NIN 98/40 - Republication for Comment of Proposed National Instrument 54-101 and Related Documents Communication With Beneficial Owners of Securities of a Reporting Issuer [NIN - Rescinded]

Published Date:	1998-07-17
Effective Date:	1998-07-16

The Commission, together with other members of the Canadian Securities Administrators ("CSA"), is republishing for comment the text of proposed National Instrument 54-101 (the "National Instrument"); proposed Companion Policy 54-101CP (the "Companion Policy"); proposed related Forms 54-101F1, 54-101F2, 54-101F3, 54-101F4, 54-101F5, 54-101F6, 54-101F7 and 54-101F8 (the "Forms"); and, in British Columbia, proposed consequential amendments to the Securities Rules. The National Instrument, Companion Policy, Forms and proposed consequential amendments to the Securities Rules deal with communication with beneficial owners of securities of a reporting issuer and are a reformulation of most of the provisions of National Policy Statement No. 41 ("NP41"), which they will replace. The National Instrument and Companion Policy contain footnotes that are not part of the proposed instrument or policy, which have been included to provide background and explanation.

The proposed National Instrument and Companion Policy are initiatives of the CSA. The proposed National Instrument is expected to be adopted as a rule in each of British Columbia, Alberta, Ontario and Nova Scotia, as a Commission regulation in Saskatchewan, and as a policy in all the other jurisdictions represented by the CSA. The proposed Forms are expected to be implemented by local rule in certain jurisdictions. In British Columbia, the proposed Forms are expected to be specified by the Executive Director under section 182 of the Securities Act. The proposed Companion Policy is expected to be implemented as a policy in all of the jurisdictions of the CSA.

Subject to considering any further comments submitted and receiving approval from the Minister of Finance, the Commission hopes to be able to adopt the proposed National Instrument in January 1999. Subject to the same considerations, the proposed National Instrument is expected to be applicable to the sending of securityholder materials other than proxy-related materials on or after July 1, 1999 and to the sending of proxy-related materials for meetings held on or after October 1, 1999.

Background

On February 27, 1998, the Commission, together with other members of the CSA, published for comment proposed National Instrument 54-101 "Communication with Beneficial Owners of Securities of a Reporting Issuer" and related documents.¹

¹ NIN#98/12.

The comment period for these materials expired on May 29, 1998.

During the comment period, the CSA received submissions from a broad range of commenters. The list of commenters is contained in Appendix A of this Notice, and the summary of their comments, together with the CSA responses to those comments, are contained in Appendix B of this Notice. As the result of consideration of the comments, the CSA are proposing a number of amendments to the materials published in February, and are therefore republishing for a second comment period the proposed National Instrument, the Forms and the Companion Policy. Changes are also proposed to be made to the consequential amendments to the Securities Rules in British Columbia.

In this Notice, the versions of these materials published in February are called the "Draft National Instrument", the "Draft Forms", the "Draft Companion Policy" and the "Draft Consequential Amendments", respectively.

Proposed National Instrument 54-102 "Supplemental Mailing List and Interim Financial Statement Exemption", which replaces the provisions of NP41 and associated rules and blanket orders pertaining to supplemental mailing lists, was published for comment in February with the proposed National Instrument, but will not be republished for comment.²

² NIN#98/13.

National Instrument 54-102 is expected to be adopted by the CSA at the same time as proposed National Instrument 54-101, without material changes from the version that was published in February.

Substance and Purpose of the Proposed National Instrument, Forms and Companion Policy

The proposed National Instrument, Forms and Companion Policy provide a procedure to enable a reporting issuer to send securityholder materials, including proxy-related materials and annual reports, to beneficial owners of its securities who are not registered holders of its securities, and impose obligations on various parties in the securityholder communication process.

For additional information concerning the background of the proposed National Instrument, Forms and Companion Policy, reference should be made to NIN#98/12 published in the Commission’s Weekly Summary dated February 27, 1998.

Summary of Changes to the Proposed National Instrument from the Draft National Instrument

This section describes substantive and certain other changes made in the proposed National Instrument from the Draft National Instrument. Other changes made in response to comments received are described in Appendix B. Reference should be made to the proposed National Instrument for further details, including the definitions of "OBO" and "NOBO", and to Appendix A and Appendix B to this Notice.

Definitions

Changes from the Draft National Instrument

The definition of "intermediary" has been amended by the addition of paragraph (c), which has the effect of ensuring that a person that is treated as a beneficial owner of a security cannot also be treated as an intermediary in respect of that security. This change was made in response to a comment to ensure that persons holding securities on behalf of others and having discretionary authority over those securities not be considered intermediaries under the proposed National Instrument. Persons that have discretionary authority over the securities, and thus have authority to provide instructions in a client response card, will be defined as beneficial owners under this Instrument. The scheme of the proposed National Instrument does not contemplate that a person can be both beneficial owner and intermediary with respect to the same security.

The definitions of "non-objecting beneficial owner" and "objecting beneficial owner" have been amended to reflect changes made to section 3.3 of the proposed National Instrument, which now permits an intermediary to rely upon instructions given by clients under NP41. The Draft National Instrument would have required intermediaries to send out new client response cards to all clients, even if they had already provided responses under NP41. The CSA are proposing this change in response to comments received concerning the inconvenience and expense associated with the approach contemplated in the Draft National Instrument.

The definition of "non-objecting beneficial owner list" has been amended to contemplate both an electronic and non-electronic form of the list. The Draft National Instrument contemplated only an electronic form of the list. The proposed National Instrument would permit the preparation of NOBO lists in non-electronic form, at the specific request of the issuer or other person authorized to request this list. This request would be made in the request for beneficial ownership information (Form 54-101F2). This change is proposed in response to comments that certain issuers and third parties may not have the technical capacity to receive an electronic list.

The definition of "routine business" has been expanded by the addition of the "setting or changing of the number of directors to be elected within a range permitted by corporate law" under certain circumstances. This provision has been added in response to a comment received that some corporate statutes require or permit the securityholders to set the number of directors to be elected, and that this is properly treated under this Instrument as "routine business". The definition has also been amended by now providing that only a "reappointment of an incumbent auditor" is routine business, rather than the appointment of any auditor as provided for in the Draft National Instrument. This amendment was made in response to comments that only the reappointment of an incumbent auditor should be considered to be routine business; the appointment of an auditor could include a change of auditor, which should not be regarded as routine business.

In addition, definitions of "FINS", "NP41" and "preferred language of communication" have been added for convenience of reference.

Section 1.5

Section 1.5 provides that fees payable under the proposed National Instrument shall be in amounts specified in Appendix A.

Changes from the Draft National Instrument

Section 1.5 is new and was added to simplify the drafting of the fees sections of the proposed National Instrument. In conjunction with this change, references to amounts of fees have been moved to an Appendix, rather than being contained in the proposed National Instrument.

Section 2.2

Changes from the Draft National Instrument

Subsection (1) of section 2.2 has been amended to delete the minimum notice period of eight business days before the record date for notice for a reporting issuer to send a notification of meeting and record dates. This change has been made to give reporting issuers flexibility to call meetings on an expedited basis.

Section 2.5

Changes from the Draft National Instrument

Subsection (1) of section 2.5 has been amended to delete the minimum period of five business days before the record date for notice for sending a request for beneficial ownership information to proximate intermediaries. Like subsection 2.2, this change has been made to give reporting issuers flexibility to call meetings on an expedited basis.

Subsection (3) of section 2.5 has been amended to require that a statutory declaration be given with a request for beneficial ownership information that includes a request for NOBO lists, rather than an undertaking as provided for in the Draft National Instrument. The statutory declaration confirms the person’s obligations with respect to beneficial owner lists.

Section 2.9

Section 2.9 provides that a reporting issuer that has stated in its request for beneficial ownership information sent in connection with a meeting that it will send proxy-related materials to, and seek voting instructions from, NOBOs shall send, at its expense, at least 21 days before the date fixed for the meeting, the proxy-related materials for the meeting, subject to section 2.10, directly to the NOBOs on the NOBO lists received in response to the request.

Changes from the Draft National Instrument

This section has been amended from the Draft National Instrument to provide that a reporting issuer is required to send materials to NOBOs at least 21 days before the date fixed for the meeting only if the reporting issuer has indicated in the request for beneficial ownership information that it will send the materials to, and seek voting instructions from, NOBOs. The Draft National Instrument required these materials to be sent this way if the request for beneficial ownership information was given in connection with a meeting. The CSA recognize that there may be circumstances in which a reporting issuer wishes to communicate with, and send materials to, NOBOs in connection with a meeting, while allowing the intermediaries to attend to the formal delivery of the proxy-related materials and the obtaining of voting instructions. In such circumstances, the requirements of this section will not apply to the reporting issuer.

In addition, this section has been amended to explicitly state that the sending of materials to NOBOs by a reporting issuer is at the expense of the reporting issuer. This was implicit, but not stated explicitly, in the Draft National Instrument.

Section 2.10

Section 2.10 provides that a reporting issuer that uses a NOBO list to send securityholder materials directly to NOBOs on the NOBO list shall not send the securityholder materials to NOBOs that are identified on the NOBO list as having declined to receive those materials unless the reporting issuer has specified in the request for beneficial ownership information in connection with the sending of the materials that the securityholder materials will be sent to all beneficial owners of securities.

Changes from the Draft National Instrument

This section has been amended to permit a reporting issuer to override the election of securityholders not to receive certain materials. A reporting issuer would state its intention in that regard in the request for beneficial ownership information sent in connection with the meeting.

Section 2.14

Subsection 2.14(1) requires a reporting issuer that sends securityholder materials to NOBOs through a proximate intermediary to pay a fee, the actual cost of postage and, if the materials are not sent by first class mail, the reasonable costs of preparation for mailing, to the proximate intermediaries for sending securityholder materials on to NOBOs. Paragraph (c) requires the reporting issuer to pay to the proximate intermediary the reasonable costs associated with the preparation by that intermediary of the securityholder materials for mailing, if the material are not sent by first class mail.

Subsection 2.14(2) requires a reporting issuer that sends securityholder materials, indirectly through a proximate intermediary, to OBOs that have declined in accordance with the proposed National Instrument to receive those materials to pay a fee to that intermediary for sending the materials on to those OBOs. In such circumstances, the reporting issuer is also required to pay the actual cost of postage, as in subsection (1).

Changes from the Draft National Instrument

The CSA have added paragraph (c) to subsection (1) to reflect the fact that it may be more economical in some mailings to send securityholder materials by other than first class mail. In such circumstances, the proximate intermediary must sort the materials before delivery to the post office, and this provision permits that intermediary to recover its costs in that regard. The request for beneficial ownership information permits the reporting issuer to designate how it wishes the materials to be sent to securityholders. The CSA expect that issuers will agree on the amount of these costs before the mailing to enable the issuer to determine whether it wishes the materials to be sent by first class mail or otherwise.

With respect to subsection (2), the CSA are proposing to amend the fee arrangements from those proposed in the Draft National Instrument. The proposed National Instrument now proposes that reporting issuers pay the cost of distribution of securityholder materials to OBOs only in respect of distributions to those OBOs that had declined to receive the materials. The proposed National Instrument does not carry forward the proposal contained in the Draft National Instrument under which a reporting issuer that sends securityholder materials to NOBOs indirectly through a proximate intermediary would compensate that intermediary for the costs associated with delivery to all beneficial owners of securities, including all OBOs. This proposal has not been carried forward due to the fact that the approach in the proposed National Instrument is more consistent with the principle of OBOs bearing the cost of confidentiality.

Section 3.3

Section 3.3 provides that an intermediary that holds securities on behalf of a client in an account that was opened before the proposed National Instrument comes into force may follow the steps required for new clients under the proposed National Instrument, i.e., sending an explanation to clients and a client response card and seeking responses from the client in connection with the disclosure of client information, the receipt of securityholder materials and the preferred language of communication. Alternatively, the intermediary may rely upon the choices previously made by the client under NP41 in respect of that account. An intermediary that follows the steps required for new clients may not rely on instructions or deemed instructions received from the client under NP41.

