Securities Law & Instruments

 


NATIONAL INSTRUMENT 81-105 - MUTUAL FUND SALES PRACTICES


TABLE OF CONTENTS
PART 1 DEFINITIONS, INTERPRETATION AND APPLICATION

1.1 Definitions
1.2 Interpretation
1.3 Application
PART 2 GENERAL
2.1 Restrictions on Payments or Provision of Benefits
2.2 Restrictions on Solicitation and Acceptance of Payments or Benefits
2.3 Prohibition of Indirect Means
2.4 Application of Instrument to Some Participating Dealers or Representatives
PART 3 PERMITTED COMPENSATION
3.1 Commissions
3.2 Trailing Commissions
PART 4 INTERNAL DEALER INCENTIVE PRACTICES
4.1 Participating Dealers' Practices
4.2 Principal Distributors' Practices
PART 5 MARKETING AND EDUCATIONAL PRACTICES
5.1 Cooperative Marketing Practices
5.2 Mutual Fund Sponsored Conferences
5.3 Third Party Sponsored Educational Events
5.4 Industry Association Sponsored Events
5.5 Participating Dealer Sponsored Events
5.6 Promotional Items and Business Promotion Activities
PART 6 PORTFOLIO TRANSACTIONS
6.1 Reciprocal Commissions and Portfolio Transactions
6.2 Obligations of Participating Dealers Executing Portfolio Transactions
PART 7 OTHER SALES PRACTICES
7.1 Commission Rebates
7.2 Financial Assistance
7.3 Charitable Donations
7.4 Tied Selling
PART 8 PROSPECTUS AND POINT OF SALE DISCLOSURE
8.1 Disclosure of Sales Practices
8.2 Disclosure of Equity Interests
8.3 Disclosure Requirements If No Prospectus or Simplified Prospectus
PART 9 EXEMPTION
9.1 Exemption

PART 1. DEFINITIONS, INTERPRETATION AND APPLICATION

1.1 Definitions - In this Instrument

"direct costs" means reasonable, out-of-pocket costs and expenses directly attributable to

(a) the production and presentation of a sales communication3 referred to in Part 5, or

(b) the presentation and organization of a conference or seminar referred to in Part 5, other than any travel, accommodation or personal incidental expensesassociated with the attendance of an individual at the conference or seminar;4

"equity interest" means, in relation to an issuer

(a) if the issuer is a reporting issuer in any jurisdiction and its securities are listed on a Canadian stock exchange, the direct or indirect ownership of securitiesrepresenting more than ten percent of any class of voting securities, equity securities or partnership units of the issuer, or

(b) for all other issuers, the direct or indirect ownership of a voting security, equity security or partnership unit of the issuer;5

"equity security" means a security of an issuer that carries a residual right to participate in the earnings of the issuer and, upon the liquidation or winding up ofthe issuer, in the distribution of its assets;6

"IDA" means the Investment Dealers Association of Canada;

"IFIC" means The Investment Funds Institute of Canada;

"member of the organization" means, for a mutual fund

(a) the manager7 of the mutual fund,

(b) the principal distributor8 of the mutual fund,

(c) the portfolio adviser9 of the mutual fund,

(d) an affiliate of any of the persons or companies referred to in paragraphs (a), (b) or (c), or

(e) a person or company that is organized by a member of the organization of the mutual fund as a vehicle to fund payment of commissions to participatingdealers10 and that has a right to arrange for the distribution of the securities of the mutual fund;11

"mutual fund family" means two or more mutual funds that have the same manager or managers that are affiliates of each other; and

"representative" means, for a participating dealer,

(a) a partner, director, officer, salesperson or employee of the participating dealer, and

(b) any company through which a person referred to in paragraph (a) carries on activities in connection with services provided to the participating dealer.12

1.2 Interpretation - Terms defined in National Policy Statement No. 39, or in a successor instrument to that policy statement, and used in this Instrument havethe respective meanings ascribed to them in National Policy Statement No. 39 or the successor instrument, whichever is in force.13

1.3 Application - This Instrument applies to

(a) a distribution of securities of a mutual fund that offers or has offered securities under a prospectus or simplified prospectus for so long as the mutual fundremains a reporting issuer; and

(b) a person or company in respect of activities pertaining to a mutual fund referred to in paragraph (a).14

PART 2 GENERAL15

2.1 Restrictions on Payments or Provision of Benefits16

(1) No member of the organization of a mutual fund and no mutual fund17 shall, in connection with the distribution of securities of the mutual fund

(a) make a payment of money to a participating dealer or a representative of a participating dealer;

(b) provide a non-monetary benefit to a participating dealer or a representative of a participating dealer; or

(c) pay for or make reimbursement of a cost or expense incurred or to be incurred by a participating dealer or a representative of a participating dealer.

