Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from section 13.5(2)(b) of NI 31-103 to permit Inter-Fund trading between pooled funds and managed accounts managed by the same manager – Relief subject to conditions, including IRC approval and pricing requirements – certain trades involving exchange-traded securities permitted to occur at last sale price as defined in the Universal Market Integrity Rules – Exemption also granted from conflict of interest trading prohibition in paragraph 13.5(2)(b) to permit in-specie subscriptions and redemptions by separately managed accounts and pooled funds – relief subject to conditions.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5 and 15.1.

 March 6, 2019

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
PORTLAND INVESTMENT COUNSEL INC.
(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for a decision (the Exemption Sought) pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) exempting the Filer from the prohibitions in paragraph 13.5(2)(b) of NI 31-103 (the Trading Prohibition) 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 the securities of any issuer from or to the investment portfolio of an associate of a responsible person or any investment fund for which a responsible person acts as an adviser, to permit:

a)            a Pooled Fund (as defined below) to purchase securities from, or sell securities to, another Pooled Fund;

b)            a Managed Account (as defined below) to purchase securities from, or sell securities to, a Pooled Fund,

and, in each case, for the purchase and sale described above of exchange-traded securities to occur at the Last Sale Price (as defined below) in lieu of the Closing Sale Price (as defined below);

(a purchase or sale of securities described in paragraphs (a) and (b) above being referred to herein as an Inter-Fund Trade);

c)             the purchase by a Managed Account of securities of a Pooled Fund, and the redemption of securities of a Pooled Fund held by a Managed Account, and as payment:

i.              for such purchase, in whole or in part, by the Managed Account making good delivery of portfolio securities to the Pooled Fund; and

ii.             for such redemption, in whole or in part, by the Managed Account receiving good delivery of portfolio securities from the Pooled Fund; and

d)            the purchase by a Pooled Fund of securities of another Pooled Fund, and the redemption of securities held by a Pooled Fund in another Pooled Fund, and as payment:

i.              for such purchase, in whole or in part, by the Pooled Fund making good delivery of portfolio securities to the other Pooled Fund; and

ii.             for such redemption, in whole or in part, by the Pooled Fund receiving good delivery of portfolio securities from the other Pooled Fund;

(a purchase or redemption described in paragraph (c) or (d) above being referred to herein as an In Specie Transaction).

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

a)            the Ontario Securities Commission (the OSC) 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 all of the provinces and territories of Canada (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in the Legislation, MI 11-102, National Instrument 14-101 Definitions, NI 31-103, National Instrument 81-102 Investment Funds (NI 81-102), National Instrument 81-106 Investment Fund Continuous Disclosure or National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) have the same meanings in this decision, unless otherwise defined. In addition:

Closing Sale Price means the closing sale price contemplated by the definition of “current market price of the security” in subparagraph 6.1(1)(a)(i) of NI 81-107 on that trading day;

Last Sale Price means the last sale price, as defined in the Market Integrity Rules of the Investment Industry Regulatory Organization of Canada, prior to the execution of the trade on that trading day where the securities involved in the Inter-Fund Trade are exchange-traded securities (which term shall include Canadian and foreign exchange-traded securities);

Managed Account means an existing or future account over which the Filer has discretionary authority for a client; and

Pooled Fund means an existing or future investment fund of which the Filer is the investment fund manager and to which neither NI 81-102 nor NI 81-107 apply.

Representations

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

The Filer

1.             The Filer is a corporation amalgamated under the laws of Ontario with its registered head office located in Burlington, Ontario.

2.             The Filer is registered as follows:

a)            in the provinces of Alberta, Newfoundland and Labrador, Ontario and Quebec in the category of investment fund manager;

b)            in each of the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan as an adviser in the category of portfolio manager;

c)             in each of the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Québec and Saskatchewan as a dealer in the category of exempt market dealer; and

d)            in Ontario as a dealer in the category of mutual fund dealer.

3.             The Filer acts, or will act, as the:

a)            investment fund manager of each Pooled Fund;

b)            portfolio adviser to each Pooled Fund; and

c)             adviser to each Managed Account.

4.             The Filer acts, or may act, as the trustee of those Pooled Funds that are structured as trusts. Accordingly, each such Pooled Fund is, or may be, an associate of the Filer.

5.             An entity related to the Filer acts, or may act, as the general partner to those Pooled Funds that are structured as a limited partnership.

6.             The Filer is not in default of the securities legislation of any Jurisdiction.

Pooled Funds

7.             Each Pooled Fund is, or will be, an investment fund established under the laws of Ontario or another Jurisdiction.

8.             Each Pooled Fund’s reliance on the Exemption Sought will be compatible with its investment objectives and strategies.