Changes from the Draft National Instrument

The CSA have amended this section to allow intermediaries to rely upon instructions with respect to existing clients, because the choices made by clients under NP41, and the consequences of not making those choices, are very similar to those made under this Instrument. An intermediary may seek new instructions from existing clients if it so chooses, in which case it may not rely upon the NP41 approach with respect to those clients. The Draft National Instrument proposed that intermediaries be required to seek new instructions from all clients.

Section 3.7

Subsection 3.7(1) provides that an intermediary that sends securityholder materials to an OBO in accordance with this Instrument is entitled to recover from the OBO the reasonable costs, including postage, incurred by the intermediary in sending the securityholder materials to the OBO.

Subsection 3.7(2) provides, despite subsection (1), that an intermediary is not entitled to recover its costs in sending securityholder materials to an OBO that has declined in accordance with this Instrument to receive those materials if the intermediary has sent those materials as the result of the reporting issuer specifying in the request for beneficial ownership information sent in connection with the sending of materials that the securityholder materials shall be sent to all beneficial owners of securities.

Changes from the Draft National Instrument

The proposed National Instrument now provides that OBOs may be responsible for the costs associated with the delivery of materials to them in all circumstances, other than when materials that have been declined by the OBOs are sent. This approach is consistent with the approach taken in NP41, and recognizes that securities legislation in a number of jurisdictions allocates to the client any costs related to the sending of securityholder materials by intermediaries (for example, section 165 of theSecurities Act (Québec) and section 79(2)(b) of the Securities Act (Alberta)). This replaces the approach proposed in the February Draft, in which reporting issuers would bear the cost associated with the sending of materials by intermediaries to OBOs, if the reporting issuers chose to send materials to NOBOs indirectly.

Deletions from Part 3

Section 3.5 of the Draft National Instrument has been deleted. That provision required that an intermediary make all necessary arrangements to permit the instructions requested in a client response card to be returned to the intermediary at no cost to the client. Upon consideration, the CSA have no objection to arrangements whereby clients are responsible for some of the costs, such as postage, for providing instructions to an intermediary. The CSA consider this a business matter best left between the client and the intermediary.

Section 4.1

Subsection (2) of section 4.1 provides that in the case of a request sent in connection with a meeting, a proximate intermediary is to respond within three business days of the request, and if the request contains a request for a NOBO list, to provide the NOBO list in electronic format within three business days after the record date for notice of the meeting. If the reporting issuer has indicated in the request that it will send materials and seek voting instructions from NOBOs, the proximate intermediary is also required to provide an omnibus proxy appointing management of the reporting issuer proxy for NOBOs.

Changes from the Draft National Instrument

Subsection (2) of section 4.1 has been revised from the corresponding provision of the Draft National Instrument to require that the reporting issuer is entitled to receive an omnibus proxy appointing management of the reporting issuer as the proximate intermediary’s proxy holder if the reporting issuer has indicated in the request for beneficial ownership information that it will send the materials to, and seek voting instructions from, NOBOs. The CSA recognize that there may be circumstances in which a reporting issuer wishes to communicate with, and send materials to, NOBOs in connection with a meeting, while allowing the intermediaries to attend to the formal delivery of the proxy-related materials and the obtaining of voting instructions. In such circumstances, the omnibus proxy would remain with the proximate intermediary and would not be delivered to the reporting issuer.

Section 4.2

Section 4.2 provides that intermediaries that receive securityholder materials for sending to beneficial owners of securities shall send those materials within the time periods provided for in that section.

Changes from the Draft National Instrument

Section 4.3 has been amended by the addition of the words "subject to securities legislation" in paragraphs (1)(a) and (b) and 2(a). This addition recognizes that the securities legislation of some jurisdictions permits some intermediaries to decline to send on those materials unless the reporting issuer or the beneficial owner has agreed to pay the costs of that sending of materials.

Section 4.3

Section 4.3 provides that, except as required by securities legislation, an intermediary that receives securityholder materials that are to be sent to a beneficial owner of securities shall not send the securityholder materials to the beneficial owner if the beneficial owner has declined in accordance with this Instrument to receive the securityholder materials unless the reporting issuer has specified in the request for beneficial ownership information in connection with the sending of materials that the securityholder materials shall be sent to all beneficial owners of securities.

Changes from the Draft National Instrument

The section corresponds to section 2.10, and now provides that securityholder materials will not be sent to OBOs that have declined to receive them except if the reporting issuer has indicated in the applicable request of beneficial ownership information that the materials shall be sent to all beneficial owners of the securities.

Section 6.1

Section 6.1 permits any person to request a reporting issuer to send to it the most recently prepared NOBO lists for each intermediary holding securities of the reporting issuer that are in the reporting issuer’s possession. The request is to be accompanied by a statutory declaration of the person in the required form. The reporting issuer is required to deliver the lists within three business days of the request upon receipt of a fee for preparing the lists for sending under section 6.1.

Subsection 6.1(4) provides that a reporting issuer shall delete from NOBO lists sent under section 6.1 the FINS numbers referred to in the required form and any other information that would identify the intermediary through which a NOBO holds securities.

Changes from the Draft National Instrument

The CSA are proposing to put third parties, to the extent possible, in the same position as reporting issuers in respect of obtaining information concerning beneficial owners of securities of the reporting issuer. The CSA have eliminated the need to make requests for NOBO lists only through reporting issuers that was contained in section 6.1 of the Draft National Instrument, and have therefore provided in section 6.2 that third parties have substantially the rights and are subject to the obligations of reporting issuers under the proposed National Instrument. Reporting issuers will be provided with copies of requests for NOBO lists made by third parties.

As a matter of convenience, the CSA are proposing that a third party can obtain from a reporting issuer the most recent NOBO lists in the possession of the reporting issuer upon payment of a fee. The proposed National Instrument provides that the FINS numbers be deleted from NOBO lists sent under this section in order to protect sensitive information concerning the identity of the intermediaries through which securities are held.

Section 6.2

Section 6.2 provides that a person may take any action permitted under the proposed National Instrument to be taken by a reporting issuer and, in so doing, has all the rights, and is subject to all of the obligations, of a reporting issuer in connection with that action.

Subsection 6.2(4) also provides that a person that sends an intermediary search request under section 2.3 or a request for beneficial ownership under section 2.5 shall concurrently send a copy of that request to the reporting issuer of the securities to which the request relates.

Changes from the Draft National Instrument

Section 6.2 has been revised from the corresponding provision of the Draft National Instrument to better reflect the intention of the CSA that third parties should have the same rights as a reporting issuer in requesting searches and arranging for the delivery of materials to securityholders, except for specified reporting issuer matters.

In conjunction with this approach, section 5.4 of the Draft National Instrument has been deleted. That provision specifically provided for the ability of third parties to make an intermediary search request to a depository in substantially the same manner as a reporting issuer. This specific provision is unnecessary in light of section 6.2, which would give third parties generally the same rights as reporting issuers.

Deletions from Part 8

Section 8.3 of the Draft National Instrument, like section 4.5 of the Draft National Instrument, has been deleted. This section required a person requesting voting instructions from a beneficial owner to make arrangements to ensure that there would be no cost to the beneficial owner in providing the instructions. Upon consideration, the CSA have no objection to arrangements whereby a beneficial owner is responsible for some costs, such as postage, in connection with providing instructions.

Part 10

Part 10 has been amended to provide more generous transitional provisions than contained in the Draft National Instrument. The CSA are continuing to propose that the proposed National Instrument come into force on January 1, 1999 but are proposing that the proposed National Instrument will apply to the sending of proxy-related materials for meetings held on or after October 1, 1999, and that the proposed National Instrument will apply to the sending of securityholder material other than proxy-related materials occurring on or after July 1, 1999. The sending of proxy-related materials for meetings held between January 1, 1999 and October 1, 1999 are exempt from the proposed National Instrument so long as they are sent in accordance with NP41.

In addition, no person may request a NOBO list before July 1, 1999.

These changes are designed to permit participants in the securityholder material distribution process adequate time to make necessary systems or operational changes as appropriate to be able to comply with the proposed National Instrument.

Appendix A

Appendix A is new and contains the schedule of fees contemplated by the proposed National Instrument. As in the Draft National Instrument, the proposed National Instrument continues to require that fees be in a reasonable amount. However, the proposed National Instrument prescribes fixed amounts of fees in British Columbia.

Summary of Changes to the Proposed Forms

A substantial number of changes were made to the proposed Forms in order to conform the Forms to amendments made to the proposed National Instrument.

Except as noted below, there are no substantive changes to the Forms not relating to amendments discussed in this Notice under "Summary of Changes to the Proposed National Instrument". However, the requirement for manual signatures in respect of all Forms, except the form of statutory declaration, has been removed as part of the CSA’s promotion and facilitation of the use of electronic communication.

Part 1 of Form 54-101F2 (the portion of the Request for Beneficial Ownership Information completed by the reporting issuer) has been reorganized to clarify the five circumstances under which the request can be delivered, and the information to be contained in the request, depending on the purpose for which the request was made. The form also has been amended to contemplate preliminary search requests.

Item 6 of Part 2 of Form 54-101F2 has been added in connection with the changes to Part 1 concerning preliminary search requests.

Forms 54-101F6 and 54-101F7 have been amended by the addition of more detailed instructions concerning the steps to be taken by a beneficial owner that wishes to attend a meeting and vote in person.

Form 54-101F8 now consists of a form of statutory declaration, rather than a form of undertaking.

Summary of Changes to the Proposed Companion Policy

This section describes substantive changes made in the proposed Companion Policy from the Draft Companion Policy. For a detailed summary of the contents of the Draft Companion Policy, reference should be made to the February Notice. Other changes made in response to comments received are described in Appendix B.

Section 3.1

This section notes that the CSA recommend the use of as long a time period as possible to ensure compliance with the proposed National Instrument. This section also notes that it remains the responsibility of reporting issuers when planning a meeting timetable to factor in all timing considerations, including deadlines external to the proposed National Instrument, such as corporate law requirements and CDS requirements.

Changes from the Draft Companion Policy

The title of this section has been clarified and a discussion of the need to factor in deadlines external to the proposed National Instrument has been added.

Section 3.2

Section 3.2 notes that the fee schedule to the proposed National Instrument sets fees in a reasonable amount, or in the case of British Columbia, a fixed amount. Section 3.2 notes that the CSA consider that the fees fixed by British Columbia are reasonable, in light of current procedures and technology.

Changes from the Draft Companion Policy

Section 3.2 is new, and replaces the discussion contained in section 3.2 of the Draft Companion Policy concerning certain fee amounts considered by the CSA to be reasonable.

Section 3.4

Changes from the Draft Companion Policy

Section 3.4 has been amended to reflect the revised approach taken in respect of the rights and associated obligations of third parties to take actions that a reporting may take under the proposed National Instrument.

Section 5.4

Section 5.4 contains the recognition of the CSA that much of the communication under the proposed National Instrument will be by electronic means, and that the CSA intend to promote and facilitate the use of electronic communication, subject to the current limits of both technology and applicable corporate law and securities legislation.

The section also indicates that the CSA are prepared to consider applications in specific circumstances to facilitate electronic communication beyond what is currently contemplated in the proposed National Instrument. In particular, the CSA will entertain applications for relief from the requirement contained in the Canadian securities legislation of some jurisdictions requiring the provision of written voting instructions. Furthermore, the section also indicates that manual signatures of documents required under the proposed National Instrument are no longer required.

Changes from the Draft Companion Policy

Section 5.4 has been expanded to emphasize the CSA’s views on the desirability of electronic communication and their intent to promote and facilitate its use. In addition, as part of their promotion of electronic communication, the CSA have removed the obligation to provide manual signatures to documents other than statutory declarations, believing that while the content of these documents should be prescribed, persons should satisfy themselves in whatever manner they consider appropriate as to the authenticity of the person who would otherwise be signing the document manually.

Section 6.4

The detailed application requirements contained in the Draft Companion Policy have been deleted. The procedure for making applications will be contained in National Policy 12-201, the National Application System policy.

Section 7.1

Section 7.1 reminds market participants that the use of a NOBO list contrary to section 7.1 of the Instrument constitutes a breach of the proposed National Instrument and securities legislation.

Changes from Draft companion Policy

Section 7.1 is new and was added as a result of comments received requesting clarification that the use of NOBO lists for prohibited purposes constitutes a breach of the proposed National Instrument and securities legislation.

Summary of Changes to the Proposed Consequential Amendments

While no comments were received on the Draft Consequential Amendments, a number of changes were made to the proposed consequential amendments in order to simplify them and conform them to amendments made to the proposed National Instrument.

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument, Forms and Companion Policy. Submissions received by September 15, 1998 will be considered.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission, in duplicate, as indicated below:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Department of Government Services and Lands, Newfoundland and Labrador
Registrar of Securities, Northwest Territories
Registrar of Securities, Government of the Yukon Territory

c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows

Claude St Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of the written comments received during the comment period be published, confidentiality of submissions received cannot be maintained.

Questions may be referred to any of:

Diane Joly
Commission des valeurs mobilières du Québec
(514) 873-5326

Glenda A. Campbell
Alberta Securities Commission
(403) 297-6454

Robert Hudson
British Columbia Securities Commission
(604) 899-6691
(800) 373-6393 (in B.C.)

Robert F. Kohl
Ontario Securities Commission
(416) 593-8233

DATED at Vancouver, British Columbia, on July 16, 1998

Douglas M. Hyndman
Chair

Ref: NP 41
NIN#98/12
NIN#98/13

1. Blain & Company
2. Canadian Investor Relations Institute
3. Canadian Society of Corporate Secretaries
4. Canadian Corporate Shareholder Services Association
5. Canadian Bankers Association
6. Canadian Depository for Securities
7. CIBC Mellon Global Securities Services Company
8. Fiducie Desjardins
9. Independent Investor Communications Corporation
10. Investment Dealers Association of Canada
11. Investors Group Financial Services Inc.
12. MacMillan Bloedel
13. Manulife Securities International Ltd.
14. Willy Rasmussen
15. Securities Law Subcommittee of the Business Law Section of the Canadian Bar Association (Ontario)
16. Security Transfer Association of Canada
17. Stikeman, Elliott
18. TD Securities Services
19. Tory, Tory, DesLauriers & Binnington
20. TransAlta Corporation

1. INTRODUCTION

On February 27, 1998, the Canadian Securities Administrators (the "CSA") published for comment proposed National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (the "National Instrument"), Forms 54-101F1, 54-101F2, 54-101F3, 54-101F4, 54-101F5, 54-101F6, 54-101F7 and 54-101F8 (the "Forms"), the proposed Companion Policy 54-101CP (the "Companion Policy") and, in British Columbia, proposed consequential amendments to the Securities Rules.Ontario, the proposed Implementing Rule 54-801¹

¹ NIN#98/12.

The comment period for these materials expired on May 29, 1998.

In this Appendix, the versions of these materials published in February are called the "Draft National Instrument", the "Draft Forms" and the "Draft Companion Policy".

During the comment period, the CSA received 20 submissions. The commenters providing the submissions can be grouped as follows:

Mutual Fund Companies/Registrants 3
- Investors Group Financial Services Inc. ("IG")
- Manulife Securities International Ltd. ("Manulife")
- TD Securities Services ("TD Securities")

Law Firms 3
- Tory, Tory, DesLauriers & Binnington ("Tories")
- Stikeman, Elliott, on behalf of Securities Transfer
Association of Canada ("Stikeman/STAC")
- Blain & Company ("Blain")

Trade Associations 6
- Canadian Bankers Association ("CBA")
- Canadian Corporate Shareholder Services Association
("CCSSA")
- Canadian Investor Relations Institute ("CIRI")
- Canadian Society of Corporate Secretaries ("CSCS")
- Security Transfer Association of Canada ("STAC")
- Securities Law Subcommittee of the Business Law
Section of the Canadian Bar Association
(Ontario) ("CBAO Subcommittee")

Reporting Issuers 2
- MacMillan Bloedel Limited
- TransAlta Corporation

Individual 1
- Mr. Willy Rasmussen

Self-Regulatory Organizations 2
- Investment Dealers Association of Canada ("IDA")

Financial Institutions 2
- CIBC Mellon Global Securities Services Company
("CIBC Mellon")
- Fiducie Desjardins ("Desjardins")

Others 2
- Canadian Depository for Securities Inc. ("CDS")
- ADP Independent Investor Communications Corporation
("IICC"), whose comment adopted a letter of
Stikeman, Elliott ("Stikeman/IICC")

TOTAL 20

Copies of the comment letters may be viewed at the reception area of the British Columbia Securities Commission, 200-865 Hornby Street, Vancouver, British Columbia (604) 899-6660 or (800) 373-6393 (in B.C.); the office of the Alberta Securities Commission, 10025 Jasper Avenue, Edmonton, Alberta (403) 427-5201; the office of Micromedia, 20 Victoria Street, Toronto, Ontario (416) 312-5211 or (800) 387-2689; or the library of the Commission des valeurs mobilières du Québec, 800 Victoria Square, 17th Floor, Montréal, Québec (514) 873-5326.

The CSA have considered the comments received and thank all commenters for providing their comments on the Draft National Instrument, Draft Forms and Draft Policy. The Draft National Instrument, Draft Forms and Draft Policy have been amended to reflect a number of the comments, and are being republished for further comment.

The following is a summary of the comments received, together with the CSA's responses and, where applicable, the proposed changes in response to the comments. The republished versions of these instruments are called the "proposed National Instrument", the "proposed Forms" and "proposed Policy" in this Appendix. Terms used in this summary that are defined in the proposed National Instrument have the meanings ascribed to them in that Instrument.

The CSA received a number of helpful drafting comments on the Draft National Instrument. Those comments that are purely technical or designed to improve the clarity of the instruments are not summarized in this Appendix.

2. GENERAL COMMENTS

The comments received on the Draft National Instrument were varied and mixed, ranging from those that expressed general approval of the approach proposed in the Draft National Instrument, to comments that suggested that the proposed approach was fundamentally misguided and unnecessary. Virtually all commenters acknowledged that some amendments to NP41 were appropriate, and that some of the proposals contained in the Draft National Instrument were useful. However, a number of commenters argued that NP41 was basically working well, that no major amendments to it were appropriate and that the changes proposed in the Draft National Instrument would create complexity, confusions, inefficiency and higher costs for market participants.

Certain commenters, including STAC, the CCSSA, CIRI, the CSCS and an issuer, strongly supported the proposals for reform in the Draft National Instrument and felt that they positively addressed the deficiencies that exist under NP41. The CCSSA stated that its position on NP41 "has the support of the entire issuer community from the smallest junior resource company to those as large as BCE Inc."

Permitting Reporting Issuers to Send Materials Directly to NOBOs

Objections to Proposal

The most controversial aspect of the Draft National Instrument, as evidenced by the comments received, was the proposal to permit reporting issuers to deliver securityholder documents directly to NOBOs of their securities. The most strenuous objections in this regard were raised in respect of proxy-related materials. The commenters that objected to this proposal felt that the proposal ran the risk of creating significant inefficiencies for those parties involved in the process of distributing securityholder materials.

CIBC Mellon, IICC, TD Securities, STAC and the CBA recognized the CSA's efforts to provide reporting issuers with a more cost effective method of shareholder communication, but expressed concern that the proposed changes will instead result in significantly increased costs, specifically for intermediaries and reporting issuers. It was argued that these costs will be the result of the requirement to maintain multiple infrastructures to support communication to investors through two alternative approaches (indirectly through intermediaries and directly through issuers) rather than the one approach used under NP41 (indirectly through intermediaries). Some commenters felt that permitting two approaches to the distribution of securityholder materials constituted a "fragmentation" of the distribution process that would lead to inefficiencies of the system in an area where standardization and high volume should be encouraged.

The CBA argued that the ability of a reporting issuer to elect in connection with a distribution of materials whether it would mail directly to NOBOs would mean that the issuer could in one year distribute directly and distribute the next year only through intermediaries. This would create a "seesaw" effect that would be inefficient and materially impact intermediaries.

The argument of several of commenters, such as the IDA and the CBA, was that the existing shareholder communication process is operating efficiently and should not be changed. They argued that the process to revise NP41 was commenced at a time when the existing procedures were thought to be inefficient. However, they suggested that the situation has changed dramatically with the evolution of technology and the refinement of delivery systems and channels. This is evidenced by the decreasing number of complaints received by the IDA and the members of the CBA from clients concerning the non-receipt of requested material, so much so that these complaints are now virtually non-existent. The IDA stated that most large reporting issuers and IDA members, who represent a large segment of the intermediary group, believe the existing system is working well and need not be amended in any significant way.

In addition, IICC argued that changes to the system will lead to confusion and failure and that incentives to utilize technologic innovation (such as telephone and Internet voting) to lower issuers' costs, which are encouraged by the present system, will be lost.

IICC also expressed concern that regulators will experience increased administration and associated expenses to oversee and regulate this new, complex process. In particular, the securities commissions will be required to monitor compliance by issuers who opt to carry out the mailing and voting process themselves, a task much more difficult than simply focusing on the present standardized method of proxy distribution and processing used by all issuers.

The CSA note that virtually all commenters supported the right of reporting issuers to obtain lists of their NOBOs. In particular, TD Securities and the IDA expressed their agreement with the proposal by the CSA that reporting issuers be permitted access to NOBO lists. However, IICC and the IDA commented that they fully supported the ability of reporting issuers to obtain NOBO lists for all legitimate purposes other than proxy communication. IICC argued that the use of NOBO lists for proxy mailings will potentially compromise the integrity of the mailing, tabulation and vote process. However, system changes necessary to generate a NOBO list (apart from the proxy distribution process) are minimal, according to the IDA, and consequently, the IDA recommended that the CSA proceed with this proposal.

IICC also pointed out that while it is argued that greater transparency of ownership can be achieved with the provision of NOBO lists, the reality is that issuers want to know who their large owners are, and these owners will typically be OBOs. To answer to the argument that permitting direct proxy solicitation provides competition which should lead to a cheaper, more efficient system, the IDA pointed out that the price of the service in Canada currently is very nearly the same as the U.S., which, the IDA suggested, is surprising given the economies of scale in the U.S.

Support of Proposal

The commenters that supported the approach taken in the Draft National Instrument emphasized the importance of the ability of reporting issuers to identify and communicate with the beneficial owners of their securities. These commenters, including CIRI, believed that the Draft National Instrument would provide issuers with more flexibility in controlling costs and enable them to more efficiently identify their securityholders.

The CCSSA conducted a survey of approximately 30 issuers, and reported to the CSA that the issuers who responded unanimously want to be able to access their NOBO list so they may control the proxy mailing, tabulation and solicitation and use the list for any other purpose. The CCSSA also reported that the "overwhelming majority of respondents" said they would use their NOBO list to control the proxy procedure and would not be satisfied if they could not use their lists for that purpose.

Response

The CSA believe that, as a matter of principle, it is important that issuers have access to information on their beneficial owners and the ability to communicate directly with their non-objecting beneficial owners. These rights parallel the rights of a reporting issuer under corporate legislation with respect to registered holders, and the CSA are attempting, to the extent possible and practicable, to put beneficial owners in the same position as registered holders of securities.

The CSA recognize the expressed concerns over efficiency, but believe the rights of reporting issuers are sufficiently important enough to mitigate these concerns. The CSA also expect that programming and information systems and operations in this area will continue to evolve in order to deal with these efficiency concerns.

