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UBS Global Asset Management (Canada) Co. - MRRS Decision
Headnote
One time trade of securities between existing pooled funds and managed accounts, all advised by the same portfolio adviser, to implement a reorganization of the pooled funds exempt from the self-dealing restriction of section 118(2)(b) -- Relief also granted from section 118(2)(b) to allow in specie transfers between pooled funds and managed accounts.
Statutes Cited
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 118(2)(b), 121(2)(a)(ii).
September 9, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO, ALBERTA, SASKATCHEWAN, QUEBEC, NEW BRUNSWICK,
NOVA SCOTIA AND NEWFOUNDLAND AND LABRADOR (the "Jurisdictions")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE APPLICATIONS
AND
IN THE MATTER OF
UBS GLOBAL ASSET MANAGEMENT (CANADA) CO. (the "Filer")
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") that the prohibition contained in the Legislation that prohibits a portfolio manager from knowingly causing an investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager (the "Self-Dealing Prohibition") shall not apply to effect certain transfers of securities (a) between the Discontinuing Funds and the Separately Managed Accounts and between the Separately Managed Accounts and the Consolidating Funds in connection with a Reorganization of the Discontinuing Funds; and (b) between the Separately Managed Accounts and Pooled Funds, all as defined below.
Under the Mutual Reliance Review System for Exemptive Relief Applications
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation existing under the laws of Nova Scotia with its head office in Toronto, Ontario.
2. The Filer is registered under the Legislation as an adviser in the categories of investment counsel and portfolio manager (or the equivalent). The Filer is also registered as a limited market dealer in Ontario and Newfoundland.
3. The Filer is the portfolio manager of pooled funds (the "Existing Pooled Funds"), which have been established pursuant to an amended and restated trust agreement dated April 8, 2002 and separate supplemental trust agreements for each fund. New pooled funds may also be established by the Filer in the future, of which the Filer will be appointed the portfolio manager (the "Future Pooled Funds", and together with the Existing Pooled Funds, the "Pooled Funds").
4. Each of the Pooled Funds is, or will be, an open-end mutual fund trust established under the laws of the Province of Ontario. The Pooled Funds are not and will not be reporting issuers in any province or territory of Canada. Units of the Pooled Funds are or will be distributed in each of the provinces and territories of Canada without a prospectus pursuant to exemptions from the registration and prospectus requirements of the Legislation.
5. The Pooled Funds are an administratively efficient construction that is designed to permit the Filer to build larger investment models rather than reproduce those same models in individual client accounts over which the Filer currently maintains, or may in the future maintain, discretionary authority ("Separately Managed Accounts").
6. Certain of the Pooled Funds (the "Discontinuing Funds") and the respective Pooled Fund set out below next to such Discontinuing Fund (the "Consolidating Funds") have similar investment objectives and are managed pursuant to similar investment strategies. In order to take advantage of investment efficiencies, the Filer would like to proceed with a number of reorganizations (the "Reorganizations") involving the orderly consolidation of the Discontinuing Funds into the Consolidating Funds as follows:
7. It is proposed that the consolidations of the Pooled Funds described above will be effected by the redemption of units of the Discontinuing Funds by the investors of the Discontinuing Funds (which are Separately Managed Accounts) through making good delivery of portfolio securities (each such transfer of portfolio securities is referred to as an "In Specie Transfer") to such investors.
8. It is proposed that the Filer would permit payment, in whole or in part, for units of the Consolidating Funds to be satisfied by In Specie Transfers of securities by the investors who received an In Specie Transfer of securities from the Discontinuing Funds, provided that those securities meet the investment criteria of the relevant Consolidating Fund and are acceptable to the portfolio adviser of the relevant Consolidating Fund. While the portfolio holdings of the Consolidating Funds are anticipated to be identical to those of the Discontinuing Funds, to the extent to which any holding is considered to be unsuitable for the applicable Consolidating Fund, the Filer will arrange for such holdings to be liquidated and replaced with cash or suitable securities.
9. The Filer is the portfolio manager of Separately Managed Accounts pursuant to discretionary management agreements ("Managed Account Agreements"). Where compatible investment objectives and investment efficiencies exist, the Filer may utilize investments in its Pooled Funds for its Separately Managed Accounts.
10. In order to ensure that neither the Separately Managed Accounts nor a Pooled Fund incurs significant expenses related to the disposition and acquisition of portfolio securities in connection with the purchase or redemption of units of a Pooled Fund, the Filer proposes to facilitate such purchases and redemptions of Pooled Fund units by In Specie Transfers. These transactions will either involve the payment of the purchase price for units of a Pooled Fund or the payment of the redemption price of units of a Pooled Fund by In Specie Transfers between the Separately Managed Account and the Pooled Funds. The Filer will obtain the prior specific written consent of the relevant Separately Managed Account client before it engages in any In Specie Transfers in connection with the purchase or redemption of units of Pooled Funds for its Separately Managed Accounts.
11. Cross-trading allows a portfolio manager to efficiently retain within its control institutional-size blocks of securities that otherwise would need to be broken and re-assembled. Such securities often are those that trade in lower volumes, with less frequency, and have larger bid-ask spreads. Effecting internal cross-trades of securities to implement the Reorganizations and internal cross-trades between Separately Managed Accounts and Pooled Funds in connection with purchases or redemptions of Pooled Fund units reduces brokerage costs and costs caused by market movements, which can be detrimental to the Pooled Funds and the Separately Managed Account clients of the Filer.
12. The only cost which will be incurred by a Pooled Fund or Separately Managed Account for an In Specie Transfer is a nominal administrative charge levied by the custodian of the Pooled Fund in recording the trades (the "Custodial Charge").
13. The Royal Trust Company (the trustee, custodian and administrator of the Pooled Funds) will value the securities transferred under an In Specie Transfer on the same valuation day on which the unit purchase price or redemption price of a Pooled Fund is determined. With respect to the purchase of units of a Pooled Fund, the securities transferred to a Pooled Fund under an In Specie Transfer in satisfaction of the purchase price of those units will be valued as if the securities were portfolio assets of the Pooled Fund, as contemplated by subsection 9.4(2)(b)(iii) of National Instrument 81-102 -- Mutual Funds ("NI 81-102"). With respect to the redemption of units of a Pooled Fund, the securities transferred to a Separately Managed Account in satisfaction of the redemption price of those units will have a value equal to the amount at which those securities were valued in calculating the net asset value per security used to establish the redemption price of the units of the Pooled Fund, as contemplated by subsection 10.4(3)(b) of NI 81-102.
14. The proposed In Specie Transfers between the Pooled Funds and Separately Managed Accounts in connection with the Reorganizations and the proposed In Specie Transfers between Pooled Funds and Separately Managed Accounts do not and will not detrimentally impact any of the Pooled Funds or Separately Managed Accounts subject to the In Specie Transfers.
15. None of the securities which are subject to In Specie Transfers are or will be securities of related issuers of UBS AG, the parent company of the Filer.
16. Prior to executing an In Specie Transfer, the In Specie Transfer will be reviewed by the Filer's Senior Management Committee (which includes the Filer's Chief Compliance Officer) to ensure that the conditions of this MRRS Decision Document are or will be met at the time of the transaction and to determine that the transaction represents the business judgment of the Filer acting in its discretionary capacity with respect to the Pooled Fund and the Separately Managed Account, uninfluenced by considerations other than the best interests of the Pooled Fund and Separately Managed Account. The review by the Filer's Senior Management Committee will be submitted in the form of detailed minutes to the Filer's board of directors on a quarterly basis.
17. In the absence of the order, the Filer, being the portfolio manager of the Pooled Funds and the Separately Managed Accounts, would be prohibited by the Self-Dealing Prohibition from: (a) proceeding with In Specie Transfers to effect the Reorganizations; (b) causing a Separately Managed Account to make In Specie Transfers of securities of any issuer to a Pooled Fund in payment of the purchase price for units of a Pooled Fund subscribed for by the Separately Managed Account; and (c) causing a Pooled Fund to make In Specie Transfers of securities of any issuer to a Separately Managed Account in payment of the redemption price for units of the Pooled Fund redeemed by a Separately Managed Account.
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 under the Legislation is that:
(A) the Filer is exempt from the Self-Dealing Prohibition so as to enable the Filer to make In Specie Transfers between the Discontinuing Funds and the Separately Managed Accounts and between the Separately Managed Accounts and the Consolidating Funds to effect the Reorganizations; and
(B) the Self-Dealing Prohibition shall not apply to the Filer in connection with the payment of the purchase price or redemption price of units of a Pooled Fund by In Specie Transfers between the Pooled Funds and the Separately Managed Accounts, provided that:
(i) in connection with the purchase of units of a Pooled Fund by a Separately Managed Account:
(a) the Filer obtains the prior written consent of the client of the relevant Separately Managed Account before it engages in any In Specie Transfers in connection with the purchase of units;
(b) the Pooled Fund would at the time of payment be permitted to purchase those securities;
(c) the securities are acceptable to the portfolio adviser of the Pooled Fund and consistent with the Pooled Fund's investment objectives;
(d) the value of the securities is at least equal to the issue price of the securities of the Pooled Fund for which they are payment, valued as if the securities were portfolio assets of the Pooled Fund;
(e) the statement of portfolio transactions next prepared for the Separately Managed Account shall include a note describing the securities delivered to the Pooled Fund and the value assigned to such securities; and
(ii) in connection with the redemption of units of a Pooled Fund by a Separately Managed Account:
(a) the Filer obtain the prior written consent of the client of the relevant Separately Managed Account to the payment of redemption proceeds in the form of an In Specie Transfer;
(b) the securities are acceptable to the portfolio adviser of the Separately Managed Account and consistent with the Separately Managed Account's investment objective;
(c) the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per security used to establish the redemption price;
(d) the holder of the Separately Managed Account has not provided notice to terminate its Managed Account Agreement with the Filer;
(e) the statement of portfolio transactions next prepared for the Separately Managed Account shall include a note describing the securities delivered to the Separately Managed Account and the value assigned to such securities; and
(iii) the Filer does not receive any compensation in respect of any sale or redemption of units of a Pooled Fund and, in respect of any delivery of securities further to an In Specie Transfer, the only charge paid by the Separately Managed Account is the Custodial Charge.
"Paul M. Moore"
Vice-Chair
Ontario Securities Commission
"Theresa McLeod"
Commissioner
Ontario Securities Commission