Securities Law & Instruments



NOTICE OF RULE AND POLICY UNDER

THE SECURITIES ACT
NATIONAL INSTRUMENT 81-105
AND COMPANION POLICY 81-105CP
MUTUAL FUND SALES PRACTICES
AND NOTICE OF REVOCATION OF
CANADIAN SECURITIES ADMINISTRATORS NOTICES

Notice of Rule

The Commission has, under section 143 of the Securities Act (the "Act"), made National Instrument 81-105 Mutual Fund Sales Practices (the "NationalInstrument") as a Rule under the Act, and has made Companion Policy 81-105CP Mutual Fund Sales Practices (the "Companion Policy") as a Policy under theAct.

The National Instrument and Companion Policy are both initiatives of the Canadian Securities Administrators (the "CSA"). The National Instrument has been, oris expected to be, adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario and Nova Scotia, a Commission regulation in Saskatchewan, and apolicy in all other jurisdictions represented by the CSA. The Companion Policy has been, or is expected to be, implemented as a policy in all of the jurisdictionsrepresented by the CSA.

The National Instrument and the material required by the Act to be delivered to the Minister of Finance were delivered on January 28, 1998. If the Minister doesnot approve the National Instrument, reject the National Instrument or return it to the Commission for further consideration by March 30, 1998, or if theMinister approves the National Instrument, the National Instrument will come into force, pursuant to section 10.1 of the National Instrument, on May 1, 1998.The Companion Policy will come into force on the date that the National Instrument comes into force.

The CSA published drafts of the National Instrument (the "Proposed National Instrument") and Companion Policy (the "Proposed Companion Policy") in July19971. The Proposed National Instrument and the Proposed Companion Policy were

based upon and, in Ontario, amended and replaced proposed Rule 81-503 Sales Practices Applicable to the Sale of Mutual Fund Securities and proposedCompanion Policy 81-503CP which were released for comment by the Commission on August 30, 19962.

During the comment period on the proposed Ontario rule and policy, the Commission received submissions on these instruments from a broad range ofcommenters. The Notice of the Proposed National Instrument and the Proposed Companion Policy (the "July Ontario Notice") contained, in Ontario, a summaryof the comments received and the response of the CSA to those comments. During the comment period on the Proposed National Instrument and the ProposedCompanion Policy, which ended on September 30, 1997, the CSA received further submissions. The comments provided in these submissions were consideredand the final versions of the National Instrument and Companion Policy being published with this Notice reflect the decisions of the CSA in this regard.

Appendix A of this Notice lists the commenters on the Proposed National Instrument and Proposed Companion Policy and Appendix B provides a summary ofthe comments received and the response of the CSA.

Revocation of CSA Notices

Effective the date that the National Instrument comes into force, two CSA Notices entitled "Mutual Fund Sales Incentives" (CSA #93/1) and "Mutual Fund SalesIncentives - Point of Sale Disclosure Statement" (CSA #95/2) will be revoked. Those Notices deal with some of the same subject matter as the NationalInstrument and are superseded by the National Instrument.

Substance and Purpose of National Instrument

The National Instrument regulates the sales and business practices followed both by managers and principal distributors of publicly offered mutual funds, and byregistered dealers and their sales representatives in connection with the distribution of securities of publicly offered mutual funds. The National Instrumentmakes mandatory, on an industry-wide and on a national basis, restrictions on certain sales and business practices followed by participants in the mutual fundindustry in Canada.

For additional information concerning the background of the National Instrument, reference should be made to the July Ontario Notice.

Substance and Purpose of Companion Policy

The Companion Policy emphasizes that the National Instrument establishes only minimum standards of conduct for industry participants. The Companion Policyis designed to provide a regulatory background and context for the National Instrument and to outline the CSA's general regulatory purpose in making theNational Instrument. The Companion Policy also provides guidance as to the CSA's interpretation of some provisions of the National Instrument and bringscertain matters to the attention of participants in the mutual fund industry.

Summary of Changes to National Instrument from Proposed National Instrument

This section describes changes made in the National Instrument from the Proposed National Instrument. For a detailed summary of the contents of the ProposedNational Instrument, reference should be made to the July Ontario Notice. As the changes to the National Instrument from the Proposed National Instrument arenot material, the National Instrument is not subject to a further comment period.

Section 2.3

Changes from the Proposed National Instrument

Section 2.3 of the Proposed National Instrument has been deleted from the National Instrument. Section 2.4 of the Companion Policy sets out the CSA's viewsin connection with indirect actions taken by industry participants to circumvent direct prohibitions under the Instrument. The CSA have made this change assection 2.3 of the Proposed National Instrument was viewed as a re-statement of existing principles of law and, as such, not necessary to state in rules of thevarious members of the CSA. The CSA have articulated their views in the Companion Policy that an attempt by an industry participant to effect indirectly anyaction that it is directly prohibited from doing under the National Instrument would be seen as a breach of the National Instrument.

Section 3.2

Section 3.2 of the National Instrument permits the payment of trailing commissions, subject to certain conditions contained in paragraphs 3.2(1)(a) through (d).Paragraph 3.2(1)(d) provides, among other things, that the rate of a trailing commission may not increase based upon increases in the amount or value ofsecurities of a mutual fund sold, or held in accounts of clients of a participating dealer. This paragraph would prevent mutual fund organizations from decliningto pay trailing commissions to a participating dealer if the amount or value of securities held in accounts of the participating dealer or its representatives werelower than a specified threshold.

Changes from the Proposed National Instrument

The CSA have added subsection 3.2(3) to the National Instrument in order to provide a limited transitional exception to the general provisions of section 3.2 inrespect of minimum asset thresholds. Subsection 3.2(3) permits a member of the organization of a mutual fund to decline to pay a trailing commission inconnection with securities of the mutual fund held in client accounts of a participating dealer in certain circumstances; namely, that the non-payment be consistentwith a policy concerning minimum asset thresholds established and followed by the mutual fund organization on July 1, 1997, and that the securities with respectto which no trailing commission is paid must have been acquired by the client of the dealer before the National Instrument came into force.

The CSA have added subsection 3.2(3) in order to ensure that the National Instrument does not retroactively disrupt existing arrangements between mutual fundorganizations and participating dealers respecting securities acquired before the National Instrument came into force.

Section 4.2

Subsection 4.2(1) of the National Instrument prohibits a principal distributor of proprietary funds that also acts as a participating dealer in the distribution of thirdparty sponsored mutual funds from paying incentives to its representatives that could cause the representatives to favour the proprietary funds over the thirdparty funds.

Changes from the Proposed National Instrument

The CSA have added subsection 4.2(2) to the National Instrument in order to clarify the operation of subsection 4.2(1). Subsection 4.2(2) sets out a limitedexception to subsection (1), in order to permit the compensation paid to a representative of a principal distributor to reflect commissions received by the principaldistributor from members of the organization of which it is a member, as well as from members of the organization of other mutual funds, provided that twoconditions are satisfied.

First, paragraph (a) requires that the compensation paid to a representative under the exception, as a percentage of the commission paid to the principaldistributor, must be the same for all mutual fund families, including the mutual fund family of the principal distributor. Second, paragraph (b) requires that thecommissions paid to the principal distributor of the mutual fund securities must not exceed the commissions provided to any other participating dealer inconnection with the distribution of those securities.

Sections 5.2 and 5.5

Section 5.2 of the National Instrument permits a member of a fund organization to provide a non-monetary benefit to a representative of a participating dealer byallowing him or her to attend a conference or seminar organized and presented by a member of the organization of a mutual fund, upon certain conditions.Section 5.5 of the National Instrument allows a mutual fund organization to pay, to a participating dealer, direct costs incurred by the participating dealer relatingto a conference or seminar that is organized and presented by the participating dealer for its representatives, upon certain conditions. Each of sections 5.2 and5.5 of the National Instrument impose a condition that the conferences or seminars to which those sections apply must be held in the geographic locationsspecified in the National Instrument.

