BCN 2005/14 - Advance Notice of National Instrument 81-106 Investment Fund Continuous Disclosure and Related Instruments [BCN - Lapsed]

Concurrently Published:

• 81-106 - Investment Fund Continuous Disclosure [NI Advance Notice - Lapsed]
• 81-106CP - Investment Fund Continuous Disclosure [CP Advance Notice - Lapsed]
• 81-106F1 - Contents of Annual and Interim Management Report of Fund Performance [F Advance Notice - Lapsed]

In the attached advance notice, the Canadian Securities Administrators announce the expected implementation of National Instrument 81-106 Investment Fund Continuous Disclosure, its related form and companion policy, effective June 1, 2005. The advance notice also announces amendments to a number of other national instruments and policies, and to the Securities Rules, B.C. Reg. 194/97. The Securities Rules amendments may be found in Appendix J of the Advance Notice and are designed to eliminate duplicative financial statement preparation, filing and delivery requirements, as well as clarifying certain other requirements relating to financial disclosure.

Local amendments
In addition to the amendments to the Securities Rules, we will also be amending or repealing a number of other BC instruments, policies and forms. We will also be publishing an implementing rule, BCI 81-801 Implementing NI 81-106 Investment Fund Continuous Disclosure that provides exemptions from certain financial statement and other requirements in the Securities Act and Securities Rules. We expect to publish the text of the documents we are amending, repealing or adopting close to June 1, 2005, provided that we receive ministerial approval to adopt NI 81-106 and its related form.

We expect to amend, repeal, revoke or adopt the following local instruments:

Questions

You may refer questions to:

Noreen Bent
Manager and Senior Legal Counsel
Legal Services, Corporate Finance
British Columbia Securities Commission
(604) 899-6741
(800) 373-6393 (in BC and Alberta)
nbent@bcsc.bc.ca

Christopher Birchall
Senior Securities Analyst
Corporate Finance
British Columbia Securities Commission
(604) 899-6722
(800) 373-6393 (in BC and Alberta)
cbirchall@bcsc.bc.ca

March 10, 2005

Douglas M. Hyndman
Chair 

Ref:     NI 81-106
Form 81-106F1
81-106CP
NI 13-101
NI 51-102
NI 52-107
NI 54-102
NI 71-102
NI 81-101
Form 81-101F1
Form 81-101F2
81-101CP
NI 81-102
81-102CP
NI 81-104
NP 27
NP 31
NP 50
NP 51
Form 11-901F
BCP 31-601
Form 33-906F
BCP 41-601
BCI 44-801
BCI 45-512
BCI 51-508
BCI 51-801
BCI 52-504
BCI 53-502
BCI 71-801
BCI 81-506
Form 81-901F
BCI 81-801
Securities Rules, B.C. Reg. 194/97

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.

Notice of Rule

National Instrument 81-106 Investment Fund Continuous Disclosure,

Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance, and Companion Policy 81-106CP Investment Fund Continuous Disclosureand Related Amendments

Introduction

We, the Canadian Securities Administrators (CSA), have developed a nationally harmonized set of continuous disclosure (CD) requirements for investment funds. These requirements are set out in National Instrument 81-106 Investment Fund Continuous Disclosure (the Rule), Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance (the Form) and Companion Policy 81-106CP Investment Fund Continuous Disclosure (the CP). The Rule and the Form are together referred to as the Instrument.

We have also made consequential amendments to the following Instruments:

• National Instrument 81-101 Mutual Fund Prospectus Disclosure, Form 81-101F1 Contents of Simplified Prospectus, Form 81-101F2 Contents of Annual Information Form, and Companion Policy 81-101CP Mutual Fund Prospectus Disclosure;
• National Instrument 81-102 Mutual Funds and Companion Policy 81-102CP Mutual Funds;
• National Instrument 13-101 System For Electronic Document Analysis and Retrieval (SEDAR);
• National Instrument 81-104 Commodity Pools;
• National Instrument 51-102 Continuous Disclosure Obligations;
• National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency;
• National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers;
• revocation of National Instrument 54-102 Interim Financial Statement & Report Exemption;
• rescission of National Policy 27 Canadian Generally Accepted Accounting Principles, National Policy 31 Change of Auditor of a Reporting Issuer, National Policy 50 Reservations in an Auditor’s Report, and National Policy 51 Changes in the Ending Date of a Financial Year and in Reporting Status;  and
• in some jurisdictions, certain local amendments.

