Exemption Orders (Discretionary)
SCOTIAMCLEOD
2001 BCSECCOM 166
Headnote
Mutual Reliance Review System for Exemptive Relief Applications – Relief granted from certain of the self dealing requirements regarding (1) investments by top funds in securities of an underlying fund and (2) the top funds entering into forward contracts with a related counterparty, 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), 126(a), 126(d), 127(1)(a) 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 SCOTIAMCLEOD
AND
PINNACLE RSP AMERICAN LARGE CAP GROWTH EQUITY FUND
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, Nova Scotia and Newfoundland (the "Jurisdictions") has received an application (the "Application") from Scotia Capital Inc. (“ScotiaMcLeod”), Pinnacle RSP American Large Cap Growth Equity Fund and other mutual funds managed by ScotiaMcLeod on or after the date of this Decision (defined herein) having an investment objective that is linked to the returns or portfolio of another specified ScotiaMcLeod managed mutual fund (collectively referred to as the “Top Funds”), for a decision pursuant to the securities legislation of the Jurisdictions (the “Legislation”) that the following provisions in the Legislation (the “Applicable Requirements”) shall not apply in connection with: (a) certain investments to be made by the Top Funds in their applicable corresponding ScotiaMcLeod managed mutual funds from time to time (the funds in which such investments are to be made being collectively referred to as the "Underlying Funds") and (b) certain investments to be made by the Top Funds in forward contracts or other specified derivatives with one or more institutions, including The Bank of Nova Scotia (“Scotiabank”), (collectively the “Related Counterparties”):
1. the provisions contained in the Legislation prohibiting a mutual fund from knowingly making or 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;
2. the provisions contained in the Legislation requiring a management company (or in British Columbia, a mutual fund manager) to file a report relating to a 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;
3. the provisions contained in the Legislation prohibiting a mutual fund from knowingly making an investment in an issuer in which any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company, has a significant interest;
4. the provision contained in the Legislation prohibiting a mutual fund from knowingly making an investment in any person or company who is a substantial security holder of the mutual fund, its management company or distribution company; and
5. the provision contained in the Legislation prohibiting a portfolio manager from knowingly causing any investment portfolio managed by it to invest in any issuer in which a “responsible person” (as that term is defined in the Legislation) or an associate of a responsible person is an officer or director.
AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the “System”), the Ontario Securities Commission is the principal regulator for this application;
AND WHEREAS it has been represented by ScotiaMcLeod to the Decision Makers that:
1. ScotiaMcLeod is a corporation incorporated under the laws of Ontario and its head office is located in Ontario. ScotiaMcLeod is or will be the manager, trustee and promoter of the Top Funds and the Underlying Funds (collectively, the “Funds”).
2. Each of the Funds will be an open-ended mutual fund trust established under the laws of Ontario. The Units of the Funds are or will be qualified for distribution in all of the provinces and territories of Canada (the “Prospectus Jurisdictions”) pursuant to simplified prospectuses and annual information forms.
3. Each of the Funds will be a reporting issuer under the Legislation of each of the Prospectus Jurisdictions.
4. Upon the creation of a Top Fund and an Underlying Fund, ScotiaMcLeod will invest seed money so that for a short period of time ScotiaMcLeod will have a significant interest in, and be a substantial securityholder of, both the Top Fund and the Underlying Fund.
5. The simplified prospectuses will disclose the investment objectives, investment strategies, risks and restrictions of the Top Funds and the Underlying Funds. The investment objective of the Top Funds will include disclosure of the names of the Underlying Funds and the Top Funds’ total aggregate derivative exposure to, and direct investment in the Underlying Funds.
6. The investment objectives of each Top Fund will be similar to that of the applicable Underlying Fund. Each Top Fund will seek to achieve its investment objective primarily through the implementation of a derivative strategy that provides a return linked to the return of the applicable Underlying Fund. Each Top Fund will also invest directly in the applicable Underlying Fund up to the amount prescribed from time to time as the maximum permitted amount which may be invested in foreign property under the Income Tax Act (Canada) (the “Tax Act”) without the imposition of tax under Part XI of the Tax Act (the Foreign Property Maximum”).
7. All purchases by a Top Fund of units of the applicable Underlying Fund will be made through ScotiaMcLeod (or an affiliate).
8. Each Top Fund will make investments such that its units will, in the opinion of tax counsel to the Top Fund, be “qualified investments” for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and similar plans (collectively, the “Registered Plans”) under the Tax Act and will not constitute foreign property in a Registered Plan.
9. The investment objectives of the Underlying Funds will be achieved through investment primarily in foreign securities.
10. The direct investment by each Top Fund in its Underlying Fund will be within the Foreign Property Maximum (the “Permitted Limit”). The amount of direct investment by each Top Fund in its Underlying Fund will be adjusted from time to time so that, except for transitional cash, the aggregate of derivative exposure to, and direct investment in, the Underlying Fund (or its portfolio securities) will equal 100% of the net assets of that Top Fund.
11. The Top Funds will enter into forward contracts with one or more financial institutions, including The Scotiabank, an affiliate of ScotiaMcLeod (“Related Counterparty”) (each, a “Counterparty”). Scotiabank has a substantial interest in ScotiaMcLeod.
12. In order to hedge their obligations under the forward contracts, the Counterparties (or their affiliates) will likely, but are not required to, purchase Units of the applicable Underlying Funds.
13. Scotiabank may have a significant interest in an Underlying Fund due to its hedging activities.
14. Except to the extent evidenced by this Decision and specific approvals granted by the Canadian securities administrators pursuant to National Instrument 81-102 Mutual Funds (“NI 81-102"), the investments by the Top Funds in the Underlying Funds have been, or will be, structured to comply with the investment restrictions of the Legislation and NI 81-102.
15. In the absence of this Decision, pursuant to the Legislation, the Top Funds are prohibited from (a) knowingly making 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 unitholder; and (b) knowingly making an investment in an issuer in which any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company, has a significant interest; and (c) knowingly holding an investment referred to in clause (a) or (b) hereof. As a result, in the absence of this Decision the Top Funds would be required to divest themselves of any such investments.
16. In the absence of this Decision, the Legislation requires ScotiaMcLeod to file a report on every purchase or sale of securities of the Underlying Funds by the Top Funds.
17. In the absence of this Decision, the Legislation prohibits ScotiaMcLeod from knowingly causing a Top Fund to invest in any person or company in which a director, officer or employee of ScotiaMcLeod is an officer or director.
18. In the absence of this Decision, pursuant to the Legislation, the Top Fund is prohibited from knowingly making and investment in a person or company, namely the forward contract of Scotiabank, which is a substantial security holder of ScotiaMcLeod, the management company of the Top Fund; and (b) knowingly holding an investment referred to in clause (a) hereof. As a result, in the absence of this Decision, the Top Funds would be required to divest themselves of any such investments.
19. The Top Funds’ investment in or redemption of units of their corresponding Underlying Funds will represent the business judgment of responsible persons, uninfluenced by considerations other than the best interest of the Top Funds.
AND WHEREAS pursuant to the System this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the “Decision”);
AND WHEREAS 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 pursuant to the Legislation is that the Applicable Requirements shall not apply so as to prevent a Top Fund from making or holding an investment in securities of an Underlying Fund,
PROVIDED IN EACH CASE THAT:
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 only apply if, at the time a Top Fund makes or holds an investment in an Underlying Fund, the following conditions are satisfied:
a. the securities of both the Top Fund and the Underlying Fund are being offered for sale in the jurisdiction of the Decision Maker pursuant to a simplified prospectus and annual information form which has been filed with and accepted by the Decision Maker;
b. the investment by the Top Fund in the Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;
c. the investment objective of the Top Fund discloses that the Top Fund invests directly and indirectly (through derivative exposure) in the Underlying Fund and the name of the Underlying Fund;
d. the investment objective of the Top Fund discloses the name of the Underlying Fund;
e. the Underlying Fund is not a mutual fund whose investment objective includes investing directly or indirectly in other mutual funds;
f. the Top Fund restricts its direct investment in the Underlying Fund to a percentage of its assets that is within the Permitted Limit;
g. there are compatible dates for the calculation of the net asset value of the Top Fund and the Underlying Fund for the purpose of the issue and redemption of securities of such mutual funds;
h. no sales charges are payable by the Top Fund in relation to its purchases of securities of the Underlying Fund;
i. no redemption fees or other charges are charged by the Underlying Fund in respect of the redemption by the Top Fund of securities of the Underlying Fund owned by the Top Fund;
j. no fees and charges of any sort are paid by the Top Fund and the Underlying Fund, by their respective managers or principal distributors, or by any affiliate or associate of any of the foregoing entities to anyone in respect of the Top Fund’s purchase, holding or redemption of the securities of the Underlying Fund;
k. the arrangements between or in respect of the Top Fund and the Underlying Fund are such as to avoid the duplication of management fees;
l. any notice provided to securityholders of the Underlying Fund, as required by applicable laws or the constating documents of the Underlying Fund, has been delivered by the Top Fund to its securityholders along with all voting rights attached to the securities of the Underlying Fund which are directly owned by the Top Fund.
m. all of the disclosure and notice material prepared in connection with a meeting of securityholders of the Underlying Fund and received by the Top Fund has been provided to its securityholders, the securityholders have been permitted to direct a representative of the Top Fund to vote its holdings in the Underlying Fund in accordance with their direction, and the representative of the Top Fund has not voted its holdings in the Underlying Funds except to the extent the securityholders of the Top Fund have directed;
n. in addition to receiving the annual and, upon request, the semi-annual financial statements of the Top Fund, securityholders of the Top Fund have received the annual and, upon request, the semi-annual financial statements, of the Underlying Fund in either a combined report, containing financial statements of the Top Fund and the Underlying Fund, or in a separate report containing the financial statements of the Underlying Fund; and
o. to the extent that the Top Fund and the Underlying Fund do not use a combined simplified prospectus and annual information form containing disclosure about the Top Fund and the Underlying Fund, copies of the simplified prospectus and annual information form of the Underlying Fund have been provided upon request to securityholders of the Top Fund and this right is disclosed in the simplified prospectus of the Top Fund.
THE DECISION of the Decision Makers pursuant to the Legislation is that the Applicable Requirements shall not apply so as to prevent a Top Fund from entering into forward contracts with a Related Counterparty,
PROVIDED THAT IN EACH CASE THAT:
1. the Decision shall only apply if, at the time a Top Fund enters into a forward contract with a Related Counterparty, the following conditions are satisfied:
a. pricing terms offered by the Related Counterparty to the 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 Funds;
b. the independent auditors of the Funds, have reviewed the pricing of the forward contract offered by the Related Counterparty to the Funds against the pricing offered by the Related Counterparty to other fund groups offering RSP clone funds of similar size to ensure the pricing is as favourable;
c. this review by the independent auditors is undertaken on each renewal or pricing amendment to the forward contract during the term of such contract;
d. disclosure of the independent auditor’s role and review of the forward contract is outlined in the prospectus, as is the involvement of the Related Counterparty as counterparty; and
e. ScotiaMcLeod, on behalf of the Funds, has considered the forward contracts to be entered into with the Related Counterparty and has approved them only once such confirmation of as favourable pricing has been received from the independent auditors.
DATED January 26, 2001.
J.A. Geller R. Stephen Paddon