Changes from the Proposed National Instrument

The Proposed National Instrument required that these conferences or seminars be held in Canada or the continental United States of America. Sections 5.2 and5.5 of the National Instrument have been amended to also permit these conferences or seminars to take place in a location where a portfolio adviser of the mutualfund carries on business if the primary purpose of the conference or seminar is the provision of educational information about the investments or activities of themutual fund carried on by that portfolio adviser. These amendments have been made to permit so-called portfolio manager "due diligence" conferences tocontinue to be offered or paid for by mutual fund organizations.

Section 5.4

Section 5.4 of the National Instrument permits a member of the organization of a mutual fund to pay to IFIC, the IDA, or their respective affiliates or associates,direct costs incurred by IFIC, the IDA, or their respective affiliates or associates relating to a conference or seminar organized by IFIC, the IDA, or theirrespective affiliates or associates, subject to certain conditions.

Changes from the Proposed National Instrument

The CSA have made two technical changes to section 5.4. First, the CSA have provided that section 5.4 does not override section 5.3, which permits mutualfund organizations to pay registration fees for conferences, seminars and courses. Second, the references contained in subsection 5.4(2) to IFIC and the IDAhave been extended to include their respective affiliates or associates.

Section 6.1

Section 6.1 of the National Instrument is designed to minimize the conflicts that may occur when a participating dealer acts as a broker in connection withportfolio transactions where that participating dealer has also distributed securities of that mutual fund. Subsection 6.1(3) requires that sharing of information,relating to portfolio transactions, between a member of the organization of a mutual fund and a participating dealer or a principal distributor occur through theindividuals designated by the participating dealer or principal distributor as their respective institutional representatives.

Changes from the Proposed National Instrument

The CSA have amended subsection 6.1(3) of the National Instrument to clarify that the prohibitions contained in that subsection are only directed at particulartrades. The subsection does not prevent the sharing of general information relating to, for example, trading history.

Section 7.1

Section 7.1 of the National Instrument provides that a participating dealer or its representatives may pay all or part of the redemption fees or commissions thatmay be payable by an investor in connection with a transfer from one mutual fund to another mutual fund if certain conditions are satisfied. One of theseconditions, contained in subsection 7.1(2), requires that the participating dealer or the representative, on behalf of the participating dealer, must provide theinvestor with written disclosure of both the redemption charges to which the investor will be subject in connection with the securities being acquired, and the taxconsequences of the applicable redemption, together with a description of the current redemption fees being paid by the participating dealer or the representative.

Changes from the Proposed National Instrument

Paragraphs 7.1(2)(a) and (b) have been amended to clarify that reasonable estimates of the amount of fee or commission paid by the participating dealer on theredemption, and of the redemption charges to which the investor will be subject, must be disclosed. These changes recognize that it may be impossible toprovide disclosure of exact figures or amounts.

Section 7.3

Section 7.3 of the National Instrument prohibits a member of the organization of a mutual fund from making a charitable donation if the tax benefit associatedwith that donation would go to a participating dealer, an associate or affiliate of a participating dealer, or a representative of a participating dealer.

Changes from the Proposed National Instrument

Section 7.3 has been amended by the addition of subsection (2) to permit a member of the organization of a mutual fund to make charitable donations in favourof its affiliates on the basis that such intercorporate dealings generally do not raise regulatory concerns about inappropriate sales practices.

Section 8.1

Section 8.1 of the National Instrument requires that the prospectus of a mutual fund must contain complete disclosure of two categories of information containedin paragraphs (a) and (b). Paragraph (a) relates to the commissions paid, and paragraph (b) relates to the sales practices followed by the members of theorganization of the mutual fund.

Changes from the Proposed National Instrument

Paragraph 8.1(b) of the National Instrument now clarifies that a prospectus is only required to disclose the sales practices followed in connection with thedistribution of the mutual fund securities that are the subject of that prospectus.

Section 8.2

Section 8.2 of the National Instrument requires prospectus disclosure and separate written point of sale disclosure of any equity interest that may exist among amember of the organization of a mutual fund, a participating dealer, a representative of the participating dealer, or their associates.

Changes from the Proposed National Instrument

The prospectus disclosure requirements contained in subsection 8.2(1) have been amended in respect of equity interests held in a member of the organization of amutual fund that is not a reporting issuer whose securities are listed on a Canadian stock exchange. For disclosure concerning equity interests held in thosemembers, subsection 8.2(2) permits the equity interests of representatives and their associates to be expressed in aggregate, provided disclosure is also made ofany representative and his or her associates that hold more than five percent of the applicable class of securities.

Subsections 8.2(3), (4) and (5) have been added to the National Instrument for clarification purposes to replace subsection 8.2(3) of the Proposed NationalInstrument. Those subsections continue to require that a participating dealer, and the representative acting on a trade, provide a purchaser with a disclosuredocument if the participating dealer, representatives of the participating dealer or the particular representative involved in the trade (with their associates) have anequity interest in a member of the organization of the mutual fund or if a member of that organization has an equity interest in the participating dealer.

Part 10

Part 10 of the National Instrument is new, and, provides that the National Instrument will come into effect on May 1, 1998 and provides a transition period forprospectus disclosure. If a receipt has been obtained for the prospectus or simplified prospectus of a mutual fund before the date that the National Instrumentcomes into force, that prospectus or simplified prospectus is not required to comply with the disclosure requirements contained in the National Instrument. As aresult, a prospectus is not required to be amended; compliance with these specific disclosure requirements may be delayed until the next renewal of theprospectus. Issuers, of course, remain responsible for ensuring at all times that their prospectuses contain full, true and plain disclosure of all material factsrelating to the relevant securities and must comply with the existing requirements for disclosure related to sales practices and incentives.

Summary of Changes to the Companion Policy from the Proposed Companion Policy

This section describes the changes made in the Final Companion Policy from the Proposed Companion Policy. For a detailed summary of the ProposedCompanion Policy, reference should be made to the July Ontario Notice. As the changes to the Companion Policy from the Proposed Companion Policy are notmaterial, the Companion Policy is not subject to a further comment period.

Section 2.1

Section 2.1 of the Companion Policy describes the background to the National Instrument.

Changes from the Proposed Companion Policy

Subsection 2.1(2) to the Companion Policy has been added to describe the 1991 IFIC Report and the 1991 IFIC Code, the latter of which included restrictionson locations for conferences or seminars similar to those now included in the National Instrument, as well as enhanced disclosure requirements. This additionprovides additional background to the regulation of mutual fund sales practices.

Section 2.3

Section 2.3 of the Companion Policy describes the application of the National Instrument to the sales practices followed by industry participants in connectionwith the sale of securities of labour-sponsored venture capital corporations ("LSVCCs"). It clarifies that most members of the CSA, other than the securitiesregulatory authorities in Quebec, consider LSVCCs to be mutual funds and regulate them as such. Accordingly, the rules set out in the National Instrumentapply to LSVCCs. In Manitoba, LSVCCs are considered not to be mutual funds; however the Manitoba Securities Commission will issue a local instrumentmaking LSVCCs subject to the National Instrument. However, the relevant members of the CSA will consider an application to exempt an LSVCC from theoperation of section 2.1 of the National Instrument in order to permit the LSVCC to pay permitted sales incentives out of fund assets, on the basis that theoperational and legal structure of the LSVCC is such that it cannot comply with section 2.1 of the National Instrument.

Changes from the Proposed Companion Policy

Section 2.3 is new.

Section 2.4

Section 2.4 of the Companion Policy discusses the CSA's views on the use of indirect means to circumvent the National Instrument.

Changes from the Proposed Companion Policy

Section 2.4 of the Companion Policy has been expanded somewhat from section 4.4 of the Proposed Companion Policy to recognize that section 2.3 of theProposed National Instrument has been deleted from the National Instrument for the reasons outlined above. The substance of section 2.4 of the CompanionPolicy has not been changed from section 4.4 of the Proposed Companion Policy.

Part 5

Part 5 of the Companion Policy clarifies certain matters provided for in Part 3 of the National Instrument. Section 5.1 of the Companion Policy contains adiscussion on disclosure of the method of calculation for sales and trailing commissions and section 5.3 contains a discussion of trailing commission thresholds.

Changes from the Proposed Companion Policy

The CSA have added section 5.1 to the Companion Policy to clarify that the requirement to disclose the methods of calculation of commissions contained in Part3 of the National Instrument may be satisfied through disclosure of a general nature.

Subsections 5.3(3), (4) and (5) have been added to the Companion Policy to describe the transitional exemption provided by subsection 3.2(3) of the NationalInstrument in connection with minimum asset thresholds for payment of trailing commissions.

The CSA have added subsection 5.3(6) to the Companion Policy to describe the views of the CSA respecting internal compensation systems of participatingdealers that impose, in effect, an asset or sales threshold to be achieved by representatives in order to receive a commission paid by a mutual fund organization inrespect of mutual fund sales.

The CSA have added subsection 5.3(7) to the Companion Policy to emphasize that there is nothing in the National Instrument that requires a mutual fundorganization to pay the same rate of commission to all participating dealers selling the securities of that mutual fund's family.

Section 6.1

Section 6.1 of the Companion Policy was published as footnote 31 to the Proposed National Instrument, and has been moved into the Companion Policy. Thissection emphasizes that the National Instrument permits different payments to be made by participating dealers to their representatives for different mutual funds,provided that the difference in payments results from different commissions received by the participating dealer from the mutual fund organization.

Changes from the Proposed Companion Policy

Section 6.1 is new.

Section 7.2

Section 7.2 of the Companion Policy was published as section 6.2 of the Proposed Companion Policy. It emphasizes that section 5.1 of the National Instrumentpermits only certain "cooperative" marketing, in connection with a sales communication, investor conference or investor seminar. Section 7.2 also emphasizesthat section 5.1 of the National Instrument is not designed to enable participating dealers to recoup their general marketing costs from mutual fund organizations.

Changes from the Proposed Companion Policy

Subsection 7.2(2) has been added to the Companion Policy to clarify the position of the CSA relating to the receipts or invoices required to be provided underparagraph 5.1(c) of the National Instrument for the associated direct costs permitted to be paid by a member of the organization of a mutual fund. Subsection7.2(2) clarifies that a participating dealer need not require head office approval or dealings for these receipts and invoices and may establish procedures to dealwith these receipts or invoices at a local office level. Subsection 7.2(2) also clarifies that participating dealers may direct fund companies to pay permittedco-operative marketing monies directly to suppliers or service providers.

Subsection 7.2(3) has been added to the Companion Policy to clarify that the written disclosure required under paragraph 5.1(e) of the National Instrumentwould be satisfied if there is sufficient detail to indicate that a clearly-identified party has paid a portion of the costs of a sales communication, investorconference or investor seminar.

Section 7.3

Section 7.3 of the Companion Policy describes the views of the CSA concerning section 5.2 of the National Instrument. Subsection 7.3(2) of the CompanionPolicy provides clarification as to the position of the CSA regarding the selection of representatives of a participating dealer to attend a mutual fund sponsoredconference under section 5.2 of the National Instrument.

Changes from the Proposed Companion Policy

Subsection 7.3(2) of the Companion Policy is new. Subsection 6.3(2) of the Proposed Companion Policy, being a discussion relating to invitations for guests toa mutual fund sponsored conference under section 5.2 of the National Instrument has been deleted. Subsection 7.3(2) of the Companion Policy clarifies thatsection 5.2 of the National Instrument does not prevent mutual fund organizations from organizing events that are tailored to the interests of particular categoriesof representatives and from informing participating dealers as to the nature of such events.

Section 7.5

Section 7.5 of the Companion Policy elaborates on the meaning of the word "location" used in subparagraphs 5.2(c)(iii) and 5.5(e)(iii) of the NationalInstrument. It emphasizes that those subparagraphs permit "due diligence" trips to the immediate locale where a portfolio adviser of a mutual fund carries onbusiness.

Changes from the Proposed Companion Policy

Section 7.5 of the Companion Policy is new and results from the changes made to sections 5.2 and 5.5 of the National Instrument concerning the geographiclocation for conferences and seminars permitted by those sections.

Section 8.1

Section 8.1 of the Companion Policy contains the views of the CSA on the designation of institutional representatives for the purposes of Part 6 of the NationalInstrument.

Changes from the Proposed Companion Policy

Section 8.1 of the Companion Policy was published as section 7.1 of the Proposed Companion Policy. Subsection 8.1(2) has been added to the CompanionPolicy to clarify that the CSA recognize the legitimacy of certain types of information sharing between a member of the organization of a mutual fund and aparticipating dealer or a principal distributor.

Part 9

Part 9 has been added to the Companion Policy to address several points in relation to Part 7 of the National Instrument.

Section 9.1 clarifies that the tax disclosure required to be provided under subsection 7.1(2) of the National Instrument will be satisfied by disclosure of a generalnature.

Subsection 9.2(1) clarifies that "products or services" referred to in paragraph 7.4(b) of the National Instrument includes the opening of an account.

Subsection 9.2(2) provides a discussion regarding the ambit of section 7.4 of the National Instrument, which governs tied selling practices. Subsection 9.2(2)emphasizes that section 7.4 is not intended to interfere with legitimate "relationship pricing" where a customer obtains more favourable terms or conditionsthrough the purchase of mutual fund securities. Subsection 9.2(2) clarifies that section 7.4 is directed at situations where a customer is denied services he or shewould otherwise be able to obtain, but for the fact that the customer did not purchase mutual fund securities.

Changes from the Proposed Companion Policy

Part 9 is new.

Section 10.1

Section 10.1 of the Companion Policy discusses the disclosure required to be provided in a prospectus of a mutual fund in connection with equity interests heldby participating dealers and their representatives in members of the organization of the mutual fund. It reminds industry participants that "equity interest" isdefined in the National Instrument and has a different meaning depending on whether the relevant member of the organization of a mutual fund is a reportingissuer whose securities are listed on a Canadian stock exchange or not. Section 10.1 also indicates what action the CSA expect mutual funds to take inattempting to compile the required information.

Changes from the Proposed Companion Policy

Section 10.1 is new.

National Instrument and Companion Policy

The texts of the National Instrument and Companion Policy follow.

Text of Revocation of CSA Notices

The text of the revocation of the CSA Notices described in this Notice is as follows:

"The CSA Notices entitled "Mutual Fund Sales Incentives" (CSA #93/1) and "Mutual Fund Sales Incentives - Point of Sale Disclosure Statement" (CSA #95/2)are revoked effective the date that National Instrument 81-105 Mutual Fund Sales Practices comes into force."

DATED: February 6, 1998.

APPENDIX A - LIST OF COMMENTERS ON PROPOSED NATIONAL INSTRUMENT 81-105 AND COMPANION POLICY 81-105CP

1. AGF Management Limited

2. The Association of Labour Sponsored Investment Funds

3. Berkshire Investment Group Inc.

4. Canadian Bankers Association

5. Crocus Investment Fund

6. Dynamic Mutual Funds (letter endorsed by C.I. Mutual Funds and AGF Management Limited)

7. Fidelity Investments Canada Limited

8. Fogler, Rubinoff, on behalf of Assante Capital Management Inc., Equion Securities Canada Limited, Equion Financial Limited, Brightside Financial ServicesInc., DataPlan Securities Limited, Fenlon Financial Inc. and Loring Ward Investment Counsel Limited

9. Global Strategy Investment Funds

10. Independent Mutual Fund Dealers, being Ross Dixon Financial Services Limited, Associated Financial Planners, Balanced Planning, Brightside Financial,CMG/World Source, DPM Financial, Equion, Financial Concept Group, FPC Investments Inc., Keybase Financial Group, Money Concepts Group, The RogersGroup, Trillenium Investor Services, TWC Financial Corporation, The Investment Centre

11. Investment Dealers Association of Canada

12. The Investment Funds Institute of Canada

13. Investors Group Inc.

14. Mr. Joseph W.A. Killoran

15. Mackenzie Financial Corporation

16. Manulife Securities International Ltd.

17. Pacific Capital Management Ltd.

18. Ross Dixon Financial Services Limited

19. Scotia Securities Inc.

20. Stratégie GBS Courtier en fonds d'investissement

21. Trimark Investment Management Inc.

22. The VenGrowth Investment Fund Inc.

23. Working Opportunity Fund

APPENDIX B - SUMMARY OF COMMENTS RECEIVED ON PROPOSED NATIONAL INSTRUMENT 81-105 AND PROPOSED COMPANIONPOLICY 81-105CP AND RESPONSE OF THE CANADIAN SECURITIES ADMINISTRATORS

1. INTRODUCTION

In August 1996, the Ontario Securities Commission (the "Ontario Commission") released for public comment proposed Rule 81-503 Sales Practices Applicableto the Sale of Mutual Fund Securities (the "Ontario Draft Rule"), together with proposed Companion Policy 81-503CP (the "Ontario Draft Policy"). Both theOntario Draft Rule and the Ontario Draft Policy were replaced in July 1997 by proposed National Instrument 81-105 Mutual Fund Sales Practices (the"Proposed National Instrument") and its proposed Companion Policy 81-105CP (the "Proposed Companion Policy"). The Canadian Securities Regulators("CSA") released the Proposed National Instrument and the Proposed Companion Policy for public comment on July 25, 1997.

During the comment period on the Ontario Draft Rule and the Ontario Draft Policy, which ended on November 29, 1996, the Ontario Commission received 39submissions from 40 commenters. The Notice of the Proposed National Instrument and the Proposed Companion Policy contained, in Ontario, a summary of thecomments received on the Ontario Draft Rule and the Ontario Draft Policy and the response of the CSA to such comments (the "July Ontario Notice").3

During the comment period on the Proposed National Instrument and the Proposed Companion Policy, which ended on September 30, 1997, the CSA received23 submissions from 43 commenters.4 The commenters can be grouped as follows:

Mutual Fund Distributors and Financial Planners 23

Individuals 1

Trade Associations 4

Mutual Fund Management Companies 12

Labour Sponsored Venture Capital Corporations 35

TOTAL 43

The four trade associations listed, being The Investment Funds Institute of Canada ("IFIC"), the Investment Dealers Association of Canada (the "IDA"), theCanadian Bankers Association (the "CBA") and The Association of Labour Sponsored Investment Funds (the "LSIF Association"), each made submissions inrespect of the Proposed National Instrument and the Proposed Companion Policy on behalf of their respective members.

Copies of the comment letters may be viewed at the office of Micromedia, 20 Victoria Street, Toronto, Ontario (416) 312- 5211 or (800) 387-2689; the office ofthe British Columbia Securities Commission, 1100-865 Hornby Street, Vancouver, British Columbia (604) 899-6500; the office of the Alberta SecuritiesCommission, 10025 Jasper Avenue, Edmonton, Alberta (403) 427-5201; and the office of the Commission des valeurs mobilières du Québec, Stock ExchangeTower, 800 Victoria Square, 17th Floor, Montréal, Québec.

The CSA have considered the comments received on the Proposed National Instrument and the Proposed Companion Policy in conjunction with makingNational Instrument 81-105 Mutual Fund Sales Practices (the "National Instrument") and Companion Policy 81-105CP Mutual Fund Sales Practices (the"Companion Policy"). The CSA thank all commenters for providing their comments on the Proposed National Instrument and the Proposed Companion Policy.The nature of the comments received indicates the care and thought given by industry participants to the issues addressed by the Proposed National Instrumentand the comments have been very helpful to the CSA in making the National Instrument and the Companion Policy.

The following is a summary of the comments received, together with the CSA's responses and, where applicable, the changes adopted by the CSA. As thechanges to the Proposed National Instrument and the Proposed Companion Policy were not material, the National Instrument and the Companion Policy are notsubject to a further comment period.

2. GENERAL COMMENTS

Most commenters on the Proposed National Instrument and the Proposed Companion Policy commented on specific provisions in these instruments and made nocomments that applied generally.

However, each of IFIC, the CBA and the IDA commented that members were appreciative of the changes to the Ontario Draft Rule the CSA made with theProposed National Instrument. In addition, these trade associations commended the CSA for agreeing to make a national rule to regulate mutual fund salespractices in a fashion consistent with the IFIC Code and the Ontario Draft Rule. IFIC noted that the Proposed National Instrument and the ProposedCompanion Policy were "in many ways, significantly closer" to the IFIC Code provisions and indicated its members' satisfaction with the responsiveness of theCSA to the issues raised by IFIC in connection with its comments on the Ontario Draft Rule and Ontario Draft Policy. The IDA made a similar comment, as didthe CBA.

IFIC urged the CSA to proceed quickly to resolve any remaining issues with a view to adopting a final national instrument in time for the 1998 RRSP salesseason. The CBA on the other hand indicated that they would like to see further discussion on the points they raised in their comment letter prior to a finalnational instrument being adopted. Staff of the Ontario Commission and representatives of the CBA have met to discuss the CBA's comments and the CSA haveagreed to outline their views in respect of tied selling practices in the Companion Policy to provide more of a context for and explanation of section 7.4 of theNational Instrument.

As outlined in the Notice of the National Instrument and the Companion Policy, each member of the CSA has made, or expects to make, the National Instrumentas a rule or a policy in their jurisdiction (depending whether they have rule- making powers) and the Companion Policy as a policy in their jurisdiction. Subjectto receiving applicable ministerial approvals where needed, the National Instrument and the Companion Policy are expected to come into force in all jurisdictionson May 1, 1998.

One individual commenter reiterated the comments made in his submissions on the Ontario Draft Rule and urged the CSA to ensure that there is "zero tolerance"for any "undisclosed independent advice skewing sales incentives and/or asset retention inducements". This commenter's central concern relates to his belief thatthe present "transaction/commission based" mutual fund industry "lacks the investment advice, financial planning and investment management disclosure systemsthat are needed to elevate mutual fund sellers on the scales of respect, trust and integrity that our society accords doctors, teachers and clergy". The CSA are ofthe view that by making the National Instrument and the Companion Policy, the CSA are indeed illustrating that there will be "zero tolerance" of improper salespractices in the mutual fund industry. The National Instrument and the Companion Policy, when coupled with appropriate compliance and enforcementmeasures by the CSA, will be very significant in ensuring that investors' interests are at the forefront of actions of industry participants.

III. COMMENTS ON PROVISIONS OF PROPOSED NATIONAL INSTRUMENT

Part 1 - Definitions, Interpretation and Application

Section 1.1 - definition of "member of the organization"

One commenter noted, as it had in its submission on the Ontario Draft Rule, that the term "member of the organization" was not intuitively easy to comprehendand suggested it be changed. The name of the term has not been changed; the CSA are not persuaded that any of the proposed alternatives, or any other possiblealternative, is any more intuitive than "member of the organization".

Section 1.2 - Interpretation

One commenter recommended, as it had in its submission on the Ontario Draft Rule, that the Proposed National Instrument be amended to define all relevantterms in the rule, rather than cross-referring to the meaning of terms defined in other instruments. The CSA have not changed the National Instrument in thisregard; to duplicate terms defined in NP39 would make the National Instrument unwieldy and more difficult to read. The approach used is also in conformitywith the approach adopted for other national instruments.

Section 1.3 - Application

The labour sponsored venture capital corporation ("LSVCC") commenters primarily argued that the Proposed National Instrument should be amended toexempt LSVCCs from the operation of section 2.1 of the Proposed National Instrument. The LSIF Association restricted its comments to the potential effect onthe LSVCC community of section 2.1 and purposefully did not address other aspects of the Proposed National Instrument, leaving it up to individual LSVCCs toso comment. The LSIF Association stated that, other than in respect of the application of section 2.1 of the Proposed National Instrument, "the fundamentalobjectives of the National Instrument, being the introduction of limitations on specific marketing and sales practices, can be fully embraced by the laboursponsored investment fund industry".

One LSVCC commenter, although its submission primarily relates to section 2.1 of the Proposed National Instrument, made submissions that the CSAconsidered to be general comments on whether the National Instrument can be properly applied to LSVCCs. The response to these comments is noted:

(1) Comment - In Ontario, Part XIV of the Regulation made under the Securities Act (Ontario) (the "LSIF Regulations"), which exempts LSVCCs from certainspecified policies and practices of the Ontario Commission as they relate to mutual funds, when coupled with certain sections of the Labour Sponsored VentureCapital Corporations Act, 1992 (Ontario) (now the Community Small Business Investment Funds Act) (the "LSIF Act") means that the Ontario Commission hasno authority to regulate the sales practices of LSVCCs. The Ontario government in making the regulations and by enacting the legislation recognized that,although LSVCCs were mutual funds, they were sufficiently specialized and different that they should not be subjected to much of the securities regulationapplicable to mutual funds.

