Aurion Capital Management Inc. (Re), 2013 CanLII 19722

National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions – Relief granted to pooled funds not subject to NI 81-102 to purchase securities of related entities over a stock exchange and to purchase non-exchange traded debt securities of related entities under primary offerings and in the secondary market - Relief also granted to portfolio manager to engage the funds it manages in principal trading of debt securities of third parties with a related dealer in the secondary market – relief conditional on IRC approval, compliance with pricing requirements, and limits on the amount of a primary offering of a related entity a fund may purchase.

Applicable Legislative Provisions

Securities Act (Ontario), sections 111(2)(a), 111(2)(c)(ii), 111(3), 113. National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations, sections 13.5(2)(a), 13.5(2)(b), 15.1.

April 8, 2013

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction)

AND

IN THE MATTER OF AURION CAPITAL MANAGEMENT INC. (the Filer)

AND

IN THE MATTER OF THE FUNDS (as defined below)

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the pooled funds established and managed by the Filer to which National Instrument 81-102 Mutual Funds (NI 81-102) does not apply (the Existing Funds) and such other pooled funds that the Filer may establish in the future under the laws of Ontario (each a Future Fund, and together with the Existing Funds, the Funds, and individually, a Fund) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Filer from:

(a) the requirements of sections 13.5(2)(b)(i) and (ii), and 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to allow the Filer, as the portfolio manager of a Fund, to:

(i) buy and/or sell securities from or to an investment portfolio of a responsible person or an associate of a responsible person of the Fund (the Principal Trade Relief); and

(ii) buy securities in any issuer in which a responsible person of a Fund or an associate of a responsible person of the Fund is a partner, officer or director (a Related Issuer), unless the fact is disclosed to the client and the written consent of the client is obtained before the investment is made (the Consent Relief),

(b) the requirements in sections 111(2)(a) and (c)(ii), and 111(3) of the Securities Act (Ontario) (the Act) to allow the Funds to make and/or hold an investment:

(i) in any person or company who is a substantial holder of a Fund, its management company or distribution company (a Related Shareholder); and

(ii) in any issuer in which a Related Shareholder has a significant interest (a Related Person),

(collectively, and together with the Consent Relief, the Related Party Relief. The Related Party Relief, together with the Principal Trade Relief, is the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(d) 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 each of the other provinces and territories of Canada (collectively, with Ontario, the Jurisdictions).

Interpretation

Terms defined in NI 81-102, NI 31-103, National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

A Related Party means a Related Issuer, a Related Shareholder, or a Related Person depending on the provision that is being considered.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

The Filer is a corporation incorporated under the laws of Ontario and is registered as a portfolio manager and investment fund manager in Ontario, and as a portfolio manager in Alberta, Newfoundland and Labrador, the Northwest Territories, Nova Scotia and Québec. The Filer’s head office is located in Ontario.
The Filer is and will be the manager of each Fund.
The Filer is not in default of securities legislation in any of the Jurisdictions.
As a result of the transaction whereby The Bank of Nova Scotia (BNS) acquired all of the shares of DundeeWealth Inc. that it did not already own, BNS now indirectly owns 60% of the issued and outstanding shares of the Filer and is now a substantial security holder of the Filer.
As BNS holds, directly and indirectly, more than 10% of the outstanding securities of CI Financial Corporation (CI), BNS is therefore deemed to have a significant interest in CI.
As the Filer is an affiliate of BNS, the Filer is deemed to beneficially own the securities owned by BNS, including the securities of Scotia Capital Inc. (Scotia Capital) and CI. As BNS owns more than 10% of the voting shares of Scotia Capital and CI, Scotia Capital and CI are considered to be associates of the Filer. Scotia Capital is also an affiliate of the Filer who may have access to, or may participate in formulating, investment decisions made on behalf of the Funds or advice to be given to the Funds, and may therefore a responsible person under the Legislation.
Scotia Capital is a principal dealer (Principal Dealer) in the Canadian securities market, both primary and secondary.
The Filer, as the registered adviser of a Fund, will be a responsible person under the Legislation.
A director or officer of BNS may be a responsible person of the Funds, and may also, depending on the positions they hold, be a director and/or officer of other issuers, including CI, that will result in BNS and CI becoming Related Issuers.

The Funds

Each of the Existing Funds are mutual funds established under the laws of Ontario. The Existing Funds are not in default of securities legislation in any of the Jurisdictions.
The Filer and RBC Investor Services Trust are the manager and trustee of each Existing Fund, and will be the manager and trustee of each Future Fund, respectively.
The Funds consist of the Aurion Investment Funds and the Aurion Funds.
The Aurion Investment Funds currently consist of 12 Existing Funds. Units of the Aurion Investment Funds can only be sold to the pension plans of Shell Canada Limited on an exempt basis pursuant to available prospectus and registration exemptions from the prospectus requirements.
The Filer is and will be the portfolio manager for each Aurion Investment Fund, although certain Aurion Investment Funds may use sub-advisers who will make the investment decisions for such fund or the portion of the assets of such fund that such sub-adviser advises.
The Aurion Funds currently consist of five Existing Funds. Units of the Aurion Funds are and will only be sold to qualified investors on an exempt basis pursuant to available prospectus and registration exemptions from the prospectus requirements in each of the Jurisdictions.
The Filer is and will be the portfolio manager of each Aurion Fund.
None of the Funds is or will be a reporting issuer in any of the Jurisdictions.

Each of the Funds wants to have the ability to buy and/or sell securities of a Related Party of the Filer.
A Fund will only buy and/or sell securities of a Related Party if such purchase or sale is consistent with, or is necessary, to meet its investment objective.
The Filer will establish an independent review committee (an IRC) in respect of each Fund in accordance with section 3.7 of NI 81-107. The IRC of each Fund will be expected to comply with the standard of care set out in section 3.9 of NI 81-107 as if each Fund were subject to that rule.
The purchase of securities of a Related Party by a Fund will be referred to the IRC of such Fund.
Section 6.2 of NI 81-107 provides mutual funds that are reporting issuers with an exemption from the prohibitions comprising the Exemption Sought in respect of purchasing exchange-traded securities, such as equity securities, in the secondary market (the Equity Securities).
NI 81-107 does not apply to the Funds as they are not reporting issuers. Accordingly, in the absence of the Exemption Sought, the Funds may not purchase or hold Equity Securities of a Related Party.
All purchases of any Equity Securities of Related Parties will be done in the secondary market.
Certain Related Shareholders and Related Persons of the Filer may also be issuers of non-listed and non-exchange-traded securities such as debt securities (the Related Party Debt Securities). The Filer is also seeking the Exemption Sought to permit the Funds to purchase and hold such Related Party Debt Securities.
The Filer considers that the Funds should have access to the Related Party Debt Securities for the following reasons:

(a) there is a limited supply of certain types of securities;

(b) diversification is reduced to the extent that a Fund is limited with respect to investment opportunities; and

(c) to the extent that a Fund seeks to track or outperform a benchmark it is important for the Fund to be able to purchase any securities included in the benchmark. Securities of Related Shareholders and Related Persons are often included in Canadian indices.

All purchases of any Related Party Debt Securities will be done in either the secondary market or in a primary distribution or treasuring offering (Primary Offering).
Where the Related Party Debt Securities are purchased by a Fund in a Primary Offering pursuant to the Exemption Sought:

(a) each Related Party Debt Security, other than an asset backed commercial paper security, will have a term to maturity of 365 days or more and the Related Party has and continues to have, at the time of purchase, an “approved rating” by an “approved rating organization” within the meaning of those terms in National Instrument 44-101 Short Form Prospectus Distributions (NI 44-101); and

(b) the terms of the Primary Offering, such as the size and the pricing, will be a matter of public record as evidenced in a prospectus, offering memorandum, press release or other public document.

Where the Related Party Debt Securities are purchased by a Fund in the secondary market pursuant to the Exemption Sought and not in a Primary Offering, the Related Party Debt Securities have been given and continues to have, at the time of purchase, an “approved rating” by an “approved rating organization” within the meaning of those terms in NI 44-101.
The Filer has determined that it would be in the best interests of the Funds to receive the Exemption Sought.

Principal Trade Relief

A Fund’s purchase of debt securities of an issuer, that is not a Related Shareholder or a Related Person of the Filer, from the investment portfolio of a responsible person or an associate of a responsible person is prohibited under the Legislation (the Other Debt Securities). A Fund is therefore prohibited from purchasing the Other Debt Securities in the secondary market from a Principal Dealer that is an affiliate or an associate of the Filer (a Related Dealer), such as Scotia Capital.
The investment strategies of each Fund may permit it to invest in the Other Debt Securities other than the federal or a provincial government (Non-Government Debt Securities) or debt securities issued or fully and unconditionally guaranteed by the federal or a provincial government (Government Debt Securities).
There is a limited supply of Non-Government Debt Securities and Government Debt Securities available to the Funds, and frequently the only source of Non-Government Debt Securities for a Fund may be a Related Dealer such as Scotia Capital.
The Funds require the Principal Trade Relief in order to effectively pursue their investment objectives and strategies.
Affiliates and associates of the Filer such as Scotia Capital do not and will not influence the business judgment of the Filer in connection with the determination of the suitability of investments and information and influence barriers are in place. Decisions made by the Filer as to which investments a Fund should hold are and will be based on the best interests of such Fund, without consideration given to the interests of the party with whom a purchase or sale is transacted. This principle is reflected in the policies and procedures that have been and will be implemented and approved by the IRC for dealing with related parties.
The Filer considers granting the Exemption Sought to not be prejudicial to the public interest, given that the decision to transact security purchases and sales with a Related Dealer will be made in the best interests of the Funds and free from the influence of a Related Dealer such as Scotia Capital.

