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 of 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 in prospectus – enhanced disclosure about the financial information to be provided in prospectus, in trade confirmations, and on scholarship plan website together with information about how to obtain copies – copies of financial statements and 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.
September 1, 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
CHILDREN’S EDUCATION FUNDS INC.
(the Filer)
AND
THE CHILDREN’S EDUCATION TRUST OF CANADA EDUCATION SAVINGS PLANS
(the Plans)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer 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 the Plans to include in their 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 Filer has 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) “Form 41-101F2” means Form 41-101F2 Information Required in an Investment Fund Prospectus.
(b) “MI 11-102” means Multilateral Instrument 11-102 Passport System.
(c) “MRFPs” means the annual management reports of fund performance prepared for the Plans pursuant to NI 81-106.
(d) “NI 41-101” means National Instrument 41-101 General Prospectus Requirements.
(e) “NI 81-106” means National Instrument 81-106 Investment Fund Continuous Disclosure.
(f) “OSC” means the Ontario Securities Commission.
(g) “Required Financial Statements” means the financial statements and MRFPs required to be included in the prospectus of the Plans under NI 41-101.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is a corporation established under the laws of Ontario with its head office located in Burlington, Ontario.
The Filer is the investment fund manager of the Plans and is registered as an investment fund manager with the OSC. The Filer is also the principal distributor of the Plans and is registered in each province and territory of Canada as a scholarship plan dealer.
The Plans are:
(a) investment funds within the meaning of applicable securities laws,
(b) scholarship plans as referred to in NI 41-101, and
(c) reporting issuers in each province and territory of Canada.
Neither the Filer nor the Plans is in default of securities legislation in any of the provinces or territories in Canada.
The Plans distribute securities in each province and territory of Canada under a current multiple prospectus that complies with the requirements of Form 41-101F2. The 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 their prospectus. Including the Required Financial Statements in their prospectus adds up to 20 additional pages to the commercially printed versions of the prospectus, which is 40 pages long (excluding the Required Financial Statements) once commercially printed. Therefore the prospectus of the Plans, once commercially printed, is up to 60 pages in length.
The Filer, in its capacity as a registered scholarship plan dealer, uses the prospectus of the Plans in its sales process. The Filer provides the prospectus to an investor at account opening.
The Filer encourages investors to thoroughly understand their investment in the Plans by reviewing the prospectus of the Plans. The Filer is concerned that investors may be overwhelmed by the information in the prospectus given the substantial volume of information that is added to the prospectus due to the Required Financial Statements.
Given the nature of the Plans and the fact that they are sold to retail investors, the Filer considers that investors of the Plans have similar information needs as investors of 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 Filer believes that more concise disclosure of the material facts about investing in a Plan is essential for investors to understand their investment.
The Plans wish to incorporate the Required Financial Statements by reference into their prospectus. Scholarship plans are the only investment funds in continuous distribution that are required to include the Required Financial Statements in their prospectuses. All other types of investment funds in continuous distribution are permitted to incorporate the Required Financial Statements by reference into their prospectus. The Filer is of the view that there is no distinction between the information needs of investors in scholarship plans and those of investors in other types of retail investment funds.
The 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. These documents are available on the website to the public.
The Filer also operates an Internet-based client portal available for each investor in the Plans who wants electronic access to their account information (the Subscriber Portal). Documents pertaining to each investor’s investment in a Plan are posted in the Subscriber Portal and are available at any time to the investor on a password-protected basis. These documents include the most current Required Financial Statements, as well as other account specific documentation. Accordingly, current financial statements and MRFPs for the Plans are also available to each investor through their access to the Subscriber Portal.
The Filer believes that requiring that investors receive the Required Financial Statements included with the Plans’ prospectus may be to their detriment, in that
(a) the inclusion of the Required Financial Statements can make the prospectus seem too daunting and complex for many investors, due to the volume and the nature of the disclosure provided in those documents, and
(b) the costs of printing and mailing the prospectus, which are borne by investors, are increased by the additional volume associated with the Required Financial Statements.
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 must be incorporated by reference into the Plans’ prospectus.
The prospectus includes specific disclosure provided in plain language that (i) describes the Required Financial Statements, (ii) explains their importance and why an investor may wish to read these documents before investing in a Plan, and (iii) describes how an investor may request a copy of the Required 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 Filer’s website and also in the Subscriber Portal accessible by investors.
Disclosure reminding investors about the importance of the Required Financial Statements must also be provided in or with the trade confirmations that are sent to investors following an investment in a Plan.
The Filer must deliver or send the Required Financial Statements to any investor who requests them within two business days of receiving the request and at no charge to the investor.
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