Response - The Ontario Commission is of the view that the LSIF Regulations do not remove its ability to regulate the sales practices followed by LSVCCs andby participating dealers selling securities of LSVCCs. Nothing in the LSIF Act conflicts with the National Instrument and LSVCCs are not exempted by theLSIF Regulations from having to comply with the regulation covered by the National Instrument. In particular, the National Instrument is not regulationconcerning the "pricing, sale or redemption of securities of mutual funds"6. Other than the securities regulatory authorities of Manitoba and Quebec, the othermembers of the CSA consider that nothing in their legislation or other regulations, exempts LSVCCs from the application of the National Instrument. Thesecurities regulatory authorities in Manitoba and Quebec do not consider LSVCCs to be mutual funds in their respective jurisdictions although Manitoba intendsto issue a local instrument that makes LSVCCs in Manitoba subject to the Instrument.

(2) Comment - The Ontario Commission did not properly follow rule-making procedures in proposing that the Proposed National Instrument apply to LSVCCs.LSVCCs did not comment on the Ontario Draft Rule because they were not aware that the Ontario Draft Rule was intended to apply to LSVCCs; neither theNotice to the Ontario Draft Rule nor any provision of the Ontario Draft Rule mentioned its applicability to LSVCCs. LSVCCs were justified in believing that theOntario Draft Rule would not apply to them (despite the statements in the Ontario Draft Rule and the Notice to the Ontario Draft Rule that it applied to allpublicly offered mutual funds) due to the LSIF Regulations and by certain sections of the LSIF Act.

Response - The Ontario Commission notes that the Ontario Draft Rule clearly applied to all publicly offered mutual funds and that apart from the specificexemptions provided for in the LSIF Regulation and the application of the LSIF Act, the Ontario Commission and staff have consistently taken the position thatLSVCCs are mutual funds subject to applicable mutual fund regulation. By stating that the Ontario Draft Rule applied to publicly offered mutual funds, theOntario Commission put all such investment vehicles, including LSVCCs, on notice as to the proposed rules.

Part 2 - General

Section 2.1 - Restrictions on Payments or Provision of Benefits

The LSIF Association and the other LSVCC commenters urged the CSA to exempt LSVCCs from the application of section 2.1 which prohibits mutual fundsfrom paying out of fund assets the enumerated distribution costs. These commenters noted that the application of this section would cause severe disruption tothe operations of LSVCCs in that they would have to seek other methods of compensating participating dealers. Certain LSVCCs are "internally managed" anddo not have a third party manager or administrator that could bear these costs. These LSVCCs would find it impossible to alter their structure so as to complywith the rule. Those LSVCCs that have third party managers or administrators may find the rule equally disruptive since such managers or administrators wouldno doubt be obliged to raise management fees charged to the LSVCCs to cover the extra expense. Increasing management fees requires shareholder approval,which would take time, money and effort to seek and would not necessarily be obtained. The LSVCCs also emphasized the specialized and unique naturerecognized by the applicable provincial legislatures and their legislative purpose behind the establishment of the various LSVCC programs. Section 2.1 of theProposed National Instrument would be contrary to this legislative purpose, by, in effect, prohibiting the current legal and organizational structure for LSVCCs.

These commenters also made the comments noted under section 1.3 in connection with their objection to section 2.1 of the Proposed National Instrument.

The CSA have taken the above-noted comments into consideration and do not wish to unduly disrupt the current operations of LSVCCs. However, rather thanamending the National Instrument to provide a general exemption from section 2.1 for LSVCCs, the applicable members of the CSA that regulate LSVCCs asmutual funds, will consider granting an exemption to an LSVCC from the applicability of section 2.1, such exemption to take effect on the coming into force ofthe National Instrument. Any exemption granted will be granted on the condition that the other provisions of the National Instrument will be fully compliedwith.

Section 2.3 of the Companion Policy reiterates the applicability of the National Instrument to LSVCCs.

Part 3 - Permitted Compensation

Section 3.1 - Commissions

The CBA commented that the requirement to disclose the "method of calculation" of commissions should be deleted. The CBA was of the view that thisrequirement would result in disclosure of sensitive competitive information that would not be relevant information for investors. This provision was neverintended to require disclosure of the nature described by the CBA. The CSA have amended the Companion Policy in response to this comment to describe theCSA's expectations for disclosure of the method of calculation of commissions.

Section 3.2 - Trailing Commissions

The CBA made the same comment regarding disclosure of "method of calculation" of trailing commissions; the amendment to the Companion Policy describesthe CSA's expectations regarding this disclosure for trailing commissions.

Five commenters who are mutual fund managers reiterated the comments made on the Ontario Draft Rule in respect of the lack of a $100,000 asset thresholdfor payment of trailing commissions as is permitted by the IFIC Code. Neither IFIC nor the IDA repeated the comments concerning this issue made in theirsubmissions on the Ontario Draft Rule.

The five commenters again urged the CSA to reconsider the decision not to permit fund companies to impose a minimum asset threshold. These commentersmade arguments similar to those made in connection with the Ontario Draft Rule. The comments made and the response of the CSA to those comments aresummarized in the July Ontario Notice.

The commenters on the Proposed National Instrument emphasized four points that are in addition to, or an expansion on, the comments made on the OntarioDraft Rule.

(1) Smaller fund companies will be most affected by the rule, as proposed, for two reasons. The total dollar cost of having to increase the amount of trailingcommissions paid out will impact smaller fund managers to a greater extent. In addition, a dealer representative tends to have smaller aggregate client accountswith a smaller fund manager and, as such, the trailing commissions paid by the fund manager to the representative's dealer firm will be smaller and will tend notto be paid to the representative by the dealer due to the "grid system" for representative compensation maintained by dealer firms.

(2) The "grid system" for representative compensation maintained by dealer firms means that the trailing commissions paid to dealer firms by fund companies willnot be passed on to the representatives if those commissions are below a specified dollar amount. Accordingly an asset/sales threshold, in effect, exists at thedealer firm level.

(3) Fund companies pay trailing commissions to compensate representatives for the costs incurred by such representatives in providing on-going service to theirclients in connection with the clients' investments in the mutual funds managed by the fund companies. If the trailing commissions are not being passed on torepresentatives by the dealer firms, then the representatives are not being compensated for providing these services. Because of the effect of the compensationsystems in place in dealer firms, prohibiting an asset threshold for trailing commissions at the fund company level means that dealer firms will receive extracompensation from fund companies without providing any corresponding services, and representatives will not receive compensation intended to reimburse themfor their costs incurred in providing services.

(4) At an asset threshold of $100,000, the trailing commissions presently paid are so nominal that representatives are unlikely to sell purely to reach thethreshold and the commissions will not likely bias the advice given.

The CSA have carefully considered the comments made on this issue and have not changed their views or the reasons for their views from those articulated in theJuly Ontario Notice. However, the CSA wish to make known their concerns about compensation practices of participating dealers setting asset or salesthresholds for their representatives. Subsection 5.3(6) of the Companion Policy deals with these concerns.

Notwithstanding the CSA's decision to not change section 3.2 of the National Instrument to permit minimum asset thresholds, the CSA have changed theNational Instrument in response to a comment made on the Proposed National Instrument that was not made on the Ontario Draft Rule. The CSA also havechanged the Companion Policy to clarify the CSA's views in the area of trailing commissions in response to two commenters' questions that were not askedthrough the comments made on the Ontario Draft Rule.

