Section 5.1 of Rule 31-506 SRO Membership -- Mutual Fund Dealers -- variation of previous order exempting mutual fund dealer and investment counsel/portfolio manager from the requirement to be a member of the Mutual Fund Dealers Association of Canada -- modification of terms and conditions pursuant to previous order -- definitions of "Managed Account" and "Managed Account Trade" modified in order to include fully managed accounts managed by affiliates.
Securities Act (Ontario), R.S.O. 1990, c. S.5, as am.
Rule 31-506 SRO Membership -- Mutual Fund Dealers, s. 5.1.
February 20, 2009
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
IN THE MATTER OF
PHILLIPS, HAGER & NORTH ASSET
(Section 5.1 of the Ontario Securities Commission
Rule 31-506 SRO Membership -- Mutual Fund Dealers)
UPON the Director having received an application from Phillips, Hager & North Asset Management Inc. (the Applicant) for a decision pursuant to section 5.1 of Ontario Securities Commission Rule 31-506 SRO Membership -- Mutual Fund Dealers (Rule 31-506) to amend the existing terms and conditions (the Existing Terms and Conditions) placed on the Applicant's registration under the Act as a mutual fund dealer pursuant to a decision of the Director dated December 21, 2001 (the Original Decision) so as to permit the Applicant to effect trades in units of certain investment funds managed and investment managed by the Applicant to accounts that are fully managed by affiliates of the Applicant, without being a member of the Mutual Fund Dealers Association of Canada (the MFDA).
AND UPON considering the application and the recommendation of staff of the Ontario Securities Commission (the Commission);
AND UPON the Applicant having represented to the Director as follows:
1. All representations contained in the Original Decision remain true and complete except in respect of certain revisions to which reference is made herein, and except that the "Reorganization" (as defined in the Original Decision) is now complete.
2. Pursuant to the Original Decision, the Applicant is exempt from the requirement under section 2.1 of Rule 31-506 to be a member of the MFDA, provided that it complies with the Existing Terms and Conditions.
3. On May 1, 2008, the Applicant became an indirect, wholly owned subsidiary of Royal Bank of Canada (RBC) and an affiliate of RBC Private Counsel Inc. (RBC PC).
4. RBC PC is registered under the Act in the categories of investment counsel and portfolio manager. RBC PC's business consists, primarily, of the operation of "fully managed accounts," as defined in National Instrument 45-106 Prospectus and Registration Exemptions (the RBC PC Managed Accounts).
5. RBC PC currently invests a significant portion of the assets held in the RBC PC Managed Accounts in a family of mutual funds (the RBC Private Pools) that are offered pursuant to a simplified prospectus and annual information form and that are governed by National Instrument 81-102 Mutual Funds (NI 81-102). The manager and portfolio adviser of the RBC Private Pools is RBC Asset Management Inc. (RBC AM), another wholly owned subsidiary of RBC and an affiliate of both RBC PC and the Applicant.
6. RBC PC places purchase and redemption orders for the RBC Private Pools directly with RBC AM and RBC AM executes those orders in reliance on its registration in Ontario as a limited market dealer and in compliance with the terms and conditions of an MRRS Decision Document dated June 11, 2003 (the RBC AM Exemption).
7. The Applicant is the manager and portfolio adviser of a family of mutual funds (the PH&N Prospectus Funds) that are offered pursuant to a simplified prospectus and annual information form and that are governed by NI 81-102, as well as of a family of mutual funds that are offered pursuant to exemptions from the prospectus requirements (the PH&N Pooled Funds).
8. RBC PC has indicated that it would like to include the PH&N Prospectus Funds and selected PH&N Pooled Funds (collectively, the PH&N Funds) in the suite of products it purchases on behalf of the RBC PC Managed Accounts and, in connection therewith, the Applicant wishes to be permitted to accept orders for the PH&N Funds directly from RBC PC (the RBC PC Direct Orders).
9. Without the requested relief, the execution of RBC PC Direct Orders placed on behalf of RBC PC Managed Accounts in Ontario would not constitute "Managed Account Trades" under paragraph 1(o) of the Existing Terms and Conditions because the RBC PC Managed Accounts are not "Managed Accounts" within the meaning of paragraph 1(n) of the Existing Terms and Conditions and because paragraph 1(o) requires that the trade be made to a Managed Account "of" the Applicant. Accordingly, execution of RBC PC Direct Orders would not be permitted under paragraph 5(e) of the Existing Terms and Conditions.
10. Other RBC-related affiliates of the Applicant that operate fully managed accounts (the Other RBC-Affiliated Managed Accounts) may also, from time to time, wish to purchase the PH&N Funds on behalf of such Other RBC-Affiliated Managed Accounts. Without the requested relief, the Applicant would be prohibited from executing trades to Other RBC-Affiliated Managed Accounts for the same reasons described in paragraph 9.
11. The requested relief is intended solely to facilitate the distribution of all RBC-affiliated products on a consistent basis through all appropriate RBC distribution channels. RBC AM is permitted to execute RBC PC Direct Orders under paragraphs E and F of the RBC AM Exemption and is permitted under those same paragraphs to execute orders placed by the Applicant's investment counsellors on behalf of their managed accounts for units of any mutual fund in respect of which RBC AM acts as manager.
12. The execution of Managed Account Trades (as defined in Paragraph 1(o) of the Terms and Conditions, as amended) would be solely incidental to the Applicant's core business as a portfolio manager. The Applicant does not anticipate that any of its staff would have direct contact with clients of any of its affiliates for the purpose of marketing or selling the PH&N Funds when relying on its mutual fund dealer registration in Ontario, and all decisions to purchase PH&N Funds on behalf of a Managed Account would be made by the applicable affiliate or its registered advisory staff exercising their Know your Client, suitability and good faith obligations under sections 1.5 and 2.1 of Ontario Securities Commission Rule 31-505 Conditions of Registration, as well as the general fiduciary obligation owed to the Managed Accounts.
AND UPON the Director being satisfied that to do so would not be prejudicial to the public interest;
IT IS THE DECISION of the Director, pursuant to section 5.1 of the Rule, that:
(a) Subparagraph 1(n) of the Existing Terms and Conditions to the Original Decision be and hereby is removed and replaced with the following:
""Managed Account" means an investment portfolio account of a client under which the Registrant or an affiliate of the Registrant, pursuant to a written agreement made between the client and the Registrant or affiliate of the Registrant, makes investment decisions for the account and has full discretionary authority to trade in securities for the account without obtaining the client's specific consent to the trade;" and
(b) Subparagraph 1(o) of the Existing Terms and Conditions to the Original Decision be and hereby is removed and replaced with the following:
""Managed Account Trade" means, for the Registrant or an affiliate of the Registrant, a trade to, or on behalf of a Managed Account of the Registrant or an affiliate of the Registrant, where the trade consists of a purchase or redemption, placed with the Registrant of securities of a mutual fund, that is made on behalf of a Managed Account; where, in each case,
(i) the Registrant is the portfolio adviser to the mutual fund;
(ii) the mutual fund is managed by the Registrant or an affiliate of the Registrant; and
(iii) either of:
(A) the mutual fund is prospectus qualified in Ontario; or
(B) the trade is not subject to sections 25 and 53 of the Act."