Securities Law & Instruments

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Coordinated Review -- The relief provides an exemption, pursuant to section 233 of Regulation 1015 made under the Securities Act (Ontario) (the Regulation) from the prohibition in section 227(2)(b)(ii) of the Regulation. The prohibition prevents a registrant, when acting as a portfolio manager with discretionary authority, from providing advice with respect to a client's account to purchase and/or sell the securities of a related issuer or a connected issuer of the registrant, unless the registrant (i) secures the specific and informed written consent of the client once in each twelve month period and (ii) provides the client with its statement of policies.

Statutes Cited

Regulation 1015 made under the Securities Act (Ontario), ss. 227(2)(b)(ii), 233.

July 8, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO, NEW BRUNSWICK, NOVA SCOTIA AND

NEWFOUNDLAND AND LABRADOR

(the Jurisdictions)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

TD WATERHOUSE CANADA INC.,

TD ASSET MANAGEMENT INC. AND

TD WATERHOUSE PRIVATE INVESTMENT

COUNSEL INC.

(the Filers)

 

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption from the requirement contained in the Legislation that no registrant shall act as an adviser in respect of securities of the registrant or of a related issuer of the registrant or, in the course of a distribution, in respect of securities of a connected issuer of the registrant (the Conflict of Interest Restriction) unless, in the case of a registrant acting as a portfolio manager, the registrant, before acquiring discretionary authority in respect of the securities and once within each twelve-month period thereafter:

(a) provides the client with the statement of policies of the registrant; and

(b) secures the specific and informed written consent of the client to the exercise of the discretionary authority in respect of the securities (the Annual Consent Requirement).

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

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) the decision is the decision of the principal regulator and evidences the decision of each other Decision Maker.

Interpretation

Terms defined in National Instrument 14-101 Definitions have the same meaning if used in this decision unless otherwise defined.

Representations

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

The Filers

1. TD Waterhouse Canada Inc. (TDWCI) is a corporation incorporated under the Business Corporations Act (Ontario) (the OBCA). It is a wholly-owned subsidiary of The Toronto-Dominion Bank (TD Bank) and its head office is located in Toronto, Ontario.

2. TDWCI is registered as an investment dealer or its equivalent in all provinces and territories of Canada, is a member of the Investment Industry Regulatory Organization of Canada and is an approved participant of the Montreal Exchange.

3. TD Asset Management Inc. (TDAM) is a corporation amalgamated under the OBCA. It is a wholly-owned subsidiary of TD Bank that has its head office located in Toronto, Ontario.

4. TDAM is registered as:

(a) an investment counsel and portfolio manager, or their equivalent, under the securities legislation of all provinces and territories of Canada;

(b) a mutual fund dealer under the Securities Act (Nova Scotia);

(c) a limited market dealer under the Securities Act (Ontario) (the OSA) and the Securities Act (Newfoundland and Labrador) (the NLSA); and

(d) a commodity trading manager under the Commodity Futures Act (Ontario).

5. TD Waterhouse Private Investment Counsel Inc. (TDW PIC) is a corporation incorporated under the Canada Business Corporations Act. It is a wholly-owned subsidiary of TDAM that has its head office located in Toronto, Ontario.

6. TDW PIC is registered as an investment counsel and portfolio manager or their equivalent under the securities legislation of all provinces and territories of Canada and as a limited market dealer under the OSA and the NLSA.

7. Each of the Filers is not in default of securities legislation in any of the Jurisdictions.

8. TDWCI currently offers its clients two managed account options and may, in the future, offer other discretionary investment management services. The first option is the Premier Managed Portfolio Program (the Premier Program) and the second option is the Managed Account Program.

The Premier Program

9. The Premier Program is a "wrap" account program that provides TDWCI's clients participating in the Premier Program (Premier Clients) with access to investment advice from a number of different portfolio management firms that are located in a variety of different jurisdictions throughout the world.

10. Pursuant to the agreement that is entered into between TDWCI and a Premier Client (the Premier Agreement), the Premier Client grants TDWCI discretionary investment authority over the Premier Client's account (a Premier Account) and acknowledges that TDWCI has appointed TDAM as sub-adviser for the Premier Account, that TDAM, as sub-adviser, is authorized to exercise discretionary investment authority over the Premier Account and that TDAM may appoint other sub-advisers and authorize them to exercise discretionary investment authority over all, or part of, the Premier Account.

11. Following the conduct of a rigorous search and selection process, TDWCI identifies and selects those third party portfolio management firms that will participate in the Premier Program (Premier Portfolio Managers).

12. Each Premier Portfolio Manager is given an investment mandate and is asked to maintain a model portfolio that seeks to fulfil the investment mandate by making related investment recommendations to TDAM from time to time.

