Headnote
National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions - Relief granted to a fund manager as a “company providing services to the mutual fund” under section 11.1(1)(b) of NI 81-102 – The fund manager is not a member of the Mutual Fund Dealers’ Association – Representations of the Decision speak to the safeguarding of client assets – Relief permits the 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
May 5, 2009
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
CIBC ASSET MANAGEMENT INC.
(the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer (the Application) for a decision under the securities legislation of the principal jurisdiction (the Legislation) under section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) granting relief (the Exemption Sought) from the requirements of section 11.1(1)(b) of 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 Cash) may be commingled only with cash received by the service provider for the sale or on the redemption of other mutual fund securities (collectively, the Commingling Prohibition).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) 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, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (the Passport Jurisdictions)
(The Jurisdiction and the Passport Jurisdictions are collectively, the Jurisdictions)..
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is the manager and trustee of various open-end mutual funds (the Funds).
The Filer is registered as a dealer in the category of mutual fund dealer in Ontario and as a “firm” in the group savings plan brokerage sector in Québec. The Filer is also registered as an adviser in the categories of investment counsel and portfolio manager or the equivalent in each of the provinces and territories of Canada and as commodity trading manager in Ontario.
The Filer does not sell mutual fund securities directly to the public and is not a member of the Mutual Fund Dealers Association of Canada (the MFDA).
Securities of the Funds are generally sold through other registered dealers (Dealers).
Pursuant to an order dated June 27, 2001 (the “Order”), the Filer was exempted from the requirements of Rule 31-506 - SRO Membership – Mutual Fund Dealers requiring the Filer to become a member of the MFDA, provided its dealer activities were restricted as provided in the Order and incidental to its principal business of managing the Funds.
The Filer is not in default of securities legislation in any jurisdiction of Canada.
The Filer maintains one or more trust accounts on behalf of the Funds managed by it (the Trust Accounts) with major Canadian financial insitutions in which all monies (Mutual Fund Cash) invested by securityholders in the Funds (Investors) are paid by way of cheque, wire transfer, electronic funds transfer and the FundSERV electronic order entry systems (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 cash in the Trust Accounts is paid to Investors of the Funds or to each of the Funds on a pro rata basis in compliance with subsection 11.1(4) of NI 81-102. The Filer also ensures compliance with section 11.3 in the way in which the Trust Accounts are maintained.
Each Trust Account is held on behalf of the Funds. The Filer, as manager and trustee of the Funds, has access to the applicable Trust Account and has control over which of its employees has access to the applicable Trust Account.
The Canadian Imperial Bank of Commerce (CIBC) is a federally regulated bank. The Filer is a wholly-owned subsidiary of CIBC.
CIBC intends to accept cash deposits into high interest savings accounts from Investors via Dealers (such investments, the Deposits) by way of Industry Standard Settlement Processes. The Deposits will be offered by CIBC through the Filer and will be held at CIBC.
The Filer intends to provide the administrative infrastructure necessary to permit CIBC to offer the Deposits to Investors via Dealers, specifically including the operational means by which Investors’ funds will be moved from the Dealers to CIBC.
The Deposits offered by CIBC are or will be savings accounts eligible for deposit insurance from the Canada Deposit Insurance Corporation (CDIC) subject to CDIC rules and regulations. 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 (Other Cash) and for investment in the Funds (as noted above, Mutual Fund Cash) will forward such cash to the Filer via Industry Standard Settlement Processes. Once received, the Filer proposes to hold both Mutual Fund Cash and Other Cash temporarily in the Trust Accounts. Investors’ Other Cash will then be forwarded by the Filer from its Trust Accounts to CIBC, while the Investors’ Mutual Fund Cash will be forwarded by the Filer from the Trust Account to individual Fund accounts in the name of the Funds’ custodian. For a brief time then, the Filer anticipates that Mutual Fund Cash and Other Cash will be temporarily commingled in the Trust Accounts.
As manager of the Funds, the Filer is 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 company, CIBC accepts the Deposits as guaranteed trust money and the Filer, acting as an agent of CIBC, will comply with the fiduciary standard of care and applicable customer protection legislation and regulations which apply to CIBC in respect of the Deposits. Investors’ Other Cash will be eligible for deposit insurance from CDIC subject to CDIC rules and regulations.
The temporary commingling of Other Cash with Mutual Fund Cash in the Trust Accounts will permit a seamless method to move funds from Dealers to the Funds and CIBC, and in reverse, and will facilitate significant administrative and systems economies that will enable the Filer to enhance its level of service to its clients.
In the absence of the Exemption Sought, the commingling of the Mutual Fund Cash with Other Cash would contravene the Commingling Prohibition and would require the Filer 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 nominee-name accounts, which the Filer believes to be of significant value to investors.
Commingled Mutual Fund Cash and Other Cash will be forwarded to individual Fund accounts in the name of the Funds’ custodian and to CIBC, as applicable, no less frequently than following overnight processing of Fund purchase and Deposit orders. Commingled Mutual Fund Cash and Other Cash will be forwarded from the Trust Accounts 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 Accounts 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 Filer does not believe that the interests of its clients will be prejudiced in any way by the commingling of Other Cash with Mutual Fund Cash in the Trust Accounts.
The 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 Other Cash.
Mutual Fund Cash or Other Cash related to the transaction initiated by one of the Filer’s clients will not be used to settle the transaction initiated by any other client of the Filer.
In providing services, the Filer currently has systems in place to be able to account for all monies it received into and all of the monies that are to be paid out of the Trust Accounts in order to meet the policy objectives of section 11.1 and 11.2 of NI 81-102.
The Filer will ensure that proper records with respect to client cash in a commingled account are kept, and will ensure that its respective Trust Accounts are reconciled, and that Mutual Fund Cash and Other Cash are properly accounted for, daily.
The Filer will ensure that all transactions in its Trust Accounts are manually reviewed on a daily basis in order to monitor the Trust Account for discrepancies in the handling of Mutual Fund Cash and Other Cash in the Trust Accounts.
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 Filer.
Except for the Commingling Prohibition, the Filer will comply with all other requirements prescribed in Part 11 of NI 81-102 with respect to handling and segregation 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.
“Darren McKall”
_____________________________
Darren McKall
Assistant Manager, Investment Funds Branch
ONTARIO SECURITIES COMMISSION
Headnote
National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions - – Relief granted to a fund manager as a “company providing services to the mutual fund” under section 11.1(1)(b) of NI 81-102 – The fund manager is not a member of the Mutual Fund Dealers’ Association – Representations of the Decision speak to the safeguarding of client assets – Relief permits the 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