Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief sought from conflict of interest provisions in NI 31-103 to permit in specie transfers of holdings amongst managed accounts, pooled funds and mutual funds managed by the manager -- relief subject to usual conditions, such as consent of managed account clients to allow in specie transfers, acceptability of portfolio assets to receiving fund or managed account portfolio manager, filer to keep written record of transfers, certain pricing conditions.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements, Exemptions and ongoing Registrant Obligations, ss. 13.5(2)(b), 15.1.

April 2, 2015

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 FRANKLIN TEMPLETON INVESTMENTS CORP. (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the prohibitions in sections 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registration Obligations (NI 31-103) which prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of an associate of a responsible person, or from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser, in order to permit In specie subscriptions and redemptions by:

(a) Managed Accounts (as defined below) in Pooled Funds (as defined below) and Mutual Funds (as defined below); and

(b) Pooled Funds in Pooled Funds and Mutual Funds

(the Requested Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(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 each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 -- Definitions, National Instrument 81-107 -- Independent Review Committee for Investment Funds and MI 11-102 have the same meanings if used in this Application, unless otherwise defined. The terms set out immediately below have the following meanings:

"Existing Mutual Funds" means each existing Mutual Fund, being a mutual fund as defined in the Legislation that is a reporting issuer and subject to National Instrument 81-102 -- Investment Funds (NI 81-102), of which the Filer or an affiliate of the Filer acts as manager and/or portfolio adviser;

"Existing Pooled Funds" means each existing Pooled Fund, being an investment fund that is not a reporting issuer, of which the Filer or an affiliate of the Filer acts as manager and/or portfolio adviser;

"Funds" means the Mutual Funds and the Pooled Funds;

"Future Mutual Fund" means each Mutual Fund, being a mutual fund that is a reporting issuer, of which the Filer or an affiliate of the Filer may act as manager and/or portfolio adviser in the future;

"Future Pooled Fund" means each investment fund that is not a reporting issuer, of which the Filer or an affiliate of the Filer may act as manager and/or portfolio adviser in the future;

"In specie Transfer" means causing a Managed Account or a Fund to deliver securities to another Fund in respect of the purchase of securities of the other Fund by the Managed Account or Fund, or to receive securities from the investment portfolio of the other Fund by the Managed Account or Fund;

"Managed Account" means an account managed by the Filer for a client that is not a responsible person and over which the Filer has discretionary authority;

"Mutual Funds" means collectively, the Existing Mutual Funds and the Future Mutual Funds; and

"Pooled Funds" means collectively, the Existing Pooled Funds and the Future Pooled Funds.

Representations

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

The Filer

1. The head office of the Filer is located in Toronto, Ontario.

2. The Filer is registered under securities legislation in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, Saskatchewan and Yukon as an adviser in the category of portfolio manager and as a dealer in the categories of mutual fund dealer and exempt market dealer. The Filer is also registered under securities legislation in Alberta, British Columbia, Manitoba, Newfoundland & Labrador, Nova Scotia, Ontario and Quebec as an investment fund manager.

3. The Filer and each of the Funds are not in default of securities legislation in any of the Jurisdictions.

The Funds

4. The Filer is, or will be, the manager of the Funds. The Filer and/or portfolio managers, including affiliates of the Filer, may be the portfolio manager(s) of the Funds. The Filer may also appoint sub-advisers for the Funds.

5. Each of the Mutual Funds is, or will be, established under the laws of Ontario, Alberta or Canada as an investment fund that is an open-ended mutual fund trust or an open-ended mutual fund corporation and is, or will be, a reporting issuer in each of the Jurisdictions.

6. The securities of each of the Mutual Funds are, or will be, qualified for distribution pursuant to simplified prospectuses and annual information forms that have been prepared or will be prepared and filed in accordance with National Instrument 81-101 -- Mutual Fund Prospectus Disclosure. Each of the Mutual Funds is, or will be, subject to the provisions of NI 81-102.

7. The Filer has established an independent review committee (an "IRC") in respect of the Mutual Funds in compliance with Independent Review Committee for Investment Funds ("NI 81-107").

8. Each of the Pooled Funds is, or will be, an investment fund established under the laws of Ontario, Alberta or Canada as an open-ended mutual fund trust, open-ended mutual fund corporation or closed-ended trust that will not be a reporting issuer in any of the Jurisdictions.

9. The securities of the Pooled Funds are, or will be, distributed on a private placement basis pursuant to available prospectus exemptions. None of the Pooled Funds are or will be subject to NI 81-102.

The Managed Accounts

10. The Filer offers discretionary investment management services to institutional and individual investors through Managed Accounts.

11. Each Managed Account client wishing to receive the discretionary investment management services of the Filer has entered into, or will enter into, a written agreement (an "Investment Management Agreement") whereby the client appoints the Filer to act as portfolio manager in connection with an investment portfolio of the client with full discretionary authority to trade in securities for the Managed Account without obtaining the specific consent of the client to execute the trade.

12. The Filer may determine that investments in either individual securities or Funds are no longer appropriate. Consequently, the Filer may, where authorized under the Investment Management Agreement, from time to time invest or redeem a Managed Account client's assets in Fund Securities to facilitate portfolio management.

13. Each Investment Management Agreement or other documentation in respect of a Managed Account contains, or will contain, the authorization of the client for the Filer to engage in In specie Transfers.

In specie Transfers

14. The Filer may wish to or otherwise be required to deliver securities held in a Managed Account or Fund to a Fund in respect of a purchase of units or shares of the Fund ("Fund Securities"), and may wish to or otherwise be required to receive securities from a Fund in respect of a redemption of Fund Securities by a Managed Account or Fund.

15. As the Filer is the trustee of certain Funds organized as a trust, each such Fund could be an 'associate' of the Filer and accordingly, absent the grant of the Requested Relief, the Filer is precluded by the provisions of section 13.5(2)(b)(ii) of NI 31-103 from effecting the In specie Transfers in such circumstances. As the Filer is a registered adviser which is, or will be, the manager and/or portfolio manager of the Funds and is, or will be, the portfolio manager of the Managed Accounts, absent the grant of the Requested Relief, the Filer is precluded by the provisions of Section 13.5(2)(b)(iii) of NI 31-103 from effecting the In specie Transfers.

16. The Filer does not receive any compensation in respect of any sale or redemption of Fund Securities and, in respect of any delivery of securities further to an In specie Transfer, the only charge paid by the Fund or Managed Account, as applicable, is a nominal administrative charge levied by the custodian of the relevant Fund or Managed Account in recording the trade and any commission charged by the dealer executing the trade.

17. The Filer has obtained, or will obtain, the prior specific written consent of the relevant Managed Account client before it engages in any In specie Transfers in connection with the purchase or redemption of securities of the Funds for the Managed Account.

18. The Filer, as manager of the Funds, will value the securities transferred under an In specie Transfer on the same valuation day on which the purchase price or redemption price of the Fund Securities of a Fund is determined. With respect to the purchase of Fund Securities of a Fund, the securities transferred to a Fund under an In specie Transfer in satisfaction of the purchase price of those Fund Securities will be valued as if the securities were portfolio assets of the Fund, as contemplated by subsection 9.4(2)(b)(iii) of NI 81-102. With respect to the redemption of Fund Securities of a Fund, the securities transferred to a Managed Account in satisfaction of the redemption price of those Fund Securities will have a value equal to the amount at which those securities were valued in calculating the net asset value per security used to establish the redemption price of the Fund Securities of the Fund, as contemplated by subsection 10.4(3)(b) of NI 81-102.

19. In specie Transfers will be subject to (i) compliance with the written policies and procedures of the Filer respecting In specie Transfers that are consistent with applicable securities legislation, and (ii) the oversight of the Filer's Compliance Department, to ensure that the transaction represents the business judgment of the Filer acting in its discretionary capacity with respect to the Fund and the Managed Account, uninfluenced by considerations other than the best interests of the Fund and Managed Account.

20. Should any In specie Transfer involve the transfer of an "illiquid asset" (as defined in NI 81-102), the Filer will obtain at least one quote for the asset from an independent arm's length purchaser or seller, immediately before effecting the In specie Transfer.

21. The Filer has determined that it is in the best interests of the Funds and the Managed Accounts to receive the Requested Relief and engage in In specie Transfers.

22. Effecting In specie Transfers of securities as described above will allow the Filer to manage each asset class more effectively and reduce transaction costs for the Managed Accounts and the Funds. In specie Transfers also allow a portfolio manager to retain within its control institutional-size blocks of securities that otherwise would need to be broken and re-assembled.

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) if the transaction is the purchase of Fund Securities of a Fund by a Managed Account:

i. in respect of the Requested Relief as it applies to purchases of a Mutual Fund,

I. the Filer, as manager of the Mutual Fund, obtains the approval of the IRC of the Mutual Fund in respect of an In specie Transfer in accordance with the terms of s. 5.2 of NI 81-107; and

II. the Filer, as manager of the Mutual Fund, and the IRC, comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In specie Transfer;

ii. the Filer obtains the prior written consent of the client of the relevant Managed Account before it engages in any In specie Transfers in connection with the purchase of Fund Securities;

iii. the Fund would at the time of payment be permitted to purchase the securities held in the Managed Account;

iv. the securities are acceptable to the Filer as portfolio manager of the Fund and consistent with the Fund's investment objectives;

v. the value of the securities sold to the Fund is at least equal to the issue price of the Fund Securities of the Fund for which they are payment, valued as if the securities were portfolio assets of that Fund;

vi. the account statement next prepared for the Managed Account will include a note describing the securities delivered to the Fund and the value assigned to such securities; and

vii. the Fund keeps written records of all In specie Transfers during the financial year of the Fund, reflecting details of the securities delivered to the Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(b) if the transaction is the redemption of Fund Securities of a Fund by a Managed Account:

i. in respect of the Requested Relief as it applies to redemptions of a Mutual Fund,