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 to permit the Filer to purchase and hold Related Party Debt Securities on behalf of the Funds provided that:

(a) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Fund;

(b) at the time of the purchase, the IRC of the Fund has approved the transaction in accordance with section 5.2(2) of NI 81-107;

(c) the Filer complies with section 5.1 of NI 81-107, and the Filer and the IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;

(d) in the case of Related Party Debt Securities of a Related Party to be purchased in a Primary Offering:

(i) the size of the Primary Offering is at least $100 million;

(ii) at least two purchasers who are independent, arm’s length purchasers, which may include “independent underwriters” within the meaning of National Instrument 33-105 Underwriting Conflicts, collectively purchase at least 20% of the Primary Offering;

(iii) no Fund shall participate in the Primary Offering if following its purchase the Fund together with related Funds will hold more than 20% of the securities issued in the Primary Offering;

(iv) no Fund shall participate in the Primary Offering if following its purchase the Fund would have more than 5% of its net assets invested in the Related Party Debt Securities of the Related Party; and

(v) the price paid for the securities by a Fund in the Primary Offering shall be no higher than the lowest price paid by any of the arm’s length purchasers who participate in the Primary Offering;

(e) in the case of Related Party Debt Securities of a Related Party to be purchased in the secondary market:

(i) the security has been given and continues, at the time of the purchase, to have an “approved rating” by an “approved rating organization” within the meaning of those terms in NI 44-101;

(ii) the price payable for the security is not more than the ask price of the security;

(iii) the ask price of the security is determined as follows:

(A) if the purchase occurs on a marketplace, the price payable is determined in accordance with the requirements of that marketplace; or

(B) if the purchase does not occur on a marketplace:

(I) the Fund may pay the price for the security at which an independent, arm’s length seller is willing to sell the security; or

(II) if the Fund does not purchase the security from an independent, arm’s length seller, the Fund must pay the price quoted publicly by an independent marketplace or obtain, immediately before the purchase, at least one quote from an independent, arm’s length purchaser or seller and not pay more than that quote; and

(iv) the transaction complies with any applicable “market integrity requirements” as defined in NI 81-107;

(f) on or before the 90^th^ day after the end of each financial year of a Fund, the Filer files with the securities regulatory authority or regulator the particulars of any investments made in reliance on this relief;

(g) the IRC of the Fund complies with section 4.5 of NI 81-107 in connection with any instance that it becomes aware that the Filer did not comply with any of the conditions of this decision; and

(h) the decision with respect to Related Party Debt Securities purchased pursuant to a Primary Offering or in the secondary market will expire on the coming into force of any securities legislation relating to fund purchases of Related Party Debt Securities purchased pursuant to a Primary Offering or in the secondary market.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted to permit the Filer to purchase and hold Equity Securities on behalf of the Funds provided that:

(a) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Fund;

(b) at the time of the purchase the IRC of the Fund has approved the transaction in accordance with section 5.2(2) of NI 81-107;

(c) the Filer complies with section 5.1 of NI 81-107 and the Filer and the IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;

(d) the purchase is made in the secondary market on an exchange on which the securities are listed and traded;

(e) on or before the 90^th^ day after the end of each financial year of a Fund, the Filer files with the securities regulatory authority or regulator the particulars of any investments made in reliance on this relief;

(f) the IRC of the Fund complies with section 4.5 of NI 81-107 in connection with any instance that it becomes aware that the Filer did not comply with any of the conditions of this decision; and

(g) the decision with respect to purchases of Equity securities by the Funds will expire on the coming into force of any securities legislation relating to purchases of exchange-traded securities of a Related Party by mutual funds not governed by NI 81-102.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted to permit the purchase of Other Debt Securities from or sale of Other Debt Securities to a Related Dealer by a Fund in the secondary market provided that:

(a) the purchase or sale is consistent with, or is necessary to meet, the investment objective of the Fund;

(b) at the time of the investment, the IRC has approved the transaction in accordance with section 5.2(2) of NI 81-107;

(c) the Filer, as manager of a Fund, complies with section 5.1 of NI 81-107, and the Filer and the 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;

(d) the bid and ask price of the security transacted are readily available, as contemplated by section 6.1(2)(c) of NI 81-107;

(e) a purchase is not executed at a price which is higher than the available ask price and a sale is not executed at a price which is lower than the available bid price;

(f) the purchase or sale is subject to “market integrity requirements” as defined in NI 81-107; and

(g) the Fund keeps the written records required by section 6.1(2)(g) of NI 81‑107.

Relief from the Act

“Judith N. Robertson”

“Sarah B. Kavanagh”

Name: Judith N. Robertson

Name: Sarah B. Kavanagh

Title: Commissioner

Ontario Securities Commission

NI 31-103 Relief

“Raymond Chan”

Raymond Chan

Manager, Investment Funds

Ontario Securities Commission