Exemption granted to labour sponsored investment fund corporation to permit it to pay certain specified distribution costs out of fund assets contrary to section 2.1 of National Instrument 81-105 Mutual Fund Sales Practices. Exemption granted on the condition that the distribution costs so paid are permitted by, and otherwise paid in accordance with the National Instrument, and that the distribution costs are included in the fund's calculation of its management expense ratio.
Securities Act, R.S.O. 1990, c. S.5, as am.
National Instrument 81-105 Mutual Fund Sales Practices.
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
ALTRUISTA FUND INC.
(Section 9.1 of NI 81-105)
WHEREAS Altruista Fund Inc. (the Fund) has made an application with the Ontario Securities Commission (the Commission) for an exemption pursuant to section 9.1 of National Instrument 81-105 -- Mutual Fund sales Practices (NI 81-105) from section 2.1 of NI 81-105 to permit the Fund to make certain distribution costs payments to registered dealers;
AND WHEREAS the Commission has considered the Application and the recommendation of staff of the Commission;
AND WHEREAS the Fund has represented to the Commission as follows:
1. The Fund is a corporation incorporated under the Business Corporations Act (Ontario). The Fund is registered as a labour sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario).
2. The Fund is a mutual fund as defined in Act. The Fund has filed a preliminary prospectus dated November 7, 2003 (the Preliminary Prospectus) in the Province of Ontario in connection with the proposed offering to the public of Class A shares in the capital of the Fund (Class A Shares).
3. The authorized capital of the Fund consists of an unlimited number of Class A Shares, of which none are currently issued and outstanding as of the date hereof, an unlimited number of Class B shares in the capital of the Fund (Class B Shares), all of which issued and outstanding Class B Shares are owned by the Christian Labour Association of Canada as of the date hereof, and an unlimited number of Class C shares issuable in series, of which none are issued and outstanding.
4. Altruista Inc., the manager of the Fund (the Manager), formed and organized the Fund. The Manager will, commencing March 1, 2004, be paid an annual management fee by the Fund of 1.0% of the net asset value of the Fund, calculated and paid monthly in arrears.
5. The Fund proposes to pay directly to registered dealers certain costs associated with the distribution of its Class A Shares. These costs include:
(a) a sales commission of up to 6.0% of the selling price for each Class A Share subscribed for (the Sales Commission), and
(b) a monthly service fee of up to 1/12 of 0.5% of the total net asset value of the Class A Shares held by the clients of the dealer (the Service Fees).
6. The Fund may also pay for the reimbursement of co-operative marketing expenses (the Co-op Expenses) incurred by registered dealers in promoting sales of the Class A Shares, pursuant to co-operative marketing agreements the Fund may enter into with such dealers.
7. All of the costs associated with the distribution of the Class A Shares, including, among other things, the Sales Commission, the Service Fees and the Co-Op Expenses are fully disclosed in the Preliminary Prospectus. The Sales Commission, the Service Fees and the Co-Op Expenses are collectively referred to as the "Distribution Costs".
8. Due to the structure of the Fund, the most practical and tax efficient way for the Distribution Costs to be financed is for the Fund to pay them directly. To ensure that the entire subscription price paid by a subscriber for Class A Shares is taken into account for the purpose of determining applicable federal and provincial tax credits, the gross investment amount for Class A Shares will be paid to the Fund in respect of subscriptions received, as opposed, for example, to the net amount obtained after deducting the Sales Commission from the subscription price.
9. The Manager is the only member of the organization of the Fund, other than the Fund itself, available to pay the Distribution Costs. Without the requested discretionary relief, the Manager would be obliged to finance the Distribution Costs through borrowing.
10. Any loans taken by the Manager to finance the Distribution Costs would result in an increased management fee chargeable to the Fund of an amount equal to the borrowing costs incurred by the Manager to pay the Distribution Costs plus an amount required to compensate the Manager for any risks associated with fluctuations in the net asset value of the Fund. Requiring compliance with Section 2.1 of NI 81-105 would cause management expenses of the Fund to increase above those contemplated in the Preliminary Prospectus.
11. The Fund undertakes to comply with all other provisions of NI 81-105. In particular, the Fund undertakes that all Distribution Costs paid by it will be compensation permitted to be paid to participating dealers under NI 81-105. All accounting for the Distribution Costs will be made in accordance with Canadian GAAP.
AND WHEREAS the Commission being satisfied that to do so would not be prejudicial to the public interest;
NOW THEREFORE pursuant to section 9.1 of NI 81-105, the Commission hereby exempts the Fund from section 2.1 of NI 81-105 to permit the fund to pay the Distribution Costs, provided that:
(a) the Distribution Costs are otherwise permitted by, and paid in accordance with, NI 81-105;
(b) the summary section of the final prospectus has full, true and plain disclosure explaining to investors that they pay the Distribution Costs indirectly, and the Fund pays the Sales Commissions using investors' subscription proceeds and this summary section must be placed within the first 10 pages of the final prospectus;
(c) the Distribution Costs are being included in the Fund's calculation of its management expense ratio; and
(d) this Exemption shall cease to be operative with respect to the Decision Maker on the date that a rule replacing or amending section 2.1 of NI 81-105 comes into force.
December 30, 2003.
"Robert L. Shirriff"
"Paul K. Bates"