Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions - Exemption granted to permit affiliated portfolio managers to engage in in specie purchases and redemptions by separately managed accounts and pooled funds of mutual funds and pooled funds.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, ss.13.5(2)(b)(ii) and (iii).
June 18, 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
HOWSON TATTERSALL INVESTMENT COUNSEL LIMITED (HTIC)
AND
MACKENZIE FINANCIAL CORPORATION (MFC)
DECISION
Background
The principal regulator (the Principal Regulator) in the Jurisdiction has received an application from HTIC and MFC for a decision under the securities legislation of the Jurisdiction (the Legislation) providing an exemption from:
(a) the prohibition in section 13.5(2)(b)(ii) of National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it (including an investment fund for which it acts as an adviser) to purchase or sell a security from or to the investment portfolio of an associate of a responsible person; and
(b) the prohibition in section 13.5(2)(b)(iii) of NI 31-103 that prohibits a registered adviser from knowingly causing an investment portfolio managed by it (including an investment fund for which it acts as an adviser) to purchase or sell a security from or to the investment portfolio of any investment fund for which a responsible person acts as an adviser
in order to permit HTIC, MFC and any affiliate thereof (together, the Filers and each, a Filer) to effect In Specie Transfers (as defined below) of securities between (i) Separately Managed Accounts and Mutual Funds, (ii) Separately Managed Accounts and Pooled Funds, (iii) Pooled Funds and Mutual Funds, and (iv) Pooled Funds and Pooled Funds (all as defined below)
(collectively, the Exemption Sought).
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 Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than Ontario (the Passport Jurisdictions, together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in MI 11-102 and National Instrument 14-101 – Definitions, National Instrument 81-102 – Mutual Funds (NI 81-102), National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107) and NI 31-103 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filers:
HTIC is a corporation organized under the Business Corporations Act (Ontario). HTIC is registered as a portfolio manager in all the provinces and territories of Canada and is registered as an exempt market dealer in Ontario. HTIC is a wholly-owned subsidiary of MFC. The head office of HTIC is located in Ontario.
MFC is a corporation organized under the Business Corporations Act (Ontario). MFC is registered as a portfolio manager in the provinces of Ontario, Manitoba and British Columbia and is registered as an exempt market dealer in Ontario. The head office of MFC is located in Ontario.
Each Filer acts as the portfolio manager to existing investment funds (the Existing Funds) for which MFC acts as investment fund manager. The Existing Funds, together with any other funds established in the future for which a Filer acts as the portfolio manager and MFC acts as investment fund manager, are collectively hereinafter referred to as the “Funds”.
Each of the Funds is or will be an open-end mutual fund, and each of them is or will be formed as either a trust established under the laws of the Province of Ontario or as a class of shares of a mutual fund corporation.
Certain of the Funds (the Mutual Funds) are or will be distributed in all of the provinces and territories of Canada pursuant to simplified prospectuses and annual information forms filed under National Instrument 81-101 – Mutual Fund Prospectus Disclosure and, accordingly, are or will be governed by NI 81-107. The remaining Funds (the Pooled Funds) are or will be distributed in all of the provinces and territories of Canada pursuant to exemptions from the prospectus requirement and, accordingly, are not, or will not be, subject to NI 81-107.
Neither the Filers nor any of the Funds is in default of the securities legislation of any of the Jurisdictions.
Each Filer provides discretionary portfolio management services to non-Fund clients (each a Client) through separately managed accounts (Separately Managed Accounts) governed by investment management agreements (Managed Account Agreements) under which the Filer has full discretionary authority to purchase and sell securities and other assets in accordance with the mandate of the Clients.
No Client is or will be a “responsible person” of the Filers as defined in subsection 13.5(1) of NI 31-103.
Based on the size of a Client’s assets and depending on the allocation of a Client’s assets to a particular asset class, a Filer acting as portfolio manager will determine whether the Client’s assets in the Separately Managed Account should be managed by purchasing and selling individual securities or should instead be managed by causing the Separately Managed Account to invest in one or more of the Funds.
Each of the Filers may from time to time determine that assets that are being managed in a Separately Managed Account would be better served by instead investing in one or more of the Funds. A Filer may also determine that a new Client that holds an existing portfolio of securities when they retain the Filer would be better served by investing in one or more of the Funds. In order to facilitate this transition of a Separately Managed Account into a Fund, the Filers wish to be able to cause Separately Managed Accounts to subscribe for units or shares of the relevant Funds and to pay for such subscription by causing the relevant Separately Managed Account to deliver securities to the relevant Fund.
