IA Clarington Investments Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from conflict of interest trading prohibition in paragraphs 13.5(2)(b)(ii) and (iii) of NI 31-103 to permit Inter Fund Trades between Funds -- Portfolio manager of Fund is also portfolio manager of other Funds and is therefore a responsible person -- Relief subject to certain conditions.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b)(ii) and (iii).
March 10, 2020
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 IA CLARINGTON INVESTMENTS INC. (the "Filer")
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Makers) has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the prohibitions under subparagraphs 13.5(2)(b)(ii) and (iii) of Regulation 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (Regulation 31-103) 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 Fund (as defined below) to purchase securities from or sell securities to another Fund; and
(ii) the transactions listed in (i) (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 subparagraph 6.1(1)(a)(i) of Regulation 81-107 Independent Review Committee for Investment Funds (Regulation 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 securities) ((i) and (ii) are, collectively, 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 subsection 4.7(1) of Regulation 11-102 respecting Passport System (c.V-1.1, r.1) (Regulation 11-102) is intended to be relied upon in the provinces of Canada other than the Jurisdictions, 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 Regulation 14-101 respecting Definitions (c.V-1.1. r.3), Regulation 11-102, Regulation 31-103 and Regulation 81-107 have the same meaning if used in this decision, unless otherwise defined.
Representations
The decision is based on the following facts represented by the Filer:
1. The Filer is the manager of certain existing investment funds (the Existing Funds) and may, in the future, be the manager of other investment funds that are governed by Regulation 81-102 -- Investment Funds (Regulation 81-102) (collectively, with the Existing Funds, the Funds and, individually, a Fund).
2. The Filer is a corporation amalgamated under the laws of Canada. The Filer's head office is in Québec City, Québec.
3. The Filer is registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador, as an exempt market dealer in Québec and Ontario, and as a portfolio manager in all of the provinces of Canada.
4. The Filer is, or will be, the manager of each of the Funds and the sub-adviser to certain Funds. The Filer may appoint related or third party portfolio advisers or sub-advisers to the Funds.
5. Each Fund is, or will be, established under the laws of the Province of Ontario, under the laws of Canada or under the laws of another Jurisdiction, as an investment fund and is, or will be, a reporting issuer in one or more of the Jurisdictions.
6. The securities of each Fund are, or will be, qualified for distribution pursuant to simplified prospectuses and annual information forms that have been prepared and filed in accordance with Regulation 81-101 Mutual Fund Prospectus Disclosure. Each Fund is, or will be, subject to the provisions of Regulation 81-102.
7. Neither the Filer nor the Existing Funds are in default of securities legislation in any of the Jurisdictions.
8. The Filer wishes to be able to permit Inter Fund Trades of portfolio securities between Funds.
9. Regulation 31-103, Regulation 81-102 and Regulation 81-107 restrict inter-fund trading. Absent the Exemption Sought, neither the Funds, nor the Filer on their behalf, will be permitted to engage in Inter Fund Trades as contemplated by this decision.
10. The Filer is a responsible person for the purpose of paragraph 13.5(2)(b) of Regulation 31-103 and, absent exemptive relief, is prohibited from effecting certain Inter Fund Trades between the Funds for which the Filer, or other responsible person, acts as an adviser.
11. Each Inter Fund Trade will be consistent with the investment objectives of the relevant Fund.
12. At the time of an Inter Fund Trade, the Filer will have policies and procedures in place to enable the applicable Funds to engage in Inter Fund Trades.
13. The Filer, as manager of each Fund, has established, or will establish, an independent review committee (IRC) in respect of each Fund in accordance with Regulation 81-107.
14. Inter Fund Trades will be referred to and approved by the IRC of the Fund under subsection 5.2(1) of Regulation 81-107 and the Filer, as manager of the Funds, and the IRC of the Funds will comply with section 5.4 of Regulation 81-107 in respect of any standing instructions the IRC provides in connection with the Inter Fund Trade. The IRC of the Funds will not approve an Inter Fund Trade involving a Fund unless it has made the determination set out in subsection 5.2(2) of Regulation 81-107.
15. Inter Fund Trades will comply with paragraphs (c) to (g) of subsection 6.1(2) of Regulation 81-107 except that for the purposes of paragraph (e) of subsection 6.1(2) of Regulation 81-107, in respect of exchange-traded securities, the current market price of the securities may be the Last Sale Price.
16. The Filer cannot rely on the exemption available in subsection 6.1(4) of Regulation 81-107 for Inter Fund Trades unless the Inter Fund Trade occurs at the "current market price of the security" which, in the case of exchange-traded securities includes the Closing Price but not the Last Sale Price.
17. If the IRC of the Fund becomes aware of an instance where the Filer did not comply with the terms of this Proposed Relief, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator which is the Fund's principal regulator.
18. The Filer has determined that it would be in the best interests of all Funds to permit Inter Fund Trades because given the various investment objectives and investment strategies that are or will be utilized by the Funds, it may be appropriate for different investment portfolios to acquire or dispose of the same securities. The Filer has determined that engaging in these Inter Fund Trades directly rather than with a third party has potential benefits such as lower trading costs, reduced market disruption and quicker execution.
19. The Filer considers that it would be in the best interests of the Funds if an Inter Fund Trade could be conducted 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.
20. An Inter Fund Trade to be effected at the Last Sale Price will be implemented by the Filer as follows:
(a) the portfolio manager will deliver the trade instruction in respect of a purchase or sale of a portfolio security by a Fund (Party A), to a trader on a third-party or affiliated dealers' trading desk;
(b) the portfolio manager will deliver the trade instruction in respect of a purchase or sale of a portfolio security by another Fund (Party B), to a trader on a third-party or affiliated dealers' trading desk;
(c) the trader on the 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 trading desk will require that all orders are to be executed on a timely basis and orders will be executed for no consideration other than cash payment against prompt delivery of a security; and
(e) the trader on the trading desk will advise of the Last Sale Price.
Decision
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that the following conditions are satisfied:
(a) the Inter Fund Trade is consistent with the investment objectives of each of the Funds involved in the trade;
(b) the Filer, as manager of the Funds, refers the Inter Fund Trade to the IRC of the Fund in the manner contemplated by section 5.1 of Regulation 81-107 and the Filer and the IRC of the Funds comply with section 5.4 of Regulation 81-107 in respect of any standing instructions the IRC provides in connection with the Inter Fund Trade;
(c) the IRC of each Fund has approved the Inter Fund Trade in accordance with the terms of subsection 5.2(2) of Regulation 81-107; and
(d) the Inter Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of Regulation 81-107, except that for the purposes of paragraph (e) of subsection 6.1(2) of Regulation 81-107 in respect of exchange-traded securities, the current market price of the securities may be the Last Sale Price.