Headnote National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from paragraph s. 4.2(1) of NI 81-102 to permit inter-fund trades between public mutual funds and pooled funds – inter-fund trades will comply with conditions in subsection 6.1(2) of NI 81-107 including IRC approval – relief contemplates both debt securities and mortgages – interfund trades in mortgages must comply with certain provisions of NP 29 and NI 81-102 – mortgages traded must be valued by an independent provider of mortgage valuation services - relief also subject to pricing and transparency conditions. Applicable Legislative Provisions
National Instrument 31-103 – Registration Requirements and Exemptions – s. 4.2 and 15.1. National Instrument 81-107 – Independent Review Committee for Investment Funds – ss. 6.1(2) and 6.1(4).
September 7, 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 RBC Global Asset Management Inc. (the Filer)
and
the Funds (as defined below)
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 relief from section 4.2 of National Instrument 81-102 Mutual Funds (the NI 81-102 Self-Dealing Restrictions) to permit the purchase or sale of debt securities and mortgages (each purchase or sale of securities, an Inter-Fund Trade) between Public Funds (as defined below) and Pooled Funds (as defined below) (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 on in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (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 they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is registered under securities legislation in each of the Jurisdiction and the Non-Principal Jurisdictions in the categories of portfolio manager and exempt market dealer and under the Securities Act (Ontario) as an investment fund manager. The Filer is duly organized under the Canada Business Corporations Act and has its head office in Ontario.
The Filer or an affiliate of the Filer, is the manager and promoter of mutual funds that are either offered for sale pursuant to a simplified prospectus and annual information form filed in certain provinces and territories of Canada (Public Funds) or offered for sale on a private placement basis pursuant to prospectus exemptions under applicable securities legislation (Pooled Funds and together with the Public Funds, Funds), and the Filer or an affiliate of the Filer will be the manager and promoter of future Funds.
The Filer or an affiliate of the Filer is the portfolio manager of the existing Funds, and the Filer expects that the Filer or an affiliate of the Filer will be the portfolio manager of future Funds.
RBC Dexia Investor Services Trust is the trustee of certain of the existing Funds. The Filer is the trustee for all other existing Funds, and the Filer expects that either the Filer or RBC Dexia Investor Services Trust will be the trustee for all future Funds.
None of the Pooled Funds will be a reporting issuer. Securities of each of the Pooled Funds are or will be qualified for distribution pursuant to exemptions from the prospectus requirement. Each Pooled Fund may be an “associate” of the Filer or RBC Dexia Investor Services Trust as appropriate, in their capacity as trustee of a Fund.
The Filer or an affiliate of the Filer, as manager of a Public Fund, has established or will establish an independent review committee (IRC) for each of the Public Funds in accordance with the requirements of NI 81-107 Independent Review Committees for Investment Funds (NI 81-107). The mandate of each IRC includes or will include the review and approval of the transactions covered by the Exemption Sought.
An Inter-Fund Trade involving a Public Fund will be referred to the IRC of the Public Fund as contemplated by section 5.2(1) of NI 81-107. The IRC of the Public Fund will not approve such purchase or sale transaction unless it has made the determination set out in section 5.2(2) of NI 81-107.
The Filer or an affiliate of the Filer, as manager of a Pooled Fund, does not intend to establish a new IRC for the Pooled Funds. Instead, the mandate of the IRC of the Public Funds will be expanded to include the review and approval of Inter-Fund Trades on behalf of each Pooled Fund. In its review of Inter-Fund Trades on behalf of a Pooled Fund, the IRC will comply with the standard of care set out in section 3.9 of NI 81-107. The IRC will not approve an Inter-Fund Trade on behalf of a Pooled Fund unless the IRC has made the determination set out in section 5.2(2) of NI 81-107.
Inter-Fund Trades involving a Fund will be referred to the IRC under subsection 5.2(1) of NI 81-107 and the manager of such Fund will comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade.
From time to time, the Filer may wish to transfer individual securities, including debt securities and mortgages (Mortgages), held on behalf of a Fund, to another Fund.
