IA Clarington Investments Inc.

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted to a fund manager as a “company providing services to the mutual fund” under paragraph 11.1(1)(b) of National Instrument 81-102 Investment Funds – Relief permits the investment fund manager to commingle client cash related to the manager’s investment funds in the same trust account as client cash temporarily received by the fund manager for investment in deposits offered by an affiliate.

[TRANSLATION]

June 12, 2019

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
IA CLARINGTON INVESTMENTS INC.
(the “Filer”)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the “Decision Makers”) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the “Legislation”) for relief from the requirements of section 11.1(1)(b) of Regulation 81-102 respecting Investment Funds, CQLR, c. V-1.1, r. 39 (“Regulation 81-102”) that cash received by a person providing services to a mutual fund (the “Mutual Fund”), for investment in, or on the redemption of, securities, of the Mutual Fund may be commingled only with cash received by the service provider for the sale or on the redemption of other investment fund securities (the “Commingling Prohibition”) (the “Exemption Sought”).

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

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

b)            the Filer has provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System, CQLR, c. V-1.1, r. 1 (“Regulation 11-102”) is intended to be relied upon in each of the territories of Canada other than the Jurisdictions; and

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, CQLR, c. V-1.1, r. 3, Regulation 11-102 and Regulation 81-102 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 and the Funds

1.             The Filer’s head office is in Québec.

2.             The Filer is registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador, as an exempt market dealer in Québec and Ontario, and as a portfolio manager in all of the jurisdictions of Canada.

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

4.             The Filer acts as the manager of various open-end investment funds (the “Funds”).

5.             Securities of the Funds are sold through registered dealers (the “Dealers”).

6.             The Filer is a “person providing services to the mutual fund” under the provisions of section 11.1(1)(b) of Regulation 81-102. Accordingly, the Commingling Prohibition prohibits the Filer from commingling Mutual Fund Cash (as defined below) with Other Cash (as defined below).

The Trust Accounts

7.             The Filer maintains clearing accounts on behalf of the Funds managed by it (the “Trust Accounts”) with major Canadian financial institutions. All monies (“Mutual Fund Cash”) invested by securityholders in the Funds managed by it (“Investors”) are paid by way of cheque, wire transfer, electronic funds transfer and the FundServ electronic order entry system (“Industry Standard Settlement Processes”) and from which redemption proceeds and or assets to be distributed are paid.

8.             Each Trust Account is held on behalf of the Funds. The Filer has access to the Trust Accounts and has control over which of its employees have access to the Trust Accounts.

9.             The Trust Accounts are interest bearing and all of the interest income earned in the Trust Accounts is paid to the Funds on a pro rata basis in compliance with subsection 11.1(4) of Regulation 81-102.

10.          The Filer maintains separate Trust Accounts for Canadian monies and U.S. monies. The Filer ensure compliance with section 11.3 of Regulation 81-102 in the way in which the Trust Accounts are maintained.

11.          Industrial Alliance Trust Inc. (“IA Trust”) is a federally regulated trust company. IA Trust is an affiliate of the Filer.

The Deposits

12.          IA Trust intends to accept Canadian dollar cash deposits into Canadian high interest savings accounts (the “Canadian Deposits”) and, may in the future, accept U.S. dollar cash deposits in U.S. high interest savings account (the “U.S. Deposits”) from Investors via Dealers (collectively, the “Deposits”) by way of Industry Standard Settlement Processes. The Deposits will be offered by IA Trust through the Filer.

13.          The Filer intends to provide the administrative infrastructure necessary to permit IA Trust to offer Deposits to Investors, specifically including the operational means by which Other Cash (as defined below) will be moved from the Dealers to IA Trust.

14.          The Canadian Deposits offered by IA Trust will be savings accounts eligible for deposit insurance from the Canada Deposit Insurance Corporation (“CDIC”) subject to maximum coverage limitations. The U.S. Deposits are ineligible for CDIC insurance as CDIC does not insure any accounts or products in U.S. Dollars. Investors who wish to invest in the Deposits may also purchase units of the Funds from their Dealers at the same time.
The Proposed Commingling

15.          Dealers who accept cash from Investors for investment in the Deposits (“Other Cash”) and for investment in the Funds (as noted above, Mutual Fund Cash, together the “Cash”) will forward such Cash to the Filer via Industry Standard Settlement Processes. Once received, the Filer proposes to hold the Cash temporarily in Trust Accounts. Investors’ Other Cash will then be forwarded by the Filer form its Trust Accounts to IA Trust, while the Investors’ Mutual Fund Cash will be forwarded by the Filer from the Trust Account to the Funds’ custodian that will apply it to the individual Fund accounts in the custodian’s name. For a brief time, the Filer anticipates that Mutual Fund Cash and Other Cash will be temporarily commingled in the Trust Accounts.

Interest of the Funds and the Investors

16.          As manager of the Funds, the Filer is subject to the standard of care set forth in subsection 159.3 of Securities Act, CQLR, c.V-1.1 and to similar provisions contained in the legislation of all the jurisdictions of Canada. As a federally regulated trust company, IA Trust accepts the Deposits as guaranteed trust money and the Filer, acting as agent of IA Trust, will comply with the fiduciary standard of care and applicable customer protection legislation and regulations which apply to IA Trust in respect of the Deposits.

17.          The temporary commingling of Cash in the Trust Accounts will permit a seamless method to move Cash from Dealers to the Funds and IA Trust, and in reverse, will facilitate significant administrative and systems economies that will enable the Filer to enhance its level of service to its clients.

18.          In the absence of the Exemption Sought, the commingling of Cash would contravene the Commingling Prohibition and would require the Filer to establish separate trust accounts for the Funds and the Deposits. This would effectively not permit the offering of the Deposits to Investor alongside Mutual Fund investments within the same nominee-name accounts, which the Filer believe to be of significant value to Investors.

Cash Clearing

19.          Commingled Cash will be forwarded to individual Fund accounts in the name of the Funds’ custodian and to IA Trust, as applicable, no less frequently than following overnight processing of Fund purchase and Deposit orders. Commingled Cash will be forwarded from the Trust Accounts to the relevant dealers or dealer trust accounts which redeem Funds or order withdrawals from the Deposits no less frequently than following overnight processing of redemption or withdrawal orders, subject to the time it may take for an Investor to redeem a cheque issued in respect of redeemed Fund securities or withdrawn Deposits. Accordingly, all monies held in the Trust Accounts will be cleared no less frequently than on a daily basis at the beginning of each business day following the previous business day’s overnight processing of all purchase and deposit transaction involving the Funds and Deposits and most redemptions from the Funds and withdrawals from the Deposits.

20.          The Filer believes that the commingling of Cash in the Trust Accounts will not be detrimental to the protection of Investors.

Internal Controls

21.          In providing services, the Filer is able to account for all monies received into and all monies that are to be paid out of its Trust Account in order to meet the policy objectives of sections 11.1 and 11.2 of Regulation 81-102.

22.          The Filer will ensure that proper records with respect to the Cash in a commingled account are kept and will ensure that its respective Trust Account is reconciled, and that Cash are properly accounted for daily.

23.          The Filer will ensure that all transactions in its Trust Account are manually reviewed on a daily basis in order to monitor the Trust Account for discrepancies in handling of Cash in the Trust Account.

24.          Any error in the handling of monies in a Filer’s Trust Account as a result of the commingling of Cash identified through such daily review process will promptly be corrected by the Filer.

25.          Except for the Commingling Prohibition, the Filer will comply with all other requirements prescribed in Part 11 of Regulation 81-102 with respect to the separate accounting and handling of Cash.

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.

Hugo Lacroix
Superintendent, Securities Markets (interim)