Addenda Capital Inc
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from conflict of interest trading prohibition in paragraph 13.5(2)(b) of NI 31-103 to permit in-specie subscriptions and redemptions by separately managed accounts and pooled funds in pooled funds -- Portfolio manager of managed accounts is also portfolio manager of pooled funds and is therefore a "responsible person" -- Relief subject to certain conditions.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements and Exemptions, s. 13.5(2)(b)(iii).
May 10, 2012
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
ADDENDA CAPITAL INC.
(the Filer)
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) providing an exemption from the requirement in subparagraph 13.5(2)(b)iii) of Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations that prohibits 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 investment fund for which a responsible person acts as an adviser, to permit (each purchase and redemption, an In Specie Transaction):
a) the purchase by a Fund (defined below) of securities of another Fund, and the redemption of securities held by a Fund in another Fund, and as payment for such purchase or redemption, in whole or in part, by making good delivery of portfolio securities that meet the investment objectives of that Fund; and
b) the purchase by a Managed Account (defined below) of securities of a Fund, and the redemption of securities held by a Managed Account in a Fund, and as payment:
i) for such purchase, in whole or in part, by the Managed Account making good delivery of portfolio securities to the Fund; and
ii) for such redemption, in whole or in part, by the Fund making good delivery of portfolio securities to the Managed Account.
(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 (11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador; 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 the Legislation, Regulation 14-101 respecting Definitions and 11-102 have the same meanings if used in this decision, unless otherwise defined.
Fund means an investment fund managed by the Filer or managed in the future by the Filer to which Regulation 81-102 respecting Mutual Funds does not apply.
Managed Account means an account over which the Filer has discretionary authority.
Certain other defined terms have the meanings given to them above or below.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer was constituted under Part IA of the Companies Act (Québec) and continued under the Business Corporations Act (Québec). Its head office is located in Montreal, Québec.
2. The Filer is a registered portfolio manager and a registered investment fund manager in the provinces of Québec, Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland-and-Labrador, as well as a registered derivatives portfolio manager in the Province of Québec and a commodity trading manager in the Province of Ontario.
3. Each Fund is, or will be, an investment fund structured as a trust, a corporation or a partnership under the laws of Canada or of one of the provinces or territories of Canada.
4. The Filer is, or will be, the investment fund manager and portfolio manager of each of the Funds.
5. Desjardins Trust Inc. or CIBC Mellon Trust Company acts as trustee, when applicable, and as custodian of each of the Funds.
6. The Funds are not, and will not be, reporting issuers in any of the Filing Jurisdictions nor in any of the other provinces or territories of Canada.
7. The securities of the Funds are, or will be, offered pursuant to exemptions from prospectus requirements in each Filing Jurisdiction.
8. The Filer and each of the Funds are not in default of securities legislation in either the Filing Jurisdictions or in any other province or territory of Canada.
9. The Filer is, or will be, the portfolio manager of each of the Managed Accounts.
10. Each client who wishes to receive the investment management services of the Filer through a Managed Account executes a written discretionary management agreement (Discretionary Management Agreement) with the Filer whereby such client appoints the Filer to act as a 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 a trade, including the authorization to invest the Managed Accounts in the Funds and to switch Funds as determined by the Filer in accordance with the investment objectives of the Managed Account.
11. Since investments in individual securities may in some circumstances not be appropriate for certain clients, the Filer may, from time to time, where authorized under a written Discretionary Management Agreement, invest client assets in the securities of any one or more of the Funds, in order to give clients the benefit of asset diversification and economies of scale regarding minimum commission charges on portfolio trades, and in order to generally facilitate portfolio management.
12. In order to ensure that neither the Managed Accounts nor the Funds incur unnecessary costs for the acquisition or disposition of securities in the context of the purchase or redemption of securities of a Fund, the Filer wishes to be able to enter into transactions whereby payment, in whole or in part, for securities of a Fund (Fund Securities) purchased by a Managed Account, may be affected via good delivery of portfolio securities held by such Managed Account, to the Fund, provided those portfolio securities meet the investment objectives of the Fund.
13. Similarly, following a redemption of Fund Securities by a Managed Account, the Filer wishes to be able to enter into transactions that permit payment, in whole or in part, of redemption proceeds via good delivery of portfolio securities held in the investment portfolio of the Fund, to such Managed Account, provided those portfolio securities meet the investment objectives of the Managed Account.
14. The Filer anticipates that such In-Specie Transactions will typically occur following a redemption of Fund Securities where a Managed Account invested in such Fund has experienced a change in circumstances which results in the Managed Account being an ideal candidate for direct holdings of individual portfolio securities rather than Fund Securities, or vice versa.
15. In addition, the Filer wishes to be able to enter into In-Specie Transactions for purchases and redemptions of Fund Securities between two Funds. This will occur where, as part of its portfolio management, a Fund wishes to obtain exposure to certain investments or categories of asset classes in which a second Fund has invested, by investing in the Fund Securities of that second Fund. The Filer wishes to be able to affect payment, in whole or in part, for such Fund Securities by making good delivery of portfolio securities held by the Fund to the second Fund in which it seeks to invest. Similarly, following a redemption of Fund Securities, the Filer wishes to be able to affect payment, in whole or in part, of the redemption proceeds by making good delivery of portfolio securities held in the investment portfolio of the Fund being redeemed.
