Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted 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

National Instrument 31-103 Registration Requirements, s. 13.5(2)(b)(ii) and (iii).

National Instrument 81-107 Independent Review Committee for Investment Funds.

October 30, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(THE JURISDICTION)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

SCOTIA ASSET MANAGEMENT L.P.

(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for a decision providing an exemption from the requirement that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of an associate of a responsible person, or from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser (the Exemption Sought).

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

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

(b) 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 each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador and Yukon (the Non-Principal Jurisdictions).

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

BNS means The Bank of Nova Scotia.

Funds means the Scotia Funds, together with any other investment funds established in the future for which SAM LP is the manager and portfolio manager.

In Specie Transfer means causing a Separately Managed Account to deliver securities to a Fund in respect of the purchase of units of the Fund by the Separately Managed Account, or receiving securities from the investment portfolio of a Fund in respect of a redemption of units of the Fund by the Separately Managed Account.

Managed Account Agreements means the investment management agreements between clients and SCICL.

NI 31-103 means National Instrument 31-103 Registration Requirements and Exemptions.

NI 81-102 means National Instrument 81-102 Mutual Funds.

Reorganization means the internal reorganization of the asset management and investment fund manager businesses currently conducted by SSI, SCICL and Scotia Capital Inc.

SAM LP means Scotia Asset Management L.P.

SCICL means Scotia Cassels Investment Counsel Limited.

Scotia Funds means each of the mutual funds currently managed by SSI.

Separately Managed Account means an account of a client that is managed on a segregated basis rather than on a pooled basis.

SSI means Scotia Securities Inc.

Representations

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

1. SCICL is a corporation organized under the Canada Business Corporations Act and is registered as a portfolio manager in each of the provinces and territories of Canada, other than Northwest Territories and Nunavut.

2. SCICL is a wholly-owned subsidiary of BNS and currently acts as portfolio manager in respect of various private client accounts and mutual funds managed by its affiliate, SSI.

3. SSI is a wholly-owned subsidiary of BNS and acts as a mutual fund dealer and as the manager and trustee of the family of open-end mutual funds known as the ScotiaFunds.

4. SCICL currently acts as portfolio manager for several of the Scotia Funds.

5. The Filer is an Ontario limited partnership, which is wholly-owned directly or indirectly by BNS. The general partner of the Filer is Scotia Asset Management G.P. Inc., an Ontario company wholly-owned directly or indirectly by BNS with its head office in Toronto, Ontario.

6. The Filer is registered as a portfolio manager, exempt market dealer and commodity trading manager in Ontario and as a portfolio manager in each of the other provinces and territories of Canada, excluding Northwest Territories and Nunavut.

7. The Filer and SSI are affiliates based on the definition of "affiliate" in National Instrument 45-106 Prospectus and Registration Exemptions.

8. The predecessor to the Filer, SCICL, was granted identical relief in the Jurisdiction and certain of the Non-Principal Jurisdictions, under an MRRS Decision Document dated March 30, 2006, by the Ontario Securities Commission as principal regulator for the decision (the Original Decision).

9. The Scotia group of companies (Scotia Group) is planning a Reorganization of its asset management and investment fund manager businesses currently conducted by three entities within the Scotia Group (SSI, SCICL and Scotia Capital Inc.). The effective date of the Reorganization is scheduled for November 1, 2009.

10. Under the Reorganization, the asset management business conducted by SCICL at the time of the Reorganization and the investment fund manager business conducted by SSI at the time of the Reorganization will be transferred to SAM LP, such that SAM LP will become the manager and trustee of the Scotia Funds and the portfolio manager of those Scotia Funds for which SCICL currently acts as portfolio manager. As a result of this reorganization, SCICL will no longer, as of November 1, 2009, be relying on the relief granted under the Original Decision and the Filer requires the Exemption Sought as the Original Decision is not available to the Filer.

11. The Filer is, to the best of its knowledge, not in default of the securities legislation of any jurisdiction of Canada.

12. Each of the existing Funds is an open-end mutual fund trust established under the laws of the Province of Ontario. The existing Funds are reporting issuers in each of the provinces and territories of Canada but future Funds may not be reporting issuers. Any Fund that is a reporting issuer has appointed, or will appoint, an independent review committee (IRC) in accordance with the requirements of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).

13. SCICL currently provides discretionary portfolio management services to clients pursuant to Managed Account Agreements. Based on the value of the assets of the clients and depending on the allocation of a client's assets to a particular asset class, SCICL either manages the client's assets on a segregated account basis or on a pooled basis. Following the Reorganization, the Managed Account Agreements will be assigned to SAM LP and SAM LP will provide these discretionary portfolio management services to the clients.

14. Pursuant to its Managed Account Agreements with its clients, SCICL has full authority to provide its portfolio management services, including investing clients in mutual funds for which SCICL is the portfolio manager and for changing those funds as SCICL determines in accordance with the mandate of the clients.

15. The Filers may wish to or be required to deliver securities held in a Separately Managed Account to a Fund in respect of a purchase of units of the Fund, and may wish to or be required to receive securities from a Fund in respect of a redemption of units of the Fund by a Separately Managed Account.

16. As the Filer will be the trustee of the Funds, each Fund will be an 'associate' of the Filer and accordingly, absent the grant of the Exemption Sought, the Filer would be precluded by the provisions of section 13.5(2)(b)(ii) of NI 31-103 from effecting the In-Specie Transfers. As the Filer is a registered adviser which is or will be the manager and portfolio manager of the Funds and is or will be the portfolio manager of the Separately Managed Accounts, absent the grant of the Exemption Sought the Filer would be precluded by the provisions of Section 13.5(2)(b) (iii) of NI 31-103 from effecting the In Specie Transfers.

17. Effecting In Specie Transfers 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, In Specie Transfers reduce market impact costs, which can be detrimental to the clients and/or Funds(s). In Specie Transfers also allow a portfolio manager to retain within its control institutional-size blocks of securities that otherwise would need to be broken and re-assembled.

18. 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 and any commission charged by the dealer executing the trade.

19. 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 the Funds for the Separately Managed Account.

20. The Filer, as 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 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.

21. In Specie Transfers will be subject to (i) compliance with the written policies and procedures of the Filer respecting In Specie Transfers that are consistent with applicable securities legislation, and (ii) the oversight of the Filer's Compliance Department, to ensure 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 results of the oversight and review by the Filer's Compliance Department will be submitted in the form of a report to the Filer's board of directors on a quarterly basis.

Decision

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 under the Legislation is that the Exemption Sought is granted provided that:

(a) in connection with the purchase of units of a Fund by a Separately Managed Account:

(i) where the Fund is a reporting issuer,

(A) the Filer, as manager of the Fund, obtains the approval of the IRC of the Fund in respect of an In-Specie Transfer in accordance with the terms of s. 5.2(2) of NI 81-107; and

(B) the Filer, as manager of the Fund, and the IRC of the Fund, comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In-Specie Transfer;

(ii) 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 of the Fund;

(iii) the Fund would at the time of payment be permitted to purchase the securities of the Separately Managed Account;

(iv) the securities are acceptable to the Filer as portfolio manager of the Fund and consistent with the Fund's investment objectives;

(v) the value of the securities sold to the Fund is at least equal to the issue price of the units of the Fund for which they are payment, valued as if the securities were portfolio assets of that Fund;

(vi) the account statement next prepared for the Separately Managed Account will include a note describing the securities delivered to the Fund and the value assigned to such securities; and

(vii) the Fund keeps written records of all In Specie Transfers during the financial year of the Fund, reflecting details of the securities delivered to the Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(b) in connection with the redemption of units of a Fund by a Separately Managed Account:

(i) where the Fund is a reporting issuer,

(A) the Filer, as manager of the Fund, obtains the approval of the IRC of the Fund in respect of an In-Specie Transfer in accordance with the terms of s. 5.2(2) of NI 81-107; and

(B) the Filer, as manager of the Fund, and the IRC of the Fund, comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In-Specie Transfer;

(ii) 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;

(iii) the securities are acceptable to the Filer as portfolio manager of the Separately Managed Account and consistent with the Separately Managed Account's investment objectives;

(iv) the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per unit of the Fund used to establish the redemption price;

(v) the holder of the Separately Managed Account has not provided notice to terminate its Managed Account Agreement with the Filer;

(vi) the account statement next prepared for the Separately Managed Account will include a note describing the securities delivered to the Separately Managed Account and the value assigned to such securities; and

(vii) the Fund keeps written records of all In Specie Transfers during the financial year of the Fund, reflecting details of the securities delivered by the Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place; 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, if any, is the commission charged by the dealer executing the trade.

This decision is effective November 1, 2009.

"Vera Nunes"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission