Phillips, Hager & North Investment Management Ltd. and the PH&N Funds - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted to permit certain funds to make in-species transfers of debt securities between mutual funds and pooled funds - transfers will comply with conditions in s. 6.1(2) of National Instrument 81-107 - Independent Review Committee for Investment Funds including Independent Review Committee approval.
Applicable Legislative Provisions
National Instrument 81-102 - Mutual Fund, ss. 4.2, 4.3(2), 19.1.
National Instrument 81-107 - Independent Review Committee for Investment Funds, s. 6.1(2).
November 29, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR, NORTHWEST
TERRITORIES, NUNAVUT AND YUKON
(the Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
PHILLIPS, HAGER & NORTH INVESTMENT MANAGEMENT LTD.
(the Filer)
AND
THE PH&N FUNDS (as defined below)
MRRS DECISION DOCUMENT
Background
1 The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for relief from section 4.2 of NI 81-102 (the NI 81-102 Self-Dealing Restrictions) to permit the purchase or sale of debt securities and mortgages between Public Funds (as defined below) and Pooled Funds (as defined below) or Managed Accounts (as defined below) (the Requested Relief).
Under the Mutual Reliance Review System for Exemptive Relief Applications:
(a) the British Columbia Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
2 Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
The Filer represents that:
1 The Filer is a company organized under the laws of British Columbia with a head office in Vancouver, British Columbia.
2 The Filer is registered as an adviser in the category of portfolio manager and investment counsel (or its equivalent) under the Legislation.
3 The Filer is the manager and promoter of the existing mutual funds listed in Appendix A that are either offered for sale pursuant to a simplified prospectus and annual information form filed in certain provinces and territories of Canada (Public Funds) or offered for sale on a private placement basis pursuant to prospectus exemptions under applicable securities legislation (Pooled Funds and together with the Public Funds, PH&N Funds), and the Filer or an affiliate of the Filer will be the manager and promoter of future PH&N Funds.
4 The Filer or an affiliate of the Filer is the principal portfolio adviser of the existing PH&N Funds, and the Filer expects that the Filer or an affiliate of the Filer will be the principal portfolio adviser of future PH&N Funds.
5 State Street Trust Company Canada is the trustee of the existing PH&N Funds, and the Filer expects that State Street Trust Company Canada or another trust company at arm's length to the Filer will be the trustee for future PH&N Funds.
6 The Filer or an affiliate of the Filer may be the portfolio advisor for fully managed accounts held by clients of the Filer (Managed Accounts).
7 From time to time, there will be a significant outflow of cash from one PH&N Fund as a result of redemptions by one or more unitholders of one PH&N Fund switching its or their investment to another PH&N Fund or transferring its or their investment to a Managed Account.
8 In addition, from time to time the Filer may wish to transfer individual securities, including debt securities and mortgages, held on behalf of a PH&N Fund or a Managed Account to a PH&N Fund in exchange for units of the other PH&N Fund (for example, a Managed Account with a large holding of bonds transferring its bonds to a fixed income-oriented PH&N Fund in exchange for units).
9 Where there is a significant outflow of cash from one PH&N Fund in connection with redemptions, the Filer is required to sell portfolio securities to fund the redemptions (unless the applicable PH&N Fund holds a cash balance to fund the redemptions). Where there is a significant inflow of cash into a PH&N Fund in connection with subscriptions for securities, the Filer is required to purchase portfolio securities with the subscription proceeds (unless the Filer determines it is in the best interests of the applicable PH&N Fund to hold the proceeds as cash pending investment).
10 The Filer is of the view that where the portfolio securities of the selling PH&N Fund or Managed Account are compatible with the investment objectives and strategies of the purchasing PH&N Fund or Managed Account, it may be in the best interests of the applicable PH&N Funds and/or Managed Accounts for the selling PH&N Fund or Managed Account to sell portfolio securities to the purchasing PH&N Fund or Managed Account (a Cross Transaction). The Filer will only engage in a Cross Transaction between PH&N Funds or between PH&N Funds and Managed Accounts if, in its view, engaging in a Cross Transaction as opposed to similar open-market trades is in the best interests of each of the parties to the trade.
11 Cross Transactions of debt securities will be executed through a registered dealer or otherwise be subject to market integrity requirements.
12 Each of the Pooled Funds may be an "associate" of the trustee of the Public Funds.
13 Section 4.3(1) of NI 81-102 states that the NI 81-102 Self-Dealing Restrictions do not apply with respect to a purchase or sale of securities if, among other things, the price payable for the security is not more than the ask price as reported by any available public quotation in common use, in the case of a purchase, or not less than the bid price as reported by any available quotation in common use, in the case of a sale.
14 The Filer is not able to rely on section 4.3(1) of NI 81-102 with respect to transactions in mortgages because bid and ask prices for mortgages are not reported through any available public quotation in common use.
15 Section 4.3(2) of NI 81-102 states that the NI 81-102 Self-Dealing Restrictions do not apply with respect to a purchase or sale of a class of debt securities by a mutual fund from or to, another mutual fund managed by the same manager or an affiliate of the manager, if, at the time of the transaction, among other things, the mutual fund is purchasing from, or selling to, another mutual fund to which National Instrument 81-107 Independent Review Committees for Investment Funds (NI 81-107) applies and the transaction complies with section 6.1(2) of NI 81-107. Pursuant to section 6.1(2)(a) of NI 81-107, the applicable transaction must be between investment funds to which NI 81-107 applies. Pursuant to section 1.1 of NI 81-107, NI 81-107 only applies to an investment fund that is a reporting issuer. Accordingly, NI 81-107 only applies to the Public Funds. In addition, pursuant to section 6.1(2)(c) of NI 81-107 the bid and ask price of the security must be readily available. Bid and ask prices for mortgages may not be readily available.
16 National Policy Statement No. 29 (NP 29) sets out guidelines relating to investments in mortgages by a mutual fund that is subject to NP 29, including with respect to the determination of the net asset value of mortgages, and provides certain protections to investors in such funds.
17 The Filer has established an independent review committee (IRC) for the Public Funds. Although the Filer does not intend to establish a new IRC for the Pooled Funds, the Filer proposes to expand the mandate of the existing IRC to include the review and approval of the transactions covered by the Requested Relief.
18 The IRC will consider the policies and procedures of the Filer and will provide its approval on whether the proposed Cross Transactions achieve a fair and reasonable result in accordance with section 5.2(2) of NI 81-107.
19 In the absence of the Requested Relief, the Filer would be prohibited by the NI 81-102 Self-Dealing Restrictions from causing the Public Funds to engage in Cross Transactions in mortgages with other PH&N Funds or Managed Accounts.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:
(a) each Cross Transaction of debt securities is made in accordance with section 6.1(2) of NI 81-107, other than the requirement in section 6.1(2)(a) that the transaction be between investment funds to which NI 81-107;
(b) with respect to each Cross Transaction of mortgages
(i) the Cross Transaction has been approved by the IRC in accordance with section 5.2(2) of NI 81-107;
(ii) the mortgages are acquired at a price equal to the net asset value of the mortgages determined in accordance with the applicable Fund's valuation principles and NP 29 (or any successor policy or instrument);
(iii) the applicable Fund(s) keeps the written records required by section 6.1(2)(g) of NI 81-107; and
(iv) the applicable Fund(s) receives no consideration and the only cost for the trade is the nominal cost incurred by the Fund(s) to print or otherwise display the trade;
(c) if securities are being traded from a Managed Account, the Managed Account holder has consented to trades from that account to a PH&N Fund; and
(d) where required, the Filer files reports of Cross Transactions in the forms and within the times required under the Legislation.
Appendix A
List of PH&N Funds
Public Funds
Phillips, Hager & North U.S. Equity Fund Phillips, Hager & North Canadian Equity Plus Pension Trust Phillips, Hager & North Bond Fund Phillips, Hager & North Canadian Equity Fund Phillips, Hager & North Dividend Income Fund Phillips, Hager & North Vintage Fund Phillips, Hager & North Canadian Money Market Fund Phillips, Hager & North Canadian Growth Fund Phillips, Hager & North Balanced Pension Trust Phillips, Hager & North $U.S. Money Market Fund Phillips, Hager & North Balanced Fund Phillips, Hager & North U.S. Growth Fund Phillips, Hager & North Short Term Bond & Mortgage Fund Phillips, Hager & North Small Float Fund Phillips, Hager & North Canadian Equity Pension Trust Phillips, Hager & North High Yield Bond Fund Phillips, Hager & North Total Return Bond Fund Phillips, Hager & North Global Equity Fund Phillips, Hager & North Overseas Equity Fund Phillips, Hager & North Overseas Equity Pension Trust Phillips, Hager & North U.S. Dividend Income Fund Phillips, Hager & North Community Values Bond Fund Phillips, Hager & North Community Values Balanced Fund Phillips, Hager & North Community Values Canadian Equity Fund Phillips, Hager & North Community Values Global Equity Fund Phillips, Hager & North Canadian Income Fund Phillips, Hager & North Currency-Hedged U.S. Equity Fund Phillips, Hager & North Currency-Hedged Overseas Equity Fund BonaVista Global Balanced Fund BonaVista Canadian Equity Value Fund
Pooled Funds
Phillips, Hager & North U.S. Pooled Pension Fund Phillips, Hager & North Global Equity Pension Trust Phillips, Hager & North Institutional S.T.I.F. Phillips, Hager & North Long Bond Pension Trust Phillips, Hager & North High Grade Corporate Bond Fund Phillips, Hager & North Investment Grade CorporateBond Trust Phillips, Hager & North Mortgage Pension Trust Phillips, Hager & North Absolute Return Fund Phillips, Hager & North Income Equity Pension Trust Phillips, Hager & North Enhanced Income Equity Pension Trust Phillips, Hager & North PRisM -- Short Phillips, Hager & North PRisM -- Mid Phillips, Hager & North PRisM -- Long Phillips, Hager & North Long Mortgage Pension Trust Phillips, Hager & North Long Corporate Bond Pension Trust Phillips, Hager & North Long Duration Swap Fund Phillips, Hager & North Foreign Bond Fund Phillips, Hager & North PRisM Balanced Fund