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Securities Law

NIN 92/30 - National Policy Statement No. 39 - Mutual Funds Draft Section 2.09 - Certain Related Parties Acting as Principals in Purchases or Sales of Portfolio Debt Securities and Proposed Revocation of Section 4.03 - Dealer Manager Acting as Principal [NIN - Rescinded]

Published Date: 1992-11-27
Effective Date: 1992-11-26

1. Introductio

The Canadian Securities Administrators ("CSA") today release for comment proposed amendments ("Proposed Amendments") to National Policy Statement No. 39 ("NPS 39"). It is proposed that a new section 2.09 be added to NPS 39 which would permit principal trading between a mutual fund to which NPS 39 applies and the portfolio manager, portfolio adviser or other related parties in certain circumstances. It is also proposed that section 4.03 - Dealer Manager Acting As Principal of NPS 39 be revoked.

2. Current Requirements

NPS 39 and the securities legislation in certain jurisdictions in Canada, among other things, prohibit a mutual fund from:

(a) purchasing or selling portfolio securities (regardless of the type of security or the identity of the issuer of the security) from or to its manager, portfolio adviser, and certain other related parties;

(b) investing in the securities of certain related parties;

(c) lending money to certain related parties; and

(d) where the mutual fund is "dealer managed", investing in securities (other than government securities) underwritten by the dealer manager or by an affiliate or associate of the dealer manager for a period commencing with the distribution of the securities and ending 60 days following completion of such distribution.

3. Proposed Relief in Section 2.09 of NPS 39

The CSA determined that it is appropriate to grant some relief to mutual funds in respect of the restrictions described in paragraph 2(a) above by amending NPS 39.

Provided that investor protection safeguards are in place to appropriately address potential conflicts that may arise between the interests of the holders of the securities of a mutual fund and the interests of the manager or the portfolio adviser of the mutual fund or other related parties, the CSA believe that certain principal trading transactions between the mutual fund and related parties may be in the best interests of the mutual fund, on the basis that such trading may:

(a) increase the market available to the mutual fund for its purchases or sales of portfolio securities; and

(b) facilitate access to trading strategies formulated by related parties that may enhance the performance of the mutual fund.

The CSA have determined that the proscribed activities referred to in paragraphs 2(b) through 2(d), above, raise conflict of interest concerns that have not yet been adequately canvassed.

The proposed relief would remove the absolute prohibition on mutual funds purchasing and selling from and to related parties government debt and government guaranteed debt securities and certain other debt securities that have received a rating in one of the specified categories from specified rating agencies.

The credit worthiness of these securities should serve to minimize downside risk to the mutual fund and allow the mutual fund to more easily satisfy the purchase price requirements in subparagraph (ii) of section 2.09(1) because of the narrower spread between prices quoted for such instruments.

A purchase or sale that meets section 2.09 requirements would also have to comply with all other applicable securities laws and the investment restrictions and practices of the mutual fund. Further, the purchase or sale must be consistent with the fundamental investment objectives of the mutual fund and be in the best interests of the mutual fund.

4. Revocation of section 4.03 of NPS 3

The CSA request comment on the revocation of section 4.03 of NPS 39. The relief provided for in section 4.03 was never implemented in Ontario, Alberta or Quebec.

Section 4.03 would have provided relief from section 2.05(11) of NPS 39 for trading in securities by dealer managed mutual funds with the dealer manager or an associate or affiliate of the dealer manager, acting as principal, subject to compliance with a term relating to the publicly quoted bid or ask price for the securities.

Insofar as section 2.09 contemplates trading in securities referred to in section 4.03, section 2.09 would replace section 4.03. There is no replacement provision for relief from the prohibition against principal trading in section 2.05(11) of NPS 39 for other securities, including equity securities, not referred to in section 2.09.

5. Request for Comments

The CSA are requesting comments on the Proposed Amendments. Comments are specifically requested on:

(a) whether the relief proposed in section 2.09 from the prohibitions in section 2.05(11) should be made available to all of the parties referred to in section 2.05(11);

(b) the adequacy or appropriateness of the requirements in subparagraph (ii) of the proposed section 2.09(1), particularly the efficacy of the requirements for obtaining an independent quote; and

(c) the revocation of section 4.03.

The CSA is presently working with the stock exchanges and the Investment Dealers Association to consider corresponding changes to their by-laws and regulations that may be appropriate.

