Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- Relief granted to pooled funds not subject to National Instrument 81-102, mutual funds and managed accounts to purchase securities of related entities over a stock exchange and to purchase non-exchange traded debt securities of related entities under primary offerings and in the secondary market -- Relief also granted to portfolio manager to engage the funds it manages in principal trading of debt securities of third parties with a related dealer in the secondary market -- relief conditional on IRC approval, compliance with pricing requirements, and limits on the amount of a primary offering of a related entity a fund may purchase.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 13.5(2)(a), 13.5(2)(b), 15.1.

TRANSLATION

DECISION: 2018-SACD-1020093

April 30, 2018

IN THE MATTER OF THE SECURITIES LEGISLATION OF QUÉBEC AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF JARISLOWSKY, FRASER LIMITED (the Filer)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer on behalf of the pooled funds established and/or advised by the Filer (the Existing Pooled Funds) and such other pooled funds that the Filer may establish and/or advise in the future (each a Future Pooled Fund, and together with the Existing Pooled Funds, the Pooled Funds, and individually, a Pooled Fund), to which Regulation 81-102 respecting Investment Funds (Regulation 81-102) does not apply, each mutual fund established and/or advised by the Filer (the Existing Public Funds) and such other mutual funds that the Filer may establish and/or advise in the future (each a Future Public Fund, and together with the Existing Public Funds, the Public Funds), to which Regulation 81-102 does apply, (the Pooled Funds and the Public Funds are collectively referred to as the Funds, and individually as a Fund) and the existing managed accounts of the Filer (each a Managed Account), for a decision of the Decision Makers under the securities legislation of the Jurisdictions (the Legislation) pursuant to section 15.1 of Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (Regulation 31-103) exempting the Filer from the requirements of sections 13.5(2)(a) and 13.5(2)(b)(i) and (ii) of Regulation 31-103 to allow a Fund and/or a Managed Account to:

(a) buy Equity Securities and/or Debt Securities (as such terms are defined below) of an issuer in which a Responsible Person (as such term is defined in Regulation 31-103), or an associate of a Responsible Person, is a partner, officer or director (a Related Issuer) unless the fact is disclosed to the client and the written consent of the client is obtained before the investment is made (the Consent Relief); and

(b) buy and/or sell Related Party Debt Securities and/or Other Debt Securities (as such terms are defined below) from or to an investment portfolio of a Responsible Person or an associate of a Responsible Person (the Principal Trade Relief)

(collectively, the Exemption Sought).

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

(a) the Autorité des marchés financiers is the principal regulator for this application; and;

(b) the Filer has provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System (Regulation 11-102) is intended to be relied upon in each other jurisdiction of Canada (except Ontario).

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 14-101 respecting Definitions, Regulation 11-102 and Regulation 81-107 respecting Independent Review Committee for Investment Funds (Regulation 81-107) 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:

The Filer

1. The Filer is a corporation incorporated under the Canada Business Corporations Act, and its head office is in Montréal, Québec.

2. The Filer is registered as a portfolio manager in each jurisdiction of Canada and as an investment fund manager in Québec, Ontario, Newfoundland and Labrador, Alberta and British Columbia.

3. The Filer is not in default under the securities legislation of any jurisdiction of Canada.

The Funds

4. Each Fund is, or will be, a mutual fund governed by the Civil Code of Québec or the laws of Ontario.

5. The Filer is, or will be, the manager and/or adviser of each Fund.

6. The Pooled Funds are not, and will not be, reporting issuers in any jurisdiction of Canada.

7. The Public Funds are, and will be, reporting issuers in one or more jurisdictions of Canada.

8. Securities of the Pooled Funds are, or will be, offered for sale only on an exempt basis pursuant to available prospectus exemptions in one or more of the jurisdictions of Canada.

9. Securities of the Public Funds are, or will be, offered for sale by means of a simplified prospectus or prospectus.

10. No Fund is in default of any securities legislation of any jurisdiction of Canada.

The Managed Accounts

11. The Filer is the adviser and/or sub-adviser of each Managed Account.

12. Each Managed Account is managed by the Filer pursuant to a discretionary investment management agreement, which is executed by or on behalf of the applicable client who wishes to receive the portfolio management services of the Filer.

13. The Filer makes investment decisions for each Managed Account and has full discretionary authority to instruct dealers to trade securities for each Managed Account without obtaining the specific consent or instructions of the applicable client, provided the securities represent that client's investment objectives.

The Acquisition

14. Subject to obtaining all required regulatory approvals, The Bank of Nova Scotia (BNS) plans on directly, and indirectly through a wholly-owned subsidiary, acquiring all of the issued and outstanding shares of the Filer on or about May 1, 2018 (the Effective Date).

15. BNS is the ultimate parent company of Scotia Capital Inc. (SCI), an investment dealer in each of the jurisdictions of Canada. SCI is also a principal dealer in the Canadian debt securities market.

16. The Filer currently uses SCI from time to time to execute trade orders on behalf of the Funds and/or the Managed Accounts in accordance with its best execution obligations. Accordingly, SCI may buy and/or sell securities that may be owned by SCI as principal (a Principal Trade).

17. After the Effective Date, BNS will be the ultimate parent company of the Filer. At that time, as an affiliate of BNS, the Filer will be deemed pursuant to the Legislation to beneficially own the securities owned by BNS, including SCI. As BNS beneficially owns more than 10% of the voting shares of SCI, SCI may be considered to be an associate of the Filer under the Legislation (a Related Party).

18. BNS and/or SCI may each also be a Responsible Person of the Filer after the Effective Date as they may have access to the investment decisions of the Filer before they are implemented (e.g., if the Filer submits trade orders to SCI for execution on behalf of a Fund and/or a Managed Account). Accordingly, a director or officer of BNS and/or SCI may also, depending on the positions they hold, be a partner, director or officer of a Related Issuer.

Consent Relief

19. The Filer is seeking the Consent Relief in order to allow each of the Funds and, for a period of approximately 12 months from the Effective Date, each of the Managed Accounts to have the ability to buy securities of a Related Issuer, which may include:

a. equity securities (e.g., common shares and preferred shares) (collectively, Equity Securities) of the Related Issuer (e.g., BNS); and/or

b. money market instruments, commercial paper, bankers acceptances, bearer deposit notes, debentures, and/or other debt securities (collectively, Debt Securities) of the Related Issuer.

20. A Fund's and/or a Managed Account's purchase of Equity Securities and/or Debt Securities of a Related Issuer is prohibited under the Legislation (each a Restricted Related Issuer Transaction).

21. The investment objective and investment strategies of each Fund and/or each Managed Account that will rely on the Consent Relief will permit that Fund and/or that Managed Account to buy Equity Securities and Debt Securities of a Related Issuer.

22. A Fund and/or a Managed Account will only buy Equity Securities and/or Debt Securities of a Related Issuer if such purchase is consistent with, or is necessary, to meet the investment objective of that Fund and/or that Managed Account, as applicable.

23. All purchases of Equity Securities and/or Debt Securities of a Related Issuer by a Fund and/or a Managed Account, to the extent possible, will be executed on a recognised marketplace at prevailing market prices.

24. The Filer considers granting the Consent Relief to not be prejudicial to the public interest, given that the decision to buy Equity Securities and/or Debt Securities of a Related Issuer will be made in the best interests of the Funds and the Managed Accounts and free from the influence of the person that is a partner, director or officer of that Related Issuer.

25. The Filer also considers that a Fund and/or a Managed Account would be prejudiced if it had to refrain from entering into a Restricted Related Issuer Transaction, where to do so is consistent with the investment objective of the Fund and/or the Managed Account, as applicable.

26. The Filer submits that securities of BNS are widely held across the Managed Accounts and that it would not be possible to make any normal course rebalancing adjustments in Managed Accounts involving BNS securities without the Consent Relief, as it would take quite some time to obtain the required client consents.

Principal Trade Relief

27. The Filer is seeking the Principal Trade Relief in order to allow each of the Funds and/or the Managed Accounts to purchase from, and/or sell to, the investment portfolio of a Responsible Person or an associate of a Responsible Person, Debt Securities of the Related Party (collectively, Related Party Debt Securities, and individually, a Related Party Debt Security), and/or debt securities that are not Related Party Debt Securities (collectively, Other Debt Securities, and individually, Other Debt Securities).

