1832 Asset Management L.P. (Re), 2013 CanLII 70168

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted to permit funds to invest in non-exchange traded debt securities issued by related parties and to permit pooled funds to also invest in exchange traded securities issued by related parties – related parties to funds are significant issuers of debt securities in Canada – funds managed by affiliate of filer have relief, but internal reorganization of filers asset management business could result in funds losing relief due to limited scope of current relief – transaction in non-exchanged traded debt securities will be subject to terms and conditions regarding pricing, arm’s length purchasers and limits of purchases by funds – purchases of exchange traded securities by pooled funds will comply with NI 81-107.

Applicable Legislative Provisions Securities Act, R.S.O. 1990, c.S.5, as am., paras 111(2)(a), 111(2)(c)(ii) and sections 111(3), and 113.

October 29, 2013

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 1832 ASSET MANAGEMENT L.P. (the Filer)

AND IN THE MATTER OF THE FUNDS (as defined below)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of existing mutual funds and future mutual funds of which the Filer or an affiliate of the Filer acts as manager and/or portfolio adviser and to which National Instrument 81-102 Mutual Funds (NI 81-102) applies (each, an NI 81-102 Fund and collectively, the NI 81-102 Funds) and on behalf of existing mutual funds and future mutual funds of which the Filer or an affiliate of the Filer acts as manager and/or portfolio adviser to which NI 81-102 does not apply (each, a Pooled Fund and collectively, the Pooled Funds and collectively with the NI 81-102 Funds, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):

(a) to exempt the Funds from the prohibitions in the Legislation (the Related Party Prohibitions) that prohibit a mutual fund from making or holding an investment:

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

(ii) in an issuer (a Related Person) in which a Related Shareholder has a significant interest (Related Person Relief and together with the Related Shareholder Relief the Requested Related Party Relief); and

(b) to revoke and replace the Current Relief (as defined below) and the GCIC Relief (as defined below) (the Revocation Relief)

(the Requested Related Party Relief and the Revocation Relief are collectively, the Requested Relief).

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

(a) the Ontario Securities Commission (OSC) 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 British Columbia, Alberta, Saskatchewan, Québec, New Brunswick, Nova Scotia and Newfoundland and Labrador (together with Ontario, the 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.

"Related Party" means a Related Shareholder or a Related Person.

Representations

This decision is based on the following facts represented by the Filer in respect of the Filer and the Funds:

2. The Filer is an Ontario limited partnership, which is wholly-owned, indirectly, by The Bank of Nova Scotia (BNS). The general partner of the Filer is 1832 Asset Management G.P. Inc., an Ontario corporation wholly-owned directly by BNS with its head office in Ontario.

3. The Filer is registered as (i) a portfolio manager in all of the provinces of Canada, and in the Yukon; (ii) an exempt market dealer in all of the provinces of Canada (except Prince Edward Island and Saskatchewan); (iii) an investment fund manager in Ontario, Quebec, and Newfoundland and Labrador; and (iv) a commodity trading manager in Ontario.

4. The Filer or an affiliate of the Filer is, or will be, the manager and/or portfolio adviser to the Funds.

5. Each of the Funds is or will be a mutual fund established under the laws of Ontario or of Canada or of one of the other Jurisdictions.

6. The securities of each of the NI 81-102 Funds are, or will be, qualified for distribution pursuant to simplified prospectuses and annual information forms that have been, or will be, prepared and filed in accordance with the securities legislation of each of the Jurisdictions.

7. Each of the NI 81-102 Funds is, or will be, a reporting issuer in one or more of the Jurisdictions.

8. The securities of the Pooled Funds are or will be offered for sale only on an exempt basis pursuant to available prospectus and registration exemptions from the prospectus requirements in one or more of the Jurisdictions. None of the Pooled Funds is or will be a reporting issuer in any of the Jurisdictions.

9. The Filer and the Funds are not in default of securities legislation in any of the Jurisdictions.

10. The Filer is seeking the Requested Related Party Relief to permit the Funds to purchase and hold non-exchange traded securities that are debt securities, other than asset backed commercial paper securities, with a term to maturity of 365 days or more, issued by a Related Party (Related Party NET Debt Securities) and to permit the Pooled Funds to purchase exchange traded securities issued by a Related Party (Related Party Exchange Traded Securities).

11. The investment strategies of each of the Funds that will rely on the Requested Related Party Relief permit, or will permit, the Fund to invest in the securities purchased.

12. The manager of the Funds has established, or will establish, an independent review committee (IRC) in respect of each NI 81-102 Fund in accordance with the requirements of NI 81-107.

13. The manager of the Funds has also established or will establish an IRC in respect of the Pooled Funds, whose composition will be in accordance with section 3.7 of NI 81-107 and will comply with the standard or care set out in section 3.9 of NI 81-107.

14. Any purchase of securities of a Related Party by a Fund will be referred to the IRC of such Fund (in the case of an NI 81-102 Fund under subsection 5.1(1)(b) of NI 81-107).

15. Section 6.2 of NI 81-107 provides the NI 81-102 Funds with an exemption from Related Party Prohibitions in respect of purchasing exchange-traded securities, such as common shares, in the secondary market. It does not permit an NI 81-102 Fund, or the Filer on behalf of a NI 81-102 Fund, to purchase non-exchange-traded securities issued by Related Parties such as the Related Party NET Debt Securities.

16. NI 81-107 does not apply to the Pooled Funds as they are not reporting issuers. Accordingly, in the absence of the Requested Related Party Relief, the Pooled Funds may not purchase Related Party Exchange Traded Securities or Related Party NET Debt Securities.

