Securities Law & Instruments


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 investment 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 investment funds and pooled funds 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), 19.1.
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).

July 24, 2017

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
MARQUEST ASSET MANAGEMENT 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) for:

(a)           an exemption from the prohibition in section 4.2(1) of National Instrument 81-102 Investment Funds (NI 81-102) to permit each NI 81-102 Fund (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); and

(b)           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) against a registered adviser 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)            a Fund (as defined below) to purchase securities from or sell securities to another Fund (an Inter-Fund Trade); and

(ii)           an Inter-Fund Trade of an Exchange-Traded Security (as defined below) 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 on the day of the transaction (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)

(paragraphs (i) and (ii) are collectively, the Inter-Fund Trading Relief)

(the Section 4.2(1) Relief and the Inter-Fund Trading Relief are, collectively, 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 the provinces and territories of Canada other than Ontario (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in the Legislation, MI 11-102, National Instrument 14-101 Definitions, NI 31-103, NI 81-102 or NI 81-107 have the same meaning if used in this decision, unless otherwise defined herein. The following terms have the following meanings:

Exchange-Traded Security means a security that is listed for trading on an exchange in Canada or a foreign jurisdiction.

Fund means an NI 81-102 Fund or a Pooled Fund.

NI 81-102 Fund means each existing investment fund, or an investment fund to be established in the future, that is a reporting issuer and subject to NI 81-102, for which the Filer acts as manager and/or portfolio adviser.

Pooled Fund means each existing investment fund, or an investment fund to be established in the future, that is not a reporting issuer, for which the Filer acts as manager and/or portfolio adviser.

Representations

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

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

2.             The Filer is registered as a portfolio manager, exempt market dealer and investment fund manager in Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, Ontario, Quebec and Saskatchewan.

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

4.             Each of the NI 81-102 Funds is, or will be, established under the laws of Canada or a province or territory of Canada as an investment fund and is, or will be, a reporting issuer in one or more provinces and territories of Canada.

5.             The securities of each NI 81-102 Fund are, or will be, qualified for distribution under a prospectus.

6.             Each Pooled Fund is, or will be, an investment fund established as a trust, partnership or corporation under the laws of Canada or a province or territory of Canada, or a jurisdiction outside of Canada.

7.             The securities of each Pooled Fund are, or will be, distributed on a private placement basis pursuant to one or more available exemptions from the prospectus requirement. None of the Pooled Funds are, or will be, reporting issuers in any province or territory of Canada or other jurisdiction and none are, or will be, subject to NI 81-102 or NI 81-107.

8.             Neither the Filer nor any of the existing Funds are in default of securities legislation of the Jurisdictions.

9.             The Filer wishes to be able to engage in Inter-Fund Trades between

(a)           an NI 81-102 Fund and another NI 81-102 Fund or a Pooled Fund, and

(b)           a Pooled Fund and another Pooled Fund or an NI 81-102 Fund.

10.          Different sections of NI 31-103, NI 81-102 and NI 81-107 impose different prohibitions and exceptions on different types of investment funds with respect to Inter-Fund Trades. These prohibitions apply because (a) the Filer acts, or will act, as the adviser to the Funds and is therefore a “responsible person” for the purposes of section 13.5(2)(b) of NI 31-103; and (b) in some cases, the Filer is, or will be, an “associate” of the Funds by virtue of direct or indirect ownership of more than 10% of the voting securities of Funds that are corporations or through serving as a trustee of any Fund organized as a trust.

11.          The NI 81-102 Funds are unable to rely on the exception in section 4.3(1) of NI 81-102 to inter-fund trade debt securities with the Pooled Funds because debt securities are typically not subject to public quotations as required by section 4.3(1) of NI 81-102. The NI 81-102 Funds also cannot rely on the exception in section 4.3(2) of NI 81-102 to inter-fund trade debt securities with the 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.

12.          The Filer cannot rely on the exemption in section 6.1(4) of NI 81-107 for any trade involving a Pooled Fund because each party to the transaction would not be an investment fund subject to NI 81-107 and, in the case of Exchange-Traded Securities, the Inter-Fund Trade would not occur at the Closing Sale Price.

13.          Absent the Exemption Sought, neither the Funds nor the Filer on their behalf will be permitted to engage in Inter-Fund Trades.

14.          Because of the various investment objectives and investment strategies used by the Funds, 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 Fund.

15.          Effecting Inter-Fund Trades amongst the Funds has the effect of reducing transaction costs for the Funds 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 Funds.

16.          The Filer has determined that it would be in the best interests of the Funds to receive the Exemption Sought because subjecting the Funds 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, and

(b)           simplified and more efficient monitoring thereof for the Filer in connection with the execution of Inter-Fund Trades.

17.          At the time of an Inter-Fund Trade, the Filer will have policies and procedures in place to enable the applicable Funds to engage in Inter-Fund Trades.

18.          The Filer, as manager of each NI 81-102 Fund, has established an independent review committee (IRC) in respect of each existing NI 81-102 Fund and will establish an IRC in respect of any future NI 81-102 Fund, as required by NI 81-107.

19.          The Filer, as manager of each Pooled Fund, will establish an IRC in respect of each Pooled Fund to review and provide its approval, including by way of standing instructions, for any proposed Inter-Fund Trades between a Pooled Fund and another Fund.

20.          Each Pooled Fund and each IRC of a 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 the Pooled Funds will not approve an Inter-Fund Trade involving a Pooled Fund unless it has made the determination set out in section 5.2(2) of NI 81-107.

21.          Inter-Fund Trades involving an NI 81-102 Fund will be referred to the IRC of the NI 81-102 Fund under section 5.2(1) of NI 81-107 and the Filer and the IRC of the NI 81-102 Fund will comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC has provided in connection with the Inter-Fund Trade. The IRC of the NI 81-102 Funds will not approve an Inter-Fund Trade involving an NI 81-102 Fund unless it has made the determination set out in section 5.2(2) of NI 81-107.

22.          The Filer considers that it would be in the best interests of the Funds 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, 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.

23.          When the Filer engages in an Inter-Fund Trade, the Filer will follow the following procedures:

(a)           the applicable portfolio manager of the Filer will request approval of the Inter-Fund Trade from the chief compliance officer of the Filer, or his or her designated alternate;

(b)           upon receipt of the required approval, the portfolio manager of the Filer will deliver the trading instructions to a trader on a trading desk of the Filer;

(c)           upon receipt of the trade instructions and the required approval for the Inter-Fund Trade, the trader on the trading desk will execute the trade in accordance with the requirements of paragraphs (c) to (g) of section 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;

(d)           the policies applicable to the trading desk of the Filer must require that all orders are to be executed on a timely basis; and

(e)           upon execution of the trade, the trader on the trading desk will advise the portfolio manager of the price at which the Inter-Fund Trade occurred.

24.          If the IRC of a Fund becomes aware of an instance where the Filer did not comply with (a) the terms of this decision or (b) 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 under the laws of which the Fund is organized.

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:

(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 accordance with the terms of subsection 5.2(2) of NI 81-107; and

(iii)          the transaction complies with paragraphs (c) to (g) of section 6.1(2) of NI 81-107; and

(b)           the Inter-Fund Trading Relief is granted provided that:

(i)            the Inter-Fund Trade is consistent with the investment objectives of each Fund;

(ii)           the Filer, as manager of each Fund, refers the Inter-Fund Trade to the IRC of each 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 has provided in connection with the Inter-Fund Trade;

(iii)          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

(iv)          the Inter-Fund Trade complies with paragraphs (c) to (g) of section 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.

“Vera Nunes”
Manager, Investment Funds & Structured Products Branch
Ontario Securities Commission