Headnote:Exemptionfrom the restrictions in section 2.1 of National Instrument 81-105to permit a labour-sponsored investment fund (LSIF) corporationto pay certain specified distribution costs out of fund assets.
StatutesCited:NationalInstrument 81-105 Mutual Fund Sales Practices, section 2.1 andsection 9.1.
INTHE MATTER OF
THESECURITIES LEGISLATION OF
ONTARIOAND NOVA SCOTIA
INTHE MATTER OF
THEMUTUAL RELIANCE REVIEW SYSTEM
FOREXEMPTIVE RELIEF APPLICATIONS
INTHE MATTER OF
NATIONAL INSTRUMENT 81-105
MUTUALFUND SALES PRACTICES
INTHE MATTER OF
LAWRENCEENTERPRISE FUND INC.
WHEREAS the local securities regulatory authorityor regulator (the "Decision Maker") in Nova Scotia and Ontario(the "Jurisdictions") has received an application from LawrenceEnterprise Fund Inc. (the "Fund") for a decision pursuant tosection 9.1 of National Instrument 81-105 ("NI 81-105") thatthe prohibition contained in section 2.1 of NI 81-105 againstthe making of certain payments by the Fund to participatingdealers shall not apply to the Fund;
AND WHEREAS under the Mutual Reliance ReviewSystem for Exemptive Relief Applications (the "System"), theOntario Securities Commission is the principal regulator forthis application;
AND WHEREAS the Fund and Lawrence Asset ManagementInc. (the "Manager") have represented to the Decision Makersas follows:
1.The Fund is a corporation formed under the laws of Canada onOctober 31, 2001 and is a mutual fund as defined in the legislationof each of the Jurisdictions. The Fund has filed a preliminaryprospectus dated November 1, 2001 (the "Preliminary Prospectus")with the Commission and anticipates becoming a reporting issuerunder the Act.
2.The Fund is registered as a labour sponsored investment fundcorporation under the Community Small Business InvestmentFunds Act (Ontario), as amended, (the "Ontario Act"), asa labour-sponsored venture capital corporation under the EquityTax Credit Act (Nova Scotia) (the "Nova Scotia Act"), andas a labour-sponsored venture capital corporation under theIncome Tax Act (Canada), as amended, (the "FederalTax Act").
3.The authorized capital of the Fund consists of an unlimitednumber of two series of Class A Shares, designated as ClassA Shares, Series I and Class A Shares, Series II (collectively,the "Class A Shares") and 25,000 Class B Shares. As of the dateof this Application, there are no Class A Shares issued andoutstanding. All of the issued and outstanding Class B Sharesare owned by the sponsor of the Fund, Canadian Air Traffic ControlAssociation, Local 5454.
4.The Fund has retained the Manager to act as manager of the Fund.
5.The Manager is a subsidiary of Lawrence & Company Inc. TheFund and the Manager have retained Lawrence & Company Inc.to assist in screening and evaluating investment opportunitiesof the Fund.
6.The administrator is Mavrix Fund Management Inc. (the "FundAdministrator"). The Fund Administrator is responsible for providingadministration and client services, shareholder reporting andtransfer agency services to the Fund.
7.The Fund will be a mutual fund which makes investment in smalland medium-sized Canadian businesses which are eligible investmentsfor the Fund under the Ontario Act or the Nova Scotia Act.
8.The Class A Shares of the Fund will be distributed in the Provinceof Ontario and Nova Scotia following receipt of a receipt forthe final prospectus.
9.Section 2.1 of the National Instrument prohibits the Fund, inconnection with the distribution of its securities, from makingpayments or providing benefits to dealers participating in thedistribution of its securities, including the payment of salescommissions to, or the reimbursements of costs or expenses incurredor to be incurred by such dealers.
10.There is no direct sales charge payable by investors on thepurchase of Class A Shares. However, the Fund proposes to paydirectly to participating dealers certain costs associated withthe distribution of its Class A Shares. These costs are:
(a) with respect to the distribution of both series of ClassA Shares, a corporate finance fee of $150,000 to the Agent,Scotia Capital Inc., for advisory services;
(b) with respect to the distribution of Class A Shares, SeriesI:
(i) a commission of 6% of the original issue price (the "6%Sales Commission"); and
(ii) an amount equal to 4% of the original issue price of theClass A Shares, Series I in lieu of any service fees being payablebefore the eighth anniversary of the date of issue of the shares(the "4% Trailing Commission"); and
(c) with respect to the distribution of Class A Shares, SeriesII:
(i) a 6% Sales Commission; and
(ii) a service fee (the "Service Fee") equal to 0.50% annuallyof the net asset value of the Class A Shares, Series II heldby clients of the sales representatives of the dealers.
11.The Fund's payment of applicable sales commissions, the amortizationof such commissions, and the potential recapture of such commissions,or part thereof, arising on redemption of Class A Shares isviewed by the Fund as an appropriate and beneficial mechanismthrough which the Fund may match distribution expenses againstsubscriptions.
12.In addition, the Fund may also enter into co-operative marketingprograms with certain registered dealers providing for the reimbursementby the Fund of certain expenses (the "Co-op Expenses") incurredby such dealers in promoting sales of Class A Shares.
13.The Prospectus discloses the payment by the Fund of the distributionand marketing expenses incurred by the Fund as described above(the "Distribution Costs") and discloses that the Fund is responsiblefor payment of these expenses.
14.The Fund desires to be in a position to incur all the DistributionCosts. The Fund and the Manager will comply with all of therelevant provisions of the National Instrument, other than theprohibition contained in section 2.1 of the National Instrumentagainst the Fund paying the Distribution Costs. The DistributionCosts are compensation permitted to be paid to participatingdealers under the National Instrument.
15.For accounting purposes, the Fund will
(i) defer and amortize the amount paid or payable in respectof the 6% Sales Commission to retained earnings on a straightline basis over eight years,
(ii) defer and amortize the amount paid or payable in respectof the 4% Trailing Commission and the Corporate Finance Feeto income on a straight line basis over eight years, and
(iii) expense the Co-op Expenses and the Service Fee in thefiscal period when incurred and will not defer and amortizeany Co-op Expenses.
16.Gross investment amounts will be contributed to the Fund inrespect of each subscription. This is to ensure that the entiresubscription amount contributed by the investor is counted forthe purpose of the applicable federal and provincial tax creditsin connection with the purchase of Class A Shares.
17.Due to the structure of the Fund, the most tax efficient wayfor the Distribution Costs to be financed is for the Fund topay them directly.
18.The Manager, or its affiliates is the only member of the organizationof the Fund, other than the Fund, available to pay the DistributionCosts. The Manager does not have sufficient resources to paythe Distribution Costs, and unless the requested discretionaryrelief is granted, would be obliged to finance these costs throughborrowings.
19.Any loans obtained by the Manager to finance the DistributionCosts would result in the Manager increasing the managementfee chargeable to the Fund, by an amount equal to the borrowingcosts incurred by the Manager plus an amount required to compensatethe Manager for any risks associated with fluctuations in thenet asset value of the Fund and, therefore, fluctuations inthe Manager's fee. Requiring compliance with section 2.1 ofNI 81-105 would cause the expenses of the Fund to increase abovethose contemplated in the Preliminary Prospectus.
20.Requiring the Manager to pay the Distribution Costs while grantingan exemption to other labour funds permitting such funds topay similar Distribution Costs directly, would put the Fundat a permanent and serious competitive disadvantage with itscompetitors.
21.The Fund undertakes to comply with all other provisions of NI81-105. In particular, the Fund undertakes that all DistributionCosts paid by it will be compensation permitted to be paid toparticipating dealers under NI 81-105.
WHEREAS under the System, this MRRS DecisionDocument evidences the decision of each Decision Maker (collectively,the "Decision");
AND WHEREAS each of the Decision Makers issatisfied that the test contained in the Legislation that providesthe Decision Maker with the jurisdiction to make the Decisionhas been met:
THE DECISION of the Decision Makers under subsection9.1(1) of NI 81-105 is that the Fund shall be exempt from section2.1 of NI 81-105 to permit the Fund to pay the DistributionCosts, provided that:
(a) the Distribution Costs are otherwise permitted by, and paidin accordance with, NI 81-105;
(b) the Distribution Costs are accounted for in the Fund's financialstatements in the manner described in paragraph 15 above;
(c) the summary section (the "Summary Section") of the finalprospectus of the Fund describes plainly the commission structureof Class A Shares, Series I as a 10% initial sales commission,plus service fees after eight years. The Summary Section mustbe placed within the first 10 pages of the final prospectus.
(d) the final prospectus explains plainly the services and valuethat the participating dealers would provide to investors inreturn for the service fees payable to them;
(e) the Summary Section of the final prospectus provides a full,true and plain explanation to investors that
(i) they pay the Distribution Costs indirectly, as the Fundpays these Distribution Costs using investors' subscriptionproceeds, and
(ii) a portion of the net asset value of the Fund is comprisedof a deferred commission, rather than an investment asset; and
(f) this Decision shall cease to be operative with respect toa Decision Maker on the date that a rule replacing or amendingsection 2.1 of NI 81-105 comes into force.
December 14, 2001.
"Paul M. Moore" "Lorne Morphy"