Scotia Asset Management L.P. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- Relief granted to existing mutual funds subject to NI 81-102 and future mutual funds subject to NI 81-102 for which a bank-owned fund manager acts as portfolio advisor and/or manager, to permit applicant funds to purchase long-term debt securities of a related entity under primary offerings of the related entity -- relief subject to conditions including IRC approval, pricing requirements and limits on the amount of the primary offering applicant funds can purchase.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 4.1(2) and 19.1.
National Instrument 81-107 Independent Review Committee for Investment Funds, s. 6.2.
October 30, 2009
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
SCOTIA ASSET MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
THE MUTUAL FUNDS
subject to National Instrument 81 102 Mutual Funds
(NI 81-102) for which the filer currently acts as
portfolio adviser and/or manager and any mutual
funds subject to NI 81-102 that may be established
in the future for which the filer acts as portfolio
advisor and/or manager
(the Filer Funds)
DECISION
Background
The principal regulator in the Jurisdiction received an application (the Application) from the Filer on behalf of each Filer Fund under Section 19.1 of NI 81-102 for relief from the requirement in Section 4.1(2) of NI 81-102 (the Requested Section 4.1(2) Relief) which prevents a dealer managed mutual fund from investing in a class of securities of an issuer (a Related Person) of which a partner, director, officer or employee of the dealer manager of the mutual fund, or a partner, director, officer or employee of an affiliate or associate of the dealer manager, is a partner, director or officer unless the partner, director, officer or employee:
(a) does not participate in the formulation of investment decisions made on behalf of the dealer managed mutual fund;
(b) does not have access before implementation to information concerning investment decisions made on behalf of the dealer managed mutual fund; and
(c) does not influence, other than through research, statistical and other reports generally available to clients, the investment decisions made on behalf of the dealer managed mutual fund.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission (the OSC) is the principal regulator for the Application; and
(ii) 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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (the Non-principal Jurisdictions).
Interpretation
Defined terms contained in National Instrument 14-101 -- Definitions, in MI 11-102, in NI 81-102 and in National Instrument 81-107 -- Independent Review Committee for Investment Funds (NI 81-107) have the same meaning in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer in respect of the Filer and the Filer Funds.
1. The Filer is or will be the portfolio adviser and/or the manager of the Filer Funds.
2. The Filer and the Filer Funds are or will be compliant with the requirements of NI 81-107. Accordingly, each Filer Fund has or will have an independent review committee (IRC) established in accordance with NI 81-107.
3. The investment strategies of each Filer Fund that relies on the Requested Section 4.1(2) Relief permit or will permit it to invest in the securities purchased.
4. Related Persons of the Filer are significant issuers of securities.
5. Section 6.2 of NI 81-107 provides an exemption from the mutual fund conflict of interest investment restrictions for exchange-traded securities, such as common shares. It does not provide relief from Section 4.1(2) of NI 81-102 to permit a Filer Fund to purchase non-exchange-traded securities issued by Related Persons. Some securities of Related Persons, such as debt securities, of the Filer are not listed and traded.
6. Related Persons (in particular those that are Canadian banks) are issuers of highly rated commercial paper and other debt instruments. The Filer consider that the Filer Funds should have access to such securities for the following reasons:
(a) There is currently and has been for several years a very limited supply of highly rated corporate debt.
(b) Diversification is reduced to the extent that a Filer Fund is limited with respect to investment opportunities.
(c) To the extent that a Filer Fund is trying to track or outperform a benchmark it is important for the Filer Fund to be able to purchase any securities included in the benchmark. Debt securities of Related Persons of the Filer are included in most of the Canadian debt indices.
7. The Filer is seeking the Requested Section 4.1(2) Relief to permit the Filer Funds to purchase and hold non-exchange traded securities that are debt securities, other than asset backed commercial paper securities, with a term to maturity of 365 days or more, issued by a Related Person in a Primary Offering.
8. Each non-exchange traded security purchased by a Filer Fund pursuant to the Requested Section 4.1(2) Relief will be a debt security, other than an asset backed commercial paper security, with a term to maturity of 365 days or more, issued by a Related Person that has been given and continues to have, at the time of purchase, an "approved credit rating" by an approved credit rating organization.
9. The predecessors to the Filer, Scotia Cassels Investment Counsel Limited (SCICL), and Scotia Securities Inc.(SSI) and Scotia Capital Inc. (SCI) were granted identical relief by the Jurisdiction and the Non-Principal Jurisdictions, under a Passport Decision Document dated January 6, 2009, by the Ontario Securities Commission as principal regulator for the decision (the Original Decision).
10. Pursuant to an internal reorganization effective November 1, 2009 involving SCICL, the Filer and certain of their affiliates, the portfolio management and investment fund manager activities carried on by SCICL, SSI and/or SCI (except for the portfolio management activities SCI carries on as an IIROC member) prior to November 1, 2009 will be transferred to and carried on by the Filer as of November 1, 2009. As a result of this reorganization, neither SCICL, SSI nor SCI will, as of November 1, 2009, be relying on the relief granted under the Original Decision and the Filer will require the Requested Section4.1(2) Relief as the Original Decision is not available to the Filer.
11. The Filer is, to the best of its knowledge, not in default of the securities legislation of the Jurisdiction or any of the Non-principal Jurisdictions.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator with the jurisdiction to make the decision.
The decision of the principal regulator is that the Requested Section 4.1(2) Relief is granted to permit the Filer to purchase and hold non-exchange traded debt securities, other than asset backed commercial paper securities, with a term to maturity of 365 days or more, issued by a Related Person in a Primary Offering on behalf of the Filer Funds on the conditions that:
(a) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Filer Fund;
(b) at the time of the purchase the IRC of the Filer Fund has approved the transaction in accordance with Section 5.2(2) of N1 81-107;
(c) the manager of the Filer Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Filer Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;
(d) the size of the Primary Offering is at least $100 million;
(e) at least 2 purchasers who are independent, arm's-length purchasers, which may include "independent underwriters" within the meaning of National Instrument 33-105 -- Underwriting Conflicts, collectively purchase at least 20% of the Primary Offering;
(f) no Filer Fund shall participate in the Primary Offering if following its purchase the Filer Fund would have more than 5% of its net assets invested in non-exchange traded debt securities of the Related Person;
(g) no Filer Fund shall participate in the Primary Offering if following its purchase the Filer Fund together with related Filer Funds will hold more than 20% of the securities issued in the Primary Offering;
(h) the price paid for the securities by a Filer Fund in the 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; and
(i) no later than the time the Filer Fund files its annual financial statements, the Filer files with the securities regulatory authority or regulator the particulars of any such investments.
This decision will expire on the coming into force of any securities legislation relating to fund purchases of Related Person debt securities in a Primary Offering.
This decision is effective on November 1, 2009