9.             The securities of each Pooled Fund are, or will be, distributed on a private placement basis pursuant to the securities legislation of the Jurisdictions and no Pooled Fund is, or will be, a reporting issuer under the securities legislation of any Jurisdiction.

10.          Each existing Pooled Fund is not in default of the securities legislation of any Jurisdiction.

Managed Accounts

11.          Each Managed Account is, or will be, managed pursuant to an investment management agreement or other documentation which is, or will be, executed by each client who wishes to receive the portfolio management services of the Filer and which provides the Filer 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 investment management agreement or other documentation in respect of each Managed Account contains, or will contain, authorization from the client for the Filer to make Inter-Fund Trades and/or enter into In Specie Transactions.

Independent Review Committee

13.          Though the Pooled Funds are not, and will not be, subject to the requirements of NI 81-107, each Pooled Fund will have an IRC at the time the Pooled Fund makes an Inter-Fund Trade. The mandate of the IRC of each Pooled Fund will include approving Inter-Fund Trades.

14.          If the IRC of a Pooled Fund becomes aware of an instance where the Filer did not comply with the terms of this decision or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Pooled Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the Jurisdiction under which the Pooled Fund is organized.

Inter-Fund Trades

15.          When the Filer engages in an Inter-Fund Trade it will follow the following procedures:

a)            in respect of a purchase or a sale of a security by a Pooled Fund or Managed Account as applicable (Portfolio A), the portfolio manager of the Filer will either place the trade directly or will deliver the trade instructions to a trader on a trading desk of the Filer;

b)            in respect of a sale or a purchase of a security by another Pooled Fund or Managed Account as applicable (Portfolio B), the portfolio manager of the Filer will either place the trade directly or will deliver the trade instructions to a trader on a trading desk of the Filer;

c)             each portfolio manager or trader of the Filer will request the approval of the chief compliance officer of the Filer (or his or her designated alternate during periods when it is not practicable for the chief compliance officer to address the matter) (the CCO) to execute the trade as an Inter-Fund Trade;

d)            once the portfolio manager or trader on the trading desk has confirmed the approval of the CCO, the portfolio manager or the trader on the trading desk will have the discretion to execute the trade as an Inter-Fund Trade between Portfolio A and Portfolio B in accordance with the requirements of paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107, except that for purposes of paragraph (e) of subsection 6.1(2) in respect of exchange-traded securities, the trade may be executed at the Last Sale Price;

e)            the policies applicable to the portfolio manager and the trading desk of the Filer will require that all Inter-Fund Trade orders are to be executed on a timely basis and will remain open only for 30 days unless the portfolio manager cancels the order sooner; and

f)             the portfolio manager or the trader on the trading desk will advise the CCO of the price at which the Inter-Fund Trade occurred.

In Specie Transactions

16.          When acting for a Managed Account of a client, the Filer wishes to be able, in accordance with the investment objectives and restrictions of the client, to cause the client's Managed Account to either invest in securities of a Pooled Fund, or to redeem such securities, pursuant to an In Specie Transaction.

17.          In acting on behalf of a Pooled Fund, the Filer wishes to be able, in accordance with the investment objectives and restrictions of the Pooled Fund, to cause the Pooled Fund to either invest in securities of another Pooled Fund, or to redeem such securities, pursuant to an In Specie Transaction.

18.          The Filer has determined that effecting the In Specie Transactions of securities between a Pooled Fund and a Managed Account or between a Pooled Fund and another Pooled Fund will allow the Filer to manage each asset class more effectively and reduce transaction costs for the client or the Pooled Funds, as applicable. For example, In Specie Transactions may:

a)            reduce market impact costs, which can be detrimental to clients and/or the Pooled Funds; and

b)            allow a portfolio manager to retain within its control institutional-size blocks of securities that otherwise would need to be broken and re-assembled.

19.          The only cost which will be incurred by a Pooled Fund or a Managed Account for an In Specie Transaction is a nominal administrative charge levied by the custodian of the Pooled Fund in recording the trades and/or any commission charged by the dealer executing the trade.

20.          At the time of each In Specie Transaction, the Filer will have in place policies and procedures governing such transactions, including the following:

a)            the Filer has obtained, or will obtain, the written consent of the relevant client before it engages in any In Specie Transaction in connection with the purchase or redemption of securities of a Pooled Fund for the Managed Account;

b)            the portfolio securities transferred in an In Specie Transaction will be consistent with the investment criteria of the Pooled Fund or Managed Account, as the case may be, acquiring the portfolio securities;

c)             the portfolio securities transferred in In Specie Transactions will be valued on the same valuation day using the same valuation principles as are used to calculate the net asset value for the purpose of the issue price or redemption price of securities of the Pooled Fund;