The Filer is of the view that where the portfolio securities of the selling Fund are compatible with the investment objectives and strategies of the purchasing Fund, it may be in the best interests of the applicable Funds engage in an Inter-Fund Trade involving the sale portfolio securities from the selling Fund to the purchasing Fund. The Filer will only engage in Inter-Fund Trades between Funds if, in its view, engaging in an Inter-Fund Trade as opposed to similar open-market trades is in the best interests of each of the parties to the trade.
Inter-Fund Trades of debt securities will be executed through a registered dealer or otherwise be subject to market integrity requirements as defined in s. 6.1(1) of NI 81-107.
Section 4.3(1) of NI 81-102 states that the NI 81-102 Self-Dealing Restrictions do not apply with respect to a purchase or sale of securities if, among other things, the price payable for the security is not more than the ask price as reported by any available public quotation in common use, in the case of a purchase, or not less than the bid price as reported by any available quotation in common use, in the case of a sale.
The Filer is not able to rely on section 4.3(1) of NI 81-102 with respect to transactions in Mortgages because bid and ask prices for mortgages are not reported through any available public quotation in common use.
National Policy Statement No. 29 (NP 29) sets out guidelines relating to investments in mortgages by a mutual fund that is subject to NP 29, including with respect to the determination of the net asset value of mortgages, and provides certain protections to investors in such funds.
Each mortgage held by Funds managed or advised by Phillips, Hager & North Investment Management, an operating division of the Filer, (the PH&N Funds) is valued and serviced by CMLS Financial Ltd. (CMLS). CMLS is an affiliate of Penmor Mortgage Capital Corporation (Penmor). Penmor is the originator for each of the mortgages held by the PH&N Funds. CMLS and Penmor are not related to the Filer; however, two officers of the Filer serve on Board of Directors of Penmor and CMLS on a voluntary basis. Other than the PH&N Funds, the Funds currently do not hold any mortgages valued by CMLS.
CMLS is a mortgage valuator which uses a risk-based system to independently value mortgages for its clients. CMLS’s valuations of the mortgages held by the PH&N Funds have been used by Phillips, Hager & North Investment Management without alteration or adjustment. Accordingly, pursuant to the Exemption Sought, each Mortgage traded between the Funds or between a Fund and a managed account will be valued by CMLS or another independent provider of mortgage valuation services at the price determined in accordance with the provisions of Section III(2)(2.3) of NP 29 and such valuation will be used to interfund trade any such Mortgage without alteration by the Filer.
Section 4.3(2) of NI 81-102 states that the NI 81-102 Self-Dealing Restrictions do not apply with respect to a purchase or sale of a class of debt securities by a mutual fund from or to, another mutual fund managed by the same manager or an affiliate of the manager, if, at the time of the transaction, among other things, the mutual fund is purchasing from, or selling to, another mutual fund to which NI 81-107 applies and the transaction complies with section 6.1(2) of NI 81-107. The Filer is unable to rely on the exemption from section 4.2(1) of NI 81-102 for inter-fund trades in debt securities codified in subsection 4.3(2) of NI 81-102 because the Pooled Funds are not subject to NI 81-107.
At the time of an Inter-Fund Trade, the Filer (or its affiliate), as manager of a Public Fund, will have in place policies and procedures applicable to Inter-Fund Trades between Public Funds and Pooled Funds.
When a Filer, or an affiliate of a Filer, engages in an Inter-Fund Trade which involves the purchase and sale of securities between a Public Fund and a Pooled Fund it will generally follow the following procedures or other procedures approved by the applicable IRC:
a. the portfolio manager of the Filer or affiliate of the Filer will request the approval of the chief compliance officer of the Filer or affiliate of the Filer or his or her designated alternate, or of another designated individual, to execute a purchase or a sale of a security by a Fund or Managed Account as an Inter-Fund Trade;
b. upon receipt of the required approval, the portfolio manager of the Filer or affiliate of the Filer will either place the trade directly or deliver the trade instructions to a trader on a trading desk of the Filer or affiliate of the Filer;
c. upon receipt of the trade instructions and the required approval, the trader on the trading desk will have the discretion to execute the trade as an Inter-Fund Trade 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, determined at the time of the receipt of the required approval prior to the execution of the trade; and
d. the policies applicable to the trading desk of the Filer or affiliate of the Filer will require that all orders are to be executed on a timely basis.
