Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subparagraphs 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to permit in-specie transfers between managed accounts and pooled funds -- relief subject to usual conditions, such as consent of managed account clients to allow in-specie transfers, acceptability of portfolio assets to receiving fund or managed account portfolio manager, filer to keep written record of transfers, certain pricing conditions.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements, Exemptions and ongoing Registrant Obligations, ss. 13.5(2)(b), 15.1.

November 21, 2019

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 BASKIN FINANCIAL SERVICES INC. (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application requesting an exemption on behalf of the Filer pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) from the prohibition in subparagraphs 13.5(2)(b)(ii) and 13.5(2)(b)(iii) of NI 31-103 to permit specified In-specie Transfers (the Exemption Sought).

Under National Policy 11-203 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 Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan (together with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in MI 11-102, National Instrument 14-101 Definitions, National Instrument 81-102 Investment Funds (NI 81-102) and NI 31-103 have the same meanings in this decision, unless otherwise defined.

In addition:

Fund Securities means units of a Pooled Fund.

Future Pooled Fund means each investment fund that is established after the formation of the Initial Pooled Fund, and for which the Filer will act as the investment fund manager and adviser and which is not a reporting issuer.

In-specie Transfer means the Filer's actions to cause a Managed Account to deliver securities to a Pooled Fund in payment for the purchase by the Managed Account of Fund Securities of such Pooled Fund or to receive securities from the investment portfolio of a Pooled Fund in respect of a redemption of Fund Securities of such Pooled Fund in respect of the Managed Account.

Initial Pooled Fund means an investment fund of which the Filer will act as the investment fund manager and adviser and which is not a reporting issuer.

Managed Account means an existing or future account over which the Filer has discretionary authority for a client in its capacity as a registered adviser.

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

Pooled Funds means, collectively, the Initial Pooled Fund and the Future Pooled Funds.

Representations

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

The Filer

1. The Filer is a corporation incorporated under the laws of Ontario with its head office located in Toronto, Ontario.

2. The Filer is registered in each of the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan as an adviser in the category of portfolio manager. The Filer is also registered in the category of investment fund manager in the provinces of Ontario and Québec.

3. The Filer's principal business is that of an adviser (portfolio manager) and currently manages $1.2 billion of assets under administration. It is an independently owned firm providing customized wealth management solutions to families and foundations with $1 million or more to invest.

4. The Filer is not a reporting issuer in any jurisdiction and is not in default of the securities legislation of any Jurisdiction.

The Managed Accounts

5. The Filer enters into Managed Accounts with its clients. Each Managed Account is, or will be, managed pursuant to an investment management agreement or other documentation which is, or will be, executed by the client who wishes to receive the portfolio management services of the Filer and which provides the Filer full discretionary authority to trade in securities for the Managed Account without obtaining the specific consent of the client to execute the trade.

Pooled Funds

6. The Filer wishes to manage certain classes of assets for its Managed Account clients within a Pooled Fund in order to achieve greater efficiencies for its Managed Account clients, including through reduced transaction costs and the ability to acquire larger blocks of securities, as well as a more diversified portfolio of securities. Initially, the Filer intends to create the Initial Pooled Fund with an investment objective to invest in fixed income securities. Securities of the Initial Pooled Fund will be suitable for Managed Account clients with strategies that include at least some exposure to fixed income securities. Future Pooled Funds may be created with other specific investment objectives and will be designed to be suitable for some or all of the Filer's Managed Account clients.

7. The Filer intends to establish the Initial Pooled Fund as a trust. The Filer will be the manager of the Pooled Funds. The Filer will act as trustee of the Pooled Funds, pursuant to Revised Approval 81-901 Mutual Fund Trusts: Approval of Trustees Under Clause 213(3)(b) of the Loan and Trust Corporations Act dated June 11, 2019.

8. The Filer wishes to invest existing and future Managed Accounts in one or more of the Pooled Funds, to the extent that a Pooled Fund's investment objectives are consistent with the investment objectives of the applicable Managed Accounts.

In-specie Transfers

9. The Filer proposes to cause those Managed Accounts that today invest a portion of their assets in fixed income securities to subscribe for units of the Initial Pooled Fund and transfer sufficient of those fixed income securities held by that Managed Account to the Initial Pooled Fund as required as payment for those units, where the Filer considers this action to be in the best interests of the Managed Account clients. The Filer may do this in the future with the Managed Accounts for Future Pooled Funds. Additionally, the Filer may cause a Pooled Fund to effect an In-specie Transfer of assets to a Managed Account in payment of proceeds of any redemption of securities of the Pooled Fund held by the Managed Account. As such, the Filer wishes to use the Exemption Sought to

(a) effect a one-time In-specie Transfer of assets held by Managed Account clients with respect to the establishment of the Initial Pooled Fund and any Future Pooled Funds where those assets are appropriate for the Initial Pooled Fund and Future Pooled Fund (as the case may be) and where it is appropriate for the Managed Account to invest in the applicable Pooled Fund;

(b) effect future In-specie Transfers with respect to Managed Account clients where it is appropriate for them to invest in a Pooled Fund and transfer assets held in the Managed Account to pay the subscription price for the securities so acquired; and

(c) effect In-specie Transfers from a Pooled Fund to a Managed Account in order to pay the proceeds of any redemption of securities of the Pooled Fund held by the Managed Account.

10. The purpose of the In-specie Transfers will be to allow the Filer to reduce transaction costs for the existing and future Managed Account clients. By pooling the applicable securities held by the Managed Accounts in the applicable Pooled Fund through the In-specie Transfers, the Filer may be able to reduce market impact costs, which can be detrimental to the Managed Accounts. The In-specie Transfer of assets will allow the Filer to retain within its control institutional-sized blocks of securities that otherwise would need to be broken and re-assembled.

11. The only cost which will be incurred by a Pooled Fund or Managed Account in connection with any In-specie Transfer will be a nominal administrative charge levied by the custodian of the Pooled Fund.

12. The Filer, as manager of the Pooled Funds, will value the securities transferred under an In-specie Transfer on the same valuation day on which the purchase or redemption price of the Fund Securities is determined. With respect to the purchase of Fund Securities of a Pooled Fund, the securities transferred to a Pooled Fund under an In-specie Transfer in satisfaction of all or part of the purchase price of those Fund Securities will be valued as if the securities were portfolio assets of the Pooled Fund, as contemplated by section 9.4(2)(b)(iii) of NI 81-102 for public mutual funds subject to NI 81-102. With respect to the redemption of Fund Securities of a Pooled Fund, the securities transferred to a Managed Account in satisfaction of the redemption price of those Fund Securities 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 Fund Securities of the Pooled Fund, as contemplated by section 10.4(3)(b) of NI 81-102 for public mutual funds subject to NI 81-102.

13. The Filer will ensure that each Managed Account client consents to an In-specie Transfer prior to the In-specie Transfer taking place. The account statement next prepared for the Managed Account will describe the portfolio securities delivered to the Pooled Fund or received by the Managed Account, as the case may be, and the value assigned to the portfolio securities.

14. The Filer will rely on the dealer exemption set out in section 8.6 of NI 31-103 with respect of the trades in the Fund Securities to the Managed Accounts.

15. Absent the Exemption Sought, neither the Managed Accounts nor the Pooled Funds, or the Filer, on their behalf, would be permitted to engage in In-specie Transfers due to the provisions of section 13.5(2)(b) of NI 31-103.

16. At the time of each In-specie Transfer, the Filer will have in place policies and procedures governing such transactions, including the following:

(a) the Filer has obtained the consent of the applicable Managed Account client before it engages in any In-specie Transfer and will report on the In-specie Transfer in the next account statement for the Managed Account;

(b) the portfolio securities transferred in an In-specie Transfer will be consistent with the investment criteria of the applicable Pooled Fund or Managed Account acquiring the portfolio securities;

(c) the portfolio securities transferred in an In-specie Transfer will be valued on the same valuation day using the same valuation principles as are used to calculate the net asset value for the purpose of the issue price or redemption price of securities of the Pooled Fund;

(d) the valuation of any illiquid securities which would be the subject of an In-specie Transfer will be carried out according to the Filer's policies and procedures for the fair valuation of portfolio securities, including illiquid securities. Should any In-specie Transfer involve the transfer of an "illiquid asset" (as defined in NI 81-102), 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 Transfer;

(e) if any illiquid securities are the subject of an In-specie Transfer, the illiquid securities will be transferred on a pro rata basis. The Pooled Funds generally invest in liquid securities The Filer will not cause any Pooled Fund to engage in an In-specie Transfer if the applicable Pooled Fund or Managed Account is not in compliance with the portfolio restrictions on the holding of illiquid securities described in section 2.4 of NI 81-102; and

(f) the Filer will keep written records of each In-specie Transfer, including records of each purchase and redemption of portfolio securities and the terms thereof for a period of at least five years commencing after the end of the financial year in which the trade occurred, the most recent two years in a reasonably accessible place.

17. In-specie Transfers will be subject to:

(a) compliance with the written policies and procedures of the Filer respecting In-specie Transfers that are consistent with applicable securities legislation and the Exemption Sought; and

(b) the oversight of the Filer's Chief Compliance Officer to ensure that the In-specie Transfers represent the business judgment of the Filer acting in its discretionary capacity with respect to a Pooled Fund and the Managed Account, uninfluenced by considerations other than the best interests of the Pooled Fund and the Managed Account. Any issues detected in the oversight and review by the Filer will be reported in the Chief Compliance Officer's annual report to the board of directors of the Filer.

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 so long as:

(a) if the In-specie Transfer is in respect of the purchase of Fund Securities by a Managed Account:

(i) the Managed Account client has consented to the In-specie Transfer before the Filer carries out the In-specie Transfer;

(ii) the Pooled Fund would, at the time of payment, be permitted to purchase the securities that are the subject of the In-specie Transfer;

(iii) the securities are acceptable to the Filer as portfolio manager of the Pooled Fund and are consistent with the investment objectives of the Pooled Fund;

(iv) the value of the securities transferred to the Pooled Fund is at least equal to the issue price of the Fund Securities for which they are used as payment, valued as if the securities were portfolio assets of the Pooled Fund;

(v) the account statement next prepared for the Managed Account describes the securities delivered to the Pooled Fund and the value assigned to such securities; and

(vi) the Pooled Funds keep written records of all In-specie Transfers during the financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Funds 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) if the In-specie Transfer is in respect of the redemption of Fund Securities by a Managed Account:

(i) the Managed Account client has consented to the In-specie Transfer before the Filer carries out the In-specie Transfer;

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

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

(iv) the holder of the Managed Account has not provided notice to terminate its investment management agreement with the Filer;

(v) the account statement next prepared for the Managed Account describes the securities received from the Pooled Fund and the value assigned to such securities; and

(vi) the Pooled Funds keep written records of all In-specie Transfers during the financial year, reflecting details of the securities delivered by the Pooled Funds 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;

(c) the Filer does not receive any compensation in respect of any sale or redemption of Fund Securities and, in respect of any delivery of securities further to an In-specie Transfer, the only charge paid by the Managed Account or Pooled Fund, as the case may be, if any, is any administrative charge levied by the custodian of the assets of the Managed Account or Pooled Fund; and

(d) should any In-specie Transfer involve the transfer of an "illiquid asset" (as defined in NI 81-102) 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 Transfer (as contemplated by commentary #7 to section 6.1 of National Instrument 81-107 Independent Review Committee for Investment Funds).

"Neeti Varma"
Manager, Investment Funds and Structured Products
Ontario Securities Commission