Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted 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 of third party mutual funds is permitted to sell, subject to certain conditions.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 11.2(1)(b), 19.1.

October 31, 2007

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO, BRITISH COLUMBIA AND MANITOBA

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

STERLING MUTUALS INC.

(the Filer)

 

MRRS DECISION DOCUMENT

Background

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 11.2(1) (b) of National Instrument 81-102 Mutual Funds (NI 81-102) that prohibit a participating mutual fund 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 and 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.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a corporation incorporated under the Canada Business Corporations Act and is registered as a mutual fund dealer in British Columbia, Alberta, Manitoba, and Ontario. The Filer's head office is located in Ontario. The Filer is not a reporting issuer. The Filer's principal business is acting as a mutual fund dealer.

2. The Filer is a member of the Mutual Fund Dealers Association of Canada ("MFDA").

3. The Filer is a participating dealer (as defined in NI 81-102) in respect of various third party mutual funds. In addition to mutual fund securities, the Filer distributes guaranteed investment certificates issued by Canadian trust companies and banks (GICs), third party segregated funds and other securities and instruments that the Filer is permitted to trade or sell.

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 proposes to pool Other Cash with Mutual Fund Cash in a trust settlement account established under section 11.3 of NI 81-102 (the 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 client accounts at less cost to the Filer. The Trust Account is designated as a 'trust account' by the financial institution at which it is held, and is held in the name of the Filer.

6. The Commingling Prohibition prevents the Filer from commingling Mutual Fund Cash with Other Cash.

7. 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 Mutual Fund 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 Prohibition 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.

8. 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 client of the Filer. The Filer settles through FundSERV, on a net basis at the end of each trading day, Mutual Fund Cash payable from the Trust Account to a mutual fund with Mutual Fund Cash payable by the mutual fund to the Trust Account.

9. 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 section 11.2 of NI 81-102.

10. 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 Mutual Fund Cash and Other Cash are properly accounted for daily.

11. 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 handling and segregation of client cash.

12. The Filer does not believe that the interests of its clients will be prejudiced in any way by the commingling of Other Cash with Mutual Fund Cash in the Trust Account.

13. 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.

14. In the absence of the Requested Relief, the commingling of Mutual Fund Cash with Other Cash in the Trust Account would contravene the Commingling Prohibition.

Decision

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.

"Vera Nunes"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission