Notice of Proposed Amendment: OSC Rule - 14-501 - Local Definitions

Request for Comment OSC Rule

December 4, 1998

NOTICE OF AMENDMENT TO RULE 14-501
UNDER THE SECURITIES ACT DEFINITIONS

Notice of Amendment

The Commission has, under section 143 of the Securities Act (the "Act") amended Rule14-501 Definitions (the "Amendment").

The Amendment and the material required by the Act to be delivered to the Minister ofFinance were delivered on December 2, 1998. If the Minister does not approve theAmendment, reject the Amendment or return it to the Commission for further consideration,the Amendment, other than paragraphs 1.1(1)(b), (d) and (i), will come into force onFebruary 15, 1998. If the Minister approves the Amendment, the Amendment, other thanparagraphs 1.1(1)(b), (d) and (i), will come into force 15 days after it is approved.Paragraphs 1.1(1)(b), (d), and (i) will come into force on the same date that amendmentsadding the terms contained in those paragraphs to National Instrument 14-101 Definitionscome into force.

Substance and Purpose of Amendment

Rule 14-501 Definitions (the "Rule") came into force on July 29, 1997 ((1997), 20 OSCB4054). Rule 14-501 was made in order to provide a consistent approach to interpretationof terms used in more than one rule, used in the Securities Act (the "Act") and a rule orused in the Regulation and a rule. The Rule also provides a framework of terms thedefinitions of which the Commission has agreed upon for use in future rules. At the timeRule 14-501 was published for comment, the Commission indicated that the Rule wasexpected to be amended from time to time to add definitions of new terms that meet thecriteria for inclusion in the Rule. The purpose of the Amendment is to amend or deletecertain terms contained in Rule 14-501 and to add others to Rule 14-501 as a result of themaking of other rules.

Summary of Amendment

The amendments to Rule 14-501 are contained in subsection 1.1(1) of the amendment.That subsection contains the terms being added to the Rule, amended or deleted. Someof the more material amendments are as follows:

1. The definition of "contractual right of action" is being amended to extend thecontractual right of action to any seller of securities and to extend the time periodfor exercise from 90 days to 180 days.

2. The definition of "offering memorandum" is being amended to delete references toparticular prospectus exemptions. Instead, it now refers to documents delivered inconnection with prospectus exemptions under Ontario securities law. If acontractual right of action is to be required in connection with the use of anexemption, that requirement will be imposed in a particular rule. In that regard, theCommission notes that when this definition comes into force, a disclosure documentdelivered in connection with Rule 45-504 Prospectus Exemption for Distribution ofSecurities to Portfolio Advisers on Behalf of Fully Managed Accounts may comewithin the definition of offering memorandum, in which case the prospectusexemption in that Rule will only be available if a contractual right of action isprovided.

3. Definitions of "future-oriented financial information" and "non-redeemableinvestment fund" have been added for the purposes of the Act, the regulation andthe rules.

Summary of Written Comments Received by the Commission

The Commission received two comments on the proposed Amendment. The commentersare listed in Schedule A to this Notice.

The first commenter commented on clause (f) of the definition of "contractual right ofaction". That clause provided that the "contractual right of action" may be subject todefences available under subsection 130(2) of the Act. The commenter suggestedrevising clause (f) to read as follows:

"reasonably corresponds to the rights provided in section 130 of the Act applicableto a prospectus and may be subject to any applicable defences or limitationsavailable under that section."

The commenter thought that the existing clause was too narrow.

The Commission agrees with the commenter and has made the change. This change isconsistent with proposed amendments to the Act, which were published at (1998), 21OSCB 5149.

That commenter also commented on the definition of "executive officer". The commentersuggested that a clause (f) be inserted before the words "any other person" and that thewords "on a full time basis" be inserted after the words "other person performed a policy-making function." The commenter indicated that the first suggestion is a drafting commentthat clarifies the interpretation of the definition. The second suggestion is intended toexclude any person who might occasionally provide advice in the nature of "policy-making".

The Commission has made the first change suggested, but not the second. TheCommission does not feel that making the change suggested is appropriate in a generaldefinition rule setting out terms for other rules. If in the context of a particular rule it isnecessary to make the distinction suggested, the Commission will do so in that rule.

The second commenter commented on the definition of "principal shareholder". Thecommenter felt that the definition may have the unintended effect of designating acustodian as a principal shareholder of an issuer if the custodian is the registered ownerof more than 10 percent of any class or series of voting securities. In the commenter'sview, unless the custodian also exercises voting control over those securities, thecustodian should not be considered a principal shareholder.

