Mutual Funds Notice National Instrument 81-102 Companion ......Mutual Fund Rules November 12, 1999 75 (1999) 22 OSCB(Supp.) Section 2.7 Subsection 2.7(4) has been amended to clarify

November 12, 1999 71 (1999) 22 OSCB(Supp.)

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NoticeNational Instrument 81-102Companion Policy 81-102CP


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NOTICE OF RULE AND POLICY UNDERTHE SECURITIES ACT

NATIONAL INSTRUMENT 81-102AND COMPANION POLICY 81-102CP

MUTUAL FUNDSAND NOTICE OF REVOCATION OF

CANADIAN SECURITIES ADMINISTRATORS NOTICEAND RESCISSION OF

NATIONAL POLICY STATEMENT NO. 34AND

NATIONAL POLICY STATEMENT NO. 39

Notice of Rule and Policy

The Commission has, under section 143 of the Securities Act(the "Act"), made National Instrument 81-102 Mutual Funds(the "National Instrument") as a Rule under the Act, and hasadopted Companion Policy 81-102CP Mutual Funds (the"Companion Policy") as a Policy under the Act.

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

The National Instrument and the material required by the Actto be delivered to the Minister of Finance were delivered onNovember 12, 1999. If the Minister does not approve theNational Instrument, reject the National Instrument or return itto the Commission for further consideration by January 11,2000, or if the Minister approves the National Instrument, theNational Instrument will come into force, pursuant tosection 20.1 of the National Instrument, on February 1, 2000.The Companion Policy will come into force on the date that theNational Instrument comes into force.

The CSA published drafts of the National Instrument (the"1999 Draft Instrument") and Companion Policy (the "1999Draft Policy") in March 1999.1 The instruments had beenpreviously published for comment in June 1997.2

During the comment period on the 1999 Draft Instrument andthe 1999 Draft Policy, which ended on May 18, 1999, the CSAreceived a number of submissions. The comments providedin these submissions have been considered by the CSA andthe final versions of the National Instrument and CompanionPolicy being published with this Notice reflect the decisions ofthe CSA in this regard.

Appendix A of this Notice lists the commenters on the 1999Draft Instrument and the 1999 Draft Policy and Appendix Bprovides a summary of the comments received and theresponse of the CSA.

Revocation of National Policy Statements and CSA Notice

Effective the date that the National Instrument comes intoforce, National Policy Statement No. 34, entitled"Unincorporated Issuers: Requirements to Maintain a Registerof Security Holders", and National Policy Statement No. 39,entitled "Mutual Funds", will be rescinded and the CSA Noticeentitled "Mutual Funds: Section 16 Sales Communications"(CSA #93/5) will be revoked. These policy statements and theCSA notice are replaced or superseded by the matterscontained in the National Instrument and Companion Policy.

Background

This Notice summarizes in a general manner the changesmade in the National Instrument and Companion Policy fromthe 1999 Draft Instrument and 1999 Draft Policy. As describedabove, Appendix B to this Notice outlines the commentsreceived in respect of the 1999 materials, together with CSAresponses.

The CSA received a number of comments, in connection withthe drafts of the National Instrument and Companion Policypublished both in 1997 and March 1999 on the need forchange in the following seven areas:

! Use of swap instruments by mutual funds;

! Securities lending by mutual funds and the useof repurchase agreements by mutual funds;

! Standardized regime for the structure of so-called “funds of funds”;

! Timing of transfers among financial institutionsand among mutual funds;

! Principal trading in securities between mutualfunds and entities related to the manager of themutual fund;

! Acquisition of securities by mutual funds fromunderwriters related to the mutual fund manager;and

! Inter-fund trading of securities.

The CSA have decided to permit mutual funds to directly useswaps and the National Instrument contains the rules in thisregard.

The CSA have considered the comments on the other areaslisted above and have decided not to make changes to theNational Instrument in those areas at the present time. TheCSA propose that these issues be addressed as part of aparallel process that will enable sufficient public comment andindustry consultation regarding any revised rules. The CSApropose to publish proposed rules as amending instrumentsto the National Instrument to deal with these issues. The CSAconsider that their anticipated process of dealing with thesesignificant comments will permit appropriate regulatory andpublic consideration of the issues, as well as permit the timelyreplacement of National Policy Statement No. 39 ("NP39"),through the finalization of the National Instrument in advance

1 In Ontario, at (1999) 22 OSCB (Supp).

2 In Ontario, at (1997), 20 OSCB (Supp2).

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of finalizing the appropriate regulatory response to thesesignificant comments.

Substance and Purpose of National Instrument andCompanion Policy

The National Instrument is designed to replace NP 39 and willregulate all publicly offered investment funds that fall within thedefinition of "mutual fund" contained in Canadian securitieslegislation. Accordingly, all publicly offered investment fundsthat give investors the right to redeem securities on demand ata price based on the net asset value of those securities will berequired to comply with the National Instrument. Specializedmutual funds such as labour sponsored investment funds,mortgage funds and commodity pools will generally berequired to comply with the National Instrument and alsoapplicable securities regulation that is in addition to, or inpartial substitution for, the provisions of the NationalInstrument.

The purpose of the Companion Policy is to state the views ofthe CSA on various matters relating to the National Instrument.

Summary of Changes to National Instrument from 1999Draft Instrument

This section describes changes made in the NationalInstrument from the 1999 Draft Instrument except that changesof a minor nature, or those made only for purposes ofclarification or drafting reasons, are generally not discussed.For a detailed summary of the contents of the 1999 DraftInstrument, reference should be made to the Notice publishedwith that instrument. As the changes to the NationalInstrument from the 1999 Draft Instrument are not material, theNational Instrument is not subject to a further comment period.

The majority of changes were made in response to commentsreceived; others were made as the result of furtherconsideration of the applicable rules by the CSA.

Section 1.1

The definitions of "approved credit rating" and "approved creditrating organization" have been amended to recognize Duff &Phelps Credit Rating Co. as an approved credit ratingorganization and to include, as approved credit ratings, thatorganization's ratings for commercial paper/short term debtand long term debt. The ratings included are those consideredby the CSA to be equivalent to the rating levels of otherorganizations already contained in the definition of "approvedcredit rating".

The definition of "fundamental investment objectives" has beenamended to remove from the definition the inclusion of thephrase "whether the mutual fund is managed to constituteforeign property under the ITA". The CSA state, in section 2.5of the Companion Policy, their view that whether a mutualfund's securities are foreign or non-foreign property under theIncome Tax Act (Canada) ("ITA") is linked to the fundamentalinvestment objectives of the mutual fund as a matter ofinterpretation. For this reason, this reference has beenremoved from the definition in the National Instrument.

A definition of "index mutual fund" has been added to refer toa mutual fund whose fundamental investment objectives

require it to hold securities, or invest, in a manner thatreplicates a specified widely quoted market index. Thedefinition is used in subsection 15.3(3) to exempt young indexmutual funds from a prohibition concerning the content of itssales communications applicable generally to young mutualfunds. See the discussion on that subsection in this Notice forfurther information.

The definition of "investor fees" has been amended to clarifythat the definition only pertains to fees, charges and expensespayable to the mutual fund organization in which an investorinvests. The change was made to clarify that the definitiondoes not include sales commissions paid to participatingdealers. The definition also clarifies that it does not includefees, charges and expenses paid to a member of theorganization of the mutual fund acting solely as a participatingdealer.

Section 2.1

Subsection 2.1(1) has been amended to clarify that theprohibition contained in that section is triggered by the enteringinto of a specified derivatives transaction or the purchase ofindex participation units, in addition to the purchase of asecurity of an issuer. Subsection (3) has been amended toclarify that it is operative only in respect of long positions of themutual fund in specified derivatives.

Section 2.5

Subsection 2.5(1)(b) has been amended by an inclusion of areference to incentive fees to clarify that there may be noduplication of incentive fees in arrangements in which a mutualfund invests in the securities of another mutual fund. Thechange was made to remove ambiguity over whether incentivefees were included in the prohibition against duplication ofmanagement fees.

Section 2.6

Section 2.6 has been amended in two ways.

First, subparagraph (a)(i) has been amended to permit amutual fund to borrow cash or provide a security interest inorder to permit it to settle portfolio transactions, so long asafter the borrowing, the outstanding amount of all borrowing bythe mutual fund does not exceed five percent of its net assets.The CSA have made this change to recognize a procedurethat has developed in the industry and that is considerednecessary to permit timely and smooth settlement of portfoliotransactions.

Second, the language of section 2.6 has been changed toapply generally to "security interests" granted by a mutualfund, rather than encumbrances or specific types of securityinterests. The CSA believe that the principles contained in thesection should apply to all security interests, regardless of thetype of security interest that is used in a given context. TheCSA have added a provision to permit only those securityinterests in a specified derivative transaction that are made inaccordance with industry practice for the relevant type oftransaction and relate only to obligations under particularspecified derivatives positions. These changes reflect existingpractice and the existing views of the CSA on what wasimplied by NP39.

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Section 2.7

Subsection 2.7(4) has been amended to clarify that thespecified derivatives counterparty limit rule contained in thatsubsection applies only in respect of the exposure of a mutualfund to a counterparty, and therefore does not include theexposure of a counterparty to a mutual fund under thespecified derivatives positions.

Section 2.11

Section 2.11 has been amended to provide that the exemptionfrom the notice requirement contained in that section isavailable if each simplified prospectus of the mutual fund hascontained the required disclosure since the later of January 1,1994 and its inception. The provision formerly required thatdisclosure since the inception of the mutual fund. The CSArecognize that the former approach did not work well formutual funds that were in existence before the advent of thederivatives regime introduced in NP39 in 1992.

Section 4.4

The liability regime contained in section 4.4 has beenamended in two ways.

First, subsections (1) and (2) have been amended to providethat a manager of a mutual fund is responsible only for its ownfailure, or the failure of any person or company retained by itor by the mutual fund to discharge any of the manager'sresponsibilities to the mutual fund, to exercise the prescribedstandard of care. The version of section 4.4 contained in the1999 Draft Instrument would have had the manager liable forthe failure of any person or company providing services to themutual fund or to the manager in connection with the mutualfund to satisfy the standard of care. This approach could havemade the manager liable for matters outside its own area ofresponsibility, which the CSA consider inappropriate.

Second, subsection (5) has been amended to provide that adirector of a mutual fund is not subject to the liability regimecontained in section 4.4. Directors are subject to the liabilityregime imposed by the relevant corporate legislation.

Section 5.6

Paragraph 5.6(1)(b) has been amended to add references totax-deferred transactions under the ITA into which mutualfunds may enter, in addition to "qualifying exchanges" undersection 132.2 of the ITA. The CSA are satisfied that any tax-deferred transaction entered into by two mutual funds underthe ITA is acceptable for the purposes of subsection 5.6(1),subject to satisfaction of the other conditions contained in thatsubsection.

Section 6.1

Section 6.1 has been amended in two ways.

First, subsection 6.1(2) has been amended to provide that asub-custodian or custodian outside of Canada may be retainedif appropriate to facilitate portfolio transactions of the mutualfund outside Canada. The 1999 Draft Instrument would havepermitted such a retention only if "required to execute"transactions outside of Canada. The CSA do not wish to

impose an overly onerous standard concerning theappointment of non-Canadian custodians or sub-custodians,and have therefore returned to the wording now contained inNP39 in this regard.

Second, subsection (6) has been added to clarify that amanager of a mutual fund shall not act as custodian or sub-custodian of the mutual fund. The CSA have included thisprovision to reflect existing CSA policy, which is to have theportfolio assets held by an entity other than the manager;without subsection (6), the National Instrument would haveoperated to permit the manager to act as custodian.

Sections 6.2 and 6.3

Each of these sections contains a requirement permittingcertain entities to act as custodian or sub-custodian of amutual fund if its shareholders' equity, as reported in its mostrecent audited financial statements, exceeds certainprescribed amounts. These requirements have beenamended to remove the provision that this test must be basedon financial statements that have been made public. The CSArecognize that some custodians are not required to make theirfinancial statements public; for instance, some custodians aremembers of a larger corporate group that do not make publicsegregated financial statements pertaining only to thecustodian. Section 6.4

This section has been amended in two ways.

First, the section has been amended to permit a custodian orsub-custodian agreement to provide for the granting of asecurity interest by a mutual fund to secure the obligations ofthe mutual fund to repay borrowings by the fund from acustodian or sub-custodian for the purpose of settling portfoliotransactions. This change corresponds to the change tosection 2.6 described above.

Second, the section has been amended to permit a custodianor sub-custodian to charge a mutual fund a safekeeping andadministrative services fee arising on the transfer of portfolioassets of the mutual fund.

Both these changes are designed to recognize commercialrealities and existing practice.

Section 6.5

Section 6.5 has been amended to permit a mutual fund to paya safekeeping and administrative services fee to a custodianor sub-custodian arising on the transfer of portfolio assets ofthe mutual fund. This change corresponds to the changedescribed above in relation to section 6.4.

Section 6.6

This section has been amended to remove the provision thatprevented a custodian or sub-custodian from beingindemnified by a mutual fund unless the mutual fund hadreasonable grounds to believe that the action or inaction of thecustodian or sub-custodian that led to the claim was in thebest interests of the mutual fund. The CSA recognize thatcustodians and sub-custodians typically act on instructions

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from the mutual fund or the manager and do not considerwhether given instructions are in the best interests of themutual fund. Therefore, the National Instrument imposes arequirement that custodians and sub-custodians not benegligent in carrying out their duties, but not a requirement thatany indemnification of their actions be contingent on whetheror not the mutual fund has reasonable grounds to believe theyacted in the best interests of the mutual fund.

Section 6.8

Subsection 6.8(3) has been amended to provide that a mutualfund may deposit with its counterparty portfolio assets overwhich it has granted a security interest in connection with aparticular specified derivatives transaction. This changerepresents an exemption from the otherwise applicablecustodian provisions, and corresponds to the change tosection 2.6 that permits the mutual fund to grant such asecurity interest.

Section 9.2

Paragraph 9.2(a) has been amended to provide that a mutualfund has one business day to decide whether to reject apurchase order, rather than 24 hours. The one business dayrequirement is more workable in connection with purchaseorders received before weekends or holidays.

Section 9.4

Subsection 9.4(4) has been amended to ensure that theprovisions applicable to cheques that are not honoured arealso applicable in the case of other forms of payment that arenot honoured.

In addition, subsection (4) now provides that a redemptionrequired by that subsection shall be processed as if theredemption order was received on the fourth business day,rather than the third business day, after the pricing date of theoriginal sale order. This change was necessary to tie properlyto the provision that specifies that such a redemption isrequired only if payment on the relevant purchase order is notmade on or before the third business day after the pricing date.

Sections 11.1 and 11.2

Paragraphs 3(c) of sections 11.1 and 11.2 have beenamended. Those paragraphs set out the purposes for whicha dealer holding client funds may withdraw those funds fromthe relevant trust account. The paragraphs have beenamended to provide that the funds may be withdrawn to pay,among other things, fees, charges and expenses payable byan investor in connection with purchase, conversion, holding,transfer or redemption of the relevant securities. Theparagraphs no longer make reference to using the funds topay for "investor fees". This change, together with theclarification to the definition of "investor fees" described above,clarifies that funds in a trust account may be withdrawn to payany fees owing by the investor in connection with a mutualfund investment, including fees owed to a participating dealer.

Section 12.1

Paragraph 12.1(2)(b) has been amended to provide that thecompliance report relating to the principal distributor of a

mutual fund may be prepared by the auditor of the principaldistributor or by the auditor of the mutual fund.

Section 14.1

Section 14.1 has been amended by the addition of paragraph(b), which permits a mutual fund to set as the record date fora dividend or distribution the last day on which the net assetvalue per security is calculated before the day on which the netasset value per security is calculated for purposes of thedividend or distribution. This change has been made toaccommodate existing practice and to clarify an ambiguity inthe corresponding provision of NP39.

Section 15.2

Subsection 15.2(2) has been amended to provide thatperformance data and disclosure specifically required by theNational Instrument to be included in a written salescommunication must be in at least 10-point type. The 1999Draft Instrument required all of the text in a written salescommunication to be in at least 10-point type. This changerelieves mutual fund organizations and distributors from anyextra expense associated with purchasing more advertisementspace in order to accommodate the proposed requirements ofthe 1999 Draft Instrument, but ensures that some of the mostimportant information contained in a sales communication ispresented in at least 10-point type in order that the informationbe more clearly presented to investors.

Section 15.3

Section 15.3 has been amended in three ways.

First, subsection (1) has been amended to provide greaterflexibility in the preparation of sales communications thatinvolve comparison of the performance of a mutual fund orasset allocation service with a benchmark. Paragraph (d) ofthe 1999 Draft Instrument provided that such a comparisoncould be made only if the benchmark existed and was widelyavailable during the period for which the comparison wasmade. Paragraph (d) has been amended to permit thecomparison of the performance of a mutual fund or assetallocation service with a benchmark that did not exist for all orpart of the relevant period, so long as a reconstruction orcalculation of what the benchmark would have been duringthat period, calculated on a basis consistent with its currentbasis of calculation, is widely recognized and available. Thischange has been made to recognize that in the case of somenew benchmarks, such as the S&P/TSE 60 Index, thepreparers of the benchmarks have made generally availablecalculations of what the benchmark would have been prior toits introduction.

Second, subsection (3) is new, and exempts young indexmutual funds from the prohibition of not disclosing theperformance of a benchmark during the period for which otheryoung mutual funds are not permitted to publish performancedata. The CSA are satisfied that the publication of theperformance of the index on which the investments of a youngindex mutual fund are based is appropriate and not subject toabuse, so long as the index satisfies the rules applicable tobenchmarks.

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Third, subsection (4) has been amended to provide that asales communication that provides performance ratings orranking for a mutual fund or asset allocation service shallprovide the relevant rating or ranking for each period for whichstandard performance data is required to be given. Thischange is designed to prevent sales communications from"cherry picking" rankings for a mutual fund, and is consistentwith the approach of the National Instrument relating to thepresentation of performance data.

Section 15.4

Section 15.4 has been amended through changes to themandated warning disclosure contained in that section. TheCSA have attempted to make the required disclosure simpler,shorter and more understandable for the average investor.

In connection with these changes, subsection 15.4(11) of the1999 Draft Instrument has been deleted. That provision wouldhave required a shorter form of warning than was otherwiserequired in the case of certain types of sales communication.The CSA have deleted this provision on the basis that the newrequired forms of disclosure are now simpler and shorter thanin the 1999 Draft Instrument or in NP39.

Section 15.5


First, subsection (1) has been amended to provide that amutual fund shall not be described as a "no load" fund ifinvestor fees are payable by an investor on a purchase orredemption of the securities of the mutual fund, or if fees,charges or expenses are payable by an investor to aparticipating dealer named in the sales communication. Thisapproach is consistent with the approach now contained inNP39. The 1999 Draft Instrument would have prevented amutual fund from being described as a "no load" fund if salescommissions were charged by participating dealers that wereindependent of the mutual fund organization. The CSA did notintend this result, and have amended the definition of "investorfees" and amended subsection 15.5(1) accordingly.

Second, subsection (2) has been amended to require that asales communication for a "no load" mutual fund disclose thatmanagement fees and operating expenses are paid by themutual fund. The 1999 Draft Instrument would have requireda summary of those fees, and the CSA have decided that thatapproach is excessive in the circumstances.

Third, subsection (3) has been amended in a manner similarto subsection (2). Subsection (3) requires that a salescommunication containing a reference to the existence orabsence of fees or charges, other than the disclosure requiredby section 15.4 or a reference to the term "no load", shalldisclose the types of fees and charges that exist. The 1999Draft Instrument required disclosure of a summary of the feesand charges that exist.

Section 15.6

Section 15.6 has been amended to permit salescommunications for young mutual funds to containperformance data for those funds if they are sent tosecurityholders of a mutual fund or participants in an asset

allocation service under common management with the mutualfund or asset allocation service. This subsection alreadypermitted such materials to go to securityholders of the youngmutual fund. The change has been made to recognize thatmutual fund organizations with multiple funds will prepare onedocument containing performance information about all thefunds to be sent to all securityholders of all the funds.

Section 16.1


First, subsections (3) and (4) have been amended to apply toall non-optional fees, charges and expenses paid inconnection with the holding of securities of a mutual fund,rather than only to management fees. This change has beenmade to ensure that all such fees, charges and expensespayable directly by investors are taken into account forpurposes of calculating management expense ratio.

Second, subsection (5) has been changed in an analogousway, in order to provide that all mutual fund expenses rebatedby a manager or a mutual fund to a securityholder, rather thanonly management fees, are properly taken into account in thecalculation of management expense ratio.

Third, subsections (7) and (8) have been added to clarify thecalculation of management expense ratio in cases of financialyears that are less than 12 months. Subsection (7) providesthat the phrase "financial year" used in subsection (1) includesa period other than 12 months for which an issuer is requiredby securities legislation to prepare audited financialstatements. Subsection (8) provides that the managementexpense ratio of a mutual fund for a financial year of less than12 months shall be annualized. This approach is consistentwith the approach taken in National Policy Statement No. 36and carried forward into National Instrument 81-101 MutualFund Prospectus Disclosure. Section 16.1 continues toprovide that the calculation of management expense ratio mustbe based on expenses shown for a financial year; mutualfunds may not disclose a management expense ratio for lessthan a financial year, thereby ensuring that its managementexpense ratio will be based on total expenses derived fromaudited financial statements.

Section 18.1

Section 18.1 has been amended by the removal of therequirement that a mutual fund maintain records "for at leastas long as the mutual fund is in existence". The CSA aresatisfied that the length of time that a mutual fund maintainsrecords is an issue properly left to the business judgment ofthe organization, having regard to limitation periods andstatutory and other common law requirements.

Section 18.2

Section 18.2 has been amended to clarify the purposes forwhich a securityholder list may be obtained, in order toconform more closely with corporate legislation. The provisionnow provides that a list may be requested for a matter relatingto the relationships among the mutual fund, the members ofthe organization of the mutual fund, and the securityholders,partners, directors and officers of those entities. This parallelsthe corporate provisions that provide that shareholder lists may

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be obtained for a matter relating to the "affairs" of an issuer,which is defined as the relationship among a corporation, itsaffiliates and shareholders and the officers and directors ofsuch bodies corporate.3

Part 20

Part 20 has been amended to include the relevant datesrelating to the implementation of the National Instrument andvarious dates relating to transitional matters.

Section 20.1 provides that the National Instrument comes intoforce on February 1, 2000.

Section 20.2 permits sales communications printed beforeDecember 31, 1999 to be used until August 1, 2000, despiteany requirements in the National Instrument.

Subsection 20.5(1) provides that subsection 4.4(1) of theNational Instrument does not come into force until August 1,2000; this gives mutual fund organizations six months toensure that all relevant agreements conform with therequirements of that subsection. Subsection 20.5(2) providesthat subsections 2.4(2), 2.7(4) and 6.4(1) do not come intoforce until February 1, 2001; this gives mutual fundorganizations one year from the date of the coming into forceof the rest of the National Instrument to put systems in placeto monitor compliance with subsections 2.4(2) and 2.7(4) andto ensure that agreements with custodians and sub-custodianscomply with the requirements of subsections 6.4(1) and 6.8(4).

Appendix A

A number of generally recognized exchanges have beenadded to Appendix A.

Summary of Changes to the Companion Policy from the1999 Draft

This section describes the changes made in the CompanionPolicy from the 1999 Draft Policy. For a detailed summary ofthe 1999 Draft Policy, reference should be made to the Noticepublished with that policy. Changes of a minor nature, orthose made for drafting or clarification reasons or to conformthe Companion Policy to the National Instrument are notdiscussed in this section.

Section 2.5

Section 2.5 has been expanded to discuss the meaning of thedefinition "fundamental investment objectives" and itsrelationship to the disclosure of the fundamental investmentobjectives of a mutual fund in a simplified prospectus underNational Instrument 81-101 and Form 81-101F1. Section 2.5explains that the definition in the National Instrument isdesigned to refer to the disclosure of fundamental investmentobjectives made under National Instrument 81-101, and thata change to the mutual fund requiring a change to thatdisclosure will require securityholder approval under National

Instrument 81-102. Section 2.5 also states that views of theCanadian securities regulatory authorities that whether thesecurities of a mutual fund are foreign property under the ITAis linked to the fundamental investment objectives of themutual fund, and that a change in the method by which themutual fund is managed that changes that status would belikely due to a change in the fundamental investmentobjectives of the mutual fund.

Section 2.9 of the 1999 Draft Policy

This section, which discussed the definition of "investor fees"has been deleted in conjunction with the amendments to thatdefinition in the National Instrument.

Section 2.13 (Section 2.14 of the 1999 Draft Policy)

Paragraph 4 of subsection 2.13(3) has been added to providea further example of a circumstance that the Canadiansecurities regulatory authorities would generally not considerto be a "purchase" of a security by a mutual fund. Thisparagraph refers to the decision of a mutual fund not to tenderinto an issuer bid, even though its decision is likely to result inan increase in its percentage holdings of a security beyondwhat the mutual fund would be permitted under the NationalInstrument to purchase.

Section 3.3

A reference to section 2.1 of the National Instrument has beenadded to this section to emphasize that investments in "quasi-mutual funds" or index participation units by mutual funds aresubject to all of the investment restrictions of the NationalInstrument, including section 2.1.

Section 4.2

Paragraph 4 of section 4.2 has been added to clarify theoperation of the commodity futures legislation of Ontario inconnection with a non-resident sub-adviser advising in respectof a mutual fund using futures.

Section 4.4

Section 4.4 has been added to clarify that the definition of"cash cover" includes interest accrued on the securities orother portfolio assets used for cash cover purposes.

Section 7.2 of the 1999 Draft Policy

This section has been deleted in conjunction with theexpansion of the discussion of the term "fundamentalinvestment objectives" in section 2.5 of the Companion Policy.

Section 7.2

Section 7.2 has been amended by the deletion of subsection(2), which noted the need for separate approvals for certaintransactions in Quebec. The CVMQ is proceeding to takesteps to make such approvals unnecessary following theimplementation of the National Instrument.

3 See for example, the definition of "affairs" in section 2(1) ofthe Canada Business Corporations Act.

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Section 11.1

Subsection 11.1(6) has been added to discuss the status ofnon-interest bearing trust accounts maintained under sections11.1 or 11.2 of the National Instrument.

Section 12.1

Section 12.1 is new and discusses subsection 13.1(4) of theNational Instrument. Section 12.1 emphasizes that theCanadian securities regulatory authorities expect mutual fundsto calculate their net asset value per security as quickly ascommercially practicable and to make the results of thatcalculation available to the financial press as quickly as iscommercially practicable.

Section 14.1

Section 14.1 is new and states the views of the Canadiansecurities regulatory authorities on matters concerningmanagement expense ratio calculations. The sectionemphasizes that the rules of calculation of managementexpense ratio contained in the National Instrument areapplicable regardless of the context in which a mutual funddiscloses its management expense ratio. The section alsodiscusses issues relating to the determination of "totalexpenses" used in the calculation of management expenseratio.

Section 15.1

Section 15.1 discusses section 18.1 of the NationalInstrument, and states that it is up to a mutual fund, havingregard to prudent business practice and any applicablestatutory limitation periods, to decide how long it wishes toretain securityholder records required by this section.

Section 16.1

Section 16.1 has been amended by the deletion ofsubsections (2) and (3) of the 1999 Draft Policy. Thosesubsections dealt with the need for additional applications inQuebec, which will not be necessary following theimplementation of the National Instrument in Quebec.

National Instrument and Companion Policy

The texts of the National Instrument and Companion Policyfollow.

Regulation to be Amended - Ontario

In Ontario, the Ontario Commission has amended section 240of Regulation 1015 of the Revised Regulations of Ontario,1990, in conjunction with the making of the National Instrumentas a rule in Ontario, by replacing, whenever appearing,references to the words "policy or practice" with the words"rule, policy or practice".

Text of Revocation of CSA Notice

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

"The CSA Notice entitled "Mutual Funds: Section16 Sales Communications" (CSA #93/5) isrevoked effective at the time that NationalInstrument 81-102 Mutual Funds comes intoforce."

Text of Rescission of National Policy Statement No. 34 andNational Policy Statement No. 39

National Policy Statement No. 34 and National PolicyStatement No. 39 are to be replaced by the NationalInstrument and accordingly will be rescinded.

The text of the rescission of National Policy Statement No. 34is:

"National Policy Statement No. 34, entitled"Unincorporated Issuers: Requirement toMaintain a Register of Security Holders", isrescinded, effective at the time that NationalInstrument 81-102 Mutual Funds comes intoforce."

The text of the rescission of National Policy Statement No. 39is:

"National Policy Statement No. 39, entitled"Mutual Funds", is rescinded, effective at thetime that National Instrument 81-102 MutualFunds comes into force."

DATED: November 12, 1999.

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APPENDIX ALIST OF COMMENTERS ON

NATIONAL INSTRUMENT 81-102 AND COMPANION POLICY 81-102CP

1 AGF Management Ltd. 2. Duff & Phelps Credit Rating Co. (2 submissions)3. Fasken Campbell Godfrey4. Fidelity Investments Canada Limited5. Global Strategems (Michael Barrett, Managing Editor)6. Investors Group7. Osler, Hoskin & Harcourt8. PricewaterhouseCoopers9. Royal Bank of Canada, Royal Trust and Royal Mutual

Funds Inc.10. TD Asset Management Inc.11. The Association of Global Custodians12. The Investment Funds Institute of Canada (IFIC)13. Trimark Investment Management Inc.

APPENDIX BSUMMARY OF COMMENTS RECEIVED ON

NATIONAL INSTRUMENT 81-102 AND COMPANION POLICY 81-102CP AND

RESPONSE OF THE CANADIAN SECURITIESADMINISTRATORS

1. INTRODUCTION

The CSA published drafts of National Instrument 81-102 (the"National Instrument") and Companion Policy 81-102CP (the"Companion Policy") in March 19994. The instrumentspublished in March 1999 are called the "1999 Draft Instrument"and "1999 Draft Policy" in this Appendix. The instruments hadbeen previously published for comment in June 1997.5

During the comment period on the 1999 Draft Instrument andthe 1999 Draft Policy, which ended on May 18, 1999, the CSAreceived 14 submissions from 13 commenters. Thecommenters can be grouped as follows:

Mutual fund management companies: 7Stock exchanges and rating agencies: 1Accounting firms: 1Law firms: 2Trade Associations: 2TOTAL: 13

The two trade associations listed each made submissions inrespect of the 1999 Draft Instrument and the 1999 Draft Policyon behalf of their respective members.

The comments provided in these submissions have beenconsidered by the CSA and the final versions of the NationalInstrument and Companion Policy being published with thisNotice reflect the decisions of the CSA in this regard. TheCSA thank all commenters for providing their comments on the1999 Draft Instrument and the 1999 Draft Policy.

Copies of the comment letters may be viewed at the office ofMicromedia, 20 Victoria Street, Toronto, Ontario (416) 312-5211 or (800) 387-2689; the office of the British ColumbiaSecurities Commission, 200-865 Hornby Street, Vancouver,British Columbia (604) 899-6500; the office of the AlbertaSecurities Commission, 10025 Jasper Avenue, Edmonton,Alberta (403) 427-5201; and the office of the Commission desvaleurs mobilières du Québec, Stock Exchange Tower, 800Victoria Square, 17th Floor, Montréal, Québec.

Many of the commenters provided detailed comments onspecific sections of the 1999 Draft Instrument and the 1999Draft Policy. Some comments were of a very technical, non-substantive nature. The following is a summary of thesubstantive comments received, together with the CSA'sresponses and, where applicable, the changes adopted by theCSA. As the changes to the 1999 Draft Instrument and the1999 Draft Policy were not material, the National Instrument

4 In Ontario, at (1999) 22 OSCB (Supp).

5 In Ontario, at (1997), 20 OSCB (Supp2).

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and the Companion Policy are not subject to a furthercomment period.

2. COMMENTS PREVIOUSLY RAISED ON 1997 DRAFTINSTRUMENT AND COMPANION POLICY

A number of commenters provided comments on issues thathad previously been raised in connection with the draftinstruments published in June 1997. The following is a list ofthose issues:

! the use of repurchase agreements;

! reducing the equity requirement for sub-custodiansfrom $100 million to $50 million;

! reducing the time for reversing a failed redemptionorder from T+10 to T+3;

! using a currency other than the Canadian or U.S. dollarfor calculating net asset value;

! including receivables from the acceptance of purchaseorders for mutual fund securities in the definition of“cash cover”;

! eliminating the requirement for unitholder approval fora change of auditor;

! permitting the use of specified derivatives withunderlying interests in commodities other than gold.

The CSA reconsidered the comments received with respect tothese issues and concluded that their responses have notchanged since March 1999. Accordingly, the comments onthese issues are not set out in the tabular summary ofcomments which follows. Reference should be made to theSummary of Comments on the 1999 Draft Instrument and the1999 Draft Policy for the CSA response to these issues.

3. SUBSTANTIVE COMMENTS ON SPECIFIC PROVISIONSNote: In this Table, “NI” means National Instrument 81-102Mutual Funds and “CP” means Companion Policy 81-102CPMutual Funds; “March 1999 Draft” means the version of thematerials published for comment in March 1999; “NP 39"means National Policy Statement No. 39; and “CSA” meansthe Canadian Securities Administrators.

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Reference Comment CSA Response

1 Definition of“approvedcredit rating”and “approvedcredit ratingorganization”

Duff & Phelps should be included as an approvedcredit rating organization since it is one of only fourcredit rating agencies recognized by the SEC (U.S.)as a “nationally recognized statistical ratingorganization” for rating all types of securities. Thecompany has a presence in Canada in the form of ajoint venture relationship with DBRS Inc. to provideratings and research specifically designed forinvestors in high yield U.S. dollar denominatedCanadian issues.

Change made.

2 Definition of“cash cover’

Commercial paper of an approved credit ratingshould be included in the definition, particularlysince it is already permitted for money market fundsby clause (d)(iii) of the definition of “money marketfund”.

No change at this time. The useof commercial paper will beconsidered in connection with theCSA's work to permit mutualfunds to engage in securitieslending.

3 Definition of“cashequivalent”

The definition should be amended to includeinstruments with a term of 13 months, or 25 monthsin the case of government obligations, and thedollar weighted term to maturity “not exceeding 90days” (see definition of “money market fund”)should be restored to 180 days instead of 90 days.Long-term instruments provide potential for yieldimprovement without significantly altering the riskprofile of a money market portfolio.

No change. This is a commentthat was raised prior to thereformulation process when therewas some controversy concerningwhat is a money market fund. The definition reflects the CSA'sunderstanding of the industryconsensus on this issue.

4 Definition of “cashequivalent”

The definition should be expanded to includecommercial paper (with an “approved credit rating”),repurchase agreements and money market funds. Even if repurchase agreements and commercialpaper are not included, money market funds shouldbe included even if they invest in commercial paperand repurchase agreements. The reason for this isthat the inter-position of a money market fundchanges and enhances the stability and liquidity ofthe investment beyond the characteristics of thefund’s own investment holdings.

No change. Repurchaseagreements will be addressed aspart of a parallel amendingprocess. The use of moneymarket funds will be consideredas part of the review of fund onfund investments. The CSA hasconcerns about the implications ofa “top fund” which usesderivatives investing up to 80% or90% of its assets in a relatedmoney market fund. Any changesin these areas will be made asamendments to the NI.No change with respect tocommercial paper (see commentre “cash cover” above).

