Portland Investment Counsel Inc.
Headnote
National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to a fund manager as a "company providing services to the mutual fund" under section 11.1(1)(b) of NI 81-102 -- Relief permits the fund manager to commingle client cash related to the manager's open-ended mutual funds in the same trust account as client cash temporarily received by the fund manager for investment in deposits offered by an affiliate.
Applicable Legislative Provisions
National Instrument 81-102 -- Mutual Funds, ss. 11.1(1)(b) and 19.1.
December 10, 2019
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 PORTLAND INVESTMENT COUNSEL INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from the requirements of paragraph 11.1(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) that cash received by a principal distributor of a mutual fund, by a person or company providing services to the mutual fund or the principal distributor, or by a person or company providing services to a non-redeemable investment fund, for investment in, or on the redemption of, securities of the investment fund (Investment Fund Cash) may be commingled only with cash received by the principal distributor or service provider for the sale or on the redemption of other investment fund securities (the Commingling Prohibition) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the OSC) is the principal regulator for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and NI 81-102 have the same meanings if used in this decision, unless otherwise defined. In addition:
Portland Exempt Funds means the private and alternative investments, including prospectus exempt investment funds, offered by the Filer, and which are "investment funds" as defined by the Legislation;
Portland Funds means the Portland Mutual Funds, Portland Exempt Funds and Portland Private Equity Funds;
Portland Investment Funds means the Portland Mutual Funds and the Portland Exempt Funds;
Portland Mutual Funds means the prospectus offered mutual funds offered by the Filer; and
Portland Private Equity Funds means the prospectus exempt private equity funds offered by the Filer which do not fall within the definition of "investment funds" as they seek to obtain control of or become involved in the management of the companies in which they invest, but which are structured similarly to the Portland Mutual Funds and the Portland Exempt Funds in that they are also pooled investment vehicles.
Representations
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is a corporation amalgamated under the laws of Ontario with its registered head office located in Burlington, Ontario.
2. The Filer is registered as follows:
(a) in the provinces of Alberta, Newfoundland and Labrador, Ontario and Quebec in the category of investment fund manager;
(b) in each of the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan as an adviser in the category of portfolio manager;
(c) in each of the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Québec and Saskatchewan as a dealer in the category of exempt market dealer; and
(d) in Ontario as a dealer in the category of mutual fund dealer.
3. The Filer is the trustee, investment fund manager and portfolio manager of the Portland Mutual Funds. Mandeville Private Client Inc. ("Mandeville Private Client", or the "Principal Distributor"), an affiliate of the Filer, acts as principal distributor of the Portland Mutual Funds.
4. The Filer and Mandeville Private Client are direct wholly-owned subsidiaries of Mandeville Holdings Inc.
5. In addition to the Portland Mutual Funds, the Filer also offers investors private and alternative investments, including the Portland Exempt Funds and the Portland Private Equity Funds.
6. Securities of the Portland Funds are generally sold through the Filer, Mandeville Private Client or through third party registered dealers ("Dealers").
7. The Filer is a "person providing services to the mutual fund" under the provisions of section 11.1(1)(b) of NI 81-102. Accordingly, the Commingling Prohibition prohibits the Filer from commingling Portland Investment Funds Trust Cash with Portland Private Equity Funds Trust Cash.
The Trust Accounts
8. The Filer has retained CIBC Mellon Global Securities Services Company ("CIBC Mellon") to carry out certain administrative services for the Portland Investment Funds, including processing of all subscriptions and redemptions. CIBC Mellon uses the services of CIBC Mellon Trust Company ("CIBC Mellon Trust") to maintain trust accounts for their clients.
9. The Filer has one or more trust accounts on behalf of the Portland Investment Funds (the "Trust Accounts") through CIBC Mellon into which all monies ("Portland Investment Funds Trust Cash") invested by securityholders in the Portland Investment Funds ("Securityholders") are paid by way of cheque, wire transfer, electronic funds transfer and the Fundserv electronic order entry systems (collectively referred to as "Industry Standard Settlement Processes") and from which redemption proceeds or assets to be distributed are paid. The Trust Accounts bear interest at rates equivalent to comparable accounts at CIBC Mellon Trust and any interest earned on the cash in the Trust Accounts is paid to Securityholders or to each of the Portland Investment Funds on a pro rata basis in compliance with subsection 11.1(4) of NI 81-102. The Filer also ensures compliance with section 11.3 of NI 81-102 in the way in which the Trust Accounts are maintained.
10. Each Trust Account is designated as a "trust account" by CIBC Mellon and is currently held on behalf of the Portland Investment Funds. The Filer, as manager and trustee of the Portland Investment Funds, has access to the Trust Accounts and has control over which of its employees has access to the Trust Accounts.