Subsection 3.2(3) of the National Instrument and subsections 5.3(3),(4) and (5) of the Companion Policy are new and respond to the concerns raised in asubmission by a fund manager, which was formally endorsed by two other fund managers. These fund managers asked the CSA to clarify that the trailingcommissions rules contemplated by section 3.2 of the Proposed National Instrument were to apply only to trailing commissions paid on mutual fund securitiespurchased after the effective date of the National Instrument. The commenters indicated that not to clarify the effective date of these new rules would result inambiguity as to whether this regulation was intended to have retroactive effect and "thereby create a deferred commission". The commenters argued that"retroactivity would be unduly harmful to mutual fund managers". As outlined in subsection 5.3(3) of the Companion Policy, the CSA consider that the rulesproposed in section 3.2 of the Proposed National Instrument were not intended to retroactively affect existing compensation arrangements between mutual fundorganizations and participating dealers with respect to securities acquired before the effective date of the National Instrument. Prior to the effective date of theNational Instrument, participating dealers and their representatives and fund companies agreed to certain compensation arrangements. The CSA consider thatno justification exists for the National Instrument to disrupt these contractual arrangements that were entered into prior to the effective date of the NationalInstrument. Accordingly, subsection 3.2(3) of the National Instrument is designed to provide a limited transitional exception to the general requirements ofsection 3.2 of the National Instrument. The CSA note, as outlined in subsection 5.3(5) of the Companion Policy, that, of course, the National Instrument doesnot require fund companies to maintain asset thresholds in respect of trailing commissions payable on assets acquired prior to the effective date of the NationalInstrument.

Two commenters asked whether the CSA intended that fund managers be required to pay the same trailing commission to all participating dealers. The CSA arenot regulating commission payments in this way, and have added subsection 5.3(7) to the Companion Policy to clarify this matter. Another commenter askedwhether section 3.2 of the Proposed National Instrument permitted fund companies to make payments to different participating dealers at different times.Section 3.2 clearly permits different payment times, so long as the method of calculation and the time periods are the same for all participating dealers. The CSAconsider that section 3.2 of the National Instrument is clear in this regard and have not included a discussion on this matter in the Companion Policy.

Part 4 - Internal Dealer Incentive Practices

Section 4.1 - Participating Dealers' Practices

The IDA supported the change made by the CSA to section 4.1 of the Proposed National Instrument through the inclusion of subsection 4.1(2). However, theIDA requested that subsection 4.1(2) of the Proposed National Instrument be redrafted to conform to the explanation for this subsection contained in footnote31 to the Proposed National Instrument. The CSA consider that subsection 4.1(2) is clear, but have added section 6.1 to the Companion Policy in order that theexplanatory commentary contained in the former footnote 31 be continued in the formal regulatory instruments.

Section 4.2 - Principal Distributors' Practices

Several commenters commented that an exception similar to subsection 4.1(2) should be added to section 4.2 of the Proposed National Instrument. Thecommenters noted that the section should permit a principal distributor to pay its own sales force in a way that recognizes that other fund companies will paydifferent commissions. As stated in the July Ontario Notice, the CSA are of the view that the inherent conflicts of interest raised by a dealer selling proprietaryfunds as well as third party funds is best managed through a reasonable restriction on that dealer providing incentives to a representative that may cause thatrepresentative to make inappropriate recommendations. However, the CSA accept that further clarification is necessary to this section to explain what the CSAconsiders to be a reasonable restriction. The CSA also accept that an exception similar to subsection 4.1(2) of the National Instrument is necessary. Thechanges made to this section in the National Instrument respond to these comments and clarify the CSA's intentions.

Part 5 - Marketing and Educational Practices

Section 5.1 - Cooperative Marketing Practices

A group of fifteen independent mutual fund dealers requested the CSA in a collective submission to remove section 5.1 of the Proposed National Instrument andsubstitute a rule that would permit a so-called "dealer development allowance" to be paid to participating dealers by fund companies.

The independent mutual fund dealers argued that ensuring compliance with section 5.1 will be costly for dealers and managers alike and that regulators will notbe able to monitor or enforce compliance. These commenters asked that the CSA mandate a prescribed maximum amount that could be paid by fund managersas a dealer development allowance. Dealers would not be restricted in how they used the monies paid under a dealer development allowance. An alternative ruleof this nature would be simple to understand and administer and compliance would be easier to monitor.

The IDA also voiced its concerns with section 5.1 and the practice of payment of cooperative marketing expenses by fund companies. The IDA indicated that"the IDA has consistently taken the view that the practice of co-operative marketing in support of mutual fund distribution should be discontinued. In theinterest of a level playing field, the industry has not taken unilateral action on this issue, and believes that such a rule should only come into force at a time whenit will apply to all parties. It is the Association's preference that co-operative marketing practices be entirely prohibited".

As outlined in the July Ontario Notice, the CSA continued the Ontario Commission's approach of regulating sales practices as much as possible in a fashionconsistent with the IFIC Code. The CSA noted in the July Ontario Notice that Commissioner Glorianne Stromberg recommended a complete prohibition on thepractice of cooperative marketing. Had the CSA not made a decision to make rules regulating cooperative marketing practices consistent with the IFIC Codeapproach to the sales practice, the CSA may have proposed different rules. At this time however, the CSA are not prepared to prohibit cooperative marketingpractices or to provide for a CSA prescribed dealer development allowance in lieu thereof.

IFIC asked the CSA to amend section 5.1 of the Proposed National Instrument to permit representatives to seek reimbursement of marketing costs covered bythe section directly from fund companies, subject to appropriate monitoring by the dealer firms. IFIC suggested that since it is "standard industry practice" forrepresentatives to pay marketing costs directly, the representatives should be able to seek reimbursement from fund companies directly. The CSA have not madethis change. Ensuring separation between representatives and fund companies so that appropriate monitoring and supervision of representatives can bemaintained and so that representatives are not inappropriately influenced through the provision of sales incentives by fund companies is a central and fundamentalprinciple that runs throughout the National Instrument.

The CSA have added two interpretative provisions to the Companion Policy in response to comments from the IDA and from IFIC, both in respect ofcooperative marketing.

The IDA asked for clarification of paragraph 5.1(c) of the Proposed National Instrument and for assurance that a participating dealer could set up non-headoffice level monitoring of cooperative marketing claims. Subsection 7.2(2) of the Companion Policy states that the CSA consider that paragraph 5.1(c) of theNational Instrument does not require a participating dealer to set up head office level procedures to deal with cooperative marketing requests. Subsection 7.2(2)of the Companion Policy also responds to a comment contained in the IDA submission in that the CSA will not object to participating dealers directing fundcompanies to pay otherwise permitted cooperative marketing expenses directly to suppliers of participating dealers. The IDA also asked that the CSA mandatethe use of a certain industry developed form in connection with cooperative marketing expenses. The CSA have not mandated this use of a form; instead, theCSA expect that the industry will take whatever steps, including the use of appropriate forms, participants feel necessary to ensure compliance with section 5.1of the National Instrument.

IFIC asked for clarification of what the CSA would consider appropriate compliance with the requirement in paragraph 5.1(e) of the National Instrument todisclose, in writing, the identity of those paying for a sales communication or investor seminar. Subsection 7.3(3) of the Companion Policy articulates theCSA's view that the requirement to make written disclosure of the identity of those paying for a sales communication or the costs of an investor seminar is notmet through the mere insertion of a fund company logo; the disclosure should clearly identify names and state that those named entities are paying for a portionof the costs.

Section 5.2 - Mutual Fund Sponsored Conferences

Several commenters recommended changes to paragraphs 5.2(b) and (c) of the Proposed National Instrument.

IFIC and one other commenter asked that paragraph 5.2(b) of the Proposed National Instrument be deleted as an unnecessary restriction that does not recognizelegitimate business relationships between fund companies and dealer representatives. These commenters suggested that the rule, as drafted, could mean that fundcompanies would find themselves holding educational conferences for uninterested or inappropriate dealer representatives. Paragraph 5.2(b) of the NationalInstrument carries forward a central theme of the National Instrument, namely that fund companies deal with dealer firms and not directly with representatives;the CSA have not amended the National Instrument in this regard. However, the CSA have added subsection 7.3(2) to the Companion Policy. This subsectiondescribes that paragraph 5.2(b) of the National Instrument would not prevent fund companies from organizing events that are tailored to the interests ofparticular categories of representatives and advising the dealer of the nature of those events. Identifying or contacting specific representatives would not bepermitted.