5 Definition of“conventionalconvertiblesecurity”

An essential element of a conventional convertiblesecurity is that the rate or formula for conversion orexchange is fixed by the terms of the convertiblesecurity. Otherwise, any exchange or trade of asecurity (including those at market rates) would becaught by the definition. Such an exchange is not aconvertible security, conventional or otherwise. Nonetheless, it should also be clear that they do notconstitute “specified derivatives”.

Change made. The words“according to its terms” have beenadded to the definition.

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6 Definition of“dealermanagedmutual fund”and “dealermanager”

It is not clear whether these definitions recognizefunds with third party advisers (i.e. without a“specified dealer” in the chain) as dealer-managed.

No change. The CSA willconsider this issue in their reviewof the restrictions imposed onrelated party transactions. Thecurrent wording carries forwardthe requirements of NP 39.

7 Definition of“debt-likesecurity”

It is not clear whether equity-linked GICs and/orlinked notes fall within the parameters of thedefinition. Section 2.4 of the CP should beamended to provide more clarification.

No change. The CSA believe thatthe definition is clear. Whether aparticular investment fits withinthe definition will depend on thefacts as applied to the test in thedefinition.

8 Definition of“fundamentalinvestmentobjectives”

The definition does not clearly distinguish betweeninvestment objectives and investment strategies. The definition should be amended to clearlydistinguish between objectives and strategies toensure that unnecessary unitholder meetings(which are costly, time consuming and almostinvariably poorly attended) are not required. As aresult, some funds may provide more generaldisclosure of their investment objectives in order toavoid having to call unnecessary meetings.

With respect to whether the fund is managed toconstitute non-foreign property under the ITA, willrelief be granted to permit changes to currentlydisclosed fundamental investment objectives?

Changes made. The CP has been amended torefer to the disclosurerequirements of NI 81-101 andForm 81-101F1 which recognizesthe difference between investmentobjectives and investmentstrategies. Examples offundamental investmentobjectives are provided in the CP.

The reference to management ofa mutual fund so as to constituteforeign property has beenremoved from the definition sinceit was but one example of afundamental investment objective. The CP has been amended tostate that the CSA are of the viewthat whether securities of a mutualfund are foreign property underthe ITA is linked to the fund'sfundamental investmentobjectives. The NI does notrequire change in currentfundamental investmentobjectives of a mutual fund. If afund is currently being managedto be non-foreign property thenthat is part of the fundamentalinvestment objectives of that fund.

9 Definition of“hedging”

A threshold of “high” degree in relation to the statedvariables should be specified.

No change. See subsection 2.7(1)of the CP.

10 Definition of“indexparticipationunits”

The definition appears to preclude the use of indexparticipation units which track an index and employindexation strategies other than replication of thecomposition of the index.

Change made. Clause (b) addedto provide for strategies thatreplicate performance of an index.

11 Definition of“investor fees”

Does the definition include all fees applied by thefund manufacturer or must this definitioncontemplate all possible fee expenses that could beapplied by a broker/dealer and/or a financialplanner?

Definition amended for clarity.

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12 Definition of“mutual fundconflict ofinterestinvestmentrestrictions”

Part (b) of the definition could be problematic sinceit prevents the crossing of securities. For example,it would preclude a fixed income portfolio managerfrom buying a bond and then, as it nears maturity,cross the securities to a shorter term bond fund,and in turn crossing the security to a money marketfund as it approaches maturity. This type oftransaction should be permissible if executed at fairmarket value through an independent broker/dealer.

No change. Inter-fund trading notpermitted by the securitieslegislation of several of theprovinces. Issue to be addressedas part of parallel amendingprocess.

13 Definition of“permittedsupra-nationalagency”

The European Investment Bank should be includedin the definition.

No change. A "permittedsupranational agency" must beprescribed under paragraph (g) ofthe definition of "foreign property"in subsection 206(1) of the ITA. The European Investment Bankhas not been prescribed.

14 Definition of“purchase”

A transaction should be considered to be a“purchase” only where securities are acquired as aresult of a positive action by a fund and not as aresult of a passive incident. The automaticconversion of securities in connection with anamalgamation, merger or other reorganizationought not be considered a “purchase”, regardless ofhow the fund voted in connection with thetransaction. To make the characterization of asubsequent conversion dependent on the fund’svote may encourage elements of gamesmanshipwith respect to voting (i.e. to attempt to ensure100% conversion without any compliance violation). The definition should be simplified to remove therelevance of voting and to classify all automatic orforced conversions (even those with an element ofselection) as not being “purchases”

Change made to section 2.13 ofCP to clarify that a transactionwould not be a “purchase” if themutual fund declined to tenderinto an issuer bid.The CSA recognize that referringto voting may not be a perfectsolution but voting is fundamentalto decision-making.

15 Definition of“report tosecurity-holders”

The definition should be expanded to include anyreports sent to securityholders generally. Quarterlyreports would be included in the current definition of“sales communications” and this serves no validpolicy objective. The expanded definition shouldthen be excluded from the definition of “salescommunication”. Such reports are only sent toexisting securityholders, are not “primarilypromotional” in nature and are still subject tosection 15.8 with respect to the use of performancedata.

No change. The CSA believe thatsuch quarterly reports shouldcontain the modified warninglanguage (see section 15.4).

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16 Definition of“significantchange”

The proposed change to measure the subjectiveevent of “significant change” by estimating investorperception (as opposed to the view of an issuer inthe former definition of “material change”) is anonerous task. Is the “investor” of average financialknowledge? Given the varying degree of investorsophistication, fund companies require moreguidance and examples of instances where achange would be considered “significant”. Part 7 ofthe CP only provides two examples of what the CSAconsiders “significant changes”. This is notsufficient.

No change. The definitionimposes a “reasonable” persontest.

17 Definition of“specialwarrant”

In today’s market, “special warrant” can includeinstruments such as special shares or special unitsand therefore the definition should be expanded torecognize this.

No change. The CSA do notbelieve that it is necessary tochange the term since what isimportant is whether the securityfits within the definition.

18 Section 2.1 Why are securities issued by U.S. states andgovernments of other foreign jurisdictions notexcluded from the concentration restriction? It isnot clear why such securities would not be given thesame treatment if the basis for the exclusion is lowrisk, low volatility and sufficient liquidity.Despite subsection 3.1(3) of the CP, it is not clearwhy the CSA is not willing to codify the standardexemptions granted to international bond funds. Applications of this type are commonly made, thebases for the applications are usually very similar,orders are routinely issued and are very similar inmost cases.Why should an international equity fund not begiven the same flexibility as an international bondfund on a discretionary basis (s.3.1(3) of CP)?

No change; provision consistentwith NP39.The CSA would consider anapplication for discretionary reliefby mutual funds wishing to deviatefrom those restrictions due tospecialized investment objectives.

19 S. 2.1(3) and(4)

These provisions do not clearly instruct whether thefund should appraise index participation units forasset concentration or not.

Subsection 2.1(1) of the NI andsubsection 3.3(2) of the CP havebeen amended to clarify that thepurchase of index participationunits is subject to section 2.1 ofthe NI.

20 S. 2.2 Why is the issue of control for a mutual fund or agroup of mutual funds different than for any othermarket participant? The control restrictions inCanadian securities legislation already containadequate restriction on aggregate holdings ofsecurities of an issuer through the take-over bid,early warning and insider reporting requirements.The concentration restrictions in s. 2.1 provide thenecessary diversification protections to guard theinterests of investors. From a control perspectivethe issue is not how many shares are owned by aparticular fund i.e. it is irrelevant if a control positionis allocated among a dozen funds or restricted to asingle account.

No change. This rule is notaddressed to the secondarymarket but is rather intended toaddress the management of amutual fund. The fundamentalfeature of a mutual fund is that itshould not control another issuer.The rule is not intended toaddress diversification. Diversification is addressed bysection 2.1.

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21 S.2.2(2) Although section 2.14 of the CP contains examplesof acquisitions that would not generally beconsidered “purchases”, the list is not exhaustive. The current wording might (inadvertently) catch asituation in which a fund’s holdings increase as aresult of a decision not to tender to an offer (andother unforeseen circumstances).

The process for reducing holdings once the 10%level is reached should be amended to conformwith the requirements of section 2.4 concerning“illiquid assets”.

Change made to s. 2.13 of CP. Ifthe mutual fund acquiressecurities pursuant to an issuerbid to which it declined to tender,that acquisition would not beconsidered a purchase.

No change. The CSA believe thatthe time provided is adequate andappropriate.

22 S. 2.4(2) The monitoring of a fund’s holdings in illiquid assetsis typically done on a monthly basis. Therefore, thesubsection should be amended to provide that “amutual fund shall not have invested, as at the firstmonth-end following a period of 90 days, more than15 percent of its net assets taken at market value,in illiquid assets”.

No change. The CSA believe thatthe time provided is adequate andappropriate.

23 S. 2.5(2)(b) The clause should be amended to extend theexemption to funds listed on exchanges in theUnited States and other countries. Such anamendment would be parallel to the rule for indexparticipation units. There does not appear to beany policy reason to restrict mutual funds frominvesting in closed-end funds listed on a U.S.exchange.

No change. The rule reflectsthose "quasi mutual fund" entitiescurrently known to the CSA asbeing potential investments formutual funds. A problem with thissection only arises if the mutualfund wishes to invest in an entitythat has a redemption feature.

24 S. 2.6 Mutual funds should be able to purchase, for non-hedging purposes, listed warrants and debt-likesecurities on margin. Hedge funds are permitted toregularly engage in such transactions. Perhaps theCSA should encourage funds to submit statementsor implement modest disclosure arrangements toassist in monitoring these transactions.

No change. The CSA believe thatleveraged investing is notappropriate for mutual fundsoffered by way of prospectus.

25 S. 2.6(a) This subsection should be amended to permit amutual fund to borrow money on a short-term basisto settle investment transactions. The purchaseand sale of fund securities are typically settled on a“contractual settlement” basis. As a result, it ismarket practice for a custodian’s client accounts toregularly go into overdraft. These overdrafts usuallyare for very short periods of time. In other words,the custodian advances funds to the mutual fund inorder to prevent trades from failing given thedifference in settlement times and dates. Thisadvance would constitute a borrowing by the mutualfund. Therefore, the subsection should beamended to include an additional exception asfollows:The transaction is a temporary measure to facilitatethe settlement of investment transactions by thecustodian or a sub-custodian of the mutual fund.

Change made. The 5% restrictionon amount of all borrowings isaggregate (i.e. includes bothredemptions and settlements).

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26 S. 2.6(a)(ii) The commentary to the NI states that amendmentsto this provision were made “in response tocomments that mutual funds should be permitted toencumber portfolio assets to effect derivativestransactions instead of being restricted to postingmargin”. However, the wording of the clause doesnot appear to meet this objective. The wording “topost margin” is more restrictive than permitting amutual fund to encumber portfolio assets “to effectderivatives transactions”. Subsection 6.8(3) doesnot use the term margin. The words “to post margin”should be deleted.

Drafting changes made to reflectoriginal intention. The words“encumbrance”, and “post margin”have been deleted. Reference isnow made to a “security interest”. The security interest must relateonly to obligations under specifiedderivatives positions. Clause2.6(a)(iv) has been deleted.

27 S. 2.7 The three to five year term limit on swaps mayreduce the ability of a fund to effectively eliminate ordecrease its market or currency risk. Otherconditions relating to swaps, particularly thosepertaining to eligible counterparties, should alleviateregulatory concerns about extended term limits.To alleviate a counterparty credit risk that may arisefrom long-term swaps, a current practice is toinclude a three year mutual put in the swap termswhich would permit the mutual fund to put the swapback to the counterparty in three years. Thus thecounterparty risk is only three years although theterm of the swap is much longer.The Canadian swap market has become mature,highly liquid and active, enabling swaps to beunwound at any time therefore term limits shouldnot be imposed.

No change. The CSA considerthat the five year limit isacceptable since, among otherthings, derivatives with limitsexceeding five years are not veryprevalent. The CSA believe thatany impact on a fund’s ability toact will not be material. Furthermore, the CSA does notbelieve that all segments of theCanadian swap market are highlyliquid (eg. equity and commodityswaps).

28 Section 2.10 Section 4.2 of the CP appears to add additionalrequirements that would severely limit the numberof entities eligible to act as sub-advisers for fundsthat wish to use derivatives. Provided therequirements of s. 2.10 of the NI are satisfied, thereis no reason why a credible, established foreignsub-adviser should be required to acquire thespecific Canadian registrations or qualifications setout in s. 4.2 of the CP. Section 4.2 of the CPshould be deleted so as not to reverse the long-standing policy of Canadian law which hasrecognized the ability of non-resident advisers toadvise on Canadian mutual funds.

Both the NI and the CP over-emphasize thedifficulties associated with managing funds thatemploy derivative instruments. Derivativeinstruments are now a well established part ofportfolio management and do not require thedegree of focus and special requirements set out inthe NI.

No change. Section 4.2 of the CPdoes not impose anyrequirements but merely remindsindustry participants of registrationrequirements that exist undersecurities or commodity futureslegislation.

The CSA believe that theprovisions governing derivativeinstruments are necessary andappropriate.

29 S. 2.10(1) It is not clear why the restrictions in this subsectiononly apply to advice of a non-resident adviserconcerning standardized futures and options.

No change. There are registrationrequirements with respect toinvestments in options andfutures. See section 4.2 of theCP.

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30 S. 2.11(2) The exemption does not cover funds in existencebefore NP 39 was amended to permit derivatives,which have disclosed in their most recent SP thatthey may use derivatives and have previously givenunitholders notice of their intention to usederivatives, but have not actually done so to date. Such funds should not be required to provide noticeto unitholders again simply because each of itssimplified prospectuses since inception have notcontained this disclosure.

Change made. Notice notrequired if SP has containeddisclosure concerning the use ofspecified derivatives since thelater of January 1, 1994 and theinception of the fund.

31 S. 4.1(1) Determining the start of the 60 day period is linkedto the time that the relevant securities are out ofdistribution. In some cases that may be the date ofclosing of the transaction, but in other cases it maynot be until sometime after that date. For example,in a firm commitment offering that is not fullysubscribed on the date of closing the unsoldsecurities are taken into the underwriter’s inventoryafter closing and are marked to market. Section 4.1should be amended to ensure that the 60 dayperiod starts to run at the date of the closing of thetransaction. This would be sufficient to adequatelysafeguard mutual fund investors against potentialharms.

No change. The CSA believe thatit is appropriate to tie therestriction to the end of thedistribution.

32 S.4.4(3) If this provision is intended simply to deal with theindemnification of the manager of the mutual fundby the mutual fund and not all service providers tothe mutual funds then it should be clearly specified. The liability and indemnification scheme shouldapply to persons or companies retained to performduties or activities that the manager wouldotherwise be obligated to perform but not to thoseproviding services used by the manager inperforming its services for the mutual fund.

The provision should be amended to clearly excludethe trustee of the mutual fund. Common law setsthe standard that should be applicable to trusteesand it is not necessary for the NI to addressspecifically the indemnification of trustees.

Clarification should also be given regarding thestatus of directors of mutual funds which arecorporations and members of independent advisoryboards of mutual funds which are trusts.

Changes made to subsections4.4(1) and (2) to clarify that thesection relates to personsretained by the manager or themutual fund to discharge any ofthe manager’s responsibilities tothe mutual fund. Section 4.4deals only with the relationshipbetween the manager and themutual fund. It does not purportto regulate the relationshipbetween a trustee and the fund.

Subsection 4.4(5) has beenamended so that it does not applyto a director of a mutual fund. The liability and indemnification ofdirectors is addressed bycorporate law.

33 S. 5.1(a) Further clarification is needed on the scope of theobligations intended, particularly with respect to thekinds of changes that would require securityholderapproval. Is an “increase” measured in absolutedollars or in percentage terms? Do the words“could result in increases” impose a test based onpossibility, reasonable expectation or what isconceivable in a worst case scenario? Examplesand elaborations in the CP would assist ininterpreting the provision.

No change. The CSA believe thatsection 6.3 of the CP providessufficient clarification.

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34 S. 5.1(f) The requirement for securityholder approval shouldbe subject to a “significant change” test as in s.5.1(g). A 60 day notice period would be preferableso that if any securityholder did not support areorganization, despite there being no significantchange to the mutual fund or the securityholder’srights, the securityholder could redeem his or hersecurities.

No change. The CSA believe thatsecurityholders should be able tovote on arrangements that resultin the mutual fund in which theyoriginally invested ceasing to existand the securityholders becomingsecurityholders of another mutualfund.

35 s.5.1(g) Despite the definition of “significant change” insection 1.1, the meaning of the term in the contextof a merger of mutual funds is highly subjective,and will be very difficult to interpret and apply.

No change. Subsection 7.3(2) ofthe CP provides guidance.

36 S. 5.3 There should be no difference in the requiredtreatment of an increase in charges to the mutualfund between that required for those mutual fundswhich are permitted to be described as “no load”and those which are not. In either case, investorsare equally affected by non-arms length chargesand should be afforded the same protections.

No change. The CSA believe thatthis distinction is valid becausethere would be no charge to theunitholder of a no-load fund whochooses to redeem. Section is acarry-over from NP39.

37 S. 5.5(2) and5.8(1)

Whether there is a change of manager or a changeof control of the manager, the substantive result isthe same - namely, another (new) organization nowoperates the mutual fund or group of funds. Accordingly, it seems logically inconsistent thatthese two types of transactions should be treateddifferently. Presumably, for the time being,securityholder approval will not be required inrelation to a proposed change of control of amanager?

No change. At this timesecurityholder approval is notrequired for a change in control ofmanager, although as noted in thenotice published with the March1999 draft instruments, the CSAremain concerned about theimplications to investors ofchanges in control of managers.

38 S. 5.6(1)(b) Certain other transactions which do not fall withinthe meaning of “qualifying exchange” under section132.2 of the ITA should be exempted from obtainingpre-approval of securities regulatory authorities.These would include mergers of mutual fundcorporations which, in the normal course, may beequally, if not more, straightforward than a “qualifiedexchange”. As drafted, the provision would requirepre-approval for such transactions. These types oftransactions should not require pre-approvaltherefore the provision should be deleted.

Change made to contemplateother tax-deferred transactionsunder ITA.

39 S. 5.6(1)(i) Requiring that redemptions be permitted up to theclose of business on the day before the effectivedate of a merger or conversion could beproblematic since a fund company’s systems couldbe legitimately inoperative on that date. Consequently, redemptions received on that datewould not be processed.

No change. The CSA note thatmost mergers mutual fundscarried out to date have permittedredemptions up to the close ofbusiness of the day before theeffective date of the merger.

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40 S. 5.8 The notice requirement may not work in caseswhere the fund manager is a public company andthe target of a hostile take-over bid. The level ofprescribed disclosure may entail preparation of anentirely separate disclosure document geared tosecurityholders of the funds as opposed toshareholders of the current manager to whom thetake-over bid circular is directed. A notice tosecurityholders of the funds summarizing the keyelements of the transaction should be sufficient. The notice requirement should be restricted tochanges of control as a result of the agreement ofthe mutual fund manager or its owner.For indirect changes of control, prior regulatoryapproval should be required instead (which couldrequire advance notice to unitholders in appropriatecases) with notice to unitholders in the next mailingof continuous disclosure material.

No change. It is correct that aseparate disclosure documentaddressed to securityholders ofthe fund may have to be prepared. An application for an exemptioncan be made in cases where suchrequirements may be problematic.

41 S. 6.1(2)(b) The words “if appropriate to facilitate” in the 1997Draft have been replaced by the words “if requiredto execute”. Although in most cases foreigninvestment requires foreign custody, there arecountries in which it would be possible to takephysical possession of securities certificates andremove them to Canada. It is unclear whether thecurrent words would compel Canadian funds totransport physical certificates in suchcircumstances. Such a requirement would be ill-advised given related delays and risks which wouldrender such securities significantly less liquid than ifthey were held in a depository or by a sub-custodian in the relevant jurisdiction.

Change made. There was nointention to change the standard. The words “required to execute”have been deleted and the words“appropriate to facilitate” havebeen included. The latter phraseis used in NP39.

42 S. 6.1(3)(c) Confirm that this requirement is satisfied where theagreement between the custodian and the sub-custodian permits the custodian to enforce itscontractual rights against the sub-custodian withrespect to the portfolio assets held by the appointedsub-custodian.

No change. The mutual fundmust be able to require thecustodian or the sub-custodian toenforce rights on behalf of themutual fund.

43 S. 6.1(4) Confirm that a provision, either in the constatingdocuments of the mutual fund itself (where there isno separate custodian agreement) or in thecustodian agreement between the mutual fund andthe custodian, which permits the custodian toappoint in its discretion one or more sub-custodianswould be sufficient to meet the requirement of thisprovision.

No change. Subsections 6.1(4)and (5) set out the rules in thisregard.

44 S. 6.2 and 6.3 The requirement that the trust company’s auditedfinancial statements have to have been made publicshould be deleted. There are very few trustcompanies left in Canada which make their financialstatements available to the public, except on aconsolidated basis.

Change made. The words “thathave been made public” havebeen deleted from sections 6.2and 6.3.

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45 S. 6.4(3) It is industry practice for custodian agreements toprovide that no encumbrance on the portfolio assetsof the mutual fund will be created except for either agood faith claim for payment of the fees andexpenses of the custodian or for a claim forpayment of any amounts advanced by thecustodian to the mutual fund for the purpose ofsettling transactions. If custodians are notpermitted to have a security interest in respect ofsuch advances, custodians would not make theadvance and the reality is that the majority ofinvestment transactions would fail. Therefore, theNI should be amended to permit encumbrances foramounts owing in respect of advances made by thecustodian to settle transactions.

Change made. Clause 6.4(3)(a)amended to permit securityinterest in portfolio assets tosecure obligations of a mutualfund to repay amounts advancedby the custodian for the purposeof settling portfolio transactions.

46 S. 6.4(3)(b)andS. 6.5(5)

It is common for custodians to charge anadministrative and safekeeping fee which includesa charge for processing the receipt of assets intocustody or the delivery of assets out of custody.Although such processing occurs as a result ofpurchases and sales by the mutual fund, thesetransaction-based fees compensate the custodianfor performing a specific service, not for the transferof beneficial ownership. Such fees have neverbeen regarded as inconsistent with s. 7.01(8) of NP39 which expressly permits contractual provisionsrequiring payment of “the fees and expenses of theCustodian or sub-custodian as the case may be forsafekeeping and administrative services”.

Change made to s. 6.4(3)(b) ands. 6.5(5).

47 S. 6.5(5) This provision should be deleted. It introduces aprohibition which could prevent a mutual fund fromachieving proper ownership of assets in marketswhere such transfers are beneficial and are onlyavailable if fees are paid. Many markets,particularly foreign or emerging markets, havedifferent and changing practices regardingsecurities trading and settlement. As long as thefees paid by the fund are reasonable and consistentwith industry norms, it is in the best interests of thefund to be permitted to make transfers in the sameway as other investors may.

No change. The CSA believe thatit is appropriate to continue theprohibition in NP39 against thepayment of such fees, althoughthe changes referred to abovehave been made to thissubsection.

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48 S. 6.6(3) Indemnification should be permitted if the“custodian” rather than the “mutual fund” hasreasonable grounds to believe that the action is inthe best interests of the fund. Custodians mustmeet certain prescribed requirements and act in afiduciary capacity towards a fund therefore they arein the best position to determine what is in the bestinterests of a fund. Since a custodian must follow its client’sinstructions and has no discretion to assess thewisdom of those instructions, it would be highlyunfair to require custodians to bear losses resultingfrom the due execution of instructions that themutual fund later asserts were not in its bestinterests.Therefore, the word “and” which joins clauses (a)and (b) should be replaced by the word “or”. In thealternative, clause (b) should be deleted. Subsection 6.6(4) should also be amendedaccordingly.

Change made. Clause 6.6(3)(b)deleted. Subsection 6.6(4) notchanged.

49 S. 6.6(3) The use of the words “legal fees, judgments andamounts paid in settlement” arguably requires someform of litigation in order for the indemnity tooperate. However, where a custodian has clearlymet its standard of care, the custodian should beentitled to be indemnified out of the assets of themutual fund without having to take any legal action. In addition, this restrictive language may subject themutual fund itself to additional costs in order todefend a bona fide claim by the custodian, whichcannot be the intent of this provision.

No change. The provision doesnot make the commencement offormal legal proceedings aprecondition for indemnification.

50 S. 6.8(1) The reference to “initial margin” should be changedto “margin” since the concept of initial margin doesnot appear elsewhere in the section.

Change made.

51 S. 6.8 The exception in s. 6.8(3) needs to be betterexpressed to reflect three issues:(i) the exception remains limited to transactionsinvolving forward contracts or options that are notclearing corporation options;(ii) the current language, dealing with“depositing...as collateral” does not encompass thefull range of ways in which a mutual fund’s assetscan be “encumbered”;(iii) the placement of 6.8(3) in the custodial sectiondoes not clearly reflect the intention to grant anexception - such an intention should be expressedin the same section which contains the prohibition(i.e in Part 2). A new section should be added toPart 2 to permit the encumbrance of portfolio assetsby way of granting a security interest in thoseassets.

Change made. Subsection 6.8(3)has been amended to permit thedeposit of assets in connectionwith the granting of a securityinterest relevant to specifiedderivative transactions. Thisconforms to the changes made tosection 2.6 of the NI.

52 S. 6.8(4) A transitional provision should be included in Part20 to allow agreements by which portfolio assetsare deposited in accordance with section 6.8 to beamended as is the case for custodial agreementsunder section 6.4.

Change made. Paragraph20.5(2)4 added.

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53 S. 9.1(3) The word “transmitted” should be replaced by theword “sent” for consistency with subsections 9.1(1)and (2).

Change made.

54 S. 9.1(4) and(6)

The ability to establish cut-off times should extendto paper orders as well. Fund managers and dealers may need to establishdifferent cut-off times for different orders, dependingon the manner in which the order is processed. Cut-off times for electronic orders could be laterthan those for paper orders since electronic orderscan be processed more quickly. While thelanguage of the NI appears sufficiently permissiveto allow for this, a section should be added to theCP to clarify this point. These comments also applyto subsection 10.2(4) and (7).

No change. A distinction hasbeen made for electronic ordersbecause such orders go directly tothe order receipt office on thesame day.

55 S. 9.1(7) The provision seems to require either (i) that theperson responsible for approving new accountsreceive a copy of each and every purchase orderreceived by the dealer, despite the fact that theperson responsible for reviewing client trades isalso receiving this information, or (ii) that the personapproving new accounts must also be the personwho performs the know your client review of trades. Dealers should be entitled to establish, within thelimits of generally applicable supervisoryrequirements imposed by securities laws, how theywill meet these obligations. To the extent that an “inthe jurisdiction” requirement is imposed by the lawsof a jurisdiction, the obligation to satisfy thatrequirement exists notwithstanding this provision. Where such a requirement is not imposed, this NI isnot the appropriate place to establish such arequirement.

Change made. The words“approving the opening of newclient accounts and for” havebeen deleted.

56 S. 9.1(7) The provision should make clear that the relevantinformation can be communicated electronically.

No change. Electronictransmission is not precluded.

57 S. 9.2(a) The provision should be amended to state that “therejection of the order is made no later than theclose of business on the business day after the dateof receipt of the order by the mutual fund”. If the 24hour requirement is retained, it could mean that amutual fund that received an order on Friday wouldhave to reject the order on a non-business day.

Change made. The reference to“24 hours” has been replaced with“one business day”.

58 S. 9.2(b) The provision should be amended to require thatmoney be refunded within 3 business days (T+3), tobe consistent with the rest of the NI and to ensurethat the purchaser’s cheque has cleared thebanking system.

No change. The CSA believe thatthere should be no delay inrefunding cash to an investorwhen a purchase order isrejected.

59 S. 9.4(1) This provision enshrines the T+3 standard. Thesettlement standard for money market funds shouldbe dealt with separately. The industry norm iscurrently T+1 for such funds.

No change. The provisionimposes a minimum standard. Ashorter settlement period ispermitted.

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60 S. 9.4(3) &10.4(4)

In cases of both in specie purchases andredemptions the requirement to include details inthe statement of portfolio transactions should bedeleted. To put this requirement into effect bysegregating these assets would require systemsenhancements.

No change. The reportingrequirement for in specieredemptions that is currently insection 13.03 of NP 39 isretained.

61 S. 9.4(4) The provision should be amended to include anysituation in which the mutual fund discovers, afterT+3, that there are insufficient funds to settle thepurchase. There are forms of payment, other thancheques, which may be returned to the mutual fundif insufficient payor’s monies are available. Theprovision should be amended to address all formsof insufficient payment. For example, payment viaelectronic fund transfer.

Change made. Reference to“method of payment” has beenadded.

62 S. 9.4(4)(a) This clause should be amended to clarify that theorder to redeem the securities purchased and forcesettle the purchase order is deemed to be receivedon the business day following T+3. This follows thesame approach as NP 39 but simply reflects theshorter settlement cycle.

Change made.

63 S. 10.1 For registered accounts the registered holder mustbe the trustee. The trustee typically delegates anumber of functions regarding the administration ofthe registered plan to the fund company or dealerthat sponsors the registered plan and so the tradeis often approved by the fund company or dealerand then processed. It would be helpful to clarifythese requirements with respect to registeredaccounts in section 10.2 of the CP.

No change. Paragraph10.1(1)(b)(i) permits a redemptionorder to be completed “on behalfof” a securityholder. Therefore,parties are not precluded frommaking arrangements that theyconsider appropriate.

64 S. 10.2(6) Since all orders come from registered dealers, thenotice proposed should be given to the participatingdealer rather than the securityholder.

No change. The CP clarifies thatreference to “securityholder” is tothe registered securityholder.

65 S. 11.1 The provision requires a dealer to have “a” trustaccount. It should be amended to clarify that thisdoes not mean that a dealer must only maintain asingle trust account (some may wish to maintaintrust accounts with different financial institutions tomake it easier to transmit client funds).

Change made to clause 11.1(1)(a)to permit more than one trustaccount.

66 S. 11.1(4) Permitting dealers to remit interest annually to acontingency fund, as previously suggested, is aviable and positive option which should beconsidered by the CSA.

No change at this time.

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67 S. 11.3 Some financial institutions will not pay interest onan account if there is not a sufficient balancemaintained in the account at all times. In smallercommunities, dealers may not be able to access abranch of a competing financial institution. Assuming the financial institution imposes the samerequirements on all accounts with a dealer andpays no interest on any of those accounts, thiswould presumably meet the specific requirementsof clause 11.3(1)(b). Clarification of this point wasnot included in the recent CSA Staff Notice 33-303and 81-304 and would be helpful.

No change. The provision doesnot require that interest always bepaid. If no interest is charged “oncomparable accounts of thefinancial institution” then therequirement is satisfied. Seesubsection 11.1(6) of the CP.

68 S. 11.3(1)(c) S. 11.3(c) This provision is unnecessary and should bedeleted. The mutual funds benefit from all interestearned on the account. Bank charges are acustomary and reasonable cost of obtaining bankservices. There is no valid policy reason why thefunds should enjoy the benefits associated with theaccount without paying the normal costs associatedwith a bank account.

No change. The CSA considercharges against a trust account tobe a cost of doing business forprincipal distributors andparticipating dealers. The moneyin a trust account is client moneyand cannot be reduced throughbank charges.

69 S. 11.5 There is no apparent policy rationale for requiringthe custodian to open its records to the fund’sprincipal distributor for inspection. It seemsreasonable that the manager of operations and theauditors should have access to the fund’s recordsand a cogent argument could be made that thetrustee should also have access to these records.The designation of “representatives of the mutualfund” as having the authority to request inspectionof contracts may be problematic since the term isnot defined in either the NI or the CP.

Change made. The reference toprincipal distributor has beendeleted.

70 S. 12.1 The filing requirement for dealers and distributorsshould be 140 days (as it is for funds).

No change. The provision isconsistent with the financial filingrequirements for registrants.

71 S. 12.1(2)(b) The clause should be amended to allow theprincipal distributor to file a report of its own auditoror that of the funds’ auditor. In certain cases, theauditor of the principal distributor is different fromthe auditor of the mutual funds. The audit offinancial statements of a mutual fund includes anexamination of the securityholder accountingsystem procedures and controls and also coversthe co-mingling of money. If the clause is notmodified, the auditor of the principal distributorwould be required to perform the same proceduresas the auditor of the mutual fund performs inrendering an opinion on the financial statements ofthe mutual fund. This will result in a duplication ofeffort and cost inefficiency.

Change made.

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72 Part 13 The CICA and other professional bodies are in abetter position to offer guidance on these issuesand therefore the CSA should not impose detailedand specific regulations regarding the valuation ofsecurities. For example, sections 13.4 and 13.5should be deleted since it is inappropriate andunnecessary to provide specific direction on onlylimited subsets of investments.

The wording contained in s.14.05 of NP 39 ispreferable to the approach set out in subsection13.5(4) and if the provision is retained it should beamended back to the wording used in NP 39.The requirement of s.13.5(4)(b) should only apply incircumstances in which the daily limits have beenreached rather than for all standardized futures forwhich daily limits are applicable.

It would be appropriate to also consider the timevalue of money that may be built into the futurescontract i.e. the “fair value” of the futures contractshould be established. It is inappropriate for theCSA to attempt to mandate a particular valuationmethod given the need for judgment in determiningfair value in certain circumstances.

No change. The CSA believe thatit is necessary and appropriate toaddress these issues in the NI. Provisions have been carriedforward from NP39.

Change made.

No change. The CSA believe thatthe time value is accounted for bybasing the value of the future onthe gain or loss on the future.

73 S. 13.1(4) Reference is made to publication of net asset value. Net asset value per security is published. The twoconcepts are different and equally important. TheNI should deal carefully and separately with each.

Changes made throughout NI.

74 S. 13.1(4) The provision should be deleted. If the provision isretained, it should be amended so that it is notmandatory but instead reflects a concept of“commercially reasonable efforts”. Also, the word“timely” must be clarified.

No change. See section 12.1 ofthe CP.

75 S. 13.4 This section does not address adequately thecomplexities associated with valuing restrictedshares. For example, it does not deal withinstances where the information required is notavailable (eg. proportional class information at thetime of purchase and valuation). Also, the timeremaining until the lifting of a restriction is a factorin valuation and has not been addressed. There isno room for manager discretion which is advisablein certain situations.

No change. The time remaininguntil lifting of a restriction isaddressed in clause (b).

76 S. 13.5, 6 The term “mark-to-market” should be defined. Change made. The provision hasbeen deleted. The valuation ofswaps is now addressed byparagraph 3 of section 13.5.

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77 Part 14 Section 13.3 requires that capital transactions willbe reflected in the first valuation date after the dateused to establish an issue or redemption price. Accordingly, it appears that the net asset value persecurity for distribution purposes will not includecapital activity for transactions of that date. This isan inconsistency which will impact calculations,including the capital gains refund mechanism, tothe disadvantage of securityholders of the fund. The provision should be clarified so thattransactions be reflected in the net asset value persecurity for distribution purposes.

No change. The CSA are of theopinion that there is no conflictbetween s. 13.3 and s.14.1(a).

78 S. 14.1 Some funds utilize the following model fordistributions:

Day X: 1. - calculate NAVPS 2.- process orders received prior to cut-offtime on Day X at Day X NAVPS 3.- develop unitholder record

Day X+1: 1.- calculate NAVPS and distributionper unit 2.- process orders received since Day Xcut-off time and before Day X+1 cut-off time at DayX+1 NAVPS 3.- process distributions(reinvestments and cheques as appropriate) tounitholders shown on unitholder record.This is an efficient and fair method of dealing withdistributions.The section should be amended to make clear thatit will continue to be possible to declare a recorddate on a day immediately prior to the actualdistribution.

