Jones Heward Investment Counsel & RSP American Fund - MRRS Decision

Headnote

Relief to permit RSP clone fund structure.

Statutes Cited

Securities Act, R.S.O. 1990, c. S5, as amended, ss. 111, 117, 118.

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

ONTARIO, NOVA SCOTIA AND NEWFOUNDLAND

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

JONES HEWARD INVESTMENT COUNSEL INC.

JONES HEWARD RSP AMERICAN FUND

MRRS DECISION DOCUMENT

WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of the provincesof British Columbia, Alberta, Saskatchewan, Ontario, Nova Scotia and Newfoundland, (the "Jurisdictions") has receivedan application (the "Application") from Jones Heward Investment Counsel Inc. ("JH"), on behalf of Jones Heward RSPAmerican Fund and other mutual funds managed by JH after the date of this Decision (defined herein) having aninvestment objective that is linked to the returns or portfolio of another specified mutual fund while remaining 100%eligible for registered plans under the Income Tax Act (Canada) (collectively referred to as the "Top Funds"), for adecision pursuant to the securities legislation of the Jurisdictions (the "Legislation") that the following provisions in theLegislation (the "Applicable Requirements") shall not apply in respect of certain investments to be made by the TopFunds in applicable corresponding mutual funds from time to time (the funds in which such investments are to be madebeing collectively referred to as the "Underlying Funds") and in respect of investments to be made by the Top Funds inforward contracts or other specified derivatives with the Bank of Montreal or an affiliate thereof (collectively the "Bank"),as counterparty:

1. the restrictions contained in the Legislation prohibiting a mutual fund from knowingly making or holding aninvestment in a person or company who is a substantial securityholder of the mutual fund, its managementcompany or distribution company;

2. the restrictions contained in the Legislation prohibiting a mutual fund from knowingly making or holding aninvestment in a person or company in which the mutual fund, alone or together with one or more related mutualfunds, is a substantial security holder;

3. the requirements contained in the Legislation prohibiting a portfolio manager or, in British Columbia, the mutualfund, from knowingly causing an investment portfolio managed by it to invest in any issuer in which a"responsible person" (as defined in the Legislation) is an officer or director unless the specific fact is disclosedto the client and, if applicable, the written consent of the client to the investment is obtained before thepurchase; and

4. the requirements contained in the Legislation requiring a management company or, in British Columbia, amutual fund manager, to file a report relating to a purchase or sale of securities between the mutual fund andany related person or company, or any transaction in which, by arrangement other than an arrangement relatingto insider trading in portfolio securities, the mutual fund is a joint participant with one or more of its relatedpersons or companies.

AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive

Relief Applications (the "System"), the Ontario Securities Commission is the principal regulator for this application;

AND WHEREAS it has been represented by JH to the Decision Makers that:

(1) JH is a company incorporated under the laws of Ontario. JH is or will be the manager of each of the TopFunds.

(2) Each of the Top Funds and each of the Underlying Funds is, or will be, an open-end mutual fund trustestablished under the laws of the Province of Ontario.

(3) The securities of the Top Funds and the Underlying Funds are, or will be qualified for sale under a simplifiedprospectus and annual information form filed in all provinces and territories in which they are distributed. Apreliminary simplified prospectus for the Jones Heward RSP American Fund has been filed under SEDARproject number 308423.

(4) The simplified prospectuses will disclose the investment objectives, investment strategies, risks and restrictionsof the Top Funds and the Underlying Funds. The investment objectives of the Top Funds will include disclosureof the names of the Underlying Funds and the Top Funds' total aggregate derivative exposure to and directinvestment in the Underlying Funds.

(5) The investment objectives of the Underlying Funds are, or will be, achieved through investment primarily inforeign securities.

(6) To achieve its investment objective, each of the Top Funds will invest its assets such that its securities will be,in the opinion of tax counsel to the Top Fund, "qualified investments" for registered retirement savings plans,registered retirement income funds, deferred profit sharing plans and similar plans (collectively, "RegisteredPlans") under the Tax Act and will not constitute foreign property in a Registered Plan. This will primarily beachieved by the Top Fund entering into derivative contracts with one or more financial institutions that may beaffiliates of JH that provide a return linked to the returns of its corresponding Underlying Fund. However, eachTop Fund also intends to invest a portion of its assets directly in securities of its corresponding UnderlyingFund. This investment by a Top Fund will at all times be below the maximum foreign property limit prescribedunder the Tax Act for Registered Plans (the "Permitted Limit").

(7) The amount of direct investment by each Top Fund in its applicable Underlying Fund will be adjusted from timeto time so that, except for transitional cash (i.e. cash from purchases not yet invested or cash held to satisfyredemptions), the aggregate of derivative exposure to, and direct investment in, the Underlying Fund will equal100% of the assets of the Top Fund.

(8) A counterparty may, from time to time, invest directly in securities of an Underlying Fund as a hedge againstits obligations under its forward contracts with a Top Fund. A counterparty may have a significant interest inan Underlying Fund due to its hedging activities.

(9) The Top Funds will enter into forward contracts with one or more financial institutions, including the Bank.

(10) The Bank indirectly controls JH and at the time of creation of the RSP Fund, an indirect subsidiary of the Bankwill own 100% of the issued voting securities of JH.

(11) Except to the extent evidenced by this Decision and specific approvals granted by the Canadian securitiesadministrators pursuant to National Instrument 81-102 Mutual Funds ("NI 81-102"), the investments by the TopFunds in the Underlying Funds have been, or will be, structured to comply with the investment restrictions ofthe Legislation and NI 81-102.

(12) In the absence of this Decision, pursuant to the Legislation, the Top Funds are prohibited from: (a) knowinglymaking or holding an investment in any person or company who is a substantial securityholder of the mutualfund, its management company or distribution company; (b) knowingly making or holding an investment in theUnderlying Fund if the Top Fund, alone or together with one or more related mutual funds, is a substantialsecurity holder of the Underlying Fund; and (c) knowingly causing a Top Fund to invest in an issuer in whicha "responsible person" (as that term is defined in the legislation) is a director or officer. As a result, in theabsence of this Decision, the Top Funds would be required to divest themselves of any such investments.

(13) In the absence of this Decision, pursuant to the Legislation, each of the Top Funds is prohibited from investingin forward contracts or other specified derivatives in which the Bank is the counterparty.

(14) In the absence of this Decision, the Legislation requires JH to file a report in respect of every purchase or saleof securities made by the Top Funds in the Underlying Funds or in forward contracts issued by the Bank.

(15) The Top Funds' investment in or redemption of units of their corresponding Underlying Funds or investmentin forward contracts issued by the Bank will represent the business judgment of responsible persons,uninfluenced by considerations other than the best interest of the Top Funds.

AND WHEREAS pursuant to the System this MRRS Decision Document

evidences the decision of each Decision Maker (collectively, the "Decision");

AND WHEREAS each of the Decision Makers is satisfied that the test contained

in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met;

THE DECISION of the Decision Makers pursuant to the Legislation is that the

Applicable Requirements shall not apply so as to prevent a Top Fund from making or holding an investment in securitiesof an Underlying Fund, or require the filing of a report relating to the purchase or sale of such securities,

PROVIDED IN EACH CASE THAT:

1. the Decision, as it relates to the jurisdiction of a Decision Maker, will terminate one year after the publicationin final form of any legislation or rule of that Decision Maker dealing with the matters in section 2.5 of NI 81-102;and

2. the Decision shall only apply if, at the time a Top Fund makes or holds an investment in an Underlying Fund,the following conditions are satisfied:

a. the securities of both the Top Fund and the Underlying Fund are being offered for sale in thejurisdiction of the Decision Maker pursuant to a simplified prospectus and annual information formwhich has been filed with and accepted by the Decision Maker;

b. the investment by the Top Fund in the Underlying Fund is compatible with the fundamental investmentobjectives of the Top Fund;

c. the investment objective of the Top Fund discloses that the Top Fund invests directly and indirectly(through derivative exposure) in the Underlying Fund and the name of the Underlying Fund;

