Natcan Investment Management Inc. and National Bank Mortgage Fund

Headnote

National Policy.11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from s. 13.5(2)(b)(ii) of NI 31-103 permit the portfolio manager of a Fund to cause the Fund to purchase or sell mortgages from or to the investment portfolio of an associate -- relief subject to conditions including IRC approval and valuation in accordance with Regulation No. 29.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5(2)(b), 15.1.

November 2, 2011

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUÉBEC AND ONTARIO

(The Jurisdictions)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

NATCAN INVESTMENT MANAGEMENT INC.

(The Filer)

AND

NATIONAL BANK MORTGAGE FUND

(The Fund)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer (the Application) for a decision under the securities legislation of the Jurisdictions (the Legislation) pursuant to section 15.1 of Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (Regulation 31-103) for relief from the prohibition in sub-paragraph 13.5(2)(b)(ii) of Regulation 31-103 to permit the Filer, or any other affiliate of National Bank of Canada (NBC) that acts as portfolio manager for the Fund in the future, to cause the Fund to purchase or sell mortgages from or to the investment portfolio of any of the NBC Affiliates (the Exemption Sought).

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

(a) the Autorité des marchés financiers is the principal regulator for this application,

(b) the Filer has provided notice that subsection 4.7(1) of Regulation 11-102 respecting Passport System (Regulation 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Newfoundland and Labrador, and Northwest Territories; and

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 14-101 respecting Definitions and Regulation 11-102 have the same meaning if used in this decision, unless otherwise defined.

"NBC Affiliates", means NBC and the Affiliates;

"the Affiliates", means National Bank Financial Inc., National Bank Financial Ltd. and other affiliates of the Filer acting as principal.

Representations

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

1. The Filer is the portfolio manager of the Fund.

2. The Filer is a corporation organized under the laws of the province of Québec, with its head office located in Montréal, Québec. NBC has a direct and indirect majority interest in the Filer.

3. The Filer is registered under applicable securities legislation (i) as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer in each jurisdiction of Canada except Prince Edward Island, Yukon and Nunavut; (ii) as an investment fund manager and a derivatives portfolio manager in the province of Québec; and (iii) as a commodity trading manager in the province of Ontario.

4. National Bank Securities Inc. (the Manager) is the investment fund manager of the Fund.

5. The Manager is a corporation organized under the laws of Canada, with its head office located in Montréal, Québec. NBC indirectly wholly owns the Manager.

6. The Manager is registered under applicable securities legislation (i) as a dealer in the category of mutual fund dealer in each jurisdiction of Canada; and (ii) as an investment fund manager in the province of Québec. The Manager is a member of the Mutual Fund Dealers Association of Canada.

7. The Fund is an open-ended mutual fund, organized as a trust pursuant to the laws of Ontario. The Fund is a reporting issuer in each jurisdiction of Canada. Units of the Fund are qualified for sale under a simplified prospectus and annual information form prepared and filed in accordance with the requirements of Regulation 81-101 respecting Mutual Fund Prospectus in each jurisdiction of Canada.

8. Neither of the Filer nor the Fund is in default of securities legislation in any of the jurisdictions of Canada, except for a non-compliance to sub-paragraph 13.5(2)(b)(ii) of Regulation 31-103 and a non-compliance to section 4.2 of Regulation 81-102 respecting Mutual Funds (Regulation 81-102) with respect to purchases of mortgages from NBC prior to November 27, 2009. The Fund has inadvertently failed to obtain relief from section 4.2 of Regulation 81-102 (for which separate relief has been requested) and the Filer has inadvertently failed to obtain the Exemption Sought.

9. Disclosure of purchases from NBC was provided in the simplified prospectus and other disclosure documents filed with the securities regulatory authorities in the jurisdictions of Canada and delivered to the Fund's unitholders upon request as required pursuant to the Legislation. The Fund has not purchased any mortgages from any NBC Affiliate since November 27, 2009.

10. The Manager has appointed an independent review committee (IRC) under Regulation 81-107 respecting Independent Review Committee for investment Funds (Regulation 81-107) for the Fund.

11. The IRC has been informed of the failure to obtain the Exemption Sought for purchases of mortgages from NBC prior to November 27, 2009 and of the filing of the Application.

12. The IRC of the Fund will consider the policies and procedures of the Manager and will provide its approval on whether the proposed transactions in mortgages achieve a fair and reasonable result for the Fund in accordance with subsection 5.2(2) of Regulation 81-107.

13. The Fund's investment objectives are to provide a high level of income while providing sustained capital growth and preserving capital. The purchase and sale of mortgages by the Fund from or to NBC Affiliates is consistent with the investment objectives of the Fund.

14. Mortgages purchased by the Fund from NBC are purchased pursuant to Regulation No. 29 respecting Mutual Funds Investing in Mortgages (Regulation No. 29) at the "modified lender's rate" (namely at the principal amount which will produce a yield to the Fund not more than a quarter of one percent less than the interest rate at which NBC is making commitments, at the time of purchase, to loan on the security of comparable mortgages), in accordance with a Mutual Reliance Review System decision dated March 18, 2004.

15. The Fund purchases mortgages from NBC and may purchase mortgages from the other NBC Affiliates.

16. NBC has been retained to administer the mortgages held in the Fund that have been acquired from NBC pursuant to a sale and mortgage administration agreement. Mortgages purchased from an NBC Affiliate other than NBC will also be administered in accordance with an administration agreement to be entered into by or on behalf of the Fund.

17. The Fund only purchases a mortgage from an NBC Affiliate if:

(a) the transaction is made in accordance with the "Not at Arm's Length Transactions" provision of Regulation No. 29;

(b) where the transaction is made pursuant to the modified lender's rate (namely, at the principal amount which will produce a yield to the Fund of not more than a quarter of one percent less than the interest rate at which NBC is making commitments, at the time of purchase, to loan on the security of comparable mortgages):

(i) the NBC Affiliate that sells the mortgage to the Fund enters into an agreement (the Repurchase Agreement) with the Fund whereby the NBC Affiliate is obligated to repurchase it if the mortgage goes into default for more than 90 days and in circumstances benefiting the Fund; and

(ii) the Filer considers that the Repurchase Agreement is sufficient to justify the difference in yield referred to in sub-paragraph (b) above;

(c) NBC guarantees the performance of the Affiliate under the Repurchase Agreement referred to in sub-paragraph (b)(i) above;

(d) the Manager causes the Fund to comply with the disclosure provisions of Regulation No. 29, subject to the representations made in connection with the Exemption Sought; and

(e) the simplified prospectus of the Fund discloses that the Fund will engage in principal transactions in mortgages with the NBC Affiliates.

18. The provisions of Regulation No. 29 set out guidelines relating to the acquisition of mortgages by a mutual fund from lending institutions with whom such fund does not deal at arm's length and provide certain protections to the investing public.

19. The Filer only causes the Fund to purchase a mortgage from or sell a mortgage to an NBC Affiliate if the transaction is made in accordance with the "Not at Arm's Length Transactions" provision of Regulation No. 29.

20. None of the NBC Affiliates from which mortgages are purchased or to which mortgages are sold for the Fund, or any of their directors, officers or employees, participate in the formulation of investment decisions made on behalf of, or advice given to, the Fund by the Filer.

21. All decisions to purchase mortgages for the Fund's portfolio from an NBC Affiliate are made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

22. The Filer is of the view that the purchase and sale of mortgages between the Fund and NBC Affiliates are in the best interests of the Fund.

23. To the extent that the Fund purchases mortgages from, or sells mortgages to, NBC Affiliates, this fact is set out in each of the simplified prospectus, annual information form and management report of fund performance of the Fund in accordance with applicable securities legislation.

24. Sub-paragraph 13.5(2)(b)(ii) of Regulation 31-103 prohibits a registered adviser from 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 the Filer or of any other "responsible person".

25. NBC has a direct and/or indirect majority interest in the Filer and the Affiliates and thus the NBC Affiliates are associates of the Filer. As a result, the Filer is prohibited by sub-paragraph 13.5(2)(b)(ii) of Regulation 31-103 from causing the Fund to purchase or sell mortgages from or to the investment portfolio of the NBC Affiliates.

26. Regulation 81-107 does not provide an exemption for principal trading of the type contemplated by the Exemption Sought.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

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

(b) the IRC of the Fund has approved the transaction in accordance with subsection 5.2(2) of Regulation 81-107;

(c) the Manager, as manager of the Fund, complies with section 5.1 of Regulation 81-107;

(d) the Manager, as manager of the Fund, and the IRC of the Fund comply with section 5.4 of Regulation 81-107 for any standing instructions the IRC provides in connection with the transactions;

(e) the Fund keeps the written records of the transactions as described in paragraph 6.1(2)(g) of Regulation 81-107; and

(f) the mortgages are acquired from an NBC Affiliate or sold to an NBC Affiliate in accordance with Regulation No. 29 (or any successor policy, instrument or regulation) and this information is disclosed in accordance with Regulation No. 29 (or any successor policy, instrument or regulation), including disclosure through inclusion in a document incorporated by reference into the simplified prospectus of the Fund.