Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted to fund manager as a "company providing services to the mutual fund" under section 11.1(1)(b) of NI 81-102 -- Fund manager is not a member of the Mutual Fund Dealers' Association -- Representations of the Decision speak to the safeguarding of client assets -- Relief is aimed at allowing the fund manager to commingle client cash related to fund manager's 28 open-ended mutual funds in the same trust account as client cash received by the fund manager for investment in shares of a particular closed-end fund managed by the manager that is not a "mutual fund" under NI 81-102.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 11.1(1)(b), 19.1.
June 20, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO, ALBERTA, BRITISH COLUMBIA
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
NEXGEN FINANCIAL LIMITED PARTNERSHIP
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 under section 19.1 of National Instrument 81-102 Mutual Funds (the "Legislation") for an exemption from the provisions of section 11.1(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") that prohibit a person or company providing services to a mutual fund from commingling cash received for the purchase or redemption of mutual fund securities ("Mutual Fund Trust Monies" as further defined below) with cash received for the purchase or sale of non-mutual fund securities ("Non Mutual Fund Trust Monies" as further defined below) (the "Commingling Prohibition").
The above is collectively referred to as the "Requested Relief".
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.
1. The Filer is the manager of the Nexgen Funds ("the Funds"), a group of 28 open-end mutual funds currently qualified by separate simplified prospectuses dated March 6, 2007 and May 9, 2007.
2. The Filer is registered as a dealer in the categories of mutual fund dealer and limited market dealer in the Province of Ontario.
3. The Filer does not sell mutual fund securities to the public and is not a member of the Mutual Fund Dealers Association of Canada ("MFDA").
4. Pursuant to an order dated August 11, 2005 (the "Order"), the Filer was exempted from the requirements of sections 2.1 and 3.1 of OSC Rule 31-506 requiring the Filer to become a member of the MFDA, provided its dealer activities were restricted as provided in the Order and incidental to its principal business of managing the Funds.
5. Pursuant to a securityholder services agreement dated May 5, 2006 among the Filer, International Financial Data Services (Canada) Limited ("IFDS") and the Funds, the Filer retained IFDS to perform certain administrative and trust accounting services for the Funds.
6. IFDS maintains on behalf of the Funds, one trust account (the "Client Trust Account") with a major Canadian financial institution into which all monies ("Mutual Fund Trust Monies") invested by securityholders in the Funds ("Securityholders") are paid and from which redemption proceeds or assets to be distributed are paid. The Client Trust Account is interest bearing and all of the interest earned on the cash in the Client Trust Account is paid out to Securityholders or to each of the Funds on a pro rata basis in compliance with subsection 11.1(4) of NI 81-102. The Filer ensures compliance with section 11.3 of NI 81-102 in the way in which the Client Trust Account is maintained.
7. The Client Trust Account is designated a "trust account" by the financial institution at which it is held and is currently held on behalf of the Funds. The Filer, as manager of the Funds, has access to the Client Trust Account and has control over which employees of IFDS have access to the Client Trust Account.
8. The Filer acts as the manager of Macquarie NexGen Global Infrastructure Corporation (the "Closed End Fund"), a closed end fund for which a long form prospectus was receipted on February 26, 2007 to qualify the distribution of Class A ("Class A securities") and Class B securities ("Class B securities"). The Filer has retained IFDS to act as the record keeping agent of the Class B securities, and in such capacity IFDS will perform certain administrative and trust accounting services for the Closed End Fund.
9. As manager of the Funds and the Closed End Fund, section 116(1) of the Securities Act (Ontario) and similar provisions in the Jurisdictions, requires the Filer to act in the best interests of the Fund and the Closed-End Fund.
10. The Filer proposes to pool monies invested by securityholders in the Class B securities ("Non Mutual Fund Trust Monies") with Mutual Fund Trust Monies in the Client Trust Account. The commingling of Non Mutual Fund Trust Monies with Mutual Fund Trust Monies would facilitate significant administrative and systems economies that will enable the Filer to enhance its level of service to its clients at less cost.
11. In the absence of the Requested Relief, the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies would contravene the Commingling Prohibition and would require the Filer to establish separate trust accounts for the Funds and the Class B securities of the Closed-End Fund. This would represent a significant cost to be borne by the shareholders of the Closed End Fund and the Funds.
12. Commingled Mutual Fund Trust Monies and Non Mutual Fund Trust Monies will remain in the Client Trust Account for less than one business day before being forwarded to the custodian of the Funds and the Closed-End Fund, or in reverse, before being forwarded from the Client Trust Account to the relevant dealers or dealer trust accounts which sell the Funds. Accordingly, all monies held in the Client Trust Account will be cleared on a daily basis at the beginning of each business day following the previous business day's overnight processing of all purchase and sale transactions involving the Funds and the Class B securities.
13. The Filer does not believe that the interests of the Securityholders or securityholders of the Class B securities will be prejudiced in any way by the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies.
14. The Filer is a "company providing services to the mutual fund" under the provisions of section 11.1(1)(b) of NI 81-102. Accordingly, the Commingling Prohibition prohibits the Filer from commingling Mutual Fund Trust Monies with Non-Mutual Fund Trust Monies.
15. In providing services, the Filer is able to account for all monies received into and all monies that are to be paid out of the Client Trust Account in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.
16. The Filer will ensure that proper records with respect to client cash in a commingled account are kept, and will ensure that the Client Trust Account is reconciled, and that Mutual Fund Trust Monies and Non-Mutual Fund Trust Monies are properly accounted for daily. The Filer will ensure that IFDS, as record keeping agent of the Closed-End Fund and in its performance of certain administrative and trust accounting services in respect of the Funds, complies with these obligations.
17. The Filer will ensure that all transactions in the Client Trust Account are manually reviewed on a daily basis by one or more designated employees of IFDS in order to monitor the Client Trust Account for discrepancies in the handling of Mutual Fund Trust Monies and Non-Mutual Fund Trust Monies in the Client Trust Account.
18. Any error in the handling of monies in the Client Trust Account as a result of the commingling of funds identified through such daily review process will promptly be corrected by the Filer.
19. Except for the Commingling Prohibition, the Filer will comply with all other requirements prescribed in Part 11 of NI 81-102 with respect to the separate accounting and handling of client cash.
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.