28. Certain Related Party Debt Securities and Other Debt Securities are not listed and are not exchange-traded.

29. The Filer is seeking the Principal Trade Relief in order to allow each Fund and each Managed Account to have the ability to buy and/or sell Related Party Debt Securities and/or Other Debt Securities, including pursuant to a Principal Trade with SCI.

30. A Fund's and/or a Managed Account's purchase or sale of securities from or to the investment portfolio of a Responsible Person or an associate of a Responsible Person (e.g., SCI, which may be a Responsible Person and a Related Party) is prohibited under the securities legislation (each a Restricted Related Party Transaction).

31. The investment objective and investment strategies of each Fund and/or each Managed Account that will rely on the Principal Trade Relief will permit that Fund and/or that Managed Account to buy and/or sell Related Party Debt Securities and/or Other Debt Securities.

32. There may be a limited supply of Related Party Debt Securities and Other Debt Securities available to a Fund and/or a Managed Account, and frequently the only source of such securities for the Fund and/or the Managed Account may be from a Related Party such as SCI.

33. If a Related Party Debt Security is purchased by a Fund and/or a Managed Account in a primary distribution or treasury offering (a Primary Offering) pursuant to the Exemption Sought:

a. the Related Party Debt Security that is a long term debt security (i.e. debt securities have a term to maturity of 365 days or more) will have a designated rating by a designated rating organization (as such terms are defined in Regulation 44-101 respecting Short Form Prospectus Distributions); and

b. the terms of the Primary Offering, such as the size and the pricing, will be a matter of public record as set out in a prospectus, offering or information memorandum, press release or other public document.

34. If a Related Party Debt Security is purchased by a Fund and/or a Managed Account in the secondary market pursuant to the Exemption Sought it will have a designated rating by a designated rating organization.

35. The Filer considers that the Funds and the Managed Accounts should have access to Related Party Debt Securities and Other Debt Securities from or to an investment portfolio of a Responsible Person or an associate of a Responsible Person for the following reasons:

a. there is a limited supply of these types of securities;

b. diversification is reduced to the extent that a Fund and/or a Managed Account is limited with respect to investment opportunities; and

c. to the extent a Fund and/or a Managed Account seeks to track or outperform a benchmark, it is important for the Fund and/or Managed Account to be able to purchase securities included in the benchmark. These securities are often included in Canadian indices.

36. The Filer considers granting the Principal Trade Relief to not be prejudicial to the public interest, given that the decision to transact securities purchases and sales with a Related Party, that may also be a Responsible Person, will be made in the best interests of the Funds and the Managed Accounts and free from the influence of that Related Party.

37. The Filer also considers that a Fund and/or a Managed Account would be prejudiced if they had to refrain from entering into a Restricted Related Party Transaction, where to do so is consistent with the investment objective of the Fund and/or the Managed Account, as applicable.

General

38. The Filer is a well-established, independent portfolio management firm in Canada with a strong fiduciary culture and a disciplined, time-tested investment philosophy based on fundamental research and bottom-up security analysis. The Filer's Investment Strategy Committee (ISC) serves as the Filer's central investment oversight body. All investments for inclusion in a Fund and/or a Managed Account must be approved by the ISC following extensive due diligence and research analysis on each issuer company.

39. The Filer has in place best execution committees for fixed income, North American equities and International equities, and has implemented policies and procedures that are reasonably designed to ensure compliance with its best execution obligations.

40. No Related Party will be able to influence the business judgment of the Filer in connection with the determination of the suitability of investments for a Fund and/or a Managed Account, and influence barriers will be put in place by the ISC and the Filer's Chief Compliance Officer after the Effective Date with respect to Restricted Related Issuer Transactions and Restricted Related Party Transactions. Decisions made by the Filer as to which investments a Fund and/or a Managed Account may hold are based on the best interests of that Fund and/or that Managed Account, without any consideration given to the interests of the party with whom a purchase or sale is transacted, and is embedded in the Filer's policies, procedures and protocols.

41. Moreover, the independent review committee (IRC) of BNS' wholly-owned subsidiary, 1832 Asset Management L.P., which currently functions as the IRC of certain investment funds that are subject to Regulation 81-102, and certain pooled funds where required by the conditions of certain exemptive relief orders, will also function as the IRC for the Pooled Funds under a new tailored mandate which, among other things, will with respect to the Exemption Sought comply with the applicable provisions of Regulation 81-107, including the standard of care set out in section 3.9 of Regulation 81-107.

