National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- Relief granted to portfolio manager to engage the funds it manages in purchases of debt securities of related entities in the secondary market -- relief conditional on IRC approval and compliance with pricing requirements.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 4.1(2), 19.1.
National Instrument 81-107 Independent Review Committee for Investment Funds, s. 6.2.
October 30, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
SCOTIA ASSET MANAGEMENT L.P.
IN THE MATTER OF
THE MUTUAL FUNDS
listed in Schedule A and any mutual funds subject to
National Instrument 81-102 Mutual Funds
(NI 81-102) that may be established in the future
for which the Filer acts as portfolio advisor
and/or manager (the Filer Funds)
The principal regulator in the Jurisdiction received an application (the Application) from the Filer on behalf of each Filer Fund under section 19.1 of NI 81-102 for relief from the requirement in Section 4.1(2) of NI 81-102 (the Requested Section 4.1(2) Relief) which prevents a dealer managed mutual fund from investing in a class of securities of an issuer (a Related Person) of which a partner, director, officer or employee of the dealer manager of the mutual fund, or a partner, director, officer or employee of an affiliate or associate of the dealer manager, is a partner, director or officer unless the partner, director, officer or employee
(a) does not participate in the formulation of investment decisions made on behalf of the dealer managed mutual fund;
(b) does not have access before implementation to information concerning investment decisions made on behalf of the dealer managed mutual fund; and
(c) does not influence, other than through research, statistical and other reports generally available to clients, the investment decisions made on behalf of the dealer managed mutual fund.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission (the OSC) is the principal regulator for the Application; and
(ii) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (the Non-principal Jurisdictions).
Defined terms contained in National Instrument 14-101 -- Definitions (NI 14-101), MI 11-102, NI 81-102 and in National Instrument 81-107 -- Independent Review Committee for Investment Funds (NI 81-107) have the same meaning in this decision unless otherwise defined.
This decision is based on the following facts represented by the Filer in respect of the Filer and the Filer Funds.
1. The Filer is or will be the portfolio adviser and/or the manager of the Filer Funds.
2. The Filer and the Filer Funds are or will be compliant with the requirements of NI 81-07. Accordingly, each Filer Fund has or will have an independent review committee (IRC) established in accordance with NI 81-107.
3. The investment strategies of each Filer Fund that relies on the Requested Section 4.1(2) Relief permit or will permit it to invest in the securities purchased, either as a principal strategy in achieving its investment objective or as a temporary strategy pending the purchase of other securities.
4. Section 6.2 of NI 81-107 provides an exemption from the mutual fund conflict of interest investment restrictions for purchases of Related Person securities if the purchase is made on an exchange. It does not provide an exemption from section 4.1(2) of NI 81-102 and it does not provide an exemption for purchases of non-exchange traded securities.
5. Related Persons of the Filer are significant issuers of both exchange-traded and non-exchange-traded securities.
6. Non-exchange-traded securities that are debt securities issued by Related Persons, in addition to securities that are listed and traded on an exchange, may be appropriate investments for the Filer Funds.
7. In respect of Filer Funds of the Filer, directors, officers and employees of the Filer or of an affiliate or associate of the Filer may be directors, officers or employees of a Related Person who do not meet the exceptions in section 4.1(2) of NI 81-102 such that the Requested Section 4.1(2) Relief is required by the Filer to permit the Filer Funds to invest in securities of a Related Person.
8. Each purchase of securities of a Related Person will occur in the secondary market and not under primary distributions or treasury offerings of a Related Person.
9. Each non-exchange-traded security purchased by a Filer Fund pursuant to the Requested Section 4.1(2) Relief will be a debt security issued by a Related Person that has been given, and continues to have at the time of purchase, an "approved credit rating" by an approved credit rating organization.
10. The Filer considers that the Filer Funds should have access to such securities for the following reasons:
(a) There is currently and has been for several years a very limited supply of highly rated corporate debt.
(b) Diversification is reduced to the extent that a Filer Fund is limited with respect to investment opportunities.
(c) To the extent that a Filer Fund is trying to track or outperform a benchmark it is important for the Filer Fund to be able to purchase any securities included in the benchmark. Debt securities of Related Persons of the Filer are included in most of the Canadian debt indices.
11. If a Filer Fund's purchase of non-exchange-traded securities issued by Related Persons involves an interfund trade with another fund to which NI 81-107 applies, the provisions of section 6.1.(2) of NI 81-107 will apply to such transaction.
12. The predecessors to the Filer, Scotia Cassels Investment Counsel Limited (SCICL), and Scotia Securities Inc.(SSI) and Scotia Capital Inc. (SCI) were granted identical relief by the Jurisdiction and the Non-Principal Jurisdictions, under an MRRS Decision Document dated May 15, 2008, by the Ontario Securities Commission as principal regulator for the decision (the Original Decision).
13. Pursuant to an internal reorganization effective November 1, 2009 involving SCICL, the Filer and certain of their affiliates, the portfolio management and investment fund manager activities carried on by SCICL, SSI and/or SCI (except for the portfolio management activities SCI carries on as an IIROC member) prior to November 1, 2009 will be transferred to and carried on by the Filer as of November 1, 2009. As a result of this reorganization, neither SCICL, SSI nor SCI will, as of November 1, 2009, be relying on the relief granted under the Original Decision and the Filer will require the Requested Section4.1(2) Relief as the Original Decision is not available to the Filer.
14. The Filer is, to the best of its knowledge, not in default of the securities legislation of the Jurisdiction or any of the Non-principal Jurisdictions.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator is that the Requested Section 4.1(2) Relief is granted to permit purchases of Related Person securities in the secondary market on the conditions that:
(a) the purchase is consistent with, or is necessary to meet, the investment objective of the Filer Fund;
(b) the IRC of the Filer Fund has approved the transaction in accordance with Section 5.2(2) of NI 81-107;
(c) the manager of the Filer Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Filer Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;
(d) if the security is an exchange-traded security, the purchase is made on an exchange on which the securities of the issuer are listed and traded;
(e) if the security is not an exchange-traded security,
(a) the price payable for the security is not more than the ask price of the security;
(b) the ask price of the security is determined as follows:
(i) if the purchase occurs on a marketplace, the price payable is determined in accordance with the requirements of that marketplace; or
(ii) if the purchase does not occur on a marketplace,
(A) the Filer Fund may pay the price for the security at which an independent, arm's length seller is willing to sell the security, or
(B) if the Filer Fund does not purchase the security from an independent, arm's length seller, the Filer Fund must pay the price quoted publicly by an independent marketplace or obtain, immediately before the purchase, at least one quote from an independent, arm's length purchaser or seller and not pay more than that quote;
(f) the transaction complies with any applicable "market integrity requirements";
(g) no later than the time the Filer Fund files its annual financial statements, the Filer files with the securities regulatory authority or regulator the particulars of any such investments; and
(h) the reporting obligation in section 4.5 of NI 81-107 applies to the Requested Section 4.1(2) Relief granted in this decision and the IRC of the Filer Fund complies with section 4.5 of NI 81-107 in connection with any instance that it becomes aware that the Filer did not comply with any of the conditions of this decision.
This decision is effective November 1, 2009.