Headnote
National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions – Relief granted from the requirements of sections 11.1(1)(b) and 11.2(1)(b) of NI 81-102 to permit a participating dealer and potential principal distributor of third party funds to commingle cash received for the purchase or redemption of mutual fund securities with cash received for the purchase and sale of other securities or instruments it is permitted to sell, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, subsections 11.1(1)(b), 11.2(1)(b), and 19.1.
March 16, 2010
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
GLOBAL MAXFIN INVESTMENTS INC.
(the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision (the “Requested Relief”) under section 19.1 of National Instrument 81-102 Mutual Funds (the “ Legislation”) for an exemption from the provisions of paragraph 11.1(1)(b) and paragraph 11.2(1)(b) of National Instrument 81-102 Mutual Funds (“NI 81-102”) that prohibit a principal distributor and other service providers, or a participating dealer and other service providers, from commingling cash received for the purchase or from the redemption of mutual fund securities (“Mutual Fund Cash”) with cash received for the purchase or from the sale of guaranteed investment certificates (“GICs”) and other securities or instruments which the Filer is permitted to sell ( “Other Cash”) (the “Commingling Prohibitions”).
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 intended to be relied upon in British Columbia, Alberta, Saskatchewan, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador (the “Non-principal Jurisdictions”).
Interpretation
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
1.The Filer is a corporation incorporated under the Canada Business Corporations Act and is registered as a mutual fund dealer in Ontario, British Columbia, Alberta, Saskatchewan, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador and is registered as an exempt market dealer in Ontario and Newfoundland and Labrador. The Filer's head office is located in Richmond Hill, Ontario. The Filer is not a reporting issuer and its securities are not listed on a securities exchange. The Filer's principal business is acting as a mutual fund dealer.
The Filer is a member of the Mutual Fund Dealers Association of Canada ("MFDA").
The Filer is a participating dealer (as defined in NI 81-102) in respect of various third party mutual funds and may become a principal distributor in the near future. In addition to mutual fund securities, the Filer distributes GICs issued by Canadian financial institutions and other securities and instruments that the Filer is permitted to trade or sell.
As a member of the MFDA, the Filer is subject to the rules and requirements of the MFDA (“MFDA Rules”) on an ongoing basis, particularly those which set out requirements with respect to the handling and segregation of client cash. As a member of the MFDA, the Filer is expected to comply with all MFDA Rules.
The Filer proposes to pool Other Cash with Mutual Fund Cash in a trust settlement account established under section 11.3 of NI 81-102 (the “Trust Account”). The commingling of Other Cash with Mutual Fund Cash would facilitate significant administrative and systems economies that will enable the Filer to enhance its level of service to its client accounts at less cost to the Filer. The Trust Account is designated as a “trust account” by the financial institution at which it is held and is held in the name of the Filer.
The Commingling Prohibitions prevent the Filer from commingling Mutual Fund Cash with Other Cash.
Section 3.3.2(e) of the Rules of the MFDA (the “MFDA Commingling Prohibition”) also prohibits the commingling of Other Cash with Mutual Fund Cash. However, on June 23, 2006, the MFDA granted relief from the MFDA Commingling Prohibition to the Filer (and certain other MFDA members) subject to the Filer obtaining similar relief from the Commingling Prohibitions from the Jurisdiction and Non-principal Jurisdictions. Should the Requested Relief be granted by the Jurisdiction and Non-principal Jurisdictions, the Filer will provide the MFDA with notice that the Requested Relief has been granted.
Mutual Fund Cash or Other Cash related to a transaction initiated by one of the Filer's clients will not be used to settle a transaction initiated by any other client of the Filer. The Filer settles through FundSERV, on a net basis at the end of each trading day, Mutual Fund Cash payable from the Trust Account to a mutual fund with Mutual Fund Cash payable by the mutual fund to the Trust Account.
The Filer currently has systems in place to be able to account for all of the monies it receives into and all of the monies that are to be paid out of the Trust Account in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.
The Filer will maintain proper records with respect to client cash in a commingled account, and will ensure that the Trust Account is reconciled in accordance with MFDA Rules, and that Mutual Fund Cash and Other Cash are properly accounted for daily.
Except for the Commingling Prohibitions, the Filer will comply with all other requirements prescribed in Part 11 of NI 81-102 with respect to the handling and segregation of client cash.
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 Account.
Effective July 1, 2005, the MFDA Investor Protection Corporation ("MFDA IPC") commenced offering coverage, within defined limits, to customers of MFDA members against losses suffered due to the insolvency of MFDA members. The Filer does not believe that the Requested Relief will affect coverage provided by the MFDA IPC.
In the absence of the Requested Relief, the commingling of Mutual Fund Cash with Other Cash in the Trust Account would contravene the Commingling Prohibitions.
The Filer is, to the best of its knowledge, not in default of securities legislation of the Jurisdiction or any of the Non-principal Jurisdictions.
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 Requested Relief is granted provided that this decision, as it relates to the Jurisdiction or to a Non-principal Jurisdictions, will terminate upon the coming into force of any change in the MFDA IPC rules which would reduce the coverage provided by the MFDA IPC relating to Mutual Fund Cash and Other Cash held in the Trust Account.
“Rhonda Goldberg”
Rhonda Goldberg
Manager, Investment Funds Branch
Ontario Securities Commission