National Bank Securities Inc. and National Bank Mortgage Fund

Headnote

National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- Relief granted from conflict of interest reporting requirement in subsections 117(1)(a) of the Securities Act (Ontario) for purchases and sales of securities between a fund and a related person or company -- monthly reporting not required provided that similar disclosure is made in the management reports on fund performance for the subject mutual fund and that certain records of related party portfolio transactions are kept by the mutual fund.

Applicable Legislative Provisions

Securities Act (Ontario), ss. 117(1)(a), 117(2).

October 21, 2011

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

NATIONAL BANK SECURITIES INC.

(the Filer)

AND

NATIONAL BANK MORTGAGE FUND (the Fund)

DECISION

Background

The principal regulator in the Jurisdiction (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) pursuant to section 117(2) of the Securities Act (Ontario) (OSA) for relief from section 117(1)(a) of the OSA to exempt the Filer, or any affiliate of the Filer that is a management company, from the obligation to file reports in connection with transactions in mortgages between the Fund and National Bank of Canada (NBC), National Bank Financial Inc., National Bank Financial Ltd. and other affiliates of the Filer acting as principal (together, the Affiliates; NBC and the Affiliates together, the NBC Affiliates and individually, an NBC Affiliate) (the Requested Relief).

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 intended to be relied upon in British Columbia, Alberta, Saskatchewan, New Brunswick, Nova Scotia and Newfoundland and Labrador.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

1. The Filer is the investment fund manager of the Fund.

2. The Filer is a corporation organized under the laws of Canada, with its head office located in Montréal, Québec. NBC indirectly wholly owns the Filer.

3. The Filer is registered under applicable securities legislation (i) in each province and territory of Canada, as a dealer in the category of mutual fund dealer; and (ii) in the province of Québec, as an investment fund manager and a financial planner. The Filer is a member of the Mutual Fund Dealers Association of Canada.

4. Natcan Investment Management Inc. (the Portfolio Manager) is the portfolio manager of the Fund.

5. The Portfolio Manager is a corporation organized under the laws of the province of Québec, with its head office located in Montréal, Québec. NBC has a direct and indirect majority interest in the Portfolio Manager.

6. The Portfolio Manager is registered under applicable securities legislation (i) in each province and territory of Canada except Prince Edward Island, Yukon and Nunavut, as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer; (ii) in the province of Quebec, as an investment fund manager and a derivatives portfolio manager; and (iii) in the province of Ontario, as a commodity trading manager.

7. The Fund is an open-ended mutual fund, organized as a trust pursuant to the laws of Ontario. The Fund is a reporting issuer in each province and territory of Canada. Units of the Fund are qualified for sale under a simplified prospectus and annual information form filed in accordance with applicable securities legislation in each province and territory of Canada.

8. Neither of the Filer nor the Fund is in default of securities legislation in any province or territory of Canada, except for the inadvertent failure of the Filer to obtain the Requested Relief, and of the Fund to obtain relief from the provisions of section 4.2 of National Instrument 81-102 Mutual Funds (for which separate relief under a separate decision has been requested), with respect to purchases of mortgages from NBC prior to November 27, 2009.

9. Disclosure of purchases from NBC was provided in the simplified prospectus and other disclosure documents filed with the securities regulatory authorities in the provinces and territories of Canada and delivered to unitholders upon request as required pursuant to the Legislation. The Fund has not purchased any mortgages from any NBC Affiliate since November 27, 2009.

10. The Filer has appointed an independent review committee (IRC) under National Instrument 81-107 Independent Review Committee for investment Funds (NI 81-107) for the Fund.

11. The IRC has been informed that the Filer did not obtain the Requested Relief for purchases of mortgages from NBC prior to November 27, 2009 and of the filing of the application to obtain the Requested Relief.

12. The IRC of the Fund will consider the policies and procedures of the Filer and will provide its approval on whether the proposed transactions in mortgages achieve a fair and reasonable result for the Fund in accordance with subsection 5.2(2) of NI-81-107.

13. The Fund's investment objectives are to provide a high level of income while providing sustained capital growth and preserving capital. The purchase and sale of mortgages by the Fund from or to NBC Affiliates is consistent with the investment objectives of the Fund.

14. Mortgages purchased by the Fund from NBC are purchased pursuant to National Policy Statement No. 29 Mutual Funds Investing in Mortgages (NP 29) at the "modified lender's rate" (namely at the principal amount which will produce a yield to the Fund not more than a quarter of one percent less than the interest rate at which NBC is making commitments, at the time of purchase, to loan on the security of comparable mortgages), in accordance with an MRRS decision dated March 18, 2004 (the "2004 Decision").

