NIN 96/22 - Mutual Funds and Related Party Transactions [NIN - Rescinded]
| Published Date: | 1996-07-19 |
|---|---|
| Effective Date: | 1996-07-18 |
The Commission is publishing for comment the attached draft blanket order #96/**. The draft blanket order would provide relief from section 110.1(1)(b) of the Securities Act to permit certain related party transactions between mutual funds and responsible persons. The Commission is also issuing BOR#96/13. BOR#96/13 extends the period of transitional relief provided under BOR#95/8, BOR#96/6 and BOR#96/11 regarding section 110.1 of the Securities Act. This notice provides background to the publication of the draft blanket order for comment and the issuance of BOR#96/13.
Section 110.1 prohibits certain related party transactions between mutual funds and responsible persons, including purchases and sales of securities from or to the account of a responsible person. BOR#95/13 provides conditional relief from section 110.1(1)(b) to permit certain principal transactions between mutual funds and responsible persons with respect to certain debt securities. Comments have been received on the conditions applicable, in particular the pricing requirement. The draft blanket order sets out an alternative pricing requirement to that contained in BOR#95/13. The draft blanket order includes most of the other conditions set out in BOR#95/13, although certain drafting changes have been made.
The alternative pricing requirement used in the draft blanket order is similar to that used by the U.S. Securities and Exchange Commission ("SEC") as a condition of relief from certain prohibitions on transactions between an investment company and its affiliated persons (see Rule 17a-7 of the U.S. Investment Company Act). The key difference between the pricing requirement used by the SEC and that used in the proposed blanket order is that the proposed blanket order does not require the transaction to be effected at the "current market price" as defined. Rather, condition (d) of the draft blanket order requires that the price be the best reasonably available price at the time of the transaction and sets outside parameters on that price using the defined term "current market price". The price paid or amount received by the mutual fund must not be more than or less than, respectively, the current market price at the time of the transaction. The current market price as defined may not necessarily reflect the best reasonably available price because of intervening events in the market place (e.g., anticipated increases or decreases in interest rates) since the most recent trades. Condition (c) is designed to require that the parties take into account these other considerations in ensuring that that actual price received or amount paid is reasonable and fair to the mutual fund.
In addition, the SEC definition focuses on trades, offers or bids on the day of the trade, but does not address the situation where there are no trades, offers or bids on the day of the trade. The definition in the draft blanket order contains some suggested provisions (square bracketed) for this situation.
Transitional relief has previously been provided under BOR#95/8, BOR#96/6 and BOR#96/11 to allow time for the mutual fund industry to become aware of the new prohibition in section 110.1 of the Act and the relief available under BOR#95/13. BOR#96/13 extends this transitional relief until December 1, 1996 to provide additional time to consider comments on the alternative pricing requirements in finalizing the blanket order and to allow market participants a period of time to adjust to the new requirements.
The Commission is requesting comments on the alternative pricing requirement in draft blanket order. Specifically, the Commission is interested in responses to the following:
(1) Is the alternative pricing requirement in the draft blanket order preferable to the pricing requirement set out in BOR#95/13?
(2) Is the definition of "current market price" appropriate?(3) Is it virtually certain that there would always be independent trades in, or offers or bids for, highly rated debt on a day when a mutual fund plans to trade with a related party, making the additional provisions contained in the brackets in condition (d) of the draft blanket order unnecessary?
Comment letters should be submitted by September 6, 1996 to:
Brenda Benham
Director
Policy and Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver BC V6Z 2H4
Comment letters submitted in response to Requests for Comment are placed on the public file and form part of the public record, unless confidentially is requested. Although comment letters requesting confidentiality will not be placed on the public file, freedom of information legislation may require the Commission to make comment letters available. Persons submitting comment letters should therefore be aware that the press and members of the public may be able to obtain access to any comment letter.
DATED at Vancouver, British Columbia, on July 18, 1996.
