Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from ss. 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to permit in specie transfers between managed accounts and pooled funds – 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.

January 2, 2018

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
FIRST AVENUE INVESTMENT COUNSEL INC.
(FAIC)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from FAIC for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the following:

In-specie Transfer Relief

The prohibition in sections 13.5(2)(b)(ii) and 13.5(2)(b)(iii) of NI 31-103 to permit in specie subscriptions and redemptions by a Managed Account in a Pooled Fund (the Exemption Sought).

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

1.             The Ontario Securities Commission (OSC) is the principal regulator for this application; and

2.             FAIC 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 respect of the Exemption Sought in each province and territory of Canada.

Interpretation

Terms defined in National Instrument 14101 Definitions, MI 11-102, NI 31-103, NI 81-102, NI 81-106, NI 81-107 or in the Securities Act (Ontario) have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:

“Filer” means, unless otherwise specified, FAIC or a future affiliate of FAIC;

“Future Pooled Fund” means each investment fund, which is not a reporting issuer, that is established after the formation of the Initial Pooled Fund, and for which the Filer will act as investment fund manager and/or portfolio adviser.

“Fund Securities” means the units or shares of a Pooled Fund.

In-specie Transfer” means causing a Managed Account to deliver securities to a Pooled Fund in respect of the purchase of Fund Securities of such Pooled Fund, or to receive securities from the investment portfolio of a Pooled Fund in respect of a redemption of Fund Securities of such Pooled Fund.

“Initial Pooled Fund” means an investment fund, which is not a reporting issuer, and for which FAIC will act as investment fund manager and/or portfolio adviser.

“Investment Management Agreement” means an investment management agreement entered into by the Filer and a client thereof in respect to the client’s Managed Account.

“Managed Account” means each fully managed account managed by the Filer for a client that is not a responsible person.

“NI 81-102” means National Instrument 81-102 Investment Funds.

“Pooled Funds” means, collectively, the Initial Pooled Fund and the Future Pooled Funds.

Representations

The decision is based on the following facts represented by FAIC:

FAIC

1.             FAIC is a corporation incorporated under the laws of Ontario with its head office in Toronto, Ontario.

2.             FAIC is registered as a portfolio manager and exempt market dealer in Alberta, British Columbia, Nova Scotia, Ontario, Prince Edward Island, Québec. FAIC has applied to be registered as an investment fund manager in Ontario and Quebec.

3.             FAIC is not a reporting issuer in any jurisdiction and is not in default of securities legislation of any jurisdiction of Canada.

The Managed Accounts

4.             The Filer offers discretionary portfolio management services to individual and institutional investors, each of whom has entered into an Investment Management Agreement with the Filer.

In-specie Transfers

5.             FAIC intends, subject to being registered as an investment fund manager, to establish the Initial Pooled Fund, on or about January 2, 2017, as a trust with a corporation licensed under the Loan and Trust Corporations Act (Ontario) acting as trustee thereof.

6.             The Filer wishes to invest existing and future Managed Account clients in the Pooled Funds, to the extent that the Pooled Funds are consistent with the investment with the investment objectives of the Managed Accounts.

7.             As the Filer may be in the future the trustee of a Future Pooled Fund which is organized as a trust, each such Future Pooled Fund may be an ‘associate’ of the Filer, and accordingly, absent the grant of the Exemption Sought, the Filer would be 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 will be a registered adviser and investment fund manager of the Pooled Funds and is, or will be, the portfolio manager of the Managed Accounts, absent the grant of the Exemption Sought, the Filer would be precluded by section 13.5(2)(b)(iii) of NI 31-103 from effecting the In-specie Transfers.

8.             The Filer manages certain Managed Accounts on the basis of the same investment objective and investment strategies as those that will apply to the Initial Pooled Fund. As such, the Filer wishes to use the Exemption Sought to (i) effect a one-time In-specie Transfer with respect to the establishment of the Initial Pooled Fund, (ii) effect future In-specie Transfers with respect to existing and future Managed Accounts clients, and (iii) effect future In-specie Transfers with respect to the establishment of Future Pooled Funds. The purpose of the In-specie Transfers would be to allow the Filer to manage each asset class held in the existing Managed Accounts more effectively and/or reduce transaction costs for the existing and future Managed Account clients.

9.             The Filer submits that by pooling the securities held by the Managed Accounts through the In-specie Transfers, the Filer may able to reduce market impact costs, which can be detrimental to the Managed Accounts or Pooled Fund clients. The In-specie Transfer will allow the Filer to retain within its control institutional-sized blocks of securities that otherwise would need to be broken and re-assembled.

10.          The only cost which will be incurred by a Pooled Fund or Managed Account in connection with the In-specie Transfer will be a nominal administrative charge levied by the custodian of the Pooled Fund.

11.          The Filer will obtain written consent of the relevant Managed Account client before it engages in an In-specie Transfer in connection with the purchase or redemption of securities of a Pooled Fund for the Managed Account.

12.          The Filer, as manager of the Pooled 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 is determined. With respect to the purchase of Fund Securities of a Pooled Fund, the securities transferred to a Pooled Fund under an In-specie Transfer in satisfaction of all or part of the purchase price of those Fund Securities will be valued as if the securities were portfolio assets of the Pooled Fund, as contemplated by section 9.4(2)(b)(iii) of NI 81-102. With respect to the redemption of Fund Securities of a Pooled 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 Pooled Fund, as contemplated by section 10.4(3)(b) of NI 81-102.

13.          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 Chief Compliance Officer, to ensure that the transaction represents the business judgment of the Filer acting in its discretionary capacity with respect to a Pooled Fund and Managed Account, uninfluenced by considerations other than the best interests of the Pooled Fund and Managed Account.

14.          Absent the Exemption Sought, neither the Managed Accounts, nor the Filer, on their behalf, will be permitted to engage in In-specie Transfers.

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 so long as:

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

(i)            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;

(ii)           the Pooled Funds would at the time of payment be permitted to purchase the securities of the Managed Account;

(iii)          the securities are acceptable to the Filer as portfolio manager of the Pooled Funds and consistent with the Pooled Funds’ investment objectives;

(iv)          the value of the securities sold to the Pooled Funds is at least equal to the issue price of the Fund Securities for which they are payment, valued as if the securities were portfolio assets of the Pooled Funds;

(v)           the account statement next prepared for the Managed Account will include a note describing the securities delivered to the Funds and the value assigned to such securities; and

(vi)          the Pooled Funds keep written records of all In-specie Transfers during the financial year, reflecting details of the securities delivered to the Pooled Funds 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 by a Managed Account:

(i)            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;

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

(iii)          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;

(iv)          the holder of the Managed Account has not provided notice to terminate its Investment Management Agreement with the Filer;

(v)           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

(vi)          the Pooled Funds keep written records of all In-specie Transfers during the financial year, reflecting details of the securities delivered by the Funds 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)           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 Managed Account, if any, is the commission charged by the dealer executing the trade; and

(d)           should any In-specie Transfer contemplated specifically by the Exemption Sought, 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 (as contemplated by commentary #7 to section 6.1 of National Instrument 81-107 – Independent Review Committee for Investment Funds). 

“Raymond Chan”
Manager, Investment Funds & Structured Products Branch
Ontario Securities Commission