Scotia Securities Inc. and Scotia Mortgage Income Fund - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- Relief granted to permit portfolio manager, on behalf of mortgage fund, to continue to purchase and sell mortgages from and to certain related persons/companies past November 1, 2007 -- Section 7.2 of National Instrument 81-107 Independent Review Committee for Investment funds causes prior relief to expire on November 1, 2007 -- New relief now issued on revised conditions which contemplate IRC approval.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 4.2, 19.1.
National Instrument 81-107 Independent Review Committee for Investment Funds, s. 7.2.
October 31, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,
PRINCE EDWARD ISLAND, NOVA SCOTIA,
NEWFOUNDLAND AND LABRADOR, NORTHWEST
TERRITORIES, YUKON AND NUNAVUT
(the Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
SCOTIA SECURITIES INC.
(the Filer)
AND
IN THE MATTER OF
SCOTIA MORTGAGE INCOME FUND
(the Fund)
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (Decision Maker) in each of the Jurisdictions received an application (the Application) from the Filer on behalf of the Fund under section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) for relief from the prohibition in Section 4.2 of NI 81-102 which prevents a mutual fund from purchasing a security from or selling a security to any of the following persons or companies:
1. the manager, portfolio adviser or trustee of the mutual fund;
2. a partner, director or officer of the mutual fund or of the manager, portfolio adviser or trustee of the mutual fund;
3. an associate or affiliate of a person or company referred to in paragraph 1 or 2; or
4. a person or company, having fewer than 100 securityholders of record, of which a partner, director or officer of the mutual fund or a partner, director or officer of the manager or portfolio adviser of the mutual fund is a partner, director, officer or securityholder,
if such persons or companies are acting as principal (the Requested Relief).
Under the Mutual Reliance Review System for Exemptive Relief Applications (MRRS):
(a) the Ontario Securities Commission (the OSC) is the principal regulator for this application; and
(b) this MRRS decision document (Decision) represents the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions (NI 14-101) and in NI 81-102 have the same meaning in this Decision unless they are otherwise defined in this Decision. The following additional terms shall have the following meanings:
"BNS" means The Bank of Nova Scotia;
"Current Relief" means the relief from certain self-dealing prohibitions in securities legislation granted to the predecessor of the Filer by the British Columbia Securities Commission on October 8, 1992, by the Alberta Securities Commission on September 17, 1992, by the Saskatchewan Securities Commission on September 30, 1992, by the Ontario Securities Commission on September 29, 1992, by the Commission des valeurs mobilières du Quebec on August 18, 1992, by the Nova Scotia Securities Commission on July 29, 1992, and by the Newfoundland Department of Justice, Securities Division on July 21, 1992; and
"Portfolio Manager" means Scotia Cassels Investment Counsel Limited.
Representations
1. The Filer is a corporation amalgamated under the laws of Ontario. The Filer has its head office in Toronto, Ontario. The Filer is the trustee and manager of the Fund.
2. The Fund is an open-end mutual fund established under the laws of the Province of Ontario.
3. The Fund is a reporting issuer under the securities laws of each of the provinces and territories of Canada and is not in default of any requirements of applicable securities legislation.
4. The Fund is qualified for distribution in each of the provinces and territories of Canada under a simplified prospectus and annual information form dated October 31, 2006, as amended.
5. The Filer has appointed an independent review committee (IRC) under National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) for the Fund.
6. The Portfolio Manager is a corporation amalgamated under the laws of Canada and is registered in the categories of investment counsel and portfolio manager in each of the Jurisdictions.
7. The Filer has appointed the Portfolio Manager to provide portfolio management and investment advisory services to the Fund.
8. The investment objective of the Fund is to provide regular interest income. It invests primarily in high quality mortgages on residential properties in Canada.
9. The Current Relief permits the Portfolio Manager, on behalf of the Fund, to purchase and sell mortgages to and from Scotia Mortgage Corporation, an affiliate of BNS, and to sell mortgages to BNS. BNS has agreed to repurchase from the Fund any mortgage purchased from Scotia Mortgage Corporation or BNS if the mortgage is in default or is not a valid first mortgage.
