Variation of a prior order to permit a labour sponsored investment fund to pay certain specified distribution costs out of fund assets contrary to section 2.1 of National Instrument 81-105 Mutual Fund Sales Practices. Variation granted on the condition that the distribution costs are included in the management expense ratio. Exemption expires November 30, 2004.
Securities Act (Ontario), R.S.O. 1990 c. S.5., as am., s. 144.
National Instrument 81-105 Mutual Fund Sales Practices.
IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990,
CHAPTER S. 5, AS AMENDED
IN THE MATTER OF
NATIONAL INSTRUMENT 81-105
MUTUAL FUND SALES PRACTICES (NI 81-105)
IN THE MATTER OF
THE BUSINESS, ENGINEERING, SCIENCE &
TECHNOLOGY DISCOVERIES FUND INC.
(Section 9.1 of NI 81-105 and section 144 of the Act)
WHEREAS the Ontario Securities Commission (the Commission) has received an application from The Business, Engineering, Science & Technology Discoveries Fund Inc. (the Fund), for a decision pursuant to the securities legislation of Ontario (the Legislation) that the decision dated January 4, 2002 granted to the Fund by the Commission (the Previous Decision), be varied to reflect that the Fund will expense commissions paid on the sale of shares to retained earnings as a share issue cost as they occur;
AND WHEREAS, unless otherwise defined, the terms herein have the meaning set out in National Instrument 14-101;
AND WHEREAS the Fund and B.E.S.T. Investment Counsel Limited (the Manager) have represented to the Commission as follows:
1. The Fund is a corporation formed under the laws of Canada on November 21, 1996, as amended December 31, 1996, January 30, 1998 and January 4, 2002. The Fund is a reporting issuer under the Act, and is not on the list of defaulting reporting issuers maintained pursuant to subsection 72(9) of the Act.
2. The Manager is a corporation incorporated under the laws of Ontario on November 4, 1998. The Manager has been retained by the Fund pursuant to an agreement to manage and administer the affairs of the Fund, which was assigned from B.E.S.T. Capital Management Ltd. to the Manager, effective September 1, 2003.
3. The Fund has retained B.E.S.T. Investment Counsel Limited to source investments for the Fund's investment portfolio.
4. The Fund is registered as a labour sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario), as amended (the Ontario Act) and as such is a prescribed labour-sponsored venture capital corporation under the Income Tax Act (Canada), as amended (the Federal Act).
5. The Fund is a mutual fund which makes investments in small and medium-sized Ontario-based businesses which are eligible investments for the Fund under the Ontario Act and Federal Act.
6. Pursuant to the Previous Decision, the Commission exempted the Fund from section 2.1 of NI 81-105 to the extent that section 2.1 prohibits a mutual fund from making payments or providing benefits of the nature contemplated in NI 81-105, to permit the Fund to directly pay the Distribution Costs (as defined in the Previous Decision) in respect of the distribution of three series of class A shares, provided that such Distribution Costs are permitted by, and paid in accordance with, NI 81-105 and to account for the Distribution Costs in the Fund's financial statements in the manner provided for in the Previous Decision.
7. The payment of commissions (the Commissions) on the sale of the Class A Shares by the Fund is an event contemplated under the Ontario Act and the Federal Act.
8. As a result of the implementation of Section 1100 of the CICA handbook, effective July 2003, (Section 1100), labour sponsored investment funds are no longer permitted to defer and amortize Commissions on a straight line basis over an eight year period.
9. The Fund's compliance with Section 1100 is inconsistent with the terms of the Previous Decision relating to the accounting treatment of the Commissions. Thus, the Fund requires a variation of the Previous Decision.
10. Expensing Commissions to retained earnings as a share cost issue as they occur is a practice that is consistent with Section 1100.
AND WHEREAS the Commission is satisfied that to do so would not be prejudicial to the public interest;
NOW THEREFORE pursuant to section 144 of the Act, the decision of the Commission is that the Previous Decision is varied with effect as of the date hereof, and pursuant to Section 9.1 of NI 81-105, as follows:
1. Paragraph 12(a) and (b) are deleted in their entirety and replaced with the following:
"(a) with respect to the distribution of Series I Shares:
(i) a commission of 6.25% of the original issue price of the Series I Shares (the "6.25% Series I Commission"); and
(ii) a service fee equal to 0.50% annually of the net asset value of the Series I Shares held by the customers of the sales representatives of the registered dealers, calculated daily and paid quarterly in arrears (the "Series I Service Fee");
(b) with respect to the distribution of Series II Shares:
(i) a commission of 10% of the original issue price of the Series II Shares (the "10% Series II Commission"), consisting of a 6.25% sales commission plus an additional 3.75% sales commission in lieu of any service fees payable before the eighth anniversary of the date of issue of the Series II Shares; and
(ii) after the eighth anniversary of the date of issue of the Series II Shares, a service fee equal to 0.50% annually of the net asset value of the Series II Shares held by the customers of the sales representatives of the registered dealers, calculated daily and paid quarterly in arrears (the "Series II Service Fee");"
2. Paragraph 14 shall be deleted in its entirety and replaced with the following:
"For accounting purposes, the Fund will
(a) charge the amount paid or payable in respect of the 6.25% Series I Sales Commission and 10% Series II Sales Commission to retained earnings as a share issue cost as they occur; and
(b) expense the Co-op Expenses, the Series I Service Fee, the Series II Service Fee, the Series III Service Fee and the Series III Trailing Service Fee in the fiscal period when incurred."
(a) The Distribution Costs are included in the Fund's calculation of its management expense ratio; and
(b) this Variation and the Previous Decision shall cease to be operative on November 30, 2004.
April 20, 2004.