17. Certain Related Parties of the Filer are significant issuers of securities including debt instruments that are not listed for trading on an exchange. The Filer considers that the Funds should have access to such securities for the following reasons:

(a) In general, there is a limited supply of highly rated debt securities issued by issuers other than the federal or provincial government, and in particular, highly rated corporate debt 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. Debt securities of Related Parties of the Filer are included in most Canadian debt indices.

18. The Filer has determined that it would be in the best interests of the Funds to have the ability to invest in Related Party NET Debt Securities.

19. The Filer has determined that it would be in the best interests of the Pooled Funds to have the same ability to invest in Related Party Exchange Traded Securities as the NI 81-102 Funds have.

20. Where a Related Party NET Debt Security is purchased by a Fund in a primary distribution or treasury offering (Primary Offering) pursuant to the Requested Related Person Relief:

(a) the debt security, which cannot be an asset backed commercial paper security, will have a term to maturity of 365 days or more and will be issued by a Related Party that has been given and continues to have, at the time of purchase, a "designated rating" by a "designated rating organization" as those terms are defined in NI 81-102 ; 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.

21. Each Related Party NET Debt Security purchased by a Fund in the secondary market will, at the time of purchase have a "designated rating" by a "designated rating organization" as those terms are defined in NI 81-102.

22. If a Fund's purchase of Related Party NET Debt Securities involves an inter-fund trade with another Fund, either the provision of section 6.1(2) of NI 81-107 or the provisions of the relief received by the Filer, or an affiliate of the Filer, on behalf of the Funds dated November 1, 2013, as may be amended, as applicable, will apply to such transaction.

23. The Filer is seeking the Revocation Relief in connection with a proposed internal reorganization of BNS's asset management business (the Reorganization).

24. The Reorganization is structured as an internal consolidation of the asset management business currently conducted by certain affiliated BNS entities, namely, GCIC Ltd. (GCIC), WaterStreet Family Capital Counsel Inc. and CPA Securities Inc. – each of which is wholly-owned directly or indirectly by BNS – into the Filer. Under the Reorganization, the asset management business conducted by GCIC at the time of the Reorganization will be transferred to the Filer. The closing date of the Reorganization is November 1, 2013 (the Completion Date).

25. If the Reorganization is completed as contemplated, GCIC will cease to carry on registrable business and will have its various registrations under the Legislation revoked. Thereafter, the business of GCIC will be carried on by the Filer, which includes becoming manager and/or portfolio advisor of Funds for which GCIC provided such services prior to the Reorganization.

26. The Reorganization does not involve an amalgamation.

27. Under Decisions dated October 28, 2009, the Principal Regulator granted the Filer relief that is substantially the same as the Requested Related Party Relief in connection with the purchase by the NI 81-102 Funds managed by the Filer, of Related Party NET Debt Securities in the primary and secondary markets (the Current Relief).

28. Under a Decision dated March 28, 2011, the Principal Regulator granted GCIC relief that included relief that is substantially the same as the Requested Related Party Relief (the GCIC Relief).

29. The Current Relief is not as broad as the GCIC Relief, as the GCIC Relief permits both NI 81-102 Funds and Pooled Funds to purchase Related Party NET Debt Securities in the primary and secondary markets and permits the Pooled Funds to purchase Related Party Exchange Traded Securities while the Current Relief does not apply to Pooled Funds.

30. The Filer will not be able to rely on the GCIC Relief following the Reorganization since the terms of that relief do not permit it to flow through to the Filer.

31. Accordingly, as of the Completion Date, the Filer is seeking the Revocation Relief and to replace the Current Relief and the GCIC Relief with the Requested Related Party Relief.

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:

(a) the Revocation Relief is granted; and

(b) the Requested Related Party Relief is granted to permit the Filer, or an affiliate of the Filer, to purchase and hold Related Party NET Debt Securities on behalf of the Funds on the condition that:

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

(ii) the Related Party NET Debt Securities have a "designated rating" by a "designated rating organization" as those terms are defined in NI 81-102;

(iii) the IRC of the Fund has approved the transaction in accordance with Section 5.2(2) of NI 81-107;

(iv) the manager of the Fund complies with section 5.1 of NI 81-107 and the manager 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;

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

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

(B) at least 2 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;

(C) 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;

(D) 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 Related Party NET Debt Securities of a Related Issuer;

(E) 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;

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

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

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

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

(II) If the purchase does not occur on a marketplace,

a. the Fund may pay the price for the security at which an independent, arm's length seller is willing to sell the security, or

b. 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;

(C) the transaction complies with any applicable "market integrity requirements" as defined in NI 81-107;

(vii) no later than the time a NI 81-102 Fund files its annual financial statements, or on or before the 90th day after the end of each financial year of a Pooled Fund, the Filer, or the affiliate of the Filer, files with the securities regulatory authority or regulator the particulars of any investments made in reliance on this relief;

(viii) 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, or the affiliate of the Filer, did not comply with any of the conditions of this decision; and

(ix) the decision with respect to the Related Party NET 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 NET Debt Securities purchased pursuant to a Primary Offering or in the secondary market.

(c) The decision of the principal regulator under the Legislation is that the Requested Related Party Relief is granted permitting the Pooled Funds to purchase and hold Related Party Exchange-Traded Securities on condition that:

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

(ii) the IRC of the Pooled Fund has approved the transaction in accordance with Section 5.2(2) of NI 81-107;

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

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

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

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

(vii) the decision with respect to purchases of exchange-traded securities by the Pooled 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.

This decision is effective on the Completion Date.

"James E.A. Turner"

"Judith N. Robertson"

James E.A. Turner Vice-Chair

Judith N. Robertson Commissioner

ONTARIO SECURITIES COMMISSION