Headnote National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from paragraph 13.5(2)(b) of NI 31-103 to permit inter-fund trades between closed end funds funds, pooled funds and managed accounts – inter-fund trades will comply with conditions in subsection 6.1(2) of NI 81-107 including IRC approval or client consent – trades involving exchange-traded securities are permitted to occur at last sale price as defined in the Universal Market Integrity Rules - relief also subject to pricing and transparency conditions. Exemption also granted from conflict of interest trading prohibition in paragraph 13.5(2)(b) of NI 31-103 to permit in specie subscriptions and redemptions by separately managed accounts and pooled funds in pooled funds – Portfolio manager of managed accounts is also portfolio manager of pooled funds and is therefore a “responsible person” – Relief subject to certain conditions. Applicable Legislative Provisions National Instrument 31-103 – Registration Requirements and Exemptions – ss. 13.5, 15.1 National Instrument 81-107 – Independent Review Committee for Investment Funds – ss. 6.1(2) and 6.1(4).
November 26, 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
Canso Investment Counsel Ltd.
(the Filer)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for a decision granting an exemption from:
(a) the prohibition in section 13.5(2)(b) of National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) (the Trading Prohibition) against an adviser knowingly causing an investment portfolio managed by it (including an investment fund for which it acts as an adviser) to purchase or sell the securities of any issuer from or to the investment portfolio of an associate of a responsible person or any investment fund for which a responsible person acts as an adviser, such that the following purchases and sales (each purchase or sale, an Inter-Fund Trade) are permitted:
(i) Canso Credit Income Fund and any future closed end fund for which the Filer is the portfolio manager, an affiliate of the Filer is the investment fund manager and to which National Instrument 81-102 – Mutual Funds (NI 81-102) does not apply (each a Closed End Fund and collectively, the Closed End Funds) are permitted to enter into Inter-Fund Trades of securities with (a) another Closed End Fund and (b) any existing and future fund for which the Filer is the portfolio manager, an affiliate of the Filer is the investment fund manager, and to which NI 81-102 does not apply and that is sold solely pursuant to exemptions from the prospectus requirements (each a Pooled Fund and collectively, the Pooled Funds);
(ii) a Pooled Fund is permitted to enter into Inter-Fund Trades of securities with another Pooled Fund or a Closed End Fund; and
(iii) a fully managed account managed by the Filer for a client that is not a responsible person (each a Managed Account and collectively, the Managed Accounts) is permitted to enter into Inter-Fund Trades of securities with a Pooled Fund or Closed End Fund; and
(iv) the transactions listed in (i) to (iii) are permitted to be executed at the last sale price, as defined in the Market Integrity Rules of the Investment Industry Regulatory Organization of Canada, prior to the execution of the trade (the Last Sale Price) in lieu of the closing sale price (the Closing Sale Price) contemplated by the definition of “current market price of the security” in section 6.1(1)(a)(i) of National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107) on that trading day where the securities involved in the Inter-Fund Trade are exchange-traded securities (which term shall include Canadian and foreign exchange-traded securities),
(items (i) through (iv) collectively, the Inter-Fund Trade Relief); and
(b) to permit the following purchases and redemptions (each purchase and redemption, an In Specie Transaction):
(i) the purchase by a Managed Account of securities of a Pooled Fund, and the redemption of securities held by a Managed Account in a Pooled Fund, and as payment:
(A) for such purchase, in whole or in part, by the Managed Account making good delivery of portfolio securities to the Pooled Fund; and
(B) for such redemption, in whole or in part, by the Pooled Fund making good delivery of portfolio securities to the Managed Account; and
(ii) the purchase by a Pooled Fund of securities of another Pooled Fund and the redemption of securities held by a Pooled Fund in another Pooled Fund, and as payment for such purchase or redemption, in whole or in part, by making good delivery of portfolio securities to the applicable Pooled Fund,
(the above is the In Specie Relief),
(the Inter-Fund Trade Relief and the In Specie Relief are collectively referred to as 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 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 all provinces and territories of Canada other than Ontario.
Interpretation
Terms defined in MI 11-102 and National Instrument 14-101 Definitions, NI 31-103 and NI 81-107 have the same meaning if used in this decision, unless otherwise defined.
Representations
The decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation established under the laws of the Province of Ontario with its head office in Richmond Hill, Ontario, and is registered as a portfolio manager and exempt market dealer in Ontario, British Columbia, Alberta, Manitoba, Quebec and Nova Scotia. The Filer is, or will be, the portfolio manager for the Closed End Funds, the Pooled Funds and the Managed Accounts.
An affiliate of the Filer is, or will be, the investment fund manager for the Closed End Funds and the Pooled Funds (the Closed End Funds and the Pooled Funds are referred to collectively as the Funds and individually as a Fund).
