Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Exemptions from the mutual fund self-dealing prohibitions of clauses 111(2)(a) and 111(3) of the Securities Act (Ontario). Mutual funds allowed to make purchases and sales of common shares of the Bank of Nova Scotia, a related company to the manager of the mutual funds, and to retain those securities provided that a fund governance mechanism is used to oversee the holdings, purchases or sales of theses securities for the mutual funds and to ensure that such holdings, purchases or sales have been made free of any influence by the Bank of Nova Scotia and without taking into account any consideration relevant to the Bank of Nova Scotia.

Mutual funds also exempt from the provision, where applicable, prohibiting a mutual fund or responsible person from causing a mutual fund to invest in an issuer in which a responsible person is a director, partner or officer unless that fact is disclosed to the mutual fund securityholders before the purchase.

Statutes Cited

Securities Act (Ontario), R.S.O. 1990,c. 5, as am., 111(2)(a) and 111(3).

August 26, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION

OF ONTARIO, BRITISH COLUMBIA, ALBERTA,

SASKATCHEWAN, QUÉBEC, NOVA SCOTIA, New BRUNSWICK

AND NEWFOUNDLAND AND LABRADOR

(THE "JURISDICTIONS")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

SCOTIA CAPITAL INC.

AND

IN THE MATTER OF

PINNACLE CANADIAN GROWTH EQUITY FUND

PINNACLE CANADIAN MID CAP VALUE EQUITY FUND

PINNACLE CANADIAN VALUE EQUITY FUND

PINNACLE STRATEGIC BALANCED FUND

(THE "PINNACLE FUNDS")

 

MRRS DECISION DOCUMENT

Background

The securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from Scotia Capital Inc. (the "Filer") in respect of the Pinnacle Funds together with such other mutual funds for which the Filer is, or may become, the manager (individually a "Fund" and collectively with the Pinnacle Funds, the "Funds") for a decision (the "Decision") under the securities legislation of the Jurisdictions (the "Legislation") that:

(a) the provision prohibiting a mutual fund from knowingly making or holding an investment in any person or company which is a substantial security holder of the mutual fund, its management company or distribution company; and

(b) the provision, in British Columbia, prohibiting a mutual fund or a responsible person from causing a mutual fund to invest in an issuer in which a responsible person is a director, partner or officer unless that fact is disclosed to the mutual fund securityholders before the purchase;

(The "Investment Restrictions") shall not apply to investments made by the Funds in common shares (the "Common Shares") of The Bank of Nova Scotia ("Scotiabank");

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this Decision unless they are otherwise defined in this Decision.

Representations

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

1. The Filer is a corporation established under the laws of the Province of Ontario, is registered as a dealer in Ontario in the category of investment dealer and is registered under the equivalent category in the other Jurisdictions. The Filer is a member of the Investment Dealers Association of Canada. The Filer is or will be the principal distributor, trustee and manager of each of the Funds. Accordingly, the Filer is or will be the distribution company of each of the Funds.

2. Each of the Funds is or will be a mutual fund within the meaning of the Legislation and is or will be a reporting issuer subject to National Instrument 81-102.

3. Each of the Pinnacle Funds is not in default under the Legislation.

4. Securities of the Funds are or will be offered to the public in all provinces and territories of Canada.

5. Each of the Funds receives portfolio advisory services from third party portfolio managers who are not affiliates of the Filer.

6. The Filer is a subsidiary of Scotiabank. Accordingly, Scotiabank is a substantial security holder of the Filer.

7. The Filer is prohibited by the Investment Restrictions from causing the investment portfolios of certain of the Funds to invest in Common Shares of Scotiabank because Scotiabank is a substantial security holder of the manager and distribution company of the Funds.

8. For purposes of the requirement of section 11.3(b) of Part B of Form 81-101F1 -- Contents of Simplified Prospectus -- under National Instrument 81-101, the broad based securities market index that is relevant for the purposes of comparing the performance of many of the Funds is the S&P/TSX Composite Total Return Index (the "Composite Index"). In addition, investors and/or their advisors may compare the performance of a Fund to one or more of the S&P/TSX 60 Index (the "60 Index"), and the S&P/TSX Financial Services Index (the "Financial Services Index").

9. As at December 31, 2004, the Common Shares of Scotiabank are represented in each of the indices referred to in paragraph 8 above in approximately the following percentages:

Composite Index 4.44%

60 Index 5.93%

Financial Services Index 13.51%

10. The Financial Services Index is the largest industry sector sub-index of the Composite Index, representing approximately 32.84% of the Composite Index in 2004. In 2004, bank securities represented approximately 59.23% of the Financial Services Index and approximately 19.45% of the Composite Index.

11. As demonstrated by the information set out in paragraphs 8, 9 and 10 above, in the context of the Canadian capital markets, the ability to invest in Common Shares of Scotiabank is important to the Funds. Scotiabank is the second largest bank issuer by market capitalization and index weighting in each of the indices referred to above and it has a significant impact on the returns of each of such indices. The Filer is of the view that it is not prudent for a portfolio manager to arbitrarily exclude securities of such an issuer from the universe of securities available for investment.

12. The Filer considers that it would be in the best interests of investors in the Funds if the portfolios of the Funds were permitted to invest in Common Shares of Scotiabank where such investment is consistent with the investment objectives of the Funds.

13. The Filer has appointed an independent Board of Advisors (the "Board of Advisors"), which will review each Fund's purchases, sales and continued holdings of Common Shares of Scotiabank to ensure that these investment decisions have been made free from any influence by Scotiabank, have not taken into account any consideration relevant to Scotiabank or any associate or affiliate of Scotiabank, and do not cause the portfolio of the Fund to exceed the investment concentration limits for the Fund in any one issuer.

14. In reviewing the Funds' purchases, sales and continued holdings of Common Shares of Scotiabank, the Board of Advisors will take into account the best interests of the unitholders of the Funds and no other factors.

15. In addition to an annual fee, compensation to be paid to members of the Board of Advisors will be paid on a per meeting plus expenses basis and will be allocated among the Funds in a manner that is considered by the Board of Advisors to be fair and reasonable to the Funds.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make this Decision has been met.

The decision of the Decision Makers under the Legislation is that the Filer and the Funds are exempt from the Investment Restrictions so as to enable the Funds to invest, or continue to hold an investment, in Common Shares of Scotiabank provided that:

1. The Filer has appointed a Board of Advisors to review the Funds' purchases, sales and continued holdings of Common Shares of Scotiabank;

2. the Board of Advisors has at least three members, each of whom is independent of

(a) Scotiabank,

(b) the Filer or any portfolio advisor of the Funds, or

(c) any associate or affiliate of Scotiabank, the Filer or any portfolio advisor of the Funds.

A member of the Board of Advisors is not independent if the member has a direct or indirect material relationship with the Filer, the Funds, or an entity related to the Filer. A material relationship is any relationship that a reasonable person would consider might interfere with the exercise of the member's independent judgement regarding conflicts of interest facing the Filer;

3. the Board of Advisors has a written mandate describing its duties and standard of care which, at a minimum, sets out the conditions of this Decision;

4. the members of the Board of Advisors exercise their powers and discharge their duties honestly, in good faith and in the best interests of investors in the Funds and, in doing so, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances;

5. none of the Funds relieves the members of the Board of Advisors from liability for loss that arises out of a failure to satisfy the standard of care set out in paragraph 4;

6. none of the Funds indemnifies the members of the Board of Advisors against legal fees, judgements and amounts paid in settlement as a result of a breach of the standard of care set out in paragraph 4;

7. none of the Funds incurs the cost of any portion of liability insurance that insures a member of the Board of Advisors for a liability for loss that arises out of a failure to satisfy the standard of care set out in paragraph 4;

8. the cost of any indemnification or insurance coverage paid for by the Filer, any portfolio advisor of the Funds, or any associate or affiliate of the Filer or any portfolio advisor of the Funds to indemnify or insure the members of the Board of Advisors in respect of a loss that arises out of a failure to satisfy the standard of care set out in paragraph 4 is not paid either directly or indirectly by the Funds;

9. prior to effecting a purchase pursuant to this Decision, the Filer has in place written policies and procedures to ensure that there is compliance with the conditions of this Decision;

10. the Board of Advisors reviews the Funds' purchases, sales and continued holdings of Common Shares of Scotiabank on a regular basis, but not less frequently than once every calendar quarter;

11. the Board of Advisors forms the opinion after reasonable inquiry that the decisions made on behalf of each Fund by the Fund's portfolio advisor to purchase, sell or continue to hold Common Shares of Scotiabank were, and continue to be, in the best interests of the Fund and:

(a) represent the business judgement of the Fund's portfolio advisor, uninfluenced by considerations other than the best interests of the Fund,

(b) have been made free from any influence by Scotiabank and without taking into account any consideration relevant to Scotiabank or any associate or affiliate of Scotiabank, and

(c) do not exceed the limitations of the applicable legislation;

12. the determination made by the Board of Advisors pursuant to paragraph 11 above is included in detailed written minutes provided to the Filer, not less frequently than quarterly;

13. in respect of the relevant Fund, within 30 days after the end of each month in which the Fund's portfolio advisor purchases or sells Common Shares of Scotiabank on behalf of one or more Funds, the Filer will file on SEDAR:

(a) reports disclosing:

(i) the name of each Fund that purchased or sold during the month,

(ii) the date of each purchase and sale,

(iii) the volume weighted average price paid or received for the Common Shares of Scotiabank by each Fund on a given date, and

(iv) whether a purchase, sale or equity position was determined by the Board of Advisors to not comply with paragraph 11 above and, if so, why the purchase, sale or equity position was either completed, continued or not liquidated notwithstanding the Board of Advisors' determination;

(b) a certificate of the Fund's portfolio advisor certifying that:

(i) at the time of each trade the trade represented the business judgement of the portfolio advisor of the Fund uninfluenced by considerations other than the best interest of the Fund and was, in fact, in the best interests of the Fund,

(ii) the trades were made free from any influence by Scotiabank or any affiliate or associate thereof and without taking any consideration relevant to Scotiabank or any associate or affiliate thereof, and

(iii) the trades were not part of a series of transactions aiming to support or otherwise influence the price of the Common Shares of Scotiabank; and

(c) a certificate by each member of the Board of Advisors certifying that after reasonable inquiry the member formed the opinion that the policies and procedures referred to in paragraph 9 above are adequate and effective to ensure compliance with this Decision and that the decision made on behalf of each Fund by the Fund's portfolio advisor to purchase Common Shares of Scotiabank for the Fund and the purchase by the Fund:

(i) was made in compliance with the conditions of this Decision;

(ii) represented the business judgment of the Fund's portfolio advisor uninfluenced by considerations other than the best interests of the Fund; and

(iii) was, in fact, in the best interests of the Fund;

14. the Board of Advisors advises the Decision Makers in writing of:

(a) any determination by it that paragraph 11 has not been satisfied with respect to any purchase, sale or holding of Common Shares of Scotiabank,

(b) any determination by it that any other condition of this Decision has not been satisfied,

(c) any action it has taken or proposes to take following the determinations referred to above, and

(d) any action taken, or proposed to be taken, by Scotiabank, the Filer or the portfolio advisor of the Funds in response to the determinations referred to above;

15. the existence, purpose, duties and obligations of the Board of Advisors, the names of its members, whether and how they are compensated by the Funds, and the fact that they meet the requirements of paragraph 2 are disclosed:

(a) in a press release issued, and a material change report filed, prior to reliance on the Decision,

(b) in item 12 of Part A of the simplified prospectus of the Funds, and

(c) on the Filer's Internet website; and

16. the Decision, as it relates to the Jurisdiction of a Decision Maker, will terminate one year after the publication in final form of any legislation or rule of that Decision Maker dealing with mutual fund governance in a manner that conflicts with or makes inapplicable any provision of this Decision.

"Theresa McLeod"
Commissioner
Ontario Securities Commission
 
"Harold P. Hands"
Commissioner
Ontario Securities Commission