Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from conflict of interest trading prohibition in paragraph 13.5(2)(b) (ii) and (iii) of NI 31-103 to permit Inter-Fund and In-Specie Transactions by Managed Accounts and Pooled Funds in Pooled Funds -- Portfolio manager of Managed Accounts is also portfolio manager of Pooled Funds and is therefore a "responsible person" -- Relief subject to certain conditions.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b)(ii) and (iii).

November 28, 2018

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUÉBEC AND ONTARIO

(the “Jurisdictions”)

 

AND

 

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

 

AND

 

IN THE MATTER OF

CLARET ASSET MANAGEMENT CORPORATION

(the “Filer”)

 

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions ("Decision Maker") has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") for exemptive relief from the prohibition in subsections 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103"), which 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 (i) an associate of a responsible person and (ii) an investment fund for which such adviser acts as an adviser, in respect of the Inter-Fund Trades (as defined below) and In Specie Transactions (as defined below), such that the following transactions are permitted:

1. the purchase and sale of portfolio securities of any issuer (each purchase and sale, an "Inter-Fund Trade")

a) between a Pooled Fund (as defined below) and another Pooled Fund or a Managed Account (as defined below);

b) between a Managed Account and a Pooled Fund;

2. to occur at the last sale price, as defined in the Universal Market Integrity Rules ("UMIR") of the Investment Industry Regulatory Organization of Canada, prior to the execution of the trade (the "Last Sale Price") or at the closing sale price (the "Closing Sale Price") contemplated by the definition of current market price referred to in paragraph (e) of section 6.1(2) of National Instrument 81-107 Independent Review Committee for Investment Funds ("NI 81-107"), as determined by the Filer in its discretion;

3. the purchase and redemption by a Managed Account of securities of a Pooled Fund, and the payment:

a) for such purchase, in whole or in part, by the Managed Account making good delivery of portfolio securities to the Pooled Fund;

b) for such redemption, in whole or in part, by the Managed Account receiving good delivery of portfolio securities from the Pooled Fund;

4. the purchase or redemption by a Pooled Fund of securities of another Pooled Fund, and the payment:

a) for such purchase, in whole or in part, by the Pooled Fund making good delivery of portfolio securities to the other Pooled Fund;

b) for such redemption, in whole or in part, by the Pooled Fund receiving good delivery of portfolio securities from the other Pooled Fund;

(each purchase and redemption in (iii) and (iv) above is an "In Specie Transaction"):

(operations (i) to (iv) are collectively the "Exemption Sought").

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

1. L'Autorité des marchés financiers is the principal regulator (the "Principal Regulator") for this application;

2. 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 Alberta, British Columbia and Prince Edward Island;

3. the decision is the decision of the Principal Regulator and evidences the decision of each Decision Maker.

Interpretation

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

Pooled Fund means an investment fund currently structured as a trust under the laws of the Province of Ontario and managed by the Filer or as a trust, a corporation or a partnership under the laws of Canada or one of the provinces or territories of Canada, managed in the future by the Filer, that is not a reporting issuer, and whose securities are sold pursuant to prospectus exemptions under applicable securities legislation, to which National Instrument 81-102 -- Investment Funds ("NI 81-102") does not apply ("Pooled Fund").

Managed Account means an account over which the Filer has discretionary authority, other than an account of a Responsible Person ("Managed Account").

Responsible Person has the meaning given to this term in section 13.5(1) of NI 31-103 and includes each officer, employee and director of the Filer who has access to, or participates in formulating, an investment decision or advice in respect of an Inter-Fund Trade or In Specie Transaction.

Representations

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

The Filer

1. The Filer is a corporation established under the laws of Canada with its head office in Montréal, Québec.

2. The Filer is registered as a portfolio manager in the Provinces, an investment fund manager in Ontario and Québec, a commodity trading manager in Ontario and a derivatives portfolio manager in Québec.

3. The Filer is, or will be, the portfolio manager and investment fund manager of each Pooled Fund.

4. The Filer is the portfolio manager of each Managed Account.

5. The Filer is not in default of securities legislation of any province or territory of Canada.

The Pooled Funds

6. Each existing Pooled Fund is formed as a trust under the laws of Ontario and each future Pooled Fund are, or will be, established as a trust, partnership or corporation under the laws of Canada or a province or territory of Canada.

7. The securities of each Pooled Fund are, or will be, distributed pursuant to one or more available exemptions from the prospectus requirement of applicable securities legislation. None of the Pooled Funds is, or is expected to be, a reporting issuer in any province or territory of Canada or other jurisdiction and none are, or are expected to be, subject to NI 81-102 or NI 81-107 (except to the extent applicable pursuant to the Exemption Sought).

8. Each Pooled Fund's reliance on the Exemption Sought will be compatible with its investment objectives and strategies.

9. The Filer acts, or will act, as the trustee, the investment fund manager and the portfolio manager to the Trust Funds (as defined below).

10. None of the existing Pooled Funds is in default of securities legislation of any province or territory of Canada

11. Two Pooled Funds, Claret Equity Fund ("Equity Fund") and Claret Income Fund ("Income Fund"), were established under a master trust agreement dated February 1, 2014, governed by the laws of the province of Ontario, made between the Filer, as trustee, and the Filer, as manager (the "Initial Master Trust Agreement").

12. Five additional Pooled Funds were subsequently established:

a) the Claret "Outside the box" Fund ("Outside the box Fund") was established by an amendment to the Master Trust Agreement as of August 1, 2014,

b) the Claret Global Multi-Asset Fund ("Global Multi-Asset Fund") was established by an amendment to the Master Trust Agreement as of May 9, 2016,

c) the Claret U.S. Large Cap Equity Fund ("Large Cap Fund") was established by an amendment to the Master Trust Agreement as of February 1, 2017,

d) the Claret Canadian Equity Fund ("Canadian Fund") was established by an amendment to the Master Trust Agreement as of February 1, 2018,

e) Claret European Equity Fund ("European Fund" and collectively with Equity Fund, Income Fund, Outside the box Fund, Global Multi-Asset Fund, Large Cap Fund and Canadian Fund and any future Pooled Fund established as a trust under the laws of a province of Canada, the "Trust Funds") was established by an amendment to the Master Trust Agreement as of September 1, 2018;

(the Initial Master Trust Agreement, collectively with these amending agreements, the "Master Trust Agreement").

13. CIBC World Markets Inc. acts as custodian to the Pooled Funds pursuant to a custodial services agreement dated February 21, 2014 as amended between the Filer, as manager of the Pooled Funds and CIBC World Markets Inc., as custodian.

14. The Filer, which is the investment fund manager and portfolio manager of the Pooled Funds, avails itself of the dealer registration exemption available under subsection 8.6 of NI 31-103 when distributing units of the Pooled Funds to Managed Accounts.

The Managed Accounts

15. The Filer is the portfolio manager of each of the Managed Accounts.

16. Each Managed Account is, or will be, managed pursuant to an investment management agreement or other document which is, or will be, executed by each client who wishes to receive the portfolio management services of the Filer and which provides the Filer full discretionary authority to trade securities for the Managed Account without obtaining the specific consent of the client to execute the trade (the "Discretionary Management Agreements").

17. Each Discretionary Management Agreement contains, or will contain, authorization from the client for the Filer to make Inter-Fund Trades.

18. The portfolio management services provided by the Filer, as the portfolio manager of the Managed Account, to each client, consist of the following:

a) supervising, managing and directing purchases and sales in the client's Managed Account, at the Filer's full discretion on a continuing basis;

b) qualified employees of the Filer perform investment research, securities and derivatives selection and portfolio management functions with respect to all securities, derivatives, investments, cash and cash equivalents and other assets in the Managed Account;

c) each Managed Account holds securities, derivatives and other investments as selected by the Filer in its sole discretion;

d) the Filer retains overall responsibility for the advice provided to its clients and has a designated senior officer to oversee and supervise the Managed Account.

Independent Review Committee

19. Though the Pooled Funds are not, and will not be, subject to the requirements of NI 81-107, each Pooled Fund will have an independent review committee ("IRC") at the time the Pooled Fund makes an Inter-Fund Trade. The mandate of the IRC of each Pooled Fund will comply with the following provisions of NI 81-107 as if the Pooled Fund was a reporting issuer: (a) composition of the IRC as set out in section 3.7, and (b) the standard of care set out in section 3.9. The IRC of a Pooled Fund will not approve an Inter-Fund Trade involving a Pooled Fund unless it has made the determination set out in subsection 5.2(2) of NI 81-107 and the Filer will comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with such Inter-Fund Trades.

20. If the IRC of a Pooled Fund becomes aware of an instance where the Filer did not comply with the terms of the Exemption Sought or a condition imposed by securities legislation or the IRC in its approval, the IRC will, as soon as practicable, notify in writing the Autorité des marchés financiers and the Ontario Securities Commission.

21. The Filer cannot rely on the exemption from Section 13.5 of NI 31-103 contained in subsection 6.1(4) of NI 81-107, as the Pooled Funds are not reporting issuers and Managed Accounts are not investment funds and thus may not rely on this exemption pursuant to NI 81-107.

The Inter-Fund Trades

22. The Filer wishes to be able to enter into Inter-Fund Trades of portfolio securities between:

a) a Pooled Fund and another Pooled Fund or a Managed Account;

b) a Managed Account and a Pooled Fund.

23. Because of the various investment objectives and investment strategies used by the Pooled Funds and the Managed Accounts, it may be appropriate for different investment portfolios to acquire or dispose of the same securities. Each Inter-Fund Trade will be consistent with the investment objective of the relevant Pooled Fund or Managed Account, as applicable.

24. Effecting Inter-Fund Trades between the Pooled Funds and the Managed Accounts has the effect of reducing transaction costs for the Pooled Funds and the Managed Accounts due to reduced commission costs. Inter-Fund Trades can also reduce market impact costs and increase the speed of execution of trading, all of which will be to the benefit of the Pooled Funds and the Managed Accounts.

25. The Filer has determined that it would be in the best interests of the Pooled Funds and the Managed Accounts to receive the Exemption Sought because subjecting the Pooled Funds and the Managed Accounts to a consistent set of rules governing the execution of Inter-Fund Trades will result in:

a) cost and timing efficiencies in respect of the execution of Inter-Fund Trades,

b) simplified and more efficient monitoring by the Filer of the execution of Inter-Fund Trades.

26. At the time of an Inter-Fund Trade, the Filer will have policies and procedures in place to enable the applicable Pooled Funds and Managed Accounts to engage in Inter-Fund Trades. The following procedures will be applied:

27. When the Filer engages in an Inter-Fund Trade of securities between two Pooled Funds or between a Managed Account and a Pooled Fund it will follow the following procedures:

a) in respect of a purchase or a sale of a security by a Pooled Fund or a Managed Account, as applicable (Portfolio A), the registered advising representative of the Filer will either place the trade directly or will deliver the trade instructions to a trader on a trading desk of the Filer;

b) in respect of a purchase or sale of a security by another Pooled Fund or Managed Account, as applicable (Portfolio B), the registered advising representative of the Filer will either place the trade directly or will deliver the trade instructions to a trader on a trading desk of the Filer;

c) each portfolio manager of the Filer will request the approval of the chief compliance officer of the Filer (or his or her designated alternate during periods when it is not practicable for the chief compliance officer to address the matter) (the "CO") to execute the trade as an Inter-Fund Trade;

d) once the registered advising representative or trader on the trading desk has confirmed the approval of the CO, the registered advising representative or the trader on the trading desk will have the discretion to execute the trade as an Inter-Fund Trade between Portfolio A and Portfolio B in accordance with the requirements of 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) in respect of exchange-traded securities, the trade may be executed at the Last Sale Price;

e) the policies applicable to the registered advising representative and the trading desk of the Filer will require that all Inter-Fund Trade orders are to be executed on a timely basis and will remain open no longer than 30 days;

f) the registered advising representative or the trader on a trading desk will advise the Filer of the price at which the Inter-Fund Trade occurred.

The In Specie Transactions

28. In acting on behalf of a Pooled Fund, the Filer wishes to be able, in accordance with the investment objectives and investment restrictions of the Pooled Fund, to cause the Pooled Fund to either invest in securities of another Pooled Fund, or to redeem such securities, pursuant to an In Specie Transaction.

29. Similarly, when acting for a Managed Account of a client, the Filer wishes to be able, in accordance with the investment objectives and investment restrictions of the client, to cause the client's Managed Account to either invest in securities of a Pooled Fund, or to redeem such securities, pursuant to an In Specie Transaction.

30. At the time of each In-Specie Transaction, the Filer will have in place policies and procedures governing such transactions, as applicable:

a) prior to engaging in In Specie Transactions on behalf of a Managed Account, the Discretionary Management Agreement or other documentation in respect of the Managed Accounts will contain the authorization of the client for the Filer to engage in In Specie Transactions;

b) the Filer's CO, will pre-approve each In Specie Transaction in connection with the purchase or redemption of securities of a Pooled Fund by another Pooled Fund or by a Managed Account;

c) the portfolio securities transferred in an In Specie Transaction will meet the investment objectives of the Pooled Fund or Managed Account, as the case may be, acquiring the portfolio securities;

d) the portfolio securities transferred in In Specie Transactions will be valued using the same valuation principles as are used to calculate the net asset value of the Pooled Funds;

e) should any In Specie Transactions contemplated specifically by the Exemption Sought, involve the transfer of an "illiquid asset" (as defined in NI 81-102) (the "Illiquid Portfolio Securities"), the Filer will obtain at least one quote for the asset from an independent arm's length purchaser or seller, immediately before effecting the In Specie Transactions.

f) If any Illiquid Portfolio Securities are the subject of an In Specie Transaction that is a redemption, the Illiquid Portfolio Securities will be transferred on a basis that fairly represents the portfolio of the Pooled Fund. Pooled Funds generally invest in liquid securities. The Filer will not cause any Pooled Fund to accept an In Specie Transaction that is a subscription or pay out redemption proceeds In Specie if, at the time of the proposed In Specie Transactions, Illiquid Portfolio Securities represent more than an immaterial portion of the portfolio of the Pooled Fund. The valuation of any Illiquid Portfolio Securities which would be the subject of an In Specie Transactions will be carried out according to the Filer's policies and procedures for the fair value of portfolio securities, including illiquid securities.

g) none of the portfolio securities which are the subject of each In Specie Transaction will be securities of related issuers of the Filer;

h) a Pooled Fund will keep written records of each In Specie Transaction, including records of each purchase and redemption of portfolio securities and the terms thereof, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

i) No In Specie Transactions will involve a client that is a "responsible person" of the Filer, as that term is defined in subsection 13.5(1) of NI 31-103;

j) In Specie Transactions will be subject to

(i) compliance with the written policies and procedures of the Filer respecting In Specie Transactions that are consistent with applicable securities legislation,

(ii) the oversight of the Compliance Department of the Filer to ensure that the transaction represents the business judgment of the Filer acting in its discretionary capacity with respect to the Pooled Fund and the Managed Account, uninfluenced by considerations other than the best interests of the Pooled Fund and the Managed Account,

(iii) the board of directors of the Filer receiving, on a regular basis, a report on the oversight of the Compliance Department of the Filer referred to in sub-paragraph (ii) above.

31. The Filer will not receive any compensation with respect to any In Specie Transactions, and the only charges which will be incurred by a Pooled Fund or a Managed Account for an In Specie Transaction, if any, is a nominal administrative charge levied by CIBC World Markets Inc. as custodian of the Pooled Fund or the separate institutional custodian of the Managed Account in recording the trades and/or any commission charged by the dealer executing the trade.

32. Since the Filer is the portfolio manager of the Managed Accounts and the Pooled Funds, the Filer would be considered a "responsible person" with the meaning of the applicable securities legislation. In addition, as the Filer is the trustee of the Trust Funds, the Trust Funds are associates of the Filer, a responsible person. Accordingly, absent the granting of the Exemption Sought, the Filer would be prohibited from engaging in Inter-Funds Trades or In Specie Transactions.

Decision

Each of the principal regulator and the securities regulatory authority or regulator in Ontario is satisfied that the decision meets the test set out in the Legislation to make the Decision.

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

1. in connection with an Inter-Fund Trade:

a. the Inter-Fund Trade is consistent with the investment objective of the Pooled Fund or the Managed Account, as applicable;

b. the Inter-Fund Trade has been referred by the Filer, as manager of each Fund, to the IRC of the Pooled Fund in the manner contemplated by section 5.1 of NI 81-107 and the Filer and the IRC of the Pooled Fund have complied with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade;

c. if the transaction is with a Pooled Fund or between two Pooled Funds, the IRC of each Pooled Fund has approved the Inter-Fund Trade in respect of that Pooled Fund in accordance with the terms of Subsection 5.2(2) of NI 81-107;

d. if the transaction is with a Managed Account, the Discretionary Management Agreement or other documentation in respect of the Managed Account contains or will contain the authorization of the client to engage in Inter-Fund Trades and such authorization has not been revoked;

e. 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) in respect of exchange-traded securities, the Last Sale Price may be used in lieu of the Closing Sale Price;

2. in connection with an In Specie Transaction where a Managed Account acquires units of a Pooled Fund:

a. the Filer obtains the prior written consent of the client of the Managed Account before it engages in any In Specie Transaction and such consent has not been revoked;

b. the Pooled Fund would, at the time of the payment, be permitted to purchase the portfolio securities held by the Managed Account;

c. the portfolio securities are acceptable to the Filer as portfolio manager of the Pooled Fund and meet the investment objectives of the Pooled Fund;

d. the value of the portfolio securities sold to the Pooled Fund by the Managed Account is equal to the issue price of the units of the Pooled Fund for which they are used as payment, valued as if the securities were portfolio assets of that Pooled Fund;

e. none of the portfolio securities which are the subject of the In Specie Transaction will be securities of related issuers of the Filer;

f. should any In Specie Transaction involve the transfer of Illiquid Portfolio Securities, the Filer will obtain at least one quote for the asset from an independent arm's length purchaser or seller, immediately before effecting the In Specie Transaction;

g. the client of the Managed Account has not provided notice to terminate its Discretionary Management Agreement with the Filer;

h. the account statement next prepared for the Managed Account will describe the portfolio securities delivered to the Pooled Fund and the value assigned to such portfolio securities;

i. the Filer will keep written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Fund and the value assigned to such portfolio securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

3. in connection with an In Specie Transaction where a Managed Account redeems units of a Pooled Fund:

a. the Filer obtains the prior written consent of the client of the Managed Account before it engages in any In Specie Transaction and such consent has not been revoked;

b. the portfolio securities are acceptable to the Filer as portfolio manager of the Managed Account and meet the investment objectives of the Managed Account;

c. the value of the portfolio securities is equal to the amount at which those securities were valued by the Pooled Fund in calculating the net asset value per security used to establish the redemption price;

d. the client of the Managed Account has not provided notice to terminate its Discretionary Management Agreement with the Filer;

e. none of the portfolio securities which are the subject of the In Specie Transaction will be portfolio securities of related issuers of the Filer;

f. should any In Specie Transaction involve the transfer of Illiquid Portfolio Securities, the Filer will obtain at least one quote for the asset from an independent arm's length purchaser or seller, immediately before effecting the In Specie Transaction;

g. if any Illiquid Portfolio Securities are the subject of an In Specie Transaction that is a redemption, the Illiquid Portfolio Securities will be transferred on a basis that fairly represents the portfolio of the Pooled Fund;

h. the account statement next prepared for the Managed Account will describe the portfolio securities received from the Pooled Fund and the value assigned to such portfolio securities;

i. the Filer will keep written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered by the Pooled Fund and the value assigned to such portfolio securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

4. in connection with an In Specie Transaction where a Pooled Fund purchases the units of another Pooled Fund:

a. the Pooled Fund issuing the units would, at the time of payment, be permitted to purchase the portfolio securities;

b. the portfolio securities are acceptable to the Filer as portfolio manager of the Pooled Fund issuing the units and meet the investment objectives of that Pooled Fund;

c. the value of the portfolio securities is equal to the issue price of the securities of the Pooled Fund issuing the units for which they are used as payment, valued as if the portfolio securities were portfolio assets of that Pooled Fund;

d. should any In Specie Transaction involve the transfer of Illiquid Portfolio Securities, the Filer will obtain at least one quote for the asset from an independent arm's length purchaser or seller, immediately before effecting the In Specie Transaction;

e. none of the portfolio securities which are the subject of the In Specie Transaction will be portfolio securities of related issuers of the Filer;

f. the Filer will keep written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Fund and the value assigned to such portfolio securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

5. in connection with an In Specie Transaction where a Pooled Fund redeems the units of another Pooled Fund:

a. the portfolio securities are acceptable to the Filer as portfolio manager of the Pooled Fund acquiring the portfolio securities and meet the investment objectives of that Pooled Fund;

b. the value of the portfolio securities is equal to the amount at which those portfolio securities were valued in calculating the net asset value per security used to establish the redemption price;

c. none of the portfolio securities which are the subject of the In Specie Transaction will be securities of related issuers of the Filer;

d. should any In Specie Transaction involve the transfer of Illiquid Portfolio Securities, the Filer will obtain at least one quote for the asset from an independent arm's length purchaser or seller, immediately before effecting the In Specie Transaction;

e. if any Illiquid Portfolio Securities are the subject of an In Specie Transaction that is a redemption, the Illiquid Portfolio Securities will be transferred on a basis that fairly represents the portfolio of the Pooled Fund;

f. the Filer will keep written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Fund and the value assigned to such portfolio securities, for seven years in a reasonably accessible place;

6. the Filer does not receive any compensation with respect to any In Specie Transactions, and the only charges which are incurred by a Pooled Fund or a Managed Account for an In Specie Transaction if any, is a nominal administrative charge levied by CIBC World Markets Inc. as custodian of certain of the Pooled Fund or the separate institutional custodian of the Managed Account in recording the trades and/or any commission charged by the dealer executing the trade.

"Frédéric Pérodeau"
Superintendent, Client Services and Distribution Oversight