The Filer, or an affiliate of the Filer, is or will be the trustee of Pooled Funds that are created as trusts and therefore the Pooled Funds may be associates of a responsible person. An affiliate of the Filer, may be the trustee of Closed End Funds that are created as trusts and therefore certain Closed End Funds may be associates of a responsible person.
Neither the Filer nor the Funds are in default of securities legislation in any jurisdiction.
Closed End Funds
Each Closed End Fund is or will be a trust, a limited partnership or a corporation established under the laws of Canada or one of the provinces or territories of Canada, as applicable. Each Closed End Fund is or will be a reporting issuer in at least one of the provinces or territories of Canada.
The investment fund manager of each Closed End Fund has established, or will establish, an independent review committee (IRC) in respect of each Closed End Fund in accordance with the requirements of NI 81-107.
Pooled Funds
Each of the Pooled Funds is, or will be, a limited partnership, a corporation or a trust established under the laws of Canada or one of the provinces or territories of Canada, as applicable. The Pooled Funds are not, and will not be, reporting issuers in any of the provinces or territories of Canada. Securities of the Pooled Funds are, or will be, distributed pursuant to exemptions from prospectus requirements.
An IRC will be established for the Pooled Funds. The IRC will be composed in accordance with section 3.7 of NI 81-107 and will comply with the standard of care set out in section 3.9 of NI 81-107. The IRC of a Pooled Fund will not approve an Inter-Fund Trade involving a Pooled Fund unless it has made the determination set out in subsection 5.2(2) of NI 81-107.
Managed Accounts
Each client of the Filer has executed an investment management agreement for a fully managed account (Client) with the Filer whereby the Filer has been appointed as portfolio manager for the investment portfolio of the Client with full discretionary authority. The investment management agreement or other documentation will contain the authorization of the Client, on behalf of the Managed Account, to engage in Inter-Fund Trades and In Specie Transactions with the Funds.
Any Inter-Fund Trade involving a Fund and a Managed Account will be approved by the IRC for the Fund.
Inter-Fund Trades
Each Inter-Fund Trade will be consistent with the investment objective of each applicable Fund and Managed Account.
At the time of an Inter-Fund Trade, the investment fund manager of the Fund will have policies and procedures in place to enable a Fund to engage in Inter-Fund Trades with the Funds and Managed Accounts.
An Inter-Fund Trade will be implemented by the Filer on behalf of the applicable Funds and Managed Accounts as follows:
(a) the Filer, as portfolio manager, will deliver the trade instructions in respect of a purchase or sale of a portfolio security by the applicable Fund or Managed Account to a trader on a trading desk with a registered dealer;
(b) the Filer, as portfolio manager, will deliver the trade instructions in respect of a sale or purchase of a portfolio security by another Fund or Managed Account to a trader on a trading desk with a registered dealer;
(c) the trader will be required to execute the trade on a timely basis as an Inter-Fund Trade between the applicable Funds or between a Fund and a Managed Account in accordance with the requirements of paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 provided that for exchange-traded securities, the Inter-Fund Trade may be executed at the Last Sale Price of the security prior to the execution of the trade (or, as may be instructed by the Filer, at the Closing Sale Price); and
(d) the trader will advise the Filer of the price at which the Inter-Fund Trade occurred.
- Due to the various investment objectives and investment strategies of the Funds and the Managed Accounts, it may be appropriate for different investment portfolios to acquire or dispose of the same securities at the same time, through the same trader and trading system. The Filer considers that effecting an Inter-Fund Trade may be beneficial in that it will reduce transaction costs on the acquisition or disposition of portfolio securities for the applicable Funds or Fund and Managed Account, there will be reduced market disruption associated with the trades, and there will be timing efficiencies with respect to the execution of the trades.
In Specie Transactions
The Filer wishes to be able to enter into the In Specie Transactions in accordance with the investment objectives of the applicable Pooled Funds and Managed Accounts. Absent the In Specie Relief, the Filer would be prohibited by subsection 13.5(2)(b) of NI 31-103 from engaging in In Specie Transactions.
In all In Specie Transactions, the Filer will value the portfolio securities to be delivered using the same values that are used to calculate the net asset value for the purpose of the issue price or redemption price of the securities of the Pooled Fund.
In all In Specie Transactions, the portfolio securities to be delivered will meet the investment criteria of the Pooled Fund or Managed Account that is acquiring the portfolio securities.
The only cost which will be incurred by a Pooled Fund or Managed Account for an In Specie Transaction is a nominal administrative charge levied by the custodian of the Pooled Fund or Managed Account in recording the trades and/or any charges by the dealer in transferring the securities in specie.
