Securities Law & Instruments

Headnote

National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from the requirements of under sections 11.1(1)(b) and 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 which the filer is permitted to sell, subject to certain conditions.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 11.1(1)(b), 11.2(1)(b), 19.1.

May 7, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

ROYAL MUTUAL FUNDS INC.

(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption, pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) from the provisions of subsection 11.1(1)(b) and subsection 11.2(1)(b) of NI 81-102 that prohibit a principal distributor and other service providers, or a participating dealer and other service providers, from commingling cash received for the purchase or redemption of mutual fund securities (Mutual Fund Trust Monies) with cash received for the purchase or sale of guaranteed investment certificates (GICs) and other securities or instruments which the Filer is permitted to sell (Non-Mutual Fund Client Trust Monies) (collectively, the Commingling Prohibitions).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is to be relied upon in British Columbia, Manitoba, Quebec, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (the Passport Jurisdictions).

Interpretation

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

Representations

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

1. The Filer is a corporation governed by the laws of Canada and maintains its head office in the Province of Ontario.

2. The Filer is registered as a dealer in the category of mutual fund dealer (or the equivalent) in the Jurisdiction and in each of the Passport Jurisdictions, and is a member of the Mutual Fund Dealers Association of Canada (MFDA).

3. The Filer's principal business is trading in mutual funds, GICs and other securities or instruments that the Filer is permitted to sell pursuant to its mutual fund dealer registration or other registration.

4. The Filer makes available to its clients a high interest savings account product known as the RBC Investment Savings Account (RISA). The RISA is offered by Royal Bank of Canada, the parent company of the Filer. The RISA is available only through FundSERV.

5. The Filer acts as a participating dealer with respect to various third party mutual funds and acts as the principal distributor and/or a participating dealer with respect to mutual funds managed by RBC Asset Management Inc., an affiliate of the Filer.

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

7. The Filer maintains trust accounts (Client Trust Accounts) with a major Canadian financial institution into which all monies invested by or on behalf of its clients are paid and from which redemption proceeds or assets to be distributed are paid. The Client Trust Accounts are designated as "trust accounts" by the financial institution at which they are held. These trust accounts are interest bearing and all of the interest earned on the cash in the trust accounts is paid out to securityholders or to each of the mutual funds to which the trust account pertains on a pro rata basis in compliance with subsection 11.2(4) of NI 81-102 (and as required by subsection 11.1(4) where the Filer is acting as a principal distributor). The Filer also ensures compliance with section 11.3 in the way in which the Client Trust Accounts are maintained.

8. In providing its services, the Filer 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 its Client Trust Accounts in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.

9. While the Filer has had (and as of the date of this Decision, currently has) systems in place so that its distribution of GICs does not involve the commingling of Mutual Fund Trust Monies with cash received for the purchase and redemption of GICs, the Filer, through inadvertence, recently began commingling Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies when it commenced distribution of the RISA to its clients. The distribution process of the RISA involved the commingling of Mutual Fund Trust Monies with cash received for purchasing the RISA.

10. The Filer, to the best of its knowledge, is not in default of the Legislation or of securities legislation of the Passport Jurisdictions, other than the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies in its distribution of the RISA to its clients as described above.

11. The Filer is seeking relief from the Commingling Prohibitions so that it would be permitted to pool Non-Mutual Fund Client Trust Monies with Mutual Fund Trust Monies in one or more Client Trust Accounts established under section 11.3 of NI 81-102. The commingling of Non-Mutual Fund Client Trust Monies with Mutual Fund Trust Monies facilitates significant administrative and systems economies that enable the Filer to enhance its level of service to its clients at less cost to the Filer.

12. In the absence of the Exemption Sought, the Filer is not permitted to commingle Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies.

13. The Filer will commingle Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies in a Client Trust Account when it receives instructions from clients to use their cash for the purchase of mutual fund securities and for the purchase of the RISA (or other non-mutual fund securities or instruments that the Filer is permitted to sell). When such cash is pooled into a Client Trust Account, the cash is held in the account for a period that does not exceed one day. The Filer will also commingle Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies in a Client Trust Account when it receives instructions from clients to redeem mutual fund securities and to make withdrawals from the RISA (or other non-mutual fund securities or instruments that the Filer is permitted to sell). When cash from such redemptions and withdrawals is pooled into a Client Trust Account, the cash again is held in the account for a period that does not exceed one day.

14. The Filer will continue to maintain proper records with respect to client cash in a commingled account, and will ensure that all Client Trust Accounts are reconciled, and that Mutual Fund Trust Monies and Non-Mutual Fund Client Trust Monies are properly accounted for daily.

15. Except for the Commingling Prohibitions, 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.

16. Mutual Fund Trust Monies and Non-Mutual Fund Client Trust Monies 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.

17. The Filer believes that the interests of its clients are not prejudiced in any way by the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies.

18. Prior to June 23, 2006, section 3.3.2(e) of the MFDA Rules (the MFDA Commingling Prohibition) also prohibited the commingling of Mutual Fund Trust Monies with Non-Mutual Fund Client Trust Monies. 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 Prohibitions from the Jurisdiction, the Passport Jurisdictions and other jurisdictions applicable at that time. Should the Exemption Sought be granted by the Jurisdiction and the Passport Jurisdictions, the Filer will provide the MFDA with notice that the Exemption Sought has been granted.

19. 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 Exemption Sought will affect coverage provided by the MFDA IPC.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that this decision, as it relates to the Jurisdiction or to a Passport Jurisdiction, 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 the commingling of Mutual Fund Client Trust Monies and Non-Mutual Fund Client Trust Monies held in the Client Trust Accounts.

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