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Vanguard Investments Canada Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Application in Multiple Jurisdictions -- Relief from the self-dealing provision in section 4.2(1) of NI 81-102 Investment Funds to permit inter-fund trades in debt securities between certain mutual funds and pooled funds managed by the same manager -- inter-fund trades will comply with the conditions in section 6.1(2) of NI 81-107 Independent Review Committee for Investment Funds, including the requirement for independent review committee approval.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from sections 13.5(2)(b)(ii) and (iii) of NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to permit inter-fund trades between certain mutual funds, pooled funds and managed accounts managed by the same manager -- inter-fund trades subject to conditions, including independent review committee approval and pricing requirements -- trades involving exchange-traded securities permitted to occur at last sale price as defined in the Universal Market Integrity Rules.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 4.2(1), 4.3(1), 4.3(2), 19.2.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b), 15.1.
National Instrument 81-107 Independent Review Committee for Investment Funds, s. 6.1(2).
March 29, 2016
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 VANGUARD INVESTMENTS CANADA INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
(a) for an exemption from the prohibition in section 4.2(1) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the NI 81-102 Mutual Funds (as defined below) to purchase debt securities from, or sell debt securities to, a Pooled Fund (as defined below) (the Section 4.2(1) Relief);
(b) for an exemption from the prohibitions in sections 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibit 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, in order to permit:
(i) an NI 81-102 Mutual Fund to purchase securities from or sell securities to a Fund (as defined below);
(ii) a Pooled Fund to purchase securities from or sell securities to a Fund;
(iii) a Managed Account (as defined below) to purchase securities from or sell securities to a Fund; and
(iv) the transactions listed in (i) to (iii) (each, an Inter-Fund Trade) to be executed at the last sale price, as defined in the Universal Market Integrity Rules of the Investment Industry Regulatory Organization of Canada, prior to the execution of the trade (the Last Sale Price) in lieu of the closing sale price (the Closing Sale Price) contemplated by the definition of "current market price of the security" in section 6.1(1)(a)(i) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) on that trading day, in the discretion of the Filer, where the securities involved in the Inter-Fund Trade are exchange-traded securities (which term shall include Canadian and foreign exchange-traded securities)
((i), (ii), (iii), and (iv) are collectively, the Inter-Fund Trading Relief)
(the Section 4.2(1) Relief and Inter-Fund Trading Relief are, collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(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 the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions, NI 81-102, NI 81-107 and NI 31-103 have the same meaning if used in this decision, unless otherwise defined. The following terms have the following meanings:
Discretionary Management Agreement means a written agreement between the Filer and a client seeking portfolio management services;
Existing NI 81-102 Mutual Fund means each existing mutual fund, as defined in the Legislation, that is a reporting issuer and subject to NI 81-102, for which the Filer acts as the investment fund manager and portfolio manager;
Funds means, collectively, the NI 81-102 Mutual Funds and the Pooled Funds;
Future NI 81-102 Mutual Fund means each mutual fund, as defined in the Legislation, to be established in the future, that will be a reporting issuer and subject to NI 81-102, for which the Filer will act as the investment fund manager and portfolio manager;
Managed Account means an account managed by the Filer for a client that is not a responsible person and over which the Filer has discretionary authority;
NI 81-102 Mutual Funds means, collectively, the Existing NI 81-102 Mutual Funds and the Future NI 81-102 Mutual Funds;
Pooled Fund means each existing mutual fund, and each mutual fund to be created in the future, that is not or will not be a reporting issuer, for which the Filer acts as the investment fund manager and portfolio manager.
Trust Fund means any Fund established as a trust (collectively, the Trust Funds).
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the laws of Canada with its head office located in Toronto, Ontario. The Filer is a wholly-owned indirect subsidiary of The Vanguard Group, Inc., which is a registered investment adviser in the United States with offices based in Valley Forge, Pennsylvania.
2. The Filer is registered as: (i) an investment fund manager in Ontario, Québec and Newfoundland and Labrador; (ii) a portfolio manager and commodity trading manager in Ontario; and (iii) an exempt market dealer in each of the provinces in Canada.
3. The Filer is the investment fund manager and portfolio manager of each Existing NI 81-102 Mutual Fund and existing Pooled Fund and, in the future, will be the investment fund manager and portfolio manager of Future NI 81-102 Mutual Funds and future Pooled Funds. The Vanguard Group, Inc. or another affiliate of the Filer is or will be the sub-adviser to the Filer in respect of each of the Funds and may act as sub-adviser to the Filer in respect of additional Managed Accounts.
4. The Filer is or will be the trustee of the Trust Funds.
5. The Filer is not in default of securities legislation in the Jurisdictions.
The Funds
6. Each of the Funds is, or will be, an open-end mutual fund established as a trust, partnership or corporation under the laws of Ontario, Canada or another Jurisdiction.
7. Each of the NI 81-102 Mutual Funds is, or will be, a reporting issuer in one or more of the Jurisdictions.
8. The securities of each Existing NI 81-102 Mutual Fund are qualified for distribution in the Jurisdictions pursuant to a prospectus that has been prepared and filed in accordance with NI 41-101 General Prospectus Requirements and are traded on the Toronto Stock Exchange. The securities of each Future NI 81-102 Mutual Fund will be qualified for distribution in one or more of the Jurisdictions under a prospectus, or simplified prospectus, annual information form and fund facts, as applicable, prepared and filed in accordance with the securities legislation of such Jurisdictions. Each NI 81-102 Mutual Fund is, or will be, subject to the provisions of NI 81-102.
9. Each of the Pooled Funds is not and will not be a reporting issuer in any of the Jurisdictions. The securities of the Pooled Funds will be distributed on a private placement basis pursuant to available prospectus exemptions. The Pooled Funds are not or will not be subject to NI 81-102.
10. The Existing NI 81-102 Mutual Funds and existing Pooled Funds are not in default of securities legislation in the Jurisdictions.
Managed Accounts
11. The Filer offers discretionary portfolio management services to clients with a Managed Account with the Filer.
12. Pursuant to the Discretionary Management Agreement entered into with each client in respect of each Managed Account, the Filer makes investment decisions for each Managed Account and has full discretionary authority to trade in securities for each Managed Account without obtaining the specific consent or instructions of the client to execute the trade. The Filer may engage an affiliated sub-adviser in respect of such Managed Accounts.
Inter-Fund Trades
13. The Filer wishes to be able to permit any Fund or Managed Account to engage in Inter-Fund Trades of portfolio securities with a Fund.
14. NI 31-103, NI 81-102 and NI 81-107 restrict inter-fund trading. Absent the Exemption Sought, neither the Funds nor Managed Accounts, nor the Filer, on their behalf, will be permitted to engage in Inter-Fund Trades as contemplated in this decision.
15. The Filer is a responsible person for the purpose of section 13.5(2)(b) of NI 31-103 and prohibited from effecting any Inter-Fund Trades between Funds or Managed Accounts and Trust Funds (as associates of the Filer) or other Funds (as investment funds for which the Filer acts as an adviser).
16. Each NI 81-102 Mutual Fund is prohibited under section 4.2(1) of NI 81-102 from purchasing a security from or selling a security to a Trust Fund (as an associate of the Filer) and would also be prohibited under section 4.2(1) of NI 81-102 from purchasing a security from or selling a security to a Fund established in the future under a corporate structure that would be an affiliate of the Filer.
17. The exception in section 4.3(1) of NI 81-102 which permits certain inter-fund trades of securities subject to public quotations is not available for any Inter-Fund Trades of debt securities because debt securities are typically not subject to public quotations.
18. The exception in section 4.3(2) which permits certain inter-fund trades of debt securities is not available for any Inter-Fund Trades of debt securities between NI 81-102 Mutual Funds and Pooled Funds because that exception only applies where funds on both sides of the inter-fund trade are investment funds subject to NI 81-107. The Pooled Funds will not be subject to NI 81-107.
19. The Filer cannot rely on the exception in subsection 6.1 of NI 81-107 for the Inter-Fund Trades unless each party to the transaction is a reporting issuer and the Inter-Fund Trade occurs at the "current market price of the security" which, in the case of exchange-traded securities, includes the Closing Sale Price but not the Last Sale Price.
20. Each Inter-Fund Trade will be consistent with the investment objectives of the Fund or Managed Account, as applicable.
21. At the time of an Inter-Fund Trade, the Filer will have policies and procedures in place to enable the Funds and Managed Accounts to engage in Inter-Fund Trades.
22. The Filer has established in respect of each Existing NI 81-102 Mutual Fund, and will establish in respect of each Future NI 81-102 Mutual Fund, an independent review committee (IRC) in accordance with the requirements of NI 81-107.
23. Inter-Fund Trades involving a NI 81-102 Mutual Fund will be referred to and approved by the IRC of the NI 81-102 Mutual Fund under subsection 5.2(1) of NI 81-107 and the Filer and the IRC of the NI 81-102 Mutual Fund will comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade. The IRC of the NI 81-102 Mutual Funds will not approve an Inter-Fund Trade involving an NI 81-102 Mutual Fund unless it has made the determination set out in subsection 5.2(2) of NI 81-107.
24. The Filer will similarly establish an IRC (which may also be the IRC of the NI 81-102 Mutual Funds) in respect of each Pooled Fund to review and approve, including by way of standing instructions, any proposed Inter-Fund Trade involving a Pooled Fund.
25. The IRC of the Pooled Funds will be composed by the Filer in accordance with section 3.7 of NI 81-107 and the IRC will comply with the standard of care set out in section 3.9 of NI 81-107. The IRC of the Pooled Funds will not approve any Inter-Fund Trade involving a Pooled Fund unless it has made the determination set out in subsection 5.2(2) of NI 81-107.
26. Prior to the Filer engaging in Inter-Fund Trades on behalf of a Managed Account, each Discretionary Management Agreement or other documentation will contain the authorization of the client for the Filer, as portfolio manager of the Managed Account, to engage in Inter-Fund Trades.
27. When the Filer engages in an Inter-Fund Trade of securities between Funds or between a Managed Account and a Fund, it will comply with the following procedures, which apply to both the Filer and to any affiliate of the Filer appointed as sub-adviser to the Filer:
(i) the portfolio manager will deliver the trading instructions for the Inter-Fund Trade to a trader on the Filer's (or sub-adviser's, as applicable) trading desk;
(ii) upon receipt of the trade instructions, the trader on the trading desk will execute the trade as an Inter-Fund Trade in accordance with the requirements of paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 provided that, for exchange-traded securities, the Inter-Fund Trade may be executed at the Last Sale Price of the security in lieu of the Closing Sale Price;
(iii) the policies applicable to the trading desk will require that all orders are to be executed on a timely basis; and
(iv) the trader on the trading desk will advise the portfolio manager of the price at which the Inter-Fund Trade occurs.
28. If the IRC of a Fund becomes aware of an instance where the Filer did not comply with the terms of any decision document issued in connection with the Inter-Fund Trades, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the jurisdiction in which the Fund is organized.
Benefits of the Exemption Sought
29. The Filer has determined that it is in the best interests of the Funds and the Managed Accounts to obtain the Exemption Sought.
30. The Filer has determined that because of the various investment objectives and investment strategies that are or will be utilized by the Funds and Managed Accounts, it may be appropriate for different investment portfolios to acquire or dispose of the same securities. The Filer has determined that engaging in these Inter-Fund Trades directly rather than with a third party has potential benefits such as lower trading costs, reduced market disruption and quicker execution. For example, such Inter-Fund Trades would enable the Funds and Managed Accounts to efficiently process trades desired by both portfolios at the current market price of the security without having to pay the costs of brokerage commissions, and may also enable the Funds and Managed Accounts to have access to securities that may be scarce in the open market (as may be the case for certain fixed income securities that have the characteristics sought by the Funds or Managed Accounts that they may not be otherwise able to access).
31. The Filer has also determined that the Exemption Sought would be beneficial because making the Funds and Managed Accounts subject to the same set of rules governing the execution of transactions will result in cost and timing efficiencies and in simplified and more reliable compliance procedures and simplified and more efficient monitoring of those procedures in connection with the execution of transactions.
32. The Filer believes it would be in the best interests of the Funds and Managed Accounts, as applicable, if an Inter-Fund Trade could be made at the Last Sale Price prior to the execution of the trade, in lieu of the Closing Sale Price, in the Filer's discretion, as this will result in the trade being done at the price which is closest to the price at the time the decision to make the trade is made.
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:
a) the Section 4.2(1) Relief is granted provided that the following conditions are satisfied:
(i) the transaction is consistent with the investment objectives of each of the Funds involved in the trade;
(ii) the IRC of each Fund involved in the trade has approved the transaction in respect of that Fund in accordance with the terms of section 5.2 of NI 81-107; and
(iii) the transaction complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107.
b) the Inter-Fund Trading Relief is granted provided that the following conditions are satisfied:
(i) the Inter-Fund Trade is consistent with the investment objectives of the Fund or Managed Account, as applicable;
(ii) the Filer, as manager of a Fund, refers the Inter-Fund Trade involving a Fund to the IRC of that Fund in the manner contemplated by section 5.1 of NI 81-107 and the Filer and the IRC of the Fund comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade;
(iii) in the case of an Inter-Fund Trade between Funds:
a. the IRC of each Fund has approved the Inter-Fund Trade in respect of the Fund in accordance with the terms of section 5.2(2) of NI 81-107; and
b. the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 except that for purposes of paragraph (e) of subsection 6.1(2) of NI 81-107 in respect of exchange-traded securities, the current market price of the securities may be the Last Sale Price; and
(iv) in the case of an Inter-Fund Trade between a Managed Account and a Fund:
a. the IRC of the Fund has approved the Inter-Fund Trade in respect of such Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;
b. the Discretionary Management Agreement or other documentation in respect of the Managed Account authorizes the Inter-Fund Trade; and
c. the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 except that for purposes of paragraph (e) of subsection 6.1(2) of NI 81-107 in respect of exchange-traded securities, the current market price of the securities may be the Last Sale Price.
"Raymond Chan"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission