May 2010

On April 9, 2010, the Canadian Securities Administrators announced amendments to Form 81-101F2 Contents of Annual Information Form (Form 81-101F2) under National Instrument 81-101 Mutual Fund Prospectus Disclosure and Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2) under National Instrument 41-101 General Prospectus Requirements (NI 41-101) (the Amendments). The Amendments are consequential to the coming into force of new National Instrument 23-102 Use of Client Brokerage Commissions (NI 23-102). NI 23-102 will come into force on June 30, 2010 and the Amendments are expected to come into force on the same day.

National Instrument 23-102 – Use of Client Brokerage Commissions

NI 23-102 regulates the consideration that advisers are permitted to receive from dealers in exchange for directing brokerage transactions involving client brokerage commissions to dealers. Under NI 23-102, advisers are prohibited from directing such transactions to a dealer in return for any goods or services other than order execution goods and services or research goods and services. Advisers must ensure that any such goods or services received are used to assist with investment or trading decisions, or with effecting securities transactions, on behalf of the client or clients paying the commission and must also make a good faith determination that such client or clients receive reasonable benefit considering both the use of the goods or services and the amount of the commission paid. Dealers are under a similar obligation not to accept commissions in return for goods or services other than order execution goods and services or research goods and services, whether the applicable arrangement is effected directly or indirectly.

"Order execution goods and services" is defined in NI 23-102 as: (a) order execution; and (b) goods or services to the extent that they are directly related to order execution. The Companion Policy to NI 23-102 (CP 23-102) indicates that order execution goods and services may include order management systems, algorithmic trading software and market data, and custody, clearing and settlement services that are directly related to an executed order that generated commissions.

"Research goods and services" is defined in NI 23-102 as: (a) advice relating to the value of a security or the advisability of effecting a transaction in a security; (b) an analysis or report concerning a security, portfolio strategy, issuer, industry, or an economic or political factor or trend; and (c) a database or software, to the extent that it supports goods or services referred to in paragraphs (a) and (b). CP 23-102 indicates that in order to be eligible, research goods and services generally should reflect the expression of reasoning or knowledge and be related to the subject matter referred to in the definition (i.e., securities, portfolio strategy, etc.). In addition, research goods and services should be provided or used before an adviser makes an investment or trading decision.

Please refer to CP 23-102 for additional guidance on permitted and non-permitted goods and services.

NI 23-102 also requires that an adviser disclose to its clients whether any brokerage commissions relating to that client might be directed to a dealer in return for the provision of any good or service other than order execution. Advisers are required to disclose general information relating to such practices prior to a client opening an account or entering into a management contract and at least annually are required to both update the foregoing disclosure and provide information relating to any goods or services received in the prior year in exchange for directing brokerage transactions to dealers other than order execution.

Amendments to Forms 81-101F2 and 41-101F2

Forms 81-101F2 and 41-101F2 will be amended to require disclosure by investment funds which corresponds with that required by NI 23-102. The Amendments will require a fund to disclose: (i) its process for, and factors considered in, selecting a dealer to effect securities transactions, including whether receiving goods or services in addition to order execution is a factor, and how those processes may differ for a dealer that is an affiliated entity; (ii) the nature of the arrangements under which order execution and/or research goods and services might be provided; (iii) each type of good or service other than order execution, that might be provided; and (iv) the method by which the issuer's portfolio adviser makes a good faith determination that the client paying the commission receives reasonable benefit considering both the use of the goods or services and the amount of client brokerage commissions paid.

In addition, the issuer must disclose each type of good or service other than order execution that has been provided to the manager or portfolio adviser of the fund since the date of the issuer's prior annual information (or, in the case of an investment fund issuer subject to NI 41-101, the most recently issued of the issuer's most recent annual information form and its most recent prospectus) and the name of any affiliated entity that provided such services. Finally, the issuer must disclose that the name of any other dealer or third party that provided such goods or services but was not named in the foregoing will be provided to an investor upon request to the issuer.

Please see the full text of the Amendments for more information.

Planning Ahead

The Amendments are expected to come into force on June 30, 2010. Accordingly, investment fund market participants contemplating activities in Q3 2010, such as mutual fund renewals or closed-end fund initial public offerings or other long form prospectus offerings, should take note of these upcoming disclosure requirements and discuss them with their portfolio advisers.