National Bank Trust Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from conflict of interest trading prohibition in paragraph 13.5(2)(b) of NI 31-103 to permit in-specie subscriptions and redemptions by separately managed accounts and pooled funds in pooled funds -- Portfolio manager of managed accounts is also portfolio manager of pooled 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).
November 7, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF QUEBEC AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF NATIONAL BANK TRUST INC. (the Filer)
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer, on behalf of itself and each affiliate that acts as the portfolio manager of a Pooled Fund (as defined below) or a Managed Account (as defined below), for a decision under the securities legislation of the Jurisdictions (the Legislation) granting an exemption from subparagraphs 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), which prohibit an 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 any investment fund for which a responsible person acts as an adviser, to permit the following purchases and redemptions (each purchase and redemption, an In-Specie Transaction):
(a) the purchase by a Pooled Fund of securities of another Pooled Fund, and the redemption of securities held by a Pooled Fund in another Pooled Fund, and as 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 other Pooled Fund making good delivery of portfolio securities to the Pooled Fund; and
(b) the purchase by a Managed Account of securities of a Pooled Fund, and the redemption of securities held by a Managed Account in a Pooled Fund, and as 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 Pooled Fund making good delivery of portfolio securities to the Managed Account.
(the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marches financiers is the principal regulator for this application;
(b) 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 British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland and Labrador (the Other Jurisdictions, which together with the Jurisdictions, are the Filing 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 the Legislation, MI 11-102, National Instrument 14-101 Definitions and NI 31-103 have the same meanings if used in this decision unless otherwise defined. In this decision:
Pooled Fund means an investment fund to which National Instrument 81-102 Mutual Funds does not apply and the portfolio of which is currently, or in the future will be, managed by the Filer or an affiliate of the Filer.
Managed Account means an account of a client of the Filer or an affiliate of the Filer for which the Filer or affiliate has discretionary authority to trade in securities for the account without requiring the client's express consent to the transaction.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a trust company existing under the laws of Québec with its head office in Montreal, Québec.
2. The Filer is registered as a portfolio manager and exempt market dealer in each of the Filing Jurisdictions and as an investment fund manager in Québec, Ontario and Newfoundland & Labrador.
3. Each affiliate of the Filer seeking to rely on this decision is, or will be, registered as a portfolio manager in the applicable jurisdictions of Canada.
4. The Filer is a direct and indirect wholly-owned subsidiary of National Bank of Canada.
5. Securities of each of the Pooled Funds are, or will be, distributed in the Filing Jurisdictions pursuant to exemptions from the prospectus requirement. Each of the Pooled Funds is not, or will not be, a reporting issuer in the Filing Jurisdictions.
6. The Filer, or an affiliate of the Filer, is, or will be, the manager and/or portfolio manager of each of the Pooled Funds.
7. The Filer or an affiliate of the Filer, is, or will be, the portfolio manager of a Managed Account.
8. The Filer, or an affiliate of the Filer, is, or may be, the trustee of certain of the Pooled Funds that are created as trusts.
9. A Pooled Fund may be an associate of the Filer, or of an affiliate of the Filer, as the Filer or an affiliate of the Filer may be the trustee of a Pooled Fund that is structured as a trust.
10. The Filer, affiliates of the Filer seeking to rely upon this decision, and the Pooled Funds are not in default of securities legislation in any of the Filing Jurisdictions.
11. In its capacity as portfolio manager of a Pooled Fund, the Filer (or its affiliate) wishes to be able, in accordance with the investment objectives and investment restrictions of the Pooled Fund, to cause the Pooled Fund to invest in units or shares (Fund Securities) of another Pooled Fund pursuant to an In-Specie Transaction. This will occur where, as part of its portfolio management, a Pooled Fund wishes to obtain exposure to certain investments or a category of asset classes held by the second Pooled Fund by investing in Fund Securities of the second Pooled Fund.
12. Similarly, the Filer (or its affiliate) wishes to be able to cause the Pooled Fund to redeem Fund Securities from the second Pooled Fund pursuant to an In-Specie Transaction.
13. The Filer and its affiliates offer discretionary portfolio management services to clients (Clients) seeking wealth management or related services through Managed Accounts.
