First Avenue Investment Counsel Inc.
Headnotes
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from conflict of interest trading prohibition in section 13.5(2)(b) to permit in-specie purchases and redemptions by managed accounts and pooled funds subject to conditions -- previous relief revoked and replaced.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5(2)(b) and 15.1.
July 15, 2020
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. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction (the Principal Regulator) has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation): (1) revoking the January 2, 2018 Decision (defined below) (the Revocation); and (2) replacing the January 2, 2018 Decision with this decision 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 a security from or to the investment portfolio of an associate of a responsible person or of an investment fund for which a responsible person acts as an adviser, to permit:
a) the purchase or redemption by a Managed Account (as defined below) of securities of a Pooled Fund (as defined below), and 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
b) the purchase or redemption by a Pooled Fund of securities of another Pooled Fund, and 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;
(the Exemption Sought, a purchase or redemption described 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 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) or National Instrument 81-106 Investment Fund Continuous Disclosure have the same meanings in this decision, unless otherwise defined. In addition:
January 2, 2018 Decision means the previous decision of the Principal Regulator dated January 2, 2018, which granted the Filer relief from the Trading Prohibition to permit the purchase and redemption by a managed account of securities of a pooled fund with payment in specie in portfolio securities;
Managed Account means an existing or future account over which the Filer has discretionary authority for a client and for which the Filer is the portfolio adviser; and
Pooled Fund means an existing or future investment fund of which the Filer is the investment fund manager and portfolio adviser and to which NI 81-102 does not apply.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the laws of Canada with its registered head office located in Toronto, Ontario.
2. The Filer is registered as follows:
a) in the provinces of Ontario and Québec in the category of investment fund manager;
b) in each of the provinces of Alberta, British Columbia, Ontario and Québec as an adviser in the category of portfolio manager; and
c) in each of the provinces of Alberta, British Columbia, Ontario and Québec as a dealer in the category of exempt market dealer; and
3. The Filer acts, or will act, as the:
a) investment fund manager of each Pooled Fund; and
b) portfolio adviser to each Pooled Fund and Managed Account.
4. The Filer may in the future act as the trustee of those Pooled Funds that are structured as trusts. Accordingly, each such Pooled Fund may in the future be an associate of the Filer.
5. The Filer is not in default of the securities legislation of any Jurisdiction.
Pooled Funds
6. Each Pooled Fund is, or will be, an investment fund established under the laws of Ontario or another Jurisdiction.
7. Each Pooled Fund's reliance on the Exemption Sought will be compatible with its investment objectives and strategies.
8. 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.
9. Each existing Pooled Fund is not in default of the securities legislation of any Jurisdiction.
Managed Accounts
10. 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.
11. 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 enter into In Specie Transactions.
In Specie Transactions
12. 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.
13. 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.
14. The Filer has determined that effecting the In Specie Transactions 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.
15. 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.
16. 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 "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 Transaction, the illiquid securities will be transferred on a basis that fairly represents the portfolio of the Managed Account or 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; 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.
17. 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 Chief Compliance Officer's annual report to the board of directors of the Filer.
The January 2, 2018 Decision
18. The January 2, 2018 Decision does not permit in specie transactions between a Pooled Fund and another Pooled Fund.
19. The Filer only managed one Pooled Fund when it applied for the relief granted by the January 2, 2018 Decision and, as such did not require relief to permit in specie transactions between a Pooled Fund and another Pooled Fund at that time. As the Filer now manages more than one Pooled Fund, the Filer now wishes to revoke and replace the January 2, 2018 Decision with the Exemption Sought.
20. As of the date of this decision, the January 2, 2018 Decision will be revoked and no longer be relied upon by the Filer.
Reasons for the Exemption Sought
21. Since the Filer may in the future act as the trustee of those Pooled Funds that are structured as trusts, each such Pooled Fund may be an associate of the Filer. Since the Filer is the portfolio adviser to the Pooled Funds and Managed Accounts, the Filer is a responsible person of each Pooled Fund and Managed Account. Accordingly, each Pooled Fund structured as a trust may be an "associate" of a "responsible person" of another Pooled Fund or Managed Account as such terms are defined in the Legislation.
22. Pursuant to the Trading Prohibition, a Pooled Fund or a Managed Account, as applicable, may be restricted from making 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 a portfolio adviser to the second Pooled Fund, which will be the case for each second Pooled Fund.
23. Absent the granting of the Exemption Sought, the Filer may be prohibited from engaging in In Specie Transactions due to the Trading Prohibition.
24. 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.
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:
A. The Revocation is granted; and
B. The Exemption Sought is granted provided that:
1. In connection with an In Specie Transaction where a Managed Account acquires securities of a Pooled Fund:
a) 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;
b) the Pooled Fund would, at the time of payment, be permitted to purchase the portfolio securities;
c) the portfolio securities are acceptable to the portfolio manager of the Pooled Fund and meet the investment criteria of the Pooled Fund;
d) 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;
e) 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
f) 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.
2. In connection with an In Specie Transaction where a Managed Account redeems securities of a Pooled Fund:
a) 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;
b) the portfolio securities meet the investment criteria of the Managed Account acquiring the portfolio securities and are acceptable to the Filer;
c) 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;
d) 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
e) 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.
3. In connection with an In Specie Transaction where a Pooled Fund purchases securities of a Pooled Fund:
a) the Pooled Fund acquiring the portfolio securities would, at the time of payment, be permitted to purchase the portfolio securities;
b) 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;
c) 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; and
d) 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.
4. In connection with an In Specie Transaction where a Pooled Fund redeems securities of a Pooled Fund:
a) 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;
b) 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; and
c) 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;
5. 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; and
6. Should any In Specie Transaction 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 Transaction (as contemplated by commentary #7 to section 6.1 of National Instrument 81-107 Independent Review Committee for Investment Funds).
"Darren McKall"
Manager, Investment Funds and Structured Products
Ontario Securities Commission