Douglas M. Hyndman
Chair
REF: BOR#95/8
BOR#95/13
BOR#96/6
BOR#96/11
BOR#96/13
BOR#96/**
[DRAFT]
IN THE MATTER OF THE SECURITIES ACT S.B.C. 1985, c. 83
AND
IN THE MATTER OF MUTUAL FUNDS AND THE PURCHASES AND SALES OF CERTAIN DEBT SECURITIES FROM AND TO THE ACCOUNT OF RESPONSIBLE PERSONS
Order Under Section 113 of the Securities Act
WHEREAS section 110.1(1)(b) of the Securities Act, S.B.C. 1985, c. 83 (the "Act") prohibits a mutual fund or responsible person from knowingly causing the mutual fund to purchase or sell the securities of any issuer from or to the account of a responsible person;
AND WHEREAS the Commission recognizes that where there are adequate investor protection safeguards to address potential conflicts between the interests of its security holders and the interests of responsible persons, principal trading transactions between a mutual fund and a responsible person involving certain debt securities may be beneficial to the mutual fund;
AND WHEREAS the Commission considers that to do so would not be prejudicial to the public interest;
IT IS ORDERED under section 113(b) of the Act that section 110.1(1)(b) of the Act does not apply to the purchase or sale of a security by a mutual fund from or to the account of a responsible person, provided that:
A. the security is
1. a bond, debenture or other evidence of indebtedness of or guaranteed by the government of Canada or by a province or territory of Canada,
2. a bond, debenture or other evidence of indebtedness issued by a municipal corporation, which is incorporated under the laws of the government of Canada or any province or territory of Canada,
3. a bond, debenture or other evidence of indebtedness of or guaranteed by a country or political division of a country recognized in an order by the Commission made for the purposes of section 32(a)(i.1) of the Act,
4. commercial paper, maturing not more than one year from the date of issue,
5. a non-convertible bond, debenture or other evidence of indebtedness issued by a corporation, or
6. a bankers' acceptance, maturing not more than one year from the date of issue, which is accepted by a bank listed in Schedule I or II to the Bank Act (Canada),and, in the case of a security referred to in paragraphs (i) to (v), the rating of the security meets the specified credit rating set out in Appendix "A", and in the case of security referred to in paragraph (vi), the rating of the short-term debt of the accepting bank meets the specified credit rating set out in Appendix "A";
B. the parties to the transaction do not know or ought not reasonably to know that there has been an announcement by the rating agency that the rating of the security may be down-graded to a level below the specified credit rating required in paragraph (a);
C. the proposed transaction is in the best interests of the mutual fund and the terms of the transaction are no less beneficial than terms generally available at the time of the trade to market participants in arm's length transactions;
D. the price paid or amount received by the mutual fund is the best reasonably available price at the time of the transaction, and
2. the amount received (exclusive of all transaction costs) by the mutual fund is not less than the independent current market price at the time of the transaction, where "current market price" means,
3. for a security listed on an exchange,
a) if there are reported trades for the security on the principal exchange that the security trades on prior to the trade that day, the price of the last trade for the security on the exchange prior to the trade, or
b) if there is no reported trade for the security on the principal exchange prior to the trade that day, the average of the highest current independent bid and the lowest current independent offer for the security on the exchange prior to the trade that day, [or if there is no offer and bid for that security on the exchange prior to the trade that day, on the most recent day when an offer and bid was made for the security],
5. for all other securities, the average of the highest current independent bid and the lowest current independent offer for the security prior to the trade that day, determined on the basis of reasonable inquiry, [or if there is no offer and bid made for that security prior to the trade that day, on the most recent day when an offer and bid was made, determined on the basis of reasonable inquiry];
E. the mutual fund or the responsible person keeps a record, for a period of 6 years, of the steps taken to comply with paragraphs (c) and (d), including the current market price, the price paid or amount received, the quantity and transaction costs of the purchase or sale; and
F. the intention to engage in principal trading transactions with responsible persons is disclosed in the prospectus or simplified prospectus of the mutual fund.
APPENDIX "A"
SPECIFIED CREDIT RATING
The specified credit rating is the credit rating given to the security, by one of the rating agencies listed below, that is equal to or higher than the level listed below for that type of security and that rating agency.
| Rating Agency | Commercial Paper and Short-Term Debt | Other Debt |
 | | |
| CBRS Inc. | A-1 (Low) | A |
| Dominion Bond Rating Service Limited | R-1 (low) | A |
| Moody's Investors Service Inc. | P-1 | A3 |
| Standard & Poor's Corp. | A-1 | A |