14. Pursuant to a written agreement (Discretionary Management Agreement) entered into between each Client and the Filer (or an affiliate of the Filer), the Filer (or its affiliate), as the portfolio manager of the Managed Account, makes investment decisions for each Managed Account and has full discretionary authority to trade in securities for each Managed Account without obtaining the specific consent or instructions of the Client to the trade.
15. The portfolio management services provided by the Filer (or the relevant affiliate), as the portfolio manager of the Managed Account, to each Client consist of the following:
(a) each Client executes a Discretionary Management Agreement whereby the Client authorizes the portfolio manager to supervise, manage and direct purchases and sales in the Client's Managed Account, at the portfolio manager's full discretion on a continuing basis;
(b) qualified employees of the portfolio manager perform investment research, securities selection and portfolio management functions with respect to all securities, investments, cash and cash equivalents and other assets in the Managed Account;
(c) each Managed Account holds securities and other investments as selected by the portfolio manager in its sole discretion; and
(d) the portfolio manager retains overall responsibility for the advice provided to its Clients and has a designated senior officer to oversee and supervise the Managed Account.
16. Investments in individual securities may not be appropriate in certain circumstances for a Client. Consequently, the Filer (or its affiliate) may, where authorized under the Discretionary Management Agreement, invest Client assets in securities of any one or more of the Pooled Funds in order to give its Clients the benefit of asset diversification and economies of scale through minimum commission charges on portfolio trades and generally to facilitate portfolio management.
17. The Filer (or its affiliate) wishes to have the ability to cause a Managed Account for which it acts as portfolio manager to purchase and redeem Fund Securities of a Pooled Fund pursuant to In-Specie Transactions.
18. The Filer anticipates that purchases of Fund Securities pursuant to In-Specie Transactions will occur most commonly when the Managed Account is newly established and the portfolio manager of the Managed Account believes that the Client will be better served by holding securities of one or more Pooled Funds rather than continuing to directly hold individual securities.
19. The Filer anticipates that redemptions pursuant to In-Specie Transactions will typically occur following a redemption of Fund Securities where a Managed Account invested in a Pooled Fund has experienced a change in circumstances which results in the Managed Account being an ideal candidate for direct holdings of individual portfolio securities rather than Fund Securities.
20. The In-Specie Transactions will be carried out in accordance with the Filer's, or the relevant affiliate's, written policies and procedures, which are consistent with applicable securities legislation.
21. Prior to entering into an In-Specie Transaction involving a Pooled Fund and a second Pooled Fund or a Managed Account and a Pooled Fund, the proposed transaction will be reviewed by a person of authority in the Filer or the relevant affiliate's compliance department, to determine that the transaction represents the business judgment of the Filer or the relevant affiliate, uninfluenced by considerations other than the best interests of the applicable Pooled Funds and the Managed Account (as applicable).
22. Each Discretionary Management Agreement or other documentation will contain the authorization of the Client for the portfolio manager of the Managed Account to engage in In-Specie Transactions on behalf of the Managed Account.
23. No In-Specie Transaction will involve a Client that is a "responsible person" of the Filer or its affiliates, as that term is defined in subsection 13.5(1) of NI 31-103.
24. In respect of each In-Specie Transaction, the portfolio securities to be delivered will meet the investment criteria of the Pooled Fund or Managed Account, as applicable, acquiring the portfolio securities.
25. The Filer or its affiliate will value portfolio securities under an In-Specie Transaction using the same values to be used on that day to calculate the net asset value for the purpose of the issue price or redemption price of Fund Securities.
26. The Filer will not cause any Pooled Fund or Managed Account to engage in an In-Specie Transaction at any time when illiquid assets represent more than an immaterial portion of the portfolio of the applicable Pooled Fund or Managed Account.
27. In-Specie Transactions will enable the Filer and its affiliates to manage each asset class more effectively and to reduce the transaction costs of Clients and Pooled Funds. For example, In-Specie Transactions reduce market impact costs, which can be detrimental to Clients and/or Pooled Funds. In-Specie Transactions also allow a portfolio manager to retain within its control institutional-size blocks of portfolio securities that would otherwise need to be broken and re-assembled.
28. The Filer and its affiliates have determined that it would be in the interests of the Pooled Funds and the Managed Accounts to receive the Exemption Sought.
29. Since the Filer or its affiliate is the portfolio manager of the Managed Accounts and the Pooled Funds, the Filer and the affiliates would be considered a "responsible person" within the meaning of NI 31-103, and would thus be prohibited from the above-described In-Specie Transactions in the absence of the Exemption Sought.
Decision
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:
(a) in connection with an In-Specie Transaction where a Pooled Fund purchases Fund Securities of another Pooled Fund:
(i) the other Pooled Fund would, at the time of payment, be permitted to purchase the portfolio securities;
(ii) the portfolio securities are acceptable to the Filer (or its affiliate) as portfolio manager of the other Pooled Fund and consistent with the other Pooled Fund's investment objectives;
(iii) the value of the portfolio securities is equal to the issue price of the Fund Securities of the other Pooled Fund for which they are payment, valued as if the portfolio securities were portfolio assets of the other Pooled Fund; and
(iv) the other Pooled Fund will keep written records of each In-Specie Transaction in each applicable financial year, reflecting details of the portfolio securities delivered to it and the value assigned to such portfolio securities, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of NI 31-103;
(b) in connection with an In-Specie Transaction where a Pooled Fund redeems Fund Securities of another Pooled Fund:
(i) the portfolio securities are acceptable to the Filer (or its affiliate) as portfolio manager of the Pooled Fund acquiring the portfolio securities and consistent with the Pooled Fund's investment objectives;
(ii) the value of the portfolio securities is 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 Fund Securities;
(iii) the other Pooled Fund will keep written records of each In-Specie Transaction in each applicable financial year, reflecting details of the portfolio securities delivered by it and the value assigned to such portfolio securities, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of NI 31-103;
(c) in connection with an In-Specie Transaction where a Managed Account acquires Fund Securities of a Pooled Fund:
(i) the Filer (or its affiliate), as portfolio manager of the Managed Account, obtains the prior written consent of the Client of the Managed Account before it engages in any In-Specie Transaction and such consent has not been revoked;
(ii) the Pooled Fund would, at the time of payment, be permitted to purchase the portfolio securities;
(iii) the portfolio securities are acceptable to the Filer (or its affiliate) as portfolio manager of the Pooled Fund and consistent with the Pooled Fund's investment objectives;
(iv) the value of the portfolio securities is equal to the issue price of the Fund Securities of the Pooled Fund for which they are payment, valued as if the portfolio securities were portfolio assets of that Pooled Fund;
(v) the Client of the Managed Account has not provided notice to terminate its Managed Account;
(vi) 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
(vii) the Pooled Fund will keep written records of each In-Specie Transaction in each applicable financial year, reflecting details of the portfolio securities delivered to the Pooled Fund and the value assigned to such portfolio securities, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of NI 31-103;
(d) in connection with an In-Specie Transaction where a Managed Account redeems Fund Securities of a Pooled Fund:
(i) the Filer (or its affiliate), as portfolio manager of the Managed Account, obtains the prior written consent of the Client of the Managed Account before it engages in an In-Specie Transaction and such consent has not been revoked;
(ii) the portfolio securities are acceptable to the Filer (or its affiliate) as portfolio manager of the Managed Account and consistent with the Managed Account's investment objectives;
(iii) the value of the portfolio securities is 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 Fund Securities;
(iv) the account statement next prepared for the Managed Account describes the portfolio securities delivered to the Managed Account and the value assigned to such portfolio securities; and
(v) the Pooled Fund will keep written records of each In-Specie Transaction in each applicable financial year, reflecting details of the portfolio securities delivered by the Pooled Fund and the value assigned to such portfolio securities, in accordance with the form, accessibility and retention of records requirements as prescribed by section 11.6 of NI 31-103;
(e) the Filer and its affiliates relying on this decision do 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 a Managed Account or a Pooled Fund is the commission charged by the dealer executing the trade (if any) and/or any administrative charges levied by the custodian.