Exemption Orders (Discretionary)
TALVEST FUND MANAGEMENT INC.
2001 BCSECCOM 53
Headnote:
Mutual Reliance Review System for Exemptive Relief Applications - Relief granted from certain of the self dealing requirements regarding investments by top funds in units of the respective underlying fund and in respect of entering into forward contracts with a related party, subject to certain conditions.
Applicable British Columbia Provisions
Securities Act, R.S.B.C. 1996, c. 418, ss. 120(1), 120(2), 121(2)(b) and (c)(ii), 126(a), 126(d) and 130(b).
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, ONTARIO, NOVA SCOTIA AND NEWFOUNDLAND
AND
IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF TALVEST FUND MANAGEMENT INC.
AND
TALVEST GLOBAL EQUITY RSP FUND, TALVEST GLOBAL SCIENCE AND TECHNOLOGY RSP FUND, TALVEST GLOBAL HEALTH CARE RSP FUND, TALVEST GLOBAL SMALL CAP RSP FUND, TALVEST CHINA PLUS RSP FUND
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the “Decision Makers”) in each of the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia and Newfoundland (the “Jurisdictions”) has received an application (the “Application”) from Talvest Fund Management Inc. (“Talvest”), as manager of Talvest Global Equity RSP Fund, Talvest Global Science and Technology RSP Fund, Talvest Global Health Care RSP Fund, Talvest Global Small Cap RSP Fund and Talvest China Plus RSP Fund (collectively, the “RSP Funds”), for a decision by each Decision Maker (collectively, the “Decision”) under the securities legislation of the Jurisdictions (the “Legislation”) that the following provisions of the Legislation (the “Applicable Requirements”) shall not apply to the RSP Funds or Talvest, as the case may be, in respect of certain investments to be made by the RSP Funds in Talvest Global Equity Fund, Talvest Global Science and Technology Fund, Talvest Global Health Care Fund, Talvest Global Small Cap Fund and Talvest China Plus Fund (collectively, the “Underlying Funds”):
i. the provisions requiring the management company of a mutual fund to file a report relating to the purchase or sale of securities between the mutual fund and any related person or company, or any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, the mutual fund is a joint participant with one or more of its related persons or companies;
ii. the provisions prohibiting a mutual fund from knowingly making and holding an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder;
iii. the provision prohibiting a mutual fund from knowingly making and holding an investment in an issuer which is a substantial security holder of the mutual fund, its management company or distribution company; and
iv. the provision prohibiting a portfolio manager from knowingly causing an investment portfolio managed by it to invest in any issuer in which a “responsible person” (as that term is defined in the Legislation) is an officer or director, unless the specific fact is disclosed to the client and, if applicable, the written consent of the client to the investment is obtained before the purchase.
AND WHEREAS under the Mutual Reliance Review System for Exemptive Relief Applications (the “System”), the Ontario Securities Commission is the principal regulator for this application;
AND WHEREAS Talvest has represented to the Decision Makers as follows:
1. Each of the RSP Funds will be and each of the Underlying Funds is an open-ended mutual fund trust established under the laws of the Province of Ontario. Talvest is a corporation incorporated under the laws of Québec and for each of the RSP Funds will be and for each of the Underlying Funds is the trustee, manager and promoter. Talvest is and will be the registrar and transfer agent for all of the Underlying Funds and the RSP Funds (collectively, the “Funds”). The head office of Talvest is in Montreal, Québec.
2. The RSP Funds will be, and the Underlying Funds are, reporting issuers and the Underlying Funds are not in default of any requirements of the Legislation. The units of each of the Underlying Funds are currently qualified for distribution pursuant to a simplified prospectus and annual information form dated October 29, 1999, and the securities of the RSP Funds will be qualified under a preliminary simplified prospectus and a preliminary annual information form (such documents when filed in final form hereinafter referred to together as “Prospectus”) which were filed for review in all of the provinces and territories of Canada (the “Prospectus Jurisdictions”) under SEDAR project number 254349.
3. The Prospectus will contain disclosure with respect to the investment objective, investment practices and restrictions of the Funds. The investment objective of the RSP Funds is generally to provide returns similar to those of the corresponding Underlying Funds through investment in forward contracts or other specified derivatives that are linked to the returns of the Underlying Funds.
