Securities Law & Instruments

Headnote

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.

Statutes Cited

Securities Act (Ontario), R.S.O. 1990 c.S.5., as am., s. 144.

Rules Cited

National Instrument 81-105 Mutual Fund Sales Practices.

IN THE MATTER OF

THE SECURITIES LEGISLATION OF ONTARIO

AND

IN THE MATTER OF

NATIONAL INSTRUMENT 81-105

MUTUAL FUND SALES PRACTICES

AND

IN THE MATTER OF

THE BUSINESS, ENGINEERING, SCIENCE &

TECHNOLOGY DISCOVERIES FUND INC.

 

DECISION DOCUMENT

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 section 9.1 of National Instrument 81-105 Mutual Fund Sales Practices ("NI 81-105") that the prohibition contained in section 2.1 of NI 81-105 against the making of certain payments by the Fund or the Fund's manager to registered dealers shall not apply to the Fund;

AND WHEREAS unless otherwise defined, the terms herein have the meaning set out in National Instrument 14-101;

AND WHEREAS the Fund has represented to the Commission as follows:

1. The Fund is a corporation formed under the laws of Canada by articles of incorporation on November 21, 1996, as amended December 31, 1996, January 30, 1998 and January 4, 2002.

2. The Fund is a reporting issuer under the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act"), and is not on the list of defaulting reporting issuers maintained pursuant to subsection 72(9) of the Act.

3. B.E.S.T. Investment Counsel Limited (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.

4. The Fund has retained B.E.S.T. Investment Counsel Limited to source investments for the Fund.

5. The Fund is registered as a labour sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario), as amended (the "CSBIF Act") and as such is a prescribed labour-sponsored venture capital corporation under the Income Tax Act (Canada), as amended (the "Federal Act").

6. The sponsor of the Fund is the International Federation of Professional and Technical Engineers-Local 164.

7. The Fund is a mutual fund as defined in section 1(1) of the Act that makes investments in small and medium-sized Ontario-based businesses that are eligible investments for the Fund under the CSBIF Act and the Federal Act.

8. The authorized capital of the Fund consists of an unlimited number of Class A Shares issuable in series, 25,000 Class B Shares and an unlimited number of Class C Shares, issuable in series, of which three series of Class A Shares have been designated, the Series I Shares, the Series II Shares and the Series III Shares, and no series of Class C Shares have been designated. As at November 30, 2004, the Fund had 6,477,307.105 Series I Class A Shares, 628,315.029 Series II Class A Shares, 9,819.201 Series III Class A Shares, one Class B Share and 500,000 Class C Shares issued and outstanding.

9. As disclosed in the prospectus of the Fund dated January 6, 2004 the Fund intends to pay the costs of distributing its shares directly to dealers.

10. The Fund pays a sales commission to registered dealers on sales of Class A Shares of the Fund as follows:

(a) Series I Shares: A commission of 6.25% of the original issue price is paid by the Fund to registered dealers selling Series I Shares (the "6.25% Series I Commission");

(b) Series II Shares: A commission of 10% is paid by the Fund to registered dealers selling Series II Shares (the "10% Series II Commission"). The commission consists of a 6.25% sales commission (the "6.25% Series II Component") plus an additional 3.75% sales commission of the original issue price of the Series II Shares (the "3.75% Series II Component"). The 3.75% Series II Component is in lieu of any service fees payable before the eighth anniversary of the date of issue of the shares; and

(c) Series III Shares: No commission is paid to registered dealers selling Series III Shares.

11. The Fund pays service fees to registered dealers selling Class A Shares of the Fund as follows:

(a) Series I Shares: A service fee equal to 0.50% 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) Series II Shares: No annual service fee is paid to registered dealers before the eighth anniversary of the date of issue of the Series II Shares. Following the eighth anniversary of the issue date of the Series II Shares, the Fund will pay an annual service fee equal to 0.50% 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"); and

(c) Series III Shares: A service fee equal to 1.25% of the Net Asset Value of the Series III Shares held by the customers of the sales representatives of the registered dealers, calculated daily and paid quarterly in arrears for the first eight years from the date of issue (the "Series III Service Fee"). After the eighth anniversary of the date of issue of the Series III Shares such dealers will be paid a service fee equal to 0.50% annually of the Net Asset Value of the Series III Shares held by the customers of the sales representatives of the registered dealers, calculated daily and paid quarterly in arrears (the "Series III Trailing Service Fee").

12. The Fund or the Manager enters into co-operative advertising programs with registered dealers providing for the reimbursement of expenses incurred by the registered dealers in promoting sales of Class A Shares, which include advertising, mailing and other expenses (the "Co-Op Expenses"). The Manager or the Fund pays no more than 50% of such expenses.

13. The payment of commissions on the sale of the Class A Shares by the Fund is contemplated by the CSBIF Act and the Federal Act, and assists in ensuring that the entire subscription price paid by the investor is taken into consideration for the applicable federal and provincial tax credits in connection with the purchase of the Class A Shares of the Fund.

14. Section 2.1 of NI 81-105 prohibits the Fund, in connection with the distribution of securities, from making payments or providing benefits to participating dealers or representatives of such dealers, including the payment of commissions and other distribution costs to a participating dealer or a representative of such dealer.

15. Section 2.3(4) of the Companion Policy to NI 81-105 stipulates that applicable securities regulatory authorities will entertain applications from labour-sponsored venture capital corporations for relief from the provision of NI 81-105 which proscribes the payment of distribution costs directly by such funds.

16. The Fund expenses the 6.25% Series I Commission and the 6.25% Series II Component to retained earnings as a share issue cost as they occur, which is consistent with Section 1100 of the CICA handbook.

17. The Fund expenses the Co-op Expenses, the Series I Service Fee, the Series II Service Fee, the 3.75% Series II Component, the Series III Service Fee and the Series III Trailing Service Fee in the fiscal period when incurred.

18. The prospectus of the Fund discloses the 6.25% Series I Commission, the 10% Series II Commission, 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 (collectively, the "Distribution Costs") in detail and that the Fund or the Manager, as described herein, will be responsible for the payment of such expenses.

19. 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 or the Manager will be compensation permitted to be paid to participating dealers under NI 81-105.

AND WHEREAS the Commission is satisfied that to do so would not be prejudicial to the public interest;

THE DECISION of the Commission under section 9.1 of NI 81-105 is that the Fund shall be exempt from section 2.1 of NI 81-105 to permit the Fund or the Manager, as described herein, 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 Distribution Costs are being included in the Fund's calculation of its management expense ratio;

(c) the Fund, in its financial statements, will expense the 6.25% Series I Commission and the 6.25% Series II Component to retained earnings as a share issue cost as they occur and expense the Co-op Expenses, the Series I Service Fee, the Series II Service Fee, the 3.75% Series II Component, the Series III Service Fee and the Series III Trailing Service Fee in the fiscal period when incurred;

(d) the summary section (the "Summary Section") of the prospectus of the Fund has full, true and plain disclosure explaining to investors that they indirectly support the payment of the 6.25% Series I Commission and the 10% Series II Commission as the Fund pays such commissions out of the proceeds from the sale of Class A Shares of the Fund, and the Summary Section must be placed within the first 10 pages of the prospectus;

(e) the Fund shall include in the Summary Section a summary table of fees and expenses payable by the Fund in the following format:

Summary of Fees and Expenses Payable by the Fund and Annual Performance Data

Type and Amount of Fee / Description;

(f) the summary table in the prospectus shall also include the annual management expense ratio of the Fund for each of the last five completed financial years of the Fund with a brief description of the method of calculating the management expense ratio, and the annual returns of the Fund for each of the last five completed financial years of the Fund; and

(g) this exemption shall cease to be operative on the date that a rule or regulation replacing or amending section 2.1 of NI 81-105 comes into force.

December 17, 2004.

"Paul Moore"
"David L. Knight"