I. the Filer, as manager of the Mutual Fund, obtains the approval of the IRC of the Mutual Fund in respect of an In specie Transfer in accordance with the terms of s. 5.2 of NI 81-107; and

II. the Filer, as manager of the Mutual Fund, and the IRC, comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In specie Transfer;

ii. the Filer obtains the prior written consent of the client of the relevant Managed Account to the payment of redemption proceeds in the form of an In specie Transfer;

iii. the securities are acceptable to the Filer as portfolio manager of the Managed Account and consistent with the Managed Account's investment objectives;

iv. the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per Fund Security of the Fund used to establish the redemption price;

v. the holder of the Managed Account has not provided notice to terminate its Investment Management Agreement with the Filer;

vi. the account statement next prepared for the Managed Account will include a note describing the securities delivered to the Managed Account and the value assigned to such securities; and

vii. the Fund keeps written records of all In specie Transfers during the financial year of the Fund, reflecting details of the securities delivered by the Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(c) if the transaction is the purchase of Fund Securities of a Mutual Fund by a Pooled Fund:

i. the Filer, as manager of the Mutual Fund, obtains the approval of the IRC of the Mutual Fund in respect of an In specie Transfer in accordance with the terms of s. 5.2 of NI 81-107;

ii. the Filer, as manager of the Mutual Fund, and the IRC comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In specie Transfer;

iii. the Mutual Fund would at the time of payment be permitted to purchase those securities;

iv. the securities are acceptable to the Filer as portfolio manager of the Mutual Fund and consistent with the Mutual Fund's investment objectives;

v. the value of the securities is at least equal to the issue price of the Fund Securities of the Mutual Fund for which they are payment, valued as if the securities were portfolio assets of that Mutual Fund; and

vi. each of the Funds will keep written records of an In specie Transfer in a financial year of a Fund, reflecting details of the securities delivered by the Pooled Fund to the Mutual Fund, and the value assigned to such securities, for five years after the end of their financial year, the most recent two years in a reasonably accessible place;

(d) if the transaction is the redemption of Fund Securities of a Mutual Fund by a Pooled Fund:

i. the Filer, as manager of the Mutual Fund, obtains the approval of the IRC of the Mutual Fund in respect of an In specie Transfer in accordance with the terms of s. 5.2 of NI 81-107;

ii. the Filer, as manager of the Mutual Fund, and the IRC, comply with the requirements of section 5.4 of NI 81-107 for any standing instructions the IRC provides in respect of an In specie Transfer;

iii. the securities are acceptable to the portfolio manager of the Pooled Fund and consistent with the Pooled Fund's investment objectives;

iv. the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per Fund Security used to establish the redemption price of the Mutual Fund; and

v. each of the Funds keeps written records of all In specie Transfers during the financial year of a Fund, reflecting details of the securities delivered by the Mutual Fund to the Pooled Fund, and the value assigned to such securities, for five years after the end of their financial year, the most recent two years in a reasonably accessible place;

(e) if the transaction is the purchase of Fund Securities of a Pooled Fund by a Pooled Fund:

i. the Pooled Fund would at the time of payment be permitted to purchase those securities;

ii. the securities are acceptable to the Filer as portfolio manager of the Pooled Fund and consistent with the Pooled Fund's investment objectives;

iii. the value of the securities is at least equal to the issue price of the Fund Securities of the Pooled Fund for which they are payment, valued as if the securities were portfolio assets of that Pooled Fund; and

iv. each Pooled Fund will keep written records of an In specie Transfer in a financial year of a Pooled Fund, reflecting details of the securities delivered to the Pooled Fund, and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(f) if the transaction is the redemption of Fund Securities of a Pooled Fund by a Pooled Fund:

i. the securities are acceptable to the portfolio manager of the Pooled Fund and consistent with the Pooled Fund's investment objectives;

ii. the value of the securities is equal to the amount at which those securities were valued in calculating the net asset value per Fund Security used to establish the redemption price of the Pooled Fund;

iii. each Pooled Fund keeps written records of all In specie Transfers during the financial year of a Pooled Fund, reflecting details of the securities delivered by the Pooled Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place; and

(g) the Filer does not receive any compensation in respect of any sale or redemption of units of a Fund and, in respect of any delivery of securities further to an In specie Transfer, the only charge paid by the Fund or Managed Account, as applicable, is a nominal administrative charge levied by the custodian of the relevant Fund or Managed Account in recording the trade and the commission charged by the dealer executing the trade.

"Vera Nunes"
Manager, Investment Funds and
Structured Products Branch
Ontario Securities Commission