The Instrument has been made or is expected to be made by each member of the CSA, and will be implemented as a rule in each of British Columbia, Alberta, Manitoba, Ontario, Nova Scotia and New Brunswick, as a commission regulation in Saskatchewan, as a regulation in Québec, and as a policy in all other jurisdictions. We also expect all jurisdictions to adopt the CP.

If the required government approval is obtained in British Columbia, the British Columbia Securities Commission intends to make the Instrument and adopt the CP.  The BCSC will publish the Instrument and CP at that time.

In Ontario, the Instrument, consequential amendments and other required materials were delivered to the Chair of Management Board of Cabinet on March 11, 2005. The Minister may approve or reject the Instrument or return it for further consideration. If the Minister approves the Instrument or does not take any further action, the Instrument and consequential amendments will come into force on June 1, 2005.

In Quebec, the Instrument is a regulation made under section 331.1 of The Securities Act (Québec) and must be approved, with or without amendment, by the Minister of Finance. The Instrument will come into force on the date of its publication in the Gazette officielle du Québec or on any later date specified in the regulation. It must also be published in the Bulletin.

Provided all necessary approvals are obtained, we expect to implement the Instrument and consequential amendments on June 1, 2005. The CP will also come into effect at that time.

Application

The requirements in the Instrument concerning

• annual financial statements, annual management reports of fund performance, and annual information forms will apply for financial years ending on or after June 30, 2005;
• interim financial statements and interim management reports of fund performance will apply for financial periods ending after the investment fund’s first year end following June 30, 2005;
• quarterly portfolio disclosure will apply for periods that end on or after June 1, 2005;
• proxy voting records will apply for the annual period beginning July 1, 2005; and
• proxy solicitation and information circularswill apply as of July 1, 2005.

In some jurisdictions, including Ontario and Québec, the Instrument addresses certain non-reporting investment fund obligations such as financial statement requirements.  Non-reporting investment funds do not have these requirements in other jurisdictions such as British Columbia, Alberta and Manitoba. The Instrument also does not address CD obligations for reporting issuers that are not investment funds. These reporting issuers are regulated by National Instrument 51-102 Continuous Disclosure Obligations which came into force on March 30, 2004.

Substance and Purpose

The Instrument harmonizes CD requirements for investment funds among Canadian jurisdictions and replaces most existing local CD requirements. It sets out the obligations of investment funds with respect to financial statements, management reports of fund performance (MRFPs), delivery obligations, proxy voting disclosure, annual information forms (AIFs) for investment funds that do not have a current prospectus, material change reporting, information circulars, proxies and proxy solicitation, and certain other CD-related matters.

The Instrument prescribes the Form which sets out the contents of the MRFPs. The purpose of the CP is to assist users in understanding and applying the Instrument and to state our views on the interpretation of certain provisions.

Background

We first published the Instrument and CP for comment on September 20, 2002. After considering the comments, we revised the Instrument and CP and published them for comment a second time on May 28, 2004 (the 2004 Proposal). The comment period expired in August 2004. For additional background and the summary of comments received during the first publication period, please refer to the notice we published on May 28, 2004.

Summary of Written Comments Received by the CSA

During the comment period, we received 36 submissions on the 2004 Proposal. We have considered these comments and thank all the commenters. A list of the 36 commenters and a summary of the comments, together with our responses, are contained in Appendix B to this notice.

After considering the comments received, we revised the Instrument and CP. However, as these changes are not material, we are not republishing the Instrument or CP for a further comment period.

Summary of Changes to the Proposed Instrument and Companion Policy

See Appendix A for a description of the noteworthy changes made to the 2004 Proposal.

Consequential Amendments

National Amendments

Amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), including amendments to Form 81-101F1 and Form 81-101F2, are set out in Appendix C to this Notice.

Amendments to National Instrument 81-102 Mutual Funds (NI 81-102) are set out in Appendix D to this Notice. 