4. The RSP Funds may enter into forward contracts with Canadian Imperial Bank of Commerce (“CIBC”), an affiliate of Talvest (“Related Counterparty”) as counterparty.
5. To achieve its investment objective, each of the RSP Funds invest its assets in securities such that its units will, in the opinion of tax counsel to the RSP Funds, be “qualified investments” for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and similar plans (collectively, the “Registered Plans”) and will not constitute “foreign property” under the Income Tax Act (Canada) (the “Tax Act”). This will primarily be achieved by the RSP Funds entering into derivative contracts with one or more financial institutions (the “Counterparties”) that link the returns to the Underlying Funds.
6. Each RSP Fund also intends to invest a portion of its assets directly in securities of the corresponding Underlying Fund. Such investment will at all times be below the maximum foreign property limit prescribed for Registered Plans (the “Foreign Property Maximum”). The amount of direct investment by each RSP Fund in its corresponding Underlying Fund will be adjusted from time to time so that, except for the transitional cash, the aggregate of the derivative exposure to, and direct investment in, the Underlying Fund will equal 100% of the assets of that RSP Fund.
7. The investment objectives of the Underlying Funds are achieved through investment primarily in foreign securities.
8. The direct investments by the RSP Funds in the Underlying Funds will be within the Foreign Property Maximum (the “Permitted RSP Fund Investment”). Talvest and the RSP Funds will comply with the conditions of this Decision Document in respect of such investments.
9. Except to the extent evidenced by this Decision Document and specific approvals granted by the securities regulatory authorities or regulators under National Instrument NI 81-102 Mutual Funds (“NI 81-102"), the investment by the RSP Funds in the Underlying Funds have been structured to comply with the investment restrictions of the Legislation and NI 81-102.
10. In the absence of this Decision, the RSP Funds are prohibited from knowingly making and holding an investment in units of the Underlying Funds to the extent that the RSP Funds, alone or together with one or more related mutual funds, are substantial securityholders of the Underlying Funds. As a result, in the absence of this Decision, the RSP Funds would be required to divest themselves of any such investments.
11. In the absence of this Decision, the RSP Funds are prohibited from knowingly making and holding an investment in securities of CIBC.
12. In the absence of this Decision, the Legislation requires Talvest to file a report on every purchase or sale of securities of the Underlying Funds by the RSP Funds.
13. By virtue of Talvest being the trustee of the RSP Funds and the Underlying Funds and, therefore, an “associate” of each such mutual fund, and because Talvest is the portfolio manager of the RSP Funds and certain of the directors and officers of Talvest are also officers of the RSP Funds and the Underlying Funds, and are as such “responsible persons”pursuant to Legislation, in the absence of this Decision, Talvest would be prohibited from causing the RSP Funds to invest in the Underlying Funds unless the specific fact is disclosed to investors and the written consent of investors is obtained before the purchase.
14. The RSP Funds’ investment in or redemption of units of the Underlying Funds or investment in forward contracts issued by CIBC represents the business judgment of responsible persons, uninfluenced by considerations other than the best interests of the RSP Funds.
AND WHEREAS under the System, this Decision Document evidences the Decision of each Decision Maker;
AND WHEREAS each Decision Maker is satisfied that the tests contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision have been met;
THE DECISION of the Decision Makers pursuant to the Legislation is that the Applicable Requirements shall not apply to the RSP Funds, Talvest, or a portfolio sub-adviser, as the case may be, in respect of the investments to be made by the RSP Funds in units of the Underlying Funds, or in forward contracts issued by CIBC or any one of its affiliates;
PROVIDED THAT IN RESPECT OF the investment by the RSP Funds in units of the Underlying Funds:
1. the Decision, as it relates to the jurisdiction of a Decision Maker, will terminate one year after the publication in final form of any legislation or rule of that Decision Maker dealing with the matters in section 2.5 of NI 81-102; and
2. the Decision shall apply only to investments in, or transactions with, the Underlying Funds that are made by the RSP Funds in compliance with the following conditions:
(a) the RSP Funds and the Underlying Funds are under common management, and the units of both are offered for sale in the jurisdiction of each Decision Maker, pursuant to a prospectus that has been filed with and accepted by the Decision Maker;
(b) the RSP Funds restrict their aggregate direct investment in units of the Underlying Funds to a percentage of their assets that is within the Foreign Property Maximum;
(c) the investment by the RSP Funds in units of the Underlying Funds is compatible with the fundamental investment objectives of the RSP Funds;
(d) the Prospectus discloses the intent of the RSP Funds to invest in units of the Underlying Funds;
(e) the RSP Funds may change the Permitted RSP Fund Investment only if they change their fundamental investment objectives in accordance with the Legislation;
(f) no sales charges are payable by the RSP Funds in relation to purchases of units of the Underlying Funds;
(g) there are compatible dates for the calculation of the net asset values of the RSP Funds and the Underlying Funds for the purpose of the issue and redemption of units of such mutual funds.
