Notice and Proposed Amendment: OSC Rule - 14-501 - Local Definitions
Notice and Proposed Amendment: OSC Rule - 14-501 - Local Definitions
NOTICE OF PROPOSED AMENDMENT TO RULE 14-501
UNDER THE SECURITIES ACT
DEFINITIONS
Substance and Purpose of Proposed Amendment
Rule 14-501 Definitions (the "Rule") came into force on July 29, 1997 ((1997), 20 OSCB 4054). Rule 14-501 was made inorder to provide a consistent approach to interpretation of terms used in more than one rule, used in the Securities Act (the"Act") and a rule or used in the Regulation and a rule. The Rule also provides a framework of terms the definitions of whichthe Commission has agreed upon for use in future rules. At the time Rule 14-501 was published for comment, theCommission indicated that the Rule was expected to be amended from time to time to add definitions of new terms that meetthe criteria for inclusion in the Rule. The purpose of the proposed amendment is to amend or delete certain terms containedin Rule 14-501 and to add others to Rule 14-501 as a result of the making of other rules.
Summary of Proposed Amendment
The amendments to Rule 14-501 are contained in subsection 1.1(1) of the proposed amendment. That subsection containsthe terms being added to the Rule, amended or deleted. Some of the more material amendments are as follows:
1. The definition of "contractual right of action" is being amended to extend the contractual right of action to any seller ofsecurities and to extend the time period for exercise from 90 days to 180 days.
2. The definition of "offering memorandum" is being amended to delete references to particular prospectus exemptions.Instead, it now refers to documents delivered in connection with prospectus exemptions under Ontario securities law. If acontractual right of action is to be required in connection with the use of an exemption, that requirement will be imposed in aparticular rule. In that regard, the Commission notes that when this definition comes into force, a disclosure documentdelivered in connection with Rule 45-504 Prospectus Exemption for Distribution of Securities to Portfolio Advisers onBehalf of Fully Managed Accounts may come within the definition of offering memorandum, in which case the prospectusexemption in that Rule will only be available if a contractual right of action is provided.
3. Definitions of "future-oriented financial information" and "non-redeemable investment fund" have been added for thepurposes of the Act, the regulation and the rules.
Authority for the Proposed Amendment
The proposed amendment contains no substantive provisions and only sets out terms that are used in other rules or aredefined for the purposes of the Act, the regulation and the rules. The proposed amendment derives its authority from theindividual heads of authority relating to the rules in which the terms defined in the Rule are used. The definition of"future-oriented financial information" and "non-redeemable investment fund" in the proposed amendment to the Rule alsoderive their authority from subsection 1(1.1) of the Act which provides that for the purposes of the Act, the regulations andthe rules, "future-oriented financial information" and "non-redeemable investment fund" may be defined in the regulations orthe rules and if so defined shall have the defined meanings.
Subsection 143(1) of the Act provides the Commission with authority to make rules in which the terms defined in the Rulewill be used.
Alternatives Considered
No alternatives to the proposed amendment were considered.
Unpublished Materials
In proposing this amendment, the Commission has not relied on any significant unpublished study, report or other writtenmaterial.
Anticipated Costs and Benefits
The proposed amendment does not impose any costs. It is expected to provide a benefit to investors, industry participantsand others by providing more certainty on the application and interpretation of terms used in rules by the Commission.
Regulations to be Amended
The proposed amendment does not require any regulation to be amended.
Comments
Interested parties are invited to make written submissions with respect to the proposed amendment. Submissions receivedby July 9, 1998 will be considered.
Submissions should be made in duplicate to:
A diskette containing the submissions (in DOS or Windows format, preferably Word Perfect) should also be submitted. Asthe Securities Act requires that a summary of written comments received during the comment period be published,confidentiality of submissions received cannot be maintained.
Questions may be referred to either of:
Proposed Amendment
The text of the proposed amendment follows, together with footnotes that are not part of the proposed amendment but havebeen included to provide background and explanation.
