Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from to permit filer to trade portfolio securities between managed accounts and pooled funds, or between pooled funds, for which the filer acts as portfolio manager – relief sought to permit pooled funds and managed accounts to engage in in specie transfers of portfolio assets as payment for purchase or redemption of pooled funds units by the managed account or pooled fund – relief subject to certain conditions, including explicit consent of managed account clients to allow in specie transfers, acceptability of portfolio securities to receiving fund or managed account manager, filer to keep written records of in-specie transactions, and conditions related to pricing.
Applicable Legislative Provisions National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, paragraphs 13.5(2)(b)(ii) and (iii), and section 15.1.
December 9, 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 HILLSDALE INVESTMENT 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 an exemption from the prohibitions in paragraphs 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, from purchasing or selling a security from or to the investment portfolio of (i) an associate of a responsible person, or (ii) an investment fund for which a responsible person acts as an adviser, in order to permit in specie subscriptions and redemptions between:
(i) a Managed Account (defined below) and a Pooled Fund (defined below); and
(ii) a Pooled Fund and another Pooled Fund.
(the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for the 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 Saskatchewan, Manitoba, Quebec and New Brunswick (together with the Jurisdiction, the Jurisdictions ).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 - Definitions, National Instrument 81-102 Mutual Funds (NI 81-102) National Instrument 81-107 -- Independent Review Committee for Investment Funds (NI 81-107) and NI 31-103 have the same meanings if used in this Decision, unless otherwise defined. The following terms have the following meanings:
(a) Client refers to a person or company that has retained the Filer to provide Managed Account services.
(b) In Specie Transfers has the meaning set forth in paragraph 12 below.
(c) Investment Management Agreement means the agreement by which a Client formally retains the Filer to provide Managed Account services.
(d) Managed Account means an investment account over which the Filer has been granted discretionary authority by the Client to make investment decisions including executing trades.
(e) Pooled Fund means a current or future investment fund whose securities are distributed pursuant to a prospectus exemption and for which the Filer acts as investment fund manager and portfolio manager.
(f) Pooled Fund Securities means the units or shares issued by a Pooled Fund, as applicable.
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, with its registered head office located in Toronto, Ontario.
The Filer is registered in each of the Jurisdictions in the category of portfolio manager, in the Principal Jurisdiction and in Saskatchewan, Quebec and New Brunswick in the category of exempt market dealer and in the Principal Jurisdiction and in Quebec in the category of investment fund manager.
The Filer is not in default of the securities legislation in any of the Jurisdictions.
The Managed Accounts
The Filer is, or will be, the portfolio manager of each of the Managed Accounts.
Each Client who wishes to receive the Managed Account service from the Filer executes an Investment Management Agreement with the Filer whereby such Client appoints the Filer to act as a portfolio manager in connection with an investment portfolio of the Client with full discretionary authority to trade in securities for the Managed Account without obtaining the specific consent of the Client to execute a trade, including the authorization to invest the Managed Accounts in the Pooled Funds and to switch Pooled Funds as determined by the Filer in accordance with the investment objectives of the Managed Account.
The Filer only offers Managed Account services to Clients that are “accredited investors” as that term is defined in securities legislation.
The Pooled Funds
Each Pooled Fund is, or will be, an investment fund that is a trust, a corporation or a limited partnership that is established under the laws of Ontario, Canada.
The Filer acts, or will act, as the investment fund manager and portfolio manager of the Pooled Funds. The Filer will also act as the trustee of any Pooled Funds that are organized as a trust, which will cause such Pooled Funds to be “associates” of the Filer, as that term is defined in securities legislation.
The Pooled Fund Securities are, or will be, distributed on a private placement basis pursuant to the Legislation and the Pooled Funds are not (or will not be) reporting issuers.
The Pooled Funds are not in default of securities legislation in any of the Jurisdictions.
In Specie Transfers
The Filer, as registered portfolio manager of the Managed Accounts and the Pooled Funds, is a “responsible person” as that term is defined in NI 31-103.