Change made. The record datecan be the date on which theNAVPS is determined forpurposes of paying a dividend ordistribution or the last day onwhich NAVPS was calculatedbefore the date of payment.

79 Part 15 This part does not mention image advertisements,nor does the Notice preceding the NI. The CSAshould confirm that CSA Notice 7 - National PolicyNo. 39 - Mutual Funds - Sales Communications,which excludes image advertisements from thedefinition of “sales communications”, continues toapply.

No change. Subsection 2.15(3) ofthe CP addresses imageadvertising.

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80 S. 15.2(2) The change to requiring 10-point type will make thecreation and use of some advertisements and salescommunications prohibitively expensive, as all textwill need to be enlarged accordingly and the overallspace required will need to be increased toaccommodate this.The new requirement may also eliminate the use ofcertain graphical presentations in advertisements,such as mountain charts.The new requirement is anti-competitive since noother participant in the financial services industry issubject to the same standards.Ultimately, there are sufficient safeguards in therequirement that sales communications not bemisleading and the current 8-point typerequirement.As a minimum, the 10-point type requirementshould be restricted to specified text (includingheadlines, performance data, warning language),with the flexibility to use any other type size for thebalance of the text.The point size of type is merely one factor thatdetermines readability and changing the type size isnot an effective way of making disclaimers morereadable. An alternative would be to establish aminimum point size and leading relationship, tomake the type easier to read.Although a disclaimer would be made larger,because designers can increase the size of theother type, the net result may be that the disclaimeris no more prominent, attractive or effective. The requirement may also make it less efficient toprovide French materials since such materials aregenerally more space intensive than in English. Extensive re-design costs will have to be incurredfor many standard documents.

Change made. The 10-point typerequirement applies toperformance data or disclosurespecifically required to beincluded in sales communicationsby the NI.

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81 S. 15.3(1)(d) The clause prohibits comparison to a benchmarkthat has or will become discontinued(eg. TSE 100)if that benchmark only existed for a portion of theperiod subject to comparison, thus limiting theperiod that can be compared. The use ofreconstructed benchmarks is the norm. Forexample, the TSE/S&P 60 will be reconstructedback over a number of years. CSA concerns couldbe addressed by appropriate disclosure concerningthe transition from the discontinued benchmark toanother benchmark.

The clause prohibits the use of peer group indicesand other benchmarks produced by an independentorganization which may be entirely suitable forcomparison but are not permitted simply becausethey are or were not widely available throughout theentire period of comparison.

For some funds (eg. balanced funds) there are nocurrently available indices against which tobenchmark. To date, the practice has been to taketwo or more appropriate benchmarks and averagethe performance on the indices in order to developa benchmark appropriate to the fund. The clausewould appear to prohibit this practice for no validpolicy reason.

Change made. Clause 15.3(1)(d)has been amended to permit theuse of reconstructed benchmarksthat are widely recognized andavailable.

Change made. A new subsection15.3(3) has been added to permitan index mutual fund to provideperformance data for itsbenchmark index provided thebenchmark is widely recognizedand available.

No change. Exemptive relief canbe requested in appropriatecircumstances.

82 S. 15.3(2) This subsection needs to be clarified. The apparentintention is that any comparison of performancedata about young funds made to existingsecurityholders includes only a comparison to afund or asset allocation service under commonmanagement and not to a benchmark. Thereference to the prohibition under 15.6(a) is unclear,since 15.6(a) describes the situations in whichperformance data can be used in a salescommunication. Also, it is not clear why theperformance data about young funds cannot becompared to a recognized benchmark.

Change made. Subsection15.3(3) has been added to permita young fund to makecomparisons to a widelyrecognized and available index.

83 S. 15.3(3)(b) S.15.3(4)(b)

For the purposes of comparability of rankings, it ismore meaningful to have the ranking information forthe standard periods of 1,3,5 and 10 years asopposed to the standard performance data forthese periods.

Change made. New paragraph(c) added.

84 S. 15.3(5) S. 15.3(6) This subsection appears to conflict with subsection15.13(3) which restricts references incommunications to funds that are money marketfunds instead of to funds that are or were moneymarket funds under the NI or NP 39.Why does subsection 15.13(3) refer to“communications” while subsection 15.3(5) refers to“sales communications”?

Change made. Subsection15.13(3) has been deleted.

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85 S. 15.3(4)(c) S.15.3(5)(c)

Is it correct that if there is a differential betweencredit ratings that the lower credit rating would haveto be used, as is currently the requirement undersubclause 16.04(a)(xv) of NP 39?

Yes. No change.

86 S. 15.4 The sample warning language remains too lengthyand inaccessible. Shorter, simpler general warninglanguage should be adopted for section 15.4.

Change made. All of the samplewarnings and disclosure havebeen amended.

87 S. 15.4(7)(b) Does the CSA intend that the prescribed statementappear adjacent to the performance numbers or onthe same page? Subsection 15.4(6) regarding non-money market funds does not prescribe where therequired statement is to be positioned.If the intent of this part is to ensure that disclosurestatements appear coterminous to the performancenumbers, it is plausible that the remainingdisclosure statements will not be read. In light ofthe change to a minimum of 10 point type, it issubmitted that the disclosure will be read andshould be part of main disclosure.

Yes. No change.

88 S. 15.4(11) DELETED The approach in NP 39 and the 1997 Draft ispreferable since there should be no need forwarning language in such situations. However, the50% should refer to the size or area of thecommunication and not to the text (number ofwords) of the communication.

Change made. This subsectionhas been deleted since thewarnings have been reduced.

89 S. 15.5 To describe a fund as no-load is misleadingnotwithstanding this provision. All mutual funds paydistribution costs in some way.

No change.

90 S. 15.5(2) The term “fees and charges paid by the mutualfund” is very broad and would arguably include feessuch as management fees, custody fees, trusteefees, brokerage fees etc. which are not required tobe disclosed by any other mutual fund in their salescommunications. There is no rationale for requiringsuch disclosure.The disclosure of fees, charges and trailingcommissions should not be required unless suchfees and charges are payable by the investor. Themarket is generally aware that “no load” means nofees or charges payable directly by the investor.

Change made. The words “feesand charges” have been replacedwith the words “management feesand operating expenses”. Therevised warning language insubsections 15.4(3) and (6) whichapplies to all mutual funds (otherthan money market funds) refersto trailing commissions, fees andexpenses.

91 S. 15.5(2)(b) This requirement goes far beyond the NP 39requirements and will, in practice, proscribe alladvertising by no-load funds since even a summarydescription of all fees and charges paid by themutual fund will be extensive. General warninglanguage (see comment re 15.4(3)) would addressany potential for confusion by alerting investors tothe possibility of fees and charges, both direct andindirect.

Change made. The requirementto include a summary of fees andcharges has been replaced by arequirement to disclose thatmanagement fees and operatingexpenses are paid by the mutualfund.

92 S. 15.5(2)(c) Despite the statement in footnote 133 that the CSAwish to alleviate confusion between the term “no-load” and the existence of trailers, the proposedregulatory solution may create confusion.

No change.

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93 S. 15.5(3) The wording should be limited to only fees andcharges payable by the investor directly. To dootherwise would be impractical and would result inno fund referring to itself as “no load”. This wouldnot be in the best interests of investors.

Change made. Thecommunication does not need toprovide a summary but mustdisclose the types of fees andcharges that exist.

94 S. 15.6(a)(i) Is this clause breached by delivering a combinedannual or semi-annual report to securityholders forall funds within a fund family where one or morefunds has operated for less than 12 months? Ifreports to securityholders are excluded from thedefinition of “sales communication”, then providingcombined reports to securityholders will not violatethis clause.

Change made. New paragraph15.6(a)(ii)(B) added to permitdelivery of sales communicationto securityholders/participants of amutual fund/asset allocationservice under commonmanagement.

95 S. 15.7 Would an advertisement making reference toinvestments available through an asset allocationservice profiling the performance of mutual fundsnot under common management be deemed as“comparing performance”? This type ofadvertisement does not actually instruct readers tocompare, but rather observe the performancehistory of various funds which comprise portfoliosoffered through the assets allocation service.

No. No change.

96 S. 15.7(b) The possibility for fund comparisons has beendramatically narrowed by this provision, particularlyin respect of funds that are not under commonmanagement. Restricting comparisons of funds indifferent families to those with similar fundamentalinvestment objectives is troubling given the breadthof the definition.

No change. The CSA believe thatcomparisons should be permittedonly where the fundamentalinvestment objectives are similar.

97 S. 15.8(2)(a) Is it correct to presume that the CSA will not requiresales communications to necessarily present datain a 10, 5, 3 and 1 year order?

No change. The order is notprescribed however the data mustbe consecutive.

98 S. 15.8(2)(b)(i)and (ii)

Please clarify the methodology that should beemployed to ensure compliance with theseprovisions.

No change. The CSA believe thatthe provisions are clear.

99 S. 15.8(4) Will this requirement be waived if fund companiesuse the most current standard performance data inthe sales communication? Many fund companieshave newspaper performance advertisements,which are based upon the most current data, andare promptly updated.

Change made. The second partof the provision has been deleted.

100 S. 15.9 It is doubtful whether the additional disclosurerequirements imposed by this section are practicaland may be adhered to in a manner that ismeaningful or useful for investors in a salescommunication.

No change.

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101 S. 15.9(2) This provision imposes significant newrequirements. Essentially it limits the use ofperformance data to either stale-dated performanceof the two funds that existed before the transactionor to performance data of the continuing fund, butonly after that fund has been in existence for oneyear. It is not clear what investors gain from seeingstale-dated performance of the two funds prior toreorganization and from not seeing anyperformance data for the continuing fund for oneyear.The acquiring fund existed before and continues toexist after the transaction. Therefore, why is itprejudicial to a securityholder to be givenperformance data of the continuing fund anytimeafter the transaction, provided there is disclosureabout the merger in the sales communication.Requiring performance information for the non-continuing fund may be misleading, especially if thenon-continuing fund was considerably smaller thanthe continuing fund. Investors may be encouragedto make “quick calculations” by blending theperformance data for both funds which, for manyreasons, may be undesirable (as noted by therejection of this approach by the CSA).

No change. The application of theprovision is limited to cases wherethere was a significant change tothe continuing fund as a result ofthe transaction.

102 S. 15.12 Does this preclude reference to the anticipatedavailability date of a new fund in a newsletter or areader newspaper advertisement? It does notappear that s.15.12(e) prohibits fund companiesfrom mentioning an anticipated launch date whenread in conjunction with s. 65 of the Securities Act(Ontario). The CSA should clarify this, perhaps witha cross-reference to corresponding sections in theSecurities Act (Ontario).

No change. Reference toanticipated availability is notprecluded.

103 Part 16 The calculation does not appear to exclude interestcharges, taxes and commissions and brokeragefees on the purchase and sale of portfolio assets. Itis in effect a total operating expense ratio. This is asignificant change and will have the effect ofincreasing industry MERs. Comparison with aprevious year will yield inconsistent results. Certain taxes, which relate solely to the investingactivity of a fund, rather than operating expenses,ought not to be included in the MER calculation. Specifically, for corporate funds, the inclusion ofcorporate income taxes, capital tax, and foreignwithholding taxes are a consequence of investingactivity and accordingly, are most properly reflectedin the performance of the fund. These costs areoutside the control of the manager and bear norelation to operating activities. Therefore, thesetaxes should be excluded from the calculation ofMER.The 1997 CICA Research Report stated thatGST/PST should be included in “total expenses” butthat income and capital tax be excluded. Theindustry practice has been to exclude GST whenreporting MER.

No change. See subsection14.1(2) of the CP.The MER is designed to be an allinclusive expense ratio regardlessof control over these expenses. The aim is to show investors theactual cost of investing.

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104 S. 16.1(1) Please clarify whether calendar or business daysshould be employed.

No change. The CSA believe thatthe provision is clear as drafted.

105 S. 16.1(2) Please clarify what is meant by “note to disclosure”. Does this include only financial statementdisclosure, or does it also include prospectuses andother continuous disclosure documents?

No change. See subsection14.1(1) of the CP.

106 S. 16.1(2) The calculation is complex for each fund and somefund companies do not presently provide thesedetails. Presently, notation is made in the financialstatements that a portion of the fees otherwisepayable by the funds has been absorbed by themutual fund. This appears to be no longeradequate. Please clarify if this is an accurateinterpretation of the new requirement.

No change. The provisionrequires that a mutual funddisclose more than that some feeshave been waived or absorbed.

107 S. 18.1 Some limits should be placed on the type ofinformation to be retained, the length of time it mustbe retained and what information securityholderscan access. The requirement should be replacedby a requirement that records be retained for 7years (in keeping with the Income Tax Act) or someother reasonable time limit.Also, it should be clarified that records and registersmay be kept in electronic form rather than in paperform.

Change made. The words “for atleast as long as the mutual fund isin existence” have been deleted. See section 15.1 of the CP.The provision does not requirethat records be kept in paperform.

108 S. 18.2 The second purpose - “a matter relating to theadministration of the mutual fund” - is a very broadlystated purpose and there are no guidelines in theCP concerning how it may be limited. Withoutsome guidance in the CP, it may not be possible toadequately control access to securityholder recordinformation that may be sought for an improperpurpose. Each mutual fund company has anobligation of confidentiality to holders of itssecurities which should only be lessened in theclearest of cases (such as to influence the voting ofsecurities).

Change made. Subsection18.2(1) has been amended torefer to a “matter relating to therelationships of the mutual fund,the members of the organizationof the mutual fund, and thesecurityholders, directors andofficers of those entities”.

109 S. 19.1(1) Clause 2.2(2)(b) of NI 13-101 SEDAR permitselectronic filing of exemptive relief applications“reasonably required to facilitate a distribution ofsecurities to which a prospectus relates”. Notwithstanding that provision, all applications forexemptive relief under NI 81-102 should be filed onSEDAR including applications under proposedNational Policy 12-201 MRRS, subject to existingrules and policy considerations pertaining toconfidentiality. Orders granted should be publishedor otherwise made publicly available as otherorders or decisions of CSA members.

Applications for relief from the NIwill be filed and processed onSEDAR as is currently thepractice with NP 39 applications.

110 S. 19.2(1) The provision should be amended to clarify that therevocation by the CSA of any exemption order orwaiver previously given under NP 39 may not bemade without the relevant market participant firsthaving the right to be heard.

No change. Any action taken by aregulator or securities regulatoryauthority would be subject to thegeneral principles ofadministrative law as well as anyspecific requirements in securitieslaw.

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111 Appendix B -ComplianceReports

The audit reports essentially provide that there iscompliance in all material respects with theapplicable requirements of NI 81-102. However,the compliance reports do not contain an exclusionfor non-material deviations. The language of thecompliance reports should be amended to state thatthere is compliance “in all material respects” withthe applicable requirements of NI 81-102.

No change. The CSA want toknow whether there has beencompliance in all respects with theapplicable provisions.

112 S. 7.5(2) & (3)CP

S. 7.4(2) &(3) CP

Recently there have been a number of moves ofhigh profile individual portfolio managers tocompeting mutual fund organizations. Somemutual fund groups have also heavily marketed,both in public advertising and advertising to thebroker network, individual “star” portfolio managerswho are managing particular funds. Perhaps thereshould be at least a minimum notice period (eg. topermit investors to switch to another fund outside orwithin the existing fund group) before there is sucha change (other than a termination for cause, whichcould occur immediately) rather than tying thechange to timely disclosure and amending theprospectus. Consideration should be given torequiring a minimum notice period or even arequirement of securityholder or securitiesregulatory approval.

Notwithstanding 7.5(2) of the CP, the name of theindividual portfolio manager may not appear in theprospectus therefore an amendment to the SP maynot be necessary to disclose the departure of aparticular individual.

No change.

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NATIONAL INSTRUMENT 81-102MUTUAL FUNDS

TABLE OF CONTENTS

PART TITLE

PART 1 DEFINITIONS AND APPLICATION1.1 Definitions1.2 Application 1.3 Interpretation

PART 2 INVESTMENTS2.1 Concentration Restriction2.2 Control Restrictions2.3 Restrictions Concerning Types of

Investments2.4 Restrictions Concerning Illiquid Assets2.5 Investments in Other Mutual Funds2.6 Investment Practices2.7 Transactions in Specified Derivatives for

Hedging and Non-hedging Purposes2.8 Transactions in Specified Derivatives for

Purposes Other than Hedging2.9 Transactions in Specified Derivatives for

Hedging Purposes2.10 Adviser Requirements2.11 Commencement of Use of Specified

Derivatives by a Mutual Fund

PART 3 NEW MUTUAL FUNDS3.1 Initial Investment in a New Mutual Fund3.2 Prohibition Against Distribution3.3 Prohibition Against Reimbursement of

Organization Costs

PART 4 CONFLICTS OF INTEREST4.1 Prohibited Investments4.2 Self-Dealing4.3 Exception4.4 Liability and Indemnification

PART 5 FUNDAMENTAL CHANGES5.1 Matters Requiring Securityholder

Approval5.2 Approval of Securityholders5.3 Circumstances in Which Approval of

Securityholders Not Required5.4 Formalities Concerning Meetings of

Securityholders5.5 Approval of Securities Regulatory

Authority5.6 Pre-Approved Reorganizations and

Transfers5.7 Applications5.8 Matters Requiring Notice5.9 Relief from Certain Regulatory

Requirements5.10 Significant Changes

PART 6 CUSTODIANSHIP OF PORTFOLIO ASSETS6.1 General6.2 Entities Qualified to Act as Custodian or

Sub-Custodian for Assets Held inCanada

6.3 Entities Qualified to Act asSub-Custodian for Assets Held outsideCanada

6.4 Contents of Custodian and Sub-Custodian Agreements

6.5 Holding of Portfolio Assets and Paymentof Fees

6.6 Standard of Care6.7 Review and Compliance Reports6.8 Custodial Provisions relating to

Derivatives6.9 Separate Account for Paying Expenses

PART 7 INCENTIVE FEES7.1 Incentive Fees7.2 Multiple Portfolio Advisers

PART 8 CONTRACTUAL PLAN8.1 Contractual Plans

PART 9 SALE OF SECURITIES OF A MUTUAL FUND9.1 Transmission and Receipt of Purchase

Orders9.2 Acceptance of Purchase Orders9.3 Issue Price of Securities 9.4 Delivery of Funds and Settlement

PART 10 REDEMPTION OF SECURITIES OF A MUTUALFUND10.1 Requirements for Redemptions10.2 Transmission and Receipt of

Redemption Orders10.3 Redemption Price of Securities10.4 Payment of Redemption Price10.5 Failure to Complete Redemption Order10.6 Suspension of Redemptions

PART 11 COMMINGLING OF CASH11.1 Principal Distributors11.2 Participating Dealers11.3 Trust Accounts11.4 Exemption11.5 Right of Inspection

PART 12 COMPLIANCE REPORTS12.1 Compliance Reports

PART 13 CALCULATION OF NET ASSET VALUE PERSECURITY13.1 Frequency and Currency of Calculation

of Net Asset Value per Security13.2 Portfolio Transactions13.3 Capital Transactions13.4 Valuation of Restricted Securities13.5 Valuation of Specified Derivatives

PART 14 RECORD DATE14.1 Record Date

PART 15 SALES COMMUNICATIONS AND PROHIBITEDREPRESENTATIONS15.1 Ability to Make Sales Communications15.2 Sales Communications - General

Requirements

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15.3 Prohibited Disclosure in SalesCommunications

15.4 Required Disclosure and Warnings inSales Communications

15.5 Disclosure Regarding Distribution Fees15.6 Performance Data - General

Requirements15.7 Advertisements15.8 Performance Measurement Periods

Covered by Performance Data15.9 Changes affecting Performance Data15.10 Formula for Calculating Standard

Performance Data15.11 Assumptions for Calculating Standard

Performance Data15.12 Sales Communications During the

Waiting Period15.13 Prohibited Representations

PART 16 CALCULATION OF MANAGEMENT EXPENSERATIO16.1 Calculation of Management Expense

Ratio16.2 Fund of Funds Calculation

PART 17 FINANCIAL STATEMENT REQUIREMENTS17.1 Information About Specified Derivatives17.2 Additional Disclosure Requirements17.3 Approval of Financial Statements

PART 18 SECURITYHOLDER RECORDS18.1 Maintenance of Records18.2 Availability of Records

PART 19 EXEMPTIONS AND APPROVALS19.1 Exemption19.2 Exemption or Approval under Prior

Policy

PART 20 TRANSITIONAL20.1 Effective Date20.2 Sales Communications20.3 Reports to Securityholders20.4 Mortgage Funds20.5 Delayed Coming into Force

APPENDIX A - Futures Exchanges for the Purpose ofSubsection 2.7(4) - Derivative Counterparty Exposure Limits

APPENDIX B-1, APPENDIX B-2 and APPENDIX B-3 -Compliance Reports

NATIONAL INSTRUMENT 81-102MUTUAL FUNDS

PART 1 DEFINITIONS AND APPLICATION

1.1 Definitions - In this Instrument

"acceptable clearing corporation" means a clearingcorporation that is an acceptable clearing corporationunder the Joint Regulatory Financial Questionnaireand Report;

"advertisement" means a sales communication thatis published or designed for use on or through apublic medium;

"approved credit rating" means, for a security orinstrument, a rating at or above one of the followingrating categories issued by an approved credit ratingorganization for that security or instrument or acategory that replaces one of the following ratingcategories if

(a) there has been no announcement by theapproved credit rating organization of whichthe mutual fund or its manager is or ought tobe aware that the rating of the security orinstrument to which the approved credit ratingwas given may be down-graded to a ratingcategory that would not be an approved creditrating, and

(b) no approved credit rating organization hasrated the security or instrument in a ratingcategory that is not an approved credit rating:

Approved Credit Rating Organization

Commercial Paper/Short Term Debt

LongTermDebt

CBRS Inc. A-1 A

Dominion Bond RatingService Limited

R-1-L A

Duff & Phelps Credit RatingCo.

D-1 A

Fitch IBCA, Inc. A-1 A

Moody's Investors Service,Inc.

P-1 A2

Standard & Poor'sCorporation

A-1 A

Thomson BankWatch, Inc. TBW-2 A

"approved credit rating organization" means each ofCBRS Inc., Dominion Bond Rating Service Limited,Duff & Phelps Credit Rating Co., Fitch IBCA, Inc.,Moody's Investors Service, Inc., Standard & Poor'sCorporation, and Thomson BankWatch, Inc. and anyof their respective successors;

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"asset allocation service" means an administrativeservice under which the investment of a person orcompany is allocated, in whole or in part, amongmutual funds to which this Instrument applies andreallocated among those mutual funds and, ifapplicable, other assets according to an assetallocation strategy;

"book-based system" means a system for the centralhandling of securities or equivalent book-basedentries under which all securities of a class or seriesdeposited within the system are treated as fungibleand may be transferred or pledged by bookkeepingentry without physical delivery;

"cash cover" means any of the following portfolioassets of a mutual fund that are held by the mutualfund, have not been allocated for specific purposesand are available to satisfy all or part of theobligations arising from a position in specifiedderivatives held by the mutual fund:

1. Cash.2. Cash equivalents.3. Synthetic cash.4. Receivables of the mutual fund that arise from

the disposition of portfolio assets, net ofpayables that arise from the acquisition ofportfolio assets;

"cash equivalent" means an evidence ofindebtedness that has a remaining term to maturity of365 days or less and that is issued, or fully andunconditionally guaranteed as to principal andinterest, by

(a) the government of Canada or the governmentof a jurisdiction,

(b) the government of the United States ofAmerica, the government of one of the statesof the United States of America, thegovernment of another sovereign state or apermitted supranational agency, if, in eachcase, the evidence of indebtedness has anapproved credit rating, or

(c) a Canadian financial institution, or a financialinstitution that is not incorporated or organizedunder the laws of Canada or of a jurisdiction if,in either case, evidences of indebtedness ofthat issuer or guarantor that are rated as shortterm debt by an approved credit ratingorganization have an approved credit rating;

"clearing corporation" means an organization throughwhich trades in options or standardized futures arecleared and settled;

"clearing corporation option" means an option, otherthan an option on futures, issued by a clearingcorporation;

"conventional convertible security" means a securityof an issuer that is, according to its terms, convertible

into, or exchangeable for, other securities of theissuer, or of an affiliate of the issuer;

"conventional floating rate debt instrument" means anevidence of indebtedness of which the interestobligations are based upon a benchmark commonlyused in commercial lending arrangements;

"conventional warrant or right" means a security of anissuer, other than a clearing corporation, that givesthe holder the right to purchase securities of theissuer or of an affiliate of the issuer;

"currency cross hedge" means the substitution by amutual fund of a risk to one currency for a risk toanother currency, if neither currency is a currency inwhich the mutual fund determines its net asset valueper security and the aggregate amount of currencyrisk to which the mutual fund is exposed is notincreased by the substitution;

"custodian" means the institution appointed by amutual fund to act as custodian of the portfolio assetsof the mutual fund;

"dealer managed mutual fund" means a mutual fundthe portfolio adviser of which is a dealer manager;

"dealer manager" means

(a) a specified dealer that acts as a portfolioadviser,

(b) a portfolio adviser in which a specified dealer,or a partner, director, officer, salesperson orprincipal shareholder of a specified dealer,directly or indirectly owns of record orbeneficially, or exercises control or directionover, securities carrying more than 10 percentof the total votes attaching to securities of theportfolio adviser, or

(c) a partner, director or officer of a portfolioadviser referred to in paragraph (b);

"debt-like security" means a security purchased by amutual fund, other than a conventional convertiblesecurity or a conventional floating rate debtinstrument, that evidences an indebtedness of theissuer if

(a) either

(i) the amount of principal, interest orprincipal and interest to be paid to theholder is linked in whole or in part by aformula to the appreciation ordepreciation in the market price, valueor level of one or more underlyinginterests on a predetermined date ordates, or

(ii) the security provides the holder with aright to convert or exchange the

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security into or for the underlyinginterest or to purchase the underlyinginterest, and

(b) on the date of acquisition by the mutual fund,the percentage of the purchase priceattributable to the component of the securitythat is not linked to an underlying interest isless than 80 percent of the purchase pricepaid by the mutual fund;

"delta" means the positive or negative number that isa measure of the change in market value of an optionrelative to changes in the value of the underlyinginterest of the option;

"equivalent debt" means, in relation to an option,swap, forward contract or debt-like security, anevidence of indebtedness of approximately the sameterm as, or a longer term than, the remaining term tomaturity of the option, swap, contract or debt-likesecurity and that ranks equally with, or subordinateto, the claim for payment that may arise under theoption, swap, contract or debt-like security;

"forward contract" means an agreement, not enteredinto with, or traded on, a stock exchange or futuresexchange or cleared by a clearing corporation, to doone or more of the following on terms or at a priceestablished by or determinable by reference to theagreement and at or by a time in the futureestablished by or determinable by reference to theagreement:

1. Make or take delivery of the underlyinginterest of the agreement.

2. Settle in cash instead of delivery;

"fundamental investment objectives" means theinvestment objectives of a mutual fund that defineboth the fundamental nature of the mutual fund andthe fundamental investment features of the mutualfund that distinguish it from other mutual funds;

"futures exchange" means an association ororganization operated to provide the facilitiesnecessary for the trading of standardized futures;

"government security" means an evidence ofindebtedness issued, or fully and unconditionallyguaranteed as to principal and interest, by any of thegovernment of Canada, the government of ajurisdiction or the government of the United States ofAmerica;

"guaranteed mortgage" means a mortgage fully andunconditionally guaranteed, or insured, by thegovernment of Canada, by the government of ajurisdiction or by an agency of any of thosegovernments;

"hedging" means the entering into of a transaction, ora series of transactions, and the maintaining of the

position or positions resulting from the transaction orseries of transactions

(a) if

(i) the intended effect of the transaction,or the intended cumulative effect of theseries of transactions, is to offset orreduce a specific risk associated withall or a portion of an existinginvestment or position or group ofinvestments or positions,

(ii) the transaction or series of transactionsresults in a high degree of negativecorrelation between changes in thevalue of the investment or position, orgroup of investments or positions,being hedged and changes in the valueof the instrument or instruments withwhich the investment or position ishedged, and

(iii) there are reasonable grounds tobelieve that the transaction or series oftransactions no more than offset theeffect of price changes in theinvestment or position, or group ofinvestments or positions, beinghedged, or

(b) if the transaction, or series of transactions, isa currency cross hedge;

"illiquid asset" means

(a) a portfolio asset that cannot be readilydisposed of through market facilities on whichpublic quotations in common use are widelyavailable at an amount that at leastapproximates the amount at which theportfolio asset is valued in calculating the netasset value per security of the mutual fund, or

(b) a restricted security held by a mutual fund, theresale of which is prohibited by arepresentation, undertaking or agreement bythe mutual fund or by the predecessor in titleof the mutual fund;

"index mutual fund" means a mutual fund that hasadopted fundamental investment objectives thatrequire it to

(a) hold the securities that are included in aspecified widely quoted market index insubstantially the same proportion as thosesecurities are reflected in that index, or

(b) invest in a manner that causes the mutualfund to replicate the performance of thatindex;

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"index participation unit" means a security traded ona stock exchange in Canada or the United States andissued by an issuer the only purpose of which is to

(a) hold the securities that are included in aspecified widely quoted market index insubstantially the same proportion as thosesecurities are reflected in that index, or

(b) invest in a manner that causes the issuer toreplicate the performance of that index;

"investor fees" means, in connection with thepurchase, conversion, holding, transfer or redemptionof securities of a mutual fund, all fees, charges andexpenses that are or may become payable by asecurityholder of the mutual fund to a member of theorganization of the mutual fund other than a memberof the organization acting solely as a participatingdealer;

"Joint Regulatory Financial Questionnaire andReport" means the Joint Regulatory FinancialQuestionnaire and Report of various Canadian SROson the date that this Instrument comes into force andevery successor to the form that does not materiallylessen the criteria for an entity to be recognized asan "acceptable clearing corporation";

"long position" means a position held by a mutualfund that, for

(a) an option, entitles the mutual fund to elect topurchase, sell, receive or deliver theunderlying interest or, instead, pay or receivecash,

(b) a standardized future or forward contract,obliges the mutual fund to accept delivery ofthe underlying interest or, instead, pay orreceive cash,

(c) a call option on futures, entitles the mutualfund to elect to assume a long position instandardized futures,

(d) a put option on futures, entitles the mutualfund to elect to assume a short position instandardized futures, and

(e) a swap, obliges the mutual fund to acceptdelivery of the underlying interest or receivecash;

"management expense ratio" means the ratio,expressed as a percentage, of the expenses of amutual fund to its average net asset value, calculatedin accordance with Part 16;

"manager" means a person or company that directsthe business, operations and affairs of a mutual fund;

"member of the organization" has the meaningascribed to that term in National Instrument 81-105Mutual Fund Sales Practices;

"money market fund" means a mutual fund that hasand intends to continue to have

(a) all of its assets invested in any or all of

(i) cash,

(ii) cash equivalents,

(iii) evidences of indebtedness, other thancash equivalents, that have remainingterms to maturity of 365 days or less,or

(iv) floating rate evidences of indebtednessnot referred to in subparagraph (ii) or(iii), if the principal amounts of theobligations will continue to have amarket value of approximately par atthe time of each change in the rate tobe paid to the holders of the evidencesof indebtedness,

(b) a portfolio with a dollar-weighted average termto maturity not exceeding 90 days, calculatedon the basis that the term of a floating rateobligation is the period remaining to the dateof the next rate setting,

(c) not less than 95 percent of its assets investedin cash, cash equivalents or evidences ofindebtedness denominated in a currency inwhich the net asset value per security of themutual fund is calculated, and

(d) not less than 95 percent of its assets investedin any or all of

(i) cash,

(ii) cash equivalents, or

(iii) evidences of indebtedness of issuersthe commercial paper of which has anapproved credit rating;

"mortgage" includes a hypothec or security thatcreates a charge on real property in order to securea debt;

"mutual fund conflict of interest investmentrestrictions" means the provisions of securitieslegislation that

(a) prohibit a mutual fund from knowingly makingor holding an investment in an issuer in whichthe mutual fund, alone or together with one ormore mutual funds under commonmanagement, is a substantial securityholderas defined by securities legislation, or

(b) prohibit the portfolio adviser of the mutualfund, the mutual fund or a responsible person,as defined in securities legislation, from sellingportfolio assets of the mutual fund to, or

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purchasing portfolio assets from, another mutual fund undercommon management;

"mutual fund conflict of interest reportingrequirements" means the provisions of securitieslegislation that require the filing of a report with thesecurities regulatory authority in prescribed form thatdiscloses every transaction of purchase or sale ofportfolio assets between the mutual fund andspecified related persons or companies;

"non-resident sub-adviser" means a person orcompany providing portfolio management advice

(a) whose principal place of business is outside ofCanada,

(b) that advises a portfolio adviser to a mutualfund, and

(c) that is not registered under securitieslegislation in the jurisdiction in which theportfolio adviser that it advises is located;

"option" means an agreement that provides theholder with the right, but not the obligation, to do oneor more of the following on terms or at a priceestablished by or determinable by reference to theagreement at or by a time established by theagreement:

1. Receive an amount of cash determinable byreference to a specified quantity of theunderlying interest of the option.

2. Purchase a specified quantity of theunderlying interest of the option.

3. Sell a specified quantity of the underlyinginterest of the option;

"option on futures" means an option the underlyinginterest of which is a standardized future;

"order receipt office" means, for a mutual fund

(a) the principal office of the mutual fund,

(b) the principal office of the principal distributorof the mutual fund, or

(c) a location to which a purchase order orredemption order for securities of the mutualfund is required or permitted by the mutualfund to be delivered by participating dealers orthe principal distributor of the mutual fund;

"participating dealer" means a dealer other than theprincipal distributor that distributes securities of amutual fund;

"participating fund" means a mutual fund in which anasset allocation service permits investment;

"performance data" means a rating, ranking,quotation, discussion or analysis regarding an aspectof the investment performance of a mutual fund, anasset allocation service, a security, an index or abenchmark;

"permitted gold certificate" means a certificaterepresenting gold if the gold is

(a) available for delivery in Canada, free ofcharge, to or to the order of the holder of thecertificate,

(b) of a minimum fineness of 995 parts per 1,000,

(c) held in Canada,

(d) in the form of either bars or wafers, and

(e) if not purchased from a bank listed inSchedule I or II of the Bank Act (Canada), fullyinsured against loss and bankruptcy by aninsurance company licensed under the laws ofCanada or a jurisdiction;

"permitted supranational agency" means the AfricanDevelopment Bank, the Asian Development Bank,the Caribbean Development Bank, the EuropeanBank for Reconstruction and Development, the Inter-American Development Bank, the International Bankfor Reconstruction and Development, theInternational Finance Corporation, and any person orcompany prescribed under paragraph (g) of thedefinition of "foreign property" in subsection 206(1) ofthe ITA;

"physical commodity", means, in an original orprocessed state, an agricultural product, forestproduct, product of the sea, mineral, metal,hydrocarbon fuel product, precious stone or othergem;

"portfolio adviser" means a person or company thatprovides investment advice or portfolio managementservices under a contract with the mutual fund or withthe manager of the mutual fund;

"portfolio asset" means an asset of a mutual fund;

"pricing date" means, for the sale of a security of amutual fund, the date on which the net asset valueper security of the mutual fund is calculated for thepurpose of determining the price at which thatsecurity is to be issued;

"principal distributor" means a person or companythrough whom securities of a mutual fund aredistributed under an arrangement with the mutualfund or its manager that provides

(a) an exclusive right to distribute the securities ofthe mutual fund in a particular area, or

(b) a feature that gives or is intended to give theperson or company a material competitive

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advantage over others in the distribution of thesecurities of the mutual fund;

"public quotation" includes, for the purposes ofcalculating the amount of illiquid assets held by amutual fund, any quotation of a price for a fixedincome security made through the inter-dealer bondmarket;

"purchase" means, in connection with an acquisitionof a portfolio asset by a mutual fund, an acquisitionthat is the result of a decision made and action takenby the mutual fund;

"report to securityholders" means a report thatincludes annual or semi-annual financial statementsand that is delivered to securityholders of a mutualfund;

"restricted security" means a security, other than aspecified derivative, the resale of which is restrictedor limited by a representation, undertaking oragreement by the mutual fund or by the mutual fund'spredecessor in title, or by law;

"sales communication" means a communicationrelating to, and by, a mutual fund or asset allocationservice, its promoter, manager, portfolio adviser,principal distributor, a participating dealer or a personor company providing services to any of them, that

(a) is made

(i) to a securityholder of the mutual fundor participant in the asset allocationservice, or

(ii) to a person or company that is not asecurityholder of the mutual fund orparticipant in the asset allocationservice, to induce the purchase ofsecurities of the mutual fund or the useof the asset allocation service, and

(b) is not contained in any of the followingdocuments of the mutual fund:

1. A preliminary or pro forma prospectus.

2. A simplified prospectus or preliminaryor pro forma simplified prospectus.

3. An annual information form orpreliminary or pro forma annualinformation form.

4. Financial statements, including thenotes to the financial statements andthe auditor's report on the financialstatements.

