Headnote
National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions - Relief granted to two fund managers, each as a “company providing services to the mutual fund” under section 11.1(1)(b) of NI 81-102 – Each fund manager is not a member of the Mutual Fund Dealers’ Association – Representations of the Decision speak to the safeguarding of client assets – Relief is aimed at allowing each fund manager to commingle client cash related to the fund manager’s open-ended mutual funds in the same trust account as client cash temporarily received by the fund manager for investment in deposits offered by an affiliate.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, section 11.1(1)(b) and section 19.1
December 3, 2008
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ONTARIO
(the “Jurisdiction”)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF Mackenzie Financial Corporation
AND Counsel Group of Funds Inc.
(the “Filers”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers (the “Application”) for a decision under the securities legislation of the jurisdiction of the principal regulator (the “Legislation”) under section 19.1 of National Instrument 81-102 – Mutual Funds (“NI 81-102”) for relief (the “Exemption Sought”) from the requirements of section 11.1(1)(b) of National Instrument 81-102 Mutual Funds (“NI 81-102”) that cash received by a person or company providing services to a mutual fund, for investment in, or on the redemption of, securities of the mutual fund (“Mutual Fund Trust Monies” as further defined below) may be commingled only with cash received by the service provider for the sale or on the redemption of other mutual fund securities (the “Commingling Prohibition”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
Interpretation
Defined terms contained in National Instrument 14-101 – Definitions and in NI 81-102 have the same meaning in this decision document unless they are otherwise defined in this decision.
Representations
This decision is based on the following facts represented by the Filers:
Mackenzie Financial Corporation (“Mackenzie”) is the manager of various open-end mutual funds (the “Mackenzie Funds”).
Mackenzie is registered in the categories investment counsel and portfolio manager, commodity trading manager and limited market dealer in the Province of Ontario, in the categories investment counsel and portfolio manager in the Province of Alberta, and in the category portfolio manager in Newfoundland and Labrador.
Counsel Group of Funds Inc. (“Counsel”) is the manager of various open-end mutual funds (the “Counsel Funds”, the Mackenzie Funds and the Counsel Funds are sometimes referred to herein as the “Funds”).
Counsel is registered in the categories of investment counsel and portfolio manager in the Province of Ontario.
The Filers do not sell mutual fund securities directly to the public and are not members of the Mutual Fund Dealers Association of Canada.
Securities of the Funds are sold through registered dealers (the “Dealers”).
Each of the Filers is not in default of securities legislation in any jurisdiction of Canada.
Each Filer maintains clearing accounts on behalf of the Funds managed by it (the “Trust Accounts”) with major Canadian financial institutions into which all monies (“Mutual Fund Trust Monies”) invested by securityholders in the Funds managed by it (“Investors”) are paid by way of cheque, wire transfer, electronic funds transfer and the FundServ electronic order entry system (“Industry Standard Settlement Processes”) and from which redemption proceeds or assets to be distributed are paid. The Trust Accounts are interest bearing and all of the interest earned on the cash in the Trust Accounts is paid to the Funds on a pro rata basis in compliance with subsection 11.1(4) of NI 81-102. The Filers ensure compliance with section 11.3 of NI 81-102 in the way in which the Trust Accounts are maintained.
Each Trust Account is held on behalf of the Funds. Each Filer, as manager of the Mackenzie Funds or Counsel Funds, as applicable, has access to the applicable Trust Account and has control over which of its employees have access to the applicable Trust Account.
M.R.S. Trust Company (“M.R.S. Trust”) is a federally regulated trust company. M.R.S. Trust is an indirect wholly-owned subsidiary of Mackenzie and is an affiliate of Counsel.
M.R.S. Trust intends to accept deposits from Investors via Dealers (such investments the “Deposits”) by way of Industry Standard Settlement Processes.
The Filers intend to provide the administrative infrastructure necessary to permit M.R.S. Trust to offer the Deposits to Investors via Dealers, specifically including the operational means by which Investors’ funds will be moved from the Dealers to M.R.S. Trust.
The Deposits offered by M.R.S. Trust are or will be savings accounts eligible for deposit insurance from the Canada Deposit Insurance Corporation (“CDIC”) subject to maximum coverage limitations. Investors who wish to invest cash in the Deposits may also purchase units of the Funds from their Dealer at the same time.
