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 – Relief permits the fund manager to commingle client cash related to the 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, sections 11.1(1)(b) and section 19.1.
March 9, 2011
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 for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting the following:
relief under section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) from the requirements of section 11.1(1)(b) of NI 81-102 (the “Commingling Prohibition”) 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 (the Commingling Relief); and
revocation of the Decision Document (the “Prior Decision”) granted by the principal regulator on May 5, 2009 in favour of the Filer (the “Revocation Relief”).
(The Commingling Relief and the Revocation 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 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 a service provider to a number of mutual funds sponsored by it (the Funds) and is also the manager and trustee of the Funds.
The Filer is registered as an investment fund manager in Ontario. The Filer is also registered as an adviser in the category of portfolio manager in each of the provinces and territories of Canada and as commodity trading manager in Ontario.
Securities of the Funds are generally sold through registered dealers (Dealers).
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 institutions 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 maintains separate Trust Accounts for Canadian monies (the “Canadian Trust Accounts”) and U.S. monies (the “U.S. Trust Accounts”). 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.
Canadian Imperial Bank of Commerce (CIBC) is a federally regulated bank. The Filer is a wholly-owned subsidiary of CIBC.
CIBC intends to accept Canadian dollar cash deposits into Canadian high interest savings accounts (Canadian Deposits) and U.S. dollar cash deposits into U.S high interest savings account (U.S. Deposits) from Investors via Dealers (collectively 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 provides 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 Canadian 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. The U.S. Deposits are ineligible for CDIC insurance as CDIC does not insure any accounts or products in U.S. dollars. 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 Canadian Trust Accounts or U.S. Trust Accounts, as applicable. Investors’ Other Cash will then be forwarded by the Filer from its Trust Accounts to CIBC, while Investor’s Mutual Fund Cash will be forwarded by the Filer from the Trust Account to the Funds’ custodian that will apply it to the individual Fund accounts in the custodian’s name. 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 in the Canadian Deposits will be eligible for deposit insurance from CDIC subject to CDIC rules and regulations. The Filer also maintains insurance coverage in accordance with section 12.5 of National Instrument 31-103- Registration Requirements and Exemptions.
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 the 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 Cash 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 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.
Upon obtaining the Exemption Sought, the Filer will no longer rely on the Prior Decision.
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 – Relief permits the fund manager to commingle client cash related to the 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, sections 11.1(1)(b) and section 19.1.