d)            with respect to the purchase of securities of a Pooled Fund, the portfolio securities transferred to the Pooled Fund in an In Specie Transaction as purchase consideration for those securities will be valued as if the portfolio securities were assets of the Pooled Fund and as if the Pooled Fund was subject to subparagraph 9.4(2)(b)(iii) of NI 81-102;

e)            with respect to the redemption of securities of a Pooled Fund, the portfolio securities transferred in consideration for the redemption price of those securities will have a value at least equal to the amount at which those portfolio securities were valued in calculating the net asset value per security used to establish the redemption price of the securities as if the Pooled Fund was subject to paragraph 10.4(3)(b) of NI 81-102;

f)             the valuation of any illiquid securities which would be the subject of an In Specie Transaction will be carried out according to the Filer's policies and procedures for the fair valuation of portfolio securities, including illiquid securities. Should any In Specie Transaction involve the transfer of an exchange-traded security that is 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 Transaction;

g)            if any illiquid securities are the subject of an in specie redemption, the illiquid securities will be transferred on a basis that fairly represents the portfolio of the Pooled Fund. The Filer will not cause any Pooled Fund to accept an in specie subscription or pay out redemption proceeds in specie if, at the time of the proposed In Specie Transaction, illiquid securities represent more than an immaterial portion of the portfolio of the Pooled Fund. The valuation of any illiquid securities which would be the subject of an In Specie Transaction will be carried out according to the Filer’s policies and procedures for the fair value of portfolio securities, including illiquid securities; and

h)            the Filer will keep written records of each In Specie Transaction, including records of each purchase and redemption of portfolio securities and the terms thereof for a period of at least five years commencing after the end of the financial year in which the trade occurred, the most recent two years in a reasonably accessible place.

21.          In Specie Transactions will be subject to:

a)            compliance with the written policies and procedures of the Filer respecting In Specie Transactions that are consistent with applicable securities legislation and the Exemption Sought; and

b)            the oversight of the Filer to ensure that the In Specie Transactions represent the business judgment of the Filer acting in its discretionary capacity with respect to the Pooled Funds and the Managed Accounts, uninfluenced by considerations other than the best interests of the Pooled Funds and Managed Accounts. Any issues detected in the oversight and review by the Filer will be reported in the CCO’s annual report to the board of directors of the Filer.

Reasons for the Exemption Sought

22.          Since the Filer is, or may be, the trustee of those Pooled Funds that are structured as trusts, each such Pooled Fund is, or may be, an associate of the Filer. Since the Filer is the adviser to the Pooled Funds, the Filer is a responsible person of each Pooled Fund. The Filer is a responsible person of each Managed Account. Accordingly, each Pooled Fund is, or may be, an "associate" of a "responsible person" of another Pooled Fund or Managed Account as such terms are defined in the Legislation.

23.          Pursuant to the Trading Prohibition, a Pooled Fund or a Managed Account, as applicable, may be restricted from making Inter-Fund Trades and In Specie Transactions with another Pooled Fund if:

a)            the second Pooled Fund is an associate of a responsible person of the first Pooled Fund or of the Managed Account, as applicable, which will be the case on each occasion that the second Pooled Fund is structured as a trust and the Filer is the trustee of the second Pooled Fund; or

b)            a responsible person of the first Pooled Fund or the Managed Account, as applicable, is an adviser to the second Pooled Fund, which will be the case for each second Pooled Fund.

24.          The Filer, as the adviser to a Pooled Fund or Managed Account, cannot rely upon the exemption from paragraph 13.5(2)(b) of NI 31-103 codified in subsection 6.1(4) of NI 81-107 because such codified relief is not available in the context of the Pooled Funds and Managed Accounts.

25.          Absent the granting of the Exemption Sought, the Filer may be prohibited from engaging in Inter-Fund Trades and In Specie Transactions due to the Trading Prohibition. The Trading Prohibition is similar to the restriction that is contained in subsection 4.2(1) of NI 81-102. However, there is no statutory relief from the Trading Prohibition equivalent to subsection 4.3(1) of NI 81-102 for purchases and sales of securities with available public quotations. Subsection 6.1(4) of NI 81-107 provides relief from the Trading Prohibition but only if, among other conditions:

a)            the trade involves two investment funds to which NI 81-107 applies; and

b)            the Inter-Fund Trade occurs at the closing market price which, in the case of exchange-traded securities, does not include the Last Sale Price.

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 provided that:

Inter-Fund Trades

1.             In connection with Inter-Fund Trades:

a)            the Inter-Fund Trade is consistent with the investment objective of the Pooled Fund or the Managed Account, as applicable;

b)            the Filer refers the Inter-Fund Trade to the IRC of the Pooled Fund involved in the manner contemplated by section 5.1 of NI 81-107, and the Filer complies with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade;

c)             the IRC of each Pooled Fund has approved the Inter-Fund Trade in respect of that Pooled Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

d)            if the transaction is with a Managed Account, the investment management agreement or other documentation in respect of the Managed Account contains or will contain the authorization of the client to engage in Inter-Fund Trades and such authorization has not been revoked; and

e)            if the Inter-Fund Trade involves exchange-traded securities, the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107, except that for purposes of paragraph (e) of subsection 6.1(2), the trade may be executed at the Last Sale Price.