10. In reliance on the Current Relief, the Fund currently purchases mortgages for its portfolio from Scotia Mortgage Corporation.
11. The Current Relief granted an exemption from prohibitions in the securities legislation of various Jurisidictions applicable to purchases and sales of mortgages to and from Scotia Mortgage Corporation and sales of mortgages to BNS by the Portfolio Manager on behalf of the Fund. The Current Relief, however, did not include relief from section 4.2 of NI 81-102 for these transactions. Through inadvertence, when NI 81-102 came into force, the Fund did not apply for relief from section 4.2 of NI 81-102. Accordingly, for the Fund to continue with these transactions, the Requested Relief is required.
12. Neither Scotia Mortgage Corporation or BNS, nor any director, officer or employee of either of them participates in the formulation of investment decisions made on behalf of, or advice given to, the Fund by the Portfolio Manager.
13. Section 4.2 of NI 81-102 prohibits a mutual fund from purchasing a security from or selling a security to an associate or affiliate of the manager, portfolio adviser or trustee of the mutual fund.
14. As the Fund, Scotia Mortgage Corporation and BNS are "affiliates" of the Filer and of the Portfolio Manager, the Fund is prohibited from purchasing mortgages from or selling mortgages to Scotia Mortgage Corporation, BNS or any other affiliate.
15. Paragraph 4.3(1) of NI 81-102 provides an exemption if, among other conditions, the price payable for the mortgages is not more than the ask price of the security as reported by any available public quotation in common use (in the case of a purchase by the Fund) or not less than the bid price of the security as reported by any available public quotation in common use (in the case of a sale by the Fund).
16. The Fund is not able to rely on paragraph 4.3(1) of NI 81-102 because purchases of mortgages will not be made on an exchange as required by paragraph 4.3(1) of NI 81-102.
17. The Fund seeks greater flexibility to purchase and sell mortgages in the event that Scotia Mortgage Corporation is unable for any reason to sell mortgages to the Fund. The Requested Relief, if granted, will permit the Fund greater flexibility to purchase and sell mortgages from or to Scotia Mortgage Corporation, BNS, or any other affiliate of the manager, portfolio adviser or trustee of the Fund. Accordingly, the Requested Relief will permit the Portfolio Manager, on behalf of the Fund, to continue to engage in principal trades of mortgages with Scotia Mortgage Corporation and BNS, in addition to allowing the Fund to engage in principal trades with any other affiliate of the Filer or the Portfolio Manager.
18. NI 81-107 does not provide an exemption for principal trading of the type contemplated by the Requested Relief.
19. The provisions of National Policy Statement No. 29 set out guidelines relating to the acquisition of mortgages by a mutual fund from lending institutions with whom such fund does not deal at arm's length and provide certain protections to the investing public.
20. The IRC of the Fund will consider the policies and procedures of the Filer and will provide its approval on whether the proposed transactions in mortgages achieve a fair and reasonable result for the Fund in accordance with section 5.2(2) of NI-81-107.
21. To the extent that the Fund is purchasing mortgages from, or selling mortgages to, BNS, Scotia Mortgage Corporation or another affiliate of the Applicant or the Portfolio Manager, this fact is set out, and will continue to be set out, in the simplified prospectus and annual information form of the Fund.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Makers with the jurisdiction to make the decision has been met.
The decision of the Decision Makers is that the Requested Relief is granted on the conditions that:
(a) the purchase or sale is consistent with, or is necessary to meet, the investment objective of the Fund;
(b) the IRC of the Fund has approved the transaction in accordance with section 5.2(2) of NI 81-107;
(c) SSI, as manager of the Fund, complies with section 5.1 of NI 81-107;
(d) SSI, as manager of the Fund, and the IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions; and
(e) the Fund keeps the written records required by section 6.1(2)(g) of NI 81-107.