The Filer may wish to or be required to (i) cause a Managed Account to deliver securities to a Pooled Fund in respect of the purchase of Pooled Fund Securities, or to receive securities from the investment portfolio of a Pooled Fund in respect of the redemption of Pooled Fund Securities by a Managed Account, or (ii) cause a Pooled Fund to deliver securities from its investment portfolio to another Pooled Fund in respect of the purchase or redemption of Pooled Fund Securities (In Specie Transfers).
Since the Filer is the portfolio manager of the Managed Accounts and the Pooled Funds, and because the Pooled Funds that are organized as trusts are considered to be associates of the Filer, absent the Exemption Sought, the Prohibition would preclude the Filer from effecting In Specie Transfers (i) between a Managed Account and a Pooled Fund and (ii) between Pooled Funds.
In Specie Transfers will be carried out in accordance with the Filer's written policies and procedures, which will be consistent with applicable securities legislation.
The Filer’s Chief Compliance Officer will pre-approve each In Specie Transfer with respect to the purchase or redemption Pooled Fund Securities by another Pooled Fund or by a Managed Account.
Each Investment Management Agreement or other documentation in respect of a Managed Account will contain the specific written authorization of the Client for the Filer to engage in In Specie Transfers.
The portfolio securities transferred to a Pooled Fund or Managed Account in respect of an In Specie Transfer will be consistent with the investment objectives of the Pooled Fund or Managed Account, as the case may be, and will be acceptable to such Pooled Fund or Managed Account’s portfolio manager.
The only cost which will be incurred by a Pooled Fund or a Managed Account for an In Specie Transfer is a nominal administrative charge levied by the Pooled Fund’s custodian for recording the delivery of securities in connection with the In Specie Transfers.
Each Pooled Fund will keep written records of each In Specie Transfer in a financial year of the Pooled Fund, reflecting details of the portfolio securities delivered to the Pooled Fund and the value assigned to such portfolio securities, in accordance with the form, accessibility and retention of record requirements as prescribed by section 11.6 of NI 31-103.
The Pooled Funds generally invest in liquid securities. The Filer will not cause any Pooled Fund to engage in an In Specie Transfer if illiquid securities represent more than an immaterial portion of the portfolio of the applicable Pooled Fund or Managed Account.
The valuation of any illiquid securities which would be the subject of an In Specie Transfer will be carried out according to the Filer's policies and procedures for the fair valuation of portfolio securities, including illiquid securities (FV Procedures). The Filer’s internal valuation team monitors and determines fair value according to the applicable FV Procedures. The Filer’s Chief Compliance Officer will review and approve the valuation of any illiquid securities. Any valuation of private securities, including illiquid securities, is subject to review by the Pooled Funds' auditors. If any illiquid securities are the subject of an In Specie Transfer, the illiquid securities will be transferred on a pro rata basis.
The Filer considers that In Specie Transfers will be beneficial to the Pooled Funds and the Managed Accounts by enabling the Filer to manage each asset class more effectively and to reduce the transaction costs to the Managed Accounts and the Pooled Funds, for the acquisition and disposition of portfolio securities. For example, In Specie Transfers reduce market impact costs, which can be detrimental to the Clients and/or Pooled Funds. In Specie Transfers will also allow a portfolio manager to retain within its control institutional-size blocks of portfolio securities that would otherwise need to be broken and re-assembled.