42. The Public Funds also have, or will have, an IRC that is, or will be, responsible for reviewing any conflicts of interest that might arise including dealing with Restricted Related Issuer Transactions and Restricted Related Party Transactions.

43. For greater certainty, the purchase of securities of a Related Issuer by a Fund will be referred to the IRC of the Fund.

44. Each client of the Filer will also be appropriately advised in that client's statements and investment performance reports about any securities held in that client's account.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

1. the purchase or sale of the security is consistent with, or is necessary to meet, the investment objective of the applicable Fund and/or applicable Managed Account;

2. at the time of purchase or sale of a security by a Fund, the IRC of the Fund has approved the transaction in accordance with section 5.2(2) of Regulation 81-107;

3. the Filer complies with section 5.1 of Regulation 81-107, and the Filer and the IRC of the applicable Fund complies with section 5.4 of Regulation 81-107 for any standing instructions the IRC provides in connection with the transaction;

4. at the time of purchase or sale of a security by a Managed Account, the Filer and the ISC has approved the transaction as set out in this decision;

5. in the case of the purchase of a Related Party Debt Security by a Fund and/or a Managed Account during a Primary Offering:

a. the security has been given, and continues to have, at the time of purchase, a designated rating by a designated rating organization;

b. the size of the Primary Offering is at least $100 million;

c. at least two purchasers who are independent, arm's length purchasers, which may include "independent underwriters" with the meaning of Regulation 33-105 respecting Underwriting Conflicts, collectively purchase at least 20% of the Primary Offering;

d. no Fund and/or Managed Account shall participate in the Primary Offering if following its purchase the Fund and/or the Managed Account would have more than five percent (5%) of its net assets invested in that security;

e. no Fund and/or Managed Account shall participate in the Primary Offering if following the purchase the Funds and/or the Managed Accounts together hold more than 20% of the long term debt securities issued in the Primary Offering;

f. the price paid for the long term debt securities by a Fund and/or a Managed Account in a Primary Offering shall be no higher than the lowest price paid by any of the arm's length purchasers who participate in the Primary Offering;

6. in the case of the purchase or sale of a Related Party Debt Security by a Fund and/or a Managed Account in the secondary market:

a. the security has been given, and continues to have, at the time of purchase a designated rating by a designated rating organization;

b. the price payable for the security is not more than the ask price of the security;

c. the ask price of the security is determined as follows:

(i) if the purchase occurs on a marketplace, the price payable is determined in accordance with the requirements of the marketplace; or

(ii) if the purchase does not occur on a marketplace:

(A) the Fund and/or the Managed Account may pay the price for the security at which an independent arm's length seller is willing to sell the security; or

(B) if the Fund and/or the Managed Account does not purchase the security from an independent, arm's length seller, the Fund and/or the Managed Account may pay the price quoted publicly by an independent marketplace or obtain, immediately before the purchase, at least one quote from an independent, arm's length purchaser or seller and not pay more than that quote; and

d. the transaction complies with any applicable "market integrity requirements" as defined in Regulation 81-107;

7. in the case of the purchase or sale of an Equity Security of a Related Issuer:

a. the purchase is made in the secondary market on an exchange on which the Equity Security is listed and traded; and

b. the transaction complies with any applicable "market integrity requirements" as defined in Regulation 81-107;

8. in the case of the purchase or sale of an Other Debt Security, from a Responsible Person or an associate of a Responsible Person, which may include SCI:

a. the bid and ask price of the security is readily available as contemplated by section 6.1(2)(c) of Regulation 81-107;

b. a purchase is not executed at a price that is higher than the available ask price and a sale of an Other Debt Security is not executed at a price which is lower than the available bid price; and

c. the transaction complies with any applicable "market integrity requirements" as defined in Regulation 81-107;

9. the applicable Fund and/or Managed Account keeps written records of the transactions referred to above as required by section 6.1(2)(g) of Regulation 81-107; and

10. the Consent Relief allowing a Managed Account to purchase securities of a Related Issuer ceases to have effect on May 1st, 2019.

"Frédéric Pérodeau"
Superintendant,
Client Services and Distribution Oversight