The Commission agrees with the commenter and has removed the reference to registeredowner in the definition.

Text of Amendment

The text of the amendment follows.

December 4 , 1998.

AMENDMENT TO
ONTARIO SECURITIES COMMISSION RULE
RULE 14-501DEFINITIONS

PART 1 AMENDMENTS

1.1 Amendments

(1) Rule 14-501 Definitions is amended by

(a) deleting the definition of "contractual right of action" insubsection 1.1(2) and replacing it with the following:

"contractual right of action" means a right of action forrescission or damages, that

(a) is against an issuer if it is selling securities,

(b) is against a selling securityholder,

(d) is available to an investor to whom an offeringmemorandum containing a misrepresentation isdelivered by or on behalf of the seller of securities,

(e) is exercisable on notice against the person or companythat granted the right of action not later than 180 daysafter payment is made for the securities or after theinitial payment, if a payment subsequent to the initialpayment is made under a contractual commitmentassumed before, or at the same time as, the initialpayment,

(f) reasonably corresponds to the rights provided insection 130 of the Act applicable to a prospectus andmay be subject to any applicable defences orlimitations available under that section, and

(g) includes a provision stating that the right is in additionto any other right or remedy available at law to theinvestor;

(b) deleting the definition of "equity security" in subsection 1.1(2);

"executive officer" means an individual who is or atany time during the most recently completed financialyear was (a) a chair of the issuer, if that individualperformed the functions of the office on a full timebasis, (b) a vice-chair of the issuer, if that individualperformed the functions of the office on a full timebasis, (c) the president of the issuer, (d) a vice-president of the issuer in charge of a principal businessunit, division, or function such as sales, finance, orproduction, (e) an officer of the issuer or any of itssubsidiaries who performed a policy-making functionin respect of the issuer, or (f) any other person whoperformed a policy-making function in respect of theissuer;

(d) deleting the definition of "issuer bid" in subsection 1.1(2);

(e) deleting the definition of "offering memorandum" insubsection 1.1(2) and replacing it with the following:

"offering memorandum" means a document purportingto describe the business and affairs of an issuer thathas been prepared primarily for delivery to and reviewby a prospective purchaser so as to assist theprospective purchaser to make an investment decisionfor a security being sold in a distribution to whichsection 53 of the Act would apply but for theavailability of one or more of the exemptionscontained in Ontario securities law but does notinclude a document setting out current informationabout an issuer for the benefit of a prospectivepurchaser familiar with the issuer through priorinvestment or business contacts;

(f) deleting the definition of "portfolio manager" in subsection1.1(2);

(g) deleting the definition of "principal shareholder" in subsection1.1(2) and replacing it with the following:

"principal shareholder", if used to indicate arelationship with a person or company, means a personor company that is the direct or indirect beneficialowner of or exercises control or direction over morethan 10 percent of any class or series of votingsecurities of the person or company;

(h) adding the following definition to subsection 1.1(2) after thedefinition of "selling group member":

"special relationship", when used in reference to aperson or company in a special relationship with areporting issuer, shall be interpreted in accordancewith subsection 76(5) of the Act;

(i) deleting the definition of "take-over bid" in subsection 1.1(2);

(j) adding the following definitions to subsection 1.1(3) after thedefinition of "derivative":

"future-oriented financial information" has the meaningascribed to the term "FOFI" in National Instrument52-101 Future-Oriented Financial Information; and

"non-redeemable investment fund means an issuer

(a) whose primary purpose is to invest moneyprovided by its securityholders;

(b) that does not invest for the purpose ofexercising effective control, seeking toexercise effective control, or being activelyinvolved in the management of the issuers inwhich it invests, other than other mutual fundsor non-redeemable investment funds; and

PART 2 EFFECTIVE DATE

2.1 Effective Date

(1) This Rule, other than paragraphs 1.1(1)(b), (d) and (i), comes intoforce on the date specified by the Act.

(2) Paragraphs 1.1(1)(b), (d) and (i) come into force on the date thatamendments to National Instrument 14-101 Definitions adding theterms contained in those paragraphs to the National Instrument comeinto force.

SCHEDULE A
NOTICE OF AMENDMENTS TO
ONTARIO SECURITIES COMMISSION RULE 14-501
DEFINITIONS
LIST OF COMMENTERS

1. Osler, Hoskin & Harcourt by letter dated July 9, 1998.

2. Canadian Bankers Association by letter dated August 4, 1998.