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 is that the Exemption Sought is granted on the following conditions:
(a) if the transaction is the purchase of Pooled Fund Securities by a Managed Account:
(i) the Investment Management Agreement or other documentation in respect of the Managed Account contains the authorization of the Client for the Filer to engage in In Specie Transfers and such consent has not been revoked;
(ii) the Pooled Fund would, at the time of payment, be permitted to purchase the portfolio securities of the Managed Account;
(iii) the portfolio securities are acceptable to the Filer as portfolio manager of the Pooled Fund and are consistent with the investment objectives of the Pooled Fund;
(iv) the value of the portfolio securities sold to the Pooled Fund is equal to the issue price of the Pooled Fund Securities for which they are used as payment, valued as if the portfolio securities were portfolio assets of that Pooled Fund;
(v) the next account statement prepared for the Managed Account will include a note describing the portfolio securities delivered to the Pooled Fund and the value assigned to such portfolio securities; and
(vi) the Pooled Fund will keep written records of each In Specie Transfer in a financial year of the Pooled Fund, reflecting details of the portfolio securities delivered to the Pooled Fund and the value assigned to such portfolio securities, in accordance with the form, accessibility and retention of record requirements as prescribed by section 11.6 of NI 31-103;
(b) if the transaction is the redemption Pooled Fund Securities by a Managed Account:
(i) the Investment Management Agreement or other documentation in respect of the Managed Account contains the authorization of the Client for the Filer to engage in In Specie Transfers and such authorization has not been revoked;
(ii) the Filer, as the portfolio manager of the Manager Account, determines that the portfolio securities meet the investment criteria of the Managed Account acquiring the portfolio securities;
(iii) the value of the portfolio securities is equal to the amount at which those portfolio securities were valued by the Pooled Fund in calculating the net asset value per Pooled Fund Securities used to establish the redemption price;
(iv) the next account statement prepared for the Managed Account will include a note describing the portfolio securities received from the Pooled Fund and the value assigned to such portfolio securities; and
(v) the Pooled Fund will keep written records of each In Specie Transfer in a financial year of the Pooled Fund, reflecting details of the securities delivered by the Pooled Fund and the value assigned to such securities, in accordance with the form, accessibility and retention of record requirements as prescribed by section 11.6 of NI 31-103;
(c) if the transaction is the purchase of Pooled Fund Securities by another Pooled Fund:
(i) the Pooled Fund issuing the Pooled Fund Securities would, at the time of payment, be permitted to purchase the portfolio securities of the other Pooled Fund;
(ii) the portfolio securities are acceptable to the Filer as portfolio manager of the Pooled Fund acquiring the portfolio securities and are consistent with the investment objectives of that Pooled Fund;
(iii) the value of the portfolio securities is equal to the issue price of the Pooled Fund Securities of the Pooled Fund issuing the Pooled Fund Securities for which they are used as payment, valued as if the portfolio securities were portfolio assets of that Pooled Fund; and
(iv) each Pooled Fund will keep written records of each In Specie Transfer in a financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Fund and the value assigned to such portfolio securities, in accordance with the form, accessibility and retention of record requirements as prescribed by section 11.6 of NI 31-103.
(d) if the transaction is the redemption of Pooled Fund Securities by another Pooled Fund:
(i) the Pooled Fund redeeming the Pooled Fund Securities would, at the time of payment, be permitted to purchase the portfolio securities of the other Pooled Fund;
(ii) the portfolio securities are acceptable to the Filer as portfolio manager of the Pooled Fund acquiring the portfolio securities and are consistent with the investment objectives of that Pooled Fund;
(iii) the value of the portfolio securities is equal to the amount at which those portfolio securities were valued by the Pooled Fund in calculating the net asset value per Pooled Fund Security used to establish the redemption price;
(iv) each Pooled Fund will keep written records of each In Specie Transfer in a financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Fund and the value assigned to such portfolio securities, in accordance with the form, accessibility and retention of record requirements as prescribed by section 11.6 of NI 31-103 ; and
(e) the Filer does not receive any compensation in respect of any In Specie Transfer and, in respect of any delivery of securities further to an In Specie Transfer, the only charges paid by the applicable Pooled Fund or Managed Account are administrative charges for recording the delivery of securities levied by the custodians of the Pooled Funds and Managed Accounts.
“Vera Nunes”
Vera Nunes Manager, Investment Funds Branch
ONTARIO SECURITIES COMMISSION