Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – scholarship plans granted relief to not include financial statements and management report on fund performance (MRFP) in the prospectus – relief granted to reduce the size and complexity of prospectus and to equalize disclosure requirements for scholarship plans with other types of investment funds - financial statements and MRFP to be incorporated by reference – enhanced disclosure about the documents to be provided in prospectus, in trade confirms, and on scholarship plan website about the documents and how to get copies – copies of financial statements and/or MRFP to be delivered on demand at no charge within two days of receipt of request. Applicable Legislative Provisions National Instrument 41-101 General Prospectus Requirements, subsection 4.1(2), section 19.1
June 2, 2011
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO
(the Jurisdiction)
AND
IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
C.S.T. CONSULTANTS INC., HERITAGE EDUCATION FUNDS INC. AND USC EDUCATION SAVINGS PLANS INC.
(the Filers)
AND
CANADIAN SCHOLARSHIP TRUST PLANS, THE HERITAGE PLANS AND
USC EDUCATION SAVINGS PLANS
(the Plans)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers on behalf of the Plans for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption under section 19.1 of NI 41-101 for relief from subsection 4.1(2) of NI 41-101 which requires each Plan to include in its prospectus the Required Financial Statements (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the OSC is the principal regulator for this application; and
(b) the Filers have provided notice that section 4.7(1) of MI 11-102 is intended to be relied upon in all of the other provinces and territories of Canada.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 41-101 have the same meaning if used in this decision, unless otherwise defined.
The following terms shall have the following meanings:
(a) “CST” means C.S.T. Consultants Inc.
(b) “CST Plans” means the Canadian Scholarship Trust Plans managed by CST.
(c) “Form 41-101F2” means Form 41-101F2 Information Required in an Investment Fund Prospectus.
(d) “Heritage” means Heritage Education Funds Inc.
(e) “Heritage Plans” means the Plans managed by Heritage.
(f) “MI 11-102” means Multilateral Instrument 11-102 Passport System.
(g) “MRFPs” means the annual Management Reports of Fund Performance prepared by each Plan pursuant to NI 81-106.
(h) “NI 41-101” means National Instrument 41-101 General Prospectus Requirements.
(i) “NI 81-106” means National Instrument 81-106 Investment Fund Continuous Disclosure.
(j) “OSC” means the Ontario Securities Commission.
(k) “Plan Prospectus Proposals” means the proposals of the Canadian Securities Administrators published in the CSA Notice and Request for Comment – Modernization of Scholarship Plan Regulation Phase 1: A New Prospectus Form for Scholarship Plans, Proposed Amendments to National Instrument 41-101 General Prospectus Requirements, Form 41-101F2 and Related Amendments, published for comment in March 2010, which includes a proposal to amend NI 41-101 to create a new Form 41-101F3, which would be the mandated prospectus form for all scholarship plans, including the Plans.
(l) “Plans” means, collectively, the CST Plans, the Heritage Plans and the USC Plans.
(m) “RESPDAC” means the RESP Dealers Association of Canada.
(n) “Required Financial Statements” means, for each Plan, the financial statements and MRFPs required to be included in a Plan prospectus under NI 41-101.
(o) “subscriber” means an investor in a scholarship plan, such as the Plans.
(p) “USC” means USC Education Savings Plans Inc.
(q) “USC Plans” means USC Education Savings Plans managed by USC.
Representations
This decision is based on the following facts represented by the Filers:
Each Filer is a corporation established under the laws of Canada or Ontario, as applicable, with its head office located in Ontario.
Each Filer acts as the investment fund manager of the applicable Plans, and accordingly is registered as an investment fund manager with the OSC. Each Filer also acts as the principal distributor of the applicable Plan and accordingly is registered in each province and territory of Canada as a scholarship plan dealer.
Each Plan is
(a) an investment fund within the meaning of applicable securities laws
(b) a scholarship plan as referred to in NI 41-101 and
(c) a reporting issuer in each province and territory of Canada.
None of the Filers or the Plans is in default of securities legislation in any of the provinces or territories in Canada.
Each Plan distributes securities in each province and territory of Canada under a current prospectus that complies with the requirements of Form 41-101F2. Each Plan’s prospectus is written in plain language and as concisely as possible, while still ensuring that the disclosure standards required by applicable securities laws are adhered to.