None of the securities which are the subject of an In Specie Transaction are or will be securities of related issuers of the Filer.
At the time of an In Specie Transaction, the Filer will have policies and procedures in place concerning In Specie Transactions.
The Filer considers that effecting In Specie Transactions will be beneficial to the Funds and Managed Accounts in that it will reduce transaction costs on the acquisition or disposition of securities for the applicable Pooled Fund or Managed Account and there will be reduced market disruption associated with the transactions.
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:
Inter-Fund Trade Relief
a) the Inter-Fund Trade is consistent with the investment objective of the Fund or the Managed Account;
b) the manager of a Fund refers the Inter-Fund Trade to the IRC of the Fund in the manner contemplated by section 5.1 of NI 81-107 and the manager of the Fund complies with section 5.4 of NI 81-107 in respect of any standing instructions an IRC provides in connection with the Inter-Fund Trade;
c) in the case of an Inter-Fund Trade between Funds:
(i) the IRC of each Fund has approved the Inter-Fund Trade in respect of the Fund in accordance with the terms of section 5.2(2) of NI 81-107; and
(ii) the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 except that for purposes of paragraph (e) of subsection 6.1(2) in respect of exchange-traded securities, the current market price of the security may be the Last Sale Price.
d) in the case of an Inter-Fund Trade between a Managed Account and a Fund:
(i) the IRC of the Fund has approved the Inter-Fund Trade in respect of such Fund in accordance with the terms of section 5.2(2) of NI 81-107;
(ii) the investment management agreement or other documentation in respect of the Managed Account authorizes the transaction; and
(iii) the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 except that for purposes of paragraph (e) of subsection 6.1(2) in respect of exchange-traded securities, the current market price of the security may be the Last Sale Price.
In Specie Relief
e) in connection with an In Specie Transaction where a Pooled Fund acquires securities of another Pooled Fund:
(i) the Pooled Fund acquiring the securities would, at the time of payment, be permitted to purchase the securities;
(ii) the securities are acceptable to the Filer as the portfolio manager of the Pooled Fund and are consistent with the investment objective of the Pooled Fund acquiring the securities;
(iii) the value of the securities is equal to the issue price of the securities of the Pooled Fund valued as if the securities were portfolio assets of that Pooled Fund; and
(iv) each Pooled Fund will keep written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Fund and the value assigned to such securities for five years after the end of the financial year, the most recent two years in a reasonably accessible place;
f) in connection with an In Specie Transaction where a Pooled Fund redeems securities of another Pooled Fund:
(i) the securities are acceptable to the Filer as the portfolio manager of the Pooled Fund and consistent with the investment objective of the Pooled Fund;
(ii) the value of the securities is equal to the amount at which those securities were valued by the Pooled Fund in calculating the net asset value per security used to establish the redemption price; and
(iii) each Pooled Fund will keep written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered by the Pooled Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;
g) in connection with an In Specie Transaction where a Managed Account acquires securities of a Pooled Fund:
(i) the investment management agreement or other documentation in respect of the Managed Account authorizes the In Specie Transaction;
(ii) the Pooled Fund would, at the time of payment, be permitted to purchase the securities to be delivered;
(iii) the securities are acceptable to the Filer as portfolio manager and are consistent with the investment objective of the Pooled Fund;
(iv) the value of the portfolio securities is at least equal to the issue price of the securities of the Pooled Fund for which they are used as payment, valued as if the securities were portfolio assets of that Pooled Fund;
(v) the account statement next prepared for the Managed Account will describe the securities delivered to the Pooled Fund and the value assigned to such securities; and
(vi) the Pooled Fund will keep written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;
h) in connection with an In Specie Transaction where a Managed Account redeems securities of a Pooled Fund:
(i) the investment management agreement or other documentation in respect of the Managed Account authorizes the In Specie Transaction and such authorization has not been revoked;
(ii) the securities meet the investment criteria of the Managed Account acquiring the securities and are acceptable to the Filer;
(iii) the value of the securities is equal to the amount at which those securities were valued by the Pooled Fund in calculating the net asset value per security used to establish the redemption price;
(iv) the account statement next prepared for the Managed Account will describe the securities delivered to the Managed Account and the value assigned to such securities; and
(v) the Pooled Fund will keep written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered by the Pooled Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place; and
i) the Filer does not receive any compensation in respect of any In Specie Transaction and, in respect of any delivery of securities further to an In Specie Transaction, the only charges paid by the Managed Account or Pooled Fund, as applicable, is the commission charged by the dealer executing the trade and/or any administrative charges levied by the custodian.
“Vera Nunes”
Vera Nunes
Assistant Manager, Investment Funds Branch
Ontario Securities Commission