Dealers who accept cash from Investors for investment in the Deposits (“Non-Mutual Fund Trust Monies”) and for investment in the Funds (as noted above, “Mutual Fund Trust Monies”), will forward such cash to the Filers via Industry Standard Settlement Processes. Once received, the Filers propose to hold both Non-Mutual Fund Trust Monies and Mutual Fund Trust Monies temporarily in the Trust Accounts. Investors’ Non-Mutual Fund Trust Monies will then be forwarded by the Filers from their Trust Accounts to M.R.S. Trust, while Investors’ Mutual Fund Trust Monies will be forwarded by the Filers from the Trust Accounts to individual Fund accounts in the name of the Funds’ custodian. For a brief time then, the Filers anticipate that Non-Mutual Fund Trust Monies and Mutual Fund Trust Monies will be temporarily commingled in the Trust Accounts.
As managers of the Funds, the Filers are subject to the statutory standard of care set forth in section 116 of the Securities Act (Ontario) and to similar provisions contained in the legislation of the Jurisdictions. As a federally regulated trust company, M.R.S. Trust accepts the Deposits as guaranteed trust money and the Filers, acting as agents of M.R.S. Trust, will comply with the fiduciary standard of care and applicable customer protection legislation and regulations which apply to M.R.S. Trust in respect of the Deposits. Investors’ Non Mutual Fund Trust Monies will be eligible for deposit insurance from CDIC subject to maximum coverage limitations.
The temporary commingling of Non Mutual Fund Trust Monies with Mutual Fund Trust Monies in the Trust Accounts will permit a seamless method to move funds from Dealers to the Funds and M.R.S. Trust, and in reverse, and will facilitate significant administrative and systems economies that will enable the Filers to enhance their levels of service to their clients.
In the absence of the Requested Relief, the commingling of the Mutual Fund Trust Monies with the Non-Mutual Fund Client Trust Monies would contravene the Commingling Prohibition and would require the Filers to establish separate trust accounts for the Funds and the Deposits. This would effectively not permit the offering of CDIC eligible deposits to Investors alongside mutual fund investments within the same client-name accounts, which the Filers believe to be of significant value to investors.
Commingled Mutual Fund Trust Monies and Non Mutual Fund Trust Monies will be forwarded to individual Fund accounts in the name of the Funds’ custodian and to M.R.S. Trust, as applicable, no less frequently than following overnight processing of Fund purchase and Deposit orders. Commingled Mutual Fund Trust Monies and Non Mutual Fund Trust Monies will be forwarded from the Trust Account to the relevant dealers or dealer trust accounts which redeem Funds or order withdrawals from the Deposits no less frequently than following overnight processing of redemption or withdrawal orders, subject to the time it may take for an Investor to redeem a cheque issued in respect of redeemed Fund units or withdrawn Deposits. Accordingly, all monies held in the Trust Account will be cleared no less frequently than on a daily basis at the beginning of each business day following the previous business day’s overnight processing of all purchase and deposit transactions involving the Funds and Deposits and most redemptions from the Funds and withdrawals from the Deposits.
The Filers do not believe that the interests of the Investors will be prejudiced in any way by the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies.
Each Filer is a “company providing services to the mutual fund” under the provisions of section 11.1(1)(b) of NI 81-102. Accordingly, the Commingling Prohibition prohibits the Filers from commingling Mutual Fund Trust Monies with Non-Mutual Fund Trust Monies.
In providing services, each Filer is able to account for all monies received into and all monies that are to be paid out of its Trust Account in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.
The Filers will ensure that proper records with respect to client cash in a commingled account are kept, and will ensure that its respective Trust Account is reconciled, and that Mutual Fund Trust Monies and Non-Mutual Fund Trust Monies are properly accounted for daily.
Each Filer will ensure that all transactions in its Trust Account are manually reviewed on a daily basis in order to monitor the Trust Account for discrepancies in the handling of Mutual Fund Trust Monies and Non-Mutual Fund Trust Monies in the Trust Account.
Any error in the handling of monies in a Filer’s Trust Account as a result of the commingling of funds identified through such daily review process will promptly be corrected by the applicable Filer.
Except for the Commingling Prohibition, the Filers will comply with all other requirements prescribed in Part 11 of NI 81-102 with respect to the separate accounting and handling of client cash.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted.
“Rhonda Goldberg”
_________________________
Rhonda Goldberg
Manager, Investment Funds Branch
ONTARIO SECURITIES COMMISSION
Headnote
National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions - – Relief granted to two fund managers, each as a “company providing services to the mutual fund” under section 11.1(1)(b) of NI 81-102 – Each fund manager is not a member of the Mutual Fund Dealers’ Association – Representations of the Decision speak to the safeguarding of client assets – Relief is aimed at allowing each fund manager to commingle client cash related to the fund manager’s open-ended mutual funds in the same trust account as client cash temporarily received by the fund manager for investment in deposits offered by an affiliate.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, section 11.1(1)(b) and section 19.1