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 28, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA AND ONTARIO
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
QUEENSBURY STRATEGIES INC.
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 the securities legislation of the Jurisdictions (the "Legislation") for an exemption from the provisions of section 11.1(1)(b) and section 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 ("MF Cash") with cash received for the purchase or sale of guaranteed investment certificates and other securities or instruments the principal distributor or participating dealer is permitted to sell ("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 otherwise defined in this decision.
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 on January 28, 1993. The Filer's principal business is acting as a mutual fund dealer and it deals almost exclusively in mutual fund products.
2. The Filer is registered as a dealer in the category of mutual fund dealer (or the equivalent) in each of the Jurisdictions. The Filer is also registered as a limited market dealer in Ontario, and is accordingly permitted to process prospectus exempt products. Sales of prospectus exempt products represent a small percentage of transactions handled by the Filer.
3. The Filer is a member of the Mutual Fund Dealers' Association ("MFDA").
4. The Filer is a "participating dealer" as defined in NI 81-102 in respect of certain third party mutual funds. The Filer may, in the future, act as a principal distributor of certain mutual funds.
5. As a member of 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.
6. The Filer maintains client trust accounts ("Client Trust Accounts") into which monies invested by the Filer clients is paid from and from which redemption proceeds or assets to be distributed are paid. The Client Trust Accounts are interest bearing and all of the interest earned on the cash in the trust accounts 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 of NI 81-102 in the way in which the Client Trust Accounts are maintained.
7. The Filer proposes to pool Other Cash with MF Cash in a trust settlement account established under Section 11.3. of NI 81-102 (the "Trust Account"). The commingling of Other Cash with MF Cash would facilitate significant administrative and systems economies that would enable the Filer to enhance its level of service to its clients at less cost to the Filer. The 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 MF Cash with Other Cash.
9. Prior to June 23, 2006, section 3.3.2(e) of the Rules of the MFDA (the "MFDA Commingling Prohibition") also prohibited the commingling of Other Cash with MF 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 Jurisdictions. Should the Requested Relief be granted by the Jurisdictions, the Filer will provide the MFDA with notice that the Requested Relief has been granted.
10. The Filer does not believe that the interest of its clients will be prejudiced in any way by the commingling of Other Cash and MF Cash in the Trust Account.
11. MF 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 client of the Filer. The Filer settles payments of MF Cash payable from the Trust Account on a manual basis in accordance with section 11.2 of NI 81-102 and, could if volumes warranted, use electronic settlement procedures.
12. The Filer currently has systems in place to be able to account for all of the monies it receives into and all of the monies that are to be paid out of the Trust Account in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.
13. The Filer will maintain proper records with respect to client cash in a commingled account, and will ensure that the Trust Account is reconciled in accordance with MFDA Rules, and that MF Cash and Other Cash are properly accounted for daily.
14. 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.
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 MF Cash with Other Cash would contravene the Commingling Prohibitions.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provided 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 coming into force of any change in the MFDA IPC Rules with would reduce the coverage provided by the MFDA IPC relating to MF Cash and Other Cash.