Amendments to National Instrument 13-101 System For Electronic Document Analysis and Retrieval (SEDAR) (NI 13-101) are set out in Appendix E to this Notice. 

Amendments to National Instrument 81-104 Commodity Pools (NI 81-104) are set out in Appendix F to this Notice.

Amendments to National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) are set out in Appendix G to this Notice.

Amendments to National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107) are set out in Appendix H to this Notice.

Amendments to National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers (NI 71-102) are set out in Appendix I to this Notice.

National Instrument 54-102 Interim Financial Statement & Report Exemption (NI 54-102) will be revoked when the Instrument comes into force.

National Policy 27 Canadian Generally Accepted Accounting Principles (NP 27), National Policy 31 Change of Auditor of a Reporting Issuer (NP 31), National Policy 50 Reservations in an Auditor’s Report (NP 50), and National Policy 51 Changes in the Ending Date of a Financial Year and in Reporting Status (NP 51) will be rescinded when the Instrument comes into force.

Local Amendments

We are amending or repealing elements of local securities legislation and securities directions, in conjunction with the implementation of the Instrument. The provincial and territorial securities regulatory authorities may publish, or may have published, these local changes or proposed changes separately in their local jurisdictions. Any consequential amendments to rules or regulations in a particular jurisdiction may be published in Appendix J to this Notice.

Some jurisdictions will implement the Instrument using a local implementing rule. These jurisdictions will separately publish the implementing rule.

Questions

Please refer your questions to any of:

Raymond Chan
Accountant, Investment Funds
Ontario Securities Commission
Tel: (416) 593-8128
rchan@osc.gov.on.ca

Vera Nunes
Legal Counsel, Investment Funds
Ontario Securities Commission
Tel: (416) 593-2311
vnunes@osc.gov.on.ca 

Irene Tsatsos
Senior Accountant, Investment Funds
Ontario Securities Commission
Tel: (416) 593-8223
itsatsos@osc.gov.on.ca 

Noreen Bent
Manager and Senior Legal Counsel
British Columbia Securities Commission
Tel:  (604) 899-6741
or 1-800-373-6393 (in B.C. and Alberta)
nbent@bcsc.bc.ca 

Christopher Birchall
Senior Securities Analyst
British Columbia Securities Commission
Tel: (604) 899-6722
or 1-800-373-6393 (in B.C. and Alberta)
cbirchall@bcsc.bc.ca

Melinda Ando
Legal Counsel
Alberta Securities Commission
Tel: (403) 297-2079
melinda.ando@seccom.ab.ca 

Bob Bouchard
Director, Corporate Finance and Chief Administrative Officer
Manitoba Securities Commission
Tel: (204) 945-2555
bbouchard@gov.mb.ca 

Wayne Bridgeman
Senior Analyst, Corporate Finance
Manitoba Securities Commission
Tel: (204) 945‑4905
wbridgeman@gov.mb.ca

Sylvie Anctil-Bavas
Responsablede l’expertise comptable
Direction des marchés des capitaux
Autorité des marchés financiers
Tel: (514) 395-0558, poste 4373
sylvie.anctil-bavas@lautorite.qc.ca 

The text of the Instrument and CP follows or can be found on a CSA member website.

March 11, 2005

Appendix A

Summary of Changes to the Instrument

The Rule

Part 1 Definitions and Applications

• We revised the definition of “current value” to refer more generally to the value calculated in accordance with Canadian GAAP, rather than specific references to market value and fair value.
• We changed the term “group scholarship plan” to “scholarship plan” and have modified the definition to make it consistent with other defined terms. The substance of the definition has not changed.
• We modified the definition of “independent valuation” to allow it to be a valuation of either the net asset value or the venture investments of a labour sponsored or venture capital fund.
• We added the definition of “management expense ratio” from NI 81-102.
• We clarified the definition of “management fees” to indicate that these do not include operating expenses of the investment fund.
• We removed the definition of “manager” as this term is already defined in NI 81-102.
• The Rule contains only one definition of “non-redeemable investment fund” applicable in every jurisdiction. This definition is consistent with the definition currently used in Ontario.
• We removed the definition of “related party”. We decided the definition was unnecessary as “related party” and “related party transactions” are explained in the Handbook.

Part 2 Financial Statements

• The filing deadline for interim financial statements was changed from 45 to 60 days. This filing deadline also applies to the interim MRFPs. We removed the additional ten days for mailing so that securityholders will not receive CD documents later than they currently do.
• We specified that financial statements must be prepared in accordance with Canadian GAAP as applicable to public enterprises so as to be consistent with NI 52-107.
• The Rule now states that the change in year end provisions only apply to investment funds that are reporting issuers. We also clarified the comparative periods for each type of financial statement in the transition year.
• Part 3 Financial Disclosure Requirements
• We specified that investment funds must present certain line items in the financial statements per class or series if applicable.
• We deleted the separate requirements for commodity pools in subsection 3.2(2) as these items are already captured in the statement of operations.
• The requirement to disclose short term debt instruments by currency was modified to require separate disclosure by currency only if the amount represents more than 5% of the total short term debt.
• We removed the requirements to disclose details of related party transactions and to disclose a breakdown of management fees in the notes to the financial statements. This disclosure should be provided in the notes when required by Canadian GAAP. The MRFP will contain a discussion of related party transactions and a breakdown of management fees.
• We removed the requirement to disclose details of amounts waived or paid by the manager in the notes to the financial statements. This disclosure is already required in the statement of operations.
• We clarified the requirement to disclose soft dollars by indicating that this disclosure is to be provided if the amount is ascertainable and by indicating that the soft-dollar portion is the amount paid to dealers for goods and services other than order execution.
• We moved the requirement to disclose the total cost of distribution of the investment fund’s securities from the CP to the Rule. This disclosure must be provided in the notes to the financial statements.
• We moved the requirements with respect to incentive arrangements into the statement of net assets and statement of operations, as applicable. Consequently, we deleted section 3.11.
• We changed the specific requirements for scholarship plans to indicate that they must provide the disclosure by year of eligibility, rather than year of maturity. We also exempted scholarship plans from disclosing certain “per security” line items.

Part 5 Delivery of Financial Statements and Management Reports of Fund Performance

• To improve readability, we defined the term “securityholder” for the purposes of Part 5 to mean registered holder and beneficial owner.
• We added a prohibition against using annual instructions after standing instructions have been obtained. This prohibition was previously contained in the CP.
• We clarified that investment funds must apply the procedures in National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer for the purposes of Part 5 of the Rule, but are exempted from these procedures if they have the necessary beneficial owner information.
• We removed the time limits for obtaining either standing or annual instructions. Investment funds can seek these instructions at a convenient time, remembering that the Rule requires delivery of financial statements and MRFPs to all securityholders unless the investment fund has solicited specific delivery instructions.
• The Rule now permits investment funds under common management to solicit one set of delivery instructions from a securityholder that owns more than one fund in the same fund family.
• The Rule now permits more than one MRFP to be bound together for the purposes of delivery to a securityholder that owns each of the investment funds to which the MRFPs relate.
• We changed the delivery deadline to be the later of the filing deadline or ten days following a securityholder request. This change is consistent with the delivery deadline for reporting issuers other than investment funds.

Part 6 Quarterly Portfolio Disclosure

• We extended the deadline for providing quarterly portfolio disclosure from 45 days to 60 days to address the comments received and to coincide with the interim filing deadline.

Part 7 Financial Disclosure - General [Now Part 7 Binding and Presentation]

• We removed the requirement to send financial statements and MRFPs to people who request them other than securityholders. There is no corresponding requirement in NI 51-102 and we are of the view that it is not necessary to prescribe how investment funds communicate with individuals who are not securityholders.
• We modified section 7.5 [now 7.2] to require multi-class funds (where all classes are referable to the same portfolio of assets) to prepare one set of financial statements. This change was made in response to comments that raised concerns with allowing a separate set of financial statements per class, which is not supported by accounting literature and may not be consistent with Canadian GAAP.

Part 8 Independent Valuations for Labour Sponsored or Venture Capital Funds

• We added a requirement to disclose the qualifications of the independent valuator in the statement of investment portfolio or in the notes to the annual financial statements.
•  We deleted the requirement to disclose the compensation paid to the independent valuator as this disclosure would likely not assist with evaluating independence.

andlt;/andlt;EMandgt;Part 9 Annual Information Form

• Every investment fund that does not have a current prospectus must prepare and file an AIF. The Rule previously exempted investment funds that hold an annual meeting from filing an AIF. However, we determined that the information required in an AIF and in an information circular was not substantially similar, so it is preferable that all investment funds without a current prospectus continue to file an AIF.

