Relief from registration requirements under section 25(3) of the Securities Act (Ontario) for a municipality proposing to enter into separate investment management agreements with one or more municipalities incorporated in Ontario relating to the investment of each participating municipality's surplus funds, subject to investment restrictions under the Municipal Act (Ontario).
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(3) and 74(1).
Municipal Act, 2001, S.O. 2001, c. 25, as am., s 418(1).
National Instrument 14-101 Definitions.
May 21, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE REGIONAL MUNICIPALITY OF YORK
The Ontario Securities Commission (the Commission) has received an application from the Filer for a decision pursuant to section 74(1) of the Securities Act (the Act) that the Filer, and its officers, directors and employees, be exempted from the adviser registration requirement in section 25(3) of the Act in connection with investment advisory services provided to the Participating Municipalities (as defined below) (the Exemption Sought).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer:
1) The Filer is a municipal corporation incorporated by the Province of Ontario in 1971.
2) The Filer is an upper-tier municipality that consists of nine lower-tier municipalities.
3) Section 418(1) of the Ontario Municipal Act, 2001, S.O. 2001, c. 25, as amended (the Municipal Act) allows a municipality to invest money that it does not require immediately in securities (Eligible Investments) prescribed by O. Reg. 438/97, as amended (the Municipal Regulation), which are predominantly fixed-income investments that are traded over-the-counter.
4) The Filer employs a dedicated team of highly skilled and experienced professionals with investment management experience (the Internal Portfolio Managers) to make decisions regarding the investment of the Filer's surplus funds in Eligible Investments. None of the Internal Portfolio Managers is registered as an adviser (or advising representative) under the Act.
5) Section 420 of the Municipal Act provides that a power given to a municipality under the Municipal Act to invest money includes the power to enter into an agreement for the investment of money with any other municipality (or with certain other entities).
6) Pursuant to section 420 of the Municipal Act, the Filer wishes to enter into separate investment management agreements (each, an Agreement) with one or more municipalities incorporated in Ontario which may include one or more of the Filer's lower-tier municipalities (each, a Participating Municipality and collectively, the Participating Municipalities) relating to the investment of each Participating Municipality's surplus funds.
7) Under the terms of each Agreement:
a) the applicable Participating Municipality will adopt its own investment policies and investment objectives that are consistent with the investment restrictions in the Municipal Regulation (the Policy);
b) the Filer will invest the surplus funds of the Participating Municipality in accordance with the Policy and the Municipal Regulation; and
c) the Participating Municipality will pay a nominal management fee to the Filer to cover certain expenses incurred by the Filer in connection with the management of the Participating Municipality's surplus funds and may reimburse the Filer for certain additional expenses depending on the services provided by the Filer.
8) The Filer will charge each Participating Municipality a nominal management fee which will be:
a) used to cover certain direct expenses incurred by the Filer in connection with the management of the Participating Municipality's surplus funds as well as a reasonable recovery of overhead and indirect expenses; and
b) will be less than the management fee that a third party commercial portfolio manager would charge for investments in Eligible Securities.
9) The management fee will be based on the overall cost structure of the Filer's in-house investment program including an overhead factor; and on that basis, the fee will vary depending on the size of the portfolio managed. The management fee structure proposed approximates what it would cost a municipality to establish and operate an in-house investment program. The proposed structure takes the Filer's rate and adjusts it based on the size of the Participating Municipality's portfolio. The management fee structure is two-tier as it is assumes that a municipality with a smaller portfolio would normally scale down the size of any in-house investment program.
10) The investment policy will be reviewed annually by senior management but updated on an as needed basis (subject to regulatory changes and dynamics of the investment program).
11) The Filer will institute a process for portfolios managed on behalf of Participating Municipalities similar to the following:
a) Prior to engagement:
i) review client needs, expectations and risk tolerances;
ii) review/update/prepare client's investment policy;
iii) establish term limits and approved credit exposures;
iv) agree on a list of Eligible Investments;
v) establish appropriate performance goals and benchmarks; and
vi) prepare and finalize the Agreement
b) Investment program strategy process:
i) based on consultation through process outlined above, determine client-specific needs;
ii) formulate strategy combining client-specific needs and market outlook in compliance with policy directives and guidelines;
iii) strategy will set out recommended term exposure and credit/asset mixes within an approved tolerance band;
iv) communicate strategy to client and determine if modifications are necessary and then solicit client's approval;
v) if Internal Portfolio Manager feels it is advisable to move beyond the agreed upon strategy, he/she must seek client approval in writing;
vi) as part of ongoing review with the client, the Internal Portfolio Manager will (i) provide a summary of period over period results compared to strategy outline and a comparison of portfolio structure and performance compared to benchmark portfolio and any other agreed upon performance comparators; and (ii) present a review of portfolio assumptions and new strategy.
12) The Filer will provide regular reports to each Participating Municipality regarding the performance of the Participating Municipality's surplus funds managed by the Filer. The Filer will supply to each Participating Municipality both a statement of account activity and a statement of portfolio holdings at least quarterly or more frequently, if requested.
13) The statement of account will include for each transaction made during the period:
a) date of transaction,
b) type of transaction (i.e. purchase, sale),
c) name of the security,
d) number of securities,
e) price and effective yield per security,
f) total value/settlement cost of the transaction, and
g) name of dealer counterparty.
Transaction sheets for each purchase or sale will also be available that will include, in addition to the information included in the statement of account activity, time of transaction, alternate quotes obtained (and source) and interest rate spread information.
14) The statement of portfolio holdings will include:
a) name and quantity of each security in the account,
b) date of transaction,
c) market value of each security in the account,
d) total market value of each security position in the account,
e) amount of cash balance in the account, and
f) total market value of all cash and securities in the account.
15) An exposure report will also be provided at least quarterly (and available on request) which will compare security holdings to policy guideline limits for proof of compliance with policy directives.
16) The Filer and the Internal Portfolio Managers have certain investment restrictions and oversight features in place to ensure that the supervisory protections afforded by registration under the Act are not necessary. In particular, the types of securities that the Filer may invest in are strictly prescribed by the Municipal Regulation, the Internal Portfolio Managers will be required to invest in accordance with the Policy agreed to by the Filer and each Participating Municipality and the Internal Portfolio Managers have expertise and controls in place to ensure that the restrictions under the Municipal Regulation and the Policy are complied with.
17) Given the narrow range of investments permitted by the Municipal Regulation, it is difficult for municipalities that do not have the internal portfolio management resources to find appropriate and cost-effective third party portfolio management service providers.
18) In managing the surplus funds of each Participating Municipality, the Filer, and certain of its officers, directors or employees, could be considered to be engaging in the business of, or holding itself out as engaging in the business of, advising the Participating Municipality with respect to investing in, buying or selling securities, and in the absence of the exemption requested hereby, be required to register as an adviser pursuant to section 25(3) of the Act.
The Commission is satisfied that the decision meets the test set out in the Act for the Commission to make the decision.
The decision of the Commission under the Act is that the Exemption Sought is granted.