16. The In-Specie Transactions will be carried out in accordance with the Filer's written policies and procedures, which will be consistent with applicable securities legislation.
17. The Filer will have obtained the client's written authorization for the Filer to engage in In-Specie Transactions on behalf of the Managed Accounts.
18. Prior to entering into an In-Specie Transaction involving a Fund and/or Managed Account, the proposed transaction will be reviewed by a person of authority in the Filer's compliance department, to ensure that the transaction represents the business judgment of the Filer, uninfluenced by considerations other than the best interests of the Fund and/or Managed Account.
19. In respect of each In-Specie Transaction, the portfolio securities to be delivered will meet the investment objectives of the Fund or Managed Account, as applicable, acquiring the portfolio securities.
20. The Filer will value portfolio securities that are the subject of an In-Specie Transaction using the same values to be used on that day to calculate the net asset value for the purpose of the issue price or redemption price of Fund Securities.
21. None of the securities which will be the subject of an In-Specie Transaction shall be the securities of an issuer that is a related party of the Filer.
22. Each Fund will keep written records of all In-Specie Transactions conducted in each of its financial years, including records of each purchase and sale of portfolio securities and the terms thereof, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of Regulation 31-103.
23. In-Specie Transactions will enable the Filer to manage each asset class more effectively and to reduce the transaction costs of clients and Funds. For example, In-Specie Transactions reduce market impact costs, which can be detrimental to the clients and/or Funds. In-Specie Transactions also allow a portfolio manager to retain within its control institutional-size blocks of portfolio securities that would otherwise need to be broken and re-assembled.
24. The Filer will receive no remuneration with respect to any In-Specie Transaction, and with respect to the delivery of securities pursuant to an In-Specie Transaction, the only expenses which will be incurred by a Fund or Managed Account shall be nominal administrative charges levied by the custodian of the Fund or Managed Account for recording the trades and/or any charges by the dealer in transferring the securities in specie.
25. Since the Filer is, and will be, the portfolio manager of the Managed Accounts and the Funds, the Filer would be considered a "responsible person", and would thus be prohibited from the above-described In-Specie Transactions in the absence of the Requested Relief.
Decision
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:
a) in connection with an In Specie Transaction where a Managed Account acquires Fund Securities:
(i) the Filer has obtained the client's prior written consent to the Filer engaging in In-Specie Transactions;
(ii) the Fund would be permitted, at the time of payment, to purchase the securities;
(iii) the Filer, as the portfolio manager of the Fund, determines that the securities are acceptable and consistent with the Fund's investment objectives;
(iv) the value of the securities is equal to the issue price of the Fund Securities for which they are used as payment, valued as if the securities were portfolio assets of that Fund;
(v) none of the securities which are the subject of an In-Specie Transaction shall be the securities of an issuer that is a related party of the Filer;
(vi) the account statement next prepared for the Managed Account shall describe the securities delivered to the Fund and the value assigned to such securities; and
(vii) the Fund will keep written records of each In-Specie Transaction in a financial year of the Fund, reflecting details of the securities delivered to the Fund and the value assigned to such securities, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of Regulation 31-103;
b) in connection with an In Specie Transaction where a Managed Account redeems Fund Securities:
(i) the Filer has obtained the client's prior written consent to the Filer engaging in In-Specie Transactions, and such consent has not been revoked;
(ii) the Filer, as the portfolio manager of the Managed Account, determines that the securities are acceptable 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) none of the securities which are the subject of an In-Specie Transaction shall be the securities of an issuer that is a related party of the Filer;
(v) the account statement next prepared for the Managed Account shall describe the securities delivered to the Managed Account and the value assigned to such securities; and
(vi) the Fund will keep written records of each In-Specie Transaction in a financial year of the Fund, reflecting details of the securities delivered by the Fund and the value assigned to such securities, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of Regulation 31-103;
c) in connection with an In Specie Transaction where a Fund purchases Fund Securities:
(i) the Fund would, at the time of payment, be permitted to purchase the securities;
(ii) the Filer, as the portfolio manager of the Fund, determines that the securities are acceptable and consistent with the Fund's investment objectives;
(iii) the value of the securities is equal to the issue price of the Fund Securities, valued as if the securities were portfolio assets of that Fund;
(iv) none of the securities which are the subject of an In-Specie Transaction shall be the securities of an issuer that is a related party of the Filer; and
(v) the Fund will keep written records of each In-Specie Transaction in a financial year of the Fund, reflecting details of the securities delivered to the Fund and the value assigned to such securities, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of Regulation 31-103;
d) in connection with an In Specie Transaction where a Fund redeems Fund Securities:
(i) the Filer, as the portfolio manager of the Fund, determines that the securities are acceptable and consistent with the 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 security used to establish the redemption price; and
(iii) the Fund will keep written records of each In-Specie Transaction in a financial year of the Fund, reflecting details of the securities delivered by the Fund and the value assigned to such securities, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of Regulation 31-103; and
e) the Filer will receive no remuneration with respect to any In-Specie Transaction, and with respect to the delivery of securities pursuant to an In-Specie Transaction, the only expenses which will be incurred by a Fund or Managed Account shall be nominal administrative charges levied by the custodian of the Fund or Managed Account for recording the trades and/or any charges by the dealer in transferring the securities in specie.