Credential Funds - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications - Relief granted from certain of the self dealingrequirements regarding investments for specified purposes by mutual funds in securities of mutual funds that are undercommon management.
Applicable Ontario Provisions
Securities Act, R.S.O. 1990, c. S.5 as am., s. 111(2)(6) and s. 117(1)(a).
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,ONTARIO, NOVA SCOTIA, NEWFOUNDLAND, PRINCE EDWARD ISLAND, AND YUKON TERRITORY
AND
IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF CREDENTIAL SELECT BALANCED PORTFOLIO, CREDENTIAL SELECT GROWTHPORTFOLIO, CREDENTIAL SELECT HIGH GROWTH PORTFOLIO
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of BritishColumbia, Alberta, Saskatchewan, Ontario, Nova Scotia, Prince Edward Island, Newfoundland, and the Yukon Territory(the "Jurisdictions") has received an application from Ethical Funds Inc. ("EFI") in its capacity as Manager of theCredential Select Growth Fund, Credential Select Balanced Fund and Credential Select High Growth Fund (the"Credential Select Funds") for a decision under the securities legislation of the Jurisdictions (the "Legislation") that;
1. the provision contained in the Legislation prohibiting a mutual fund from knowingly making or holding aninvestment in a person or company in which the mutual fund, alone or together with one or more related mutualfunds, is a substantial securityholder;
2. the requirement contained in the Legislation for a mutual fund manager to file a report in the required form foreach mutual fund to which the mutual fund manager provides services or advice respecting a purchase or saleof securities between the mutual fund and any related person; and
3. other than in Ontario, the provision contained in the Legislation prohibiting a mutual fund or responsible personor if applicable, a portfolio manager, from knowingly causing the mutual fund to invest in any issuer in whicha responsible person is an officer or director unless the specific fact is disclosed to the client and, if applicable,the written consent of the client to the investment is obtained before the purchase;
(the "Applicable Requirements") shall not apply to investments by the Credential Select Funds directly in securities ofcertain third party or EFI managed mutual funds (the "Underlying Funds"):
AND WHEREAS under the Mutual Reliance Review System for Exemptive Relief Applications (the "System"),the British Columbia Securities Commission is the principal regulator for this application;
AND WHEREAS EFI has represented to the Decision Makers that:
1. EFI is a corporation established under the laws of Canada and is the manager of the Credential Select Funds;the head office for EFI is located in Vancouver, British Columbia;
2. EFI is registered as an investment counsel and portfolio manager under the Legislation in British Columbia;
3. the Credential Select Funds will be comprised of three open-ended mutual fund trusts, each of which will beestablished under the laws of British Columbia and will be qualified for distribution in all Jurisdictions by meansof a simplified prospectus and annual information form (the "Prospectus"); upon obtaining the receipt for theProspectus, each of the Credential Select Funds will become a reporting issuer or the equivalent under theLegislation of the Jurisdictions;
4. under the Prospectus, each Credential Select Fund will offer Class A units;
5. each of the Credential Select Funds will invest specified percentages (the "Fixed Percentages") of its assetsin units of third party or EFI managed Underlying Funds and may not deviate more than 2.5% above or belowthe Fixed Percentages (the "Permitted Range");
6. the Underlying Funds are or will be qualified for distribution in the Jurisdictions under a simplified prospectusand annual information form; none of the Underlying Funds include investing directly or indirectly in othermutual funds in its investment objective;
7. the Prospectus will contain disclosure with respect to the investment objectives, investment policies, FixedPercentages, Permitted Range, maximum management fees and risk profiles of the Credential Select Funds,as well as the name, manager, investment objectives, management expense ratio and risks of each UnderlyingFund;
8. each of the Credential Select Funds will have different investment objectives, which will determine theinvestment allocation among the Underlying Funds;
9. if at any time the investment of a Credential Select Fund in an Underlying Fund deviates from the PermittedRange, the necessary changes will be made to the Credential Select Fund's investment portfolio as at the nextvaluation date in order to bring its investments in accordance with the Fixed Percentage;
10. the Fixed Percentages and the Underlying Funds disclosed in the Prospectus will not be changed unless theProspectus is amended to reflect the proposed change and the amended Prospectus is filed with and receiptedby the Decision Makers and existing unitholders of the applicable Credential Select Fund are given at least 60days prior notice of the proposed change; each purchaser of units of the applicable Credential Select Fundwho acquires units following the delivery of such written notice to existing unitholders will be provided with anamended Prospectus;
11. the purchase and sale of securities of an Underlying Fund by a Credential Select Fund will represent thebusiness judgment of responsible persons uninfluenced by considerations other than the best interests of theCredential Select Fund;
12. except to the extent evidenced by this decision and specific approvals granted by the Decision Makers underNational Instrument 81-102, the investments by the Credential Select Funds in the Underlying Funds have beenstructured to comply with the investment restrictions of the Legislation and National Instrument 81-102;
13. in the absence of this Decision, under the Legislation, the Credential Select Funds are prohibited from (a)knowingly making an investment in a person or company in which the mutual fund, alone or together with oneor more related mutual funds, is a substantial securityholder; and (b) knowingly holding an investment referredto in subsection (a) hereof. As a result, the Credential Select Funds would be required to divest themselvesof any investments referred to in subsections (a) and (b) hereof; and
14. in the absence of this Decision, the Legislation requires EFI to file a report on every purchase or sale ofsecurities of the Underlying Funds by the Credential Select Funds;
AND WHEREAS under the System, this MRRS Decision Document evidences the decision of each DecisionMaker (collectively, the "Decision");
AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that providesthe Decision Maker with jurisdiction to make the Decision has been met;
The Decision of the Decision Makers under the Legislation is that the Applicable Requirements shall not apply to theCredential Select Funds investing in, or redeeming the securities of, the Underlying Funds:
PROVIDED THAT IN RESPECT OF the investment by the Credential Select Funds directly in securities of theUnderlying Funds:
1. this Decision, as it relates to the jurisdiction of a Decision Maker, will terminate one year after the publicationin final form of any legislation or rule of that Decision Maker dealing with matters in section 2.5 of NationalInstrument 81-102; and
2. this Decision shall only apply in respect of investments made by the Credential Select Funds in compliance withthe following conditions:
a) securities of the Credential Select Funds and the Underlying Funds are offered for sale in the jurisdiction of theDecision Maker under a prospectus that has been filed with and receipted by the Decision Maker;
b) each Credential Select Fund invests its assets (exclusive of cash and cash equivalents) in the UnderlyingFunds in accordance with the Fixed Percentages, subject to a permitted variation above or below such FixedPercentages to account for market fluctuations of not more than 2.5% of the net asset value of the CredentialSelect Fund;
c) the Prospectus will disclose the intent of each Credential Select Fund to invest in securities of the UnderlyingFunds, the names of the Underlying Funds, the Fixed Percentages, and the Permitted Ranges within whichsuch Fixed Percentages may vary;
d) the investment by each Credential Select Fund in the Underlying Funds is compatible with the fundamentalinvestment objective of the Credential Select Fund;
e) the Fixed Percentages and the Underlying Funds which are disclosed in the Prospectus may be changed onlyif the Prospectus is amended, or a new prospectus is filed, and receipted and in either event, if the unitholdersof the Credential Select Fund are given at least 60 days notice of the proposed change;
f) if at any time the investment of a Credential Select Fund in an Underlying Fund deviates from the PermittedRange, the necessary changes are made to the Credential Select Fund's investment portfolio as at the nextvaluation date in order to bring its investments in accordance with the Fixed Percentage;
g) there are compatible dates for the calculation of the net asset value of the Credential Select Funds and theUnderlying Funds for the purpose of the issue and redemption of the securities of such mutual funds;
h) in the event of the provision of any notice to unitholders of an Underlying Fund, as required by the constatingdocuments of or the laws applicable to the Underlying Fund, such notice will also be delivered to the unitholdersof each Credential Select Fund that holds securities of the Underlying Fund; all voting rights attached to thesecurities of the Underlying Funds that are directly owned by a Credential Select Fund will be passed throughto the unitholders of the Credential Select Fund;
i) in the event that a meeting is called for the unitholders of an Underlying Fund, all of the disclosure and noticematerial prepared in connection with such meeting and received by a Credential Select Fund will be providedto its unitholders, and such unitholders will be entitled to direct a representative of the Credential Select Fundto vote its holdings in the Underlying Fund in accordance with their direction; the representative of theCredential Select Fund will not be permitted to vote its holdings in the Underlying Fund except to the extent theunitholders of the Credential Select Fund so direct;
j) no sales charges are payable by the Credential Select Funds in relation to purchases of securities of theUnderlying Funds;
k) no fees and charges of any sort are paid by the Credential Select Funds and the Underlying Funds, theirrespective managers or principal distributors, or by any affiliate or associate of any of the foregoing entities toanyone in respect of the Credential Select Fund's purchase, holding or redemption of the securities of theUnderlying Funds;
l) the arrangements between or in respect of the Credential Select Funds and the Underlying Funds are such asto avoid the duplication of management fees;
m) any management fee rebates received from the Underlying Funds will be retained by the Credential SelectFund for the benefit of the unitholders of the Credential Select Fund;
n) the simplified prospectus of the Credential Select Funds discloses that the simplified prospectus and annualinformation forms of the Underlying Funds are available upon request and unitholders will receive the annualand, upon request, the semi-annual financial statements of the Credential Select Fund together with (i)appropriate summary disclosure in the financial statements of the Credential Select Fund concerning eachUnderlying Fund in which it invests; or (ii) upon request, the annual and semi-annual financial statements ofeach applicable Underlying Fund in either a combined report containing both the Credential Select Fund andUnderlying Fund financial statements, or in a separate report containing Underlying Fund financial statements;and
o) the Credential Select Funds do not invest in any mutual funds (including RSP clone funds) that includeinvesting directly or indirectly in other mutual funds as their investment objective.
DATED December 1, 2000.
Brenda Leong
Director