In Specie Transactions

2.             In connection with an In Specie Transaction where a Managed Account acquires securities of a Pooled Fund:

a)            if the transaction involves the purchase of securities in a Pooled Fund, the IRC of the Pooled Fund has approved the In Specie Transaction on behalf of the Pooled Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

b)            the Filer and the IRC complies with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the In Specie Transaction;

c)             the Filer obtains the prior written consent of the client of the Managed Account before it engages in the In Specie Transaction;

d)            the Pooled Fund would, at the time of payment, be permitted to purchase the portfolio securities;

e)            the portfolio securities are acceptable to the portfolio manager of the Pooled Fund and meet the investment criteria of the Pooled Fund;

f)             the value of the portfolio securities is at least equal to the issue price of the securities of the Pooled Fund for which they are used as payment, valued as if the portfolio securities were portfolio assets of that Pooled Fund;

g)            the account statement next prepared for the Managed Account describes the portfolio securities delivered to the Pooled Fund and the value assigned to such portfolio securities; and

h)            the Pooled Fund keeps written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the portfolio securities delivered to the Pooled Fund and the value assigned to such portfolio securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place.

3.             In connection with an In Specie Transaction where a Managed Account redeems securities of a Pooled Fund:

a)            if the transaction involves the redemption of securities in a Pooled Fund, the IRC of the Pooled Fund has approved the In Specie Transaction on behalf of the Pooled Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

b)            the Filer and the IRC complies with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the In Specie Transaction;

c)             the Filer obtains the prior written consent of the client of the Managed Account before it engages in the In Specie Transaction, and such consent has not been revoked;

d)            the portfolio securities meet the investment criteria of the Managed Account acquiring the portfolio securities and are acceptable to the Filer;

e)            the value of the portfolio securities is equal to the amount at which those portfolio securities were valued by the Pooled Fund in calculating the net asset value per unit or share used to establish the redemption price;

f)             the account statement next prepared for the Managed Account describes the portfolio securities received from the Pooled Fund and the value assigned to such portfolio securities; and

g)            the Pooled Fund keeps written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered by the Pooled Fund and the value assigned to such securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place.

4.             In connection with an In Specie Transaction where a Pooled Fund purchases securities of a Pooled Fund:

a)            if the transaction involves the purchase of securities in a Pooled Fund, the IRC of the Pooled Fund has approved the In Specie Transaction on behalf of the Pooled Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

b)            the Filer and the IRC comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the In Specie Transaction;

c)             the Pooled Fund acquiring the portfolio securities would, at the time of payment, be permitted to purchase the portfolio securities;

d)            the portfolio securities are acceptable to the portfolio manager of the Pooled Fund acquiring the portfolio securities and meet the investment objective of such Pooled Fund;

e)            the value of the portfolio securities is at least equal to the issue price of the units or shares of the Pooled Fund issuing the units or shares for which they are used as payment, valued as if the portfolio securities were portfolio assets of that Pooled Fund;

f)             each Pooled Fund keeps written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the securities delivered to the Pooled Fund and the value assigned to such portfolio securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place.

5.             In connection with an In Specie Transaction where a Pooled Fund redeems securities of a Pooled Fund:

a)            if the transaction involves the redemption of securities in a Pooled Fund, the IRC of the Pooled Fund has approved the In Specie Transaction on behalf of the Pooled Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

b)            the Filer and the IRC comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the In Specie Transaction;

c)             the portfolio securities are acceptable to the portfolio manager of the Pooled Fund and are consistent with the investment objective of the Pooled Fund acquiring the portfolio securities;

d)            the value of the portfolio securities is equal to the amount at which those securities were valued by the Pooled Fund in calculating the net asset value per security used to establish the redemption price;

e)            each Pooled Fund keeps written records of each In Specie Transaction in a financial year of the Pooled Fund, reflecting details of the portfolio securities delivered by the Pooled Fund and the value assigned to such securities, for at least five years after the end of the financial year, the most recent two years in a reasonably accessible place.

6.             The Filer does not receive any compensation in respect of any In Specie Transaction and, in respect of any delivery of portfolio securities further to an In Specie Transaction, the only charges paid by the Managed Account or the applicable Pooled Fund is the commission charged by the dealer executing the trade (if any) and/or any administrative charges levied by the custodian.

“Neeti Varma”
Manager (Acting)
Investment Funds & Structured Products Branch
Ontario Securities Commission