Bloombergsen Inc.
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 certain pooled funds and managed accounts managed by the same manager 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.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5 and 15.1.
March 24, 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 BLOOMBERGSEN INC. ("Bloombergsen")
DECISION
Background
1. The principal regulator in the Jurisdiction has received an application (the "Application") from Bloombergsen, on behalf of Bloombergsen and any future affiliates of Bloombergsen (collectively, the "Filer") for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for a 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 from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser, in order to permit,
(i) a Pooled Fund (as defined below) to purchase securities from or sell securities to a Pooled Fund;
(ii) a Managed Account (as defined below) to purchase securities from or sell securities to a Pooled Fund; and
(iii) the transactions listed in (i) to (ii) (each an "Inter-Fund Trade") to be executed at the last sale price, as defined in the Universal Market Integrity Rules of the Investment Industry Regulatory Organization of Canada, prior to the execution of the trade (the "Last Sale Price") in lieu of the closing sale price (the "Closing Sale Price") contemplated by the definition of "current market price of the security" in subsection 6.1(1)(a)(i) of National Instrument 81-107 Independent Review Committee for Investment Funds ("NI 81-107") 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)
(the "Exemption Sought").
2. Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for the Application; and
(ii) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in respect of the Exemption Sought in all provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).
Interpretation
3. Terms defined in the Legislation, MI 11-102, National Instrument 14-101 Definitions, NI 31-103 and NI 81-107 have the same meanings in this decision, unless otherwise defined. In addition:
(a) "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;
(b) "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);
(c) "Managed Account" means an account over which the Filer has discretionary authority for a client; and
(d) "Pooled Fund" means an existing or future investment fund of which the Filer acts or will act as investment fund manager and to which neither National Instrument 81-102 Investment Funds nor NI 81-107 apply.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
4. Bloombergsen is a corporation incorporated under the laws of the Province of Ontario, with its registered head office located in Toronto, Ontario.
5. Bloombergsen is currently registered as:
(a) an exempt market dealer, a portfolio manager and investment fund manager under the securities legislation of Ontario and Newfoundland and Labrador;
(b) an investment fund manager and exempt market dealer under the securities legislation of Quebec; and
(c) an exempt market dealer under the securities legislation of Alberta, British Columbia, Manitoba and New Brunswick.
6. The Filer has or will have complete discretion to invest and reinvest the assets of the Pooled Funds and Managed Accounts and is or will be responsible for executing all portfolio transactions. Furthermore, the Filer, subject to compliance with applicable securities laws, may act as a distributor of securities of the Pooled Funds not otherwise sold through another registered dealer.
7. The Filer:
(a) acts, or may act, as the trustee of each Pooled Fund formed as a trust;
(b) acts, or will act, as the investment fund manager of each Pooled Fund;
(c) acts, or will act, as the portfolio adviser to each Pooled Fund; and
(d) will act as the adviser to each Managed Account.
8. The Filer is not in default of the securities legislation of any Jurisdiction.
Pooled Funds
9. Each Pooled Fund is, or will be, an investment fund that is either a trust established or limited partnership formed under the laws of Ontario or another Jurisdiction.
10. Each Pooled Fund's reliance on the Exemption Sought will be compatible with its investment objective and strategies.
11. 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.
12. Each existing Pooled Fund is not in default of the securities legislation of any of the Jurisdictions.
Managed Accounts
13. The Filer will be the adviser of each Managed Account.
14. Each Managed Account will be managed pursuant to an investment management agreement or other documentation which 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.
15. The investment management agreement or other documentation in respect of each Managed Account will contain authorization from the client for the Filer to make Inter-Fund Trades.
Independent Review Committee
16. 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 be limited to approving Inter-Fund Trades. It is expected that the IRC of each Pooled Fund will be comprised of the same three individuals.
17. 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 with respect to an Inter-Fund Trade, 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
18. The Filer wishes to be able to permit Inter-Fund Trades of portfolio securities between:
(a) a Pooled Fund and another Pooled Fund or a Managed Account; and
(b) a Managed Account and a Pooled Fund.