Several commenters disagreed with the restriction on the geographic location of mutual fund sponsored conferences contained in paragraph 5.2(c) of theProposed National Instrument. Two commenters asked that the restriction be deleted entirely and argued that if the other restrictions provided for in section 5.2were adhered to the location of the conference would be irrelevant and neutral. On the other hand, two commenters, including IFIC, acknowledged the CSA'sconcern about the locale for mutual fund sponsored conferences, even where, as required by section 5.2, mutual fund companies are not paying any of the travelor accommodation costs of representatives. One commenter noted that it supported the principal that fund companies should not host conferences in exoticlocales such as Hawaii and the Caribbean. IFIC acknowledged that "there may be a legitimate concern in preventing trips to exotic destinations chosen solelybecause they are out of the normal routine".

Commenters, including IFIC, asked that if the restriction were not deleted entirely, exceptions should be provided in the National Instrument for so-called "duediligence" trips organized by fund managers to international locations, either to permit representatives to review the operations of third party portfolio managersat that location or to experience international markets first-hand.

The CSA have accepted IFIC's and the other commenters' recommendation that the National Instrument permit fund managers to organize due diligence trips tointernational locations where a fund's portfolio adviser is located and carries out the portfolio management for the fund. Subparagraph 5.2(c)(iii) of the NationalInstrument has been added as a limited exception to the general restriction on the location for such conferences. The CSA are not prepared at this time topermit more wide-ranging due diligence trips to international locations whereby fund managers would allow representatives to be exposed to the internationalcapital markets as requested by one commenter. Section 7.5 of the Companion Policy has been added to clarify the CSA's view on the meaning of the word"location" as used in the above noted limited exception.

One commenter asked for clarification whether the CSA consider Alaska to form part of the continental United States. The CSA are of the view that it does.

Section 5.3 - Third Party Sponsored Educational Events

IFIC, and one other commenter, noted an apparent inconsistency between the permission given fund companies in section 5.3 of the Proposed NationalInstrument to pay the registration fees incurred by dealers or their representatives in taking educational courses and the prohibition contained in subsection 5.4(1)of the Proposed National Instrument against fund companies paying costs incurred in connection with seminars, conferences and courses organized by IFIC, theIDA or other trade association. The CSA did not intend this result and accordingly have amended section 5.4(1) of the National Instrument to give precedenceto the rule contained in section 5.3 of the National Instrument.

IFIC also asked that section 5.4 of the Proposed National Instrument be amended to permit industry participants to pay for the costs incurred by IFIC affiliates inconnection with the provision of seminars and conferences. The CSA have so amended section 5.4 in the National Instrument and have included a similaramendment to permit industry participants to pay the costs incurred by IDA affiliates.

Section 5.5 - Participating Dealer Sponsored Events

Two comments were made regarding the restriction on the geographic location for dealer sponsored events contained in paragraph 5.5(e) of the ProposedNational Instrument. IFIC made the same comments as noted above under the summary of comments made on section 5.2 of the Proposed National Instrument.The other commenter urged that the location restriction be removed in favour of a per person dollar limit for the costs of organizing a conference. Thecommenter noted that it could be more expensive and involve longer travel time to travel to resorts located in the continental United States than locations in theCaribbean and Mexico. The commenter suggested that the restriction could be viewed as an unauthorized interference with international trade or as contrary tothe North American Free Trade Agreement.

The CSA are not regulating all conferences held by a dealer for its own representatives; but only those conferences where the dealer is seeking monetarycontributions from fund companies. The CSA consider that section 5.5 of the National Instrument is an appropriate restriction on the ability of Canadian dealersto seek reimbursement from Canadian mutual fund companies for their costs of holding conferences for their Canadian based representatives. The CSA are notmaking rules that infringe upon international trade or that prevent free trade between the signatories to the North American Free Trade Agreement.

The CSA analysis outlined above concerning the need for a geographic restriction for mutual fund sponsored conferences is applicable to the geographic locationrestriction for participating dealer sponsored conferences. The CSA have made the same limited exception as described above to permit dealers to seekreimbursement (subject to the percentage limits set out in paragraphs 5.5(b) and (c) of the National Instrument) from fund companies in respect of due diligencetrips to international locations where fund portfolio advisers are located.

Section 5.6 - Promotional Items and Business Promotion Activities

One individual commenter again urged the CSA, as he did in his submissions on the Ontario Draft Rule, to restrict the provision of promotional items andpromotional activities by fund companies, noting that these items and activities constitute "investorism integrity abusing mutual fund sales incentive/assetretention enhancing inducements". The commenter suggested that the CSA review the Canadian Medical Association's Code of Ethics and its 1994 PolicySummary entitled "Physicians and the Pharmaceutical Industry" before finalizing the Proposed National Instrument and in particular before adopting section 5.6of the Proposed National Instrument. The commenter gave an example of a particular fund company's "asset retention inducement" he believed wasinappropriate and was made available to representatives in 1996. As outlined in the July Ontario Notice, the CSA continue to be of the view that the regulatoryapproach set out in section 5.6 of the National Instrument is appropriate for the mutual fund industry at this time but will monitor sales practices in this regard.

Part 6 - Portfolio Transactions

Section 6.1 - Reciprocal Commissions and Portfolio Transactions

IFIC again asked, as it did in its submission on the Ontario Draft Rule, that section 6.1 of the Proposed National Instrument be amended to contemplatepermission for fund companies and dealers to carry out "necessary communications" concerning portfolio transactions. The CSA have not amended section 6.1of the National Instrument in this regard, but have added subsection 8.1(2) to the Companion Policy to ensure that the CSA's views in connection with thiscomment as set out in the July Ontario Notice are carried forward into the formal regulatory instruments.

Part 7 - Other Sales Practices

Section 7.1 - Commission Rebates

IFIC again asked, as it did in its submission on the Ontario Draft Rule, that the obligation to obtain a client's written consent before an applicable redemption ofsecurities as required by subsection 7.1(1) of the Proposed National Instrument be deleted. It noted that clients tend to resist having to provide written consentto transactions. The CSA have not deleted this requirement; written consent is essential in ensuring that a client understands the implications of the applicableredemption transaction.

One commenter pointed out the "logical impossibility" of disclosing the precise amount of redemption fees being paid for and to be paid upon redemption of thesecurities being acquired, prior to the purchase taking place. The CSA have amended subsection 7.1(2) of the National Instrument to require disclosure of areasonable estimate of these amounts. The CSA have also included section 9.1 of the Companion Policy in response to this commenter's request for anexplanation as to the CSA's expectations for the tax disclosure required to be given under subsection 7.1 (2) of the National Instrument.

IFIC's submission as well as two submissions from mutual fund dealers urged the CSA to delete the restrictions contained in section 7.1 of the Proposed NationalInstrument on a participating dealer and its representatives paying a commission rebate to a client where the participating dealer is a member of the organizationof a mutual fund and the client is switching into a fund within the mutual fund family of that fund organization. These commenters argued that the restriction isnot reflective of reality and unfairly imposes a financial burden upon clients who wish to switch to the sponsored products from other mutual fund products. Onecommenter suggested that the rule be changed to restrict sales by representatives on a commission rebated basis to certain defined limits. The other commentersuggested the rule be changed to permit commission rebates by representatives without restriction, so long as the representative is not being reimbursed for thepayment by the related fund organization. This commenter's submission is largely based upon the assumption that a representative is largely uninfluenced by hisor her related fund organization whether or not to recommend a sponsored product over a third party sponsored product and to decide whether or not to offer acommission rebate to a client.

The CSA continue to have policy concerns about members of a fund organization, including dealer and representative members of that fund organization,providing an incentive to a client by way of a commission rebate, to switch investments into sponsored products. Subsection 7.1(3) of the National Instrumentprohibits a fund organization from directly making these commission rebates; the CSA see no difference in the policy rationale for such a prohibition when thecommission rebate is being made, not by the fund organization directly, but by a representative or a participating dealer that is a member of that fundorganization. Notwithstanding the arguments made in the above submissions, the CSA are of the view that it is not unrealistic to assume that a participatingdealer and its representative may be influenced by the related fund organization to recommend switches to sponsored products. The CSA wish to remove anypotential for concern that investors will agree to such a switch due to the financial incentive represented by a commission rebate when the switch is notnecessarily in the client's best interests.