Each Inter-Fund Trade will be consistent with the investment objective of the Public Fund.
The Filer has determined that it would be in the interests of the Public Funds to receive the Exemption Sought for the following reasons:
it will result in cost and timing efficiencies in respect of the execution of transactions for the Public Funds; and
it will result in less complicated and more reliable compliance procedures, as well as simplified and more efficient monitoring thereof, for the Filer, or an affiliate of the Filer, in connection with the execution of transactions on behalf of Public Funds.
A predecessor entity of the Filer, Phillips, Hager & North Investment Management Ltd., was granted an exemption from the NI 81-102 Self-Dealing Restrictions pursuant to a decision dated November 29, 2007 (the Existing Relief), which permits the purchase or sale of debt securities and mortgages between Public Funds and Pooled Funds or Managed Accounts.
A predecessor entity of the Filer, RBC Asset Management Inc., was granted an exemption from the application of section 6.1(4) of NI 81-107 to the extent that it requires a purchase or sale of an exchange traded security between one Public Fund and another Public Fund to comply with section 6.1(2)(e) of NI 81-107 to permit Inter-Fund Trades between one Public Fund and another Public Fund at the Last Sale Price pursuant to a decision dated January 18, 2008 (the Last Sale Price Relief).
The Filer was formed through the amalgamation of Phillips, Hager & North Investment Management Ltd., with its affiliate, RBC Asset Management Inc., effective November 1, 2010 (the Amalgamation). Following the Amalgamation, the head office of the Filer is located in Ontario. The Exemption Sought is requested to provide the Filer, as the existing amalgamated entity, with the Exemption Sought going forward in its own capacity.
Should the Exemption Sought be granted, neither the Filer, nor any affiliate of the Filer, will rely on the Existing Relief or the Last Sale Price Relief.
None of the Filer, or any affiliate of the Filer or the Funds, is in default of any requirements of securities legislation in the Jurisdiction or any Non-Principal Jurisdiction.
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) the Inter-Fund Trade is consistent with the investment objective of the Fund or Managed Account;
(b) the Filer, or an affiliate of the Filer, as manager of a Fund, refers the Inter-Fund Trade involving a Fund to the IRC in the manner contemplated by section 5.1 of NI 81-107 and the manager and the IRC comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade;
(c) the IRC of each Fund has approved the Inter-Fund Trade in respect of the Fund in accordance with subsection 5.2(2) of NI 81-107;
(d) the Inter-Fund Trade of debt securities complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107;
(e) with respect to each Inter-Fund trade of Mortgages:
(i) each Mortgage traded in reliance on the Exemption Sought will comply with Section III (2)(2.1) (b), (c), (e), (f) and (i) of NP 29;
(ii) each Mortgage traded between a Pooled Fund and a NI 81-102 Fund in reliance on the Exemption Sought will be a guaranteed mortgage as defined in NI 81-102;
(iii) each Mortgage traded between a Pooled Fund and a NI 81-102 Fund subject to NP 29 under s. 20.4 of NI 81-102, will comply with Section III(2)(2.1)(g) of NP 29;
(iv) each Mortgage traded between the Funds will be valued by CMLS or another independent provider of mortgage valuation services, at the price determined in accordance with the provisions of Section III (2)(2.3) Arm’s Length Transactions Investor’s Yield of NP 29;
(v) the applicable Fund(s) keeps the written records required by section 6.1(2)(g) of NI 81-107; and
(vi) the applicable Fund(s) receives no consideration and the only cost for the trade is the nominal cost incurred by the Fund(s) to print or otherwise display the trade.
“Darren McKall”
Darren McKall
Manager, Investment Funds
ONTARIO SECURITIES COMMISSION
SEDAR# 1661893
(and 1661896, 1661897, 1661903,
1661904, 1661905, 1661906)