(2) Despite subsection (1), a member of the organization of a mutual fund may

(a) make a payment of money or provide a non-monetary benefit to a participating dealer, or pay for or make reimbursement of a cost or expense incurred or tobe incurred by a participating dealer or its representatives, if permitted by Parts 3 or 5; and

(b) provide a non-monetary benefit to a representative of a participating dealer, if permitted by Part 5.

(3) A member of the organization of a mutual fund shall not, and shall not represent that it may, make a payment, provide a non-monetary benefit or pay for ormake reimbursement of a cost or expense otherwise permitted by subsection (2) that is conditional upon

(a) the sale of a particular amount or value of securities of one or more mutual funds by a participating dealer or a representative; or

(b) a particular amount or value of securities of one or more mutual funds being held in accounts of clients of a participating dealer or a representative.18

2.2 Restrictions on Solicitation and Acceptance of Payments or Benefits19

(1) No participating dealer and no representative of a participating dealer shall solicit or accept from a mutual fund or a member of the organization of the mutualfund, in connection with the distribution of securities of the mutual fund, the payment of money, the provision of a non-monetary benefit or payment orreimbursement for a cost or expense incurred or to be incurred by the participating dealer or representatives of the participating dealer.

(2) Despite subsection (1)

(a) a participating dealer may solicit and accept a payment of money, provision of a non-monetary benefit or payment or reimbursement for a cost or expenseincurred or to be incurred by it or its representatives from a member of the organization of the mutual fund, if the member is permitted by Parts 3 or 5 to makethe payment, provide the benefit or make the payment or reimbursement; and

(b) a representative of a participating dealer may accept the provision of a non-monetary benefit from a member of the organization of the mutual fund, if themember is permitted by Part 5 to provide the benefit.20

2.3 Prohibition of Indirect Means - No person or company shall arrange to effect indirectly any action that the person or company would be prohibited by thisInstrument from taking directly.21

2.4 Application of Instrument to Some Participating Dealers or Representatives

(1) Nothing in this Instrument prohibits a person or company that is both a member of the organization of a mutual fund and a participating dealer of a mutualfund in a different mutual fund family from undertaking any activity, if

(a) the activity is undertaken in the person or company's capacity as a participating dealer of the mutual fund of which it is a participating dealer, and not in itscapacity as a member of the organization of the mutual fund of which it is a member; and

(b) a participating dealer is not prohibited by this Instrument from undertaking that activity.

(2) Nothing in this Instrument prohibits a representative of a participating dealer that is also a member of the organization of a mutual fund from soliciting oraccepting any payment, non-monetary benefit or reimbursement otherwise permitted by this Instrument from the participating dealer, if the payment, provision ofthe non-monetary benefit or reimbursement is made in the participating dealer's capacity as a participating dealer and not in its capacity as a member of theorganization of a mutual fund.22

PART 3 PERMITTED COMPENSATION23

3.1 Commissions - A member of the organization of a mutual fund may pay to a participating dealer a commission in money for the distribution of a security ofthe mutual fund made through the participating dealer, if

(a) the obligation to make the payment arises at the time of the trade;

(b) the prospectus or simplified prospectus of the mutual fund discloses the range of rates of commissions that may be paid and the method of calculation used indetermining the amount of those commissions;24 and

(c) the rate of the commission does not increase

(i) based on increases in the amount or value of securities of the mutual fund sold, or of mutual funds in the same mutual fund family as the mutual fund sold, orof any or all of the foregoing,

(ii) based on increases in the amount or value of securities of the mutual fund, or of mutual funds in the same mutual fund family as the mutual fund, or of any orall of the foregoing, held in accounts of clients of the participating dealer, or

(iii) for a particular period of the year in which the commission is paid or earned.25

3.2 Trailing Commissions26

(1) A member of the organization of a mutual fund may pay to a participating dealer a trailing commission in money that is based upon the aggregate value ofsecurities of the mutual fund held in accounts of clients of the participating dealer as at a particular time or during a particular period, if

(a) the obligation to make the payment arises after the time of the trade;

(b) the prospectus or simplified prospectus of the mutual fund discloses the range of rates of trailing commissions that may be paid and the method of calculationand relevant times or time periods used in determining the amount of those trailing commissions;27