DATED: April 10, 1998
ONTARIO SECURITIES COMMISSION RULE
RULE 14-501
DEFINITIONS
1.1 Amendments
(1) Rule 14-501 Definitions is amended by
(a) deleting the definition of "contractual right of action" in subsection 1.1(2) and replacing it with the following:
"contractual right of action" means a right of action, that
(a) is against an issuer if it is selling securities,
(b) is against a selling securityholder (1),
(c) is against an issuer and selling securityholder if they are both selling securities,
(d) is available to an investor to whom an offering memorandum containing a misrepresentation is delivered by or on behalfof the seller of securities,
(e) is exercisable on notice against the person or company that granted the right of action not later than 180 (2) days afterpayment is made for the securities or after the initial payment, if a payment subsequent to the initial payment is made under acontractual commitment assumed before, or at the same time as, the initial payment,
(f) reasonably corresponds to the rights provided in section 130 of the Act applicable to a prospectus (3) and may be subjectto defences available under subsection (2) of that section, (4) and
(g) includes a provision stating that the right (5) is in addition to any other right or remedy available at law to the investor;
(b) deleting the definition of "equity security" in subsection 1.1(2) (6);
(c) adding the following definition to subsection 1.1(2) after the definition of "custodian":
"executive officer" means an individual who is or at any time during the most recently completed financial year was (a) achair of the issuer, if that individual performed the functions of the office on a full time basis, (b) a vice-chair of the issuer, ifthat individual performed the functions of the office on a full time basis, (c) the president of the issuer, (d) a vice-president ofthe issuer in charge of a principal business unit, division, or function such as sales, finance, or production, or (e) an officer ofthe issuer or any of its subsidiaries who performed a policy-making function in respect of the issuer or any other person whoperformed a policy-making function in respect of the issuer (7);
(d) deleting the definition of "issuer bid" in subsection 1.1(2) (8);
(e) deleting the definition of "offering memorandum" in subsection 1.1(2) and replacing it with the following:
"offering memorandum" means a document purporting to describe the business and affairs of an issuer that has beenprepared primarily for delivery to and review by a prospective purchaser so as to assist the prospective purchaser to make aninvestment decision for a security being sold in a distribution to which section 53 of the Act would apply but for theavailability of one or more of the exemptions contained in Ontario securities law (9) but does not include a document settingout current information about an issuer for the benefit of a prospective purchaser familiar with the issuer through priorinvestment or business contacts;
(f) deleting the definition of "portfolio manager" (10) in subsection 1.1(2);
(g) deleting the definition of "principal shareholder" in subsection 1.1(2) and replacing it with the following:
"principal shareholder", if used to indicate a relationship with a person or company, means a person or company that is thedirect or indirect registered owner or beneficial owner of or exercises control or direction over (11) more than 10 percent ofany class or series of voting securities of the person or company;
(h) adding the following definition to subsection 1.1(2) after the definition of "selling group member":
"special relationship", when used in reference to a person or company in a special relationship with a reporting issuer, shallbe interpreted in accordance with subsection 76(5) of the Act;
(i) deleting the definition of "take-over bid" in subsection 1.1(2) (12);
(j) adding the following definitions to subsection 1.1(3) after the definition of "derivative":
"future-oriented financial information" has the meaning ascribed to the term "FOFI" in National Instrument 52-101Future-Oriented Financial Information; and
"non-redeemable investment fund means an issuer (13)
(a) whose primary purpose is to invest money provided by its securityholders;
(b) that does not invest for the purpose of exercising effective control, seeking to exercise effective control, or being activelyinvolved in the management of the issuers in which it invests, other than other mutual funds or non-redeemable investmentfunds; and
(c) that is not a mutual fund.
Footnotes
1. Section 32 of the Regulation provides a contractual right of action against the issuer in certain circumstances where theseller of the securities is an issuer, an affiliate of the issuer, a "control person" or an underwriter. The proposed definitionextends the contractual right of action to any seller of the securities.
2. The time period for exercising the contractual right of action has been changed from 90 days to 180 days.
3. As the rights must reasonably correspond to the rights provided in section 130 of the Act applicable to a prospectus,these rights will include joint and several liability if both the issuer and selling securityholder are selling securities.
4. The words "and may be subject to defences available under subsection (2) of that section", that appear in section 32 ofthe Regulation have been reinserted here rather than repeat those words in each Rule that provides for the granting of acontractual right.
5. The words "includes a provision stating that the right" that appear in section 32 of the Regulation have been reinsertedhere rather than repeat those words in each Rule that provides for the granting of a contractual right.
6. This definition is being deleted as it is proposed to be moved to National Instrument 14-101 Definitions.
7. This term has been added as it is used in proposed Rule 41-501 General Prospectus Requirements. This term alsoappears in Form 40 of the Regulation. Clause (e) clarifies the usage of this term to make it clear that the officer must alsoperform a policy-making function in order to be considered an executive officer.
8. This definition is being deleted as it is proposed to be moved to National Instrument 14-101 Definitions.
9. Certain sections of proposed Rule 45-501 Exempt Distributions and Rule 45-504 Prospectus Exemption forDistributions of Securities to Portfolio Advisers on Behalf of Fully Managed Accounts require that a contractual right ofaction be provided if an offering memorandum has been delivered. The Commission considered inserting specific referencesto those rules in the definition. The Commission determined that it would be more sensible to refer to "Ontario securitieslaw" generally in this definition and to provide for a "contractual right of action" in each rule in which it is to be provided. Inthat regard, the Commission notes that when this definition comes into force, a disclosure document delivered in connectionwith Rule 45-504 Prospectus Exemption for Distribution of Securities to Portfolio Advisers on Behalf of Fully ManagedAccounts may come within the definition of offering memorandum, in which case the prospectus exemption in that Rule willonly be available if a contractual right of action is provided.
10. The term "portfolio manager" is being deleted as it is already defined in section 1 of the Act.
11. The words "or exercises control or direction over" have been added to add a control or direction test.
12. This definition is being deleted as it is proposed to be moved to National Instrument 14-101 Definitions.
13. At one point, the Commission considered that the definition would include a clause that substantially all of theinvestments of the issuer, other than cash, are in securities, derivatives, contracts or financial instruments. The Commissiondecided that this was too limiting given the increased use of vehicles such as real estate investment trusts.