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Scotia Cassels Investment Counsel Limited - MRRS Decision
Headnote
MRRS - exemption granted under subparagraph 121(2)(a)(ii) of the Securities Act (Ontario) from subsection 118(2)(b) to permit in specie subscriptions and redemptions by separately managed accounts in mutual funds where portfolio manager of managed accounts is also portfolio manager of the mutual funds.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 118(2)(b), 121(2)(a)(ii).
March 30, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO, ALBERTA, SASKATCHEWAN,
NEW BRUNSWICK, NOVA SCOTIA AND
NEWFOUNDLAND AND LABRADOR
(the Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
SCOTIA CASSELS INVESTMENT COUNSEL LIMITED
(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 between the Separately Managed Accounts and the 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 organized under the Canada Business Corporations Act. The Filer is registered as an adviser in the categories of investment counsel and portfolio manager in each of the Jurisdictions.
2. There are currently (i) six funds bearing the name Scotia Cassels (Scotia Cassels Funds) which only offer a Scotia Private Client Unit class ("PCU Class"), (ii) 7 funds managed by Scotia Securities Inc. for which there is also a PCU Class of units (Scotia Funds). The Scotia Cassels Funds and the Scotia Funds, together with any other mutual or pooled funds established in the future which are associates of the Filer and for which the Filer is the portfolio manager from time to time are collectively hereinafter referred to as the Funds.
3. Each of the Funds is or will be an open-end mutual fund trust established under the laws of the Province of Ontario. The existing Funds are reporting issuers in each province and territory of Canada but future Funds may not be reporting issuers. Scotia Securities Inc., an affiliate of the Filer is the manager of each Fund. Each of the Funds is or will be associates of the Filer under the Legislation as the Filer serves or will serve in a capacity similar to a trustee of the Funds.
4. The Filer provides discretionary portfolio management services to clients pursuant to investment management agreements between the clients and the Filer (Managed Account Agreements). Based on the size of the assets of the clients and depending on the allocation of a client's assets to a particular asset class, the Filer either manages the client's assets on a segregated account basis (Separately Managed Accounts) or on a pooled basis.
5. Pursuant to most of its Managed Account Agreements with its clients, the Filer has full authority to provide its portfolio management services, including investing clients in mutual funds for which the Filer is the portfolio manager and for changing those funds as the Filer determines in accordance with the mandate of the clients. To the extent the Filer either currently does not have such authority or enters into an agreement with a new client, the Filer will obtain the prior specific written consent of the relevant Separately Managed Account client before it engages in any In Specie Transfers, as defined below, in connection with the purchase or redemption of units of the Funds for its Separately Managed Accounts
6. The Filer may determine that in lieu of holding portfolio securities in a Separately Managed Account, the clients would be better served to be invested in one or more of the Funds. As a result, the Filer desires to have such clients subscribe in kind for units of the relevant Funds. Further, future clients of the Filer may have an existing portfolio of securities when they retain the Filer such that the Filer may similarly desire to have the clients subscribe for the Funds in kind provided these securities are appropriate for the Fund.
7. In addition, due to portfolio changes for a client, the Filer may determine, in connection with a redemption, to redeem in kind certain portfolio securities held by a Fund and subscribe in kind for another Fund or Funds or simply hold the portfolio securities on behalf of the clients in a Separately Managed Account. Lastly, some clients require the in kind redemption of their units in a Fund.
8. In order to ensure that neither the Separately Managed Accounts nor a Fund incurs significant expenses related to the disposition and acquisition of portfolio securities in connection with the purchase or redemption of units of a Fund, the Filer proposes to facilitate such purchases and redemptions of the Fund units by transfers in kind of portfolio securities between a Separately Managed Account and a Fund (In Specie Transfers). These transactions will either involve the payment of the purchase price for units of a Fund or the payment of the redemption price of units of a Fund by In Specie Transfers between the Separately Managed Account and the Funds.
9. Effecting such internal cross-trades of securities between the Separately Managed Accounts and the Funds will allow the Filer to manage each asset class more effectively and reduce transaction costs for the client and the Fund. For example, cross trading reduces market impact costs, which can be detrimental to the clients and/or Funds(s). Cross-trading also allows a portfolio manager to 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.
10. The only cost which will be incurred by a Fund or Separately Managed Account for an In Specie Transfer is a nominal administrative charge levied by the custodian of the Fund in recording the trades (the Custodial Charge).
11. Scotia Securities Inc. (the manager of the 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 Fund is determined. With respect to the purchase of units of a Fund, the securities transferred to a 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 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 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 Fund, as contemplated by subsection 10.4(3)(b) of NI 81-102.
12. None of the securities which are subject to In Specie Transfers are or will be securities of related issuers of The Bank of Nova Scotia, the parent company of the Filer.
13. Prior to executing an In Specie Transfer, the In Specie Transfer will be reviewed by the Filer's Compliance Committee 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 Fund and the Separately Managed Account, uninfluenced by considerations other than the best interests of the Fund and Separately Managed Account. The review by the Filer's Compliance Committee will be submitted in the form of detailed minutes to the Filer's board of directors on a quarterly basis.
14. In the absence of the order, the Filer would be prohibited by the Self-Dealing Prohibition from (a) causing a Separately Managed Account to make In Specie Transfers of securities of any issuer to a Fund in payment of the purchase price for units of a Fund subscribed for by the Separately Managed Account; and (b) causing a 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 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 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 Fund by In Specie Transfers between the Funds and the Separately Managed Accounts, provided that:
(a) in connection with the purchase of units of a Fund by a Separately Managed Account:
(i) 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;
(ii) the Fund would at the time of payment be permitted to purchase those securities;
(iii) the securities are acceptable to the portfolio adviser of the Fund and consistent with the Fund's investment objectives;
(iv) the value of the securities is equal to the issue price of the units of the Fund for which they are used as payment, valued as if the securities were portfolio assets of the Fund;
(v) the statement of portfolio transactions next prepared for the Separately Managed Account shall include a note describing the securities delivered to the Fund and the value assigned to such securities; and
(b) in connection with the redemption of units of a Fund by a Separately Managed Account:
(i) the Filer obtains 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;
(ii) the securities are acceptable to the portfolio adviser of the Separately Managed Account and consistent with the Separately Managed Account's investment objective;
(iii) the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per unit used to establish the redemption price;
(iv) the holder of the Separately Managed Account has not provided notice to terminate its Managed Account Agreement with the Filer;
(v) 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
(c) the Filer does not receive any compensation in respect of any sale or redemption of units of a 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.
"Susan Wolburgh Jenah"
"Paul K. Bates"