(c) the method and time of calculation of the trailing commission and the relevant times or time periods used in determining the amount of the trailingcommission are the same for all participating dealers of the mutual fund; and

(d) the rate of the trailing commission does not increase

(i) based on increases in the amount or value of securities of the mutual fund sold, or of mutual funds in the same mutual fund family as the mutual fund sold, orof any or all of the foregoing,

(ii) based on increases in the amount or value of securities of the mutual fund, or of mutual funds in the same mutual fund family as the mutual fund, or of any orall of the foregoing, held in accounts of clients of the participating dealer, or

(iii) for a particular period of the year in which the trailing commission is paid or earned.28

 

(2) A member of the organization of a mutual fund may establish policies and practices concerning the timing of payments of trailing commissions so long as alltrailing commissions are paid within one year from the date earned.29

PART 4 INTERNAL DEALER INCENTIVE PRACTICES

4.1 Participating Dealers' Practices

(a) No participating dealer shall provide an incentive to any of its representatives to recommend mutual funds of one mutual fund family over mutual funds ofanother mutual fund family.30

(b) Despite subsection (1), the compensation paid to a representative of a participating dealer by the participating dealer may reflect commissions received by theparticipating dealer from members of the organizations of mutual funds, so long as the compensation paid to a representative for the securities of a mutual fundsold or held, as a percentage of the commissions paid to the participating dealer, is the same for all mutual fund families.31

4.2 Principal Distributors' Practices - A principal distributor of a mutual fund that is also a participating dealer of another mutual fund shall not provide anincentive for any of its representatives to recommend a mutual fund of which it is a principal distributor over a mutual fund of which it is a participating dealer.32

PART 5 MARKETING AND EDUCATIONAL PRACTICES33

5.1 Cooperative Marketing Practices - A member of the organization of a mutual fund may pay, to a participating dealer, direct costs incurred by theparticipating dealer relating to a sales communication34, investor35 conference or investor seminar prepared or presented by the participating dealer, if

(a) the primary purpose36 of the sales communication, investor conference or investor seminar is to promote, or provide educational information concerning, themutual fund, the mutual fund family of which the mutual fund is a member or mutual funds generally;

(b) in the case of an investor conference or investor seminar, the conference or seminar is presented by the participating dealer to investors or potential investorsof the mutual fund, another mutual fund in the same mutual fund family, or of mutual funds generally;

(c) the participating dealer provides invoices for, or receipts evidencing payment of, the direct costs to be paid by a member of the organization of the mutualfund;

(d) the aggregate direct costs of the sales communication, investor conference or investor seminar paid by all members of organizations of mutual funds does notexceed 50 percent of the total direct costs incurred by the participating dealer; and

(e) the sales communication discloses, or persons attending the investor conference or investor seminar are informed in writing of, the identity of all partiespaying for a portion of the costs of the sales communication, investor conference or investor seminar.

5.2 Mutual Fund Sponsored Conferences - A member of the organization of a mutual fund may provide a non- monetary benefit to a representative of aparticipating dealer by allowing him or her to attend a conference or seminar organized and presented by members of the organization of the mutual fund, if

(a) the primary purpose of the conference or seminar is the provision of educational information about financial planning, investing in securities, mutual fundindustry matters, the mutual fund, the mutual fund family of which the mutual fund is a member or mutual funds generally;

(b) the selection of the representatives of the participating dealer to attend the conference or seminar is made exclusively by the participating dealer, uninfluencedby any member of the organization of the mutual fund;37

(c) the conference or seminar is held in Canada or the continental United States of America;38

(d) no member of the organization of the mutual fund pays any travel, accommodation or personal incidental expenses associated with the attendance of therepresentative at the conference or seminar;39 and

(e) the costs relating to the organization and presentation of the conference or seminar are reasonable having regard to the purpose of the conference or seminar.

5.3 Third Party Sponsored Educational Events40 - A member of the organization of a mutual fund may, for a conference, seminar or course that is organized andpresented by a person or company that is not a member of the organization of the mutual fund or a participating dealer, pay the registration fees of arepresentative of a participating dealer for the conference, seminar or course, if

(a) the primary purpose of the conference, seminar or course is the provision of educational information about financial planning, investing in securities, mutualfund industry matters or mutual funds generally;

(b) the participating dealer provides invoices for or receipts evidencing payment of the registration fees to be paid by a member of the organization of the mutualfund;

(c) the selection of the representatives of the participating dealer to attend the conference, seminar or course is made exclusively by the participating dealer,uninfluenced by any member of the organization of the mutual fund; and

(d) the conference, seminar or course is held in Canada or the continental United States of America.

5.4 Industry Association Sponsored Events

(1) Except as permitted by subsection (2), no member of the organization of a mutual fund may pay money, provide non-monetary benefits or pay or reimbursecosts or expenses relating to a conference, seminar or course that is organized and presented by IFIC, the IDA or other trade or industry association.

(2) A member of the organization of a mutual fund may pay, to IFIC or the IDA, direct costs incurred by IFIC or the IDA relating to a conference or seminarorganized and presented by IFIC or the IDA41, if

(a) the primary purpose of the conference or seminar is the provision of educational information about financial planning, investing in securities, mutual fundindustry matters or mutual funds generally;

(b) the members of the organization of mutual funds in a mutual fund family in aggregate pay not more than 10 percent of the total direct costs incurred by IFICor the IDA for the organization and presentation of the conference or seminar;42

(c) the selection of the representatives of a participating dealer to attend the conference or seminar is made exclusively by the participating dealer, uninfluencedby any member of the organization of the mutual fund; and

(d) the conference or seminar is held in Canada or the continental United States of America.

5.5 Participating Dealer Sponsored Events - A member of the organization of a mutual fund may pay, to a participating dealer, direct costs incurred by theparticipating dealer relating to a conference or seminar that is organized and presented by the participating dealer, and that is not an investor conference orinvestor seminar referred to in section 5.1, if

(a) the primary purpose of the conference or seminar is the provision of educational information about financial planning, investing in securities, mutual fundindustry matters, the mutual fund, the mutual fund family of which the mutual fund is a member or mutual funds generally;

(b) the members of the organization of mutual funds in a mutual fund family in aggregate pay not more than 10 percent of the total direct costs incurred by theparticipating dealer for the organization and presentation of the conference or seminar;

(c) the aggregate direct costs of the conference or seminar paid by all members of organizations of mutual funds does not exceed 66 percent of the total directcosts incurred by the participating dealer;

(d) the selection of the representatives of the participating dealer to attend the conference or seminar is made exclusively by the participating dealer, uninfluencedby any member of the organization of the mutual fund; and

(e) the conference or seminar is held in Canada or the continental United States of America.

5.6 Promotional Items and Business Promotion Activities43 - A member of the organization of a mutual fund may provide to a representative of a participatingdealer, non-monetary benefits of a promotional nature and of minimal value, and a member of the organization of a mutual fund may engage in businesspromotion activities that result in a representative of a participating dealer receiving a non-monetary benefit if

(a) the provision of the benefits and activities is neither so extensive nor so frequent as to cause a reasonable person to question whether the provision of thebenefits or activities improperly influence the investment advice given by the representative to his or her clients; and

(b) in the case of business promotion activities, no member of the organization of the mutual fund pays the travel, accommodation or personal incidentalexpenses associated with attendance of the representative at the activities.

PART 6 PORTFOLIO TRANSACTIONS

6.1 Reciprocal Commissions and Portfolio Transactions

(1) No member of the organization of a mutual fund shall influence or attempt to influence how, or if, a participating dealer will pay or allocate in a particularmanner to any representative, all or part of a brokerage commission or of an amount representing the spread on a principal transaction arising from a portfoliotransaction of the mutual fund executed by the participating dealer.

(2) No member of the organization of a mutual fund shall direct a portfolio transaction of a mutual fund to a participating dealer or principal distributor of themutual fund except through individuals designated by the participating dealer or principal distributor as the institutional representatives of the participating dealeror principal distributor.44

(3) No member of the organization of a mutual fund shall advise a representative of a participating dealer or a person or company employed by a principaldistributor, other than an individual referred to in subsection (2), of a portfolio transaction of the mutual fund directed, or to be directed, to the participatingdealer or principal distributor.

(4) No member of the organization of a mutual fund shall direct, or offer or agree to direct, a portfolio transaction of the mutual fund to a participating dealer orprincipal distributor as inducement or reward for the participating dealer or principal distributor selling or having sold securities of the mutual fund or maintainingor having maintained particular levels of securities of the mutual fund in accounts of clients.45

(5) No participating dealer shall solicit or execute portfolio transactions of a mutual fund as inducement or reward for the participating dealer selling, or havingsold, securities of the mutual fund or maintaining, or having maintained, particular levels of securities of the mutual fund in accounts of clients.

