Exemption Orders (Discretionary)
TD ASSET MANAGEMENT INC.
2001 BCSECCOM 1033
Headnote:
Mutual Reliance Review System for Exemptive Relief Applications – Relief granted from reporting requirements of a mutual fund manager for transactions between a mutual fund and related persons.
Applicable British Columbia Provisions
Securities Act, R.S.B.C. 1996, c. 418, ss. 126 and 130(b)
BC Instrument 81-504 Transactions Between Mutual Funds and Responsible Persons Relating to Certain Debt Securities, Mortgages and Equity Securities
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, ONTARIO, QUEBEC, NOVA SCOTIA, AND NEWFOUNDLAND
AND
IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF TD ASSET MANAGEMENT INC.
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the “Decision Maker”) in each of the provinces of British Columbia, Alberta, Saskatchewan, Ontario, Quebec, Nova Scotia and Newfoundland (the “Jurisdictions”) has received an application from TD Asset Management Inc. (“TDAM”), in its own capacity and on behalf of TD Mortgage Fund, (the “Mortgage Fund”) TD Short Term Monthly Income Fund, TD Short Term Bond Fund, TD Monthly Income Fund (collectively, the “Income Funds”), TD Private Canadian Bond Income Fund, TD Private Canadian Corporate Bond Fund and TD Private Canadian Bond Return Fund (collectively, the “Private Funds” and together with the Mortgage Fund and Income Funds, the “Funds”, and individually, the “Fund”) for a decision (the “Decision”) pursuant to the securities legislation of the Jurisdictions (the “Legislation”) that the following provisions of the Legislation do not apply to TDAM, in respect of the purchase or sale of mortgages that TDAM may cause a Fund to enter into with affiliates of TDAM:
(a) the provision requiring the management company of a mutual fund or, in British Columbia, a mutual fund manager, to file a report relating to
(i) every purchase or sale of securities between the mutual fund and any related person or company, and
(ii) every purchase or sale effected by the mutual fund through any related person or company with respect to which the related person or company received a fee either from the mutual fund or from the other party to the transaction or both,
within thirty days after the end of the month in which the purchase or sale occurs (the “Reporting Requirements”); and
(b) the provision prohibiting a portfolio manager from knowingly causing any investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a “responsible person” as defined in the Legislation (the “Investment Prohibition”);
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 TDAM has represented to the Decision Makers as follows:
1. TDAM is a corporation established under and governed by the laws of Ontario and is the manager and principal distributor of each of the Funds. It is a wholly-owned subsidiary of The Toronto-Dominion Bank (the “TD Bank”). The head office of TDAM is located in Toronto, Ontario.
2. Each of the Funds is an open-ended mutual fund trust governed by the laws of the province of Ontario. The securities of the Funds are qualified for sale in each of the provinces and territories of Canada (the “Prospectus Jurisdictions”) under a simplified prospectus and annual information form filed in and accepted by each of the Prospectus Jurisdictions.
3. The Mortgage Fund was created as a result of the merger on October 8, 2000 (the “Merger”) of Green Line Mortgage Fund and Green Line Mortgage-Backed Fund (together, the “Green Line Funds”) with what was then Canada Trust Mortgage Fund.
4. The investment objective of the Mortgage Fund, as disclosed in its current simplified prospectus, is to provide a steady stream of interest income by investing in a diversified portfolio consisting primarily of high-quality Canadian residential mortgages bought from and administered by the TD Bank and The Canada Trust Company (“Canada Trust”). It may also invest in uninsured conventional mortgages, mortgages insured under the National Housing Act (NHA) or by an insurance company, and may also invest in Canadian mortgage-backed securities.
5. Prior to the Merger, Canada Trust Mortgage Fund bought/sold mortgages from/to Canada Trust in reliance upon an order issued on April 13, 1988 by the Ontario Securities Commission (the “OSC”) and similar orders from other applicable Canadian Securities Administrators, which permitted Canada Trust to cause The Canada Trust Company Retirement Savings Plan-Mortgage Section to purchase/sell mortgages from/to Canada Trust (the “1988 Orders”).
6. Also, prior to the Merger, the Green Line Funds’ manager, Toronto Dominion Securities Inc. (“TDSI”), was issued an order on March 22, 1994 by the OSC and similar orders from other applicable Canadian Securities Administrators, which permitted TDSI to cause the Green Line Funds to purchase/sell mortgages from/to the TD Bank (the “1994 Orders”).
7. Following the Merger, TDAM, as portfolio manager of the Mortgage Fund, caused it to purchase mortgages from the TD Bank in a single bulk transaction.
8. In order to continue causing the Mortgage Fund to purchase/sell mortgages from/to affiliates of TDAM, including the TD Bank, Canada Trust and Canada Trustco Mortgage Company (collectively, the “TDAM Affiliates”), TDAM needs discretionary relief from the Investment Prohibition and the Reporting Requirements because neither the 1988 Order nor the 1994 Order of the OSC applies to it.
9. The Income Funds and the Private Funds are not precluded from investing in “guaranteed mortgages” as defined in National Instrument 81-102 - Mutual Funds. As portfolio manager of the Income Funds and the Private Funds, TDAM proposes to cause them to purchase/sell “guaranteed mortgages” from/to TDAM Affiliates.