In order to facilitate portfolio rebalancings that require the redemption of securities of a Fund, a Filer may wish to pay the proceeds of redemption by causing the Fund to deliver certain portfolio securities in kind. The Filer may then cause the Client’s Separately Managed Account to subscribe for securities of another Fund or Funds using such portfolio securities, or it may simply hold the portfolio securities on behalf of the Client in the Separately Managed Account.
A Client may also decide to terminate its relationship with the relevant Filer or to change its mandate and may request an in kind redemption of its securities of a Fund.
In addition to purchases and redemptions of securities of a Fund by a Separately Managed Account being satisfied by making good delivery of securities, the Filers wish to be able to enter into such transactions for purchases and redemptions between a Pooled Fund and a Mutual Fund or between two Pooled Funds. This will occur where, as part of its portfolio management, a Pooled Fund wishes to obtain exposure to certain investments or category of asset classes invested in by a Mutual Fund or another Pooled Fund by investing in securities of the Mutual Fund or other Pooled Fund. The Filers wish to be able to enter into transactions on behalf of a Pooled Fund pursuant to which the Pooled Fund would pay for securities issued by a Mutual Fund or other Pooled Fund by making good delivery of securities held by the Pooled Fund. Similarly, following a redemption of securities of a Fund, the Filers wish to be able to pay the proceeds of redemption by making good delivery of securities held by the Mutual Fund or other Pooled Fund to the Pooled Fund, provided that those securities meet the investment criteria of the Pooled Fund.
In each of the circumstances described in paragraphs 10 through 13, the Filers propose to effect such purchases and redemptions of securities of a Fund by transferring securities between a Separately Managed Account and a Fund or between a Pooled Fund and a Fund (each, an In Specie Transfer). These transactions will either involve the payment of the purchase price for securities of a Fund or the payment of the redemption price of securities of a Fund by an In Specie Transfer between a Separately Managed Account or a Pooled Fund and a Fund.
Effecting In Specie Transfers will allow the Filers to manage each asset class more effectively and reduce transaction costs for the Separately Managed Account and the Fund. The only cost which will be incurred by a Fund or Separately Managed Account for an In Specie Transfer is a nominal administrative charge levied by the custodian of the Separately Managed Account or Fund in recording the trades (the Custodial Charge).
None of the securities which are the subject of In Specie Transfers are or will be securities of related issuers of the Filers.
The Filers make their Clients aware of the relationship between themselves and the Funds and Clients specifically consent or will consent to invest in the Funds prior to entering into In Specie Transfers.
MFC has established an independent review committee (IRC) in respect of each Mutual Fund in accordance with the requirements of NI 81-107.
At the time of an In Specie Transfer, MFC, as the manager of the Mutual Funds, will have in place policies and procedures in connection with the Mutual Funds engaging in In Specie Transfers with the Separately Managed Accounts and Pooled Funds.
The securities that are the subject of an In Specie Transfer will be valued using the same values to be used on the day of the transfer to calculate the net asset value for the purpose of calculating the issue price or redemption price of securities of a Fund.
Prior to entering into an In Specie Transfer, the applicable Filer will review the proposed transaction to ensure that the conditions of the Exemption Sought are met at the time of the transaction and to determine that the transaction represents the business judgment of the Filer exercising its discretion on behalf of the Fund and/or the Separately Managed Account, uninfluenced by considerations other than the best interests of the Fund and/or Separately Managed Account.
Since each Filer is the portfolio manager of applicable Separately Managed Accounts and Funds, each Filer would be considered to be a “responsible person” within the meaning of that term in NI 31-103. Each Fund that is organized as a trust is or will be an “associate” of MFC under the Legislation because MFC serves or will serve as trustee of a Fund.
In the absence of the Exemption Sought, the Filers would be prohibited from (a) causing a Separately Managed Account to execute an In Specie Transfer with a Fund; and (b) causing a Fund to execute an In Specie Transfer with a Managed Account or with a Pooled Fund.
