Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted to participating dealers from the requirements of 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 is licensed to sell, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 11.2(1)(b), 19.1.
May 29, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO, BRITISH COLUMBIA, SASKATCHEWAN,
MANITOBA, NOVA SCOTIA, NEW BRUNSWICK,
PRINCE EDWARD ISLAND, NEWFOUNDLAND
AND LABRADOR, NORTHWEST TERRITORIES,
NUNAVUT, AND YUKON
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
QUADRUS INVESTMENT SERVICES LTD. AND
CREDENTIAL ASSET MANAGEMENT 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 Filers for a decision (the "Requested Relief") under the securities legislation of the Jurisdictions (the Legislation) for an exemption from the provisions of section 11.2(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") that prohibit 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 other securities or instruments the participating dealer is permitted to sell ("Other Cash") (the "Commingling Prohibition").
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 decisions.
This decision is based on the following facts represented by each of the Filers:
1. Each of the Filers is registered as a mutual fund dealer or its equivalent in the following jurisdictions:
Ontario, B.C., Alberta,
Manitoba, Nova Scotia,
Quebec, NB, PEI, NFLD,
NWT, NU, Yukon
Ontario, BC, Alberta,
Manitoba, Nova Scotia,
Quebec, NB, PEI, NFLD
2. Each Filer is a member of the Mutual Fund Dealers Association of Canada ("MFDA").
3. As a member of the MFDA, each 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, each Filer is expected to comply with all MFDA Rules.
4. The Filers' principal business is trading in mutual funds, guaranteed investment certificates ("GICs") and other securities or instruments that the Filers are permitted to sell pursuant to their mutual fund dealers registration or other registration.
5. The Filers are "participating dealers" as defined in NI 81-102, with respect to the sale of mutual funds.
6. Univeris Corporation ("Univeris") is a technology service provider to the Canadian financial services industry specializing in, among other things, systems for cash control, compliance, web services and real-time front and back office management. One of the modules offered by Univeris is software for cash control systems ("Cash Control Software"). The Filers license the use of the Cash Control Software from Univeris.
7. The Cash Control Software is part of an enterprise wealth management system developed by Univeris that provides record keeping, back office processing and front office functionality for a variety of financial institutions in Canada. The use of the Cash Control Software is applicable to those institutions that administer nominee accounts, in the name of the institution. The Cash Control Software uses a series of notional sub-ledgers to keep track of entitlement of all monies flowing in and out of a nominee trust account (a "Trust Account") established under Section 11.3 of NI 81-102. The Cash Control Software is used by each Filer to assist in the operation of a single Trust Account by each Filer, to hold both MF Cash and Other Cash on a commingled basis on behalf of investors.
8. The Cash Control Software provides a mechanism for tracking all cash movement in and out of a Trust Account for proper settlement of trades or disbursement to investors, as applicable. The Cash Control Software also facilitates the movement of client monies from and to separate clearing accounts for settlement of mutual fund and other products on the settlement day.
9. Each Filer proposes to pool Other Cash with MF Cash in a Trust Account. The commingling of Other Cash with MF Cash would facilitate significant administrative and systems economies that will enable each Filer to enhance its level of service to its client accounts at less cost. The Trust Account of each Filer is designated as a "trust account" by the financial institution at which it is held.
10. The Commingling Prohibition prevents each Filer from commingling the MF Cash with Other Cash.
11. 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 Filers subject to the Filers obtaining similar relief from the Commingling Prohibition from the Jurisdictions. Should the Requested Relief be granted by the Jurisdictions, the Filers will provide the MFDA with notice that the Requested Relief has been granted.
12. In providing their services, each Filer has systems in place to be able to account for all the monies they receive into and all of the monies that are to be paid out of each of their Trust Accounts in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.
13. MF Cash or Other Cash related to a transaction initiated by one of the Filers' clients will not be used to settle a transaction initiated by any other client of the Filer. Each Filer settles through FundSERV at the end of each trading day, MF Cash payable from the Trust Account to a mutual fund with MF Cash payable by the mutual fund to the Trust Account.
14. The Filers 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.
15. Except for the Commingling Prohibition, the Filers will comply with all other requirements prescribed in Part 11 of NI 81-102 with respect to the handling and segregation of client cash.
16. 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 Filers do not believe that the Requested Relief will affect coverage provided by the MFDA IPC.
17. In the absence of the Requested Relief, the commingling of MF Cash with Other Cash in the Trust Account would contravene the Commingling Prohibition.
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 MF Cash and Other Cash held in the Trust Account.