Comments relating to Fees

Reasonable Fees

A number of commenters, including Desjardins and Stikeman/IICC raised concerns regarding the fact that fee provisions in the Draft National Instrument simply require the payment of a fee in a "reasonable amount".

Response

The approach in the proposed National Instrument has been amended slightly to provide for prescribed fees in British Columbia, and for reasonable fees in other jurisdictions. Section 3.2 of the proposed Companion Policy states the view of the CSA that it considers the fees prescribed in British Columbia to be reasonable fees.

Provision for Start-up Fees

Stikeman/IICC noted that the Draft National Instrument makes no provision for first-time start-up fees to cover the programming and other costs of implementing procedures to provide beneficial owner information and NOBO lists. IICC argued that "there is no experience in Canada on which appropriate fees can be determined." The IDA, Desjardins and IICC also argued that the ability of intermediaries to negotiate fees and expenses, as they believed is contemplated under the Draft National Instrument, will create confrontation, abuse and administrative delays. IICC stated that issuers have benefited by the fixed fees of IICC as inflation has devalued the dollar in real terms since 1987. Stikeman/IICC pointed out that this is a departure from the fixed rate regulated price environment for non-registered shareholder communications whereby the many small reporting issuers in Canada have been subsidized by the few large issuers.

Response

The CSA are confident that the changes necessary to implement the system contemplated by the proposed National Instrument will not be so significant as to lead to substantial first-time start-up costs.

Fees Borne by Intermediaries

STAC was the only commenter who urged that all fees applicable to such things as beneficial shareholder searches, data transmissions and the provision of NOBO lists should be borne by intermediaries. STAC stated that "this approach would be consistent with the normal business practice of matching expenses to revenues since it is the intermediaries who generate the revenue from the existence of beneficial shareholder accounts."

Response

The CSA are satisfied that the fee regime contained in the proposed National Instrument represents a fair allocation of costs having regard to the competing interests represented in the process, and have not adopted the STAC comment.

Confidentiality Issues

Confidentiality Issues Associated with OBOs

Some commenters objected to the principle behind the Draft National Instrument that OBOs should bear the costs of remaining anonymous. Stikeman/IICC stated that "the assumption under New NP41 that OBOs will be responsible for the cost of remaining anonymous (if issuers send directly to NOBOs) is far from being a consensus view". In addition, the CBA and CIBC Mellon argued that OBOs would be adversely affected as a result of being charged directly with mailing costs depending on the method of mailing chosen by the reporting issuer.

The CCSSA expressed uncertainty whether OBOs should be penalized for wishing to remain anonymous, and the CBAO Subcommittee stated that securities legislation provides the right of anonymity to shareholders. The CCSSA therefore raised concerns about the requirement in the Draft National Instrument which makes OBOs pay for this right and the CBAO Subcommittee suggested deleting this requirement in its entirety.

The CBA argued that this principle departs from one of the principles articulated in section 1.2 of the Draft Companion Policy that registered and non-registered shareholders are to be treated equally. The IDA argued that the cost of communicating with an OBO in the current system is no more than the cost of communicating with a NOBO and therefore could not see the justification for the transfer of this cost to the OBO.

CIBC Mellon felt that this principle would be contradicted by requiring each OBO client to support an additional administrative function required to track and verify their receipt of the materials mailed by the intermediary.

The CCSSA suggested that in the "interests of equitable allocation of obligations under the National Instrument, the intermediaries should be required to pay these costs". However, the CCSSA stated that as this appears to be precluded by section 49 of the Securities Act (Ontario), at the very least, the intermediaries should be entitled to recover the reasonable costs and section 49 should be referenced.

The CBA and the CBAO Subcommittee expressed concern about the process of collecting the fees from OBOs who are charged directly with mailing costs for securityholder materials sent to them. The CBA stated that the collection responsibility apparently rests with the intermediary but there are no rules stipulating what would occur in the event that the OBO fails to remit the fee.

STAC supported the principle of OBOs bearing the costs of confidentiality, arguing that if OBOs were no longer required to pay the costs associated with remaining anonymous, more beneficial shareholders would likely choose to become OBOs, "which could seriously impact an issuer's ability to identify its beneficial shareholders".

The CSA note that one commenter, IG, took the position that the Draft National Instrument did not go far enough in permitting a reporting issuer to gain access to shareholder information if the beneficial owner does not wish that information to be revealed. IG suggested that while the Draft National Instrument certainly expands the ability of a reporting issuer to obtain more detailed information concerning beneficial owners, it still allows a shareholder to maintain confidentiality at the discretion of the shareholder. IG would prefer to see the ability to maintain this confidentiality removed, thereby permitting reporting issuers access to all shareholder information it requires in order to fulfill its own mandatory reporting obligations.

Response

The CSA continue to believe that the costs of confidentiality should properly be borne by OBOs. The CSA are of the view that the holding of securities by intermediaries and the requests for confidentiality increase communication costs throughout the system significantly and therefore should be paid by those parties that benefit from this structure of holding. Those costs must be borne by someone, and it is not appropriate that reporting issuers bear those costs. If a client determines that it will hold securities indirectly and not identify itself, it must be prepared to pay the costs associated with remaining anonymous. Furthermore, those OBOs that are troubled by the costs of remaining anonymous have the option of identifying themselves. Moreover, it will be a matter of business relations between OBOs and the intermediaries of which they are clients whether the intermediaries directly charge OBOs for those costs or whether those costs are absorbed by the intermediaries directly.

The CSA note that some amendments have been made to the fee structures contained in the proposed National Instrument from the Draft National Instrument. The CSA have determined that OBOs should be responsible for the costs associated with the delivery of materials to them in all circumstances except, subject to securities legislation, when materials that have been declined by the OBOs are sent. This replaces the approach contained in the Draft National Instrument in which reporting issuers would bear the costs associated with the sending of materials to OBOs if the reporting issuer chose to send materials to NOBOs directly. The CSA are of the view that the revised approach both simpler, more consistent with the approach taken in NP41 and better recognizes that securities legislation in a number of jurisdictions allocates to the client any costs related to the sending of securityholder materials by intermediaries.

The CSA also note that beneficial owners of securities are OBOs only if they have taken the positive step of objecting to disclosure of their identity. Beneficial owners cannot inadvertently become OBOs, either under the proposed National Instrument or under NP41.

In response to the comment from IG, the CSA believe that is appropriate to permit a choice to remain anonymous provided that beneficial owner bears the cost that anonymity provides.

Confidentiality Issues Associated with Intermediaries

Section 4.4 of the Draft Companion Policy states that Form 54-101F6, dealing with requests for voting instructions from NOBOS, requires the identification of the intermediary and the shareholdings to enable the reporting issuer to reconcile voting instructions received from NOBOs and proxies. Stikeman/IICC pointed out that this means that reporting issuers will have access to all intermediary NOBO lists, even when one intermediary holds through another intermediary. They have suggested that if NOBO lists were by proximate intermediary, it would still seem possible to keep confidential the identity of clients of intermediaries holding through other intermediaries without affecting the vote reconciliation process. Stikeman/IICC observed that the loss of confidentiality on the part of intermediaries that are not proximate intermediaries, without off-setting benefits, is presumably an unintended consequence of the Draft National Instrument.

Response

The CSA generally agrees with this comment and has amended the proposed National Instrument to include subsection 6.1(4), which ensures that NOBO lists will be provided without FINS numbers unless the NOBO lists are being used in connection with the delivery of proxy-related materials to NOBOs and the reporting issuer will seek voting instructions from the NOBOs.

Electronic Distribution and Communication

A substantial number of commenters felt that the Draft National Instrument required clarification or amendment to ensure that the process that would be established under the Instrument would permit and facilitate the use of electronic delivery of the communications and materials contemplated by the Instrument and in connection with the submission of proxy votes electronically. The commenters generally believed that electronic delivery of these matters would result in general improvement in the efficiency of the system over time.

CDS stated that it would appreciate confirmation that nothing in the Draft National Instrument, Draft Forms or Policy would restrict its ability to implement a system of "straight through" (i.e., automated and electronic) processing of communications with reporting issuers and intermediaries, which relies exclusively on specific modes of electronic communication.

Response

The CSA agree with the comments and have made a number of changes to the proposed National Instrument and proposed Companion Policy to facilitate electronic communication and transmission of materials.

Specifically, the CSA have amended the proposed National Instrument in order that all references regarding the delivery of materials consistently refer to the "sending" of materials. The definition of "send" in the proposed National Instrument includes, with the consent of the recipient, sending by electronic means and so, under the proposed National Instrument, materials may be sent electronically with the consent of the recipient. It is noted that the CSA are considering general issues relating to electronic transmission of documents. The CSA expect that the general approach to be taken will be that documents may be transmitted electronically only with the consent of the recipient, and the proposed National Instrument has been prepared to reflect this general approach. The CSA initiative in this area may provide guidance or establish rules concerning consents, which may be made applicable to documents sent electronically under the proposed National Instrument.

The CSA have also eliminated the references contained in the Draft National Instrument to "requests for written voting instructions", in part due to a comment by STAC that the Draft National Instrument be amended to permit electronic proxy tabulation. The proposed National Instrument now makes reference only to "requests for voting instructions" in order to permit the use of electronic means to send and receive voting instructions, subject to existing requirements of any other applicable law, including section 49 of the Securities Act (Ontario).

Generally speaking, the CSA expect that most communication for the purposes of the proposed National Instrument will be in electronic format, except the form of statutory declaration that is required to be given with a request for beneficial ownership information, which requires a manual signature and the signature of the person before whom the statutory declaration is taken. The CSA are of the view that electronic systems for delivery and authentication of digital signatures are still at preliminary stages of technology although applications for exemption from this requirement may be made in appropriate cases.

Comment relating to Ability of Beneficial Owners to Attend Meetings

Stikeman, on behalf of STAC, argued that the current provisions of the Draft National Instrument concerning voting in person by beneficial owners raise some legal and procedural concerns and fail to achieve one of the expressly stated fundamental objectives of the Draft National Instrument contained in section 1.2 of the Draft Policy, namely the equal treatment of registered or beneficial owners of securities. Stikeman submitted that "this equality of treatment should expressly extend to voting rights." Stikeman argued that under the Draft National Instrument, "beneficial owners are not treated the same as registered holders...to the extent that beneficial owners must take additional steps to enforce their right to vote in person at meetings."

Stikeman argued that in order to vote in person, a beneficial owner must either demand and obtain a form of proxy from a proximate intermediary under section 8.2 of the Draft National Instrument or present a form of request for voting instructions at the meeting, procedures which registered holders are not required to follow.

In order to deal with this perceived problem, Stikeman proposed an alternative approach to the proxy mechanism proposed in the Draft National Instrument and currently in practice under NP41. The major steps in the proposal are as follows:

1. In connection with each meeting, each depository would provide to a reporting issuer an omnibus power of attorney delegating the depository's voting authority to each participant on whose behalf, and to the extent that, the depository holds securities that carry the right to vote at the meeting.

2. Each intermediary would be required to file with each reporting issuer (or its agent, such as its registrar and transfer agent), in respect of the securities of which it beneficially holds, from time to time, an omnibus power of attorney sub-delegating the voting power delegated to them under the depository omnibus power of attorney to each beneficial owner on whose behalf, and to the extent that, such intermediary holds securities from time to time.

The proposed intermediary power of attorney, when deposited with an agent of a reporting issuer would operate as a blanket standing power of attorney in respect of all meetings of all issuers, the securities of which such intermediaries hold on behalf of beneficial owners, from time to time.

3. (i) Canadian-resident NOBOs and NOBOs to whom reporting issuers may legally deliver proxy-related materials would receive an issuer proxy (coded to identify the relevant intermediary) in the same manner as registered holders. Pursuant to the omnibus power of attorney, these direct-voting NOBOs would have all of the voting rights of, and could appoint and revoke their proxy, or attend or vote in person at a meeting on the same basis as, registered holders; and

(ii) U.S.-resident NOBOs, and other NOBOs to whom reporting issuers may not legally deliver proxy-related materials, and OBOs would continue to receive a request for voting instructions. If such indirect-voting NOBOs wished to attend or vote in person at a meeting, they would have to request a form of legal proxy from the relevant intermediary and present the form at the meeting in order to be eligible to vote in person.