Comment letters submitted in response to Requests for Comments are placed in the public file in certain jurisdictions and form part of the public record, unless confidentiality is requested. Comment letters will be circulated among the securities regulatory authorities for purposes of finalizing the amendments to NPS 39 whether or not confidentiality is requested. Accordingly, although comment letters requesting confidentiality will not be placed in the public file, freedom of information legislation may require the securities regulatory authorities in certain jurisdictions 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.

Twelve copies of each comment letter should be delivered by January 15, 1993 to:

Canadian Securities Administrators
c/o The Secretary
Ontario Securities Commission
8th Floor, 20 Queen Street West
Toronto, Ontario
M5H 3S8

For further information please contact any of the following:

Wayne Redwick
Deputy Superintendent Corporate Finance
British Columbia Securities Commission
(604) 660 4800

Ron Sczinski
Director Securities Analysis
Alberta Securities Commission
(403) 427 5201

Robert Bouchard
Deputy Director Corporate Finance
Commission Mobilieres du Quebec des Valeurs
(204) 945 2548

Johanne Duchesne
Deputy Director Corporate Finance
Manitoba Securities Commission
(514) 873 5326

Robert F. Kohl
Solicitor, Capital Markets
Ontario Securities Commission (416) 593 8233

Susan McCallum
Director, Corporate Finance
Ontario Securities Commission 
(416) 593 8248

Bernadette Dietrich
Solicitor, Capital Markets
Ontario Securities Commission
(416) 593 8121

Arnold Hochman
Deputy Director, Corporate Finance
Ontario Securities Commission
(416) 593 8247

DATED at Vancouver, British Columbia, on November 26, 1992.

Douglas M. Hyndman



(1) Notwithstanding the provisions of Section 2.05(11), but subject to all other provisions of this policy, a mutual fund may purchase from or sell to the persons or companies referred to in Section 2.05(11), acting as principal, the following portfolio securities:

a) bonds, debentures or other evidences of indebtedness of or guaranteed by the Government of Canada or any province or territory of Canada;

b) bonds, debentures or other evidences 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;

c) commercial paper, maturing not more than one year from the date of issue;

d) non-convertible bonds, debentures or other evidences of indebtedness issued by a corporation; and

e) bankers' acceptances, maturing not more than one year from the date of issue, which are accepted by a bank listed in Schedule I or II to the Bank Act (Canada);

provided that:

(i) in the case of securities referred to in paragraphs (b), (c) and (d), the rating of the security is as specified below and, in the case of securities referred to in paragraph (e), the rating of the short-term debt of the accepting bank is as specified below:



CBRS Inc. A-1+, A-1, A-1(low) A++,A+,A

Dominion Bond Rating R-1-H, R-1-M, R-1-L AAA,AA,A
Service Limited

Moody's Investors P-1 Aaa,Aa1,Aa2
Service Inc.

Standard & Poor's Corp. A-1+, A-1, A-2 AAA,AA+,AA

; and

(ii) the purchase price (including sales commission, if any) paid by the mutual fund is no more than, or the amount of the sale price received by the mutual fund is no less than, prices or amounts generally available to market participants in independent, arm's length transactions and the terms of the purchase or sale are otherwise no less beneficial to the mutual fund than those generally available to market participants in independent, arm's-length transactions; and immediately before the agreement of purchase or sale is entered into, the mutual fund must obtain at least one quote from an independent, arm's length purchaser or seller and record the name of the purchaser or seller (or the agent for the purchaser or seller if the purchaser or seller is not known), the date and time of the quote, the representative making the quote, the price, quantity and other relevant terms of the quote.

(2) The statement of portfolio transactions of the mutual fund must disclose each purchase or sale of securities to or from a person or company referred to in Section 2.05(11), setting out: the date of the transaction; the name of the issuer of the securities (including any guarantor of the securities); the class or designation of the securities; the amount or number of the securities; and the consideration. The category of persons or companies in Section 2.05(11) must be presented in a segregated format, or be identified by an asterisk or other notation in the statement.

(3) The variation from Section 2.05(11) permitted by this Section which is adopted by a mutual fund constitutes a variation from the standard investment restrictions and practices for the purposes of Section 2.08(2) and therefore must be disclosed in the prospectus of the mutual fund. The prospectus should refer the purchaser of its securities to the statement of portfolio transactions of the mutual fund for details of purchases and sales made by the mutual fund in accordance with such variation. Where the mutual fund employs the simplified prospectus disclosure system set out in National Policy Statement No. 36, the above disclosure required to be included in the prospectus may be included in the annual information form of the mutual fund.