19. The Filer has submitted that because of the various investment objectives and investment strategies utilized by the Pooled Funds and Managed Accounts, it may be appropriate for different investment portfolios to acquire or dispose of the same securities directly, rather than with a third party. Authorizing the Inter-Fund Trades may result in such benefits as lower trading costs, reduced market disruption and quicker execution. In addition, certain Pooled Funds maintain a mirror portfolio of one another, and as such, the Filer has submitted that it requires the ability to transfer such Pooled Funds' holdings between the Pooled Funds efficiently using Inter-Fund Trades.
20. The Filer has determined that it would be in the best interests of the Pooled Funds and Managed Accounts to receive the Exemption Sought because administering the Pooled Funds and Managed Accounts subject to the same set of rules governing the execution of Inter-Fund Trades will result in:
(a) a consistent and fair result for all of the Filer's clients;
(b) cost and timing efficiencies in respect of the execution of Inter-Fund Trades; and
(c) simplified and more efficient monitoring thereof, for the Filer in connection with the execution of Inter-Fund Trades.
21. Each Inter-Fund Trade will be consistent with the investment objectives of the relevant Pooled Fund or Managed Account, as applicable.
22. At the time of an Inter-Fund Trade, the Filer will have policies and procedures in place to enable the applicable Pooled Funds and Managed Accounts to engage in Inter-Fund Trades.
23. The Filer, as manager of each Pooled Fund, will establish an IRC in respect of each Pooled Fund to review and provide its approval for any proposed Inter-Fund Trades between a Pooled Fund and another Pooled Fund or a Managed Account.
24. The IRC of the Pooled Funds will be composed by the manager of the Pooled Funds in accordance with section 3.7 of NI 81-107 and the IRC will be expected to comply with the standard of care set out in section 3.9 of NI 81-107. The IRC of the Pooled Funds will not approve an Inter-Fund Trade involving a Pooled Fund unless it has made the determination set out in subsection 5.2(2) of NI 81-107.
25. The Filer cannot rely on the exemption codified under subsection 6.1(4) of NI 81-107 unless each party to the transaction is a reporting issuer and the Inter-Fund Trade occurs at the "current market price of the security" which, in the case of exchange-traded securities, includes the Closing Sale Price but not the Last Sale Price.
26. The Filer considers that it would be in the best interests of the Pooled Funds and Managed Accounts, as applicable, if an Inter-Fund Trade could be made at the Last Sale Price prior to the execution of the trade, in lieu of the Closing Sale Price, as this will result in the trade being done at the price which is closest to the price at the time the decision to make the trade is made.
27. An Inter-Fund Trade to be effected at the Last Sale Price will be implemented by the Filer as follows:
(a) the Filer, as the portfolio manager, will deliver the trade instruction in respect of a purchase or sale of a portfolio security by a Pooled Fund or a Managed Account, as applicable ("Party A"), to a trader on the Filer's trading desk;
(b) the Filer, as the portfolio manager, will deliver the trade instruction in respect of a purchase or sale of a portfolio security by another Pooled Fund or Managed Account, as applicable ("Party B"), to a trader on the Filer's trading desk;
(c) the trader on the Filer's trading desk will have the discretion to execute the trade as an Inter-Fund Trade between Party A and Party B at the Last Sale Price of the portfolio security, prior to the execution of the trade;
(d) the policies applicable to the Filer's trading desk will require that all orders are to be executed on a timely basis; and
(e) the trader on the Filer's trading desk will advise of the Last Sale Price.
Reasons for Exemption Sought
28. Each Pooled Fund for which the Filer acts or will act as trustee is, or will be, an associate of the Filer. As the Filer is the adviser to a Pooled Fund, the Filer is a responsible person of the 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.
29. Pursuant to the Trading Prohibition, a Pooled Fund or a Managed Account, as applicable, may be restricted from making Inter-Fund Trades 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; 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 may be the case for each Pooled Fund.
30. 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.
31. Absent the granting of the Exemption Sought, the Filer may be prohibited from engaging in Inter-Fund Trades due to the Trading Prohibitions.
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:
(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 each of the Filer and the IRC of the Pooled Fund comply 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) 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) in respect of exchange-traded securities, the trade may be executed at the Last Sale Price.