Exemption Orders (Discretionary)
JONES HEWARD INVESTMENT COUNSEL INC.
2001 BCSECCOM 178
Headnote
Mutual Reliance Review System for Exemptive Relief Applications - relief from certain of the self dealing prohibitions and reporting requirements and in respect of entering into forward contract with a related counterparty in connection with investments by an RSP fund in securities of other mutual funds that are under common management for specified purposes, subject to certain conditions.
Applicable British Columbia Provisions
Securities Act, R.S.B.C. 1996, c. 418, ss. 121(2)(a), 121(2)(b), 123, 126(a), 126(d), 127(1)(a) and 130
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
JONES HEWARD INVESTMENT COUNSEL INC.
JONES HEWARD RSP AMERICAN 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 Jones Heward Investment Counsel Inc. (“JH”), on behalf of Jones Heward RSP American Fund and other mutual funds managed by JH after the date of this Decision (defined herein) having an investment objective that is linked to the returns or portfolio of another specified mutual fund while remaining 100% eligible for registered plans under the Income Tax Act (Canada) (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 respect of certain investments to be made by the Top Funds in applicable corresponding 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 in respect of investments to be made by the Top Funds in forward contracts or other specified derivatives with the Bank of Montreal or an affiliate thereof (collectively the “Bank”), as counterparty:
1. the restrictions contained in the Legislation prohibiting a mutual fund from knowingly making or holding an investment in a person or company who is a substantial securityholder of the mutual fund, its management company or distribution company;
2. the restrictions 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;
3. the requirements contained in the Legislation prohibiting a portfolio manager or, in British Columbia, the mutual fund, from knowingly causing an investment portfolio managed by it to invest in any issuer in which a “responsible person” (as 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
4. the requirements 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.
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 JH to the Decision Makers that:
(1) JH is a company incorporated under the laws of Ontario. JH is or will be the manager of each of the Top Funds.
(2) Each of the Top Funds and each of the Underlying Funds is, or will be, an open-end mutual fund trust established under the laws of the Province of Ontario.
(3) The securities of the Top Funds and the Underlying Funds are, or will be qualified for sale under a simplified prospectus and annual information form filed in all provinces and territories in which they are distributed. A preliminary simplified prospectus for the Jones Heward RSP American Fund has been filed under SEDAR project number 308423.
(4) The simplified prospectuses will disclose the investment objectives, investment strategies, risks and restrictions of the Top Funds and the Underlying Funds. The investment objectives 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.
(5) The investment objectives of the Underlying Funds are, or will be, achieved through investment primarily in foreign securities.
(6) To achieve its investment objective, each of the Top Funds will invest its assets such that its securities will be, in the opinion of tax counsel to the Top Fund, “qualified investments” for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and similar plans (collectively, “Registered Plans”) under the Tax Act and will not constitute foreign property in a Registered Plan. This will primarily be achieved by the Top Fund entering into derivative contracts with one or more financial institutions that may be affiliates of JH that provide a return linked to the returns of its corresponding Underlying Fund. However, each Top Fund also intends to invest a portion of its assets directly in securities of its corresponding Underlying Fund. This investment by a Top Fund will at all times be below the maximum foreign property limit prescribed under the Tax Act for Registered Plans (the “Permitted Limit”).
(7) The amount of direct investment by each Top Fund in its applicable Underlying Fund will be adjusted from time to time so that, except for transitional cash (i.e. cash from purchases not yet invested or cash held to satisfy redemptions), the aggregate of derivative exposure to, and direct investment in, the Underlying Fund will equal 100% of the assets of the Top Fund.
(8) A counterparty may, from time to time, invest directly in securities of an Underlying Fund as a hedge against its obligations under its forward contracts with a Top Fund. A counterparty may have a significant interest in an Underlying Fund due to its hedging activities.
(9) The Top Funds will enter into forward contracts with one or more financial institutions, including the Bank.
(10) The Bank indirectly controls JH and at the time of creation of the RSP Fund, an indirect subsidiary of the Bank will own 100% of the issued voting securities of JH.
(11) 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.
(12) In the absence of this Decision, pursuant to the Legislation, the Top Funds are prohibited from: (a) knowingly making or holding an investment in any person or company who is a substantial securityholder of the mutual fund, its management company or distribution company; (b) knowingly making or holding an investment in the Underlying Fund if the Top Fund, alone or together with one or more related mutual funds, is a substantial security holder of the Underlying Fund; and (c) knowingly causing a Top Fund to invest in an issuer in which a “responsible person” (as that term is defined in the legislation) is a director or officer. As a result, in the absence of this Decision, the Top Funds would be required to divest themselves of any such investments.
(13) In the absence of this Decision, pursuant to the Legislation, each of the Top Funds is prohibited from investing in forward contracts or other specified derivatives in which the Bank is the counterparty.
(14) In the absence of this Decision, the Legislation requires JH to file a report in respect of every purchase or sale of securities made by the Top Funds in the Underlying Funds or in forward contracts issued by the Bank.
(15) The Top Funds’ investment in or redemption of units of their corresponding Underlying Funds or investment in forward contracts issued by the Bank 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, or require the filing of a report relating to the purchase or sale of such securities,
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 Underlying Fund is not a mutual fund whose investment objective includes investing directly or indirectly in other mutual funds;
e. the Top Fund restricts its direct investment in the Underlying Fund to a percentage of its assets that is within the Permitted Limit;
f. 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;
g. no sales charges are payable by the Top Fund in relation to its purchases of securities of the Underlying Fund;
h. 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;
i. 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;
j. the arrangements between or in respect of the Top Fund and the Underlying Fund are such as to avoid the duplication of management fees;
k. 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;
l. 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;
m. 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
n. 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.
AND 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 the Bank,
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 the Bank, the following conditions are satisfied:
a. an independent auditor (the “Contract Auditor”), engaged for this purpose by JH, has reviewed and assessed the pricing and terms of the forward contract offered by the Bank to the Top Fund against the pricing and terms offered by the Bank for similar forward contracts to other fund groups offering RSP clone funds that are similar in size (the “Arm’s Length Contracts”);
b. the Contract Auditor has provided JH with its opinion which concludes that the pricing and terms of the forward contract offered by the Bank to the Top Fund is at least as favourable as the pricing and terms of such Arm's Length Contracts;
c. JH’s board of directors has approved the forward contract offered by the Bank;
d. the Contract Auditor has reconsidered and reassessed the forward contracts offered by the Bank to the Top Fund whenever the Prospectus is renewed and whenever it is proposed to amend the pricing and terms of the forward contract offered by the Bank to the Top Fund;
e. the Prospectus identifies the Bank as the counterparty to the forward contract offered by the Bank to the Top Fund and discloses the relationship that exists between JH, the Bank and the Top Fund; and
f. the Prospectus describes the Contract Auditor's role of assessing and reassessing the forward contract offered by the Bank for the purpose of ensuring that the pricing and terms thereof is, and remains, at least as favourable as Arm's Length Contracts.
Dated this 24th day of January, 2001.
J.A. Geller R. Stephen Paddon