National Bank Securities Inc. and National Bank Mortgage Fund

Headnote

National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- A mutual fund seeks an exemption from the prohibition in section 4.2 of National Instrument 81-102 Mutual Funds to enable it to purchase mortgages from parties related to the fund manager -- The purchase or sale is consistent with, or is necessary to meet, the investment objectives of the mutual fund -- The exemption includes a condition that contemplates IRC approval.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 4.2, 19.1.

October 17, 2011

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUÉBEC AND ONTARIO

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

NATIONAL BANK SECURITIES INC.

(the Filer)

AND

NATIONAL BANK MORTGAGE FUND

(the Fund)

DECISION

Background

The securities regulatory authority or regulator in each of Québec and Ontario (Decision Maker) has received an application from the Filer (the Application) for a decision under the securities legislation of Québec and Ontario (the Legislation) for an exemption under section 19.1 of Regulation 81-102 respecting Mutual Funds (Regulation 81-102) from the prohibition in section 4.2 of Regulation 81-102 to permit the Fund to purchase mortgages from and sell mortgages to NBC Affiliates (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple jurisdictions (for a dual application):

(a) the Autorité des marchés financiers is the principal regulator for this application;

(b) the Filer has provided notice that subsection 4.7(1) of Regulation 11-102 respecting Passport System (Regulation 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (together with Ontario and Québec, the Jurisdictions); and

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 14-101 respecting Definitions and Regulation 11-102 have the same meaning if used in this decision, unless otherwise defined.

"NBC Affiliates", means National Bank of Canada (NBC) and the Affiliates;

"the Affiliates", means National Bank Financial Inc., National Bank Financial Ltd. and other affiliates of the Filer acting as principal.

Representations

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

1. The Filer is the investment fund manager of the Fund.

2. The Filer is a corporation organized under the laws of Canada, with its head office located in Montréal, Québec. NBC indirectly wholly owns the Filer.

3. Under applicable securities legislation, the Filer is registered (i) as a dealer in the category of mutual fund dealer in each Jurisdiction; and (ii) as an investment fund manager in the province of Québec. The Filer is a member of the Mutual Fund Dealers Association of Canada.

4. Natcan Investment Management Inc. (the Portfolio Manager) is the portfolio manager of the Fund.

5. The Portfolio Manager is a corporation organized under the laws of the province of Québec, with its head office located in Montréal, Québec. NBC has a direct and indirect majority interest in the Portfolio Manager.

6. Under applicable securities legislation, the Portfolio Manager is registered (i) as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer in each Jurisdiction except Prince Edward Island, Yukon and Nunavut; (ii) as an investment fund manager and a derivatives portfolio manager in the province of Quebec; and (iii) as a commodity trading manager in the province of Ontario.

7. The Fund is an open-ended mutual fund, organized as a trust pursuant to the laws of Ontario. The Fund is a reporting issuer in each Jurisdiction. Units of the Fund are qualified for sale under a simplified prospectus and annual information form prepared and filed in accordance with the requirements of Regulation 81-101 respecting Mutual Fund Prospectus (Regulation 81-101) in each Jurisdiction.

8. Neither of the Filer nor the Fund is in default of securities legislation in any of the Jurisdictions, except for a non-compliance to paragraph 117(1)(a) of the Securities Act (Ontario) (the Securities Act) and a non-compliance to section 4.2 of Regulation 81-102 with respect to purchases of mortgages from NBC prior to November 27, 2009. The Filer has inadvertently failed to obtain relief from the provisions of paragraph 117(1)(a) of the Securities Act, for which separate relief has been requested, and the Fund has inadvertently failed to obtain the Exemption Sought.

9. Disclosure of purchases from NBC was provided in the simplified prospectus and other disclosure documents filed with the securities regulatory authorities in the Jurisdictions and delivered to the Fund's unitholders upon request as required pursuant to the Legislation. The Fund has not purchased any mortgages from any NBC Affiliate since November 27, 2009.

10. The Filer has appointed an independent review committee (IRC) under Regulation 81-107 respecting Independent Review Committee for investment Funds (Regulation 81-107) for the Fund.

11. The IRC has been informed of the failure to obtain the Exemption Sought for purchases of mortgages from NBC prior to November 27, 2009 and of the filing of the Application.

12. The IRC of the Fund will consider the policies and procedures of the Filer and will provide its approval on whether the proposed transactions in mortgages achieve a fair and reasonable result for the Fund in accordance with subsection 5.2(2) of Regulation-81-107.

13. The Fund's investment objectives are to provide a high level of income while providing sustained capital growth and preserving capital. The purchase and sale of mortgages by the Fund from or to NBC Affiliates is consistent with the investment objectives of the Fund.

14. Mortgages purchased by the Fund from NBC are purchased pursuant to Regulation No. 29 respecting Mutual Funds Investing in Mortgages (Regulation No. 29) at the "modified lender's rate" (namely at the principal amount which will produce a yield to the Fund not more than a quarter of one percent less than the interest rate at which NBC is making commitments, at the time of purchase, to loan on the security of comparable mortgages), in accordance with a Mutual Reliance Review System decision dated March 18, 2004.

15. The Fund purchases mortgages from NBC and may purchase mortgages from the other NBC Affiliates.

16. NBC has been retained to administer the mortgages held in the Fund that have been acquired from NBC pursuant to a sale and mortgage administration agreement. Mortgages purchased from an NBC Affiliate other than NBC will also be administered in accordance with an administration agreement to be entered into by or on behalf of the Fund.

17. The Fund only purchases a mortgage from an NBC Affiliate if:

(a) the transaction is made in accordance with the "Not at Arm's Length Transactions" provision of Regulation No. 29;

(b) where the transaction is made pursuant to the modified lender's rate (namely, at the principal amount which will produce a yield to the Fund of not more than a quarter of one percent less than the interest rate at which NBC is making commitments, at the time of purchase, to loan on the security of comparable mortgages):

(i) the NBC Affiliate that sells the mortgage to the Fund enters into an agreement (the Repurchase Agreement) with the Fund whereby the NBC Affiliate is obligated to repurchase it if the mortgage goes into default for more than 90 days and in circumstances benefiting the Fund; and

(ii) the Portfolio Manager considers that the Repurchase Agreement is sufficient to justify the difference in yield referred to in sub-paragraph (b) above;

(c) NBC guarantees the performance of the Affiliate under the Repurchase Agreement referred to in sub-paragraph (b)(i) above;

(d) the Filer causes the Fund to comply with the disclosure provisions of Regulation No. 29, subject to the representations made in connection with the Exemption Sought; and

(e) the simplified prospectus of the Fund discloses that the Fund will engage in principal transactions in mortgages with the NBC Affiliates.

18. The provisions of Regulation No. 29 set out guidelines relating to the acquisition of mortgages by a mutual fund from lending institutions with whom such fund does not deal at arm's length and provide certain protections to the investing public.

19. The Portfolio Manager only causes the Fund to purchase a mortgage from or sell a mortgage to an NBC Affiliate if the transaction is made in accordance with the "Not at Arm's Length Transactions" provision of Regulation No. 29.

20. None of the NBC Affiliates from which mortgages are purchased or to which mortgages are sold for the Fund, or any of their directors, officers or employees, participate in the formulation of investment decisions made on behalf of, or advice given to, the Fund by the Portfolio Manager.

21. All decisions to purchase mortgages for the Fund's portfolio from an NBC Affiliate are made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

22. The Filer is of the view that the purchase and sale of mortgages between the Fund and NBC Affiliates are in the best interests of the Fund.

23. To the extent that the Fund purchases mortgages from, or sells mortgages to, NBC Affiliates, this fact is set out in each of the simplified prospectus, annual information form and management report of fund performance of the Fund in accordance with applicable securities legislation.

24. Section 4.2 of Regulation 81-102 prohibits a mutual fund from, among other thing, purchasing a security from, or selling a security to, an associate or affiliate of the manager, portfolio adviser or trustee of the mutual fund.

25. As NBC Affiliates are affiliates of the Filer and the Portfolio Manager, the Fund is prohibited by section 4.2 of Regulation 81-102 from purchasing mortgages from or selling mortgages to the NBC Affiliates.

26. Subsection 4.3(1) of Regulation 81-102 provides that section 4.2 of Regulation 81-102 does not apply to a purchase or sale of a security by a mutual fund if the price payable for the security is not more than the ask price of the security as reported by any available public quotation in common use (in the case of a purchase by a mutual fund) or not less than the bid price of the security as reported by any available public quotation in common use (in the case of a sale by a mutual fund).

27. The Fund is not able to rely the exemption provided by subsection 4.3(1) of Regulation 81-102 because the transactions on mortgages will not be made on an exchange and therefore, the price of mortgages is not reported on a public quotation in common use, as required by subsection 4.3(1) of Regulation 81-102.

28. Subsection 4.3(2) of Regulation 81-102 provides that section 4.2 of Regulation 81-102 does not apply if a transaction in a class of debt securities is between a mutual fund and another mutual fund managed by the same manager or an affiliate of the manager.

29. The Fund is not able to rely on the exemption provided by subsection 4.3(2) of Regulation 81-102 because the mortgages are not purchased from or sold to another mutual fund.

30. Regulation 81-107 does not provide an exemption for principal trading of the type contemplated by the Exemption Sought.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

(a) the purchase or sale is consistent with, or is necessary to meet, the investment objective of the Fund;

(b) the IRC of the Fund has approved the transaction in accordance with subsection 5.2(2) of Regulation 81-107;

(c) the Filer, as manager of the Fund, complies with section 5.1 of Regulation 81-107;

(d) the Filer, as manager of the Fund, and the IRC of the Fund comply with section 5.4 of Regulation 81-107 for any standing instructions the IRC provides in connection with the transactions;

(e) the Fund keeps the written records of the transactions as described in paragraph 6.1(2)(g) of Regulation 81-107; and

(f) the mortgages are acquired from an NBC Affiliate or sold to an NBC Affiliate in accordance with Regulation No. 29 (or any successor policy, instrument or regulation) and this information is disclosed in accordance with Regulation No. 29 (or any successor policy, instrument or regulation), including disclosure through inclusion in a document incorporated by reference into the simplified prospectus of the Fund.