15. The Fund purchases mortgages from NBC and may purchase mortgages from the other NBC Affiliates.

16. NBC has been retained to administer the mortgages held in the Fund that have been acquired from NBC pursuant to a sale and mortgage administration agreement. Mortgages purchased from an NBC Affiliate other than NBC will also be administered in accordance with an administration agreement to be entered into by or on behalf of the Fund.

17. The Fund only purchases a mortgage from an NBC Affiliate if:

(a) the transaction is made in accordance with the calculation set forth in the "Not at Arm's Length Transactions" provision of NP 29;

(b) where the transaction is made pursuant to the modified lender's rate (namely, at the principal amount which will produce a yield to the Fund of not more than a quarter of one percent less than the interest rate at which NBC is making commitments, at the time of purchase, to loan on the security of comparable mortgages):

(i) the NBC Affiliate that sells the mortgage to the Fund enters into an agreement (the "Repurchase Agreement") with the Fund whereby the NBC Affiliate is obligated to repurchase it if the mortgage goes into default for more than 90 days and in circumstances benefiting the Fund; and

(ii) the Portfolio Manager considers that the Repurchase Agreement is sufficient to justify the difference in yield referred to in sub-paragraph (b) above;

(c) NBC guarantees the performance of the Affiliate under the Repurchase Agreement referred to in paragraph 17(b)(i) above;

(d) the Filer causes the Fund to comply with the disclosure provisions of NP 29, subject to the representations made in connection with the Requested Relief; and

(e) the simplified prospectus of the Fund discloses that the Fund will engage in principal transactions in mortgages with the NBC Affiliates.

18. The provisions of NP 29 set out guidelines relating to the acquisition of mortgages by a mutual fund from lending institutions with whom such fund does not deal at arm's length and provide certain protections to the investing public.

19. The Portfolio Manager only causes the Fund to purchase a mortgage from or sell a mortgage to an NBC Affiliate if the transaction is made in accordance with the calculation set forth in the "Not at Arm's Length Transactions" provision of NP 29.

20. None of the NBC Affiliates from which mortgages are purchased or to which mortgages are sold for the Fund, or any of their directors, officers or employees, participate in the formulation of investment decisions made on behalf of, or advice given to, the Fund by the Portfolio Manager.

21. All decisions to purchase mortgages for the Fund's portfolio from an NBC Affiliate are made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.

22. The Filer is of the view that the purchase and sale of mortgages between the Fund and NBC Affiliates are in the best interests of the Fund.

23. To the extent that the Fund purchases mortgages from, or sells mortgages to, NBC Affiliates, this fact is set out, and will continue to be set out, in each of the simplified prospectus, annual information form and management report of fund performance of the Fund in accordance with applicable securities legislation.

24. Pursuant to the provisions of section 117(1)(a) of the OSA, the Filer is required to file a report with respect to each purchase and sale of mortgages between the Fund and NBC Affiliates. This report is to be filed within 30 days after the end of the month in which the transaction occurs, disclosing the issuer of the securities purchased or sold, the class or designation of the securities, the amount and number of securities and the consideration paid.

25. When discussing portfolio transactions with related parties of the Fund, National Instrument 81-106 Investment Fund Continuous Disclosure requires the Fund to include the dollar amount of commission, spread, or any other fee paid to a related party in connection with a portfolio transaction. To the extent that the Fund purchases mortgages from, or sells mortgages to, NBC Affiliates, these facts will be set out in the management report of fund performance of the Fund filed with the securities regulatory authorities in the applicable Jurisdictions and delivered to unitholders (if requested) on a semi-annual basis, so that the information will be provided to the securities regulatory authorities in the applicable Jurisdictions and to unitholders of the Fund in fulfillment of its continuous disclosure obligations.

26. The Filer keeps written records of the mortgage purchase and sale transactions with NBC Affiliates, which records comply with the requirements of section 6.1(2)(g) of NI 81-107.

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 Requested Relief is granted provided that:

(a) the annual and interim management reports of fund performance for the Fund disclose:

(i) the name of the NBC Affiliate;

(ii) the amount of fees paid to each NBC Affiliate, and

(iii) the person or company who paid the fees if they were not paid by the Fund; and

(b) the records of the portfolio transactions maintained by the Fund include, separately for every mortgage transaction effected by the Fund through an NBC Affiliate:

(i) the name of the NBC Affiliate;

(ii) the amount of fees paid to the NBC Affiliate; and

(iii) the person or company who paid the fees.