Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted to existing mutual funds subject to NI 81-102 and future mutual funds subject to NI 81-102 for which bank-owned fund managers act as portfolio advisor and/or manager, to permit applicant funds to purchase long-term debt securities of a related entity under primary offerings of the related entity -- Relief subject to conditions including IRC approval, pricing requirements and limits on the amount of the primary offering applicant funds can purchase.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 4.1(2), 19.1.

National Instrument 81-107 Independent Review Committee for Investment Funds, s. 6.2.

January 6, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

(the Legislation)

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR,

NORTHWEST TERRITORIES, YUKON

AND NUNAVUT

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

(MRRS)

AND

IN THE MATTER OF

NATIONAL BANK SECURITIES INC., TD ASSET

MANAGEMENT INC., SCOTIA CASSELS

INVESTMENT COUNSEL LIMITED, SCOTIA

SECURITIES INC., SCOTIA CAPITAL INC.,

RBC ASSET MANAGEMENT INC., PHILLIPS, HAGER

& NORTH INVESTMENT MANAGEMENT LTD.,

BMO HARRIS INVESTMENT MANAGEMENT INC.,

BMO NESBITT BURNS INC., GUARDIAN GROUP

OF FUNDS LTD., BMO INVESTMENTS INC.,

JONES HEWARD INVESTMENT COUNSEL INC.,

CIBC ASSET MANAGEMENT INC. AND

CIBC GLOBAL ASSET MANAGEMENT INC.

(the Applicants)

AND

IN THE MATTER OF THE MUTUAL FUNDS SUBJECT T

O NATIONAL INSTRUMENT 81-102 -- MUTUAL FUNDS

(NI 81-102) FOR WHICH AN APPLICANT CURRENTLY

ACTS AS PORTFOLIO ADVISER AND/OR MANAGER

AND ANY MUTUAL FUNDS SUBJECT TO NI 81-102

THAT MAY BE ESTABLISHED IN THE FUTURE FOR

WHICH THE APPLICANT ACTS AS

PORTFOLIO ADVISOR AND/OR MANAGER

(the Applicant Funds)

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (Decision Maker) in each of the Jurisdictions received an application (the Application) from the Applicants on behalf of each Applicant Fund under Section 19.1 of NI 81-102 for relief from the requirement in Section 4.1(2) of NI 81-102 (the Requested Section 4.1(2) Relief) which prevents a dealer manager mutual fund from investing in a class of securities of an issuer (a Related Person) of which a partner, director or officer of the dealer manager of the mutual fund, or a partner, director, officer or employee of an affiliate or associate of the dealer manager, is a partner, director or officer unless the partner, director, officer or employee

(a) does not participate in the formulation of investment decisions made on behalf of the dealer managed mutual fund;

(b) does not have access before implementation to information concerning investment decisions made on behalf of the dealer managed mutual fund; and

(c) does not influence, other than through research, statistical and other reports generally available to clients, the investment decisions made on behalf of the dealer managed mutual fund.

Under the Mutual Reliance Review System (MRRS) for Exemptive Relief Applications:

(i) the Ontario Securities Commission (the OSC) is the principal regulator for the Application; and

(ii) this MRRS decision document (MRRS Decision) represents the decision of each of the Decision Makers.

Interpretation

Defined terms contained in National Instrument 14-101 -- Definitions, in NI 81-102 and in National Instrument 81-107 -- Independent Review Committee for Investment Funds (NI 81-107) have the same meaning in this MRRS Decision Document unless they are otherwise defined in this Decision Document.

Representations

This decision is based on the following facts represented by an Applicant in respect of the Applicant and the Applicant Funds of the Applicant.

1. Each of the Applicants is or will be the portfolio adviser and/or the manager of the Applicant Funds of the Applicant.

2. Each of the Applicants and the Applicant Funds is or will be compliant with the requirements of NI 81-107. Accordingly, each Applicant Fund has or will have an independent review committee (IRC) established in accordance with NI 81-107.

3. The investment strategies of each of the Applicant Funds that relies on the Requested Section 4.1(2) Relief permit or will permit it to invest in the securities purchased.

4. Related Persons of the Applicants are significant issuers of securities.

5. Section 6.2 of NI 81-107 provides an exemption from the mutual fund conflict of interest investment restrictions for exchange-traded securities, such as common shares. It does not provide relief from Section 4.1(2) of NI 81-102 (Section 4.1(2) Relief) to permit an Applicant Fund to purchase non-exchange-traded securities issued by Related Persons. Some securities of Related Persons, such as debt securities, of the Applicants are not listed and traded.

6. Each of the Applicants, other than Phillips, Hager & North Investment Management Ltd. (PH&N), obtained Section 4.1(2) Relief to permit the Applicants on behalf of the Applicant Funds to purchase Related Person debt securities in the secondary market in an MRRS Decision Document dated May 15, 2008. PH&N received similar relief in a Passport Decision dated April 28, 2008.

7. Each of the Applicants, other than PH&N, is restricted from purchasing and holding non-exchange traded securities that are debt securities of Related Persons on behalf of the Applicant Funds in a primary distribution or treasury offering (a Primary Offering). PH&N received Section 4.1(2) Relief to purchase debt securities of Related Persons in a Primary Offering with a term to maturity of 365 days or more, and to purchase debt securities of Related Persons with a term to maturity of less than 365 days, on May 2, 2008. This relief expires on December 31, 2008.

8. Related Persons (in particular those that are Canadian banks) are issuers of highly rated commercial paper and other debt instruments. The Applicants consider that the Applicant Funds should have access to such securities for the following reasons:

(a) There is currently and has been for several years a very limited supply of highly rated corporate debt.

(b) Diversification is reduced to the extent that an Applicant Fund is limited with respect to investment opportunities.

(c) To the extent that an Applicant Fund is trying to track or outperform a benchmark it is important for the Applicant Fund to be able to purchase any securities included in the benchmark. Debt securities of Related Persons of the Applicants are included in most of the Canadian debt indices.

9. Each Applicant is seeking the Requested Section 4.1(2) Relief to permit the Applicant Funds of the Applicant 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 Person in a Primary Offering.

10. Each non-exchange traded security purchased by an Applicant Fund pursuant to the Requested Section 4.1(2) Relief will be a debt security, other than an asset backed commercial paper security, with a term to maturity of 365 days or more, issued by a Related Person that has been given and continues to have, at the time of purchase, an "approved credit rating" by an approved credit rating organization.

11. Each non-exchange traded debt security purchased by an Applicant Fund pursuant to the Requested Section 4.1(2) Relief will be purchased in a Primary Offering where 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.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Makers with the jurisdiction to make the decision has been met.

The decision of the Decision Makers is that the Requested Section 4.1(2) Relief is granted to permit the Applicants to purchase and hold non-exchange traded debt securities, other than asset backed commercial paper securities, with a term to maturity of 365 days or more, issued by a Related Person in a Primary Offering on behalf of the Applicant Funds on the conditions that:

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

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

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

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

(e) 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;

(f) no Applicant Fund shall participate in the Primary Offering if following its purchase the Applicant Fund would have more than 5% of its net assets invested in non-exchange traded debt securities of the Related Person;

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

(h) the price paid for the securities by an Applicant 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; and

(i) no later than the time the Applicant Fund files its annual financial statements, the Applicant files with the securities regulatory authority or regulator the particulars of any such investments.

This Decision will expire on the coming into force of any securities legislation relating to fund purchases of Related Person debt securities in a Primary Offering.

"Rhonda Goldberg"
Manager, Investment Funds Branch
Ontario Securities Commission