13. TDAM does not generally deviate from a model portfolio recommended by a Premier Portfolio Manager unless it is required to do so in accordance with instructions that it receives from a Premier Client or unless it is required to do so in accordance with applicable laws or the agreement with the Premier Portfolio Manager.

14. Premier Clients may change Premier Portfolio Managers from time to time in consultation with, and based upon recommendations received from, TDWCI.

15. The Premier Program offers Premier Clients an all-inclusive fee structure with no embedded fees. Premier Clients are required to pay TDWCI a single annual fee that is expressed as a percentage of assets under management within the Premier Program and that is payable monthly in arrears.

The Managed Account Program

16. The Managed Account Program is a more traditional asset management service that provides TDWCI's clients with access to the discretionary investment management services that are available from TDWCI's investment advisers.

17. TDWCI clients that participate in the Managed Account Program (MA Clients) enter into a managed account client agreement with TDWCI (Managed Account Agreement) pursuant to which TDWCI is granted discretionary investment authority over an MA Client's account.

Separately Managed Accounts

18. As part of its operations, TDAM provides discretionary investment management services to separately managed accounts (SMAs) pursuant to a written agreement (a SMA Agreement) between TDAM and its client (a SMA Client). The SMA Agreement grants TDAM discretionary investment authority to purchase or sell securities for an SMA.

The Funds

19. TDAM is also the manager and promoter of various investment funds (the TDAM Funds) that are offered for sale by means of confidential offering memoranda to institutional investors, members of corporate sponsored group plans and SMAs pursuant to exemptions from prospectus and registration requirements of applicable securities legislation.

20. TDAM also acts as the trustee, manager and promoter of the TD Mutual Funds, the TD MAP Portfolios, the TD Private Funds and the TD Pools (collectively, the TD Funds), and as the manager and promoter of the TD Emerald Pooled Funds and the TD Emerald Treasury Management Pooled Funds (collectively, the TD Emerald Funds). The TD Funds and the TD Emerald Funds are offered for sale by means of simplified prospectuses and annual information forms that have been prepared and filed in accordance with applicable Canadian securities regulatory requirements.

21. The TD Mutual Funds currently consist of 69 different mutual funds that are offered for sale to retail investors by TD Investment Services Inc. at TD Canada Trust branches and through independent brokers and dealers.

22. The TD MAP Portfolios currently consist of 15 different mutual funds that invest in, among other things, units of the TD Mutual Funds and thereby serve to provide their unitholders with a discretionary asset allocation service. The TD MAP Portfolios are offered for sale to retail investors through the same distribution channels that are used for the sale of TD Mutual Funds.

23. The TD Private Funds currently consist of 12 different mutual funds that are used for servicing accounts that are fully managed by TDW PIC.

24. The TD Pools currently consist of 3 different mutual funds that are only offered for sale to investors that have entered into an agreement with TDAM.

25. The TD Emerald Pooled Funds currently consist of 7 different mutual funds that are only offered for sale to institutional investors, members of corporate sponsored group plans and SMAs.

26. The TD Emerald Treasury Management Pooled Funds currently consist of 4 different mutual funds that are only offered for sale to institutional investors, members of corporate sponsored group plans and SMAs as well as to other accredited investors who do not receive advice from TDAM in respect of their investments in the TD Emerald Treasury Management Pooled Funds.

27. TDW PIC utilizes the TD Private Funds to provide customized investment strategies to clients (PIC Clients) who have $500,000 or more of investable assets. PIC Clients must enter into an investment management agreement (the PIC Agreement) with TDW PIC. The PIC Agreement grants TDW PIC discretionary investment authority over a PIC Client's account and it authorizes TDW PIC to exercise such discretion to purchase and redeem units of the TD Private Funds on behalf of the PIC Client.

28. In addition to the Premier Program and the Managed Account Program offered by TDWCI, the SMAs offered by TDAM and the customized investment strategies that are provided to PIC Clients by TDW PIC, TDWCI, TDAM, TDW PIC and other affiliates of TD Bank (collectively, the TD Portfolio Managers) may offer other discretionary investment management services to their clients from time to time.

29. TD Bank is, or will be, a related issuer of each TD Portfolio Manager because each TD Portfolio Manager is, or will be, a direct or indirect subsidiary of TD Bank.

30. Each of the TDAM Funds, the TD Funds, the TD Emerald Funds and any other investment funds that may, in the future, be managed by a TD Portfolio Manager (individually, a Fund and collectively, the Funds) is, or will be, a connected issuer of a TD Portfolio Manager because the Funds are, or will be, in continuous distribution and they are, or will be, managed by a TD Portfolio Manager.

31. A Fund may also be a related issuer of a TD Portfolio Manager on a temporary basis as a result of National Instrument 81-102 Mutual Funds that requires, among other things, the manager of a mutual fund to provide $150,000 of seed capital when starting a new mutual fund which could cause a TD Portfolio Manager to hold more than 20% of the units of the new mutual fund.

