up-to-date information can be obtained from the Filer’s website, which will be updated if there are any changes to the Equity Interests of Dealer Representatives;
(b) that no Dealer Representative is expected to hold more than 1.5% of the Filer’s Units;
(c) that if an investor’s Dealer Representative holds Units then that investor will receive a disclosure statement describing the equity interest held by that Dealer Representative; and
(d) that if the branch manager or other supervisor of the investor’s Dealer Representative is a Dealer Representative, the investor will also receive a disclosure statement describing the equity interest that the branch manager or supervisor holds before they invests in the Funds and that they must consent to the trade of securities of the Funds.
The disclosure in the simplified prospectus referred to in condition 1 is updated with each renewal of the simplified prospectus, and in that case the information is current as of a date that is no more than 30 days from the date of the simplified prospectus.
The Filer updates its website to provide the aggregate percentage Equity Interests held by Dealer Representatives and the names of the applicable Participating Dealers will be updated if new Dealer Representatives of additional Participating Dealers acquire Units or if the aggregate percentages previously disclosed, change.
Prior to a Participating Dealer relying on this Decision, the Filer has provided a copy of this Decision to the Participating Dealer together with a disclosure statement informing the Dealer of the ramifications of the Exemption Sought.
Any Participating Dealer wishing to rely on this Decision shall:
(a) send a written consent to the Filer agreeing to comply with the conditions of this decision as they relate to the Participating Dealer and its Dealer Representatives; and
(b) have in place written policies and procedures to ensure that there is compliance with the conditions of this Decision.
- Before completing a trade in a security of a Fund in which a Dealer Representative is acting, the Participating Dealer and Dealer Representative wishing to rely on this Decision, shall:
(a) Provide the client with a disclosure statement that discloses:
(i) that Dealer Representatives of the Participating Dealer and their associates hold, in the aggregate, no more than a stated percentage of the securities of the Filer;
(ii) that the Dealer Representative acting on the trade holds no more than a stated percentage of the securities of the Filer; and
(iii) that the client may go to the Filer’s website, which will be disclosed in the statement, to obtain additional information about the holdings of the Participating Dealer and its Dealer Representatives;
(b) ensure that the stated percentage disclosed in (a)(i) above shall be that number determined by the Participating Dealer that reasonably and accurately represents the maximum amount that it expects its Dealer Representatives to hold from time to time in the Filer. The stated percentage must be disclosed pursuant to (a)(ii) above, shall be that number determined by the Dealer Representative that reasonably and accurately represents the maximum amount that they expect to hold from time to time in the Filer, and shall not exceed 1.5% percent;
(c) obtain the necessary client consent required under subsection 8.2(4) of NI 81-105, unless, in respect of a subsequent trade in securities of the Funds, there has been no change to the disclosure in the disclosure statement since the previous trade, pursuant to subsection 8.2(5) of NI 81-105; and
(d) ensure that in the event a Dealer Representative assumes a position of authority or supervision over other Dealer Representatives of the Participating Dealer, before completing a trade in a security of the Funds that is acted on by one of those Dealer Representatives, the Participating Dealer and the other Dealer Representative shall comply with the requirements of conditions 5 (a), (b) and (c) above, to disclose the amount held by that Dealer Representative in the position of authority.
If the Equity Interests of Dealer Representatives of a Participating Dealer, in aggregate exceed the stated percentage referred to in Condition 5 above, then the Equity Disclosure and Consent Requirements as prescribed in section 8.2 of NI 81-105 will apply in respect of Equity Interests held by that Participating Dealer and its Dealer Representatives until such time as the Equity Interest falls below the above-mentioned stated percentage.
This Decision will expire on the earlier of the date:
(a) the Filer’s securities are listed for trading on a Canadian stock exchange; or
(b) NI 81-105 is amended or replaced such that the Equity Disclosure and Consent Requirements under that Instrument are no longer in force.
“Carol S. Perry”
“James E. A. Turner”
Carol S. Perry Commissioner
James E. A. Turner Vice-Chair
ONTARIO SECURITIES COMMISSION