A variation order granted to labour sponsoredinvestment fund corporation to permit it to pay certain distributioncosts out of fund assets contrary to section 2.1 of NationalInstrument 81-105 Mutual Fund Sales Practices.
Securities Act, R.S.O. 1990, c. S.5, as am.s. 144.
National Instrument 81-105 Mutual Fund SalesPractices.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5,AS AMENDED (the "Act")
IN THE MATTER OF
NATIONAL INSTRUMENT 81-105
MUTUAL FUND SALES PRACTICES
IN THE MATTER OF
AXIS INVESTMENT FUND INC.(the "Fund")
STARTINGSTARTUPS INVESTMENTFUND INC.)
(Section 144 of the Act)
WHEREAS on December 21, 2001, the OntarioSecurities Commission (the "Commission") granted theFund relief from section 2.1 of NI 81-105 to make certain paymentsto participating dealers in connection with the distributionon Class A Shares of the Fund (the "Prior Decision");
AND WHEREAS the Commission has receivedan application from the Fund for an order under section 144of the Act to vary the Prior Decision to allow the Fund to makecertain additional payments to participating dealers in connectionwith the distribution on the new Series 2 Shares (defined herein)of the Fund;
AND WHEREAS the Fund has representedto the Commission as follows:
1. The Fund is a corporation incorporatedunder the Canada Business Corporations Act by articlesof incorporation dated October 29, 2001.
2. The Fund is registered as a labour sponsoredinvestment fund corporation under the Community Small BusinessInvestments Fund Act (Ontario) and as a result of suchregistration is prescribed as a labour-sponsored venture capitalcorporation under the Income Tax Act (Canada).
3. The Fund is a mutual fund as defined insubsection 1(1) of the Act. The Fund has filed a preliminaryand pro forma prospectus dated November 5, 2002 (the "Prospectus")with the Decision Maker and intends to distribute Series 2Class A Shares ("Series 2 Shares") once a receiptfor a final prospectus has been issued by the Decision Maker.
4. The authorized capital of the Fund consistsof an unlimited number of Class A Shares issuable in series,of which Series 1 Shares ("Series 1 Shares"), andthe Series 2 Shares have been designated, an unlimited numberof Class B Shares, and an unlimited number of Class C Sharesissuable in series. As of the date of the application, thereare 96,179.3148 Series 1 Shares, no Series 2 Shares, 10 ClassB Shares, and no Class C Shares issued and outstanding.
5. Axis Capital Corporation (the "Manager")and the Independent Union of Defence Contractors formed andorganized the Fund.
6. The Fund proposes to pay directly to participatingdealers certain costs associated with the distribution ofits Series 2 Shares. These costs are:
(a) a sales commission of 6% to registereddealers selling Series 2 Shares (the "6% Commission)plus an additional commission of 5% in lieu of any servicefees being payable before the eighth anniversary of thedate of issue (the "5% Sales Commission"), and
(b) after the eighth anniversary of thedate of issue of the Series 2 Shares, an annual servicefee of 0.5% of the net asset value of the Series 2 Sharesheld by customers of the sales representatives of the dealers(the "Service Fee").
7. The Fund may also pay for the reimbursementof co-operative marketing expenses (the "Co-op Expenses")incurred by certain dealers in promoting sales of Series 2Shares pursuant to co-operative marketing agreements the Fundmay enter into with such dealers.
8. All of the costs associated with the distributionof Series 2 Shares, including the 6% Sales Commission, the5% Sales Commission, the Service Fee and the Co-op Expenses(collectively, the "Distribution Costs") are fullydisclosed in the Prospectus. The fact that the Fund intendsto pay the Distribution Costs out of the assets of the Fundis also disclosed in the Prospectus.
9. For accounting purposes, the Fund will
(a) defer and amortize the amount paid orpayable in respect of the 6% Sales Commission to retainedearnings on a straight line basis over eight years;
(b) defer and amortize the amount paid orpayable in respect of the 5% Sales Commission to incomeon a straight line basis over eight years; and
(c) expense the Service Fee and the Co-opExpenses in the fiscal period when incurred.
10. Gross investment amounts will be contributedto the Fund in respect of each subscription. This is to ensurethat the entire subscription amount contributed by the investoris counted for the purpose of the applicable federal and provincialtax credits in connection with the purchase of Series 2 Shares.
11. Due to the structure of the Fund, themost tax efficient way for the Distribution Costs to be financedis for the Fund to pay them directly.
12. The Manager, or an affiliate, is the onlymember of the organization of the Fund, other than the Fund,available to pay the Distribution Costs. The Manager doesnot have sufficient resources to pay the Distribution Costs,and unless the requested discretionary relief is granted,would be obliged to finance these costs through borrowing.
13. Any loans obtained by the Manager to financethe Distribution Costs would result in the Manager increasingthe management fee chargeable to the Fund, by an amount equalto the borrowing costs incurred by the Manager plus an amountrequired to compensate the Manager for any risks associatedwith fluctuations in the net asset value of the Fund and,therefore, fluctuations in the manager's fee. Requiring compliancewith section 2.1 of NI 81-105 would cause the expenses ofthe Fund to increase above those contemplated in the Prospectus.
14. Requiring the Manager to pay the DistributionCosts while granting an exemption to other labour funds permittingsuch funds to pay similar Distribution Costs directly, wouldput the Fund at a permanent and serious competitive disadvantagewith its competitors.
15. The Fund undertakes to comply with allother provisions of NI 81-105. In particular, the Fund undertakesthat all Distribution Costs paid by it will be compensationpermitted to be paid to participating dealers under NI 81-105.
AND WHEREAS considering the Applicationand the recommendation of staff of the Commission;
AND WHEREAS the Commission being satisfiedthat to do so would not be prejudicial to the public interest;
IT IS ORDERED pursuant to section 144of the Act, the Commission hereby varies the Prior Decisionby replacing representation 6 of the Prior Decision with thefollowing representation:
"The Fund proposes to pay directly toparticipating dealers certain costs associated with the distributionof its Class A Shares which consists of two series, Series1 and Series 2.
These costs are:
a) with respect to Class A Shares, Series1 (the "Series 1 Shares"),
i) a sales commissions of 6% of the sellingprice for each Series 1 Shares subscribed for (the "Series1 Sales Commission"), and
ii) an annual service fee of 0.5% of thenet asset value of the Series 1 Shares held by customersof the sales representatives of the dealers (the "Series1 Service Fee");
b) with respect to Class A Shares, Series2 (the "Series 2 Shares"),
i) a sales commission of 6% of the sellingprice for each Series 2 Shares subscribed for (the "Series2 6% Commission"),
ii) plus an additional commission of 5%of the selling price in lieu of any service fees beingpayable before the eighth anniversary of the date of issue(the "5% Sales Commission"), and
ii) after the eighth anniversary of thedate of issue of the Series 2 Shares, an annual servicefee of 0.5% of the net asset value of the Series 2 Sharesheld by customers of the sales representatives of thedealers (the "Series 2 Service Fee").
Series 1 Sales Commission and the Series 26% Sales Commission are collectively referred as the "SalesCommission". Series 1 Service Fee and Series 2 ServiceFee are collectively referred as the "Service Fee".Distribution Costs (defined herein) also includes the 5% SalesCommission."
THIS ORDER is subject to the followingconditions:
(a) the Distribution Costs are otherwise permittedby, and paid in accordance with, NI 81-105;
(b) the Distribution Costs are accounted forin the Fund's financial statements in the manner describedin paragraph 9 above;
(c) the summary section (the "SummarySection") of the final prospectus has full, true andplain disclosure explaining to investors that
(i) they pay the 6% Sales Commission andthe 5% Sales Commission indirectly, as the Fund pays thesecommissions using assets of the Fund, and
(ii) a portion of the net asset value ofthe Fund is comprised of a deferred commission, rather thanan investment asset, and
this Summary Section must be placed withinthe first 10 pages of the final prospectus; and
(d) the Summary Section has full, true andplain disclosure describing the commission structure of Series2 Shares as a 11% initial sales commission, plus the ServiceFee after eight years.
November 26, 2002.
"H. Lorne Morphy" "RobertW. Korthals"