The CSA have not changed section 7.1 to accommodate these submissions, but point out they will consider granting relief to provide an exemption for anyindustry participant that demonstrates that its operations are such that the policy concerns articulated above are minimized.

One commenter stated that section 7.1 should not prohibit a representative from paying a rebate on a redemption when the client is liquidating his portfoliowithout buying any other mutual fund securities. The CSA note that section 7.1 will not prohibit the payment of a rebate on such redemptions as section 7.1only applies on redemptions occurring in connection with the purchase of other mutual fund securities.

Section 7.3 - Charitable Donations

The CBA asked that section 7.3 of the Proposed National Instrument be amended to permit charitable donations between affiliates, as is permitted by section 7.2of the Proposed National Instrument in connection with the provision of financial assistance. The CSA have amended section 7.3 of the National Instrument torespond to this comment in order not to interfere with intercorporate funding issues that do not raise regulatory concerns about inappropriate sales practices.

Section 7.4 - Tied Selling

The CBA and one other financial institution affiliate mutual fund manager commented on section 7.4 of the Proposed National Instrument. The CBA asked thatthe CSA "withhold" the effective date of section 7.4 in order to facilitate further discussions between the CSA and the industry on this section. The CBA notedthat in their view, a legislative approach to tied selling (in the nature of section 7.4) should only be considered where there is clear evidence of continuinginvestor protection problems with tied selling practices and where industry developed solutions do not work. It pointed out that it was working on an industrystatement on tied selling and a program of self-regulation in response to a federal government proposal to amend the Bank Act to regulate loan-making practicesof financial institutions. The CBA and the other commenter also noted that they were very concerned about the meaning of the words "or on terms that appearto be a reasonable person to be a condition" contained in section 7.4 of the Proposed National Instrument. The commenters were of the view that this test was"unworkable" in practice and failed to provide certainty to persons packaging products for customers.

The CSA have added section 9.2 of the Companion Policy to describe their views on the nature of the tied selling activities being regulated by section 7.4 of theNational Instrument. This section is provided to give guidance to industry participants as to the CSA's intentions regarding the scope of section 7.4. Thissection carries forward the CSA's views described in the July Ontario Notice that the CSA accept legitimate "relationship pricing", but that the CSA remainconcerned about the potential for coercion in connection with the provision of services related to the sale of mutual fund securities. Staff of the OntarioCommission discussed this approach with representatives of the CBA. Although the CBA has not altered its primary position, namely that section 7.4 should beremoved from the National Instrument, it confirmed the usefulness of an explanation as to the CSA's views in the Companion Policy.

Part 8 - Prospectus and Point of Sale Disclosure

Section 8.1 - Disclosure of Sales Practices

The CBA, IFIC and another commenter asked that the CSA clarify the expectations as to the disclosure to be provided under section 8.1 of the ProposedNational Instrument. In particular these commenters asked for clarification that the requirement to include a "complete description" in a mutual fund'sprospectus of compensation payable and sales practices followed would not necessitate disclosure concerning the compensation payable by parties other than themutual fund's fund organization or the sales practices followed by the mutual fund's fund organization in respect of other securities. Section 8.1 of the NationalInstrument is clearly intended to require disclosure of compensation payable and sales practices followed by a mutual fund's fund family in connection with thedistribution of that fund's securities. The CSA have added appropriate clarifying words to section 8.1 in the National Instrument to ensure that the scope of thissection is properly understood.

IFIC and the CBA again asked that the National Instrument contain transitional provisions so that fund companies would not be immediately required to amendprospectuses to comply with section 8.1 of the National Instrument. The CSA appreciate the concerns raised, and although they are of the view that the requireddisclosure is important and is in large part now being provided in fund prospectuses, have added section 10.2 to the National Instrument to respond to thiscomment.

Section 8.2 - Disclosure of Equity Interests

One commenter outlined the extreme difficulty its organization would be subject to if section 8.2 of the Proposed National Instrument remained as drafted havingregard to the fact that over 300 individual representatives associated with that organization have equity interests (as defined) in members of the organization ofthe relevant mutual fund family. The CSA have re-considered the objectives for the disclosure contemplated by subsection 8.2(1) of the National Instrument andhave amended that section to require disclosure of equity interests held by representatives of participating dealers in members of a fund organization that are notpublic companies on a collective basis and not individually. A mutual fund is required, however, to disclose the equity interests held by any representative thatholds more than 5 percent of the outstanding shares of a non-public member of a fund organization. The CSA have not changed the requirement that anindividual representative must disclose his or her equity interest in a member of the organization of a mutual fund in the disclosure document contemplated to beprovided to purchasers under subsection 8.2(3) of the National Instrument.

Section 10.1 of the Companion Policy has been added to further clarify the disclosure requirements of section 8.2 of the National Instrument.

Section 8.3 - Disclosure Requirements If No Prospectus or Simplified Prospectus

IFIC again recommended, as it did in its submission on the Ontario Draft Rule, that section 8.3 of the Proposed National Instrument be deleted. IFIC noted thatit could not see the policy rationale for requiring disclosure of sales practices for mutual fund securities being distributed under a prospectus exemption,particularly when arguably more important information is not required to be disclosed under applicable securities legislation. The CSA have retained section 8.3in the National Instrument. The potential for conflicts of interest associated with the sales practices used in exempt mutual fund transactions is sufficientlyserious and in reality no different from public transactions (that is, those carried out under a prospectus) that the requirement for the disclosure provided for inthis section remains appropriate.

IV. COMMENTS ON PROVISIONS OF THE PROPOSED COMPANION POLICY

Part 2 - General Discussion of the Instrument

Section 2.1 - Background

IFIC asked that the chronology of events described in section 2.1 of the Proposed Companion Policy refer to the 1991 code of sales practices developed by IFIC.The CSA have included this reference in section 2.1 of the Companion Policy.

Section 2.2 - General Purpose of the Instrument

IFIC asked that paragraph 2.2(2)(b) of the Proposed Companion Policy be redrafted to read "a participating dealer and its representatives have a primaryobligation to act in the best interests of the clients". The CSA have made this drafting change.

Part 4 - Discussion of Certain Aspects of Part 2 of the Instrument

Section 4.2 - Non-Monetary Benefits

IFIC asked that the word "normal" be deleted from subsection 4.2(3) of the Proposed Companion Policy. The CSA have made this drafting change.

IFIC also asked that subsection 4.2(5) of the Proposed Companion Policy be deleted. IFIC argued that fund companies should be able to provide dealerseducational software in any form. IFIC pointed out that it was "incongruous" that the Proposed National Instrument permits fund companies to pay theregistration fees incurred by dealers in connection with the attendance of representatives at educational courses, but the CSA does not permit educationalsoftware to be given to dealers. The CSA have not made this change. Software that does not fall within the parameters described in subsections 4.2(4) and (6)of the Companion Policy, and could not be considered a business promotional item of minimal value in accordance with section 5.6 of the National Instrument,would likely be a non-monetary benefit and therefore not permitted under the National Instrument.

Part 6 - Marketing and Educational Practices [now Part 7 of the Companion Policy]

Section 6.3 - Mutual Fund Sponsored Conferences [now section 7.3 of the Companion Policy]

Two commenters urged the CSA to delete subsection 6.3(2) of the Proposed Companion Policy. Subsection 6.3(2) of the Proposed Companion Policy wasintended to remind fund companies that section 5.2 of the Proposed National Instrument did not permit a fund company to invite a guest of a representative to amutual fund sponsored conference. The CSA have deleted this provision from the Companion Policy, on the basis that section 5.2 of the National Instrumentrequires attendees at fund sponsored conferences to pay their own travel, accommodation and personal incidental expenses. Section 5.2 of the NationalInstrument does not permit fund organizations to directly invite representatives or guests of representatives. The CSA considers that attendees at mutual fundconferences should be free to travel with their guests, provided that no costs associated with guest travel are paid for by the fund organizations. A discussion inthe Companion Policy as to the CSA's views on guests of attendees is not necessary.