4. Where a reporting issuer elected to have proxy-related materials delivered to NOBOs indirectly through intermediaries, all NOBOs and OBOs would be subject to the procedure outlined in item 3(i) above and, in order to attend a meeting or vote in person, they would have to request a form of legal proxy from the relevant intermediary and present the form at the meeting in order to be eligible to vote in person.

Stikeman recommended that the obtaining of NOBO lists be made mandatory in connection with each meeting to facilitate this system.

Response

The CSA appreciate the suggestions made by Stikeman and STAC and recognize the considerable effort that went into their preparation. The CSA considered the proposal and spoke with some industry participants to better understand the process now available for beneficial owners to take steps to attend and vote at meetings. The CSA are satisfied that the existing mechanisms are working satisfactorily and have elected not to implement the Stikeman/STAC proposal at this time. The CSA also wish to ensure that the changes to existing systems required by the implementation to the proposed National Instrument are as manageable as possible for industry participants, and considered this issue in deciding not to implement the Stikeman/STAC proposal at this time. In addition, the proposal would result in it being necessary for reporting issuers to incur the costs of obtaining NOBO lists in connection with every meeting and the CSA do not propose to mandate the delivery of NOBO lists by proximate intermediaries or their use by reporting issuers.

Stikeman helpfully provided a detailed outline of the amendments to the Draft National Instrument and Draft Forms that would be required to implement its proposal. As the CSA is not implementing the proposal at this time, this Appendix does not describe the detailed proposed amendments.

Regulatory Compliance and Integrity of the System

Some commenters expressed concern that failures by a reporting issuer to properly mail materials directly to NOBOs would cause difficulties for others involved in the distribution process.

CIBC Mellon stated that if material is not mailed in accordance with the Draft National Instrument, CIBC Mellon would have a contractual obligation to all clients to obtain another copy of the material and deliver the replacement material within tight time frames. CIBC Mellon stated that the client would not care who mailed the material, but would simply want their materials promptly. The IDA agreed, stating that complaints from clients regarding the failure to receive materials must be dealt with by the intermediary.

Stikeman/IICC also expressed concern regarding how regulatory compliance will be ensured when reporting issuers send materials directly to the NOBOs.

IICC stated that communication with beneficial shareholders under the proposed regime would, from a practical point of view for an investor, remain the responsibility of the intermediary. IICC was of the opinion that concerns created by an issuer's direct communication with a beneficial shareholder (or the absence of communication) would most likely be reported by a shareholder to the intermediary with whom the shareholder has an advisory relationship and maintains telephone contact.

TD Securities submitted that the NP41 system reduces the likelihood of inappropriate behaviour of reporting issuers.

The CBA suggested that, because of the concerns over the ability of a reporting issuer to properly deliver materials to NOBOs, it is necessary to specify that an intermediary is not responsible for the non-delivery of materials to NOBOs if a reporting issuer has elected to distribute the materials directly. The CBA stressed that some specific relief from the fiduciary obligation to provide the materials to the securityholders must be given to intermediaries. The CBA also noted that an indemnity may also be appropriate.

Response

The CSA are of the view that the system will operate in substantially the same manner as in the past and do not anticipate significant changes. The CSA believe that concerns over the inability of reporting issuers to satisfy their obligations under the proposed National Instrument expressed in some of the comments are somewhat exaggerated. The CSA expect that many reporting issuers will, in any event, use as their agents to distribute materials some of the same service providers that currently distribute materials on behalf of intermediaries, and that those service providers will be as efficient in distributing the materials on behalf of reporting issuers as they have been on behalf of intermediaries.

Over-voting Issues

Securities Lending

A number of commenters, including the CCSSA, the CBA, CIBC Mellon and Stikeman/IICC noted that the Draft National Instrument did not address the legal issue as to who, as between a borrower or lender of securities, is entitled to vote. It was urged that the Draft National Instrument address this issue in order to reduce some of the problems now experienced in connection with over-voting at meetings. Some of these commenters suggested that the proxy revert to the lender and not to the borrower.

Response

The CSA believe that the issue of who votes the securities that are subject to a securities lending arrangement is a contractual matter between the borrower or lender and beyond the scope of the proposed National Instrument.

Transfers of Securities

Paragraph 8.2(b) of the Draft National Instrument stated that nothing in that Instrument shall be interpreted to restrict in any way the right of a depository or intermediary to vary an omnibus proxy in respect of securities to reflect a change in the registered or beneficial ownership of the securities. Stikeman/IICC suggested that the taking of steps by a transferee contemplated by corporate law to be recognized as a securityholder often cause over-voting.

Response

The referenced paragraph does not create any new rights or obligations; it simply clarifies that nothing in the Draft National Instrument will take away any of those rights or obligations existing under other law. This paragraph has not been amended. The CSA consider the over-voting issue an issue that is separate from and beyond the scope of the proposed National Instrument.

Duplicates

CIBC Mellon pointed out that the Draft National Instrument does not currently contemplate the administration of duplicate and multiple accounts in the system. STAC suggested that one possible solution to deal with the issue of duplicate mailings for investors who have accounts with more than one intermediary could be that the beneficial shareholder mailings contain a notice that no attempt has been made to eliminate these duplicate mailings.

Response

The CSA are of the view that the proposed National Instrument does not prohibit issuers from following the suggestion of the commenter and accordingly, no specific authority is necessary.

3. RESPONSES TO SPECIFIC QUESTIONS

In the February 1998 Notice accompanying the Draft National Instrument, the CSA requested specific comment on nine issues. The comments requested and the responses received are discussed below.

Issue 1 - Timing Requirements

The CSA noted that the timing requirements of NP41 have been amended in the Draft National Instrument to reflect a requirement that materials be sent to beneficial owners no later than 21 days before a meeting and to reduce the minimum time periods for conducting intermediary searches before the record date. The CSA requested comment on the appropriateness of the timing requirements.

The comments received on this issue varied greatly. Some commenters suggested that the timing requirements were acceptable, while a number of commenters expressed concern that the reduced time periods were either too short or too long.

Specifically, one issuer and CIRI indicated that the reduced time periods are acceptable.
STAC pointed out that the Draft National Instrument requires issuers to provide notice of meeting at least 8 days before the record date period and that this reduced time frame may conflict with the CDS procedure for meeting publication services. Generally, CDS was of the view that the timing requirements contained in the Draft National Instrument were feasible and did not present a problem for them.

Desjardins and the IDA stated that the time periods proposed in the Draft National Instrument are too short and strongly urged that the longer timing requirements in NP41 should be retained. The IDA argued that the changes will make timely delivery to shareholders more difficult and shareholders will be given less time to review and consider the materials.

Stikeman/IICC stated that despite the statement in subsection 3.1(1) of the Draft Companion Policy that "it is useful for reporting issuers to take these steps at earlier times to ensure sufficient time for the search procedures to be completed", intermediaries should probably count on the minimum time periods from reporting issuers, as it is unlikely that reporting issuers will follow this suggestion in the Draft Companion Policy. The CCSSA recommended that this suggestion be given far greater prominence and perhaps should be included in the Draft National Instrument itself.

Tories, Manulife Securities and IG stated that the minimum time periods required to hold a meeting of shareholders in the Draft National Instrument is now 35 days plus 8 business days, arguing that this time period is too long. Those comments stated this time period is in excess of what was permitted under NP41 which allowed issuers to condense the 60 days to 35 days for an urgent meeting. Tories, Manulife Securities and IG argued that this shorter minimum time period under NP41 should be carried forward to the Draft National Instrument. In addition, IG suggested that the calling of meeting process continues to be cumbersome and lengthy. A solution to this problem would be to provide for a minimum 21 day period prescribed under the Canada BusinessCorporations Act in the case of meetings at which non-contentious matters are to be dealt with, and in the case of meetings at which more contentious matters will be dealt with, provide for a minimum 35 day period.

Response

The CSA have amended the timing provisions from those contained in the Draft National Instrument by deleting the timing requirements in sections 2.2 and 2.5. This will permit reporting issuers to call meetings on a more expedited basis than under the Draft National Instrument.

With respect to the general point relating to the compression of the time periods, the CSA note that the time periods now contained in the proposed National Instrument are substantially the same as the minimum time periods provided for in NP41 under the automatic waiver provision of Part XII of NP41. As stated in the February Notice and in section 3.1 of the proposed Companion Policy, the CSA emphasize that these are minimum time periods only and that reporting issuers should allow as much time as required to ensure that all steps in the process are properly carried out and that all time requirements to which an issuer may be subject are taken into account.

Issue 2 - Use of Procedures for Non-proxy-related Materials

The CSA requested comment on whether the use of procedures set out in the Draft National Instrument for the sending of proxy-related materials to beneficial owners should be mandatory for reporting issuers in respect of non-proxy-related materials and if so, in what circumstances. Under the Draft National Instrument, section 2.8 provides that a reporting issuer may, but is not required to, use these procedures for securityholder materials other than proxy-related materials.

Differing views were expressed on this issue.

CIRI strongly suggested that the procedures not be mandatory for non-proxy-related material so that "issuers are not forced into expensive and time-consuming search procedures". The CBAO Subcommittee also argued that it would be "unduly burdensome" to mandatorily extend the procedures.

An issuer expressed the view that the Draft National Instrument should be used only if there is a security law or corporate law requirement to send material to beneficial holders.

On the other hand, STAC argued that the beneficial shareholder communication procedures should also be applicable to all communications required by regulation for registered shareholders. STAC felt that this would be in keeping with one of the stated principles contained in section 1.2 of the Draft Companion Policy, which is to ensure that "all securityholders of a reporting issuer, whether registered holders or beneficial owners, should have the opportunity to be treated alike as far as is practicable." CDS was in favour of extending the communication procedures to include other securityholder materials, as there are other important materials distributed by reporting issuers, provided these reporting issuers pay their appropriate share of the associated costs.

The CBA and IICC strongly encouraged the CSA to require issuers to use the Draft National Instrument in connection with the distribution of non-proxy-related materials. IICC suggested that issuers should be required to use the system for capital events including take-over bids, rights offerings, and others. IICC maintained that the current system, when used by issuers for these purposes, has proven to be effective.

Response

After considering the comments, the CSA have decided not to make the distribution of non-proxy-related materials by a reporting issuer under the proposed National Instrument mandatory. The CSA encourage the use of the regime established under the proposed National Instrument, but do not feel it is appropriate to make the use of that regime mandatory at this time for all distributions given the general lack of consensus on the point and the desire not to hold up the implementation of this Instrument.

Issue 3 - Use of Procedures by Persons or Companies other than Reporting Issuers

The CSA requested comment on whether the use of the procedures to deliver securityholder materials contained in the Draft National Instrument by parties other than reporting issuers should be mandatory and if so, for what distributions of materials and in what circumstances.

The majority of commenters stated that third parties should also comply with the Draft National Instrument. In IG's view, the rationale for compliance is that third parties have the benefit of obtaining all the information that a reporting issuer can obtain and therefore should also be obliged to comply with the process. Similarly, STAC maintained that third parties should be bound as this would be in keeping with the "spirit of equality expressed in the Instrument". In addition, CDS stated that parties would benefit from the extension of the scope of the Draft National Instrument as a result of the roles and responsibilities of each party.

An issuer suggested that if a third person "has a legitimate reason to communicate with beneficial holders about an issuer then the procedures should be used."

IICC suggested that third parties be required to use the Draft National Instrument in the circumstances of a distribution of non-proxy-related materials for capital events including such events as take-over bids and rights offerings.

An issuer and the CBAO Subcommittee disagreed with the majority of commenters, stating that it is important to protect the right of the beneficial shareholder to receive material relating to an issuer, but not in other situations. The CBAO Subcommittee argued that to require outside parties to adhere to this process would be difficult to enforce and create needless complexities.

