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TD Asset Management Ltd. et al.
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- relief granted from the mutual fund conflict of interest investment restrictions of the Securities Act (Ontario) to permit pooled funds to invest in other pooled funds.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(3), 113.
IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990,
CHAPTER S.5, AS AMENDED
(the "Act")
AND
IN THE MATTER OF
TD ASSET MANAGEMENT LTD.
("TDAM")
AND
TD HARBOUR CAPITAL CANADIAN BALANCED FUND
TD HARBOUR CAPITAL FOREIGN BALANCED FUND
TD HARBOUR CAPITAL BALANCED FUND
TD HARBOUR CAPITAL COMMODITY FUND
(the "Existing Funds")
ORDER
Background
The Ontario Securities Commission has received an application from TDAM, on its behalf and on behalf of the Existing Funds and any trusts that may be established and managed by TDAM in the future (the "Future Funds", and together with the Existing Funds, the "TD Harbour Capital Funds"). TDAM, as investment fund manager of the TD Harbour Capital Funds, wishes to engage or may wish to engage in certain fund on fund strategies in respect of the investment by a TD Harbour Capital Fund (each, a "Top Fund") in one or more other TD Harbour Capital Funds (each, an "Underlying Fund"). TDAM has requested relief (the "Requested Relief"), in respect of a Top Fund's investment in an Underlying Fund, from the restriction prohibiting a mutual fund from knowingly making or holding an investment:
(i) in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial securityholder; or
(ii) in an issuer in which
(1) any officer or director of the mutual fund, its management company or distribution company or an associate of any of them, or
(2) any person or company who is a substantial securityholder of the mutual fund, its management company or its distribution company has a significant interest (collectively, the "Applicable Restrictions").
Interpretation
Defined terms contained in National Instrument 14-101 -- Definitions and in the Act have the same meaning in this decision unless they are otherwise defined in this Application.
Representations
This decision is based on the following facts represented by TDAM:
1. TDAM is a corporation amalgamated under the Business Corporations Act (Ontario).
2. TDAM is registered as an investment counsel and portfolio manager and as a limited market dealer under the Act.
3. Each Existing Fund and Future Fund is or will be a trust that is a mutual fund established under the laws of Ontario. TDAM is or will be the investment fund manager of the TD Harbour Capital Funds.
4. CIBC Mellon Trust Company is or will be the trustee of the TD Harbour Capital Funds unless the trustee is changed in accordance with the terms of the Trust Agreement (as defined below) relating to the TD Harbour Capital Funds.
5. Securities of the Top Funds and the Underlying Funds are or will be distributed by TDAM as a limited market dealer in Ontario on a private placement basis to investors pursuant to one or more exemptions from the prospectus requirement or in accordance with regulatory relief granted to TDAM ("Exempt Purchasers").
6. A Top Fund may invest a portion of its assets in securities of one or more Underlying Fund(s).
7. The percentage of the assets of a Top Fund that are invested in securities of an Underlying Fund will be determined by TDAM from time to time on a basis that TDAM considers is appropriate for the Top Fund and is consistent with the investment objectives of the Top Fund, provided that such percentage will not exceed 20%.
8. TDAM will not make an investment for a Top Fund in an Underlying Fund unless TDAM considers that the Top Fund is an appropriate investor for the Underlying Fund.
9. One or more Top Funds and other related mutual funds may be substantial securityholders of an Underlying Fund.
10. A substantial securityholder of a Top Fund may have a significant interest in an Underlying Fund in which the Top Funds invests.
11. There will be no sales fees or redemption fees payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund.
12. There will be no management fees or incentive fees payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service.
13. TDAM will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of an Underlying Fund.
14. The financial statements of each of the TD Harbour Capital Funds will be prepared and delivered to securityholders in accordance with National Instrument 81-106. The securityholders of a Top Fund will receive the financial statements of any Underlying Fund in which the Top Fund invests.
15. No offering memorandum is currently prepared in respect of the TD Harbour Capital Funds.
16. Each client who is an investor in a TD Harbour Capital Fund enters into an investment management agreement (the "IMA") with TDAM which grants TDAM discretion over the client's account and pursuant to which the client consents to the investment of all or any portion of the account in units of one or more TD Harbour Capital Funds as long as such investment is consistent with the investment objectives and restrictions for the account.
17. The investment objectives and restrictions applicable to a TD Harbour Capital Fund are contained in the trust agreement applicable to the fund (the "Trust Agreement"). The fees, compensation and expenses payable by a TD Harbour Capital Fund are also contained in the Trust Agreement applicable to the fund as are matters relating to the structure of the fund, the calculation of net asset value, distributions, the powers and duties of TDAM and the trustee and all other matters material to the fund. Certain of these matters are also summarized in the financial statements of the TD Harbour Capital Funds. A client who requests a copy of the Trust Agreement receives one. However, clients do not generally receive any document describing the TD Harbour Capital Funds, other than as described below.
18. The investment objectives and restrictions, fees and expenses and other principal features of the TD Harbour Capital Funds are explained to a client at the time a client enters into an IMA if the IMA contemplates investment in one or more TD Harbour Capital Funds.
19. The client receives annual audited and interim (unaudited) financial statements of the relevant TD Harbour Capital Funds.
20. A client also receives a portfolio holdings report on a monthly basis showing the client's holdings of securities, including units of the TD Harbour Capital Funds. The report also shows a fund's holdings of securities. Where a Top Fund invests in an Underlying Fund, the Underlying Fund's holdings of securities will be included in the portfolio holdings report.
21. Existing clients have received notice of an amendment, to be effective 60 days after the notice, to the investment objectives of the TD Harbour Capital Funds to permit an investment in the TD Harbour Capital Commodity Fund. The notice included the investment objective of the TD Harbour Capital Commodity Fund and advice that the management of the TD Harbour Capital Commodity Fund would be the same as the existing TD Harbour Capital Funds. The first monthly portfolio holdings report sent to such clients after an investment by a Top Fund in the TD Harbour Capital Commodity Fund will advise clients that no more than 20% of the net assets of the Top Fund will be invested in the TD Harbour Capital Commodity Fund. It will also contain an explanation of the process or criteria used to select the TD Harbour Capital Commodity Fund.
22. In the future, prior to a Top Fund commencing a program to invest in Underlying Funds, existing clients who invest in a Top Fund will be given at least 60 days written notice of the program. The notice will provide disclosure of: (i) the intent of the Top Fund to invest its assets in securities of the Underlying Funds; (ii) the investment objective of any Underlying Fund in which a Top Fund will invest; (iii) the fact that the Underlying Funds are managed by TDAM; (iv) the percentage of net assets of the Top Fund dedicated to the investment in securities of the Underlying Funds; and (v) the process or criteria used to select the Underlying Funds.
23. Where a Top Fund invests in an Underlying Fund, new clients are provided with a document containing the disclosure outlined in items (i) -- (v) in paragraph 22 above at the time they enter into the IMA.
24. An investment by a Top Fund in securities of an Underlying Fund will represent the business judgment of "responsible persons" uninfluenced by considerations other than the best interests of the Top Fund and the Underlying Fund.
25. In the absence of this Order, the Applicable Restrictions prohibit the Top Funds from knowingly making or holding investments in the Underlying Funds in certain circumstances.
Decision
The Decision Maker is satisfied that the test contained in the Act that provides the Decision Maker with the jurisdiction to make the decision has been met. The decision of the Decision Maker under the Act is that the Requested Relief is granted provided that:
(a) securities of the Top Funds are distributed in Ontario solely to Exempt Purchasers under Ontario securities legislation;
(b) each Underlying Fund is a "mutual fund in Ontario" as defined in the Act;
(c) each Top Fund does not vote any of the securities it holds of the Underlying Funds, except that each Top Fund may, if TDAM so chooses, arrange for all the securities it holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;
(d) no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;
(e) no sales fees or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund;
(f) investors in a Top Fund receive written disclosure which discloses:
(i) the intent of the Top Fund to invest its assets in securities of the Underlying Funds;
(ii) that the Underlying Funds are managed by TDAM;
(iii) what percentage of net assets of the Top Fund is dedicated to the investment in securities of the Underlying Funds; and
(iv) the process or criteria used to select the Underlying Funds; and
(g) investors in a Top Fund are entitled to receive from TDAM, on request and free of charge, a copy of the offering memorandum (if any) relating to all Underlying Funds in which the Top Fund may invest its assets.
DATED March 3, 2006
"Paul M. Moore"
"Paul K. Bates"