(h) no redemption fees or other charges are charged by the Underlying Funds in respect of the redemption by the RSP Funds of units of the Underlying Funds owned by the RSP Funds;
(i) the arrangements between or in respect of the RSP Funds and the Underlying Funds are such as to avoid the duplication of management fees;
(j) no fees and charges of any sort are paid by the RSP Funds, the Underlying Funds, the manager or principal distributor of the RSP Funds or the Underlying Funds, or by any affiliate or associate of any of the foregoing entities to anyone in respect of the RSP Funds’ purchases, holdings or redemptions of the units of the Underlying Funds;
(k) in the event of the provision of any notice to unitholders of the Underlying Funds, as required by applicable laws or the constating documents of the Underlying Funds, such notice will also be delivered to the unitholders of the RSP Funds; all voting rights attached to the units of the Underlying Funds that are owned by the RSP Funds will be passed through to the unitholders of the RSP Funds;
(l) in the event that a meeting of the unitholders of the Underlying Funds is called, all of the disclosure and notice material prepared in connection with such meeting will be provided to the unitholders of the RSP Funds; each unitholder will be entitled to direct a representative of the RSP Funds to vote that unitholder’s proportion of the RSP Funds’ holdings in the Underlying Funds in accordance with his or her direction; and the representative of the RSP Funds will not be permitted to vote the RSP Funds’ holdings in the Underlying Funds except to the extent the unitholders of the RSP Funds so direct;
(m) in addition to receiving the annual and, upon request, the semi-annual financial statements of the RSP Funds, unitholders of the RSP Funds will receive the annual and, upon request, semi-annual financial statements of the Underlying Funds, either in a combined report containing the financial statements of both the RSP Funds and the Underlying Funds, or in a separate report containing the financial statements of the Underlying Funds;
(n) to the extent that the RSP Funds and the Underlying Funds do not use a combined simplified prospectus, annual information form and financial statements containing disclosure about the RSP Funds and the Underlying Funds, copies of the simplified prospectus, annual information form and financial statements relating to the Underlying Funds may be obtained upon request by a unitholder of the RSP Funds.
AND PROVIDED THAT IN RESPECT OF the investment by the RSP Funds in the forward contracts, the Decision applies to the investments in forward contracts of CIBC as counterparty that are made in compliance with the following conditions:
(a) the pricing terms offered by the Related Counterparty to the RSP Funds under the forward contracts are at least as favourable as the terms committed by the Related Counterparty to other third parties, which are of similar size as the RSP Funds;
(b) prior to the RSP Funds entering into a forward contract transaction with a Related Counterparty, the independent auditors of the RSP Funds will review the pricing offered by the Related Counterparty to the RSP Funds against the pricing offered by the Related Counterparty to other fund groups offering RSP Funds of similar size, to ensure that the pricing is at least as favourable;
(c) the review by the independent auditors will be undertaken not less frequently than on a quarterly basis and, in addition, on every renewal or pricing amendment to each forward contract, during the term of such contract;
(d) the RSP Funds’ Prospectus (and each renewal thereof) discloses the independent auditors’ role and their review of the forward contracts, as well as the involvement of the Related Counterparty; and
(e) the RSP Funds will enter into forward contracts with a Related Counterparty only once confirmation of favourable pricing is received from the independent auditors of the RSP Funds.
DATED at Toronto, Ontario, this 2nd day of June, 2000.
Howard I. Wetston Robert W. Korthals