NIN 94/05 - National Policy Statement No. 39 Definition of Debt-Like Securities [NIN - Rescinded]

The Ontario Securities Commission (the "OSC") published a notice regarding the definition of "debt-like securities" in National Policy Statement No. 39 ("NP 39") in the OSC Bulletin dated April 15, l994. The OSC notice identifies concerns with the improper classification of a debt-like security as debt. As this concern is shared by the British Columbia Securities Commission (the "Commission"), the Commission is issuing a similar notice.

The definition of debt-like securities contained in NP 39 encompasses instruments commonly referred to as "structured" or "commodity-linked" notes. This definition permits securities to be categorized as debt securities rather than debt-like securities if on the date of initial issue the value of the component that is linked to the underlying interest accounts for less than 20% of the total market value of the security. NP 39 does not prescribe any method of valuation for determining whether the component that is linked to the underlying interest accounts for less than 20% of the total market value of the security.

It has been brought to the attention of the Commission that there are several different methods of valuation that might be used for determining the value of the component that is linked to the underlying interest. Depending on the method of valuation used, a security that should more properly be classified as a debt-like security, having regard to the underlying policy concerns addressed by NP 39, might be classified as a debt security. An improper classification could result in the mutual fund exceeding the investment restrictions relating to debt-like securities in NP 39.

The Canadian Securities Administrators' Mutual Fund Committee is currently reviewing the definition of debt-like security contained in NP 39. Interested persons are invited to comment on:

(1) the appropriateness of the current definition of debt-like security;

(2) the appropriateness of changing the current definition to reflect that an instrument should be categorized as a debt-like security if the amount to be paid at maturity (because of the performance of the component that is linked to the underlying interest) could be less than 80% of the original "principal" amount; and

(3) if the definition requires the component that is linked to the underlying interest to be valued, what valuation method should be specified in NP 39.

Seven copies of any comment letter should be submitted by June 30, l994 to:

Canadian Securities Administrators
c/o Office of the Secretary
Ontario Securities Commission
Suite 800, Box 55
20 Queen Street West
Toronto, Ontario
M5H 3S8

Comment letters submitted in response to Requests for Comments are placed on the public file in certain jurisdictions and form part of the public record unless confidentiality is requested. Comment letters will be circulated among the securities regulatory authorities. Accordingly, although comment letters requesting confidentiality will not be placed in the public file, freedom of information legislation may require the securities regulatory authorities in certain jurisdictions to make the comment letters available. Persons submitting comment letters should accordingly be aware that the press and members of the public may be able to obtain access to any comment letter.

It is expected that proposals for comment will be published in the summer of l994. Pending a determination of these issues, the Commission has instructed staff to take the view that an instrument should be regarded as a debt-like security if the amount to be paid at maturity (because of the performance of the component of the instrument that is linked to the underlying interest) could be less than 80% of the original principal amount. Mutual funds and their advisers should discuss with staff the classification of potential investments as debt or debt-like securities.

DATED at Vancouver, British Columbia, on June 8, 1994

Douglas M. Hyndman
Chair