5. A trade confirmation.

6. A statement of account;

"short position" means a position held by a mutualfund that, for

(a) an option, obliges the mutual fund, at theelection of another, to purchase, sell, receiveor deliver the underlying interest, or, instead,pay or receive cash,

(b) a standardized future or forward contract,obliges the mutual fund, at the election ofanother, to deliver the underlying interest or,instead, pay or receive cash,

(c) a call option on futures, obliges the mutualfund, at the election of another, to assume ashort position in standardized futures, and

(d) a put option on futures, obliges the mutualfund, at the election of another, to assume along position in standardized futures;

"significant change" means

(a) a change in the business, operations or affairsof a mutual fund that would be consideredimportant

(i) by a reasonable investor in determiningwhether to purchase securities of themutual fund, or

(ii) by a reasonable securityholder of themutual fund in determining whether tocontinue to hold securities of themutual fund, or

(b) a decision to implement a change referred toin paragraph (a) made

(i) by senior management of the mutualfund who believe that confirmation ofthe decision by the board of directors ofthe mutual fund is probable, or

(ii) by senior management of the managerof the mutual fund who believe thatconfirmation of the decision by theboard of directors of the manager ofthe mutual fund is probable;

"special warrant" means a security that, by its termsor the terms of an accompanying contractualobligation, entitles or requires the holder to acquireanother security without payment of materialadditional consideration and obliges the issuer of thespecial warrant or the other security to undertakeefforts to file a prospectus to qualify the distribution ofthe other security;

"specified asset-backed security" means a securitythat

(a) is primarily serviced by the cash flows of adiscrete pool of receivables or other financialassets, either fixed or revolving, that by their

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terms convert into cash within a finite time,and any rights or assets designed to assurethe servicing or timely distribution of proceedsto securityholders, and

(b) by its terms entitles an investor in that securityto a return of the investment of that investor ator by a time established by or determinable byreference to an agreement, except as a resultof losses incurred on, or the non-performanceof, the financial assets;

"specified dealer" means a dealer other than a dealerwhose activities as a dealer are restricted by theterms of its registration to one or both of

(a) acting solely in respect of mutual fundsecurities, or

(b) acting solely in respect of transactions inwhich a person or company registered in thecategory of limited market dealer in ajurisdiction is permitted to engage;

"specified derivative" means an instrument,agreement or security, the market price, value orpayment obligations of which are derived from,referenced to or based on an underlying interest,other than

(a) a conventional convertible security,

(b) a specified asset-backed security,

(c) an index participation unit,

(d) a government or corporate strip bond,

(e) a capital, equity dividend or income share of asubdivided equity or fixed income security,

(f) a conventional warrant or right, or

(g) a special warrant;

"standardized future" means an agreement traded ona futures exchange pursuant to standardizedconditions contained in the by-laws, rules orregulations of the futures exchange, and cleared bya clearing corporation, to do one or more of thefollowing at a price established by or determinable byreference to the agreement and at or by a timeestablished by or determinable by reference to theagreement:

1. Make or take delivery of the underlyinginterest of the agreement.

2. Settle the obligation in cash instead ofdelivery of the underlying interest;

"sub-custodian" means, for a mutual fund, an entitythat has been appointed to hold portfolio assets ofthe mutual fund in accordance with section 6.1 by

either the custodian or a sub-custodian of the mutualfund;

"swap" means an agreement that provides for

(a) an exchange of principal amounts,

(b) the obligation to make, and the right toreceive, cash payments based upon the value,level or price, or on relative changes ormovements of the value, level or price, of oneor more underlying interests, which paymentsmay be netted against each other, or

(c) the right or obligation to make, and the right orobligation to receive, physical delivery of anunderlying interest instead of the cashpayments referred to in paragraph (b);

"synthetic cash" means a position that in aggregateprovides the holder with the economic equivalent ofthe return on a banker's acceptance accepted by abank listed in Schedule I of the Bank Act (Canada)and that consists of

(a) a long position in a portfolio of shares and ashort position in a standardized future of whichthe underlying interest consists of a stockindex, if

(i) there is a high degree of positivecorrelation between changes in thevalue of the portfolio of shares andchanges in the value of the stock index,and

(ii) the ratio between the value of theportfolio of shares and thestandardized future is such that, for anychange in the value of one, a change ofsimilar magnitude occurs in the valueof the other, or

(b) a long position in the evidences ofindebtedness issued, or fully andunconditionally guaranteed as to principal andinterest, by any of the government of Canadaor the government of a jurisdiction and a shortposition in a standardized future of which theunderlying interest consists of evidences ofindebtedness of the same issuer and sameterm to maturity, if

(i) there is a high degree of positivecorrelation between changes in thevalue of the portfolio of evidences ofindebtedness and changes in the valueof the standardized future, and

(ii) the ratio between the value of theevidences of indebtedness and thestandardized future is such that, for anychange in the value of one, a change ofsimilar magnitude occurs in the valueof the other;

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"timely disclosure requirements" means therequirements in securities legislation for a reportingissuer to file a press release and a report when amaterial change occurs in the affairs of the reportingissuer;

"underlying interest" means, for a specifiedderivative, the security, commodity, financialinstrument, currency, interest rate, foreign exchangerate, economic indicator, index, basket, agreement,benchmark or any other reference, interest orvariable, and, if applicable, the relationship betweenany of the foregoing, from, to or on which the marketprice, value or payment obligation of the specifiedderivative is derived, referenced or based; and

"underlying market exposure" means, for a positionof a mutual fund in

(a) an option, the quantity of the underlyinginterest of the option position multiplied by themarket value of one unit of the underlyinginterest, multiplied, in turn, by the delta of theoption,

(b) a standardized future or forward contract, thequantity of the underlying interest of theposition multiplied by the current market valueof one unit of the underlying interest; or

(c) a swap, the underlying market exposure, ascalculated under paragraph (b), for the longposition of the mutual fund in the swap.

1.2 Application - This Instrument applies only to

(a) a mutual fund that offers or has offeredsecurities under a prospectus or simplifiedprospectus for so long as the mutual fundremains a reporting issuer; and

(b) a person or company in respect of activitiespertaining to a mutual fund referred to inparagraph (a) or pertaining to the filing of aprospectus to which subsection 3.1(1) applies.

1.3 Interpretation - Each section, part, class or series ofa class of securities of a mutual fund that is referableto a separate portfolio of assets is considered to bea separate mutual fund for purposes of thisInstrument.

PART 2 INVESTMENTS

2.1 Concentration Restriction

(1) A mutual fund shall not purchase a security ofan issuer, enter into a specified derivativestransaction or purchase index participationunits if, immediately after the transaction,more than 10 percent of the net assets of themutual fund, taken at market value at the timeof the transaction, would be invested insecurities of any issuer.

(2) Subsection (1) does not apply to a purchaseof a government security or a security issuedby a clearing corporation.

(3) In determining a mutual fund's compliancewith the restrictions contained in this section,the mutual fund shall, for each long position ina specified derivative that is held by themutual fund for purposes other than hedgingand for each index participation unit held bythe mutual fund, consider that it holds directlythe underlying interest of that specifiedderivative or its proportionate share of thesecurities held by the issuer of the indexparticipation unit.

(4) Despite subsection (3), the mutual fund shallnot include in the determination referred to insubsection (3) a security or instrument that isa component of, but that represents less than10 percent of

(a) a stock or bond index that is theunderlying interest of a specifiedderivative; or

(b) the securities held by the issuer of anindex participation unit.

2.2 Control Restrictions

(1) A mutual fund shall not

(a) purchase a security of an issuer if,immediately after the purchase, themutual fund would hold securitiesrepresenting more than 10 percent of

(i) the votes attaching to theoutstanding voting securities ofthat issuer; or

(ii) the outstanding equity securitiesof that issuer; or

(b) purchase a security for the purpose ofexercising control over or managementof the issuer of the security.

(2) If a mutual fund acquires a security of anissuer other than as the result of a purchase,and the acquisition results in the mutual fundexceeding the limits described in paragraph(1)(a), the mutual fund shall as quickly as iscommercially reasonable, and in any event nolater than 90 days after the acquisition, reduceits holdings of those securities so that it doesnot hold securities exceeding those limits.

(3) In determining its compliance with therestrictions contained in this section, a mutualfund shall

(a) assume the conversion of specialwarrants held by it; and

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(b) consider that it holds directly theunderlying securities represented byany American depositary receipts heldby it.

2.3 Restrictions Concerning Types of Investments -A mutual fund shall not

(a) purchase real property;

(b) purchase a mortgage, other than aguaranteed mortgage;

(c) purchase a guaranteed mortgage if,immediately after the purchase, more than 10percent of the net assets of the mutual fund,taken at market value at the time of thepurchase, would consist of guaranteedmortgages;

(d) purchase a gold certificate, other than apermitted gold certificate;

(e) purchase gold or a permitted gold certificate if,immediately after the purchase, more than 10percent of the net assets of the mutual fund,taken at market value at the time of thepurchase, would consist of gold and permittedgold certificates;

(f) except to the extent permitted by paragraphs(d) and (e), purchase a physical commodity;

(g) purchase, sell or use a specified derivativeother than in compliance with sections 2.7 to2.11;

(h) purchase, sell or use a specified derivative theunderlying interest of which is

(i) a physical commodity other than gold,or

(ii) a specified derivative of which theunderlying interest is a physicalcommodity other than gold; or

(i) purchase an interest in a loan syndication orloan participation if the purchase wouldrequire the mutual fund to assume anyresponsibilities in administering the loan inrelation to the borrower.

2.4 Restrictions Concerning Illiquid Assets

(1) A mutual fund shall not purchase an illiquidasset if, immediately after the purchase, morethan 10 percent of the net assets of themutual fund, taken at market value at the timeof the purchase, would consist of illiquidassets.

(2) A mutual fund shall not have invested, for aperiod of 90 days or more, more than 15

percent of its net assets, taken at marketvalue, in illiquid assets.

(3) If more than 15 percent of the net assets of amutual fund, taken at market value, are illiquidassets, the mutual fund shall, as quickly as iscommercially reasonable, take all necessarysteps to reduce the percentage of its netassets made up of illiquid assets to 15 percentor less.

2.5 Investments in Other Mutual Funds

(1) A mutual fund shall not purchase a security ofanother mutual fund unless

(a) immediately after the purchase, notmore than 10 percent of the net assetsof the mutual fund, taken at marketvalue at the time of the purchase,would be invested in securities of othermutual funds,

(b) there is no duplication of managementfees, incentive fees and sales chargesbetween the mutual funds and this isdescribed in the simplified prospectusof the mutual fund, and

(c) either

(i) the other mutual fund isqualified for distribution under asimplified prospectus in thejurisdictions in which thesecurities of the mutual fund arequalified for distribution under asimplified prospectus, or

(ii) the other mutual fund wasestablished with the approval ofthe government of a foreignjurisdiction, the only means bywhich the mutual fund mayinvest in the securities of issuersof that foreign jurisdiction isthrough a mutual fund soestablished, and there isdisclosure in the simplifiedprospectus of the mutual fund ofthe risk factors that may beassociated with the investmentin that foreign jurisdiction.

(2) Subsection (1) does not apply to the purchaseof

(a) an index participation unit that is asecurity of a mutual fund; or

(b) a mutual fund that is listed and postedfor trading on a Canadian stockexchange.

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2.6 Investment Practices - A mutual fund shall not

(a) borrow cash or provide a security interest overany of its portfolio assets unless

(i) the transaction is a temporary measureto accommodate requests for theredemption of securities of the mutualfund while the mutual fund effects anorderly liquidation of portfolio assets, orto permit the mutual fund to settleportfolio transactions and, after givingeffect to all transactions undertakenunder this subparagraph, theoutstanding amount of all borrowings ofthe mutual fund does not exceed fivepercent of the net assets of the mutualfund taken at market value at the timeof the borrowing,

(ii) the security interest is required toenable the mutual fund to effect aspecified derivative transaction underthis Instrument, is made in accordancewith industry practice for that type oftransaction and relates only toobligations arising under that particularspecified derivatives transaction, or

(iii) the security interest secures a claim forthe fees and expenses of the custodianor a sub-custodian of the mutual fundfor services rendered in that capacityas permitted by subsection 6.4(3);

(b) purchase securities on margin, unlesspermitted by section 2.7 or 2.8;

(c) sell securities short, unless permitted bysection 2.7 or 2.8;

(d) purchase a security, other than a specifiedderivative, that by its terms may require themutual fund to make a contribution in additionto the payment of the purchase price;

(e) engage in the business of underwriting, ormarketing to the public, securities of any otherissuer;

(f) lend cash or portfolio assets other than cash;

(g) guarantee securities or obligations of a personor company; or

(h) purchase securities other than through marketfacilities through which these securities arenormally bought and sold unless the purchaseprice approximates the prevailing market priceor the parties are at arm's length in connectionwith the transaction.

2.7 Transactions in Specified Derivatives for Hedgingand Non-hedging Purposes

(1) A mutual fund shall not purchase an optionthat is not a clearing corporation option orenter into a swap or a forward contract unless

(a) the option, swap or contract has aremaining term to maturity of

(i) three years or less, or

(ii) between three and five years if,at the time of the transaction,the option, swap or contractprovides the mutual fund with aright, at its election, to eliminateits exposure under the option,swap or contract no later thanthree years after the mutual fundhas purchased the option orentered into the swap orcontract; and

(b) at the time of the transaction, theoption, swap or contract, or equivalentdebt of the counterparty, or of a personor company that has fully andunconditionally guaranteed theobligations of the counterparty inrespect of the option, swap or contract,has an approved credit rating.

(2) If the credit rating of an option that is not aclearing corporation option, the credit rating ofa swap or forward contract, or the credit ratingof the equivalent debt of the writer orguarantor of the option, swap or contract, fallsbelow the level of approved credit rating whilethe option, swap or contract is held by amutual fund, the mutual fund shall take thesteps that are reasonably required to close outits position in the option, swap or contract inan orderly and timely fashion.

(3) Despite any other provisions contained in thisPart, a mutual fund may enter into a trade toclose out all or part of a position in a specifiedderivative, in which case the cash cover heldto cover the underlying market exposure of thepart of the position that is closed out may bereleased.

(4) The mark-to-market value of the exposure ofa mutual fund under its specified derivativespositions with any one counterparty other thanan acceptable clearing corporation or aclearing corporation that clears and settlestransactions made on a futures exchangelisted in Appendix A, calculated in accordancewith subsection (5), shall not exceed, for aperiod of 30 days or more, 10 percent of thenet assets of the mutual fund.

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(5) The mark-to-market value of specifiedderivatives positions of a mutual fund with anyone counterparty shall be, for the purposes ofsubsection (4),

(a) if the mutual fund has an agreementwith the counterparty that provides fornetting or the right of set-off, the netmark-to-market value of the specifiedderivatives positions of the mutualfund; and

(b) in all other cases, the aggregatedmark-to-market value of the specifiedderivative positions of the mutual fund.

2.8 Transactions in Specified Derivatives forPurposes Other than Hedging

(1) A mutual fund shall not

(a) purchase a debt-like security that hasan options component or an option,unless, immediately after the purchase,not more than 10 percent of the netassets of the mutual fund, taken atmarket value at the time of thepurchase, would consist of thoseinstruments held for purposes otherthan hedging;

(b) write a call option, or have outstandinga written call option, that is not anoption on futures unless, as long as theposition remains open, the mutual fundholds

(i) an equivalent quantity of theunderlying interest of the option,

(ii) a right or obligation, exercisableat any time that the option isexercisable, to acquire anequivalent quantity of theunderlying interest of the option,and cash cover that, togetherwith margin on account for theposition, is not less than theamount, if any, by which thestrike price of the right orobligation to acquire theunderlying interest exceeds thestrike price of the option, or

(iii) a combination of the positionsreferred to in subparagraphs (i)and (ii) that is sufficient, withoutrecourse to other assets of themutual fund, to enable themutual fund to satisfy itsobligations to deliver theunderlying interest of the option;

(c) write a put option, or have outstandinga written put option, that is not an

option on futures, unless, as long asthe position remains open, the mutualfund holds

(i) a right or obligation, exercisableat any time that the option isexercisable, to sell an equivalentquantity of the underlyinginterest of the option, and cashcover in an amount that,together with margin on accountfor the position, is not less thanthe amount, if any, by which thestrike price of the optionexceeds the strike price of theright or obligation to sell theunderlying interest,

(ii) cash cover that, together withmargin on account for the optionposition, is not less than thestrike price of the option, or

(iii) a combination of the positionsreferred to in subparagraphs (i)and (ii) that is sufficient, withoutrecourse to other assets of themutual fund, to enable themutual fund to acquire theunderlying interest of the option;

(d) open or maintain a long position in adebt-like security that has a componentthat is a long position in a forwardcontract, or in a standardized future orforward contract, unless the mutualfund holds cash cover in an amountthat, together with margin on accountfor the specified derivative and themarket value of the specifiedderivative, is not less than, on a dailymark-to-market basis, the underlyingmarket exposure of the specifiedderivative;

(e) open or maintain a short position in astandardized future or forward contract,unless the mutual fund holds

(i) an equivalent quantity of theunderlying interest of the futureor contract,

(ii) a right or obligation to acquirean equivalent quantity of theunderlying interest of the futureor contract and cash cover thattogether with margin on accountfor the position is not less thanthe amount, if any, by which thestrike price of the right orobligation to acquire theunderlying interest exceeds theforward price of the contract, or

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(iii) a combination of the positionsreferred to in subparagraphs (i)and (ii) that is sufficient, withoutrecourse to other assets of themutual fund, to enable themutual fund to deliver theunderlying interest of the futureor contract; or

(f) enter into, or maintain, a swap positionunless

(i) for periods when the mutualfund would be entitled to receivepayments under the swap, themutual fund holds cash cover inan amount that, together withmargin on account for the swapand the market value of theswap, is not less than, on a dailymark-to-market basis, theunderlying market exposure ofthe swap; and

(ii) for periods when the mutualfund would be required to makepayments under the swap, themutual fund holds

(A) an equivalent quantity ofthe underlying interest ofthe swap,

(B) a right or obligation toacquire an equivalentquantity of the underlyinginterest of the swap andcash cover that, togetherwith margin on accountfor the position, is notless than the aggregateamount of the obligationsof the mutual fund underthe swap, or

(C) a combination of thepositions referred to inclauses (A) and (B) thatis sufficient, withoutrecourse to other assetsof the mutual fund, toenable the mutual fund tosatisfy its obligationsunder the swap.

(2) A mutual fund shall treat any synthetic cashposition on any date as providing the cashcover equal to the notional principal value of abanker's acceptance then being accepted bya bank listed in Schedule I of the Bank Act(Canada) that would produce the sameannualized return as the synthetic cashposition is then producing.

2.9 Transactions in Specified Derivatives for HedgingPurposes - Sections 2.1, 2.2, 2.4 and 2.8 do notapply to the use of specified derivatives by a mutualfund for hedging purposes.

2.10 Adviser Requirements

(1) If a portfolio adviser of a mutual fund receivesadvice from a non-resident sub-adviserconcerning the use of options or standardizedfutures by the mutual fund, the mutual fundshall not invest in or use options orstandardized futures unless

(a) the obligations and duties of thenon-resident sub-adviser are set out ina written agreement with the portfolioadviser; and

(b) the portfolio adviser contractuallyagrees with the mutual fund to beresponsible for any loss that arises outof the failure of the non-resident sub-adviser

(i) to exercise the powers anddischarge the duties of its officehonestly, in good faith and in thebest interests of the mutualfund, and

(ii) to exercise the degree of care,diligence and skill that areasonably prudent personwould exerc ise in thecircumstances.

(2) A mutual fund shall not relieve a portfolioadviser of the mutual fund from liability for lossfor which the portfolio adviser has assumedresponsibility under paragraph (1)(b) thatarises out of the failure of the relevant non-resident sub-adviser

(a) to exercise the powers and dischargethe duties of its office honestly, in goodfaith and in the best interests of themutual fund, or

(b) to exercise the degree of care,diligence and skill that a reasonablyprudent person would exercise in thecircumstances.

(3) Despite subsection 4.4(3), a mutual fund mayindemnify a portfolio adviser against legalfees, judgments and amounts paid insettlement, actually and reasonably incurredby that person or company in connection withservices provided by a non-resident sub-adviser for which the portfolio adviser hasassumed responsibility under paragraph(1)(b), only if

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(a) those fees, judgments and amountswere not incurred as a result of abreach of the standard of caredescribed in subsection (1) or (2); and

(b) the mutual fund has reasonablegrounds to believe that the action orinaction that caused the payment of thefees, judgments and amounts paid insettlement was in the best interests ofthe mutual fund.

(4) A mutual fund shall not incur the cost of anyportion of liability insurance that insures aperson or company for a liability except to theextent that the person or company may beindemnified for that liability under this section.

2.11 Commencement of Use of Specified Derivativesby a Mutual Fund

(1) A mutual fund that has not used specifiedderivatives shall not begin using specifiedderivatives unless

(a) its simplified prospectus contains thedisclosure required for mutual fundsusing derivatives; and

(b) the mutual fund has provided to itssecurityholders, not less than 60 daysbefore it begins using specifiedderivatives, written notice thatdiscloses its intent to begin usingspecified derivatives and the disclosurerequired for mutual funds usingderivatives.

(2) A mutual fund is not required to provide thenotice referred to in paragraph (1)(b) if eachsimplified prospectus of the mutual fund sincethe later of January 1, 1994 and its inceptioncontains the disclosure required for mutualfunds using specified derivatives.

PART 3 NEW MUTUAL FUNDS

3.1 Initial Investment in a New Mutual Fund

(1) No person or company shall file a simplifiedprospectus for a newly established mutualfund unless

(a) an investment of at least $150,000 insecurities of the mutual fund has beenmade, and those securities arebeneficially owned, before the time offiling by

(i) the manager, a portfolio adviser,a promoter or a sponsor of themutual fund,

(ii) the partners, directors, officersor securityholders of any of themanager, a portfolio adviser, apromoter or a sponsor of themutual fund, or

(iii) a combination of the persons orcompan ies re fe r red tosubparagraphs (i) and (ii); or

(b) the simplified prospectus of the mutualfund states that the mutual fund will notissue securities other than thosereferred to in paragraph (a) unlesssubscriptions aggregating not less than$500,000 have been received by themutual fund from investors other thanthe persons and companies referred toin paragraph (a) and accepted by themutual fund.

(2) A mutual fund shall not redeem a securityissued upon an investment in the mutual fundreferred to in paragraph (1)(a) until $500,000has been received from persons or companiesother than the persons and companiesreferred to in paragraph (1)(a).

3.2 Prohibition Against Distribution - If a simplifiedprospectus of a mutual fund contains the disclosuredescribed in paragraph 3.1(1)(b), the mutual fundshall not distribute any securities unless thesubscriptions described in that disclosure, togetherwith payment for the securities subscribed for, havebeen received.

3.3 Prohibition Against Reimbursement ofOrganization Costs - None of the costs ofincorporation, formation or initial organization of amutual fund, or of the preparation and filing of any ofthe preliminary simplified prospectus, preliminaryannual information form, initial simplified prospectusor annual information form of the mutual fund shall beborne by the mutual fund or its securityholders.

PART 4 CONFLICTS OF INTEREST

4.1 Prohibited Investments

(1) A dealer managed mutual fund shall notknowingly make an investment in a class ofsecurities of an issuer during, or for 60 daysafter, the period in which the dealer managerof the mutual fund, or an associate or affiliateof the dealer manager of the mutual fund, actsas an underwriter in the distribution ofsecurities of that class of securities, except asa member of the selling group distributing fivepercent or less of the securities underwritten.

(2) A dealer managed mutual fund shall notknowingly make an investment in a class ofsecurities of an issuer of which a partner,director, officer or employee of the dealer

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manager of the mutual fund, or a partner, director, officer oremployee of an affiliate or associate of the dealer manager, isa partner, director or officer, unless the partner, director, officeror employee

(a) does not participate in the formulationof investment decisions made onbehalf of the dealer managed mutualfund;

(b) does not have access beforeimplementation to informationconcerning investment decisions madeon behalf of the dealer managedmutual fund; and

(c) does not influence, other than throughresearch, statistical and other reportsgenerally available to clients, theinvestment decisions made on behalfof the dealer managed mutual fund.

(3) Subsections (1) and (2) do not apply to aninvestment in a class of securities issued orfully and unconditionally guaranteed by thegovernment of Canada or the government ofa jurisdiction.

4.2 Self-Dealing - A mutual fund shall not purchase asecurity from, or sell a security to, any of the followingpersons or companies, if that person or companywould be selling to the mutual fund, or purchasingfrom the mutual fund, as principal:

1. The manager, portfolio adviser ortrustee of the mutual fund.

2. A partner, director or officer of themutual fund or of the manager, portfolioadviser or trustee of the mutual fund.

3. An associate or affiliate of a person orcompany referred to in paragraph 1 or2.

4. A person or company, having fewerthan 100 securityholders of record, ofwhich a partner, director or officer ofthe mutual fund or a partner, director orofficer of the manager or portfolioadviser of the mutual fund is a partner,director, officer or securityholder.

4.3 Exception - Section 4.2 does not apply to apurchase or sale of a security by a mutual fund if theprice payable for the security is

(a) not more than the ask price of the security asreported by any available public quotation incommon use, in the case of a purchase by themutual fund; or

(b) not less than the bid price of the security asreported by any available public quotation in

common use, in the case of a sale by themutual fund.

4.4 Liability and Indemnification

(1) An agreement or declaration of trust by whicha person or company acts as manager of amutual fund shall provide that the manager isresponsible for any loss that arises out of thefailure of the manager, or of any person orcompany retained by the manager or themutual fund to discharge any of the manager'sresponsibilities to the mutual fund,

(a) to exercise the powers and dischargethe duties of its office honestly, in goodfaith and in the best interests of themutual fund, and


(2) A mutual fund shall not relieve the manager ofthe mutual fund from liability for loss thatarises out of the failure of the manager, or ofany person retained by the manager or themutual fund to discharge any of the manager'sresponsibilities to the mutual fund,

(a) to exercise the powers and dischargethe duties of its office honestly, in goodfaith and in the best interests of themutual fund, or


(3) A mutual fund may indemnify a person orcompany providing services to it against legalfees, judgments and amounts paid insettlement, actually and reasonably incurredby that person or company in connection withservices provided by that person or companyto the mutual fund, if

(a) those fees, judgments and amountswere not incurred as a result of abreach of the standard of caredescribed in subsection (1) or (2); and

(b) the mutual fund has reasonablegrounds to believe that the action orinaction that caused the payment of thefees, judgments and amounts paid insettlement was in the best interests ofthe mutual fund.

(4) A mutual fund shall not incur the cost of anyportion of liability insurance that insures aperson or company for a liability except to the

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extent that the person or company may beindemnified for that liability under this section.

(5) This section does not apply to any losses to amutual fund or securityholder arising out of anaction or inaction by a custodian or sub-custodian of the mutual fund or by a director ofthe mutual fund.

PART 5 FUNDAMENTAL CHANGES

5.1 Matters Requiring Securityholder Approval - Theprior approval of the securityholders of a mutual fund,given as provided in section 5.2, is required before

(a) the basis of the calculation of a fee or expensethat is charged to the mutual fund is changedin a way that could result in an increase incharges to the mutual fund;

(b) the manager of the mutual fund is changed,unless the new manager is an affiliate of thecurrent manager;

(c) the fundamental investment objectives of themutual fund are changed;

(d) the auditor of the mutual fund is changed;

(e) the mutual fund decreases the frequency ofthe calculation of its net asset value persecurity;

(f) the mutual fund undertakes a reorganizationwith, or transfers its assets to, another mutualfund, if

(i) the mutual fund ceases to continueafter the reorganization or transfer ofassets, and

(ii) the transaction results in thesecurityholders of the mutual fundbecoming securityholders in the othermutual fund; or

(g) the mutual fund undertakes a reorganizationwith, or acquires assets from, another mutualfund, if

(i) the mutual fund continues after thereorganization or acquisition of assets,

(ii) the transaction results in thesecurityholders of the other mutualfund becoming securityholders in themutual fund, and

(iii) the transaction would be a significantchange to the mutual fund.

5.2 Approval of Securityholders

(1) Unless a greater majority is required by theconstating documents of the mutual fund, thelaws applicable to the mutual fund or anapplicable agreement, the approval of thesecurityholders of the mutual fund to a matterreferred to in section 5.1 shall be given by aresolution passed by at least a majority of thevotes cast at a meeting of the securityholdersof the mutual fund duly called and held toconsider the matter.

(2) Despite subsection (1), the holders ofsecurities of a class or series of a class ofsecurities of a mutual fund shall voteseparately as a class or series of a class on amatter referred to in section 5.1 if that class orseries of a class is affected by the actionreferred to in section 5.1 in a manner differentfrom holders of securities of other classes orseries of a class.

(3) Despite section 5.1 and subsections (1) and(2), if the constating documents of the mutualfund so provide, the holders of securities of aclass or series of a class of securities of amutual fund shall not be entitled to vote on amatter referred to in section 5.1 if they, asholders of the class or series of a class, arenot affected by the action referred to insection 5.1.

5.3 Circumstances in Which Approval ofSecurityholders Not Required

(1) Despite section 5.1, the approval ofsecurityholders of a mutual fund is notrequired to be obtained for a change referredto in paragraph 5.1(a)

(a) if

(i) the mutual fund is at arm'slength to the person or companycharging the fee or expense tothe mutual fund referred to inparagraph 5.1(a) that ischanged,

(ii) the simplified prospectus of themutual fund discloses that,although the approval ofsecurityholders will not beobtained before making thechanges, securityholders will besent a written notice at least 60days before the effective date ofthe change that is to be madethat could result in an increasein charges to the mutual fund,and

(iii) the notice referred to insubparagraph (ii) is actually sent

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60 days before the effectivedate of the change; or

(b) if

(i) the mutual fund is permitted bythis Instrument to be describedas a "no-load" fund,

(ii) the simplified prospectus of themutual fund discloses thatsecurityholders will be sent awritten notice at least 60 daysbefore the effective date of achange that is to be made thatcould result in an increase incharges to the mutual fund, and

(iii) the notice referred to insubparagraph (ii) is actually sent60 days before the effectivedate of the change.

5.4 Formalities Concerning Meetings ofSecurityholders

(1) A meeting of securityholders of a mutual fundcalled to consider any matter referred to insection 5.1 shall be called on written noticesent not less than 21 days before the date ofthe meeting.

(2) The notice referred to in subsection (1) shallcontain or be accompanied by a statementthat includes

(a) a description of the change ortransaction proposed to be made orentered into and, if the matter is onereferred to in paragraph 5.1(a), theeffect that the change would have hadon the management expense ratio ofthe mutual fund had the change beenin force throughout the mutual fund'slast completed financial year;

(b) the date of the proposedimplementation of the change ortransaction; and

(c) all other information and documentsnecessary to comply with theappl icab le proxy so l ic i ta t ionrequirements of securities legislationfor the meeting.

5.5 Approval of Securities Regulatory Authority

(1) The approval of the securities regulatoryauthority is required before

(a) the manager of a mutual fund ischanged, unless the new manager isan affiliate of the current manager;

(b) a reorganization or transfer of assets ofa mutual fund is implemented, if thetransaction will result in thesecurityholders of the mutual fundbecoming securityholders in anothermutual fund;

(c) a change of the custodian of a mutualfund is implemented, if there has beenor will be, in connection with theproposed change, a change of the typereferred to in paragraph (a); or

(d) a mutual fund suspends, other thanunder section 10.6, the rights ofsecurityholders to request that themutual fund redeem their securities.

(2) No person or company, or affiliate orassociate of that person or company, may actas manager of a mutual fund if that person orcompany, or an affiliate or associate of thatperson or company, has acquired control of amanager of the mutual fund unless theapproval of the securities regulatory authorityhas been obtained for the change in control.

5.6 Pre-Approved Reorganizations and Transfers

(1) Despite subsection 5.5(1), the approval of thesecurities regulatory authority is not requiredto implement a transaction referred to inparagraph 5.5(1)(b) if

(a) the mutual fund is being reorganizedwith, or its assets are being transferredto, another mutual fund to which thisInstrument applies and that

(i) is managed by the manager, oran affiliate of the manager, ofthe mutual fund,

(ii) a reasonable person wouldconsider to have substantiallysimilar fundamental investmentobjectives, valuation proceduresand fee structure as the mutualfund,

(iii) is not in default of anyrequirement of securitieslegislation, and

(iv) has a current simplifiedprospectus in the localjurisdiction;

(b) the transaction is a "qualifyingexchange" within the meaning ofsection 132.2 of the ITA or is a tax-deferred transaction under subsection85(1), 85.1(1), 86(1) or 87(1) of theITA;

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(c) the transaction contemplates the wind-up of the mutual fund as soon asreasonably possible following thetransaction;

(d) the portfolio assets of the mutual fundto be acquired by the other mutual fundas part of the transaction

(i) may be acquired by the othermutual fund in compliance withthis Instrument, and

(ii) are acceptable to the portfolioadviser of the other mutual fundand consistent with the othermutual fund's fundamentalinvestment objectives;

(e) the transaction is approved

(i) by the securityholders of themutual fund in accordance withparagraph 5.1(f), and

(ii) i f r e q u i r e d , b y t h esecurityholders of the othermutual fund in accordance withparagraph 5.1(g);

(f) the materials sent to securityholders ofthe mutual fund in connection with theapproval under paragraph 5.1(f)include

(i) a circular that, in addition toother requirements prescribedby law, describes the proposedtransaction, the mutual fund intowhich the mutual fund will bereorganized, the income taxconsiderations for the mutualfunds participating in thet r a n s a c t i o n a n d t h e i rsecurityholders, and, if themutual fund is a corporation andthe transaction involves itssha reho lde rs becom ingsecurityholders of a mutual fundthat is established as a trust, adescription of the materialdifferences between being ashareholder of a corporationand being a securityholder of atrust,

(ii) if not previously sent to allsecurityholders, the currentsimplified prospectus and themost recent annual and interimfinancial statements that havebeen made public for the mutualfund into which the mutual fundwill be reorganized, and

(iii) a statement that securityholdersmay obtain an annualinformation form for the mutualfund into which the mutual fundwil l be reorganized bycontacting that mutual fund at aspecified address or telephonenumber;

(g) the mutual fund has complied withsection 5.10 in connection with themaking of the decision to proceed withthe transaction by the board ofdirectors of the manager of the mutualfund or of the mutual fund;

(h) the mutual funds participating in thetransaction bear none of the costs andexpenses associated with thetransaction; and

(i) securityholders of the mutual fundcontinue to have the right to redeemsecurities of the mutual fund up to theclose of business on the business dayimmediately before the effective date ofthe transaction.

(2) A mutual fund that has continued after atransaction described in paragraph 5.5(1)(b)shall, if the audit report accompanying itsaudited financial statements for its firstcompleted financial year after the transactioncontains a reservation in respect of the valueof the portfolio assets acquired by the mutualfund in the transaction, send a copy of thosefinancial statements to each person orcompany that was a securityholder of a mutualfund that was terminated as a result of thetransaction and that is not a securityholder ofthe mutual fund.

5.7 Applications

(1) An application for an approval required undersection 5.5 shall contain,

(a) if the application is required byp a r a g r a p h 5 . 5 ( 1 ) ( a ) o rsubsection 5.5(2),

(i) details of the proposedtransaction,

(ii) details of the proposed newmanager or the person orcompany proposing to acquirecontrol of the manager,

(iii) as applicable, the names,residence addresses andbirthdates of

(A) all proposed newpartners, directors or

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officers of themanager,

(B) all partners, directors orofficers of the person orcompany proposing toacquire control of themanager,

(C) any proposed newindividual trustee of themutual fund, and

(D) any new directors orofficers of the mutualfund,

(iv) all information necessary topermit the securities regulatoryauthority to conduct securitychecks on the individualsreferred to in subparagraph (iii),

(v) sufficient information toestablish the integrity andexperience of the persons orcompanies referred to insubparagraphs (ii) and (iii), and

(vi) details of how the proposedtransaction will affect themanagement and administrationof the mutual fund;

(b) if the application is required byparagraph 5.5(1)(b),

(i) details of the proposedtransaction,

(ii) details of the total annualreturns of each of the mutualfunds for each of the previousfive years,

(iii) a description of the differencesbetween the fundamentali n v e s t m e n t o b j e c t i v e s ,investment strategies, valuationprocedures and fee structure ofeach of the mutual funds andany other material differencesbetween the mutual funds, and

(iv) a description of those elementsof the proposed transaction thatmake section 5.6 inapplicable;

(c) if the application is required byparagraph 5.5(1)(c), sufficientinformation to establish that theproposed custodial arrangements willbe in compliance with Part 6;

(d) if the application relates to a matter thatwould constitute a significant changefor the mutual fund, a draft of anamendment to the simplifiedprospectus of the mutual fund reflectingthe change; and

(e) if the matter is one that requires theapprova l o f secur i tyho lders ,confirmation that the approval hasbeen obtained or will be obtainedbefore the change is implemented.

(2) A mutual fund that applies for an approvalunder paragraph 5.5(1)(d) shall

(a) make that application to the securitiesregulatory authority or regulator in thejurisdiction in which the head office orregistered office of the mutual fund issituate; and

(b) concurrently file a copy of theapplication so made with the securitiesregulatory authority or the regulator inthe local jurisdiction if the head officeor registered office of the mutual fundis not situated in the local jurisdiction.

(3) A mutual fund that has complied withsubsection (2) in the local jurisdiction maysuspend the right of securityholders to requestthat the mutual fund redeem their securities if

(a) the securities regulatory authority orregulator in the jurisdiction in which thehead office or registered office of themutual fund is situate has grantedapproval to the application made underparagraph (2)(a); and

(b) the securities regulatory authority orregulator in the local jurisdiction hasnot notified the mutual fund, by theclose of business on the business dayimmediately following the day on whichthe copy of the application referred toin paragraph (2)(b) was received, eitherthat

(i) the securities regulatoryauthority or regulator hasrefused to grant approval to theapplication, or

(ii) this subsection may not berelied upon by the mutual fundin the local jurisdiction.

5.8 Matters Requiring Notice

(1) No person or company that is a manager of amutual fund may continue to act as managerof the mutual fund following a direct or indirect

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change of control of the person or companyunless

(a) notice of the change of control wasgiven to all securityholders of themutual fund at least 60 days before thechange; and

(b) the notice referred to in paragraph (a)contains the information that would berequired by law to be provided tosecurityholders if securityholderapproval of the change were requiredto be obtained.

(2) No mutual fund shall terminate unless noticeof the termination is given to allsecurityholders of the mutual fund at least 60days before termination.

(3) The manager of a mutual fund that hasterminated shall give notice of the terminationto the securities regulatory authority within 30days of the termination.

5.9 Relief from Certain Regulatory Requirements

(1) The mutual fund conflict of interest investmentrestrictions and the mutual fund conflict ofinterest reporting requirements do not apply toa transaction referred to in paragraph 5.5(1)(b)if the approval of the securities regulatoryauthority has been given to the transaction.

(2) The mutual fund conflict of interest investmentrestrictions and the mutual fund conflict ofinterest reporting requirements do not apply toa transaction described in section 5.6.

5.10 Significant Changes - Upon the occurrence of asignificant change with respect to a mutual fund, themutual fund shall

(a) comply with the timely disclosurerequirements in connection with the significantchange as if the significant change were amaterial change in the affairs of the mutualfund; and

(b) file an amendment to its simplified prospectusthat discloses the significant change inaccordance with the requirements of securitieslegislation as if the amendment were requiredto be filed under securities legislation.

PART 6 CUSTODIANSHIP OF PORTFOLIO ASSETS

6.1 General

(1) Except as provided in sections 6.8 and 6.9, allportfolio assets of a mutual fund shall be heldunder the custodianship of one custodian thatsatisfies the requirements of section 6.2.

(2) Except as provided in subsection 6.5(3) andsections 6.8 and 6.9, portfolio assets of amutual fund shall be held

(a) in Canada by the custodian or a sub-custodian of the mutual fund; or

(b) outside Canada by the custodian or asub-custodian of the mutual fund, ifappropriate to facilitate portfoliotransactions of the mutual fund outsideCanada.

(3) The custodian or a sub-custodian of a mutualfund may appoint one or more sub-custodiansto hold portfolio assets of the mutual fund, if,for each appointment,

(a) written consent to the appointment hasbeen provided by the mutual fund and,if the appointment is by a sub-custodian, the custodian of the mutualfund;

(b) the sub-custodian that is to beappointed is a person or companydescribed in section 6.2 or 6.3, asapplicable;

(c) the arrangements under which a sub-custodian is appointed are such thatthe mutual fund may enforce rightsdirectly, or require the custodian or asub-custodian to enforce rights onbehalf of the mutual fund, to theportfolio assets held by the appointedsub-custodian; and

(d) the appointment is otherwise incompliance with this Instrument.

(4) The written consent referred to in paragraph(3)(a) may be in the form of a general consent,contained in the agreement governing therelationship between the mutual fund and thecustodian, or the custodian and the sub-custodian, to the appointment of persons orcompanies that are part of an internationalnetwork of sub-custodians within theorganization of the appointed custodian orsub-custodian.

(5) A custodian or sub-custodian shall provide tothe mutual fund a list of each person orcompany that is appointed sub-custodianunder a general consent referred to insubsection (4).

(6) Despite any other provisions of this Part, themanager of a mutual fund shall not act ascustodian or sub-custodian of the mutual fund.

6.2 Entities Qualified to Act as Custodian or Sub-Custodian for Assets Held in Canada - Thecustodian of a mutual fund, and a sub-custodian of a

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mutual fund that is to hold portfolio assets ofthe mutual fund in Canada, shall be one of thefollowing:

1. A bank listed in Schedule I or II of the BankAct (Canada).

2. A trust company that is incorporated under thelaws of Canada or a jurisdiction and licensedor registered under the laws of Canada or ajurisdiction, and that has shareholders' equity,as reported in its most recent audited financialstatements, of not less than $10,000,000.

3. A company that is incorporated under the lawsof Canada or of a jurisdiction, and that is anaffiliate of a bank or trust company referred toin paragraph 1 or 2, if

(a) the company has shareholders' equity,as reported in its most recent auditedfinancial statements that have beenmade public, of not less than$10,000,000; or

(b) the bank or trust company hasassumed responsibility for all of thecustodial obligations of the company inrespect of that mutual fund.

6.3 Entities Qualified to Act as Sub-Custodian forAssets Held outside Canada - A sub-custodian ofa mutual fund that is to hold portfolio assets of themutual fund outside of Canada shall be one of thefollowing:

1. An entity referred to in section 6.2.

2. An entity that

(a) is incorporated or organized under thelaws of a country, or a politicalsubdivision of a country, other thanCanada;

(b) is regulated as a banking institution ortrust company by the government, oran agency of the government, of thecountry under whose laws it isincorporated or organized or a politicalsubdivision of that country; and

(c) has shareholders' equity, as reported inits most recent audited financialstatements, of not less than theequivalent of $100,000,000.

3. An affiliate of an entity referred to inparagraph 1 or 2 if

(a) the affiliate has shareholders' equity,as reported in its most recent auditedfinancial statements that have beenmade public, of not less than theequivalent of $100,000,000; or

(b) the entity referred to in paragraph 1 or2 has assumed responsibility for all ofthe custodial obligations of thesubsidiary in respect of that mutualfund.

6.4 Contents of Custodian and Sub-CustodianAgreements

(1) All custodian agreements and sub-custodianagreements of a mutual fund shall provide formatters relating to

(a) the requirements concerning thelocation of portfolio assets contained insubsection 6.1(2);

(b) the appointment of a sub-custodianrequired by subsection 6.1(3);

(c) the requirements concerning lists ofsub-custodians contained in subsection6.1(5);

(d) the method of holding portfolio assetsrequired by section 6.5 and subsection6.8(4);

(e) the standard of care and responsibilityfor loss required by section 6.6; and

(f) the review and compliance reportsrequired by section 6.7.

(2) A sub-custodian agreement concerning theportfolio assets of a mutual fund shall providefor the safekeeping of portfolio assets onterms consistent with the custodian agreementof the mutual fund.

(3) No custodian agreement or sub-custodianagreement concerning the portfolio assets ofa mutual fund shall

(a) provide for the creation of any securityinterest on the portfolio assets of themutual fund except for a good faithclaim for payment of the fees andexpenses of the custodian orsub-custodian for acting in thatcapacity or to secure the obligations ofthe mutual fund to repay borrowings bythe mutual fund from a custodian orsub-custodian for the purpose ofsettling portfolio transactions; or

(b) contain a provision that would requirethe payment of a fee to the custodianor sub-custodian for the transfer of thebeneficial ownership of portfolio assetsof the mutual fund, other than forsafekeeping and administrativeservices in connection with acting ascustodian or sub-custodian.

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6.5 Holding of Portfolio Assets and Payment of Fees

(1) Except as provided in subsections (2) and (3)and sections 6.8 and 6.9, portfolio assets of amutual fund not registered in the name of themutual fund shall be registered in the name ofthe custodian or a sub-custodian of the mutualfund or any of their respective nominees withan account number or other designation in therecords of the custodian sufficient to show thatthe beneficial ownership of the portfolio assetsis vested in the mutual fund.

(2) Portfolio assets of a mutual fund issued inbearer form shall be designated or segregatedby the custodian or a sub-custodian of themutual fund or the applicable nominee so asto show that the beneficial ownership of theproperty is vested in the mutual fund.

(3) A custodian or sub-custodian of a mutual fundmay deposit portfolio assets of the mutualfund with a depository, or a clearing agency,that operates a book-based system.

(4) The custodian or sub-custodian of a mutualfund arranging for the deposit of portfolioassets of the mutual fund with, and theirdelivery to, a depository, or clearing agency,that operates a book-based system shallensure that the records of any of theapplicable participants in that book-basedsystem or the custodian contain an accountnumber or other designation sufficient to showthat the beneficial ownership of the portfolioassets is vested in the mutual fund.

(5) A mutual fund shall not pay a fee to acustodian or sub-custodian for the transfer ofbeneficial ownership of portfolio assets of themutual fund other than for safekeeping andadministrative services in connection withacting as custodian or sub-custodian.

6.6 Standard of Care

(1) The custodian and each sub-custodian of amutual fund, in carrying out their dutiesconcerning the safekeeping of, and dealingwith, the portfolio assets of the mutual fund,shall exercise

(a) the degree of care, diligence and skillthat a reasonably prudent personwould exercise in the circumstances; or

(b) at least the same degree of care asthey exercise with respect to their ownproperty of a similar kind, if this is ahigher degree of care than the degreeof care referred to in paragraph (a).

(2) A mutual fund shall not relieve the custodianor a sub-custodian of the mutual fund fromliability to the mutual fund or to a

securityholder of the mutual fund for loss thatarises out of the failure of the custodian orsub-custodian to exercise the standard of careimposed by subsection (1).

(3) A mutual fund may indemnify a custodian orsub-custodian against legal fees, judgmentsand amounts paid in settlement, actually andreasonably incurred by that entity inconnection with custodial or sub-custodialservices provided by that entity to the mutualfund, if those fees, judgments and amountswere not incurred as a result of a breach ofthe standard of care described in subsection(1).

(4) A mutual fund shall not incur the cost of anyportion of liability insurance that insures acustodian or sub-custodian for a liability,except to the extent that the custodian or sub-custodian may be indemnified for that liabilityunder this section.

6.7 Review and Compliance Reports

(1) The custodian of a mutual fund shall, on aperiodic basis not less frequently thanannually,

(a) review the custodian agreement and allsub-custodian agreements of themutual fund to determine if thoseagreements are in compliance with thisPart;

(b) make reasonable enquiries as towhether each sub-custodian satisfiesthe applicable requirements of section6.2 or 6.3; and

(c) make or cause to be made anychanges that may be necessary toensure that

(i) the custodian and sub-custodianagreements are in compliancewith this Part; and

(ii) all sub-custodians of the mutualfund satisfy the applicablerequirements of section 6.2 or6.3.

(2) The custodian of a mutual fund shall, not morethan 60 days after the end of each financialyear of the mutual fund, advise the mutualfund in writing

(a) of the names and addresses of allsub-custodians of the mutual fund;

(b) whether the custodian and sub-custodian agreements are incompliance with this Part; and

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(c) whether, to the best of the knowledgeand belief of the custodian, eachsub-custodian satisfies the applicablerequirements of section 6.2 or 6.3.

(3) A copy of the report referred to in subsection(2) shall be delivered by or on behalf of themutual fund to the securities regulatoryauthority within 30 days after the filing of theannual financial statements of the mutualfund.

6.8 Custodial Provisions relating to Derivatives

(1) A mutual fund may deposit portfolio assets asmargin for transactions in Canada involvingclearing corporation options, options onfutures or standardized futures with a dealerthat is a member of an SRO that is aparticipating member of CIPF if the amount ofmargin deposited does not, when aggregatedwith the amount of margin already held by thedealer on behalf of the mutual fund, exceed 10percent of the net assets of the mutual fund,taken at market value as at the time ofdeposit.

(2) A mutual fund may deposit portfolio assetswith a dealer as margin for transactionsoutside Canada involving clearing corporationoptions, options on futures or standardizedfutures if

(a) in the case of standardized futures andoptions on futures, the dealer is amember of a futures exchange or, inthe case of clearing corporationoptions, is a member of a stockexchange, and, as a result in eithercase, is subject to a regulatory audit;

(b) the dealer has a net worth, determinedfrom its most recent audited financialstatements that have been madepublic, in excess of the equivalent of$50 million; and

(c) the amount of margin deposited doesnot, when aggregated with the amountof margin already held by the dealer onbehalf of the mutual fund, exceed 10percent of the net assets of the mutualfund, taken at market value as at thetime of deposit.

(3) A mutual fund may deposit with itscounterparty portfolio assets over which it hasgranted a security interest in connection witha particular specified derivatives transaction.

(4) The agreement by which portfolio assets of amutual fund are deposited in accordance withthis section shall require the person orcompany holding portfolio assets of themutual fund so deposited to ensure that its

records show that mutual fund is the beneficialowner of the portfolio assets.

6.9 Separate Account for Paying Expenses - A mutualfund may deposit cash in Canada with an institutionreferred to in paragraph 1 or 2 of section 6.2 tofacilitate the payment of regular operating expensesof the mutual fund.

PART 7 INCENTIVE FEES

7.1 Incentive Fees - A mutual fund shall not pay, orenter into arrangements that would require it to pay,and no securities of a mutual fund shall be sold onthe basis that an investor would be required to pay,a fee that is determined by the performance of themutual fund, unless

(a) the fee is calculated with reference to abenchmark or index that

(i) reflects the market sectors in which themutual fund invests according to itsfundamental investment objectives,

(ii) is available to persons or companiesother than the mutual fund and personsproviding services to it, and

(iii) is a total return benchmark or index;

(b) the payment of the fee is based upon acomparison of the cumulative total return ofthe mutual fund against the cumulative totalpercentage increase or decrease of thebenchmark or index for the period that beganimmediately after the last period for which theperformance fee was paid; and

(c) the method of calculation of the fee anddetails of the composition of the benchmark orindex are described in the simplifiedprospectus of the mutual fund.

7.2 Multiple Portfolio Advisers - Section 7.1 applies tofees payable to a portfolio adviser of a mutual fundthat has more than one portfolio adviser, if the feesare calculated on the basis of the performance of theportfolio assets under management by that portfolioadviser, as if those portfolio assets were a separatemutual fund.

PART 8 CONTRACTUAL PLANS

8.1 Contractual Plans - No securities of a mutual fundshall be sold by way of a contractual plan unless

(a) the contractual plan was established, and itsterms described in a prospectus or simplifiedprospectus that was filed with the securitiesregulatory authority, before the date that thisInstrument came into force;

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(b) there have been no changes made to thecontractual plan or the rights ofsecurityholders under the contractual plansince the date that this Instrument came intoforce; and

(c) the contractual plan has continued to beoperated in the same manner after the datethat this Instrument came into force as it wason that date.

PART 9 SALE OF SECURITIES OF A MUTUAL FUND

9.1 Transmission and Receipt of Purchase Orders

(1) Each purchase order for securities of a mutualfund received by a participating dealer at alocation that is not its principal office shall, onthe day the order is received, be sent by sameday or next day courier, same day or next daypriority post, telephone or electronic means,without charge to the person or companyplacing the order or to the mutual fund, to theprincipal office of the participating dealer.

(2) Each purchase order for securities of a mutualfund received by a participating dealer at itsprincipal office or by the principal distributor ofthe mutual fund at a location that is not anorder receipt office of the mutual fund shall, onthe day the order is received, be sent by sameday or next day courier, same day or next daypriority post, telephone or electronic means,without charge to the person or companyplacing the order or to the mutual fund, to anorder receipt office of the mutual fund.

(3) Despite subsections (1) and (2), a purchaseorder for securities of a mutual fund receivedat a location referred to in those subsectionsafter normal business hours on a businessday, or on a day that is not a business day,may be sent, in the manner and to the placerequired by those subsections, on the nextbusiness day.

(4) A participating dealer or principal distributorthat sends purchase orders electronically may

(a) specify a time on a business day bywhich a purchase order must bereceived in order that it be sentelectronically on that business day; and

(b) despite subsections (1) and (2), sendelectronically on the next business daya purchase order received after thetime so specified.

(5) A mutual fund is deemed to have received apurchase order for securities of the mutualfund when the order is received at an orderreceipt office of the mutual fund.

(6) Despite subsection (5), a mutual fund mayprovide that a purchase order for securities ofthe mutual fund received at an order receiptoffice of the mutual fund after a specified timeon a business day, or on a day that is not abusiness day, will be considered to bereceived by the mutual fund on the nextbusiness day following the day of actualreceipt.

(7) A principal distributor or participating dealershall ensure that a copy of each purchaseorder received in a jurisdiction is sent, by thetime it is sent to the order receipt office of themutual fund under subsection (2), to a personresponsible for the supervision of trades madeon behalf of clients for the principal distributoror participating dealer in the jurisdiction.

9.2 Acceptance of Purchase Orders - A mutual fundmay reject a purchase order for the purchase ofsecurities of the mutual fund if

(a) the rejection of the order is made no later thanone business day after receipt by the mutualfund of the order;

(b) on rejection of the order, all cash received withthe order is refunded immediately; and

(c) the simplified prospectus of the mutual fundstates that the right to reject a purchase orderfor securities of the mutual fund is reservedand reflects the requirements of paragraphs(a) and (b).

9.3 Issue Price of Securities - The issue price of asecurity of a mutual fund to which a purchase orderpertains shall be the net asset value per security ofthat class, or series of a class, next determined afterthe receipt by the mutual fund of the order.

9.4 Delivery of Funds and Settlement

(1) A principal distributor or participating dealershall forward any cash received for paymentof the issue price of securities of a mutualfund to an order receipt office of the mutualfund so that the cash arrives at the orderreceipt office as soon as practicable and inany event no later than the third business dayafter the pricing date.

(2) Payment of the issue price of securities of amutual fund shall be made to the mutual fundon or before the third business day after thepricing date for the securities by

(a) a payment of cash in a currency inwhich the net asset value per securityof the mutual fund is calculated; or

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(b) good delivery of securities if

(i) the mutual fund would at thetime of payment be permitted topurchase those securities,

(ii) the securities are acceptable tothe portfolio adviser of themutual fund and consistent withthe mutual fund's investmentobjectives, and

(iii) the value of the securities is atleast equal to the issue price ofthe securities of the mutual fundfor which they are payment,valued as if the securities wereportfolio assets of the mutualfund.

(3) If payment of the issue price of securities of amutual fund is made by the good delivery ofsecurities as contemplated by paragraph(2)(b), the statement of portfolio transactionsnext prepared by the mutual fund shall includea note providing details of the securities sodelivered.

(4) If payment of the issue price of the securitiesof a mutual fund to which a purchase orderpertains is not made on or before the thirdbusiness day after the pricing date or if themutual fund has been paid the issue price bya cheque or method of payment that issubsequently not honoured,

(a) the mutual fund shall redeem thesecurities to which the purchase orderpertains as if it had received an orderfor the redemption of the securitiesimmediately before the close ofbusiness on the fourth business dayafter the pricing date or on the day onwhich the mutual fund first knows thatthe method of payment will not behonoured; and

(b) the amount of the redemption proceedsderived from the redemption shall beapplied to reduce the amount owing tothe mutual fund on the purchase of thesecurities and any banking costsincurred by the mutual fund inconnection with the dishonouredcheque.

(5) If the amount of the redemption proceedsreferred to in subsection (4) exceeds theaggregate of issue price of the securities andany banking costs incurred by the mutual fundin connection with the dishonoured cheque,the difference shall belong to the mutual fund.

(6) If the amount of the redemption proceedsreferred to in subsection (4) is less than the

issue price of the securities and any bankingcosts incurred by the mutual fund inconnection with the dishonoured cheque,

(a) if the mutual fund has a principaldistributor, the principal distributor shallpay, immediately upon notification bythe mutual fund, to the mutual fund theamount of the deficiency; or

(b) if the mutual fund does not have aprincipal distributor, the participatingdealer that delivered the relevantpurchase order to the mutual fund shallpay immediately, upon notification bythe mutual fund, to the mutual fund theamount of the deficiency.

PART 10 REDEMPTION OF SECURITIES OF AMUTUAL FUND

10.1 Requirements for Redemptions

(1) No mutual fund shall pay redemptionproceeds unless

(a) if the security of the mutual fund to be

redeemed is represented by acertificate, the mutual fund hasreceived the certificate or appropriateindemnities in connection with a lostcertificate; and

(b) either

(i) the mutual fund has received awritten redemption order, dulycompleted and executed by oron behalf of the securityholder,or

(ii) the mutual fund permits themaking of redemption orders bytelephone or electronic meansby, or on behalf of, asecurityholder who has madeprior arrangements with themutual fund in that regard andthe relevant redemption order ismade in compliance with thosearrangements.

(2) A mutual fund may establish reasonablerequirements applicable to securityholderswho wish to have the mutual fund redeemsecurities, not contrary to this Instrument, asto procedures to be followed and documentsto be delivered

(a) by the time of delivery of a redemptionorder to an order receipt office of themutual fund; or

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(b) by the time of payment of redemptionproceeds.

(3) The manager shall provide to securityholdersof a mutual fund at least annually a statementoutlining the requirements referred to insubsection (1) and established by the mutualfund under subsection (2), and containing

(a) detailed reference to all documentationrequired for redemption of securities ofthe mutual fund;

(b) detailed instructions on the manner inwhich documentation is to be deliveredto participating dealers or the mutualfund;

(c) a description of all other procedural orcommunication requirements; and

(d) an explanation of the consequences offailing to meet timing requirements.

(4) The statement referred to in subsection (3) isnot required to be separately provided, in anyyear, if the requirements are described in themutual fund's annual financial statements orannual report, or in a simplified prospectusthat is sent to all securityholders in that year.

10.2 Transmission and Receipt of Redemption Orders

(1) Each redemption order for securities of amutual fund received by a participating dealerat a location that is not its principal office shall,on the day the order is received, be sent bysame day or next day courier, same day ornext day priority post, telephone or electronicmeans, without charge to the relevantsecurityholder or to the mutual fund, to theprincipal office of the participating dealer.

(2) Each redemption order for securities of amutual fund received by a participating dealerat its principal office or by the principaldistributor of the mutual fund at a location thatis not an order receipt office of the mutualfund shall, on the day the order is received, besent by same day or next day courier, sameday or next day priority post, telephone orelectronic means, without charge to therelevant securityholder or to the mutual fund,to an order receipt office of the mutual fund.

(3) Despite subsections (1) and (2), a redemptionorder for securities of a mutual fund receivedat a location referred to in those subsectionsafter normal business hours on a businessday, or on a day that is not a business day,may be sent, in the manner and to the placerequired by those subsections, on the nextbusiness day.

(4) A participating dealer or principal distributorthat sends redemption orders electronicallymay

(a) specify a time on a business day bywhich a redemption order must bereceived in order that it be sentelectronically on that business day; and

(b) despite subsections (1) and (2), sendelectronically on the next business daya redemption order received after thetime so specified.

(5) A mutual fund is deemed to have received aredemption order for securities of the mutualfund when the order is received at an orderreceipt office of the mutual fund or allrequirements of the mutual fund establishedunder paragraph 10.1(2)(a) have beensatisfied, whichever is later.

(6) If a mutual fund determines that itsrequirements established under paragraph10.1(2)(a) have not been satisfied, the mutualfund shall notify the securityholder making theredemption order, by the close of business onthe business day after the date of the deliveryto the mutual fund of the incompleteredemption order, that its requirementsestablished under paragraph 10.1(2)(a) havenot been satisfied and shall specifyprocedures still to be followed or thedocuments still to be delivered by thatsecurityholder.

(7) Despite subsection (5), a mutual fund mayprovide that orders for the redemption ofsecurities that are received at an order receiptoffice of the mutual fund after a specified timeon a business day, or on a day that is not abusiness day, will be considered to bereceived by the mutual fund on the nextbusiness day following the day of actualreceipt.

10.3 Redemption Price of Securities - The redemptionprice of a security of a mutual fund to which aredemption order pertains shall be the net assetvalue of a security of that class, or series of a class,next determined after the receipt by the mutual fundof the order.

10.4 Payment of Redemption Price

(1) Subject to subsection 10.1(1) and tocompliance with any requirements establishedby the mutual fund under paragraph10.1(2)(b), a mutual fund shall pay theredemption price for securities that are thesubject of a redemption order

(a) within three business days after thedate of calculation of the net asset

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value per security used in establishingthe redemption price; or

(b) if payment of the redemption price wasnot made at the time referred to inparagraph (a) because a requirementestablished under paragraph 10.1(2)(b)or a requirement of subsection 10.1(1)had not been satisfied, within threebusiness days of

(i) the satisfaction of the relevantrequirement, or

(ii) the decision by the mutual fundto waive the requirement, if therequirement was a requirementestablished under paragraph10.1(2)(b).

(2) The redemption price of a security, less anyapplicable investor fees, shall be paid to or tothe order of the securityholder of the security.

(3) A mutual fund shall pay the redemption priceof a security

(a) in the currency in which the net assetvalue per security of the redeemedsecurity was denominated; or

(b) with the prior written consent of thesecurityholder, by making gooddelivery to the securityholder ofportfolio assets, the value of which isequal to the amount at which thoseportfolio assets were valued incalculating the net asset value persecurity used to establish theredemption price.

(4) If payment of the redemption price ofsecurities of a mutual fund is made underparagraph (3)(b), the statement of portfoliotransactions next prepared by the mutual fundshall include a note describing the portfolioassets delivered to the securityholder and thevalue assigned to the portfolio assets.

(5) If the redemption price of a security is paid incurrency, a mutual fund is deemed to havemade payment

(a) when the mutual fund, its manager orprincipal distributor mails a cheque ortransmits funds in the required amountto or to the order of the securityholderof the securities; or

(b) if the securityholder has requested thatredemption proceeds be delivered in acurrency other than that permitted insubsection (3), when the mutual funddelivers the redemption proceeds tothe manager or principal distributor of

the mutual fund for conversion into thatcurrency and delivery forthwith to thesecurityholder.

10.5 Failure to Complete Redemption Order

(1) If a requirement of a mutual fund referred to insubsection 10.1(1) or established underparagraph 10.1(2)(b) has not been satisfied onor before the close of business on the tenthbusiness day after the date of the redemptionof the relevant securities, and, in the case of arequirement established under paragraph10.1(2)(b), the mutual fund does not waivesatisfaction of the requirement, the mutualfund shall

(a) issue, to the person or company thatimmediately before the redemptionheld the securities that were redeemed,a number of securities equal to thenumber of securities that wereredeemed, as if the mutual fund hadreceived from the person or companyon the tenth business day after theredemption, and accepted immediatelybefore the close of business on thetenth business day after theredemption, an order for the purchaseof that number of securities; and

(b) apply the amount of the redemptionproceeds to the payment of the issueprice of the securities.

(2) If the amount of the issue price of thesecurities referred to in subsection (1) is lessthan the redemption proceeds, the differenceshall belong to the mutual fund.

(3) If the amount of the issue price of thesecurities referred to in subsection (1)exceeds the redemption proceeds

(a) if the mutual fund has a principaldistributor, the principal distributor shallpay immediately to the mutual fund theamount of the deficiency;

(b) if the mutual fund does not have aprincipal distributor, the participatingdealer that delivered the relevantredemption order to the mutual fundshall pay immediately to the mutualfund the amount of the deficiency; or

(c) if the mutual fund has no principaldistributor and no dealer delivered therelevant redemption order to the mutualfund, the manager of the mutual fundshall pay immediately to the mutualfund the amount of the deficiency.

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10.6 Suspension of Redemptions

(1) A mutual fund may suspend the right ofsecurityholders to request that the mutual fundredeem its securities for the whole or any partof a period during which normal trading issuspended on a stock exchange, optionsexchange or futures exchange within oroutside Canada on which securities are listedand traded, or on which specified derivativesare traded, if those securities or specifiedderivatives represent more than 50 percent byvalue, or underlying market exposure, of thetotal assets of the mutual fund withoutallowance for liabilities and if those securitiesor specified derivatives are not traded on anyother exchange that represents a reasonablypractical alternative for the mutual fund.

(2) A mutual fund that has an obligation to pay theredemption price for securities that have beenredeemed in accordance with subsection10.4(1) may postpone payment during aperiod in which the right of securityholders torequest redemption of their securities issuspended, whether that suspension wasmade under subsection (1) or pursuant to anapproval of the securities regulatory authority.

(3) A mutual fund shall not accept a purchaseorder for securities of the mutual fund duringa period in which it is exercising rights undersubsection (1) or at a time in which it is relyingon an approval of the securities regulatoryauthorities contemplated by paragraph5.5(1)(d).

PART 11 COMMINGLING OF CASH

11.1 Principal Distributors

(1) Cash received by a principal distributor of amutual fund, or by a person or companyproviding services to the mutual fund or theprincipal distributor, for investment in, or onthe redemption of, securities of the mutualfund, or on the distribution of assets of themutual fund, until disbursed as permitted bysubsection (3),

(a) shall be accounted for separately andbe deposited in a trust account or trustaccounts established and maintainedin accordance with the requirements ofsection 11.3; and

(b) may be commingled only with cashreceived by the principal distributor orservice provider for the sale or on theredemption of other mutual fundsecurities.

(2) Except as permitted by subsection (3), theprincipal distributor or person or company

providing services to the mutual fund orprincipal distributor shall not use any of thecash referred to in subsection (1) to finance itsown or any other operations in any way.

(3) The principal distributor or person or companyproviding services to a mutual fund or principaldistributor may withdraw cash from a trustaccount referred to in paragraph (1)(a) for thepurpose of

(a) remitting to the mutual fund the amountor, if subsection (5) applies, the netamount, to be invested in the securitiesof the mutual fund;

(b) remitting to the relevant persons orcompanies redemption or distributionproceeds being paid on behalf of themutual fund; or

(c) paying fees, charges and expensesthat are payable by an investor inconnection with the purchase,conversion, holding, transfer orredemption of securities of the mutualfund.

(4) All interest earned on cash held in a trustaccount referred to in paragraph (1)(a) shallbe paid to securityholders or to each of themutual funds to which the trust accountpertains, pro rata based on cash flow,

(a) no less frequently than monthly if theamount owing to a mutual fund or to asecurityholder is $10 or more; and

(b) no less frequently than once a year.

(5) When making payments to a mutual fund, theprincipal distributor or service provider mayoffset the proceeds of redemption of securitiesof the mutual fund or amounts held fordistributions to be paid on behalf of the mutualfund held in the trust account against amountsheld in the trust account for investment in themutual fund.

11.2 Participating Dealers

(1) Cash received by a participating dealer, or bya person or company providing services to aparticipating dealer, for investment in, or onthe redemption of, securities of a mutual fund,or on the distribution of assets of a mutualfund, until disbursed as permitted bysubsection (3)

(a) shall be accounted for separately andshall be deposited in a trust account ortrust accounts established andmaintained in accordance with section11.3; and

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(b) may be commingled only with cashreceived by the participating dealer orservice provider for the sale or on theredemption of other mutual fundsecurities.

(2) Except as permitted by subsection (3), theparticipating dealer or person or companyproviding services to the participating dealershall not use any of the cash referred tosubsection (1) to finance its own or any otheroperations in any way.

(3) A participating dealer or person or companyproviding services to the participating dealermay withdraw cash from a trust accountreferred to in paragraph (1)(a) for the purposeof

(a) remitting to the mutual fund or theprincipal distributor of the mutual fundthe amount or, if subsection (5) applies,the net amount, to be invested in thesecurities of the mutual fund;

(b) remitting to the relevant persons orcompanies redemption or distributionproceeds being paid on behalf of themutual fund; or

(c) paying fees, charges and expensesthat are payable by an investor inconnection with the purchase,conversion, holding, transfer orredemption of securities of the mutualfund.

(4) All interest earned on cash held in a trustaccount referred to in paragraph (1)(a) shallbe paid to securityholders or to each of themutual funds to which the trust accountpertains, pro rata based on cash flow,

(a) no less frequently than monthly if theamount owing to a mutual fund or to asecurityholder is $10 or more; and

(b) no less frequently than once a year.

(5) When making payments to a mutual fund, aparticipating dealer or service provider mayoffset the proceeds of redemption of securitiesof the mutual fund and amounts held fordistributions to be paid on behalf of a mutualfund held in the trust account against amountsheld in the trust account for investment in themutual fund.

(6) A participating dealer or person providingservices to the participating dealer shall permitthe mutual fund and the principal distributor,through their respective auditors or otherdesignated representatives, to examine thebooks and records of the participating dealerto verify the compliance with this section of the

participating dealer or person providingservices.

11.3 Trust Accounts - A principal distributor orparticipating dealer that deposits cash into a trustaccount in accordance with section 11.1 or 11.2 shall

(a) advise, in writing, the financial institution withwhich the account is opened at the time of theopening of the account that

(i) the account is established for thepurpose of holding client funds in trust,

(ii) the account is to be labelled by thefinancial institution as a "trust account",

(iii) the account is not to be accessed byany person other than authorizedrepresentatives of the principaldistributor or participating dealer, and

(iv) the cash in the trust account may notbe used to cover shortfalls in anyaccounts of the principal distributor orparticipating dealer;

(b) ensure that the trust account bears interest atrates equivalent to comparable accounts ofthe financial institution; and

(c) ensure that any charges against the trustaccount are not paid or reimbursed out of thetrust account.

11.4 Exemption

(1) Sections 11.1 and 11.2 do not apply tomembers of The Investment DealersAssociation of Canada, The Alberta StockExchange, The Montreal Exchange, TheToronto Stock Exchange or the VancouverStock Exchange.

(2) A participating dealer that is a member of anSRO referred to in subsection (1) shall permitthe mutual fund and the principal distributor,through their respective auditors or otherdesignated representatives, to examine thebooks and records of the participating dealerto verify the participating dealer's compliancewith the requirements of its association orexchange that relate to the commingling ofcash.

11.5 Right of Inspection - The mutual fund, its trustee,manager and principal distributor shall ensure that allcontractual arrangements made between any of themand any person or company providing services to themutual fund permit the representatives of the mutualfund, its manager and trustee to examine the booksand records of those persons or companies in orderto monitor compliance with this Instrument.

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PART 12 COMPLIANCE REPORTS

12.1 Compliance Reports

(1) A mutual fund that does not have a principaldistributor shall complete and file, within 140days after the financial year end of the mutualfund

(a) a report in the form contained inAppendix B-1 describing compliance bythe mutual fund during that financialyear with the applicable requirementsof Parts 9, 10 and 11; and

(b) a report by the auditor of the mutualfund, in the form contained in AppendixB-1, concerning the report referred to inparagraph (a).

(2) The principal distributor of a mutual fund shallcomplete and file, within 90 days after thefinancial year end of the principal distributor

(a) a report in the form contained inAppendix B-2 describing compliance bythe principal distributor during thatfinancial year with the applicablerequirements of Parts 9, 10 and 11;and

(b) a report by the auditor of the principaldistributor or by the auditor of themutual fund, in the form contained inAppendix B-2, concerning the reportreferred to in paragraph (a).

(3) Each participating dealer that distributessecurities of a mutual fund in a financial yearof the participating dealer shall complete andfile, within 90 days after the end of thatfinancial year

(a) a report in the form contained inAppendix B-3 describing compliance bythe participating dealer during thatfinancial year with the applicablerequirements of Parts 9, 10 and 11 inconnection with its distribution ofsecurities of all mutual funds in thatfinancial year; and

(b) a report by the auditor of theparticipating dealer, in the formcontained in Appendix B-3, concerningthe report referred to in paragraph (a).

(4) Subsection (3) does not apply to members ofThe Investment Dealers Association ofCanada, The Alberta Stock Exchange, TheMontreal Exchange, The Toronto StockExchange or the Vancouver Stock Exchange.

PART 13 CALCULATION OF NET ASSET VALUE PERSECURITY

13.1 Frequency and Currency of Calculation of NetAsset Value per Security

(1) The net asset value per security of a mutualfund shall be calculated

(a) if the mutual fund does not usespecified derivatives, at least once ineach week; or

(b) if the mutual fund uses specifiedderivatives, at least once everybusiness day.

(2) Despite subsection (1)(a), a mutual fund that,at the date that this Instrument comes intoforce, calculates net asset value per securityno less frequently than once a month maycontinue to calculate net asset value persecurity at least as frequently as it does at thatdate.

(3) The net asset value per security of a mutualfund shall be calculated in the currency ofCanada or in the currency of the United Statesof America or both.

(4) A mutual fund that arranges for the publicationof its net asset value per security in thefinancial press shall ensure that its current netasset value per security is provided on atimely basis to the financial press.

13.2 Portfolio Transactions - Each transaction ofpurchase or sale of a portfolio asset effected by amutual fund shall be reflected in a calculation of netasset value per security of the mutual fund made notlater than the first calculation of net asset value persecurity made after the date on which the transactionbecomes binding.

13.3 Capital Transactions - The issue or redemption ofa security of a mutual fund shall be reflected in thefirst calculation of net asset value per security of themutual fund made after the calculation of net assetvalue per security used to establish the issue orredemption price.

13.4 Valuation of Restricted Securities - A mutual fundshall value a restricted security at the lesser of

(a) the value based on reported quotations of thatrestricted security in common use; and

(b) that percentage of the market value of thesecurities of the class or series of a class ofwhich the restricted security forms part thatare not restricted securities, equal to thepercentage that the mutual fund's acquisitioncost was of the market value of the securitiesat the time of acquisition, but taking intoaccount, if appropriate, the amount of time

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remaining until the restricted securitieswill cease to be restricted securities.

13.5 Valuation of Specified Derivatives - A mutual fundshall value specified derivatives transactions andpositions in accordance with the following principles:

1. A long position in an option or a debt-likesecurity shall be valued at the current marketvalue of the position.

2. For options written by a mutual fund

(a) the premium received by the mutualfund for those options shall be reflectedas a deferred credit that shall be valuedat an amount equal to the currentmarket value of the option that wouldhave the effect of closing the position;

(b) any difference resulting fromrevaluation shall be treated as anunrealized gain or loss on investment;

(c) the deferred credit shall be deducted incalculating the net asset value persecurity of the mutual fund; and

(d) any securities that are the subject of awritten option shall be valued at theircurrent market value.

3. The value of a forward contract or swap shallbe the gain or loss on the contract that wouldbe realized if, on the date that valuation ismade, the position in the forward contract orswap were to be closed out.

4. The value of a standardized future shall be

(a) if daily limits imposed by the futuresexchange through which thestandardized future was issued are notin effect, the gain or loss on thestandardized future that would berealized if, on the date that valuation ismade, the position in the standardizedfuture were to be closed out; or

(b) if daily limits imposed by the futuresexchange through which thestandardized future was issued are ineffect, based on the current marketvalue of the underlying interest of thestandardized future.

5. Margin paid or deposited on standardizedfutures or forward contracts

(a) shall be reflected as an accountreceivable; and

(b) if not in the form of cash, shall be notedas held for margin.

PART 14 RECORD DATE

14.1 Record Date - The record date for determining theright of securityholders of a mutual fund to receive adividend or distribution by the mutual fund shall beone of

(a) the day on which the net asset value persecurity is determined for the purpose ofcalculating the amount of the payment of thedividend or distribution;

(b) the last day on which the net asset value persecurity of the mutual fund was calculatedbefore the day referred to in paragraph (a); or

(c) if the day referred to in paragraph (b) is not abusiness day, the last day on which the netasset value per security of the mutual fundwas calculated before the day referred to inparagraph (b).

PART 15 S A L E S C O M M U N I C A T I O N S A N DPROHIBITED REPRESENTATIONS

15.1 Ability to Make Sales Communications - Salescommunications pertaining to a mutual fund may bemade by a person or company only in accordancewith this Part.

15.2 Sales Communications - General Requirements

(1) Despite any other provision of this Part, nosales communication shall

(a) be untrue or misleading; or

(b) include a statement that conflicts withinformation that is contained in thepreliminary simplified prospectus, thepreliminary annual information form,the simplified prospectus or annualinformation form

(i) of a mutual fund, or

(ii) in which an asset allocationservice is described.

(2) All performance data or disclosure specificallyrequired by this Instrument and contained in awritten sales communication shall be at leastas large as 10-point type.

15.3 Prohibited Disclosure in Sales Communications

(1) A sales communication shall not compare theperformance of a mutual fund or assetallocation service with the performance orchange of any benchmark or investmentunless

(a) it includes all facts that, if disclosed,would be likely to alter materially the

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conclusions reasonably drawnor implied by the comparison;

(b) it presents data for each subject of thecomparison for the same period orperiods;

(c) it explains clearly any factorsnecessary to make the comparison fairand not misleading; and

(d) in the case of a comparison with abenchmark

(i) the benchmark existed and waswidely recognized and availableduring the period for which thecomparison is made, or

(ii) the benchmark did not exist forall or part of the period, but areconstruction or calculation ofwhat the benchmark would havebeen during that period,calculated on a basis consistentwith its current basis ofcalculation, is widely recognizedand available.

(2) A sales communication for a mutual fund orasset allocation service that is prohibited byparagraph 15.6(a) from disclosingperformance data shall not provideperformance data for any benchmark orinvestment other than a mutual fund or assetal locat ion service under commonmanagement with the mutual fund or assetallocation service to which the salescommunication pertains.

(3) Despite subsection (2), a salescommunication for an index mutual fund mayprovide performance data for the index onwhich the investments of the mutual fund arebased if the index complies with therequirements for benchmarks contained inparagraph (1)(d).

(4) A sales communication shall not refer to aperformance rating or ranking of a mutual fundor asset allocation service unless

(a) the rating or ranking is prepared by anorganization that is not a member ofthe organization of the mutual fund;

(b) standard performance data is providedfor any mutual fund or asset allocationservice for which a performance ratingor ranking is given; and

(c) the rating or ranking is provided foreach period for which standardperformance data is required to begiven.

(5) A sales communication shall not refer to acredit rating of securities of a mutual fundunless

(a) the rating is current and was preparedby an approved credit ratingorganization;

(b) there has been no announcement bythe approved credit rating organizationof which the mutual fund or its manageris or ought to be aware that the creditrating of the securities may bedown-graded; and

(c) no approved credit rating organizationis currently rating the securities at alower level.

(6) A sales communication shall not refer to amutual fund as, or imply that it is, a moneyfund, cash fund or money market fund unless,at the time the sales communication is usedand for each period for which money marketfund standard performance data is provided,the mutual fund is and was a money marketfund, either under National Policy StatementNo. 39 or under this Instrument.

(7) A sales communication shall not state or implythat a registered retirement savings plan,registered retirement income fund orregistered education savings plan in itself,rather than the mutual fund to which the salescommunication relates, is an investment.

15.4 Required Disclosure and Warnings in SalesCommunications

(1) A written sales communication shall

(a) bear the name of the principaldistributor or participating dealer thatdistributed the sales communication;and

(b) if the sales communication is not anadvertisement, contain the date of firstpublication of the sales communication.

(2) A sales communication that includes a rate ofreturn or a mathematical table illustrating thepotential effect of a compound rate of returnshall contain a statement in substantially thefollowing words:

"[The rate of return or mathematicaltable shown] is used only to illustratethe effects of the compound growthrate and is not intended to reflect futurevalues of [the mutual fund or assetallocation service] or returns oninvestment [in the mutual fund or fromthe use of the asset allocationservice].".

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(3) A sales communication, other than a report tosecurityholders, of a mutual fund that is not amoney market fund and that does not containperformance data shall contain a warning insubstantially the following words:

"Commissions, trailing commissions,management fees and expenses allmay be associated with mutual fundinvestments. Please read theprospectus before investing. Mutualfunds are not guaranteed, their valueschange frequent ly and pastperformance may not be repeated.".

(4) A sales communication, other than a report tosecurityholders, of a money market fund thatdoes not contain performance data shallcontain a warning in substantially the followingwords:

"Commissions, trailing commissions,management fees and expenses allmay be associated with mutual fundinvestments. Please read theprospectus before investing. Mutualfund securities are not covered by theCanada Deposit Insurance Corporationor by any other government depositinsurer. There can be no assurancesthat the fund will be able to maintain itsnet asset value per security at aconstant amount or that the full amountof your investment in the fund will bereturned to you. Past performancemay not be repeated.".

(5) A sales communication for an asset allocationservice that does not contain performancedata shall contain a warning in substantiallythe following words:

"Commissions, trailing commissions,management fees and expenses allmay be associated with mutual fundinvestments and the use of an assetallocation service. Please read theprospectus of the mutual funds inwhich investment may be made underthe asset allocation service beforeinvesting. Mutual funds are notguaranteed, their values changefrequently and past performance maynot be repeated.".

(6) A sales communication, other than a report tosecurityholders, of a mutual fund that is not amoney market fund and that containsperformance data shall contain a warning insubstantially the following words:

"Commissions, trailing commissions,management fees and expenses allmay be associated with mutual fundinvestments. Please read the

prospectus before investing. Theindicated rate[s] of return is [are] thehistorical annual compounded totalreturn[s] including changes in [share orunit] value and reinvestment of all[dividends or distributions] and does[do] not take into account sales,redemption, distribution or optionalcharges or income taxes payable byany securityholder that would havereduced returns. Mutual funds are notguaranteed, their values changefrequently and past performance maynot be repeated.".

(7) A sales communication, other than a report tosecurityholders, of a money market fund thatcontains performance data shall contain

(a) a warning in substantially the followingwords:

"Commissions, trailing commissions,management fees and expenses allmay be associated with mutual fundinvestments. Please read theprospectus before investing. Theperformance data provided assumesreinvestment of distributions only anddoes not take into account sales,redemption, distribution or optionalcharges or income taxes payable byany securityholder that would havereduced returns. Mutual fundsecurities are not covered by theCanada Deposit Insurance Corporationor by any other government depositinsurer. There can be no assurancesthat the fund will be able to maintain itsnet asset value per security at aconstant amount or that the full amountof your investment in the fund will bereturned to you. Past performancemay not be repeated."; and

(b) a statement in substantially thefollowing words, immediately followingthe performance data:

"This is an annualized historical yieldbased on the seven day period endedon [date] [annualized in the case ofeffective yield by compounding theseven day return] and does notrepresent an actual one year return.".

(8) A sales communication for an asset allocationservice that contains performance data shallcontain a warning in substantially the followingwords:

"Commissions, trailing commissions,management fees and expenses allmay be associated with mutual fundinvestments and the use of an asset

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allocation service. Please readthe prospectus of the mutualfunds in which investment maybe made under the assetallocation service beforeinvesting. The indicated rate[s]of return is [are] the historicalannual compounded totalre turn [s ] assuming thei n v e s t m e n t s t r a t e g yrecommended by the assetallocation service is used andafter deduction of the fees andcharges in respect of theservice. The return[s] is [are]based on the historical annualcompounded total returns of theparticipating funds includingchanges in [share] [unit] valueand reinvestment of all[dividends or distributions] anddoes [do] not take into accountsales, redemption, distributionor optional charges or incometaxes payable by anysecurityholder in respect of aparticipating fund that wouldhave reduced returns. Mutualfunds are not guaranteed, theirvalues change frequently andpast performance may not berepeated.".

(9) A sales communication distributed after theissue of a receipt for a preliminary prospectusor preliminary simplified prospectus of themutual fund described in the salescommunication but before the issue of areceipt for its prospectus or simplifiedprospectus shall contain a warning insubstantially the following words:

"A preliminary simplified prospectusrelating to the fund has been filed withcer ta in Canad ian secur i t i escommissions or similar authorities.You cannot buy [units] [shares] of thefund until the relevant securitiescommissions or similar authoritiesissue receipts for the simplifiedprospectus of the fund.".

(10) A sales communication for a mutual fund orasset allocation service that purports toarrange a guarantee or insurance in order toprotect all or some of the principal amount ofan investment in the mutual fund or assetallocation service shall

(a) identify the person or companyproviding the guarantee or insurance;

(b) provide the material terms of theguarantee or insurance, including the

maturity date of the guarantee orinsurance;

(c) if applicable, state that the guaranteeor insurance does not apply to theamount of any redemptions before thematurity date of the guarantee orbefore the death of the securityholderand that redemptions before that datewould be based on the net asset valueper security of the mutual fund at thetime; and

(d) modify any other disclosure required bythis section appropriately.

(11) The warnings referred to in this section shallbe communicated in a manner that areasonable person would consider clear andeasily understood at the same time as, andthrough the medium by which, the relatedsales communication is communicated.

(12) A mutual fund that files a prospectus ratherthan a simplified prospectus shall amend thewarnings required by this section to refer to aprospectus, as applicable.

15.5 Disclosure Regarding Distribution Fees

(1) No person or company shall describe a mutualfund in a sales communication as a "no-loadfund" or use words of like effect if on apurchase or redemption of securities of themutual fund investor fees are payable by aninvestor or if any fees, charges or expensesare payable by an investor to a participatingdealer of the mutual fund named in the salescommunication, other than

(a) fees and charges related to specificoptional services;

(b) for a mutual fund that is not a moneymarket fund, redemption fees on theredemption of securities of the mutualfund that are redeemed within 90 daysafter the purchase of the securities, ifthe existence of the fees is disclosed inthe sales communication, or in thesimplified prospectus of the mutualfund; or

(c) costs that are payable only on the set-up or closing of a securityholder'saccount and that reflect theadministrative costs of establishing orclosing the account, if the existence ofthe costs is disclosed in the salescommunication, or in the simplifiedprospectus of the mutual fund.

(2) If a sales communication describes a mutualfund as "no-load" or uses words to like effect,the sales communication shall

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(a) indicate the principal distributor or aparticipating dealer through which aninvestor may purchase the mutual fundon a no-load basis;

(b) disclose that management fees andoperating expenses are paid by themutual fund; and

(c) disclose the existence of any trailingcommissions paid by a member of theorganization of the mutual fund.

(3) A sales communication containing a referenceto the existence or absence of fees orcharges, other than the disclosure required bysection 15.4 or a reference to the term "no-load", shall disclose the types of fees andcharges that exist.

(4) The rate of sales charges or commissions forthe sale of securities of a mutual fund or theuse of an asset allocation service shall beexpressed in a sales communication as apercentage of the amount paid by thepurchaser and as a percentage of the netamount invested if a reference is made tosales charges or commissions.

15.6 Performance Data - General Requirements - Nosales communication pertaining to a mutual fund orasset allocation service shall contain performancedata of the mutual fund or asset allocation serviceunless

(a) either

(i) the mutual fund has offered securitiesunder a simplified prospectus in ajurisdiction for at least one completedfinancial year, or the asset allocationservice has been operated for at least12 months and has invested only inparticipating mutual funds each ofwhich has offered securities under asimplified prospectus in a jurisdictionfor at least one completed financialyear, or

(ii) if the sales communication pertains toa mutual fund or asset allocationservice that does not satisfy therequirements of subparagraph (i), thesales communication is sent only to

(A) securityholders of the mutualfund or participants in the assetallocation service, or

(B) securityholders of a mutual fundor participants in an assetallocation service undercommon management with themutual fund or asset allocationservice;

(b) the sales communication also containsstandard performance data of the mutual fundor asset allocation service and, in the case ofa written sales communication, the standardperformance data is presented in a type sizethat is equal to or larger than that used topresent the other performance data;

(c) the performance data reflects or includesreferences to all elements of return; and

(d) except as permitted by subsection 15.3(3), thesales communication does not containperformance data for a period that is beforethe time when the mutual fund offered itssecurities under a simplified prospectus orbefore the asset allocation servicecommenced operation.

15.7 Advertisements - An advertisement for a mutualfund or asset allocation service shall not compare theperformance of the mutual fund or asset allocationservice with any benchmark or investment other than

(a) one or more mutual funds or asset allocationservices that are under common managementor administration with the mutual fund or assetallocation service to which the advertisementpertains;

(b) one or more mutual funds or asset allocationservices that have fundamental investmentobjectives that a reasonable person wouldconsider similar to the mutual fund or assetallocation service to which the advertisementpertains; or

(c) an index.

15.8 Performance Measurement Periods Covered byPerformance Data

(1) A sales communication, other than a report tosecurityholders, that relates to a moneymarket fund may provide standardperformance data only if

(a) the standard performance data hasbeen calculated for the most recentseven day period for which it ispracticable to calculate, taking intoaccount publication deadlines; and

(b) the seven day period does not startmore than 45 days before the date ofthe appearance, use or publication ofthe sales communication.

(2) A sales communication, other than a report tosecurityholders, that relates to an assetallocation service or to a mutual fund otherthan a money market fund may providestandard performance data only if

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(a) the standard performance data hasbeen calculated for the 10, five, threeand one year periods and the periodsince the inception of the mutual fund ifthe mutual fund has been offeringsecurities by way of simplifiedprospectus for more than one and lessthan 10 years, and

(b) the periods referred to in paragraph (a)end on the same calendar month endthat is

(i) not more than 45 days beforethe date of the appearance oruse of the advertisement inwhich it is included, and

(ii) not more than three monthsbefore the date of firstpublication of any other salescommunication in which it isincluded.

(3) A report to securityholders may containstandard performance data only if

(a) the standard performance data hasbeen calculated for the 10, five, threeand one year periods and the periodsince the inception of the mutual fund ifthe mutual fund has been offeringsecurities by way of simplifiedprospectus for more than one and lessthan 10 years; and

(b) the periods referred to in paragraph (a)end on the day as of which the balancesheet of the financial statementscontained in the report tosecurityholders was prepared.

(4) A sales communication shall clearly identifythe periods for which performance data iscalculated.

15.9 Changes affecting Performance Data

(1) If, during or after a performance measurementperiod of performance data contained in asales communication, there have beenchanges in the business, operations or affairsof the mutual fund or asset allocation serviceto which the sales communication pertainsthat could have materially affected theperformance of the mutual fund or assetallocation service, the sales communicationshall contain

(a) summary disclosure of the changes,and of how those changes could haveaffected the performance had thosechanges been in effect throughout theperformance measurement period; and

(b) for a money market fund that during theperformance measurement period didnot pay or accrue the full amount ofany fees and charges of the typedescribed under paragraph 15.11(1)1,disclosure of the difference betweenthe full amounts and the amountsactually charged, expressed as anannualized percentage on a basiscomparable to current yield.

(2) If a mutual fund has, in the last 10 years,undertaken a reorganization with, or acquiredassets from, another mutual fund in atransaction that was a significant change forthe mutual fund or would have been asignificant change for the mutual fund had thisInstrument been in force at the time of thetransaction, then, in any sales communicationof the mutual fund,

(a) the mutual fund shall provide summarydisclosure of the transaction;

(b) the mutual fund may include itsperformance data covering any part ofa period before the transaction only if italso includes the performance data forthe other fund for the same periods;

(c) the mutual fund shall not include itsperformance data for any part of aperiod after the transaction unless

(i) 12 months have passed sincethe transaction, or

(ii) the mutual fund includes in thesales communication theperformance data for itself andthe other mutual fund referred toin paragraph (b); and

(d) the mutual fund shall not include anyperformance data for any period that iscomposed of both time before and afterthe transaction.

15.10 Formula for Calculating Standard PerformanceData

(1) The standard performance data of a mutualfund shall be calculated in accordance withthis section.

(2) In this Part

"current yield" means the yield of a moneymarket fund expressed as a percentage anddetermined by applying the following formula:

current yield = [seven day return x365/7] x 100;

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"effective yield" means the yield of a moneymarket fund expressed as a percentage anddetermined by applying the following formula:

effective yield = [(seven day return +1)365/7 - 1] x 100;

"seven day return" means the income yield ofan account of a securityholder in a moneymarket fund that is calculated by

(a) determining the net change, exclusiveof new subscriptions other than fromthe reinvestment of distributions orproceeds of redemption of securities ofthe money market fund, in the value ofthe account,

(b) subtracting all fees and charges of thetype referred to in paragraph 15.11(1)3for the seven day period, and

(c) dividing the result by the value of theaccount at the beginning of the sevenday period;

"standard performance data" means

(a) for a money market fund

(i) the current yield, or

(ii) the current yield and effectiveyield, if the effective yield isreported in a type size that is atleast equal to that of the currentyield, and

(b) for any mutual fund other than a moneymarket fund, the total return

calculated in each case in accordance withthis section; and

"total return" means the annual compoundedrate of return for a mutual fund for a periodthat would equate the initial value to theredeemable value at the end of the period,expressed as a percentage, and determinedby applying the following formula:

total return = [(redeemable value/initialvalue)(1/N)-1] x 100

where N = the length of theperformance measurementperiod in years, with a minimumvalue of 1.

(3) If there are fees and charges of the typedescribed in paragraph 15.11(1)1 relevant tothe calculation of redeemable value and initialvalue of the securities of a mutual fund, theredeemable value and initial value ofsecurities of a mutual fund shall be the net

asset value of one unit or share of the mutualfund at the beginning or at the end of theperformance measurement period, minus theamount of those fees and charges calculatedby applying the assumptions referred to in thatparagraph to a hypothetical securityholderaccount.

(4) If there are no fees and charges of the typedescribed in paragraph 15.11(1)1 relevant toa calculation of total return, the calculation oftotal return for a mutual fund may assume ahypothetical investment of one security of themutual fund and be calculated as follows:

(a) "initial value" means the net assetvalue of one unit or share of a mutualfund at the beginning of theperformance measurement period; and

(b) "redeemable value" =

R x (1 + D1/P1) x (1 + D2/P2) x (1 +D3/P3) . . . x (1 + Dn/Pn)

where R = the net asset valueof one unit orsecurity of themutual fund at thee n d o f t h ep e r f o r m a n c em e a s u r e m e n tperiod,

D = the dividend ordistribution amountper security of themutual fund at thet i m e o f e a c hdistribution,

P = the dividend ord i s t r i b u t i o nreinvestment priceper security of themutual fund at thet i m e o f e a c hdistribution, and

n = t h e n u m b e r o fd i v i d e n d s o rdistributions duringthe performancem e a s u r e m e n tperiod.

(5) Standard performance data of an assetallocation service shall be based upon thestandard performance data of its participatingfunds.

(6) Performance data

(a) for a mutual fund other than a moneymarket fund shall be calculated to the

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nearest one-tenth of onepercent; and

(b) for a money market fund shall becalculated to the nearest one-hundredth of one percent.

15.11 Assumptions for Calculating StandardPerformance Data

(1) The following assumptions shall be made inthe calculation of standard performance dataof a mutual fund:

1. Recurring fees and charges that arepayable by all securityholders

(a) are accrued or paid inproportion to the length of theperformance measurementperiod;

(b) if structured in a manner thatwould result in the performanceinformation being dependent onthe size of an investment, arecalculated on the basis of aninvestment equal to the greaterof $10,000 or the minimumamount that may be invested;and

(c) if fully negotiable, are calculatedon the basis of the average feespaid by accounts of the sizereferred to in paragraph (b).

2. There are no fees and charges relatedto specific optional services.

3. All fees and charges payable by themutual fund are accrued or paid.

4. Dividends or distributions by the mutualfund are reinvested in the mutual fundat the net asset value per security ofthe mutual fund on the reinvestmentdates during the performancemeasurement period.

5. There are no non-recurring fees andcharges that are payable by some or allsecurityholders and no recurring feesand charges that are payable by somebut not all securityholders.

6. A complete redemption occurs at theend of the performance measurementperiod so that the ending redeemablevalue includes elements of return thathave been accrued but not yet paid tosecurityholders.

(2) The following assumptions shall be made inthe calculation of standard performance dataof an asset allocation service:

1. Fees and charges that are payable byparticipants in the asset allocationservice

(a) are accrued or paid inproportion to the length of theperformance measurementperiod;

(b) if structured in a manner thatwould result in the performanceinformation being dependent onthe size of an investment, arecalculated on the basis of aninvestment equal to the greaterof $10,000 or the minimumamount that may be invested;and

(c) if fully negotiable, are calculatedon the basis of the average feespaid by accounts of the sizereferred to in paragraph (b).

2. There are no fees and charges relatedto specific optional services.

3. The investment strategy recommendedby the asset allocation service isuti l ized for the performancemeasurement period.

4. Transfer fees are

(a) accrued or paid;

(b) if structured in a manner thatwould result in the performanceinformation being dependent onthe size of an investment,calculated on the basis of anaccount equal to the greater of$10,000 or the minimum amountthat may be invested; and

(c) if the fees and charges are fullynegotiable, calculated on thebasis of the average fees paidby an account of the sizereferred to in paragraph (b).

5. A complete redemption occurs at theend of the performance measurementperiod so that the ending redeemablevalue includes elements of return thathave been accrued but not yet paid tosecurityholders.

(3) The calculation of standard performance datashall be based on actual historicalperformance and the fees and charges

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payable by the mutual fund andsecurityholders, or the asset allocationservice and participants, in effectduring the performance measurementperiod.

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15.12 Sales Communications During the Waiting Period- If a sales communication is used after the issue ofa receipt for a preliminary simplified prospectus of themutual fund described in the sales communicationbut before the issue of a receipt for its simplifiedprospectus, the sales communication shall state only

(a) whether the security represents a share in acorporation or an interest in a non-corporateentity;

(b) the name of the mutual fund and its manager;

(c) the fundamental investment objectives of themutual fund;

(d) without giving details, whether the security isor will be a qualified investment for aregistered retirement savings plan, registeredretirement income fund or registerededucation savings plan or qualifies or willqualify the holder for special tax treatment;and

(e) any additional information permitted bysecurities legislation.

15.13 Prohibited Representations

(1) Securities issued by an unincorporated mutualfund shall be described by a term that is notand does not include the word "shares".

(2) No communication by a mutual fund or assetallocation service, its promoter, manager,portfolio adviser, principal distributor,participating dealer or a person providingservices to the mutual fund or asset allocationservice shall describe a mutual fund as acommodity pool or as a vehicle for investors toparticipate in the speculative trading of, orleveraged investment in, derivatives, unlessthe mutual fund is a commodity pool asdefined in National Instrument 81-101 MutualFund Prospectus Disclosure.

PART 16 CALCULATION OF MANAGEMENTEXPENSE RATIO

16.1 Calculation of Management Expense Ratio

(1) A mutual fund may disclose its managementexpense ratio only if the managementexpense ratio is calculated for a financial yearof the mutual fund and if it is calculated by

(a) dividing

(i) the total expenses of the mutualfund for the financial year asshown on its income statement,

by

(ii) the average net asset value ofthe mutual fund for the financialyear, obtained by

(A) adding together the netasset values of themutual fund as at theclose of business of themutual fund on each dayduring the financial yearon which the net assetvalue of the mutual fundhas been calculated, and

(B) dividing the amounto b t a i n e d u n d e rclause (A) by the numberof days during thefinancial year on whichthe net asset value of themutual fund has beencalculated; and

(b) multiplying the result obtained underparagraph (a) by 100.

(2) If any fees and expenses otherwise payableby a mutual fund in a financial year werewaived or otherwise absorbed by a member ofthe organization of the mutual fund, the mutualfund shall disclose in a note to the disclosureof its management expense ratio, details of

(a) what the management expense ratiowould have been without any waiversor absorptions;

(b) the length of time that the waiver orabsorption is expected to continue;

(c) whether the waiver or absorption canbe terminated at any time by themember of the organization of themutual fund; and

(d) any other arrangements concerning thewaiver or absorption.

(3) All non-optional fees, charges and expensespaid directly by investors of a mutual fund inconnection with the holding of securities of themutual fund during the period to which thedisclosed management expense ratio relatesshall be included by the mutual fund in itscalculation of the management expense ratiowith an appropriate explanation in a note tothe disclosure.

(4) If the aggregate amount of a non-optional fee,charge and expense payable directly byinvestors of a mutual fund in connection withthe holding of securities of the mutual fundduring the period to which the disclosedmanagement expense ratio relates is notascertainable, the mutual fund shall include

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the maximum amount of the non-optional investor fee that could havebeen paid by those investors in itscalculation of the managementexpense ratio.

(5) Mutual fund expenses rebated by a manageror a mutual fund to a securityholder shall notbe deducted from total expenses of the mutualfund in determining the management expenseratio of the mutual fund.

(6) A mutual fund that has separate classes orseries of securities shall calculate amanagement expense ratio for each class orseries, in the manner required by this section,modified as appropriate.

(7) In this section, the phrase "financial year"includes, for an issuer, a period other than the12 months for which the issuer is required bysecurities legislation to prepare auditedfinancial statements.

(8) The management expense ratio of a mutualfund for a financial year of less than 12months shall be annualized.

16.2 Fund of Funds Calculation - For the purposes ofsubparagraph 16.1(1)(a)(i), the total expenses of amutual fund for a financial year that invests insecurities of one or more other mutual funds is equalto the sum of

(a) the total expenses incurred by the mutual fundattributable to its investment in eachunderlying mutual fund, as calculated by

(i) multiplying the total expenses of eachunderlying mutual fund for the financialyear as shown on the incomestatement of each underlying mutualfund,

by

(ii) the average proportion of securities ofthe underlying mutual fund held by themutual fund during the financial year,calculated by

(A) adding together the proportionof securities of the underlyingmutual fund held by the mutualfund on each day in the financialyear, and

(B) dividing the amount obtainedunder clause (A) by the numberof days in the financial year; and

(b) the total expenses of the mutual fund for thefinancial year as shown on its incomestatement.

PART 17 FINANCIAL STATEMENT REQUIREMENTS

17.1 Information About Specified Derivatives

(1) A mutual fund shall, in the statement ofinvestment portfolio included in the annualand interim financial statements of the mutualfund, or in the notes to that statement,disclose

(a) for long positions in clearingcorporation options, the number ofoptions, the underlying interest, thestrike price, the expiration month andyear, the cost and the market value;

(b) for long positions in options on futures,the number of options on futures, thefutures contracts that form theunderlying interest, the strike price, theexpiration month and year of the optionon futures, the delivery month and yearof the futures contract that forms theunderlying interest of the option onfutures, the cost and the market value;

(c) for clearing corporation options writtenby the mutual fund, the particulars ofthe deferred credit account, indicatingthe number of options, the underlyinginterest, the strike price, the expirationmonth and year, the premium receivedand the value as determined undersection 13.5;

(d) for options purchased by the mutualfund that are not clearing corporationoptions, the number of options, thecredit rating of the issuer of the options,whether the rating has fallen below theapproved credit rating, the underlyinginterest, the principal amount orquantity of the underlying interest, thestrike price, the expiration date, thecost and the market value;

(e) for options written by the mutual fundthat are not clearing corporationoptions, the particulars of the deferredcredit account, indicating the number ofoptions, the underlying interest, theprincipal amount or quantity of theunderlying interest, the exercise price,the expiration date, the premiumreceived and the value as determinedunder section 13.5;

(f) for positions in standardized futures,the number of standardized futures, theunderlying interest, the price at whichthe contract was entered into, thedelivery month and year and the valueas determined under section 13.5;

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(g) for positions in forward contracts, thenumber of forward contracts, the creditrating of the counterparty, whether therating has fallen below the approvedcredit rating level, the underlyinginterest, the quantity of the underlyinginterest, the price at which the contractwas entered into, the settlement dateand the value as determined undersection 13.5; and

(h) for debt-like securities, the principalamount of the debt, the interest rate,the payment dates, the underlyinginterest, the principal amount orquantity of the underlying interest, adescription of whether the derivativecomponent is an option or a forwardcontract with respect to the underlyinginterest, the strike price in the case ofan options component and the set pricein the case of a forward component,and the value as determined undersection 13.5.

(2) If applicable, the statement of investmentportfolio included in the annual and interimfinancial statements of the mutual fund, or thenotes to that statement, shall identify by anasterisk or other notation the underlyinginterest that is being hedged by each positiontaken by the mutual fund in a specifiedderivative.

17.2 Additional Disclosure Requirements

(1) The annual financial statements of a mutualfund shall

(a) set out in appropriate detail theamounts of all fees, charges andexpenses, if any, that have beencharged to the mutual fund during eachfinancial year reported upon in thefinancial statements; and

(b) set out the net asset value per securityof the mutual fund as at the end of thelast completed financial year and as atthe end of each of the four precedingcompleted financial years, or suchfewer number of financial years as themutual fund has been in existence.

(2) The annual and interim financial statements ofa mutual fund shall disclose

(a) the management expense ratio of eachclass or series of a class of securitiesof the mutual fund for each of the lastfive completed financial years of themutual fund or such fewer number offinancial years as the mutual fund hasbeen in existence, and shown forperiods of less than 12 months on an

annualized basis with reference to theperiod covered and the fact that themanagement expense ratio shown isannualized; and

(b) a brief description of the method ofcalculating the management expenseratio.

17.3 Approval of Financial Statements

(1) The board of directors of a mutual fund that isa corporation shall

(a) approve the annual financialstatements of the mutual fund that areto be delivered on request topurchasers of its securities; and

(b) authorize two directors of the mutualfund to sign those financial statementsto evidence that approval.

(2) The manager or the trustee or trustees of amutual fund that is a trust, or another personor company authorized to do so by theconstating documents of the mutual fund,shall

(a) approve the annual financialstatements of the mutual fund that, onand after the date the simplifiedprospectus of the mutual fund is filed,are to be delivered to purchasers of itssecurities with the prospectus or thesimplif ied prospectus or areincorporated by reference into thesimplified prospectus; and

(b) authorize two appropriate persons tosign those financial statements toevidence that approval.

PART 18 SECURITYHOLDER RECORDS

18.1 Maintenance of Records - A mutual fund that is nota corporation shall maintain, or cause to bemaintained, up to date records of

(a) the names and latest known addresses ofeach securityholder of the mutual fund;

(b) the number and class or series of a class ofsecurities held by each securityholder of themutual fund; and

(c) the date and details of each issue andredemption of securities, and eachdistribution, of the mutual fund.

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18.2 Availability of Records

(1) A mutual fund that is not a corporation shallmake, or cause to be made, the recordsreferred to in section 18.1 available forinspection, free of charge, during normalbusiness hours at its principal or head officeby a securityholder or a representative of asecurityholder, if the securityholder hasagreed in writing that the informationcontained in the register will not be used bythe securityholder for any purpose other thanattempting to influence the voting ofsecurityholders of the mutual fund or a matterrelating to the relationships among the mutualfund, the members of the organization of themutual fund, and the securityholders, partners,directors and officers of those entities.

(2) A mutual fund shall, upon written request by asecurityholder of the mutual fund, provide, orcause to be provided, to the securityholder acopy of the records referred to in paragraphs18.1(a) and (b) if the securityholder

(a) has agreed in writing that theinformation contained in the registerwill not be used by the securityholderfor any purpose other than attemptingto in f luence the vot ing ofsecurityholders of the mutual fund or amatter relating to the administration ofthe mutual fund; and

(b) has paid a reasonable fee to themutual fund that does not exceed thereasonable costs to the mutual fund ofproviding the copy of the register.

PART 19 EXEMPTIONS AND APPROVALS

19.1 Exemption

(1) The regulator or securities regulatory authoritymay grant an exemption from this Instrument,in whole or in part, subject to such conditionsor restrictions as may be imposed in theexemption.

(2) Despite subsection (1), in Ontario only theregulator may grant such an exemption.

19.2 Exemption or Approval under Prior Policy

(1) A mutual fund that has obtained, from theregulator or securities regulatory authority, anexemption or waiver from, or approval under,a provision of National Policy Statement No.39 before this Instrument came into force isexempt from any substantially similarprovision of this Instrument, if any, on thesame conditions, if any, as are contained inthe earlier exemption or approval, unless theregulator or securities regulatory authority has

revoked that exemption or waiver underauthority provided to it in securities legislation.

(2) Despite Part 7, a mutual fund that hasobtained, from the regulator or securitiesregulatory authority, approval under NationalPolicy Statement No. 39 to pay incentive feesmay continue to pay incentive fees on theterms of that approval if disclosure of themethod of calculation of the fees and detailsof the composition of the benchmark or indexused in calculating the fees are described inthe simplified prospectus of the mutual fund.

(3) A mutual fund that intends to rely uponsubsection (1) shall, at the time of the firstfiling of its pro forma simplified prospectusafter this Instrument comes into force, send tothe regulator a letter or memorandumcontaining

(a) a brief description of the nature of theexemption from, or approval under,National Policy Statement No. 39previously obtained; and

(b) the provision in the Instrument that issubstantially similar to the provision inNational Policy Statement No. 39 fromor under which the exemption orapproval was previously obtained.

PART 20 TRANSITIONAL

20.1 Effective Date - This Instrument comes into force onFebruary 1, 2000.

20.2 Sales Communications - Sales communications,other than advertisements, that were printed beforeDecember 31, 1999 may be used until August 1,2000, despite any requirements in this Instrument.

20.3 Reports to Securityholders - This Instrument doesnot apply to reports to securityholders printed beforethis Instrument came into force.

20.4 Mortgage Funds - Paragraphs 2.3(b) and (c) do notapply to a mutual fund that has adopted fundamentalinvestment objectives to permit it to invest inmortgages in accordance with National PolicyStatement No. 29 if

(a) a National Instrument replacing NationalPolicy Statement No. 29 has not come intoforce;

(b) the mutual fund was established, and has aprospectus or simplified prospectus for whicha receipt was issued, before the date that thisInstrument came into force; and

(c) the mutual fund complies with National PolicyStatement No. 29.

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20.5 Delayed Coming into Force

(1) Despite section 20.1, subsection 4.4(1) doesnot come into force until August 1, 2000.

(2) Despite section 20.1, the following provisionsof this Instrument do not come into force untilFebruary 1, 2001:

1. Subsection 2.4(2).




NATIONAL INSTRUMENT 81-102

APPENDIX A

Futures Exchanges for the Purpose ofSubsection 2.7(4) - Derivative Counterparty Exposure Limits

Futures Exchanges

Australia

Sydney Futures ExchangeAustralian Financial Futures Market

Austria

Osterreichische Termin-und Option Borse (OTOB - TheAustrian Options and Futures Exchange)

Belgium

Belfox CV (Belgium Futures and Options Exchange)

Brazil

Bolsa Brasileira de FuturosBolsa de Mercadorias & FuturosBolsa de Valores de Rio de Janeiro

Canada

The Winnipeg Commodity ExchangeThe Toronto Futures ExchangeThe Montreal Exchange

Denmark

Kobenhavus Fondsbors (Copenhagen Stock Exchange)Garenti fonden for Dankse Optioner og Futures (GuaranteeFund for Danish Options and Futures)Futop (Copenhagen Stock Exchange)

Finland

Helsinki Stock ExchangeOy Suomen Optiopörssi (Finnish Options Exchange)Suomen Optionmeklarit Oy (Finnish Options Market)

France

Marché à terme international de France S.A. (MATIF S.A.)Marché des option négociables à Paris (MUNCP)

Germany

DTB Deutsche Terminbörse GmbHEUREX

Hong Kong

Hong Kong Futures Exchange Limited

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Ireland

Irish Futures and Options Exchange

Italy

Milan Italiano Futures Exchange

Japan

Osaka Shoken Torihikisho (Osaka Securities Exchange)The Tokyo Commodity Exchange for IndustryThe Tokyo International Financial Futures ExchangeTokyo Grain ExchangeTokyo Stock Exchange

Netherlands

AEX Options & Futures ExchangeEOE-Optiebeurs (European Options Exchange)Financiele Termijnmarkt Amsterdam N.V.

New Zealand

New Zealand Futures and Options Exchange

Norway

Oslo Stock Exchange

Philippines

Manila International Futures Exchange

Portugal

Bosa de Derivatives de Porto

Singapore

Singapore Commodity Exchange (SICOM)Singapore International Monetary Exchange Limited (SIMEX)

Spain

Meff Renta FijaMeff Renta Variable

Sweden

OM Stockholm Fondkommission AB

Switzerland

EUREX

United Kingdom

International Petroleum Exchange (IPE)London International Financial Futures and Options Exchange(LIFFE)London Metal Exchange (LME)OM London

United States

Chicago Board of Options Exchange (CBOE)Chicago Board of Trade (CBOT)Chicago Mercantile Exchange (CME)Commodity Exchange, Inc. (COMEX)Financial Instrument Exchange (Finex) a division of the NewYork Cotton ExchangeBoard of Trade of Kansas City, Missouri, Inc.Mid-America Commodity ExchangeMinneapolis Grain Exchange (MGE) New York Futures Exchange, Inc. (NYFE)New York Mercantile Exchange (NYMECX)New York Board of Trade (NYBOT)Pacific Stock ExchangePhiladelphia Board of Trade (PBOT)Twin Cities Board of Trade

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APPENDIX B-1

Compliance Report

TO: [The appropriate securities regulatoryauthorities]

FROM: [Name of mutual fund]

RE: Compliance Report on National Instrument 81-102For the year ended [insert date]

We hereby confirm that we have complied withthe applicable requirements of Parts 9, 10 and 11 of NationalInstrument 81-102 for the year ended [insert date] [except asfollows:] [list exceptions, if any].

[NAME of mutual fund]

Signature

Name and office of the personexecuting this report

Date


APPENDIX B-1

Audit Report

TO: [The appropriate securities regulatory authorities]


We have audited [name of mutual fund]'s report madeunder section 12.1 of National Instrument 81-102 regarding itscompliance for the year ended [insert date] with the applicablerequirements of Parts 9, 10 and 11 of that National Instrument.Compliance with these requirements is the responsibility of themanagement of [name of mutual fund] (the "Fund"). Ourresponsibility is to express an opinion on management'scompliance report based on our audit.

We conducted our audit in accordance with thestandards for assurance engagements established by TheCanadian Institute of Chartered Accountants. Thosestandards require that we plan and perform an audit to obtainreasonable assurance as a basis for our opinion. Such anaudit includes examining, on a test basis, evidence supportingthe assertions in management's compliance report.

In our opinion, the Fund's report presents fairly, in allmaterial respects, the Fund's compliance for the year ended[insert date] with the applicable requirements of Parts 9, 10and 11 of National Instrument 81-102.

This report is provided solely for the purpose ofassisting the securities regulatory authority [ies] to which it isaddressed in discharging its [their] responsibilities and shouldnot be used for any other purpose.

CityDate Chartered Accountants

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APPENDIX B-2

Compliance Report


FROM: [Name of principal distributor] (the "Distributor")


FOR: [Name(s) of the mutual fund (the "Fund[s]")]

We hereby confirm that we have compliedwith the applicable requirements of Parts 9, 10 and 11 ofNational Instrument 81-102 in respect of the Fund[s] for theyear ended [insert date] [except as follows:] [list exceptions, ifany].

[NAME of the Distributor]

Signature


Date


APPENDIX B-2

Audit Report



We have audited [name of principaldistributor]'s report made under section 12.1 of NationalInstrument 81-102 regarding its compliance for the year ended[insert date] with the applicable requirements of Parts 9, 10and 11 of that National Instrument in respect of the [name ofmutual funds] (the "Funds"). Compliance with theserequirements is the responsibility of the management of [nameof principal distributor] (the "Company"). Our responsibility isto express an opinion on management's compliance reportbased on our audit.

We conducted our audit in accordance withthe standards for assurance engagements established by TheCanadian Institute of Chartered Accountants. Thosestandards require that we plan and perform an audit to obtainreasonable assurance as a basis for our opinion. Such anaudit includes examining, on a test basis, evidence supportingthe assertions in management's compliance report.

In our opinion, the Company's reportpresents fairly, in all material respects, the Company'scompliance for the year ended [insert date] with the applicablerequirements of Parts 9, 10 and 11 of National Instrument 81-102 in respect of the Funds.

This report is provided solely for the purposeof assisting the securities regulatory authority [ies] to which itis addressed in discharging its [their] responsibilities andshould not be used for any other purpose.


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APPENDIX B-3

Compliance Report


FROM: [Name of participating dealer] (the"Distributor")

RE: Compliance Report on National Instrument81-102For the year ended [insert date]

We hereby confirm that we have sold mutualfund securities to which National Instrument 81-102 isapplicable. In connection with our activities in distributingthese securities, we have complied with the applicablerequirements of Parts 9, 10 and 11 of National Instrument 81-102 for the year ended [insert date] [except as follows:] [listexceptions, if any].

[NAME of the Distributor]

Signature


Date


APPENDIX B-3

Audit Report


RE: Compliance Report on National Instrument81-102For the year ended [insert date]

We have audited [name of participatingdealer]'s report made under section 12.1 of NationalInstrument 81-102 regarding its compliance for the year ended[insert date] with the applicable requirements of Parts 9, 10and 11 of that National Instrument in respect of sales of mutualfund securities. Compliance with these requirements is theresponsibility of the management of [name of participatingdealer] (the "Company"). Our responsibility is to express anopinion on management's compliance report based on ouraudit.

We conducted our audit in accordance withthe standards for assurance engagements established by TheCanadian Institute of Chartered Accountants. Thosestandards require that we plan and perform an audit to obtainreasonable assurance as a basis for our opinion. Such anaudit includes examining, on a test basis, evidence supportingthe assertions in management's compliance report.

In our opinion, the Company's reportpresents fairly, in all material respects, the Company'scompliance for the year ended [insert date] with the applicablerequirements of Parts 9, 10 and 11 of National Instrument 81-102 in respect of sales of mutual fund securities.

This report is provided solely for the purposeof assisting the securities regulatory authority [ies] to which itis addressed in discharging its [their] responsibilities andshould not be used for any other purpose.


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COMPANION POLICY 81-102CP TO NATIONALINSTRUMENT 81-102

MUTUAL FUNDS

TABLE OF CONTENTS

PART TITLE

PART 1 PURPOSE1.1 Purpose

PART 2 COMMENTS ON DEFINITIONS CONTAINED INTHE INSTRUMENT2.1 "asset allocation service"2.2 "cash equivalent"2.3 "clearing corporation"2.4 "debt-like security"2.5 "fundamental investment objectives"2.6 "guaranteed mortgage"2.7 "hedging"2.8 "illiquid asset"2.9 "manager"2.10 "option"2.11 "performance data"2.12 "public medium"2.13 "purchase"2.14 "restricted security"2.15 "sales communication"2.16 "specified derivative"2.17 "standardized future" 2.18 "swap"

PART 3 INVESTMENTS3.1 Evidences of Indebtedness of Foreign

Governments and Supranational Agencies3.2 Special Warrants3.3 Investment in Other Mutual Funds3.4 Instalments of Purchase Price 3.5 Purchase of Evidences of Indebtedness

PART 4 USE OF SPECIFIED DERIVATIVES4.1 Exercising Options on Futures4.2 Registration Matters4.3 Leveraging4.4 Cash Cover

PART 5 LIABILITY AND INDEMNIFICATION5.1 Liability and Indemnification

PART 6 SECURITYHOLDER MATTERS6.1 Meetings of Securityholders6.2 Limited Liability6.3 Calculation of Fees

PART 7 CHANGES7.1 Integrity and Competence of Mutual Fund

Management Groups7.2 Mergers and Conversions of Mutual Funds7.3 Regulatory Approval for Reorganizations7.4 Significant Changes

PART 8 CUSTODIANSHIP OF PORTFOLIO ASSETS8.1 Standard of Care8.2 Book-Based System8.3 Compliance

PART 9 CONTRACTUAL PLANS9.1 Contractual Plans

PART 10 SALES AND REDEMPTIONS OF SECURITIES10.1 General10.2 Interpretation10.3 Receipt of Orders10.4 Backward Pricing10.5 Coverage of Losses

PART 11 COMMINGLING OF CASH11.1 Commingling of Cash

PART 12 PUBLICATION OF NET ASSET VALUE PERSECURITY12.1 Publication of Net Asset Value per Security

PART 13 PROHIBITED REPRESENTATIONS AND SALESCOMMUNICATIONS13.1 Misleading Sales Communications13.2 Other Provisions

PART 14 CALCULATION OF MANAGEMENT EXPENSERATIO14.1 Calculation of Management Expense Ratio

PART 15 SECURITYHOLDER RECORDS15.1 Securityholder Records

PART 16 EXEMPTIONS AND APPROVALS16.1 Need for Multiple or Separate Applications16.2 Exemptions under Prior Policies16.3 Waivers and Orders concerning "Fund of

Funds"

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COMPANION POLICY 81-102CP TO NATIONALINSTRUMENT 81-102

MUTUAL FUNDS

PART 1 PURPOSE

1.1 Purpose - The purpose of this Policy is to state theviews of the Canadian securities regulatoryauthorities on various matters relating to NationalInstrument 81-102 Mutual Funds (the "Instrument"),including

(a) the interpretation of various terms used in theInstrument;

(b) recommendations concerning the operatingprocedures that the Canadian securitiesregulatory authorities suggest that mutualfunds, or persons performing services formutual funds, adopt to ensure compliance withthe Instrument;

(c) discussions of circumstances in which theCanadian securities regulatory authoritieshave granted relief from particularrequirements of National Policy Statement No.39 ("NP39"), the predecessor to theInstrument, and the conditions that thoseauthorities imposed in granting that relief; and

(d) recommendations concerning applications forapprovals required under, or relief from,provisions of the Instrument.

PART 2 COMMENTS ON DEFINITIONS CONTAINED INTHE INSTRUMENT

2.1 "asset allocation service" - The definition of "assetallocation service" in the Instrument includes onlyspecific administrative services in which aninvestment in mutual funds subject to the Instrumentis an integral part. The Canadian securities regulatoryauthorities do not view this definition as includinggeneral investment services such as discretionaryportfolio management that may, but are not requiredto, invest in mutual funds subject to this Instrument.

2.2 "cash equivalent" - The definition of "cashequivalent" in the Instrument includes certainevidences of indebtedness of Canadian financialinstitutions. This includes banker's acceptances.

2.3 "clearing corporation" - The definition of "clearingcorporation" in the Instrument includes bothincorporated and unincorporated organizations,which may, but need not, be part of an options orfutures exchange.

2.4 "debt-like security" - Paragraph (b) of the definitionof "debt-like security" in the Instrument provides thatthe value of the component of an instrument that is

not linked to the underlying interest of the instrumentmust account for less than 80 percent of theaggregate value of the instrument in order that theinstrument be considered a debt-like security. TheCanadian securities regulatory authorities havestructured this provision in this manner to emphasizewhat they consider the most appropriate manner tovalue these instruments. That is, one should firstvalue the component of the instrument that is notlinked to the underlying interest, as this is often mucheasier to value than the component that is linked tothe underlying interest. The Canadian securitiesregulatory authorities recognize the valuationdifficulties that can arise if one attempts to value, byitself, the component of an instrument that is linked tothe underlying interest.

2.5 "fundamental investment objectives"

(1) The definition of "fundamental investmentobjectives" is relevant in connection withparagraph 5.1(c) of the Instrument, whichrequires that the approval of securityholders ofa mutual fund be obtained before any changeis made to the fundamental investmentobjectives of the mutual fund. Thefundamental investment objectives of a mutualfund are required to be disclosed in asimplified prospectus under Part B of Form81-101F1 Contents of Simplified Prospectus.The definition of "fundamental investmentobjectives" contained in the Instrument usesthe language contained in the disclosurerequirements of Part B of Form 81-101F1, andthe definition should be read to include thematters that would have to be disclosed underthe Item of Part B of the form concerning"Fundamental Investment Objectives".Accordingly, any change to the mutual fundrequiring a change to that disclosure wouldtrigger the requirement for securityholderapproval under paragraph 5.1(c) of theInstrument.

(2) Part B of Form 81-101F1 sets out, amongother things, the obligation that a mutual funddisclose in a simplified prospectus both itsfundamental investment objectives and itsinvestment strategies. The matters requiredto be disclosed under the Item of Part B of theform relating to "Investment Strategies" arenot "fundamental investment objectives" underthe Instrument.

(3) Generally speaking, the "fundamentalinvestment objectives" of a mutual fund arethose attributes that define its fundamentalnature. For example, mutual funds that areguaranteed or insured, or that pursue a highlyspecific investment approach such as indexfunds or derivative funds, may be defined bythose attributes. Often the manner in which amutual fund is marketed will provide evidenceas to its fundamental nature; a mutual fund

Mutual Fund Rules


whose advertisements emphasize, forinstance, that investments areguaranteed likely will have theexistence of a guarantee as a"fundamental investment objective".

(4) The Canadian securities regulatory authoritiesare of the view that whether the securities of amutual fund are foreign property under the ITAis linked to the mutual fund's fundamentalinvestment objectives. Therefore, a change inthe method by which the mutual fund ismanaged that results in its securities goingfrom being foreign property to being non-foreign property, or vice versa, would be likelydue to a change in the mutual fund'sfundamental investment objectives.

(5) One component of the definition of"fundamental investment objectives" is thatthose objectives distinguish a mutual fundfrom other mutual funds. This componentdoes not imply that the fundamentalinvestment objectives for each mutual fundmust be unique. Two or more mutual fundscan have identical fundamental investmentobjectives.

2.6 "guaranteed mortgage" - A mortgage insured underthe National Housing Act (Canada) or similarprovincial statutes is a "guaranteed mortgage" for thepurposes of the Instrument.

2.7 "hedging"

(1) One component of the definition of "hedging"is the requirement that hedging transactionsresult in a "high degree of negative correlationbetween changes in the value of theinvestment or position, or group ofinvestments or positions, being hedged andchanges in the value of the instrument orinstruments with which the investment orposition is hedged". The Canadian securitiesregulatory authorities are of the view that thereneed not be complete congruence betweenthe hedging instrument or instruments and theposition or positions being hedged if it isreasonable to regard the one as a hedginginstrument for the other, taking into accountthe closeness of the relationship betweenfluctuations in the price of the two and theavailability and pricing of hedging instruments.

(2) The definition of "hedging" includes areference to the "maintaining" of the positionresulting from a hedging transaction or seriesof hedging transactions. The inclusion of thiscomponent in the definition requires a mutualfund to ensure that a transaction continues tooffset specific risks of the mutual fund in orderthat the transaction be considered a "hedging"transaction under the Instrument; if the"hedging" position ceases to provide an offset

to an existing risk of a mutual fund, then thatposition is no longer a hedging position underthe Instrument, and can be held by the mutualfund only in compliance with the specifiedderivatives rules of the Instrument that applyto non-hedging positions. The component ofthe definition that requires the "maintaining" ofa hedge position does not mean that a mutualfund is locked into a specified derivativesposition; it simply means that the specifiedderivatives position must continue to satisfythe definition of "hedging" in order to receivehedging treatment under the Instrument.

(3) Paragraph (b) of the definition of "hedging"has been included to ensure that currencycross hedging continues to be permitted underthe Instrument. Currency cross hedging is thesubstitution of currency risk associated withone currency for currency risk associated withanother currency, if neither currency is acurrency in which the mutual fund determinesits net asset value per security and theaggregate amount of currency risk to whichthe mutual fund is exposed is not increased bythe substitution. Currency cross hedging is tobe distinguished from currency hedging, asthat term is ordinarily used. Ordinary currencyhedging, in the context of mutual funds, wouldinvolve replacing the mutual fund's exposureto a "non-net asset value" currency withexposure to a currency in which the mutualfund calculates its net asset value persecurity. That type of currency hedging issubject to paragraph (a) of the definition of"hedging".

2.8 "illiquid asset" - A portfolio asset of a mutual fundthat meets the definition of "illiquid asset" will be anilliquid asset even if a person or company, includingthe manager or the portfolio adviser of a mutual fundor a partner, director or officer of the manager orportfolio adviser of a mutual fund or any of theirrespective associates or affiliates, has agreed topurchase the asset from the mutual fund. That typeof agreement does not affect the words of thedefinition, which defines "illiquid asset" in terms ofwhether that asset cannot be readily disposed ofthrough market facilities on which public quotationsin common use are widely available.

2.9 "manager" - The definition of "manager" under theInstrument only applies to the person or companythat actually directs the business of the mutual fund,and does not apply to others, such as trustees, thatdo not actually carry out this function. Also, a"manager" would not include a person or companywhose duties are limited to acting as a serviceprovider to the mutual fund, such as a portfolioadviser.

2.10 "option" - The definition of "option" includeswarrants, whether or not the warrants are listed on a

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stock exchange or quoted on an over-the-countermarket.

2.11 "performance data" - The term "performance data"includes data on an aspect of the investmentperformance of a mutual fund, an asset allocationservice, security, index or benchmark. This couldinclude data concerning return, volatility or yield. TheCanadian securities regulatory authorities note thatthe term "performance data" would not include arating prepared by an independent organizationreflecting the credit quality, rather than theperformance, of, for instance, a mutual fund'sportfolio or the participating funds of an assetallocation service.

2.12 "public medium" - An "advertisement" is defined inthe Instrument to mean a sales communication thatis published or designed for use on or through a"public medium". The Canadian securities regulatoryauthorities interpret the term "public medium" toinclude print, television, radio, tape recordings, videotapes, computer disks, the Internet, displays, signs,billboards, motion pictures and telephones.

2.13 "purchase"

(1) The definition of a "purchase", in connectionwith the acquisition of a portfolio asset by amutual fund, means an acquisition that is theresult of a decision made and action taken bythe mutual fund.

(2) The Canadian securities regulatory authoritiesconsider that the following types oftransactions would generally be purchases ofa security by a mutual fund under thedefinition:

1. The mutual fund effects an ordinarypurchase of the security, or, at itsoption, exercises, converts orexchanges a convertible security heldby it.

2. The mutual fund receives the securityas consideration for a securitytendered by the mutual fund into atake-over bid.

3. The mutual fund receives the security

as the result of a merger,amalgamation, plan of arrangement orother reorganization for which themutual fund voted in favour.

4. The mutual fund receives the securityas a result of the automatic exercise ofan exchange or conversion rightattached to another security held by themutual fund in accordance with theterms of that other security or theexercise of that exchange or

conversion right at the option of themutual fund.

(3) The Canadian securities regulatory authoritiesconsider that the following types oftransactions would generally not be purchasesof a security by a mutual fund under thedefinition:

1. The mutual fund receives the securityas a result of a compulsory acquisitionby an issuer following completion of asuccessful take-over bid.

2. The mutual fund receives the securityas a result of a merger, amalgamation,plan of arrangement or otherreorganization that the mutual fundvoted against.

3. The mutual fund receives the securityas the result of the exercise of anexchange or conversion right attachedto a security held by the mutual fundmade at the discretion of the issuer ofthe security held by the mutual fund.

4. The mutual fund declines to tender intoan issuer bid, even though its decisionis likely to result in an increase in itspercentage holdings of a securitybeyond what the mutual fund would bepermitted under the Instrument topurchase.

2.14 "restricted security" - A special warrant is a form ofrestricted security and, accordingly, the provisions ofthe Instrument applying to restricted securities applyto special warrants.

2.15 "sales communication"

(1) The term "sales communication" refers to acommunication to a securityholder of a mutualfund and to a person or company that is not asecurityholder if the purpose of thecommunication is to induce the purchase ofsecurities of the mutual fund. A salescommunication therefore does not include acommunication solely between a mutual fundor its promoter, manager, principal distributoror portfolio adviser and a participating dealer,or between the principal distributor or aparticipating dealer and its registeredsalespersons, that is indicated to be internalor confidential and that is not designed to bepassed on by any principal distributor,participating dealer or registered salespersonto any securityholder of, or potential investorin, the mutual fund. In the view of theCanadian securities regulatory authorities, if acommunication of that type were so passed onby the principal distributor, participating dealeror registered salesperson, the communication

Mutual Fund Rules


would be a sales communication madeby the party passing on thecommunication if the recipient of thecommunication were a securityholderof the mutual fund or if the intent of theprincipal distributor, participating dealeror registered salesperson in passing onthe communication were to induce thepurchase of securities of the mutualfund.

(2) The term "sales communication" is defined inthe Instrument such that the communicationneed not be in writing and includes any oralcommunication. The Canadian securitiesregulatory authorities are of the view that therequirements in the Instrument pertaining tosales communications would apply tostatements made at an investor conference tosecurityholders or to others to induce thepurchase of securities of the mutual fund.

(3) The Canadian securities regulatory authoritiesare of the view that image advertisements thatare intended to promote a corporate identity orthe expertise of a mutual fund manager fallouts ide the def in i t ion of "sa lescommunication". However, an advertisementor other communication that refers to aspecific mutual fund or funds or promotes anyparticular investment portfolio or strategywould be a sales communication andtherefore be required to include warnings ofthe type now described in section 15.4 of theInstrument.

(4) Paragraph (b) of the definition of a "salescommunication" in the Instrument excludessales communications contained in certaindocuments that the mutual fund is required toprepare, including audited or unauditedfinancial statements (which include astatement of portfolio transactions),statements of account and confirmations oftrade. The Canadian securities regulatoryauthorities are of the view that if information iscontained in these types of documents that isnot required to be included by securitieslegislation, any such additional material is notexcluded by paragraph (b) of the definition ofsales communication and may, therefore,constitute a sales communication if theadditional material otherwise falls within thedefinition of that term in the Instrument.

2.16 "specified derivative"

(1) The term "specified derivative" is defined tomean an instrument, agreement or security,the market price, value or payment obligationsof which are derived from, referenced to orbased on an underlying interest. Certaininstruments, agreements or securities thatwould otherwise be specified derivatives within

the meaning of the definition are thenexcluded from the definition for purposes ofthe Instrument.

(2) Because of the broad ambit of the lead-inlanguage to the definition, it is impossible tolist every instrument, agreement or securitythat might be caught by that lead-in languagebut that is not considered to be a derivative inany normal commercial sense of that term.The Canadian securities regulatory authoritiesconsider conventional floating rate debtinstruments, securities of a mutual fund orcommodity pool, non-redeemable securities ofan investment fund, American depositaryreceipts and instalment receipts to be withinthis category and will not treat thoseinstruments as a specified derivative inadministering the Instrument.

2.17 "standardized future" - The definition of"standardized future" refers to an agreement tradedon a futures exchange. This type of agreement iscalled a "futures contract" in the legislation of somejurisdictions, and an "exchange contract" in thelegislation of some other jurisdictions (such as BritishColumbia and Alberta). The term "standardizedfuture" is used in the Instrument to refer to thesetypes of contracts, to avoid conflict with existing localdefinitions.

2.18 "swap" - The Canadian securities regulatoryauthorities are of the view that the definition of aswap in the Instrument would include conventionalinterest rate and currency swaps, as well as equityswaps.

PART 3 INVESTMENTS

3.1 Evidences of Indebtedness of ForeignGovernments and Supranational Agencies

(1) Section 2.1 of the Instrument prohibits mutualfunds from purchasing a security of an issuer,other than a government security or a securityissued by a clearing corporation if,immediately after the purchase, more than 10percent of the net assets of the mutual fund,taken at market value at the time of thepurchase, would be invested in securities ofthat issuer. The term "government security" isdefined in the Instrument as an evidence ofindebtedness that is issued, or fully andunconditionally guaranteed as to principal andinterest, by any of the government of Canada,the government of a jurisdiction or thegovernment of the United States of America.

(2) Before the Instrument came into force, theCanadian securities regulatory authoritiesgranted relief from the predecessor provisionof NP39 to a number of international bond

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funds in order to permit those mutualfunds to pursue their fundamentalinvestment objectives with greaterflexibility.

(3) The Canadian securities regulatory authoritieswill continue to consider applications for relieffrom section 2.1 of the Instrument if themutual fund making the applicationdemonstrates that the relief will better enablethe mutual fund to meet its fundamentalinvestment objectives. This relief willordinarily be restricted to international bondfunds.

(4) The relief from paragraph 2.04(1)(a) of NP39,which is replaced by section 2.1 of theInstrument, that has been provided to amutual fund has generally been limited to thefollowing circumstances:

1. The mutual fund has been permitted toinvest up to 20 percent of its netassets, taken at market value at thetime of purchase, in evidences ofindebtedness of any one issuer if thoseevidences of indebtedness are issued,or guaranteed fully as to principal andinterest, by supranational agencies orgovernments other than thegovernment of Canada, thegovernment of a jurisdiction or thegovernment of the United States ofAmerica and are rated "AA" byStandard & Poor's, or have anequivalent rating by one or more otherapproved credit rating organizations.

2. The mutual fund has been permitted toinvest up to 35 percent of its netassets, taken at market value at thetime of purchase, in evidences ofindebtedness of any one issuer, ifthose securities are issued by issuersdescribed in paragraph 1 and are rated"AAA" by Standard & Poor's, or havean equivalent rating by one or moreother approved credit ratingorganizations.

(5) It is noted that the relief described inparagraphs 3.1(4)1 and 2 cannot be combinedfor one issuer.

(6) Despite subsection (4), the relief fromparagraph 2.04(1)(a) of NP39, which isreplaced by section 2.1 of the Instrument,provided to a mutual fund whose securitiesare a registered investment under the ITA orwhose securities are not, and are described inthe current prospectus or simplifiedprospectus of the mutual fund as not beingforeign property under the ITA has generallybeen restricted to allowing the mutual fund to

invest no more than 20 percent of its netassets, taken at market value at the time ofpurchase, in securities issued by issuersdescribed in subsection (4) if the securities ofthose issuers are foreign property under theITA.

(7) In addition to the limitation described insubsection (6), the relief from paragraph2.04(1)(a) of NP39, which is replaced bysection 2.1 of the Instrument, has generallybeen provided only if

(a) the securities that may be purchasedunder the relief referred to insubsections (4) and (6) are traded on amature and liquid market;

(b) the acquisition of the evidences ofindebtedness by the mutual fund isconsistent with its fundamentalinvestment objectives;

(c) the prospectus or simplified prospectusof the mutual fund disclosed theadditional risks associated with theconcentration of the net assets of themutual fund in securities of fewerissuers, such as the potential additionalexposure to the risk of default of theissuer in which the fund has soinvested and the risks, including foreignexchange risks, of investing in thecountry in which that issuer is located;and

(d) the prospectus or simplified prospectusof the mutual fund gave details of therelief provided by the Canadiansecurities regulatory authorities,including the conditions imposed andthe type of securities covered by theexemption.

3.2 Special Warrants - A mutual fund is required bysubsection 2.2(3) of the Instrument to assume theconversion of each special warrant it holds. Thisrequirement is imposed because the nature of aspecial warrant is such that there is a high degree oflikelihood that its conversion feature will be exercisedshortly after its issuance, once a prospectus relatingto the underlying security has been filed.

3.3 Investment in Other Mutual Funds

(1) Subsection 2.5(1) of the Instrument containsrestrictions on the ability of a mutual fund toinvest in the securities of another mutual fund.Subsection 2.5(2) of the Instrument providesthat subsection (1) does not apply to thepurchase of a mutual fund that is listed andposted for trading on a stock exchange.

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(2) Subsection 2.5(2) of the Instrument removesfrom the fund of funds rules any security of anissuer that may technically be a mutual fund,such as a subdivided offering or an indexparticipation unit, but that is not a conventionalmutual fund and for which the fund of fundsrules should not be applicable. Since thosevehicles are generally listed on a stockexchange, the Canadian securities regulatoryauthorities have used this distinguishingfeature to define the vehicles whose securitiesmay be purchased by a mutual fund withoutregard to the fund of funds regime. Thepurchase of those vehicles is, of course,subject to the other investment restrictions ofthe Instrument, including, without limitation,section 2.1 of the Instrument.

3.4 Instalments of Purchase Price - Paragraph 2.6(d)of the Instrument prohibits a mutual fund frompurchasing a security, other than a specifiedderivative, that by its terms may require the mutualfund to make a contribution in addition to thepayment of the purchase price. This prohibition doesnot extend to the purchase of securities that are paidfor on an instalment basis in which the total purchaseprice and the amounts of all instalments are fixed atthe time the first instalment is made.

3.5 Purchase of Evidences of Indebtedness -Paragraph 2.6(f) of the Instrument prohibits a mutualfund from lending either cash or a portfolio assetother than cash. The Canadian securities regulatoryauthorities are of the view that the purchase of anevidence of indebtedness, such as a bond ordebenture, a loan participation or loan syndication aspermitted by paragraph 2.3(i) of the Instrument, orthe purchase of a preferred share that is treated asdebt for accounting purposes, does not constitute thelending of cash or a portfolio asset.

PART 4 USE OF SPECIFIED DERIVATIVES

4.1 Exercising Options on Futures - Paragraphs2.8(1)(d) and (e) of the Instrument prohibit a mutualfund from, among other things, opening andmaintaining a position in a standardized future exceptunder the conditions referred to in those paragraphs.Opening and maintaining a position in a standardizedfuture could be effected through the exercise by amutual fund of an option on futures. Therefore, itshould be noted that a mutual fund cannot exercisean option on futures and assume a position in astandardized future unless the applicable provisionsof paragraphs 2.8(1)(d) or (e) are satisfied.

4.2 Registration Matters - The Canadian securitiesregulatory authorities remind industry participants ofthe following requirements contained in securitieslegislation:

1. A mutual fund may only invest in or useclear ing corporat ion opt ions and

over-the-counter options if the portfolio adviseradvising with respect to these investments

(a) is permitted, either by virtue ofregistration as an adviser under thesecurities legislation or commodityfutures legislation of the jurisdiction inwhich the portfolio adviser is providingthe advice or an exemption from therequirement to be registered, to providethat advice to the mutual fund underthe laws of that jurisdiction; and

(b) has satisfied all applicable optionproficiency requirements of thatjurisdiction which, ordinarily, will involvecompletion of the Canadian OptionsCourse.

2. A mutual fund may invest in or use futures andoptions on futures only if the portfolio adviseradvising with respect to these investments oruses is registered as an adviser under thesecurities or commodity futures legislation ofthe jurisdiction in which the portfolio adviser isproviding the advice, if this registration isrequired in that jurisdiction, and meets theproficiency requirements for advising withrespect to futures and options on futures inthe jurisdiction.

3. A portfolio adviser of a mutual fund thatreceives advice from a non-resident sub-adviser as contemplated by section 2.10 of theInstrument is not relieved from the registrationrequirements described in paragraphs 1 and2.

4. In Ontario, a non-resident sub-adviser isrequired, under the commodity futureslegislation of Ontario, to be registered inOntario if it provides advice to anotherportfolio adviser of a mutual fund in Ontarioconcerning the use of standardized futures bythe mutual fund. Section 2.10 of theInstrument does not exempt the non-residentsub-adviser from this requirement. A non-resident sub-adviser should apply for anexemption in Ontario if it wishes to carry outthe arrangements contemplated by section2.10 without being registered in Ontario underthat legislation.

4.3 Leveraging - The Instrument is designed to preventthe use of specified derivatives for the purpose ofleveraging the assets of the mutual fund. Thedefinition of "hedging" prohibits leveraging withspecified derivatives used for hedging purposes. Theprovisions of subsection 2.8(1) of the Instrumentrestrict leveraging with specified derivatives used fornon-hedging purposes.

4.4 Cash Cover - The definition of "cash cover" in theInstrument prescribes the securities or other portfolio

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assets that may be used to satisfy the cashcover requirements relating to specifiedderivatives positions of mutual funds requiredby Part 2 of the Instrument. The definition of"cash cover" includes various interest-bearingsecurities; the definition includes interestaccrued on those securities, and so mutualfunds are able to include accrued interest forpurposes of cash cover calculations.

PART 5 LIABILITY AND INDEMNIFICATION

5.1 Liability and Indemnification

(1) Subsection 4.4(1) of the Instrument containsprovisions that require that any agreement ordeclaration of trust under which a person orcompany acts as manager of a mutual fundprovide that the manager is responsible forany loss that arises out of the failure of it, andof any person or company retained by it or themutual fund to discharge any of the manager'sresponsibilities to the mutual fund, to satisfythe standard of care referred to in that section.Subsection 4.4(2) of the Instrument providesthat a mutual fund shall not relieve themanager from that liability.

(2) The purpose of these provisions is to ensurethat the manager remains responsible to themutual fund and therefore indirectly to itssecurityholders for the duty of care that isimposed by the securities legislation of mostjurisdictions, and to clarify that the manager isresponsible to ensure that service providersperform to the level of that standard of care.The Instrument does not regulate thecontractual relationships between themanager and service providers; whether amanager can seek indemnification from aservice provider that fails to satisfy thatstandard of care is a contractual issuebetween those parties.

(3) Subsection 4.4(5) of the Instrument providesthat section 4.4 does not apply to any lossesto a mutual fund or securityholder arising outof an action or inaction by a custodian or sub-custodian or by a director of a mutual fund. Aseparate liability regime is imposed, oncustodians or sub-custodians by section 6.6 ofthe Instrument. Directors are subject to theliability regime imposed by the relevantcorporate legislation.

PART 6 SECURITYHOLDER MATTERS

6.1 Meetings of Securityholders - Subsection 5.4(1) ofthe Instrument imposes a requirement that a meetingof securityholders of a mutual fund called for thepurpose of considering any of the matters referred toin section 5.1 of the Instrument must be called on

notice sent at least 21 days before the date of themeeting. Industry participants are reminded that theprovisions of National Policy Statement No. 41, or asuccessor instrument, may apply to any meetings ofsecurityholders of mutual funds and that thoseprovisions may require that a longer period of noticebe given.

6.2 Limited Liability

(1) Mutual funds generally are structured in amanner that ensures that investors are notexposed to the risk of loss of an amount morethan their original investment. This is a veryimportant and essential attribute of mutualfunds.

(2) Mutual funds that are structured ascorporations do not raise pressing liabilityproblems because of the limited liabilityregime of corporate statutes.

(3) Mutual funds that are structured as limitedpartnerships may raise some concerns aboutthe loss of limited liability if limited partnersparticipate in the management or control ofthe partnership. The Canadian securitiesregulatory authorities encourage managers ofmutual funds that are structured as limitedpartnerships to consider this issue inconnection with the holding of meetings ofsecurityholders, even if required under section5.1 of the Instrument. In addition, allmanagers of mutual funds that are structuredas limited partnerships should considerwhether disclosure and discussion of thisissue should be included as a risk factor insimplified prospectuses.

6.3 Calculation of Fees - Paragraph 5.1(a) of theInstrument requires securityholder approval beforethe basis of the calculation of a fee or expense thatis charged to a mutual fund is changed in a way thatcould result in an increase in charges to the mutualfund. The Canadian securities regulatory authoritiesnote that the phrase "basis of the calculation"includes any increase in the rate at which a particularfee is charged to the mutual fund.

PART 7 CHANGES

7.1 Integrity and Competence of Mutual FundManagement Groups

(1) Paragraph 5.5(1)(a) of the Instrument requiresthat the approval of the securities regulatoryauthority be obtained before the manager of amutual fund is changed. Subsection 5.5(2) ofthe Instrument contemplates similar approvalto a change in control of a manager.

(2) In connection with each of these approvals,applicants are required by section 5.7 of the

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Instrument to provide information to thesecurities regulatory authorityconcerning the integrity and experienceof the persons or companies that areproposed to be involved in, or control,the management of the mutual fundafter the proposed transaction.

(3) The Canadian securities regulatory authoritieswould generally consider it helpful in theirassessment of the integrity and experience ofthe proposed new management group that willmanage a mutual fund after a change inmanager if the application set out, among anyother information the applicant wishes toprovide

(a) the name, registered address andprincipal business activity or the name,residential address and occupation oremployment of

(i) if the proposed manager is not apublic company, each beneficialowner of securities of eachshareholder, partner or limitedpartner of the proposedmanager, and

(ii) if the proposed manager is apublic company, each beneficialowner of securities of eachshareholder of the proposedmanager that is the beneficialholder, directly or indirectly, ofmore than 10 percent of theoutstanding securities of theproposed manager; and

(b) information concerning

(i) if the proposed manager is not apub l i c company , eachshareholder, partner or limitedpartner of the proposedmanager,

(ii) if the proposed manager is apub l i c company , eachshareholder that is the beneficialholder, directly or indirectly, ofmore than 10 percent of theoutstanding securities of theproposed manager,

(iii) each director and officer of theproposed manager, and

(iv) each proposed director, officeror individual trustee of themutual fund.

(4) The Canadian securities regulatory authoritieswould generally consider it helpful if the

information relating to the persons andcompanies referred to in paragraph (3)(b)included

(a) for a company

(i) its name, registered addressand principal business activity,

(ii) the number of securities orpartnership units of theproposed manager beneficiallyowned, directly or indirectly, and

(iii) particulars of any existing orpotential conflicts of interest thatmay arise as a result of theactivities of the company and itsr e l a t i o n s h i p w i t h t h emanagement group of themutual fund; and

(b) for an individual

(i) his or her name, birthdate andresidential address,

(ii) his or her principal occupationor employment,

(iii) his or her principal occupationsor employment during the fiveyears before the date of theapplication, with a particularemphasis on the individual'sexperience in the financialservices industry,

(iv) the individual's educationalb a c k g r o u n d , i n c l u d i n ginformation regarding coursessuccessfully taken that relate tothe financial services industry,

(v) his or her position andresponsibi l i t ies with theproposed manager or thecontrolling shareholders of theproposed manager or themutual fund,

(vi) whether he or she is, or withinfive years before the date of theapplication has been, a director,officer or promoter of anyreporting issuer other than themutual fund, and if so,disclosing the names of thereporting issuers and theirbusiness purpose, with apar t icu lar emphasis onrelationships between theindividual and other mutualfunds,

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(vii) the number of securities orpartnership units of theproposed manager beneficiallyowned, directly or indirectly,

(viii) particulars of any existing orpotential conflicts of interest thatmay arise as a result of theindividual's outside businessinterests and his or herr e l a t i o n s h i p w i t h t h emanagement group of themutual fund, and

(ix) a description of the individual'srelationships to the proposedmanager and other serviceproviders to the mutual fund.

(5) The Canadian securities regulatory authoritieswould generally consider it helpful in theirassessment of the integrity and experience ofthe persons or companies that are proposedto manage a mutual fund after a change ofcontrol of the manager, if the application setout, among any other information thatapplicant wishes to provide, a description of

(a) the proposed corporate ownership ofthe manager of the mutual fund afterthe proposed transaction, indicating foreach proposed direct or indirectshareholder of the manager of themutual fund the information about thatshareholder referred to in subsection(4);

(b) the proposed officers and directors ofthe manager of the mutual fund, of themutual fund and of each of theproposed controlling shareholders ofthe mutual fund, indicating for eachindividual, the information about thatindividual referred to in subsection (4);

(c) any anticipated changes to be made tothe officers and directors of themanager of the mutual fund, of themutual fund and of each of theproposed controlling shareholders ofthe mutual fund that are not set out inparagraph (b); and

(d) the relationship of the members of theproposed controlling shareholders andthe other members of the managementgroup to the manager and any otherservice provider to the mutual fund.

7.2 Mergers and Conversions of Mutual Funds -Subsection 5.6(1) of the Instrument provides thatmergers or conversions of mutual funds may becarried out on the conditions described in thatsubsection without prior approval of the securities

regulatory authority. The Canadian securitiesregulatory authorities consider that the types oftransactions contemplated by subsection 5.6(1) ofthe Instrument when carried out in accordance withthe conditions of that subsection address thefundamental regulatory concerns raised by mergersand conversions of mutual funds. Subsection 5.6(1)is designed to facilitate consolidations of mutualfunds within fund families that have similarfundamental investment objectives and strategiesand that are operated in a consistent and similarfashion. Since subsection 5.6(1) will be unavailableunless the mutual funds involved in the transactionhave substantially similar fundamental investmentobjectives and strategies and are operated in asubstantially similar fashion, the Canadian securitiesregulatory authorities do not expect that the portfoliosof the consolidating funds will be required to berealigned to any great extent before a merger. Ifrealignment is necessary, the Canadian securitiesregulatory authorities note that paragraph 5.6(1)(h) ofthe Instrument provides that none of the costs andexpenses associated with the transaction may beborne by the mutual fund. Brokerage commissionspayable as a result of any portfolio realignmentnecessary to carry out the transaction would, in theview of the Canadian securities regulatory authorities,be costs and expenses associated with thetransaction.

7.3 Regulatory Approval for Reorganizations

(1) Paragraph 5.7(1)(b) of the Instrument requirescertain details to be provided in respect of anapplication for regulatory approval required byparagraph 5.5(1)(b) that is not automaticallyapproved under subsection 5.6(1). TheCanadian securities regulatory authorities willbe reviewing this type of proposed transaction,among other things, to ensure that adequatedisclosure of the differences between thefunds participating in the proposed transactionis given to securityholders of the mutual fundthat will be merged, reorganized oramalgamated with another mutual fund.

(2) If a mutual fund is proposed to be merged,amalgamated or reorganized with a mutualfund that has a net asset value that is smallerthan the net asset value of the terminatingmutual fund, the Canadian securitiesregulatory authorities will consider theimplications of the proposed transaction onthe smaller continuing mutual fund. TheCanadian securities regulatory authoritiesbelieve that this type of transaction generallywould constitute a significant change for thesmaller continuing mutual fund, therebytriggering the requirements of paragraph5.1(g) and section 5.10 of the Instrument.

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7.4 Significant Changes

(1) The Canadian securities regulatory authoritieswill not outline all changes in a mutual fundthat could constitute a significant change forthe mutual fund within the meaning of theInstrument. However, they wish to state theirviews of two matters in this Policy.

(2) First, the Canadian securities regulatoryauthorities note that the change of portfolioadviser of a mutual fund will generallyconstitute a significant change for the mutualfund.

(3) In addition, the departure of a high-profileindividual from the employ of a portfolioadviser of a mutual fund may constitute asignificant change for the mutual fund,depending on the circumstances. Thedefinition of significant change is based on achange in the business, operations or affairsof a mutual fund that would be consideredimportant by a reasonable investor orsecurityholder. Whether such a person wouldconsider the departure of a high-profileindividual to be important in this sense wouldlikely depend substantially on how prominentlythe mutual fund featured that individual in itsmarketing. The Canadian securitiesregulatory authorities consider it unlikely thata mutual fund that emphasized the ability of aparticular individual to encourage investors topurchase the fund could later take the positionthat the departure of that individual wasimmaterial to investors and therefore not asignificant change.

PART 8 CUSTODIANSHIP OF PORTFOLIO ASSETS

8.1 Standard of Care - The standard of care prescribedby section 6.6 of the Instrument is a minimumstandard only. Similarly, the provisions of section 6.5of the Instrument, designed to protect a mutual fundfrom loss in the event of the insolvency of thoseholding its portfolio assets, are minimumrequirements. The Canadian securities regulatoryauthorities are of the view that the requirements setout in section 6.5 may require custodians and sub-custodians to take such additional steps as may benecessary or desirable properly to protect theportfolio assets of the mutual fund in a foreignjurisdiction and to ensure that those portfolio assetsare unavailable to satisfy the claims of creditors ofthe custodian or sub-custodian, having regard tocreditor protection and bankruptcy legislation of anyforeign jurisdiction in which portfolio assets of amutual fund may be located.

8.2 Book-Based System

(1) Subsection 6.5(3) of the Instrument providesthat a custodian or sub-custodian of a mutualfund may arrange for the deposit of portfolioassets of the mutual fund with a depository, orclearing agency, that operates a book-basedsystem. Such depositories or clearingagencies include The Canadian DepositoryFor Securities Limited, the Depository TrustCompany or any other domestic or foreigndepository or clearing agency that isincorporated or organized under the laws of acountry or a political subdivision of a countryand operates a book-based system in thatcountry or political subdivision or operates atransnational book-based system.

(2) A depository or clearing agency that operatesa book-based system used by a mutual fundis not considered to be a custodian or sub-custodian of the mutual fund.

8.3 Compliance - Paragraph 6.7(1)(c) of the Instrumentrequires the custodian of a mutual fund to make anychanges periodically that may be necessary toensure that the custodian and sub-custodianagreements comply with Part 6, and that there is nosub-custodian of the mutual fund that does not satisfythe applicable requirements of sections 6.2 or 6.3.The Canadian securities regulatory authorities notethat necessary changes to ensure this compliancecould include a change of sub-custodian.

PART 9 CONTRACTUAL PLANS

9.1 Contractual Plans - Industry participants arereminded that the term "contractual plan" used inPart 8 of the Instrument is a defined term in thesecurities legislation of most jurisdictions, and thatcontractual plans as so defined are not the same asautomatic or periodic investment plans. Thedistinguishing feature of a contractual plan is thatsales charges are not deducted at a constant rate asinvestments in mutual fund securities are madeunder the plan; rather, proportionately higher salescharges are deducted from the investments madeduring the first year, or in some plans the first twoyears.

PART 10 SALES AND REDEMPTIONS OF SECURITIES

10.1 General - Parts 9, 10 and 11 of the Instrument areintended to ensure that

(a) investors' cash is received by a mutual fundpromptly;

(b) the opportunity for loss of an investors' cashbefore investment in the mutual fund isminimized; and

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(c) the mutual fund or the appropriate investorreceives all interest that accrues on cashduring the periods between delivery of thecash by an investor until investment in themutual fund, in the case of the purchase ofmutual fund securities, or between payment ofthe cash by the mutual fund until receipt bythe investor, in the case of redemptions.

10.2 Interpretation

(1) The Instrument refers to "securityholders" of amutual fund in several provisions, mostnotably in Parts 9 and 10 when referring topurchase and redemption orders received bya mutual fund or a participating dealer orprincipal distributor from "securityholders".

(2) Mutual funds must keep a record of theholders of their securities. A mutual fundregisters a holder of its securities on thisrecord as requested by the person orcompany placing a purchase order or assubsequently requested by that registeredsecurityholder. The Canadian securitiesregulatory authorities are of the view that amutual fund is entitled to rely on its register ofholders of securities to determine the namesof such holders and in its determination as towhom it is to take instructions from.

(3) Accordingly, when the Instrument refers to"securityholder" of a mutual fund, it is referringto the securityholder registered as a holder ofsecurities on the records of the mutual fund.If that registered securityholder is aparticipating dealer acting for its client, themutual fund deals with and takes instructionsfrom that participating dealer. The Instrumentdoes not regulate the relationship between theparticipating dealer and its client for whom theparticipating dealer is acting as agent. TheCanadian securities regulatory authorities notehowever, that the participating dealer should,as a matter of prudent business practice,obtain appropriate instructions, in writing, fromits client when dealing with the client'sbeneficial holdings in a mutual fund.

10.3 Receipt of Orders

(1) A principal distributor or participating dealer ofa mutual fund should endeavour, to the extentpossible, to receive cash to be invested in themutual fund at the time the order to which theypertain is placed.

(2) A dealer receiving an order for redemptionshould, at the time of receipt of the investor'sorder, obtain from the investor all relevantdocumentation required by the mutual fund inrespect of the redemption including, withoutlimitation, any written request for redemptionthat may be required by the mutual fund, duly

completed and executed, and any certificatesrepresenting the mutual fund securities to beredeemed, so that all required documentationis available at the time the redemption order istransmitted to the mutual fund or to itsprincipal distributor for transmittal to themutual fund.

10.4 Backward Pricing - Sections 9.3 and 10.3 of theInstrument provide that the issue price or theredemption price of a security of a mutual fund towhich a purchase order or redemption order pertainsshall be the net asset value per security, nextdetermined after the receipt by the mutual fund of therelevant order. For clarification, the Canadiansecurities regulatory authorities emphasize that theissue price and redemption price cannot be basedupon any net asset value per security calculatedbefore receipt by the mutual fund of the relevantorder.

10.5 Coverage of Losses

(1) Subsection 9.4(6) of the Instrument providesthat certain participating dealers may berequired to compensate a mutual fund for aloss suffered as the result of a failedsettlement of a purchase of securities of themutual fund. Similarly, subsection 10.5(3) ofthe Instrument provides that certainparticipating dealers may be required tocompensate a mutual fund for a loss sufferedas the result of a redemption that could not becompleted due to the failure to satisfy therequirements of the mutual fund concerningredemptions.

(2) The Canadian securities regulatory authoritieshave not carried forward into the Instrumentthe provisions contained in NP39 relating to aparticipating dealer's ability to recover fromtheir clients or other participating dealers anyamounts that they were required to pay to amutual fund. If participating dealers wish toprovide for such rights they should make theappropriate provisions in the contractualarrangements that they enter into with theirclients or other participating dealers.

PART 11 COMMINGLING OF CASH

11.1 Commingling of Cash

(1) Part 11 of the Instrument requires principaldistributors and participating dealers toaccount separately for cash they may receivefor the purchase of, or upon the redemption of,mutual fund securities. Those principaldistributors and participating dealers areprohibited from commingling any cash soreceived with their other assets or with cashheld for the purchase or upon the sale ofsecurities of other types of securities. The

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Canadian securities regulatoryauthorities are of the view that thismeans that dealers may not depositinto the trust accounts establishedunder Part 11 cash obtained from thepurchase or sale of other types ofsecurities such as guaranteedinvestment certificates, governmenttreasury bills, segregated funds orbonds.

(2) Subsections 11.1(2) and 11.2(2) of theInstrument state that principal distributors andparticipating dealers, respectively, may notuse any cash received for the investment inmutual fund securities to finance their ownoperations. The Canadian securitiesregulatory authorities are of the view that anycosts associated with returned client chequesthat did not have sufficient funds to cover atrade ("NSF cheques") are a cost of doingbusiness and should be borne by theapplicable principal distributor or participatingdealer and should not be offset by interestincome earned on the trust accountsestablished under Part 11 of the Instrument.

(3) No overdraft positions should arise in thesetrust accounts.

(4) Subsections 11.1(3) and 11.2(3) of theInstrument prescribe the circumstances underwhich a principal distributor or participatingdealer, respectively, may withdraw funds fromthe trust accounts established under Part 11of the Instrument. This would prevent thepractice of "lapping". Lapping occurs as aresult of the timing differences between tradedate and settlement date, when cash of amutual fund client held for a trade which hasnot yet settled is used to settle a trade foranother mutual fund client who has notprovided adequate cash to cover thesettlement of that other trade on thesettlement date. The Canadian securitiesregulatory authorities view this practice as aviolation of subsections 11.1(3) and 11.2(3) ofthe Instrument.

(5) Subsections 11.1(4) and 11.2(4) of theInstrument require that interest earned oncash held in the trust accounts establishedunder Part 11 of the Instrument be paid to theapplicable mutual fund or its securityholders"pro rata based on cash flow". The Canadiansecurities regulatory authorities are of the viewthat this requirement means, in effect, that theapplicable mutual fund or securityholdershould be paid the amount of interest that themutual fund or securityholder would havereceived had the cash held in trust for thatmutual fund or securityholder been the onlycash held in that trust account.

(6) Paragraph 11.3(b) of the Instrument requiresthat trust accounts maintained in accordancewith sections 11.1 or 11.2 of the Instrumentbear interest "at rates equivalent tocomparable accounts of the financialinstitution". A type of account that ordinarilypays zero interest may be used for trustaccounts under sections 11.1 or 11.2 of theInstrument so long as zero interest is the rateof interest paid on that type of account for alldepositors other than trust accounts.

PART 12 PUBLICATION OF NET ASSET VALUE PERSECURITY

12.1 Publication of Net Asset Value per Security -Subsection 13.1(4) of the Instrument requires amutual fund that arranges for the publication of its netasset value per security in the financial press toensure that its current net asset value per security isprovided on a timely basis to the financial press.This provision ensures that a mutual fund takes stepsto calculate the net asset value per security asquickly as is commercially practicable following thevaluation date or time, and to make the results of thatcalculation available to the financial press as quicklyas is commercially practicable. A mutual fundshould, to the extent practicable, attempt to meet thedeadlines of the financial press for publication inorder to ensure that its net asset values per securityare publicly available as quickly as possible.

PART 13 PROHIBITED REPRESENTATIONS AND SALESCOMMUNICATIONS

13.1 Misleading Sales Communications

(1) Part 15 of the Instrument prohibits misleadingsales communications relating to mutual fundsand asset allocation services. Whether aparticular description, representation,illustration or other statement in a salescommunication is misleading depends uponan evaluation of the context in which it ismade. The following list sets out some of thecircumstances, in the view of the Canadiansecurities regulatory authorities, in which asales communication would be misleading. Noattempt has been made to enumerate all suchc i rcumstances s ince each sa lescommunication must be assessed individually.

1. A statement would be misleading if itlacks explanations, qualifications,limitations or other statementsnecessary or appropriate to make thestatement not misleading.

2. A representation about past or futureinvestment performance would bemisleading if it is

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(a) a portrayal of past income, gainor growth of assets that conveysan impression of the netinvestment results achieved byan actual or hypotheticalinvestment that is not justifiedunder the circumstances;

(b) a representation about securityof capital or expensesassociated with an investmentthat is not justified under thec i r c u m s t a n c e s o r arepresentation about possiblefuture gains or income; or

(c) a representation or presentationof past investment performancethat implies that future gains orincome may be inferred from orpredicted based on pastinvestment performance orportrayals of past performance.

3. A statement about the characteristicsor attributes of a mutual fund or anasset allocation service would bemisleading if

(a) it concerns possible benefitsconnected with or resulting fromservices to be provided ormethods of operation and doesnot give equal prominence todiscussion of any risks orassociated limitations;

(b) it makes exaggerated orunsubstantiated claims aboutmanagement skill or techniques;characteristics of the mutualfund or asset allocation service;an investment in securitiesissued by the fund orrecommended by the service;services offered by the fund, theservice or their respectivemanager; or effects ofgovernment supervision; or

(c) it makes unwarranted ori n c o m p l e t e l y e x p l a i n e dc o m p a r i s o n s t o o t h e rinvestment vehicles or indices.

4. A sales communication that quoted athird party source would be misleadingif the quote were out of context andproper attribution of the source werenot given.

(2) Performance data information may bemisleading even if it complies technically withthe requirements of the Instrument. For

instance, subsections 15.8(1) and (2) of theInstrument contain requirements that thestandard performance data for mutual fundsgiven in sales communications be forprescribed periods falling within prescribedamounts of time before the date of theappearance or use of the advertisement orfirst date of publication of any other salescommunication. That standard performancedata may be misleading if it does notadequately reflect intervening eventsoccurring after the prescribed period. Anexample of such an intervening event wouldbe, in the case of money market funds, asubstantial decline in interest rates after theprescribed period.

(3) An advertisement that presents information ina manner that distorts information contained inthe preliminary prospectus or prospectus, orpreliminary simplified prospectus and annualinformation form, of a mutual fund or thatincludes a visual image that provides amisleading impression will be considered tobe misleading.

(4) Any discussion of the income tax implicationsof an investment in a mutual fund securityshould be balanced with a discussion of anyother material aspects of the offering.

(5) Paragraph 15.2(1)(b) of the Instrumentprovides that sales communications may notinclude any statement that conflicts withinformation that is contained in, among otherthings, a simplified prospectus. The Canadiansecurities regulatory authorities are of the viewthat a sales communication that providesperformance data in compliance with therequirements of Part 15 of the Instrument fortime periods that differ from the time periodsfor which performance data is required to beprovided in a simplified prospectus underNational Instrument 81-101 is not thereby inviolation of the requirements of paragraph15.2(1)(b) of the Instrument.

(6) Subsection 15.3(1) of the Instrument permitsa mutual fund or asset allocation service tocompare its performance to, among otherthings, other types of investments orbenchmarks on certain conditions. Examplesof such other types of investments orbenchmarks to which the performance of amutual fund or asset allocation service may becompared include consumer price indices;stock, bond or other types of indices;averages; returns payable on guaranteedinvestment certificates or other certificates ofdeposit; and returns from an investment in realestate.

(7) Paragraph 15.3(1)(c) of the Instrumentrequires that if the performance of a mutual

Mutual Fund Rules


fund or asset allocation service iscompared to that of another investmentor benchmark, the comparison sets outclearly any factors necessary to ensurethat the comparison is fair and notmisleading. Such factors would includean explanation of any relevantdifferences between the mutual fund orasset allocation service and theinvestment or benchmark to which it iscompared. Examples of suchdifferences include any relevantdifferences in the guarantees of, orinsurance on, the principal of or returnfrom the investment or benchmark;fluctuations in principal, income or totalreturn; any differing tax treatment; and,for a comparison to an index oraverage, any differences between thecomposition or calculation of the indexor average and the investment portfolioof the mutual fund or asset allocationservice.

13.2 Other Provisions

(1) Subsection 15.9(1) of the Instrument imposescertain disclosure requirements for salescommunications in circumstances in whichthere was a change in the business,operations or affairs of a mutual fund or assetallocation service during or after aperformance measurement period ofperformance data contained in the salescommunication that could have materiallyaffected the performance of the mutual fund orasset allocation service. Examples of thesechanges are changes in the management,investment objectives, portfolio adviser,ownership of the manager, fees and charges,or of policies concerning the waiving orabsorbing of fees and charges, of the mutualfund or asset allocation service; or of achange in the characterization of the mutualfund as a money market fund.

(2) Paragraph 15.11(1)5 of the Instrumentrequires that no non-recurring fees andcharges that are payable by some or allsecurityholders and no recurring fees andcharges that are payable by some but not allsecurityholders be assumed in calculatingstandard performance data. Examples of non-recurring types of fees and charges arefront-end sales commissions and contingentdeferred sales charges, and examples ofrecurring types of fees and charges are theannual fees paid by purchasers whopurchased on a contingent deferred chargebasis.

(3) Paragraphs 15.11(1)2 and 15.11(2)2 of theInstrument require that no fees and chargesrelated to optional services be assumed in

calculating standard performance data.Examples of these fees and charges includetransfer fees, except in the case of an assetallocation service, and fees and charges forregistered retirement savings plans, registeredretirement income funds, registered educationsavings plans, pre-authorized investmentplans and systematic withdrawal plans.

(4) The Canadian securities regulatory authoritiesare of the view that it is inappropriate andmisleading for a mutual fund that is continuingfollowing a merger to prepare and use proforma performance information or financialstatements that purport to show the combinedperformance of the two funds during a periodbefore their actual merger. The Canadiansecurities regulatory authorities are of the viewthat such pro forma information ishypothetical, involving the making of manyassumptions that could affect the results.

PART 14 CALCULATION OF MANAGEMENT EXPENSERATIO

14.1 Calculation of Management Expense Ratio

(1) Part 16 of the Instrument sets out the methodto be used by a mutual fund in calculating itsmanagement expense ratio. Therequirements contained in Part 16 areapplicable in all circumstances in which amutual fund calculates and discloses amanagement expense ratio. This includesdisclosure in a sales communication, asimplified prospectus, an annual informationform, financial statements or in a report tosecurityholders.

(2) Paragraph 16.1(1)(a) requires the mutual fundto use its "total expenses" for a financial yearas shown in its income statement as the basisfor the calculation of management expenseratio. Total expenses will include interestcharges and taxes of all types, including salestaxes and GST, payable by the mutual fund.Brokerage charges are not considered to bepart of total expenses as they are included inthe cost of purchasing, or netted out of theproceeds from selling, portfolio assets.

PART 15 SECURITYHOLDER RECORDS

15.1 Securityholder Records - Section 18.1 of theInstrument requires the maintenance ofsecurityholder records, including past records,relating to the issue and redemption of securities anddistributions of the mutual fund. Section 18.1 doesnot require that these records need be heldindefinitely. It is up to the particular mutual fund,having regard to prudent business practice and any

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applicable statutory limitation periods, todecide how long it wishes to retain oldrecords.

PART 16 EXEMPTIONS AND APPROVALS

16.1 Need for Multiple or Separate Applications - TheCanadian securities regulatory authorities note thata person or company that obtains an exemption froma provision of the Instrument need not apply again forthe same exemption at the time of each prospectusor simplified prospectus refiling unless there hasbeen some change in an important fact relating to thegranting of the exemption. This also applies toexemptions from NP39 granted before theInstrument; as provided in section 19.2 of theInstrument, it is not necessary to obtain an exemptionfrom the corresponding provision of the Instrument.

16.2 Exemptions under Prior Policies

(1) Subsection 19.2(1) of the Instrument providesthat a mutual fund that has obtained, from theregulatory or securities regulatory authority, anexemption from a provision of NP 39 beforethe Instrument came into force is granted anexemption from any substantially similarprovision of the Instrument, if any, on thesame conditions, if any, contained in theearlier exemption.

(2) The Canadian securities regulatory authoritiesare of the view that the fact that a number ofsmall amendments have been made to manyof the provisions of the Instrument from thecorresponding provision of NP39 should notlead to the conclusion that the provisions arenot "substantially similar", if the generalpurpose of the provisions remain the same.For instance, even though some changeshave been made in the Instrument, theCanadian securities regulatory authoritiesconsider paragraph 2.2(1)(a) of the Instrumentto be substantially similar to paragraph2.04(1)(b) of NP39, in that the primarypurpose of both provisions is to prohibitmutual funds from acquiring securities of anissuer sufficient to permit the mutual fund tocontrol or significantly influence the control ofthat issuer.

16.3 Waivers and Orders concerning "Fund of Funds"- The CSA in a number of jurisdictions have providedwaivers and orders from NP39 and securitieslegislation to permit "fund of funds" to exist and carryon investment activities not otherwise permitted byNP39 or securities legislation. Some of thosewaivers and orders contained "sunset" provisions thatprovided that they expired when legislation or a CSApolicy or rule came into force that effectively providedfor a new "fund of funds" regime. For greatercertainty, the Canadian securities regulatoryauthorities note that the coming into force of the

Instrument will not trigger the "sunset" of thosewaivers and orders.



Ontario Securities Commission

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Table of Contents

Mutual Fund Prospectus Disclosure Notice

Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Appendix A: List of Commenters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Appendix B: Summary of Comments . . . . . . . . . . . . . . . . . . . . . . . . . 8

National Instrument 81-101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Companion Policy 81-101CP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Forms

Contents of Simplified Prospectus (Form 81-101F1) . . . . . . . . . . . . 37Contents of Annual Information Form (Form 81-101F2) . . . . . . . . . 59

Mutual FundsNotice

Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Appendix A: List of Commenters . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Appendix B: Summary of Comments . . . . . . . . . . . . . . . . . . . . . . . . 80

National Instrument 81-102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Companion Policy 81-102CP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153


Documents

Mutual Funds Notice National Instrument 81-102 Companion ......Mutual Fund Rules November 12, 1999 75 (1999) 22 OSCB(Supp.) Section 2.7 Subsection 2.7(4) has been amended to clarify