Under NI 41-101, the Plans must include the Required Financial Statements in the prospectus. Including the Required Financial Statements in the prospectuses of the Plans adds up to 50 additional pages to the commercially printed versions of the documents, which, in order to comply with Form 41-101F2, are up to 75 pages long (excluding the Required Financial Statements) once commercially printed. Therefore the prospectuses of the Plans, once commercially printed, are up to 120 pages in length.
Each Filer, in its capacity as a registered scholarship plan dealer, uses the prospectus of the applicable Plan in its sales processes. Each Filer provides the prospectus to a subscriber at account opening or includes it with the subscriber’s welcome package which is given to the subscriber when the subscriber agrees to invest in a Plan, which is always within the timing for prospectus delivery required by applicable securities laws.
The Filers encourage subscribers to thoroughly understand their investment in the Plans by reviewing the prospectus of the Plans. The Filers are concerned that subscribers to the Plans may be overwhelmed by the information in the prospectus given the substantial volume of information that is added to the prospectuses due to the Required Financial Statements.
Given the nature of the Plans and the fact that they are sold to retail investors, the Filers consider that subscribers to a Plan have similar information needs as investors in other types of investment funds sold to retail investors, such as mutual funds, so that they can properly understand their investment before they decide to so invest. The Filers believe that more concise disclosure of the material facts about investing in a Plan is essential to allow subscribers to understand their investment.
The Filers do not believe that the Required Financial Statements provide subscribers with additional information that is sufficiently material to assist them in deciding whether or not to invest in the Plans. The Filers therefore submit that the Required Financial Statements are not essential for subscribers to make informed investment decisions.
Scholarship plans are the only investment funds in Canada that are required to include the Required Financial Statements in their prospectuses. All other types of investment funds under continuous disclosure are permitted to incorporate the Required Financial Statements by reference into their prospectus. The Filers submit there is no policy basis for this distinction, given that the information needs of subscribers are similar to those of investors in other types of retail investment funds.
Under the Plan Prospectus Proposals, the Required Financial Statements would not be required to be included in the Plan’s prospectus; instead they would be incorporated by reference.
Each Filer operates a website upon which it posts the current prospectus of the Plans, as well as each financial disclosure document required by NI 81-106 and the Report to Securityholders prepared by the independent review committee of each Plan. Other documents considered educational or important for subscribers and potential subscribers are also posted on each Filer’s website. All of these documents are available to the public, including subscribers, without further formality.
Each Filer also operates an Internet-based client portal available for each subscriber in the Plans who wishes electronic access to their account information (the Subscriber Portal). Documents pertaining to each subscriber’s investment in a Plan are posted in the Subscriber Portal and are available at any time to the subscriber on a password-protected basis. These documents include the most recent versions of the Required Financial Statements, as well as other account specific documentation. Accordingly, current financial statements and MRFPs for the Plans are also available to each subscriber through their access to the Subscriber Portal in this fashion.
The Filers submit that requiring that subscribers receive the Required Financial Statements included with a Plan’s prospectus may be to their detriment, in that
(a) the cost of printing and mailing the prospectuses are increased by the additional volume associated with the Required Financial Statements. These costs are ultimately borne by the subscribers, and
(b) the inclusion of the Required Financial Statements can make the prospectus seem too daunting and complex for many subscribers, due to the volume and the nature of the disclosure provided in those documents.
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:
The Required Financial Statements are incorporated by reference into the Plan’s prospectus.
The prospectus includes specific disclosure provided in plain language that (i) describes the Required Financial Statements and (ii) explains their importance and why a subscriber may wish to read these documents before investing in a Plan, and (iii) describes how a subscriber may request a copy of the Requirement Financial Statements, which disclosure must be located on a new page immediately after the table of contents in the prospectus. Similar disclosure must also be provided on the Filers’ websites and also in the Subscriber Portal accessible by subscribers.
Disclosure reminding subscribers about the importance of the Required Financial Statements is also be provided in or with the trade confirmations that are sent to subscribers following an investment in a Plan.
The Filers deliver or send the Required Financial Statements to any subscriber who requests them within two business days of receiving the request and at no charge to the subscriber.
This Decision will expire upon the coming into force of any amendment to NI 41-101 that speaks to the inclusion of the Required Financial Statements in a scholarship plan prospectus.
"Darren McKall"
Darren McKall
Manager, Investment Funds Branch
Ontario Securities Commission