11. As permitted by the provisions of paragraph 11.1(1)(b) of NI 81-102, the Portland Investment Funds Trust Cash represents cash that has been received in respect of the Portland Investment Funds and is commingled in the Trust Accounts.
12. The Filer has similarly retained CIBC Mellon to carry out certain administrative services for the Portland Private Equity Funds, including processing of all subscriptions and redemptions.
The Proposed Commingling
13. The Filer proposes that the process in respect of monies invested by securityholders in the Portland Private Equity Funds will be the same as the process in respect of the Portland Investment Funds described in paragraph 9 above. All monies ("Portland Private Equity Funds Trust Cash") invested by securityholders in the Portland Private Equity Funds will be paid into the Trust Accounts via Industry Standard Settlement Processes. Once received, the Filer will hold both Portland Investment Funds Trust Cash and Portland Private Equity Funds Trust Cash (together, "Commingled Cash") temporarily in the Trust Accounts. The Portland Private Equity Funds Trust Cash will then be forwarded by CIBC Mellon from the Trust Accounts to the individual Portland Private Equity Fund custodial account at CIBC Mellon Trust, which is the same process as currently exists in respect of the Portland Investment Funds Trust Cash. For a brief time then, the Portland Private Equity Funds Trust Cash will temporarily be commingled with the Portland Investment Funds Trust Cash in the Trust Accounts.
Interests of the Fund and Investors
14. The Filer proposes to temporarily pool monies invested by securityholders in the Portland Private Equity Funds with Portland Investment Funds Trust Cash in the Trust Accounts. The Filers believes that the commingling of Portland Private Equity Funds Trust Cash with Portland Investment Funds Trust Cash would facilitate significant administrative and systems economies that will enable the Filer to enhance its level of service to its clients at less cost.
15. In the absence of the Requested Relief, the commingling of Portland Private Equity Funds Trust Cash with Portland Investment Funds Trust Cash may contravene the Commingling Prohibition and would require the Filer to establish separate trust accounts for the Portland Investment Funds on the one hand and the Portland Private Equity Funds on the other. This would represent a significant cost to be borne by the securityholders of the Portland Private Equity Funds and no benefit to the securityholders of the Portland Investment Funds.
Clearing and Settlement
16. Dealers may accept money from investors for investment in the Portland Private Equity Funds and for investment in the Portland Investment Funds and will forward such money to the Trust Accounts via Industry Standard Settlement Processes.
17. As manager of the Portland Investment Funds, the Filer is subject to the statutory standard of care set forth in section 116 of the Legislation and to similar provisions contained in the legislation of the Jurisdictions. The Filer also maintains insurance coverage in accordance with section 12.5 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
18. Commingled Cash will be forwarded by CIBC Mellon from the Trust Accounts to the individual custodial accounts for the Portland Funds at CIBC Mellon Trust no less frequently than following overnight processing of Portland Fund purchase orders. Commingled Cash will be forwarded from the Trust Accounts to the relevant dealers or dealer trust accounts which redeem Portland Funds no less frequently than following overnight processing of redemption orders, subject to the time it may take for a securityholder to redeem a cheque issued in respect of redeemed Portland Fund securities. Accordingly, all monies held in the Trust Accounts will be cleared no less frequently than on a daily basis at the beginning of each business day following the previous business day's overnight processing of all purchase transactions involving the Portland Funds and most redemptions from the Portland Funds.
19. The Filer believes that the commingling of Portland Private Equity Funds Trust Cash with Portland Investment Funds Trust Cash in the Trust Accounts will not be detrimental to the protection of investors.
20. Portland Investment Funds Trust Cash or Portland Private Equity Funds Trust Cash related to the transaction initiated by one of the Filer's clients will not be used to settle the transaction initiated by any other client of the Filer.
Internal Controls
21. In providing services, the Filer is able to account for all monies received into and all monies that are to be paid out of the Trust Accounts in order to meet the policy objectives of sections 11.1 and 11.2 of NI 81-102.
22. The Filer will ensure that proper records with respect to the cash that is commingled in the Trust Accounts are kept and will ensure that the Trust Accounts are reconciled, and that cash is properly accounted for daily.
23. The Filer will ensure that all transactions in the Trust Accounts are manually reviewed on a daily basis in order to monitor the Trust Accounts for discrepancies in handling of cash in the Trust Accounts.
24. Any error in the handling of monies in the Trust Accounts as a result of the commingling of cash identified through such daily review process will promptly be corrected by the Filer.
25. Except for the Commingling Prohibition, the Filer will comply with all other requirements prescribed in Part 11 of NI 81-102 with respect to the separate accounting and handling of cash.
Filer not in Default of Securities Legislation
26. The Filer is not in default of securities legislation in any jurisdiction of Canada.
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.