Lincluden Investment Management Limited (Re), 2019 CanLII 116940

December 10, 2019

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 LINCLUDEN INVESTMENT MANAGEMENT LIMITED

Decision

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Lincluden Investment Management Limited, or an affiliate (the Filer) for a decision under the securities legislation of Jurisdiction of the principal regulator (the Legislation):

(a) for an exemption from the prohibition in section 4.2(1) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the Public Funds (as defined below) to purchase debt securities from, or sell debt securities to, a Pooled Fund (as defined below) (the Section 4.2(1) Relief);

(b) for an exemption from the prohibitions in section 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of an associate of a responsible person, or from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser, in order to permit:

(i) a Pooled Fund to purchase securities from or to sell securities to a Fund (as defined below);

(ii) a Managed Account (as defined below) to purchase securities from or to sell securities to a Fund;

(iii) a Public Fund to purchase securities from or to sell securities to a Fund;

(iv) the transactions listed in (i) to (iii) (each an Inter-Fund Trade) to be executed at the last sale price, as defined in the Universal Market Integrity Rules of the Investment Industry Regulatory Organization of Canada, prior to the execution of the trade (the Last Sale Price) in lieu of the closing sale price (the Closing Sale Price) contemplated by the definition of “current market price of the security” in section 6.1(1)(a)(i) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) on that trading day, where the securities involved in the Inter-Fund Trade are exchange-traded securities (which term shall include Canadian and foreign exchange-traded securities);

((i), (ii), (iii) and (iv) are collectively, the Inter-Fund Trading Relief); and

(v) In specie subscriptions and redemptions by a (each subscription or redemption, an In-specie Transfer):

(A) Managed Account in relation to a Public Fund or a Pooled Fund; and

(B) Pooled Fund in relation to another Pooled Fund or a Public Fund

(collectively, the In-specie Transfer Relief)

(the Section 4.2(1) Relief, the Inter-Fund Trading Relief and the In Specie Transfer Relief are collectively, the Exemptions Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(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 upon in each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102, NI 81-102, NI 81-107 and NI 31-103 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

The Filer is a corporation formed and organized under the laws of Canada. The head office of the Filer is located in Ontario.
The Filer is registered as a portfolio manager in all of the Jurisdictions, as an investment fund manager in Ontario, Québec, and Newfoundland and Labrador, and as exempt market dealer in Ontario, Alberta, British Columbia and Saskatchewan.
The Filer is the manager, adviser and trustee of the Lincluden Balanced Fund, (the Current Public Fund), which is an open-ended mutual fund trust, which is governed by the laws of Ontario, which is subject to NI 81-102, which is a reporting issuer in each of the Jurisdictions and which offers its units in each of the Jurisdictions pursuant to a simplified prospectus, annual information form and fund facts in accordance with the requirements of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101).
Each future public fund that the Filer may launch (each a Future Public Fund and together with the Current Public Fund, collectively, the Public Funds and individually a Public Fund) will be managed, advised and trusteed by the Filer, will be an open-ended mutual fund trust governed by the laws of Ontario, will be subject to NI 81-102, will be a reporting issuer in one or more of the Jurisdictions and will offer its units in such Jurisdictions pursuant to a simplified prospectus, annual information form and fund facts in accordance with the requirements of NI 81-101.
The Filer is also the manager and adviser of each of the current pooled funds (a Current Pooled Fund), which are each an open-ended mutual fund trust, which are each governed by the laws of Ontario, which are not subject to NI 81-102, and which each offer their units to qualified investors in the Jurisdictions by means of the prospectus exemptions in National Instrument 45-106 Prospectus Exemptions (NI 45-106). CIBC Mellon Trust Company is the trustee of each of the Current Pooled Funds.
Each future pooled fund that the Filer may launch (each a Future Pooled Fund, and together with the Current Pooled Funds, collectively, the Pooled Funds and individually, a Pooled Fund) will be managed and advised by the Filer, will be an open-ended mutual fund trust governed by the laws of Ontario, which are not subject to NI 81-102, and will offer its units to qualified investors in the Jurisdictions by means of the prospectus exemptions in NI 45-106. CIBC Mellon Trust Company will be the trustee of each Future Pooled Fund.
Each Public Fund and each Pooled Fund (collectively, the Funds and individually, a Fund) may be an associate of the Filer.
Neither the Filer nor any of the Funds is in default of securities legislation in any of the Jurisdictions.
The Filer is and will be the adviser of each of its managed accounts (each a Managed Account).
The Filer provides discretionary portfolio management services to each Managed Account pursuant to an investment management agreement (a Discretionary Management Agreement) with the applicable client (a Client), whereby that Client appoints the Filer to act as its portfolio manager in connection with the investment portfolio of that Client with full discretionary authority, in accordance with the mandate of that Client, to trade in securities for that Client’s Managed Account without obtaining the specific consent of that Client to execute the trade.
Investments in individual securities may not be appropriate in certain circumstances for a Client. Consequently, the Filer may, where authorized under a Discretionary Management Agreement, from time to time, invest the assets in a Client’s Managed Account in securities of any one or more of the Funds in order to give such Client the benefit of asset diversification and economies of scale regarding minimum commission charges on portfolio trades and generally to facilitate portfolio management.