Part 10 Proxy Voting Disclosure for Securities Held

• We added a requirement for investment funds that have a website to post their proxy voting record.

Part 15 Calculation of Management Expense Ratio (MER)

• We deleted the requirement (in former subsection 15.1(3)) to disclose an estimate of the non-optional fees paid directly by investors as these fees are no longer included in MER. It may also be difficult for investment funds to estimate these fees as they are negotiated between the investor and their dealer.

Part 16 Additional Filing Requirements

• We modified section 16.2 to require investment funds to file any additional disclosure documents they may send to their securityholders.

Part 18 Effective Date and Transitional

• We specified when the AIF, proxy voting disclosure and proxy solicitation and information circular requirements apply.
• We removed the transition provision applicable to interim financial statements and interim MRFPs as the filing deadline for these is being maintained at 60 days.
• We modified section 18.6. Investment funds that have previously obtained an exemption from continuous disclosure obligations are exempted from any substantially similar provision of the Instrument. This section is now consistent with NI 51-102.

The Form

Part B Content Requirements for Annual Management Report of Fund Performance

Item 2 - Management Discussion of Fund Performance

• We clarified that there is no requirement to provide forward-looking information in the MRFP.
• We added instructions setting out certain requirements applicable to the disclosure of related party transactions.

Item 3 - Financial Highlights

• We added “management expense ratio before waivers or absorptions” as a line in the Ratios and Supplemental Data table, rather than having this disclosure in a note to the table.
• We added a new “trading expense ratio” which represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net assets.
• We removed the requirement to disclose the number of investments held by the investment fund.
• Labour sponsored or venture capital funds must also disclose the “pricing NAV” if different than the net asset value for accounting purposes.
• We added a new section 3.3 requiring disclosure of the basis for calculating management fees and a breakdown of the services received in consideration of the management fees. This requirement was previously contained in the Rule (see the changes to Part 3 of the Rule noted above).

Item 4 - Past Performance

• We removed the requirement for exchange-traded investment funds not to assume that all distributions they made during the relevant period were reinvested in securities of the fund in order to make the performance of these funds more comparable to the performance of investment funds that are not exchange-traded.
• We removed the requirement to disclose the best and worst total return for any six month period as we are not of the view that this disclosure would be meaningful.

Item 5 - Summary of Investment Portfolio

• In response to the comments received, we amended the summary of investment portfolio so that investment funds must only disclose their top 25 positions in total, either long or short, instead of their top 25 long positions and their top 25 short positions.

Part C- Content Requirements for Interim Management Report of Fund Performance

• We changed the Form requirements for interim MRFPs to correspond with the changes made for annual MRFPs.

The Companion Policy

• We amended the CP to reflect the changes to the Rule described above. For example,
  • we added guidance on the soft dollar disclosure required in the notes to the financial statements.
  • we removed section 3.4 dealing with auditor’s reports for multi-class funds as investment funds are not permitted to prepare separate financial statements per class.
  • we clarified the choices an investment fund has with respect to delivering CD documents to its securityholders and to soliciting delivery instructions from securityholders.
  • we specified that a labour sponsored or venture capital fund can obtain an independent valuation of either its net asset value or of the value of its venture investments.
• We expanded the discussion in the Application section to elaborate more fully on what types of issuers are considered to be investment funds.
• We removed section 3.2 “Canadian Auditors”, but added a reminder that investment funds should refer to National Instrument 52-108 Auditor Oversight.
• We updated the references to Handbook Section 7500 Auditor’s Association with Annual Reports, Interim Reports and Other Public Documents.
• We expanded our discussion of auditor involvement with interim financial statements to make it more consistent with NI 51-102.

Consequential Amendments

Amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure

• We revised the amendments to NI 81-101 to require top ten holdings, past performance and financial highlights to remain in a mutual fund’s simplified prospectus until the mutual fund has filed its first annual management report of fund performance.