Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions - relief from section 4.1 of NI 81-102 for dealer-managed mutual funds to invest in distributions of debt securities for which dealer-manager acts as underwriter during distribution period or 60 day period following distribution – debt securities will not have “approved rating” by “credit rating organization” as required by subsection 4.1(4) – limited supply of new debt offerings have approved ratings, and trend is expected to continue – dominant position of related dealers in debt underwriting limits funds’ ability to acquire debt securities for the funds – all purchases must be consistent with fund investment objectives and subject to approval of independent review committee – debt offerings must have at least one underwriter in addition to related dealer, at least one arm’s length purchaser purchasing at least 5% of the offerings – related funds can collectively purchase no more than 20% of offering and must pay no more than lowest price paid by arm’s length purchaser(s) – funds must not be money market fund funds and cannot purchase asset backed commercial paper pursuant to relief – National Instrument 81-102 – Mutual Funds. Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, sections 4.1, 19.1.
June 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 GOODMAN & COMPANY, INVESTMENT COUNSEL LTD. AND SCOTIA ASSET MANAGEMENT L.P. (the “Filers”)
AND
IN THE MATTER OF THE MUTUAL FUNDS to which National Instrument 81-102 Mutual Funds (“NI 81-102”) applies and of which one of the Filers is, or will be, the adviser, sub-adviser, and/or manager (each a “Fund” and, collectively, the “Funds”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers, in respect of the Filers and the Funds, for a decision under the securities legislation of the Jurisdiction (the “Legislation”) for relief (the “Requested Relief”) under section 19.1 of NI 81-102 from section 4.1(1) of NI 81-102 (the “Investment Prohibition”) to permit the investment by the Funds in debt securities of an issuer during the period of the distribution (the “Distribution”) or during the period of 60 days after the Distribution (the “60-Day Period”), notwithstanding the involvement of one of the Filers’ associates or affiliates as an underwriter in the Distribution and notwithstanding that the debt securities do not have an “approved rating” by an “approved credit rating organization” as contemplated by section 4.1(4)(b) of NI 81-102.
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 on in Alberta, British Columbia, Saskatchewan, Manitoba, Québec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, Yukon Territory, Northwest Territories and Nunavut Territory (collectively, the “Non-Principal Jurisdictions”).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions, NI 81-102 and National Instrument 81-107 Independent Review Committee for Investment Funds (“NI 81-107”) have the same meaning if used in this decision, unless otherwise defined. For greater certainty, the term “approved rating”, as used in section 4.1(4)(b) of NI 81-102, has the meaning given to such term in National Instrument 44-101 Short Form Prospectus Distributions.
Representations
This decision is based on the following facts represented by a Filer in respect of the Filer and the Funds of the Filer:
The Filers
One of the Filers is or will be the manager, portfolio adviser or sub-adviser of each of the Funds.
Neither of the Filers nor any of the Funds is in default of securities legislation in the Jurisdiction or in any of the Non-Principal Jurisdictions.
Each of the Filers is an affiliate of Scotia Capital Inc. and may become an affiliate or associate of additional entities in the future which may act as an underwriter in a Distribution (each of which is a “Related Dealer”, and collectively the “Related Dealers”).
The Funds
Each of the Funds is, or will be, a mutual fund established under the laws of Ontario or one of the other Jurisdictions, and none of the Funds is or will be a “money market fund” as defined in NI 81-102.
The securities of each of the Funds are, or will be, qualified for distribution pursuant to a simplified prospectus and annual information form that has been, or will be, prepared and filed in accordance with the securities legislation of each of the Jurisdictions. Each of the Funds is or will be a dealer-managed mutual fund that is or will be a reporting issuer in one or more of the Jurisdiction and the Non-Principal Jurisdictions.
Each of the Funds has or will have an independent review committee (“IRC”) appointed under NI 81-107. The IRC complies, or will comply, with the standard of care set out in section 3.9 of NI 81-107.
The Funds require the Requested Relief from the Investment Prohibition because:
(a) there is a limited supply of debt securities issued by issuers other than the federal or a provincial government (“Non-Government Debt Securities”);
(b) frequently, the only source of new issues of Non-Government Debt Securities will be offerings that are, in whole or in part, underwritten by a Related Dealer; and
(c) Non-Government Debt Securities that the Filers wish to purchase for the Funds may not have an “approved rating” by an “approved credit rating organization”.
Each Filer considers that a Fund managed or advised by it may be prejudiced if it cannot purchase, during a Distribution or in the 60-Day Period, Non-Governmental Debt Securities that are consistent with the Fund’s investment objective. Forgoing participation in these investment opportunities may be a significant opportunity cost for the relevant Funds, as they would be denied timely access to these securities purely as a result of the coincidental participation of a Related Dealer in the transaction and the lack of a credit rating of the securities distributed.
The Filers operate independently from the Related Dealers with regard to their respective investment decisions. Information and influence barriers ensure that a Fund has no involvement in a Related Dealer’s function as underwriter. Moreover, transactions executed in reliance on the Requested Relief represent the business judgment of the applicable portfolio adviser uninfluenced by considerations other than the best interests of the applicable Fund. This principle is reflected in the policies and procedures that have been implemented and approved by the IRC for dealing with related parties.
The details of a Distribution and a Related Dealer’s involvement as an underwriter in such Distribution will not be known to a Filer sufficiently long enough in advance to be practical to make an application for relief on a case-by-case basis. Furthermore, a case-by-case approach is not economical or otherwise efficient for the Filers or the Funds.
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 from the Investment Prohibition is granted in respect of purchases of Non-Governmental Debt Securities by each Fund, provided that:
(a) at the time of each investment, the purchase is consistent with, or is necessary to meet, the investment objective of the Fund and represents the business judgment of the portfolio adviser of the Fund uninfluenced by considerations other than the best interests of the Fund or in fact is in the best interests of the Fund;
(b) the manager of the Fund complies with section 5.1 of NI 81-107 and the manager and IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment in the securities;
(c) at the time of the investment, the IRC of the Fund has approved the transaction in accordance with section 5.2(2) of NI 81-107;
(d) if the securities are acquired during the Distribution,
(i) at least one underwriter acting as underwriter in the Distribution is not a Related Dealer,
(ii) at least one purchaser who is independent and arm’s length to the Fund(s) and the Related Dealers must purchase at least 5% of the securities distributed under the Distribution,
(iii) the price paid for the securities by a Fund in the Distribution shall be no higher than the lowest price paid by any of the arm’s length purchasers who participate in the Distribution, and
(iv) a Fund and any related Funds for which a Filer or its affiliate or associate acts as manager and/or portfolio adviser can collectively acquire no more than 20% of the securities distributed under the Distribution in which a Related Dealer acts as underwriter;
(e) if the securities are acquired in the 60-Day Period,
(i) the ask price of the securities is readily available as provided in Commentary 7 to section 6.1 of NI 81-107,
(ii) the price paid for the securities by a Fund is not higher than the available ask price of the security, and
(iii) the purchase is subject to market integrity requirements as defined in NI 81-107;
(f) the securities acquired by the Funds pursuant to the Requested Relief cannot be asset-backed commercial paper; and
(g) no later than the time a Fund files its annual financial statements, the manager of the Fund will file the particulars of each investment made by the Fund pursuant to the Requested Relief during its most recently completed financial year.
“Vera Nunes”
Vera Nunes
Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR NOS. 1699003, 1699004,
1699005, 1699008, 1699010