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 provided that:
(a) in connection with an In Specie Transfer where a Separately Managed Account purchases securities of a Fund:
(i) where the Fund is a Mutual Fund:
(a) MFC, as the manager of the Mutual Fund, obtains the approval of the IRC of the Mutual Fund in respect of an In Specie Transfer in accordance with the terms of section 5.2(2) of NI 81-107; and
(b) MFC, as the manager of the Mutual Fund, and the IRC of the Mutual Fund comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In Specie Transfer;
(ii) the relevant Filer obtains the prior written consent of the Client of the relevant Separately Managed Account before it engages in any In Specie Transfer;
(iii) the Fund would, at the time of payment, be permitted to purchase the securities that are the subject of the In Specie Transfer;
(iv) the securities that are the subject of the In Specie Transfer are acceptable to the portfolio manager of the Fund and consistent with the Fund's investment objectives;
(v) the value of the securities that are the subject of the In Specie Transfer is equal to the issue price of the securities of the Fund for which they are used as payment, valued as if the securities were portfolio assets of the Fund;
(vi) the account statement next prepared for the Separately Managed Account describes the securities delivered to the Fund and the value assigned to such securities; and
(vii) the Fund will keep written records of each In Specie Transfer in a financial year of the Fund, reflecting details of the securities delivered to the Fund and the value assigned to such securities, for such time and in such form and location as required by section 11.6 of NI 31-103;
(b) in connection with an In Specie Transfer where a Separately Managed Account redeems securities of a Fund:
(i) where the Fund is a Mutual Fund:
(a) MFC, as the manager of the Mutual Fund, obtains the approval of the IRC of the Mutual Fund in respect of an In Specie Transfer in accordance with the terms of section 5.2(2) of NI 81-107; and
(b) MFC, as the manager of the Mutual Fund, and the IRC of the Mutual Fund comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In Specie Transfer;
(ii) the relevant Filer obtains the prior written consent of the Client of the relevant Separately Managed Account to the payment of redemption proceeds in the form of an In Specie Transfer before it engages in an In Specie Transfer;
(iii) the securities that are the subject of the In Specie Transfer are acceptable to the portfolio manager of the Separately Managed Account and consistent with the Separately Managed Account's investment objective;
(iv) the value of the securities that are the subject of the In Specie Transfer is equal to the amount at which those securities were valued in calculating the net asset value per security of the applicable Fund used to establish the redemption price;
(v) the holder of the Separately Managed Account has not provided notice to terminate its Managed Account Agreement with the relevant Filer;
(vi) the account statement next prepared for the Separately Managed Account describes the securities delivered to the Separately Managed Account and the value assigned to such securities; and
(vii) the Fund will keep written records of each In Specie Transfer in a financial year of the Fund, reflecting details of the securities delivered by the Fund and the value assigned to such securities, for such time and in such form and location as required by section 11.6 of NI 31-103;
(c) in connection with an In Specie Transfer where a Pooled Fund purchases securities of a Fund:
(i) where the Fund is a Mutual Fund:
(a) MFC, as the manager of the Mutual Fund, obtains the approval of the IRC of the Mutual Fund in respect of an In Specie Transfer in accordance with the terms of section 5.2(2) of NI 81-107; and
(b) MFC, as the manager of the Mutual Fund, and the IRC of the Mutual Fund comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In Specie Transfer;
(ii) the Fund would, at the time of payment, be permitted to purchase the securities that are the subject of the In Specie Transfer;
(iii) the securities that are the subject of the In Specie Transfer are acceptable to the portfolio manager of the Fund and consistent with the Fund’s investment objectives;
(iv) the value of the securities that are the subject of the In Specie Transfer is equal to the applicable issue price of the securities of the Fund for which they are used as payment, valued as if the securities were portfolio assets of the Fund; and
(v) the Fund will keep written records of each In Specie Transfer in a financial year of the Fund, reflecting details of the securities delivered to the Fund and the value assigned to such securities, for such time and in such form and location as contemplated by section 11.6 of NI 31-103;
(d) in connection with an In Specie Transfer where a Pooled Fund redeems securities of a Fund:
(i) where the Fund is a Mutual Fund:
(a) MFC, as the manager of the Mutual Fund, obtains the approval of the IRC of the Mutual Fund in respect of an In Specie Transfer in accordance with the terms of section 5.2(2) of NI 81-107; and
(b) MFC, as the manager of the Mutual Fund, and the IRC of the Mutual Fund comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In Specie Transfer;
(ii) the securities that are the subject of the In Specie Transfer are acceptable to the portfolio manager of the Pooled Fund and consistent with the Pooled Fund’s investment objective;
(iii) the value of the securities that are the subject of the In Specie Transfer is equal to the amount at which those securities were valued in calculating the net asset value per security of the applicable Fund used to establish the redemption price; and
(iv) the Fund will keep written records of each In Specie Transfer in a financial year of the Fund, reflecting details of the securities delivered by the Fund and the value assigned to such securities, for such time and in such form and location as contemplated by section 11.6 of NI 31-103; and
(e) the Filers do not receive any compensation in respect of any In Specie Transfer and, in respect of any delivery of securities further to an In Specie Transfer, the only charge paid by the Separately Managed Account or the Fund is the Custodial Charge.
“Darren McKall”
______________________________
Darren McKall
Assistant Manager, Investment Funds Branch
ONTARIO SECURITIES COMMISSION