CIRI asked that the CSA specify that NOBO lists can be used by persons other than reporting issuers only for proxy-related matters.

Response

As with the previous issue relating to the use of the regime by reporting issuers for non-proxy-related material, the CSA have determined not to make the use of the regime mandatory for non-reporting issuers at this time, given the general lack of consensus on the point and the desire not to hold up the implementation of this Instrument.

Issue 4 - Sending of Materials to All Beneficial Owners

Sections 2.10 and 4.3 of the Draft National Instrument would have prohibited the delivery of routine proxy-related materials to beneficial owners who have chosen, or been considered to have elected, not to receive such materials. The CSA requested comment on whether the existing ability in NP41 of a reporting issuer to override a beneficial owner's waiver of the right to receive those materials is appropriate.

An issuer simply stated that an override provision should not exist as respect should be given to a NOBO's instruction that the material not be sent.

The CBAO Subcommittee, CIRI, STAC and the CCSSA however, took the position that issuers should have the right to override the holder's election. STAC argued that this right should exist in circumstances such as where the consideration of certain matters at a meeting or when financial statements showing a sufficiently radical change are, in the opinion of an issuer, material enough that all shareholders should be aware of them and be empowered to take action. STAC did suggest that in such circumstances, an issuer should be required to include an explanation of its decision to override the waiver. An issuer argued that an issuer should retain the right to override because the beneficial owners may not realize that they have, by default, not "elected" to receive routine proxy-related materials. This issuer stated that if subsection 3.7(2) of the Draft National Instrument is modified (as discussed under Issue 5 below) then an issuer should not have the ability to override a beneficial owner's waiver.

Response

The CSA have reconsidered the issue and are now proposing to return to the approach taken in NP41 whereby an issuer may override the election of a beneficial owner not to receive certain materials. However, the proposed National Instrument provides that a reporting issuer may take this step only if it bears the cost of distributing those materials.

Issue 5 - Decline of Receipt of Routine Materials

The CSA requested comment on whether beneficial owners should have the ability to waive the receipt of proxy-related materials for meetings at which only routine business is conducted. The CSA also requested comment on whether the definition of "routine business" contained in the Draft National Instrument should be expanded or reduced.

One issuer commented that there is no point printing materials if they will be thrown away by the recipient. The CCSSA also pointed out that some issuers do not want to incur the significant extra costs of sending materials concerning housekeeping items to all shareholders. As a result, both the issuer and CCSSA recommended that if a beneficial holder does not want materials, he or she should be allowed to waive them.

Another issuer agreed that individuals should have the right to waive receipt of materials. However, this issuer was of the opinion that if an intermediary does not receive instructions from the beneficial owner, the beneficial owner should be considered to have chosen to receive all materials, contrary to what is presently set out under subsection 3.7(2) of the Draft National Instrument. This issuer believed that this would ensure that beneficial shareholders that do not wish to receive materials are forced to take action in order not to receive materials.

The CBAO Subcommittee recommended that the current provisions of NP41 should be continued. The CBAO Subcommittee stated that if individual beneficial owners are allowed to prohibit the delivery of routine proxy-related material, this would add an unnecessary burden on the reporting issuer and the intermediary, including having to determine which materials are "routine" and which are not and the additional costs to reporting issuers to maintain different sets of mailing lists. The CBAO Subcommittee argued that it is more cost efficient for reporting issuers to mail proxy-related materials to all their beneficial shareholders and that the beneficial owner can simply choose not to read the mailing.

The views on what should be continued in the definition of "routine business" varied widely among commenters. For example, Stikeman/IICC and the CBAO Subcommittee believed that the proposed definition currently includes meetings for the election of directors and would prove overly broad in circumstances where there is a contest as to the composition of the board of directors.

An issuer and the CBA believed that the definition should be expanded. The rationale for the CBA's position was that routine meetings within the meaning of the Draft National Instrument are increasingly less common and submitted that this would result in increased distribution obligations for reporting issuers.

STAC provided specific suggestions to modify the definition of "routine business". STAC suggested that in clause (d) of the definition reference should be made to the "incumbent" auditor of the reporting issuer. The CCSSA also suggested that reference be made to the "re-appointment of the incumbent auditor". As a result of either of these changes, a change in auditor would not, according to STAC, be routine.

STAC suggested that it would be appropriate to add to the list the approval of stock options required for Vancouver Stock Exchange companies. Accordingly, STAC suggested the inclusion of a clause (e) as follows:

(e) for reporting issuers incorporated under the Laws of the Province of British Columbia, whose shares are listed only on the Vancouver Stock Exchange, the authorization of the Directors to grant Director, Senior Officer and Insider Stock Options and to amend and to exercise such options within the Policy limitations of the Vancouver Stock Exchange.

Blain pointed out that some corporate statutes deem the fixing of the number of directors to be special business and requested clarification as to whether the setting of the number of directors to be elected should be treated as routine business or not. Blain stated that under the Draft National Instrument, corporations could be required to distribute meeting materials to shareholders who do not want to receive "routine" materials where the only matter that is "special" is the selection of number of directors to be elected. Blain suggested that the definition be expanded by the inclusion of the following provision

(c) setting or changing the number of directors to be elected within a range permitted under corporate law where no change in the reporting issuer's constating documents is required in order to permit such setting or such change in the number of directors to be elected.

Response

The CSA have determined to continue with the approach contained in the Draft National Instrument under which materials relating to a meeting at which only routine business is to be conducted may be declined by beneficial owners. This continuation is subject to the ability of a reporting issuer to override this election at its own expense. The CSA have also elected to retain the "default" approach with respect to a beneficial owner's election to decline documents (whereby a beneficial owner is deemed to decline to receive routine documents if he or she does not provide instructions on the matter) which is consistent with NP41.

The CSA have amended the definition of "routine business" in response to a number of the comments.

Paragraph (d) has been added to include a vote by securityholders to set or change the number of directors to be elected within a range permitted by corporate law, in the manner suggested by the Blain comment.

Paragraph (e) has been amended to restrict the paragraph to reappointment of an incumbent auditor, rather than the appointment of an auditor.

The CSA are not adopting the STAC comment concerning stock options, as the CSA do not believe that stock option matters required to be put before the shareholders should be assumed to be routine. Accordingly, the CSA are not prepared to treat any aspects of the provision of stock options as "routine business" for these purposes.

Issue 6 - Third Party NOBO Lists

The CSA requested comment on whether a reporting issuer that receives a request from another person for a NOBO list should be required to perform an intermediary search to request a new NOBO list or whether the reporting issuer should be allowed to provide the most recent NOBO list in its possession.

An issuer and CIRI commented that an issuer should be allowed to provide a copy of the most recent NOBO list in its possession. This issuer qualified its statement by recommending that this NOBO list should not be older than six months. This issuer raised the question of who should pay the cost of generating a new NOBO list. The comments of CIRI, the CCSSA and STAC contained a response to this question, suggesting that all costs associated with providing the list should be payable by the party who has requested the list from an issuer.

The CCSSA and STAC believed that the reporting issuer should initiate the procedures to prepare a new list; however, the CCSSA suggested that consideration be given to the imposition of parameters for the effective date of a NOBO list. The CBAO Subcommittee requested that the CSA consider an exemption from the requirement for a reporting issuer to provide a new NOBO list to a third party if there has been a recent (perhaps within the last 30 days) contested meeting for which a NOBO list was prepared. However, the CBAO Subcommittee went on to state that should the party be prepared to absorb the cost of the reporting issuer providing an updated NOBO list, then an updated list could be provided to this party. An issuer agreed stating that if "reporting issuers must bear the cost of requested NOBO lists, they should be able to provide a copy of their most recent list. If the requesting party wishes a more recent list, then [they] should bear the cost of producing the list."

Response

The CSA have amended Part 6 of the proposed National Instrument to clarify the rights and obligations of a person other than a reporting issuer under the Instrument. Section 6.1 now provides that a person other than a reporting issuer may obtain from a reporting issuer the most recent NOBO lists that are in the possession of the reporting issuer, upon payment of a fee. Section 6.2 now provides that a person other than a reporting issuer has all of the rights and obligations of a reporting issuer under the Instrument, except for certain enumerated provisions that related specifically to the calling of meetings and the obtaining of voting instructions through omnibus proxies provided to management of the reporting issuer.

These changes have been made to ensure that, to the extent possible, a third party has the same rights and obligations of a reporting issuers under the proposed National Instrument, and that the third party can exercise these rights without having to deal with the relevant reporting issuer. The effect of these amendments will be that a third party may request NOBO lists at any time from intermediaries on the same basis as reporting issuers.

Issue 7 - Form of Omnibus Proxy

The CSA requested comment on whether there were any possible conflicts between the specified forms of omnibus proxy and any form of proxy that may be required pursuant to an issuer's governing legislation or constating documents.

IG requested that the Draft National Instrument clarify whether or not participants appointed in an omnibus proxy by depositories receive the form of proxy that an issuer provides, which proxy would permit the participant to name an issuer's management as its proxyholder.

An issuer stated that there could be a problem when an omnibus proxy does not comply with the form of proxy specified in any issuer's constating document. The issuer stressed that the issue is perhaps not whether there is a conflict between these two proxies, but whether an omnibus proxy that does not comply is valid.

Response

The CSA are satisfied that the forms of omnibus proxies contained in the Draft Forms are satisfactory, particularly in light of section 1.4 of the proposed National Instrument (also in the Draft National Instrument), which provides that forms can be revised so long as the same information is contained in the revised forms. The CSA expect that this provision could, if required, provide all necessary latitude for small amendments to the forms of omnibus proxy to deal with the issues raised by the commenters. The CSA also note that the procedures contained in the proposed National Instrument are substantially the same in this regard as under NP41, and do not believe that any changes are necessary.

Issue 8 - Electronic Transfer of Funds

The CSA invited comment on suggestions that it has received regarding whether it would be appropriate, at some time in the future, to mandate the electronic transfer of funds to facilitate the payment of fees.

Only one comment was received on this point. The CCSSA believed that it is appropriate to mandate in the Draft National Instrument the electronic transfer of funds. The CCSSA advised that such transfer is generally accepted and working well for SEDAR. With respect to the timing of this issue, the CCSSA stated that the implementation of the Instrument for the 1999 proxy season should not be jeopardized. However, the CCSSA noted that if the issue was not dealt with now, they believed that it may take some years before it received the required attention. As a result, the CCSSA questioned whether it would be possible to include in the Draft National Instrument an amending provision so that the issue of the electronic transfer of funds could be easily mandated in the future.

Response

The CSA expect that the proposed National Instrument will be amended at some time in the future to provide for electronic transfer of funds, but do not wish to hold up the implementation of this Instrument until the details of electronic fund transfers can be developed.

Issue 9 - Transition Period

The CSA sought comments on the appropriateness of a transition period that requires the procedures contained in the Draft National Instrument to apply for a meeting held on or after March 1, 1999 and that NP41 continued to apply for meetings held before that time.
A substantial number of commenters felt that the transition periods proposed in the Draft National Instrument were too short. The view of most commenters on this issue can be summarized by the comments provided by Stikeman/IICC:

This means that dealers, custodians and others must obtain NOBO and OBO information and have all programming and information systems operational and able to reconcile NOBO and OBO positions at beneficial owner determination dates in time for the peak annual meeting period next year.

Stikeman/IICC stated that the CSA's adoption date is aggressive by comparison to the U.S. experience where a comparable rule adopted in July, 1983 did not become effective until January, 1986.

IICC, the IDA and the CBA expressed even stronger views on this issue, stating that the effective date of the Draft National Instrument is simply not possible to accomplish within the time period contemplated. They argued that the financial community has huge resource commitments to accommodate the introduction of the Euro currency next year, including projects such as the Large Value Transfer System, the bring-on of money market instruments into the Debt Clearing System of CDS, changes to the U.S. tax-withholding rules and, most importantly, the compliance with Year 2000 requirements. IICC and CDS suggested that CSA might want to review the feasibility of the implementation of the Instrument prior to the year 2000 as a result.

