Canadian and Ontarian Securities Regulatory Framework – BMG Securities Key Features

The key features of the Canadian and Ontarian securities regulatory framework governing BMG BullionFund and BMG Gold BullionFund (the Fund(s)) are set out below:

Overview

Canadian securities regulation is managed through laws and agencies established by Canada’s 13 provincial and territorial governments.  Each province and territory has a securities commission or equivalent authority.

Canada does not have a securities regulatory authority at the federal government level.  However, securities regulators from each province and territory have teamed up to form the Canadian Securities Administrators (CSA).

Canadian Securities Administrators

The CSA is a voluntary umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize the regulation of the Canadian capital markets.

The CSA has developed a “passport system”. This allows a market participant access to markets in all passport jurisdictions while dealing only with its principal regulator and complying with one set of harmonized laws.

Mandatory regulatory filings are deposited by public companies and investment funds registered with CSA, using the System for Electronic Data Analysis and Retrieval filing system (SEDAR ).  Documents filed on SEDAR are electronically communicated to all CSA members, and are available to the public via the SEDAR website (www.sedar.com).

The CSA has an overall investigation and enforcement function, but actual enforcement is the responsibility of the individual securities commissions.  Individual securities commissions can impose sanctions, including: orders that trading in securities cease; exemptions are unavailable; bans on individuals acting as corporate directors and officers; mandatory filing of specified disclosures; monetary administrative penalties; and payment of costs.

The CSA maintains the Cease Trade Order (CTO) National Database.  A CTO is an order issued by a provincial or territorial securities commission, or similar regulatory body, against a company for failing to meet disclosure requirements, such as filing a quarterly or annual financial statement, or as a result of an enforcement action that involves an investigation of wrongdoing.  The order prohibits trading in that company’s securities.

Ontarian Securities Regulation

Overview

Ontario is the primary jurisdiction for the Funds.  The OSC  is the largest provincial regulator in Canada.

The starting point for Ontario securities legislation is the Ontario Securities Act and Regulations.  Each Fund is considered to be a “mutual fund” for the purposes of the Ontario Securities Act, because it is a fund that offers securities that are redeemable on demand by investors for a proportionate interest of the fund’s net assets.

Mutual funds are governed primarily by National Instruments NI 81-101 Mutual Fund Prospectus Disclosure and NI 81-102 Mutual Funds. Certain other disclosure requirements are set out in other National Instruments, such as NI 81-106 Investment Fund Continuous Disclosure and NI 81-107 Independent Review Committee for Investment Funds.

The purpose of the legislation is to ensure that mutual funds provide investors with disclosure documents that clearly and concisely convey information that investors should consider in connection with an investment in a mutual fund.

To achieve this, the legislation requires:

(i) “full, true and plain disclosure of all material facts” at the point of sale, through a simplified prospectus (which must be given to all investors and filed on SEDAR), and an annual information form (available to investors on request and publicly available on SEDAR); and

(ii) disclosure about the performance of the mutual fund on a continuous basis, through audited annual financial statements, unaudited semi-annual financial statements, annual and semi-annual management reports of fund performance, and quarterly portfolio disclosure (all available to investors on request, and publicly available on SEDAR, except for the quarterly portfolio disclosure).

Simplified Prospectus

To distribute securities to the public, a mutual fund must first file a preliminary simplified prospectus with the OSC.

The OSC reviews, provides comments and may ask for changes on the preliminary simplified prospectus.  The fund must then amend the prospectus to the satisfaction of the OSC.  Once this is done, a final simplified prospectus is submitted to the OSC.

If a receipt is issued for a final simplified prospectus, the prospectus can then be used to offer securities.

NI 81-101 Mutual Fund Prospectus Disclosure and Form 81-101F1 provide detailed requirements as to the contents and format of a simplified prospectus.
These requirements are designed to ensure the simplified prospectus (given to investors) is prepared in a clear manner, so as to provide investors with the necessary information to permit the making of an informed investment decision.

Under NI 81-101, a simplified prospectus consists of two sections. Part A provides general information about mutual funds, as well as introductory information applicable to the mutual funds managed by the mutual fund organisation. Part B contains specific information about the individual mutual funds.

BMG is the trustee and manager of both Funds.  BMG offers the Funds through a simplified prospectus. A mutual fund can distribute its securities under its simplified prospectus for 12 months.  Generally speaking, after 12 months the simplified prospectus lapses.

Annual Information Form

NI 81-101 contemplates that a supplemental disclosure document, the annual information form, will be provided to any person on request.  This gives investors a choice about the amount of information that they wish to consider before making a decision about investing.  The annual information form is incorporated by reference into the simplified prospectus.

Information contained in the related simplified prospectus will generally not be repeated in an annual information form, except as necessary to make the annual information form comprehensible as an independent document.  Generally speaking, an annual information form is intended to provide disclosure about different matters than those discussed in the simplified prospectus, such as information concerning the internal operations of the manager of the mutual fund, which may be of assistance or interest to some investors.

Financial Statements and Management Reports of Fund Performance

Financial Information Required

NI 81-101 contemplates that the following financial information for the Funds will be filed on SEDAR, and provided upon request to investors:

(iii) the most recent annual audited financial statements;

(iv) any interim statements filed after those audited;

(v) the most recently filed annual management report of fund performance; and

(vi) any interim management report of fund performance filed after the annual management report of fund performance.

Nature of Financial Statements

The annual audited financial statements must contain statements of net assets, operations, and changes in net assets and investment portfolio prepared in accordance with Canadian generally accepted accounting principles and audited in accordance with Canadian generally accepted auditing standards.  Interim financial statements must contain the same statements, although they are not required to be audited.

International Financial Reporting Standards (IFRS) will replace the current Canadian generally accepted accounting principles for publicly accountable entities, effective January 1, 2011.

Nature of Management Reports of Fund Performance

The annual and interim management reports of fund performance must contain a management discussion of fund performance (which supports and complements the financial statements), financial highlights, performance information and summary portfolio disclosure.

Management reports of fund performance must follow the format set out in Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance.

Distribution of Financial Information to Investors

Annual financial statements and management reports of fund performance must be provided to investors within 90 days of a fund’s financial year end, while interim (semi-annual) financial statements and management reports of fund performance must be provided within 60 days of the end of the fund’s interim reporting period.  Financial statements and management reports of fund performance must be filed on SEDAR, and provided to investors on request.

In addition to the annual and semi-annual financial reporting, funds must also produce summary portfolio disclosure for their first and third quarters.  These summary portfolio disclosures are not required to be filed on SEDAR, but must be provided to investors on request.

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