10. TDAM will not cause any Income Fund or Private Fund to purchase guaranteed mortgages, whether or not from TDAM Affiliates if, immediately after the purchase, more than 10 percent of the net assets of the Income Fund or Private Fund, taken at market value at the time of the purchase, would consist of guaranteed mortgages.
11. National Policy Statement No. 29 (“NP 29") permits a mutual fund to acquire mortgages from a lending institution on a non-arm’s length basis, subject to compliance with specified pricing or valuation and disclosure conditions.
12. In British Columbia, TDAM will rely on the exemption from the Investment Prohibition that is provided by BC Instrument 81-504, Transactions Between Mutual Funds and Responsible Persons Relating to Certain Debt Securities, Mortgages and Equity Securities.
13. TDAM will cause a Fund to purchase/sell a mortgage (in the case of the Mortgage Fund) or a guaranteed mortgage (in the case of the Income Funds and the Private Funds) from/to a TDAM Affiliate only if
a. the transaction is made in accordance with clause 2.4(3) of Section III of NP 29 such that
(i) the purchase or sale is made at the principal amount which will produce a yield to the Fund of not more than a quarter of one percent less than the interest rate at which the TDAM Affiliate is making commitments, at the time of purchase, to loan on the security of comparable mortgages or guaranteed mortgages; and
(ii) in the case of a purchase of a mortgage or guaranteed mortgage, as the case may be,
(a) the TDAM Affiliate that sells it to the Fund enters into an agreement (the “Repurchase Agreement”) with the Fund whereby the TDAM Affiliate that sells the mortgage or guaranteed mortgage is obligated to repurchase it if the mortgage or guaranteed mortgage goes into default for more than 90 days and in circumstances benefiting the Fund,
(b) TDAM considers that the Repurchase Agreement is sufficient to justify the difference in yield referred to in subparagraph (a) above; and
b. TD Bank guarantees the performance of the other TDAM Affiliates under the Repurchase Agreement referred to in paragraph a(ii) above.
14. In the absence of this Decision, TDAM
(a) is prohibited, except in British Columbia, by the Investment Prohibition from causing the Funds to purchase/sell mortgages or guaranteed mortgages, as the case may be, from/to the account of TDAM Affiliates, which are “responsible persons” under the Legislation; and
(b) is obligated to comply with the monthly Reporting Requirements in respect of mortgages or guaranteed mortgages, as the case may be, purchased/sold by the Funds from/to TDAM Affiliates.
AND WHEREAS under the System, this MRRS Decision Document evidences the Decision of each Decision Maker;
AND WHEREAS each Decision Maker 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, pursuant to the Legislation, is that
(A) except in British Columbia, the Investment Prohibition does not apply so as to prevent TDAM from causing the Funds to purchase/sell mortgages (in the case of the Mortgage Fund) or guaranteed mortgages (in the case of the Income Funds and Private Funds), from/to TDAM Affiliates provided that
i. the purchase or sale is made on the terms and conditions referred to in paragraph 13 above,
ii. TDAM causes the Funds to comply with the disclosure provisions of Section IV of NP 29,
iii. TDAM causes each Fund to include a disclosure in its simplified prospectus that the Fund will engage in principal transactions in mortgages or guaranteed mortgages, as the case may be, with TDAM Affiliates,
iv. the terms of each Fund’s principal transactions in mortgages or guaranteed mortgages, as the case may be, with TDAM Affiliates are reasonable, fair and in the best interests of the Fund or its unitholders, and
v. this relief does not apply to the Mortgage Fund’s mortgage transactions that are referred to in paragraph 7 above; and
(B) the Reporting Requirements do not apply to TDAM in respect of the purchase/sale of mortgages or guaranteed mortgages, as the case may be, by the Funds from/to TDAM Affiliates, provided that TDAM causes each Fund to file with the applicable Decision Maker and deliver to its unitholders, on a semi-annual basis, a statement of portfolio transactions prepared in accordance with the Legislation that includes, in addition to the information already required by the Legislation,
i. the total number of mortgages or guaranteed mortgages purchased/sold by the Fund from/to TDAM Affiliates, and the percentage that such total number represents of the aggregate number of mortgages or guaranteed mortgages purchased/sold by the Fund from/to lending institutions, including TDAM Affiliates, during the period reported on;
ii. the total cost of the purchase, and the total consideration for the sale, of mortgages or guaranteed mortgages bought/sold by the Fund from/to TDAM Affiliates, and the percentage that such total cost and total consideration represents of the aggregate cost and consideration paid/received by the Fund in respect of all mortgages or guaranteed mortgages purchased/sold by the Fund from/to lending institutions, including TDAM Affiliates, during the period reported on; and
iii. the total fees, if any, paid by the Fund, the other party to the transaction, or both, to TDAM Affiliates in respect of mortgages or guaranteed mortgages purchased/sold by the Fund from/to TDAM Affiliates, and the percentage that such total fees represent of the aggregate fees paid by the Fund in respect of all mortgages or guaranteed mortgages purchased/sold by the Fund from/to lending institutions, including TDAM Affiliates, during the period reported on.
Dated this 19th day of October, 2001.
Howard Weston H. Lorne Morphy