STAC and CIRI, however, believed that all parties would be able to comply with the time frame indicated by the CSA despite such concerns as the Year 2000 commitments. STAC argued that the Draft National Instrument calls for a simple extension of current practices and that existing electronic communication networks could be used to exchange data relating to the Draft National Instrument. While CDS does not anticipate any significant systems changes for itself, unlike STAC, CDS stated that many parties may be obliged to implement significant systems changes. An issuer stated that it plans to have the new procedures in place in time for its next annual meeting in late April or early May, 1999.

Finally, the CCSSA note that due to the above comments, there is some uncertainty regarding when the Instrument will be implemented. The CCSSA and CIRI suggested that it is extremely important that sufficient advance notice be given to all parties of the implementation date. CIRI suggested that notice be given no later than October 31, 1998, assuming the implementation date of March 1, 1999 is retained. In addition, STAC requested that parties pleading inability to comply, be required to specify a reasonable date with which they could comply and in the meantime, the CSA should consider giving issuers some form of interim relief.

Response

The CSA agree that the transition periods proposed in the Draft National Instrument were too short and has provided for more generous periods in the proposed National Instrument. The CSA are continuing to propose that the proposed National Instrument come into force on January 1, 1999 but are proposing that the proposed National Instrument will apply to the sending of proxy-related materials for meetings held on or after October 1, 1999, and that the proposed National Instrument will apply to the sending of securityholder material other than proxy-related materials occurring on or after July 1, 1999. The sending of proxy-related materials for meetings held between January 1, 1999 and October 1, 1999 are exempt from the proposed National Instrument so long as they are sent in accordance with NP41.

In addition, no person or company may request a NOBO list before July 1, 1999.

These changes are designed to permit participants in the shareholder material distribution process time to revise their operations as appropriate to be able to comply with the proposed National Instrument.


4. COMMENTS ON SPECIFIC PROVISIONS OF THE DRAFT NATIONAL INSTRUMENT

Part 1 - Definitions and Interpretation

Section 1.1 - definition of "beneficial owner determination date"

Stikeman/IICC suggested that, because this definition is defined to be the record date for voting, or, in the absence of a record date for voting, the record date for notice, complexities will arise where, in respect of a meeting, the record date for notice is not the same as the record date for voting. This will result in, among other things, new NOBO and OBO lists being required. Stikeman/IICC and the IDA believed that NOBO lists for mailings will not be provided until the record date for voting and that systems will need to be programmed to accommodate these possibilities for both dates.

Response

The CSA understand the complexities that may arise if the record date for voting and the record date for the meeting are not the same. However, this possibility is created by the corporate legislation of some jurisdictions (in particular, British Columbia), not by the proposed National Instrument. The CSA note that this possibility exists at the present time under NP41 and that there is nothing that the CSA can do to remove the possibility.

Section 1.1 - definition of "CDS"

CDS commented that certain of its business operations are conducted through a subsidiary and requested that the definition be revised to include affiliates of CDS.

Response

The CSA believe that a definition that includes "affiliates of CDS" is not necessary and have not made the suggested amendment.

Section 1.1 - definition of "depositary"

CDS recommended changing the spelling of the defined term from "depositary" to "depository" to better reflect industry practice.

Response

The CSA have made the requested change.


Section 1.1 - definition of "intermediary"

The CBA noted that the definition of "intermediary" in NP41 specifically excludes:

a person or company that holds a security, or a trustee pursuant to a will, court order, inter-vivos trust, or trust for a pension plan, deferred profit sharing plan, retirement savings plan or other similar capital accumulation plan, with discretionary voting powers.

The CBA noted that the definition of "intermediary" in the Draft National Instrument did not exclude these persons or companies and pointed out that an entity such as a trust company acting as an administrator of a will or in the capacity of a discretionary investment manager, for example, would be considered an intermediary and would be required to comply with the provisions of the Draft National Instrument. The CBA does not believe that there are sufficient policy reasons for the change in the definition of intermediary and as a result, the CBA recommended that the definition of intermediary in the Draft National Instrument should be amended to carry over the exemptions found in NP41.

CDA suggested that it may be appropriate to amend the definition of "intermediary" to include affiliates of intermediaries.

Response

The CSA have amended this definition to provide that a beneficial owner of a security cannot be an intermediary in respect of that security. This change was made in response to the CBA comment to ensure that persons or companies holding securities on behalf of others and that have discretionary authority over those securities not be considered intermediaries under the proposed National Instrument. Persons or companies that have discretionary authority over the securities, and thus have authority to provide instructions in a client response card, will be beneficial owners under this Instrument. The scheme of the proposed National Instrument does not contemplate that a person or company can be both beneficial owner and intermediary with respect to the same security.

The CSA have not amended the definition to include "affiliates" of intermediaries. If an affiliate of an intermediary is holding securities on behalf of another person or company, it will itself be an intermediary under the definition.

Section 1.1 - definition of "non-objecting beneficial owner list"

The CCSSA requested that the Draft National Instrument provide for small issuers who do not have the necessary software and do their own mailing, to receive at their option, a printout of the NOBO list in the non-electronic format.

Response

The CSA have amended this definition to permit the preparation of NOBO lists in non-electronic form. The request for an electronic or non-electronic form of NOBO list would be made in the request for beneficial ownership form (Form 54-101F2).

Section 1.1 - definition of "routine business"

The comments concerning this definition have been dealt with under the responses to specific questions, found above in "Issue 5 - Decline of Receipt of Routine Materials".

Section 1.1 - definition of "security"

The CCSSA suggested that to clarify the wider scope of this Draft National Instrument over NP41, this definition should be expanded to specify such securities as a common share, a preferred share and a debt instrument.

Response

The CSA do not consider the suggested change necessary and have not made the suggested amendment.

Part 2 - Reporting Issuers

Section 2.3 - Intermediary Search Request - Request to Depository

CDS recommended the removal of the requirement under paragraph 2.3(1)(a) of the Draft National Instrument for reporting issuers to request a list of intermediaries at the same time as they send the depositary a notification of meeting and record date. CDS stated that a reporting issuer may have access to that information from other sources and it would therefore be more practical if issuers were given the option of requesting an intermediary list from the depositary.

As a result of the suggested change to paragraph 2.3(1)(a), CDS recommended a parallel change to subsection 5.3(d) to clarify that the report from the depository to a reporting issuer need only contain a copy of the intermediary master list if that was specifically requested by an issuer under subsection 2.3(1).

Response

The CSA believe that section 2.4, which relieves a reporting issuer from the requirement to conduct an intermediary master search if it has access to the information electronically, satisfactorily addresses the first comment, and have not made the suggested amendment.

In response to the second comment, section 5.4 of the Draft National Instrument has been deleted, and Part 6 amended to make the search requests of third parties subject to the same provisions as those of reporting issuers.

Section 2.5 - Request for Beneficial Ownership Information

STAC suggested that section 2.5 be expanded to enable issuers to request search totals electronically and to receive the search response information in an electronic file.

CDS suggested that the requirement for a statutory declaration contained in NP41 in connection with a request for beneficial owner information be retained; the Draft National Instrument proposed the provision of an undertaking for this and other similar matters. CDS notes that legislation such as the Business Corporations Act (Ontario) calls for the provision of a statutory declaration by persons requesting the names of securityholders from an issuer or its transfer agent.

Response

As indicated above under "Electronic Distribution and Communication", the CSA expect that most communication for the purposes of the proposed National Instrument will be in electronic format and believe that the communications referred to in the comment may be made in electronic format under the proposed National Instrument without specific amendment.

The CSA agree with the comment on statutory declarations, and have amended the proposed National Instrument to require statutory declarations rather than undertakings.

Section 2.12 - Indirect Sending of Securityholder Materials by Reporting Issuer

IG suggested that the Draft National Instrument be amended to clarify that the use of a transfer agent by a reporting issuer in sending materials directly to NOBOs is still permissible. This clarification, IG argued, may be necessary as a result of subsection 2.12(2) which recognizes that, in the past, the actual sending of materials to beneficial owners has been attended to by third party service providers. IG suggested a similar amendment to section 4.2 of the Draft National Instrument.

Response

The CSA have made no amendments to the proposed National Instrument in connection with this comment. A person or company may generally discharge obligations through agents, and it is not necessary to allude specifically to that.

Section 2.13 - Fee for Search

The CCSSA urged that if the "reasonable" search response fee continues to be $10.00 per NOBO list, then the Draft National Instrument should be clarified to specify that one $10.00 fee covers information provided by an intermediary that appears with multiple nominees on both the intermediary master list and the list of registered holders.

Response

The CSA agree that the fee is for the information provided by each intermediary.

Section 2.16 - Explanation of Voting Rights

The CCSSA suggested that the Draft Companion Policy should be revised to explain how the beneficial owner may exercise voting rights.

Response

In response to this comment and the Stikeman/STAC proposal, the CSA have amended Forms 54-101F6 and 54-101F7 to provide additional instructions to beneficial owners about the steps to be taken in order to be able to attend and vote at meetings.

Part 3 - Intermediaries' Obligations Concerning the Obtaining of Beneficial Owner Instructions

Section 3.3 - Transitional - Instructions from Existing Clients

IICC and the IDA expressed some concern that upon implementation of the proposed National Instrument, intermediaries would be required to re-canvass all existing clients regarding confidentiality and the delivery of information. The proposed changes to the explanation to clients and client response cards should not, they argued, mandate that the client reconfirm instructions previously given under existing NP41. This, they maintained, is a very expensive operation with little discernable value.

Response

The CSA agree with this comment and have amended section 3.3 to give intermediaries the option of seeking new instructions under the proposed National Instrument from existing clients or relying on the choices made by those clients under NP41. The CSA believe that the choices made by clients under NP41, and the consequence of not making those choices, are very similar to those made under the proposed National Instrument.

Section 3.5 - No Cost Return of Client Instructions

The CCSSA stated that the Draft National Instrument should specify that the cost of returning the client response card must be borne by the intermediary.

Response

The CSA have reconsidered the issue of whether clients should be guaranteed in the proposed National Instrument the ability to return client response cards and other matters at no expense to them. Upon consideration, the CSA have no objection to arrangements whereby clients are responsible for some of the costs, such as postage, for providing instructions to an intermediary. The CSA consider this business matters best left between the client and the intermediary. Therefore section 3.5 of the Draft National Instrument has been deleted.

Part 5 - Depositories

Section 5.1 - Intermediary Master List

STAC noted that CDS has stated that, at the present time, updates to the Intermediary Master List are only made on a semi-annual basis, and are not available in an electronic version. STAC suggested that information updated only semi-annually increases the risk of default of a party in the communication chain owing to out-of-date intermediary information. STAC stated that any such defaults cannot be the responsibility of an issuer or their agent. However, regardless of the frequency of updates, STAC submitted that the list of intermediaries only need be reacquired when CDS advises that such updates have been done.

Response

Under the proposed National Instrument, as under the Draft National Instrument, CDS would be required to maintain a current intermediary master list, and the CSA expect that it will do so.

Section 5.4 - Response to Intermediary Search Request - Request by Person or Company Other than Reporting Issuer

CDS requested confirmation that the reference to "written application" in subsection 5.4(1) would encompass an application made by electronic means.

CDS stated that under existing NP41, a non-issuer requesting information on the holders of a security is obliged to provide a statutory declaration at the outset of the process. The statutory declaration states that the party will only use the information for a purpose permitted under the Instrument. Under the Draft National Instrument, the written undertaking (now referred to as a statutory declaration) is only required at the stage of requesting from the reporting issuer the information on NOBOs. CDS wondered whether this change may have been inadvertent. In any event, it is the view of CDS that it should be made clear that restrictions on the use of securityholder information apply also at the preliminary stage of determining which participants in a depository have positions in the security. As a result, it is suggested that subsection 5.4(2) include some reference to a statutory declaration/undertaking in addition to the reference already contained in subsection 6.1(2).

Response

Due to the amendments made to Part 6 of the proposed National Instrument, section 5.4 of the Draft National Instrument has been deleted. In connection with the deletion of section 5.4 and the amendments to Part 6, subsection 6.2(5) has been added. This provision ensures that a person or company other than a reporting issuer making an intermediary search request will provide a statutory declaration at that time.

As indicated above, the CSA wish to facilitate and promote the use of electronic communication and, accordingly, have removed references to "written" wherever possible.

Section 5.5 - Depositary to send Participant Omnibus Proxy to Reporting Issuer

CDS pointed out that subsection 5.5(2) requires written confirmation of the omnibus proxy by the depository to each affected participant. CDS stated that the depository should be able to give such confirmation by electronic means.

Response

The CSA have addressed this comment.

Part 6 - Use by Other Persons or Companies

Section 6.1 - Other Persons or Companies Request for NOBO List

The CCSSA urged the CSA to amend subsection 6.1(2) to require a third party requesting a NOBO list to provide an affidavit to an issuer, and not merely an undertaking. The CCSSA argued that the Draft National Instrument should conform to corporate legislation and not attach the form of affidavit.

Response

As indicated above, the CSA have amended the proposed National Instrument to require that a statutory declaration be used rather than an undertaking. The CSA have decided to continue to prescribe the form of statutory declaration.

Section 6.2 - Provision of NOBO list to another Person or Company

The CCSSA suggested that, as "the CBCA provides for ten days to supply a list of registered holders, therefore an issuer should have four days to make the request for beneficial owner information, instead of three".

Response

This amendment has not been made.

Section 6.4 - Other Persons or Companies - Indirect Sending

Tories argued that section 6.4 does not put third parties who may request a NOBO list on a completely equal footing with issuers because it appears that a third party can only send materials indirectly through intermediaries and not directly.

The CCSSA requested that this section clarify that the distribution by a person or company of securityholder materials indirectly through proximate intermediaries should be at the expense of that person or company.

Response

The amendments to Part 6 put persons or companies other than reporting issuers on substantially the same footing as reporting issuers.

Part 7 - Prohibited Use

Section 7.1 - Use of NOBO List

Section 7.1 sets out limited ways in which a reporting issuer is permitted to use a NOBO list. The CBA submitted that subsection 7.1(d), which refers to "any other matter relating to the affairs of the reporting issuer" may be interpreted broadly and lead some reporting issuers to believe that they can use NOBO lists for marketing or promotional purposes. The CBA stated that this is a particular concern in the mutual fund context where mutual fund companies who are reporting issuers may improperly use a NOBO list to build direct marketing relationships. A similar concern was expressed with respect to third party requests for NOBO lists. The CBA urged that the Draft Companion Policy clarify that the use of NOBO lists for competitive marketing purposes will be a violation of the rule and punishable.

Response

The CSA consider the use of NOBO lists for marketing purposes inappropriate and clearly not matters "relating to the affairs of the reporting issuer". However, the proposed Companion Policy now clarifies that a breach of this rule is breach of the Draft National Instrument and securities legislation.

Part 8 - Miscellaneous

Section 8.1 - Default of Party in Communication Chain

CDS suggested that it would be useful to include a general relief provision in section 8.1 to the effect that failure by a party in the communication chain, other than the reporting issuer itself, to discharge its obligations under the Draft National Instrument shall not invalidate any action taken by an issuer in the expectation that such obligations would be successfully discharged. CDS provided the example of where the holding of a meeting of securityholders should not be invalidated simply because materials were not properly disseminated by a party in the communication chain.

The CCSSA pointed out that section 8.1 of the Draft National Instrument exempts a person or company from the timing provisions of the Draft National Instrument to the extent that the delay arose from the failure of another person or company. The CCSSA stated that a default by another party may force an issuer to incur additional costs in order to comply with the corporate legislation, that would otherwise have been unnecessary. The CCSSA questioned who would be responsible for these costs and asked that the Draft National Instrument clearly set out the penalties for non-compliance.

Response

The CSA have chosen not to amend Part 8 or to provide specific relief in the matters described in these comments. The CSA do not believe that the liability concerns in this context are substantially different from the concerns arising in other contexts in which the obligations of one party do not arise until another party has completed a required action. In addition, the CSA do not believe it is possible to allocate, by way of a rule, the proper responsibilities for costs that may arise in cases of non-compliance. This type of allocation is best left to negotiation among the affected parties or, ultimately, judicial determination.

Section 8.3 - Free Return of Voting Instructions

Blain and STAC observed that under some current company/corporation acts, issuers are not required to provide registered holders with postage prepaid reply envelopes for the return of completed proxies. STAC suggested that it is inappropriate to provide this privilege to the non-registered holders and argued for the removal of section 8.3 in its entirety. The CCSSA also recommended the deletion of this section in order to give an issuer the choice as to whether it (i.e., a small issuer) preferred to have the beneficial holder pay, or if it (i.e., a larger issuer) preferred to pay, hoping to encourage a good return. In addition, the CCSSA stated that if a beneficial holder returns instructions electronically, which may result in greater costs, an issuer should not be required to pay these costs.

Blain questioned whether there was an intention with the language used to require beneficial shareholders to receive postage paid envelopes and requested that the provision be clarified. Blain stated that its personal preference would be not to mandate the use of postage paid envelopes that would result in having to pre-stamp envelopes or arrange for special Canada Post metering arrangements, which may be viewed as an unnecessary and unreasonable burden to place on smaller issuers.

Response

As discussed in the summary of comments on section 3.5 of the Draft National Instrument, the CSA have reconsidered the issue of whether clients should be guaranteed in the proposed National Instrument the ability to return client response cards and other matters at no expense to them, and for the reasons discussed under section 3.5, section 8.3 of the Draft National Instrument, like section 3.5, has been deleted.


5. COMMENTS ON SPECIFIC PROVISIONS OF THE DRAFT FORMS

Form 54-101F1 - Explanation to Clients and Client Response Card

Manulife pointed out that under NP41, intermediaries may include Form C as part of their New Account Application Form. Manulife requested clarification as to whether this Form may be adapted to form part of a New Account Application Form by intermediaries.

Blain questioned whether it was intentional not to include deeming languagelangauge with one of the choices to be made under the client response card concerning what choice the client is deemed to have selected if neither of the options are marked with an "x".

CIRI recommended that Part 3 of the Client Response Card of this Form state that French material will be sent at the shareholder's request "if available" for those issuers who do not normally produce shareholders material in French.

The CCSSA suggested that to avoid confusion, the explanation in the client response card should note that no annual reminder will be sent to the client. The card should also provide for a mechanism for changing instructions, and to inform clients that instructions will remain in effect until amended by the client.

To be consistent with the trend towards electronic communication, the CCSSA suggested that the card be available electronically so that the client might download and print it, and then sign and return it to the intermediary.

Response

Section 1.4 of the proposed National Instrument specifically provides that forms required under the Instrument may be combined with another form or document, so long as the other form or document requests or contains the same information as the required form.

With respect to the second comment, the CSA have added deeming language in connection with each choice to be made under the client response card.

With respect to the third comment, the CSA have made the suggested change.

With respect to the fourth comment, the CSA have not made the change, in order to keep the forms as short as possible. The CSA have confidence that intermediaries will properly explain the use and purpose of this form to their clients.

With respect to the fifth comment, the CSA have no objection to this procedure.

Form 54-101F2 - Request for Beneficial Ownership Information

The CCSSA suggested that the undertaking referred to in the first paragraph of Item 10 of Part 1 of this Form should use prescribed wording, and provided a revised Item 10 for consideration by the CSA.

STAC suggested that the Form be changed to contemplate preliminary search requests.

Response

With respect to the first comment, the CSA have now provided that all persons or companies requesting beneficial ownership information must provide a statutory declaration in the form of Form 54-101F8.

With respect to the second comment, the CSA have made the suggested changes.

Form 54-101F3 - Omnibus Proxy for Depositaries

CDS proposed that the requirement for including "place of meeting" be deleted from this Form as CDS is not generally advised of this information in the meeting notices it receives from reporting issuers. CDS suggested that if this recommendation is not accepted, then subsection 2.2(2) of the Draft National Instrument should be amended to require that reporting issuers advise the depository (and the other entities listed in subsection 2.2(1)) of the place of the meeting.

CDS suggested that the second paragraph of this Form be prefaced by words, such as "In accordance with the provisions of securities legislation," to reflect the fact that the prohibition against voting except in accordance with the written instructions is a requirement of the various securities acts. CDS stated that currently, it may appear that this prohibition was imposed by the depository itself.

Response

The CSA have made both of these suggested changes.

Form 54-101F5 - Electronic Format for NOBO List

Desjardins pointed out that this Form is issued by brokers while banks and trust companies use a different form as a result of their computer systems. Desjardins took the position that a new format should be mandated which could be used by all participants. Desjardins proposed that CDS receive all files and transmit them to an issuer or its transfer agent. Desjardins argued that this would be the most efficient solution.

Response

The CSA believe that this form is appropriate and have not made the suggested changes.

Form 54-101F6 - Request for Voting Instructions Made by a Reporting Issuer

Blain stated that the sentence "Should you wish to attend the meeting and vote in person, please bring this form to the meeting" in this Form is somewhat misleading in that the person electing this method will not be voting in person but rather as a special appointment proxy holder through a series of proxies.

Response

The CSA have amended this sentence by the addition of more detailed instructions concerning the steps to be taken by a beneficial owner that wishes to attend a meeting and vote in person. The new instructions are designed to reflect the system now in place that permits beneficial owners to indicate that they wish to attend, and vote at, meetings.

Form 54-101F8 - Undertaking

The CCSSA suggested that this Form be eliminated. A discussion of this recommendation is found above in "Section 6.1 - Other Persons or Companies - Request for NOBO List".

CDS recognized that certain changes would be made to this Form if the CSA were to accept its recommendations regarding the use of a statutory declaration in place of an undertaking, and timing of the requirement for the statutory declaration/undertaking. In addition, if CDS's recommendations were accepted, CDS suggested that the purpose set out in section 3(a), namely the sending of securityholder information to NOBOs in accordance with the Draft National Instrument, would have to be changed if the statutory declaration/undertaking was required at an earlier time.

CDS also stated that if the scope of the Draft National Instrument is expanded to apply to any type of distribution of materials by a non-issuer, a comparable provision would be necessary to make it clear that the permitted purposes under the Draft National Instrument are not necessarily restricted to matters relating to the affairs of the reporting issuer.

Response

The form has been amended to that of a statutory declaration, rather than an undertaking, and the wording has been amended to reflect the purposes for which it is now required under the proposed National Instrument.


6. COMMENTS ON SPECIFIC PROVISIONS OF THE DRAFT COMPANION POLICY

Section 2.1 - Application of Instrument

CDS stated that the international character of securities clearing and settlement systems, and the trend toward increasing globalization of the industry, raise jurisdictional issues for consideration. CDS suggested that where a foreign intermediary is under a legal obligation to disseminate securityholder information by virtue of its own domestic securities law, the Draft National Instrument should not apply to that entity.

Response

Consistent with the general approach of legislation, the proposed National Instrument does not address its own jurisdiction.

Section 5.1 - General

CDS requested clarification regarding the reference in section 5.1 to the "most efficient means of sending information or securityholder material". CDS stated that it was unclear whether the "most efficient means" is intended to focus on the speed of the delivery, on the cost of delivery, or on both.

Response

The CSA suggest that it means both speed and cost.

1. Section 182 of theSecurities Rules, B.C. Reg. 194/97, is amended

(a) by adding the following subsection:

(6) Subsections (2), (4) and (5) do not apply to registrant if the registrant has been notified that the notice, financial statement, information circular or other relevant material will be sent under NI 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer.