Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted from the requirements of section 11.1(1)(b) and section 11.2(1)(b) of NI 81-102 to permit commingling of cash received for the purchase or redemption of mutual fund securities with cash received for the purchase and sale of other securities or instruments the participating dealer of third party funds and potential principal distributor of mutual funds is permitted to sell, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 11.1(1)(b), 11.2(1)(b), 19.1.
May 18, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, SASKATCHEWAN, MANITOBA,
ONTARIO, NEW BRUNSWICK, NOVA SCOTIA,
PRINCE EDWARD ISLAND, AND NEWFOUNDLAND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
ING DIRECT FUNDS LIMITED
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer for a decision (the "Requested Relief") under section 19.1 of National Instrument 81-102 Mutual Funds (the "Legislation") for an exemption from the provisions of paragraph 11.1(1)(b) and paragraph 11.2(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") that prohibit a principal distributor, a participating dealer, or certain service providers, from commingling cash received for the purchase or redemption of mutual fund securities ("Mutual Fund Cash") with cash received for the purchase or sale of guaranteed investment certificates or other securities or instruments the participating dealer or principal distributor is permitted to sell (such monies collectively, "Other Cash") (the "Commingling Prohibitions").
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.
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer's principal business consists of acting as a mutual fund dealer.
2. The Filer is a participating dealer with respect to third party funds. The Filer may in future, assume the role of principal distributor with respect to such funds or other funds that are added to the Filer's product shelf.
3. The Filer is registered as a dealer in the category of mutual fund dealer (or the equivalent) in all the Jurisdictions in order to carry out trades in mutual fund securities. The Filer is also a member of the Mutual Fund Dealers Association of Canada ("MFDA").
4. As a member of the MFDA, the Filer is subject to the rules and requirements of the MFDA ("MFDA Rules") on an ongoing basis, particularly those which set out requirements with respect to the handling and segregation of client cash. As a member of the MFDA, the Filer is expected to comply with all MFDA Rules.
5. The Filer maintains a trust account with a major Canadian chartered bank into which all monies invested by or on behalf of its clients are paid and from which redemption proceeds or assets to be distributed are paid (the "Client Trust Account"). The Client Trust Account is interest bearing and all of the interest earned on the cash in the trust account is paid out to the applicable mutual funds on a pro rata basis in compliance with subsection 11.2(4) of NI 81-102 (and that would be required by subsection 11.1(4) were the Filer acting as a principal distributor). The Filer also ensures compliance with section 11.3 in the way in which the Client Trust Account is maintained.
6. Currently, the Filer only distributes mutual fund products to its customers. The Filer is proposing to add a high interest deposit account issued by ING Bank of Canada, a federally chartered Canadian bank listed under Schedule II of the Bank Act, to its product shelf. Funds received for purchase and sale orders related to the proposed product specifically constitute "Other Cash".
7. The Filer proposes to pool Other Cash with Mutual Fund Cash in the Client Trust Account. The commingling of Other Cash with Mutual Fund Cash would facilitate significant administrative and systems economies that will enable the Filer to enhance its level of service to its clients at less cost. The Client Trust Account is designated as a "trust account" by the financial institution at which it is held.
8. The Commingling Prohibitions prevent the Filer from commingling Mutual Fund Cash with Other Cash.
9. Prior to June 23, 2006, section 3.3.2(e) of the Rules of the MFDA ("MFDA Commingling Prohibition") also prohibited the commingling of Mutual Fund Cash with Other Cash. On June 23, 2006, the MFDA granted relief from the MFDA Commingling Prohibition to the Filer subject to the Filer obtaining similar relief from the Commingling Prohibitions from the Decision Makers. Should the Requested Relief be granted by the Decision Makers, the Filer will provide the MFDA with notice that the Requested Relief has been granted.
10. In providing its services the Filer utilizes sophisticated systems and is able to account for all of the monies it receives into and all of the monies that are to be paid out of its Client Trust Account in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.
11. The Filer will maintain proper records with respect to client cash in a commingled account, and will ensure that the Client Trust Account is reconciled in accordance with MFDA Rules, and that Mutual Fund Cash and Other Cash are properly accounted for daily.
12. Mutual Fund Cash or Other Cash related to a transaction initiated by one of the Filer's clients will not be used to settle a transaction initiated by any other of the Filer's clients. The Filer settles through FundServ at the end of each trading day.
13. Except for the Commingling Prohibitions, the Filer will comply with all other requirements prescribed in Part 11 of NI 81-102 with respect to the handling and segregation of client cash.
14. The Filer does not believe that the interests of its clients will be prejudiced in any way by the commingling of Mutual Fund Cash with Other Cash.
15. Effective July 1, 2005, the MFDA Investor Protection Corporation ("MFDA IPC") commenced offering coverage, within defined limits, to customers of MFDA members against losses suffered due to the insolvency of MFDA members. The Filer does not believe that the Requested Relief will affect coverage provided by the MFDA IPC.
16. In the absence of the Requested Relief, the commingling of Mutual Fund Cash with Other Cash would contravene the Commingling Prohibitions.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that this Decision, as it relates to the jurisdiction of a Decision Maker, will terminate upon the coming into force of any change in the MFDA IPC rules which would reduce the coverage provided by the MFDA IPC relating to Mutual Fund Cash and Other Cash.