Bick Financial Security Corporation

Decision

Headnote

Relief granted from the requirements of paragraph 11.2(1)(b) of NI 81-102 to permit a participating dealer to commingle cash received for the purchase or redemption of mutual fund securities with cash received for the purchase and sale of other securities or instruments it is permitted to sell.

Applicable Legislative Provisions

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

August 5, 2008

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

AND

IN THE MATTER OF

BICK FINANCIAL SECURITY CORPORATION

(the Filer)

 

DECISION

Background

The Ontario Securities Commission (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of Ontario (the Legislation) granting relief from the prohibition in section 11.2(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) (the Commingling Prohibition) which prohibits a participating 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 (GICs) and other securities or instruments the participating dealer is permitted to sell (Other Cash) (the Requested Relief).

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 limited market dealer and mutual fund dealer in Ontario only. 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 not in default of securities legislation in Ontario.

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

4. 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 GICs issued by Canadian trust companies and banks, third party and other securities (such as high interest savings accounts) and instruments that the Filer is permitted to trade or sell.

5. As a member of the MFDA, the Filer is subject to the rules and requirements of the MFDA (the 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 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.

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

8. Prior to June 23, 2006, section 3.3.2(e) of the MFDA Rules (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 an applicable Canadian jurisdiction. Should the Requested Relief be granted in Ontario, the Filer will provide the MFDA with notice that the Requested Relief has been granted.

9. Client purchases of mutual fund securities are processed by the Filer in the following manner:

(a) the client places an order for specified mutual fund securities with the Filer and provides a cheque to the Filer for the applicable amount;

(b) the Filer deposits the client's cheque into the Trust Account;

(c) the Filer places the client's order with the relevant mutual fund company (the Mutual Fund Company) through FundSERV;

(d) the next business day, the Filer receives from the Mutual Fund Company confirmation of the client's order, including the number of units purchased (the Contract Transaction); and

(e) at the end of each business day, the Filer sends the Mutual Fund Company a cheque from the Trust Account for the total amount of all client orders owed to the Mutual Fund Company for business placed the previous day.

10. Redemption proceeds from mutual fund securities are provided to clients of the Filer by a Mutual Fund Company in one of the following three ways:

(a) by direct deposit to the client's bank account;

(b) by cheque made payable to the client and sent by the Mutual Fund Company directly to the client; or

(c) by payment to the Filer in trust for the client, if the client wishes to use the redemption proceeds to purchase other mutual fund securities. Under this option, redemption proceeds are first deposited by the Filer in the Trust Account and then used to purchase other mutual fund securities based on client instructions to the Filer.

11. 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.

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

14. 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.

15. 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.

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 Filer does 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 Mutual Fund Cash with Other Cash in the Trust Account would contravene the Commingling Prohibition.

Decision

The Decision Maker 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 Maker under the Legislation is that the Requested Relief is granted provided that this decision 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.

"Darren McKall"
Assistant Manager, Investment Funds
Ontario Securities Commission