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

Securities Act (Ontario), ss. 111(2)(a), 111(2)(c)(ii), 111(3), 113, 118(2)(a), 121.

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

December 23, 2008

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

(the Legislation)

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

ONTARIO, QUEBEC, NEW BRUNSWICK,

NOVA SCOTIA, NEWFOUNDLAND AND

LABRADOR

(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.,

AND JONES HEWARD INVESTMENT COUNSEL

INC., CIBC ASSET MANAGEMENT INC. AND

CIBC GLOBAL ASSET MANAGEMENT INC.

(the Applicants)

AND

IN THE MATTER OF

EXISTING MUTUAL FUNDS subject to NI 81-102 --

Mutual Funds (NI 81-102) for which an Applicant acts

as portfolio advisor and/or manager and any mutual

funds subject to NI 81-102 that may be established in

the future for which an 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 for relief from:

(a) the prohibition in the Legislation of the Jurisdictions (the Related Shareholder Relief) that prohibits a mutual fund from making or holding an investment in any person or company who is a substantial security holder of the mutual fund, its management company or distribution company (each a Related Shareholder);

(b) the prohibition in the Legislation of the Jurisdictions (the Related Party Relief) that prohibits a mutual fund from making or holding an investment in an issuer in which a Related Shareholder has a significant interest (each, a Related Party); and

(c) the prohibition in the Legislation of the Jurisdictions (the Related Issuer Relief) that prohibits a portfolio manager or a mutual fund (depending on the Jurisdiction) from investing the portfolio of the mutual fund in any issuer in which a responsible person or an associate of a responsible person is an officer or director, or where his or her own interest might distort his or her judgement (each, a Related Issuer), unless the specific fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase.

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.

In this Decision Document the term Related Person will be used to refer to a Related Shareholder, a Related Party or a Related Issuer depending on the provision that is being considered.

The Related Shareholder Relief, the Related Party Relief and the Related Issuer Relief will be collectively referred to as the Requested Related Person Securities Relief.

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 Related Person Securities Relief permit or will permit it to invest in the securities purchased.

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

5. Each of the Applicants, other than Phillips, Hager & North Investment Management Ltd. (PH&N), previously obtained Related Shareholder Relief, Related Party Relief and Related Issuer Relief so that an Applicant Fund of the Applicant could invest in common shares of Related Persons of the Applicant.

6. TD Asset Management Inc., CIBC Asset Management Inc. (CIBC) and certain affiliates of CIBC also had Existing Related Person Relief that applied to "securities" of the relevant Related Persons.

7. Pursuant to section 7.2 of NI 81-107, the relief referred to in paragraphs 5 and 6 above expired on November 1, 2007.

8. Section 6.2 of NI 81-107 provides an exemption from the prohibitions comprising the Requested Related Person Securities Relief for exchange-traded securities, such as common shares. It does not permit an Applicant Fund, or an Applicant on behalf of 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.

9. Each of the Applicants, other than PH&N, obtained Related Shareholder Relief, Related Party Relief and Related Issuer 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 22, 2008. PH&N received similar relief in a Passport Decision dated April 28, 2008.

10. 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 relief to purchase debt securities of Related Persons 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 behalf of Applicant Funds of PH&N in a Primary Offering in a Passport Decision dated May 2, 2008. This relief expires on December 31, 2008.

11. 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.

12. Each Applicant is seeking the Requested Related Person Securities 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.

13. Each non-exchange traded security purchased by an Applicant Fund pursuant to the Requested Related Person Purchase 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.

14. Each non-exchange traded debt security purchased by an Applicant Fund pursuant to the Requested Related Person Purchase 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 Related Person Securities 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.

"James E.A. Turner"
Vice-Chair
Ontario Securities Commission
 
"Margot C. Howard"
Commissioner
Ontario Securities Commission