Inter-Fund Investing

The Filer wishes to be able to permit Inter-Fund Trades of portfolio securities between:

(a) a Public Fund and another Public Fund, a Pooled Fund or a Managed Account;

(b) a Pooled Fund and another Pooled Fund, a Public Fund or a Managed Account; and

Different sections of NI 31-103, NI 81-102 and NI 81-107 impose different prohibitions and exceptions on different types of Funds with respect to Inter-Fund Trades.
An exception from the inter-fund trading prohibition in section 4.2(1) of NI 81-102 currently exists in section 4.3(1) of NI 81-102 which permits the Public Funds to inter-fund trade listed equity securities with the Pooled Funds. The Public Funds are, however, unable to rely on the exception in section 4.3(1) of NI 81-102 to inter-fund trade debt securities because debt securities are typically not subject to public quotations as required by section 4.3(1) of NI 81-102. The Public Funds are further unable to rely on the exception in section 4.3(2) to inter-fund trade debt securities with the Pooled Funds because that exception only applies where funds on both sides of the inter-fund trade are investment funds governed by NI 81-107. The Pooled Funds will not be subject to NI 81-107.
The Filer has submitted that because of the various investment objectives and investment strategies utilized by the Funds and Managed Accounts, it may be appropriate for different investment portfolios to acquire or dispose of the same securities directly, rather than with a third party. Authorizing the Inter-Fund Trades may result in such benefits as lower trading costs, reduced market disruption and quicker execution.
The Filer has determined that it would be in the best interests of the Funds and the Managed Accounts to receive the Inter-Fund Trading Relief because making the Funds and the Managed Accounts subject to the same set of rules governing the execution of Inter-Fund Trades will result in:

(a) cost and timing efficiencies in respect of the execution of Inter-Fund Trades; and

(b) simplified and more efficient monitoring thereof, for the Filer in connection with the execution of Inter-Fund Trades.

Each Inter-Fund Trade will be consistent with the investment objectives of the relevant Fund or Managed Account, as applicable.
At the time of an Inter-Fund Trade, the Filer will have policies and procedures in place to enable the applicable Funds and Managed Accounts to engage in Inter-Fund Trades.
The Filer has established, or will establish, an independent review committee (an IRC) in respect of each Public Fund in accordance with the requirements of NI 81-107.
The Filer, as the manager of each Pooled Fund, will establish, an IRC in respect of each Pooled Fund to review and provide its approval for any proposed Inter-Fund Trades between a Pooled Fund and another Fund or a Managed Account.
The IRC of the Pooled Funds will be composed by the Filer in accordance with section 3.7 of NI 81-107 and the IRC will comply with the standard of care set out in section 3.9 of NI 81-107. The IRC of the Pooled Funds will not approve an Inter-Fund Trade involving a Pooled Fund unless it has made the determination set out in section 5.2(2) of NI 81-107.
Inter-Fund Trades involving a Public Fund will be referred to the IRC of the Public Fund under subsection 5.2(1) of NI 81-107 and the Filer, as the manager of the Public Fund, and the IRC of the Public 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. The IRC of the Public Funds will not approve an Inter-Fund Trade involving a Public Fund unless it has made the determination set out in subsection 5.2(2) of NI 81-107.
Prior to engaging in Inter-Fund Trades on behalf of a Managed Account, each Discretionary Management Agreement or other documentation will contain the authorization of the Client for the portfolio manager of the Managed Account to engage in Inter-Fund Trades.
The Filer cannot rely on the exemption codified under subsection 6.1(4) of NI 81-107 unless each party to the transaction is a reporting issuer and the Inter-Fund Trade occurs at the “current market price of the security” which, in the case of exchange-traded securities, includes the Closing Sale Price but not the Last Sale Price.
The Filer considers that it would be in the best interests of the Funds and the Managed Accounts, as applicable, if an Inter-Fund Trade could be made at the Last Sale Price prior to the execution of the trade, in lieu of the Closing Sale Price, as this will result in the trade being done at the price which is closest to the price at the time the decision to make the trade is made.
An Inter-fund Trade to be effected at the Last Sale Price will be implemented by the Filer as follows:

(a) the Filer, as the portfolio manager, will deliver the trade instruction in respect of a purchase or sale of a portfolio security by a Fund or a Managed Account, as applicable (Party A), to a trader on the Filer’s trading desk;

(b) the Filer, as the portfolio manager, will deliver the trade instruction in respect of a purchase or sale of a portfolio security by another Fund or Managed Account, as applicable (Party B), to a trader on the Filer’s trading desk;

(c) the trader on the Filer’s trading desk will have the discretion to execute the trade as an Inter-fund Trade between Party A and Party B at the Last Sale Price of the portfolio security, prior to the execution of the trade;

(d) the policies applicable to the Filer’s trading desk will require that all orders are to be executed on a timely basis; and

(e) the trader on the Filer’s trading desk will advise of the Last Sale Price.

In Specie Transfers

The Filer may wish to or otherwise be required to conduct an In specie Transfer (as defined below) and deliver securities held in a Managed Account or a Pooled Fund to a Fund in respect of a purchase of securities of the Fund (Fund Securities), and may wish to or otherwise be required to receive securities from a Fund in respect of a redemption of Fund Securities by a Managed Account or a Pooled Fund. As the Filer is, or may be, the portfolio manager of the Funds and is, or may be, the portfolio manager of the Managed Accounts, the Filer would be considered a “responsible person” within the meaning of section 13.5 of NI 31-103.
As the Filer is, or may be in the future, the trustee of a Fund which is organized as a trust, each such Fund may be an ‘associate’ of the Filer, and accordingly, absent the grant of the In-specie Transfer Relief, the Filer would be precluded by the provisions of section 13.5(2)(b)(ii) of NI 31-103 from effecting the In-specie Transfers in such circumstances. As the Filer is, or will be, a registered adviser, and is or will be the manager and/or portfolio manager of the Funds and is, or will be, the portfolio manager of the Managed Accounts, absent the grant of the In-specie Transfer Relief, the Filer would be precluded by section 13.5(2)(b)(iii) of NI 31-103 from effecting the In-specie Transfers.
The In-specie Transfers will allow the Filer to manage each asset class more effectively and reduce transaction costs for the Managed Account or the Fund client and the other Funds. For example, In-specie Transfers reduce market impact costs, which can be detrimental to the Managed Accounts or the Fund clients and/or the other Funds. In-specie Transfers also allow the Filer to retain within its control institutional-size blocks of securities that otherwise would need to be broken and re-assembled.
The only cost which will typically be incurred by a Fund or a Managed Account for an In-specie Transfer is a nominal administrative charge levied by the custodian of the Fund in recording the trades and any commission charged by the dealer executing the trade.
The Filer will obtain the prior specific written consent of the relevant Managed Account client before it engages in any In-specie Transfers in connection with the purchase or redemption of securities of a Fund for the Managed Account.
The Filer, as manager of the Funds, will value the securities transferred under an In-specie Transfer on the same valuation day on which the purchase price or redemption price of the Fund Securities of a Fund is determined. With respect to the purchase of Fund Securities of a Fund, the securities transferred to a Fund under an In-specie Transfer in satisfaction of the purchase price of those Fund Securities will be valued as if the securities were portfolio assets of the Fund, as contemplated by section 9.4(2)(b)(iii) of NI 81-102. With respect to the redemption of Fund Securities of a Fund, the securities transferred to a Managed Account in satisfaction of the redemption price of those Fund Securities will have a value equal to the amount at which those securities were valued in calculating the net asset value per security used to establish the redemption price of the Fund Securities of the Fund, as contemplated by section 10.4(3)(b) of NI 81-102.
Should any In-specie Transfer involve the transfer of an “illiquid asset” (as defined in NI 81-102) (the Illiquid Portfolio Securities), the Filer will obtain at least one quote for the illiquid asset from an independent arm’s length purchaser or seller, immediately before effecting the In-specie Transfer.
If any Illiquid Portfolio Securities are the subject of an In-specie Transfer, the Illiquid Portfolio Securities will be transferred on a basis that fairly represents the portfolio of the Fund. The Filer will not cause any Fund to be involved in In-specie Transfer if, at the time of the proposed In-specie Transfer, Illiquid Portfolio Securities represent more than an immaterial portion of the portfolio of the Fund. The valuation of any Illiquid Portfolio 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 value of portfolio securities, including illiquid securities.
In-specie Transfers will be subject to (i) compliance with the written policies and procedures of the Filer respecting In-specie Transfers that are consistent with applicable securities legislation, and (ii) the oversight of the Filer’s compliance department to ensure that the transaction represents the business judgment of the Filer acting in its discretionary capacity with respect to a Fund and/or a Managed Account, uninfluenced by considerations other than the best interests of the Fund and/or the Managed Account.
None of the portfolio securities which are the subject of an In-specie Transfer will be securities of related issuers of the Filer.
Since the Filer is, or will be, the portfolio manager of each Managed Account and each Fund, the Filer will be considered to be a ‘responsible person’ within the meaning of NI 31-103, and would thus be prohibited from entering into Inter-Fund Trades or In-specie Transfers in the absence of the Inter-Fund Trading Relief and In-specie Transfer Relief, respectively.
The Filer has determined that it would be in the interests of the Funds and the Managed Accounts to receive the Exemptions Sought.

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 Section 4.2(1) Relief is granted provided that:

(i) the transaction is consistent with the investment objectives of each of the Funds involved in the trade;

(ii) the IRC of each Fund involved in the trade has approved the transaction in respect of that Fund in accordance with the terms of subsection 5.2(2) of NI 81-107; and

(iii) the transaction complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107.

(b) the Inter-Fund Trading Relief is granted provided that:

(i) the Inter-Fund Trade is consistent with the investment objective of the Fund or the Managed Account;

(ii) the Filer refers the Inter-Fund Trade to the IRC of the Fund in the manner contemplated by 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 in respect of any standing instructions an IRC provides in connection with the Inter-Fund Trade;

(iii) in the case of an Inter-Fund Trade between Funds:

(A) the IRC of each Fund has approved the Inter-Fund Trade in respect of the Fund in accordance with the terms of subsection 5.2(2) of NI 81-107; and

(B) the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 except that for purposes of paragraph (e) of subsection 6.1(2) in respect of exchange-traded securities, the current market price of the security may be the Last Sale Price;

(iv) in the case of an Inter-Fund Trade between a Managed Account and a Fund:

(A) the IRC of the Fund has approved the Inter-Fund Trade in respect of such Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

(B) the investment management agreement or other documentation in respect of the Managed Account authorizes the transaction; and

(C) the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 except that for purposes of paragraph (e) of subsection 6.1(2) in respect of exchange-traded securities, the current market price of the security may be the Last Sale Price;

(i) if the transaction is the purchase of Fund Securities by a Managed Account:

(A) if the Fund Securities are of a Public Fund,

(I) the Filer, as manager of the Public Fund, obtains the approval of the IRC of the Fund in respect of an In-specie Transfer in accordance with the terms of section 5.2 of NI 81-107; and

(II) the Filer, as manager of the Public Fund and the IRC of the Fund comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In-specie Transfer;

(B) the Filer obtains the prior written consent of the client of the relevant Managed Account before it engages in any In-specie Transfers in connection with the purchase of the Fund Securities;

(D) the portfolio securities are acceptable to the Filer as portfolio manager of the Fund and consistent with the Fund’s investment objectives;

(E) the value of the portfolio securities sold to the Fund by the Managed Account is equal to the issue price of the Fund Securities for which they are payment, valued as if the securities were portfolio assets of that Fund;

(F) the account statement next prepared for the Managed Account will include a note describing the portfolio securities delivered to the Fund and the value assigned to such securities; and

(G) the Fund keeps written records of all In-specie Transfers during the financial year of the Fund, reflecting details of the portfolio securities delivered to the Fund and the value assigned to such securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(ii) if the transaction is the redemption of Fund Securities by a Managed Account:

(A) if the Fund Securities are of a Public Fund,

(I) the Filer, as manager of the Public Fund, obtains the approval of the IRC of the Fund in respect of an In-specie Transfer in accordance with the terms of section 5.2 of NI 81-107; and

(B) the Filer obtains the prior written consent of the client of the relevant Managed Account to the payment of redemption proceeds in the form of an In-specie Transfer;

(C) the portfolio securities are acceptable to the Filer as portfolio manager of the Managed Account and consistent with the Managed Account’s investment objectives;

(D) the value of the portfolio securities is equal to the amount at which those securities were valued in calculating the net asset value per Fund Security of the Fund used to establish the redemption price;

(E) the holder of the Managed Account has not provided notice to terminate its investment management agreement with the Filer;

(F) the account statement next prepared for the Managed Account will include a note describing the portfolio securities delivered to the Managed Account and the value assigned to such securities; and

(G) the Fund keeps written records of all In-specie Transfers during a financial year of the Fund, reflecting details of the portfolio securities delivered by the Fund and the value assigned to such securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(iii) the Filer does not receive any compensation in respect of any sale or redemption of Fund Securities of a Fund and, in respect of any delivery of securities further to an In-specie Transfer, the only charge paid by the Managed Account, if any, is the commission charged by the dealer executing the trade;

(iv) if the transaction is the purchase of Fund Securities of a Public Fund by a Pooled Fund:

(A) the Filer, as manager of the Public Fund, obtains the approval of the IRC of the Public Fund in respect of an In-specie Transfer in accordance with the terms of section 5.2 of NI 81-107;

(B) the Filer, as manager of the Public Fund, and the IRC of the Public Fund comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In-specie Transfer;

(D) the portfolio securities are acceptable to the Filer as portfolio manager of the Public Fund, and consistent with the Public Fund’s investment objectives;

(E) the value of the portfolio securities is equal to the issue price of the Fund Securities of the Public Fund for which they are payment, valued as if the securities were portfolio assets of that Public Fund; and

(F) each of the Funds keeps written records of all In-specie Transfers in a financial year of the Fund, reflecting details of the portfolio securities delivered by the Pooled Fund to the Public Fund, and the value assigned to such securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(v) if the transaction is the redemption of Fund Securities of a Public Fund by a Pooled Fund:

(A) the Filer, as manager of the Public Fund, obtains the approval of the IRC of the Public Fund in respect of the In-specie Transfer in accordance with the terms of section 5.2 of NI 81-107;

(C) the portfolio securities are acceptable to the Filer as the portfolio manager of the Pooled Fund, and consistent with the Pooled Fund’s investment objective;

(D) the value of the portfolio securities is equal to the amount at which those securities were valued in calculating the net asset value per Fund Security used to establish the redemption price of the Public Fund; and

(E) each of the Funds keeps written records of all In-specie Transfers in a financial year of the Fund, reflecting details of the portfolio securities delivered by the Public Fund to the Pooled Fund and the value assigned to such securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(vi) if the transaction is the purchase of Fund Securities of a first Pooled Fund by a second Pooled Fund:

(A) the first Pooled Fund would at the time of payment be permitted to purchase the portfolio securities;

(B) the portfolio securities are acceptable to the Filer as portfolio manager of the first Pooled Fund, and consistent with the first Pooled Fund’s investment objectives;

(C) the value of the portfolio securities is equal to the issue price of the Fund Securities of the first Pooled Fund for which they are payment, valued as if the securities were portfolio assets of the first Pooled Fund; and

(D) each Fund keeps written records of an In-specie Transfer in a financial year of the Fund, reflecting details of the portfolio securities delivered by the second Pooled Fund to the first Pooled Fund, and the value assigned to such securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(vii) if the transaction is the redemption of Fund Securities of a first Pooled Fund by a second Pooled Fund:

(A) the portfolio securities are acceptable to the Filer as portfolio manager of the second Pooled Fund, and consistent with the investment objective of the second Pooled Fund;

(B) the value of the portfolio securities is equal to the amount at which those securities were valued in calculating the net asset value per Fund Securities used to establish the redemption price of the first Pooled Fund; and

(C) each Fund keeps written records of all In-specie Transfers in a financial year of the Fund, reflecting details of the portfolio securities delivered to the second Pooled Fund by the first Pooled Fund and the value assigned to such securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place; and

(viii) the Filer does not receive any compensation in respect of any sale or redemption of Fund Securities of a Fund and, in respect of any delivery of securities further to an In-specie Transfer, the only charge paid by the Fund, if any, is the commission charged by the dealer executing the trade.

“Neeti Varma”___________________________

Neeti Varma, Manager
Investment Funds and Structured Products Branch
Ontario Securities Commission

File No: 2019/0486