6.2 Obligations of Participating Dealers Executing Portfolio Transactions -No participating dealer shall execute a portfolio transaction of a mutual fund unless ithas been directed to the participating dealer through an individual designated by the participating dealer as an institutional representative of the participatingdealer.46

PART 7 OTHER SALES PRACTICES47

7.1 Commission Rebates

(1) A participating dealer or representative of a participating dealer may pay all or part of a fee or commission payable by a securityholder on the redemption ofsecurities of a mutual fund if the redemption occurs in connection with the purchase by the securityholder of securities of another mutual fund, only if

(a) the participating dealer, or a representative on behalf of the participating dealer, before taking any steps in connection with the redemption, provides thesecurityholder with written disclosure of the matters described in subsection (2) and obtains the written consent of the securityholder to the completion of theredemption; and

(b) the participating dealer is not a member of the organization of the mutual fund the securities of which are being acquired.48

(2) The written disclosure referred to in subsection (1) shall include

(a) the amount of the fee or commission being paid by the participating dealer on the redemption;

(b) the amount of the redemption charges to which the securityholder will be subject in connection with the securities of the mutual fund being acquired,expressed both as dollar amounts and as percentages of the value of the securities being redeemed, and the times at which those charges would be made; and

(c) the tax consequences of the redemption.

(3) No member of the organization of a mutual fund, other than a member that is also a participating dealer acting in compliance with subsection (1), shall pay toany person or company all or part of a fee or commission payable by a securityholder on the redemption of securities of another mutual fund that is not in thesame mutual fund family.49

7.2 Financial Assistance

(1) No member of the organization of a mutual fund shall provide financial assistance to a participating dealer of the mutual fund, a representative of theparticipating dealer or their respective associates or affiliates.

(2) No participating dealer and no representative of a participating dealer of a mutual fund shall solicit or accept financial assistance from a member of theorganization of the mutual fund.

(3) Subsections (1) and (2) do not apply to financial assistance provided by

(a) a Canadian financial institution50 in the ordinary course of its business, if no conditions to the provision of the financial assistance promote the distribution ofsecurities of particular mutual funds; or

(b) affiliates.51

7.3 Charitable Donations - No member of the organization of a mutual fund shall make a charitable donation if the tax credit or deduction arising from thedonation benefits a participating dealer, a representative of a participating dealer or a person or company that is an associate or affiliate of a participating dealeror of a representative of a participating dealer.52

7.4 Tied Selling - No person or company shall require another person or company

(a) to invest in securities of a particular mutual fund or mutual fund family, either as a condition or on terms that appear to a reasonable person to be acondition53, of supplying or continuing to supply products or services; or

(b) to open an account or purchase or use any products or services, either as a condition or on terms that appear to a reasonable person to be a condition, ofselling securities of a particular mutual fund or mutual fund family.54

PART 8 PROSPECTUS AND POINT OF SALE DISCLOSURE55

8.1 Disclosure of Sales Practices - A mutual fund shall provide in its prospectus or simplified prospectus a complete description of

(a) all compensation payable to all principal distributors and participating dealers of the mutual fund; and

(b) the sales practices followed by the members of the organization of the mutual fund.56

8.2 Disclosure of Equity Interests

(1) A mutual fund shall disclose in its prospectus or simplified prospectus any equity interest

(a) that a member of the organization of the mutual fund has in a participating dealer; and

(b) that a participating dealer, a representative of the participating dealer or an associate of either of them, has in any member of the organization of the mutualfund.57

(2) No participating dealer shall complete a trade of a security of a mutual fund that is required to make the disclosure described in subsection (1), unless, for theinitial trade of the security to a purchaser, and, for any subsequent trade of securities of the mutual fund to the purchaser if there has been any change in theinformation referred to in subsection (1) since the delivery of the prospectus or simplified prospectus to the purchaser

(a) the participating dealer has delivered a document to the purchaser that provides the disclosure required under subsection (1); and

(b) the participating dealer obtains the prior written consent of the purchaser to the completion of the trade.58

8.3 Disclosure Requirements If No Prospectus or Simplified Prospectus -

A mutual fund that does not have a current prospectus or simplified prospectus shall prepare a document containing the information required by this Instrumentto be provided in a prospectus or simplified prospectus and deliver, or cause to be delivered, a copy of the document to each purchaser of securities of themutual fund at or before the time of the applicable trade in securities of the mutual fund, other than a trade in connection with a dividend reinvestment plan of themutual fund.

PART 9 EXEMPTION

9.1 Exemption

(1) The regulator59 or securities regulatory authority60 may grant an exemption to this Instrument, in whole or in part, subject to such conditions or restrictionsas may be imposed in the exemption.

(2) Despite subsection (1), in Ontario, only the securities regulatory authority may grant such an exemption.