32. Each TD Portfolio Manager and each Premier Portfolio Manager is, or will be, registered, or exempt from registration, as an investment counsel and portfolio manager or their equivalent in accordance with applicable Canadian securities regulatory requirements.

33. Every client of a TD Portfolio Manager (a TD Client) that has retained, or wishes to retain, the discretionary portfolio management services of the TD Portfolio Manager has entered, or will enter, into a form of investment management agreement (IM Agreement) that authorizes the TD Portfolio Manager to exercise its discretion to invest and reinvest the assets of the TD Client that are held in an account that has been, or will be, established and maintained by the TD Portfolio Manager on behalf of the TD Client.

34. Each TD Client will receive a copy of his, her or its TD Portfolio Manager's Statement of Policies, as prescribed by the Legislation (the Statement of Policies), that will include a conflicts statement; a list of the related issuers of the TD Portfolio Manager, which will include TD Bank and the Funds; a description of the nature of the relationship that exists between the TD Portfolio Manager and each of its related issuers; and a description of the relationship that may exist between the TD Portfolio Manager and any connected issuer thereof. In the event of a significant change in its Statement of Policies, as required by the Legislation, the TD Portfolio Manager will provide each of its TD Clients with a copy of the revised version of, or amendment to, the Statement of Policies.

35. As a portfolio manager, each of the TD Portfolio Managers is, or will be, in a fiduciary relationship with the TD Clients and, as such, it is, or will be, subject to certain fiduciary duties which include the duty to act in good faith and in the best interest of its TD Clients and the duty to avoid conflicts of interest.

36. Depending upon the nature and scope of the discretionary investment mandate that is granted to a TD Portfolio Manager by a TD Client, it may be in the best interests of the TD Client for the TD Portfolio Manager to have an unfettered discretion to invest the assets of the TD Client in the securities of TD Bank, the Funds and other related or connected issuers of the TD Portfolio Manager.

37. Before exercising, or permitting a Premier Portfolio Manager to exercise, any discretionary authority to invest the assets of a TD Client in the securities of TD Bank, the Funds or any other related or connected issuer of a TD Portfolio Manager, the TD Portfolio Manager will provide the TD Client with its Statement of Policies and it will secure the TD Client's specific and informed written consent to permit the TD Portfolio Manager, or Premier Portfolio Manager, as the case may be, to make such investments through the exercise of the discretionary investment authority granted by the TD Client.

38. Having secured the specific and informed written consent of its TD Clients, a TD Portfolio Manager or Premier Portfolio Manager should be permitted to exercise the discretionary authority granted to the TD Portfolio Manager by a TD Client in accordance with its fiduciary obligation to act in good faith and in the best interests of the TD Client having regard to the applicable investment mandate and any related investment instructions provided by the TD Client.

39. The Annual Consent Requirement is inconsistent with such discretionary authority and with a TD Client's contractual right to amend and/or terminate an IM Agreement and thereby modify or withdraw any consent previously given to a TD Portfolio Manager.

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 each TD Portfolio Manager is exempt from the Annual Consent Requirement in connection with its exercise, or the exercise by a Premier Portfolio Manager, of discretionary investment authority granted by a TD Client in respect of securities of related issuers of the TD Portfolio Manager and, in the course of a distribution, securities of connected issuers of the TD Portfolio Manager provided that,

A. at the relevant time:

(i) before exercising, or permitting a Premier Portfolio Manager to exercise, any discretionary authority to invest the assets of a TD Client in the securities of TD Bank, the Funds or any other related or connected issuer of a TD Portfolio Manager, the TD Portfolio Manager provides the TD Client with its Statement of Policies and secures the TD Client's specific and informed written consent to permit the TD Portfolio Manager or Premier Portfolio Manager, as the case may be, to make such investments through the exercise of the discretionary investment authority granted by the TD Client;

(ii) the Statement of Policies makes, or will make, full disclosure of the relationship that exists, or will exist, between a TD Portfolio Manager and TD Bank, the Funds and any other related issuer of the TD Portfolio Manager that is referred to in the Statement of Policies and it also discloses, or will disclose, the nature of the relationship that may exist between a TD Portfolio Manager and any connected issuer thereof;

(iii) in the case of the Premier Program, neither TDWCI nor TDAM participates in, or influences, the investment recommendations of a Premier Portfolio Manager in making its recommendation; and

(iv) in the case of discretionary investment management services offered by a TD Portfolio Manager from time to time, all investment decisions to invest in securities of related issuers of the TD Portfolio Manager or, in the course of a distribution, securities of connected issuers of the TD Portfolio Manager, are uninfluenced by considerations other than the best interests of the TD Client; and

B. this Decision will terminate on the day that is two years after the date of this Decision.

"Lawrence E. Ritchie"
Commissioner
Ontario Securities Commission
 
"James Turner"
Commissioner
Ontario Securities Commission