Mutual Reliance Review System for Exemptive Relief Applications -- relief from self-dealing prohibition of the Act to allow in specie transfers between pooled funds or mutual funds and separately managed accounts -- ss. 118(2)(b) and 121(2)(a)(ii) of Securities Act, R.S.O. 1990, c. S.5, as am.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 118(2)(b), 121(2)(a)(ii).
May 28, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA, SASKATCHEWAN, ONTARIO,
NEW BRUNSWICK, NOVA SCOTIA AND
NEWFOUNDLAND AND LABRADOR
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
GRYPHON INVESTMENT COUNSEL INC. (Gryphon)
GRYPHON INTERNATIONAL INVESTMENT CORPORATION
(collectively, the Filers)
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the Legislation) that the prohibition contained in the Legislation that prohibits a portfolio manager from knowingly causing any investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager (the Self-Dealing Prohibition) shall not apply to the Filers in connection with In Specie Transfers (defined below) between the Separately Managed Accounts (defined below) and the Funds (defined below) (the Requested Relief).
Under the Mutual Reliance Review System for Exemptive Relief Applications (MRRS):
(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 Filers:
1. Gryphon is a corporation which was incorporated under the laws of Canada. Gryphon has its head office in Toronto, Ontario.
2. Gryphon International is a corporation which was incorporated under the laws of Canada. Gryphon International has its head office in Toronto, Ontario.
3. Gryphon is registered as an adviser in the appropriate categories to provide discretionary advisory services in each of Ontario, British Columbia, Alberta, Québec, New Brunswick, Nova Scotia, Manitoba, Saskatchewan, Prince Edward Island and Newfoundland and Labrador.
4. Gryphon International is registered as an adviser in the appropriate categories to provide discretionary advisory services in each of Ontario, British Columbia, Alberta, Québec, New Brunswick and Nova Scotia.
5. Gryphon currently acts as manager and portfolio manager of Gryphon Balanced Fund and Gryphon EAFE Fund (collectively, the Gryphon Funds). Gryphon International currently acts as manager and portfolio manager of Gryphon EuroPac Fund and GIIC Global Fund (collectively, the Gryphon International Funds) and as sub-adviser to Gryphon in respect of the Gryphon EAFE Fund (the Gryphon Funds and the Gryphon International Funds being, collectively, the Existing Funds). The Existing Funds, together with any other mutual or pooled funds established by a Filer in the future which are associates of such Filer and for which such Filer is a portfolio manager from time to time, are collectively referred to hereafter as the Funds.
6. Each of the Funds is or will be an open-end mutual fund trust established under the laws of the Province of Ontario. The Funds are not and will not be reporting issuers in any province or territory of Canada. Each of the Funds is or will be associates of a Filer under the Legislation as such Filer serves or will serve in a capacity similar to a trustee of the Funds. The Funds are and will be specifically designed by the Filers to meet the needs of clients of the Filers and are and will be used exclusively for such clients.
7. The Filers provide discretionary portfolio management services to clients pursuant to investment management agreements between the clients and the Filers (the Managed Account Agreements). Based on the size of the assets of a client and depending on the allocation of such client's assets to a particular asset class, the Filers either manage such client's assets on a segregated account basis (Separately Managed Accounts) or on a pooled basis.
8. Pursuant to the Managed Account Agreements, the Filers have full discretion and authority to provide portfolio management services to clients, including investing clients in mutual or pooled funds for which the Filers are the portfolio managers and for changing those funds as the Filers determine in accordance with the mandate of the clients. To the extent a Filer either currently does not have such discretion or authority or enters into an agreement with a new client, such Filer will obtain the prior specific written consent of the relevant Separately Managed Account client before such Filer engages in any In Specie Transfer (defined below), in connection with the purchase or redemption of units of the Funds for its Separately Managed Accounts.
9. A Filer may determine that in lieu of holding securities in a Separately Managed Account, a client would be better served to be invested in one or more of the Funds. To the extent a client holds directly an existing portfolio of securities, such Filer desires to have such client subscribe in specie for units of the relevant Fund(s). Further, future clients of a Filer may have an existing portfolio of securities when they retain such Filer such that the Filer may similarly desire to have such clients subscribe in specie for units of the Fund(s), provided these securities are appropriate for the relevant Fund.
10. In addition, due to portfolio changes for a client, a Filer may determine, in connection with a redemption, to redeem in specie, certain portfolio securities held by a Fund, and to reinvest the client by subscribing in specie for another Fund or Funds or simply hold the portfolio securities on behalf of such client in a Separately Managed Account. Alternatively, the client may determine to change the client's mandate which may require a redemption in specie of units in a Fund in connection therewith.
11. To ensure that neither a Separately Managed Account nor a Fund incurs significant expenses related to the disposition and acquisition of portfolio securities in connection with the purchase or redemption of units of a Fund, each Filer proposes to facilitate such purchases and redemptions of such Fund's units by transfers in specie of portfolio securities between such Separately Managed Account and such Fund (collectively, In Specie Transfers). These transactions will either involve the payment of the purchase price for units of a Fund or the payment of the redemption price for units of a Fund by In Specie Transfers between the Separately Managed Accounts and the Funds.
12. Effecting such In Specie Transfers will allow the Filers to manage each asset class more effectively and reduce transaction costs for clients and the Funds. For example, such trading reduces market impact costs, which can be detrimental to clients and the Funds.
13. Each Filer issues a statement of policies to clients setting out the relationship of the Funds to such Filer. In addition, clients specifically consent to invest in the Funds pursuant to the terms of their Managed Account Agreements.
14. The only cost which will be incurred by a Separately Managed Account or by a Fund for an In Specie Transfer is a nominal administrative charge levied by the custodian of such Separately Managed Account or Fund in recording the trades (the Custodial Charge).
15. Each Filer will value the securities under an In Specie Transfer using the same values to be used on that day to calculate the net asset value for the purpose of the purchase or sale of the portfolio securities and for the purpose of the issue price or redemption price of a unit of a Fund.
16. None of the securities which are the subject of In Specie Transfers are or will be securities of related issuers of a Filer.
17. Prior to a Filer executing an In Specie Transfer, it will be reviewed by such Filer's Board of Directors (whose members include the Chief Compliance Officer) to ensure that the conditions of this MRRS decision document are or will be met at the time of the transaction and to determine that the transaction represents the business judgment of the Filer acting in its discretionary capacity with respect to the Separately Managed Account and the Fund or the Funds, uninfluenced by considerations other than the best interests of the Separately Managed Account and the Funds.
18. Since the Filers are the portfolio managers of the Separately Managed Accounts, the Filers would be considered responsible persons of such Separately Managed Accounts for the purposes of the Self-Dealing Prohibition with respect to In Specie Transfers.
19. Since the Filers are the managers and portfolio managers of the Funds and serve in a similar capacity to trustees in respect of the Funds, the Funds are associates of the Filers for the purposes of the Self-Dealing Prohibition with respect to In Specie Transfers.
20. Unless the Requested Relief is granted, a Filer would be prohibited by the Self-Dealing Prohibition from (i) causing a Separately Managed Account to make In Specie Transfers of securities of any issuer to a Fund in payment of the purchase price for units of such Fund subscribed for by the Separately Managed Account and (ii) causing a Fund to make In Specie Transfers of securities of any issuer to a Separately Managed Account in payment of the redemption price for units of such Fund redeemed by a Separately Managed Account.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Makers 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:
(a) in connection with the purchase of units of a Fund by a Separately Managed Account:
(i) the Filer obtains the prior written consent of the client of the relevant Separately Managed Account before it engages in any In Specie Transfers in connection with the purchase of units;
(ii) the Fund would at the time of payment be permitted to purchase those securities;
(iii) the securities are acceptable to the Filer as portfolio manager of the Fund and consistent with the Fund's investment objectives;
(iv) the value of the securities is at least equal to the issue price of the units of the Fund for which they are used as payment, valued as if the securities were portfolio assets of the Fund;
(v) the statement of portfolio transactions next prepared for the Separately Managed Account shall include a note describing the securities delivered to the Fund and the value assigned to such securities;
(b) in connection with the redemption of units of a Fund by a Separately Managed Account:
(i) the Filer obtains the prior written consent of the client of the relevant Separately Managed Account to the payment of redemption proceeds in the form of an In Specie Transfer;
(ii) the securities are acceptable to the Filer as portfolio manager of the Separately Managed Account and consistent with the Separately Managed Account's investment objectives;
(iii) the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per unit used to establish the redemption price;
(iv) the holder of the Separately Managed Account has not provided notice to terminate its Managed Account Agreement with the Filer;
(v) the statement of portfolio transactions next prepared for the Separately Managed Account shall include a note describing the securities delivered to the Separately Managed Account and the value assigned to such securities; and
(c) the Filer does not receive any compensation in respect of any sale or redemption of units of a Fund and, in respect of any delivery of securities further to an In Specie Transfer, the only charge paid by the Separately Managed Account or the Fund is the Custodial Charge.