d. the Underlying Fund is not a mutual fund whose investment objective includes investing directly orindirectly in other mutual funds;

e. the Top Fund restricts its direct investment in the Underlying Fund to a percentage of its assets thatis within the Permitted Limit;

f. there are compatible dates for the calculation of the net asset value of the Top Fund and theUnderlying Fund for the purpose of the issue and redemption of securities of such mutual funds;

g. no sales charges are payable by the Top Fund in relation to its purchases of securities of theUnderlying Fund;

h. no redemption fees or other charges are charged by the Underlying Fund in respect of the redemptionby the Top Fund of securities of the Underlying Fund owned by the Top Fund;

i. no fees and charges of any sort are paid by the Top Fund and the Underlying Fund, by theirrespective managers or principal distributors, or by any affiliate or associate of any of the foregoingentities to anyone in respect of the Top Fund's purchase, holding or redemption of the securities ofthe Underlying Fund;

j. the arrangements between or in respect of the Top Fund and the Underlying Fund are such as toavoid the duplication of management fees;

k. any notice provided to securityholders of the Underlying Fund, as required by applicable laws or theconstating documents of the Underlying Fund, has been delivered by the Top Fund to itssecurityholders along with all voting rights attached to the securities of the Underlying Fund which aredirectly owned by the Top Fund;

l. all of the disclosure and notice material prepared in connection with a meeting of securityholders ofthe Underlying Fund and received by the Top Fund has been provided to its securityholders, thesecurityholders have been permitted to direct a representative of the Top Fund to vote its holdings inthe Underlying Fund in accordance with their direction, and the representative of the Top Fund hasnot voted its holdings in the Underlying Funds except to the extent the securityholders of the Top Fundhave directed;

m. in addition to receiving the annual and, upon request, the semi-annual financial statements of the TopFund, securityholders of the Top Fund have received the annual and, upon request, the semi-annualfinancial statements, of the Underlying Fund in either a combined report, containing financialstatements of the Top Fund and the Underlying Fund, or in a separate report containing the financialstatements of the Underlying Fund; and

n. to the extent that the Top Fund and the Underlying Fund do not use a combined simplified prospectusand annual information form containing disclosure about the Top Fund and the Underlying Fund,copies of the simplified prospectus and annual information form of the Underlying Fund have beenprovided upon request to securityholders of the Top Fund and this right is disclosed in the simplifiedprospectus of the Top Fund.

AND THE DECISION of the Decision Makers pursuant to the Legislation is that

the Applicable Requirements shall not apply so as to prevent a Top Fund from entering into forward contracts with theBank,

PROVIDED THAT IN EACH CASE THAT:

1. the Decision shall only apply if, at the time a Top Fund enters into a forward contract with the Bank, thefollowing conditions are satisfied:

a. an independent auditor (the "Contract Auditor"), engaged for this purpose by JH, has reviewed andassessed the pricing and terms of the forward contract offered by the Bank to the Top Fund againstthe pricing and terms offered by the Bank for similar forward contracts to other fund groups offeringRSP clone funds that are similar in size (the "Arm's Length Contracts");

b. the Contract Auditor has provided JH with its opinion which concludes that the pricing and terms ofthe forward contract offered by the Bank to the Top Fund is at least as favourable as the pricing andterms of such Arm's Length Contracts;

c. JH's board of directors has approved the forward contract offered by the Bank;

d. the Contract Auditor has reconsidered and reassessed the forward contracts offered by the Bank tothe Top Fund whenever the Prospectus is renewed and whenever it is proposed to amend the pricingand terms of the forward contract offered by the Bank to the Top Fund;

e. the Prospectus identifies the Bank as the counterparty to the forward contract offered by the Bank tothe Top Fund and discloses the relationship that exists between JH, the Bank and the Top Fund; and

f. the Prospectus describes the Contract Auditor's role of assessing and reassessing the forwardcontract offered by the Bank for the purpose of ensuring that the pricing and terms thereof is, andremains, at least as favourable as Arm's Length Contracts.

January 24, 2001.

"J.A. Geller"       "R. Stephen Paddon"