NIN 95/11 - Proposed Amendments to the Securities Act Concerning Related Party Transactions Involving Mutual Funds [NIN - Rescinded]

The Commission is publishing for comment proposed amendments to the Securities Act that are intended to prohibit certain related party transactions involving mutual funds. This notice provides background to the proposed amendments.

In the Weekly Summary for the week ending November 25, 1995, the Commission published for comment in NIN#94/28, a number of proposed amendments to the Securities Act unrelated to the Government’s response to the Matkin Report. Included in that request for comment were drafting instructions for a new provision, section 110.1. The actual proposed provision, together with related provisions and a proposed draft blanket order, are attached to this NIN.

Proposed section 110.1 would (1) restrict a mutual fund from investing in certain issuers in which a responsible person of the mutual fund is a director, officer or partner, (2) prohibit principal transactions between a mutual fund and a responsible person, and (3) prohibit loans from a mutual fund to a responsible person. The proposed provision is similar to section 118 of the Ontario Securities Act. However, unlike section 118, the definition of “responsible person” covers a broader range of related parties to a mutual fund. The broader range of related parties included in the definition of responsible person is intended to address the changes in the mutual fund industry that have occurred since the removal of the ownership restrictions previously imposed on financial institutions. These changes have created increased potential for conflicts of interest. The definition of responsible persons includes a person responsible for managing the mutual fund or its portfolio, a person responsible for advising the mutual fund with respect to its portfolio, associates and affiliates of such persons and related mutual funds.

The Commission recognizes that, provided there are adequate investor protection safeguards in place to address potential conflicts, principal trading transactions between the mutual fund and the responsible person with respect to debt securities issued by certain issuers may be beneficial to 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 debt securities, and

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

Accordingly, the Commission is considering providing blanket relief from the proposed section 110.1(1)(b) with respect to certain principal transactions between a responsible person and a mutual fund. The relief being contemplated is similar to that considered by the Canadian Securities Administrators with respect to certain provisions of National Policy Statement No. 39. (See NIN#92/30.) However, the proposed relief is restricted to purchases and sales in debt securities:

(i) issued or guaranteed by the federal or provincial government,

(ii) issued by a municipal government of Canada, and

(iii) issued or guaranteed by those governments recognized by the Commission for the purposes of section 32(a)(i.1) of the Act,

provided the debt meets specified rating requirements.

Under the proposed relief, a purchase or sale of debt securities by the mutual fund is required to meet certain conditions, including conditions related to pricing. The purchase or sale of debt securities by the mutual fund continues to be subject to the applicable investment restrictions and practices set out in NP 39. Further, the purchase or sale of debt securities by the mutual fund must be consistent with the fundamental investment objectives of the mutual fund and be in the best interest of the mutual fund.

The Commission is requesting comments on the proposed amendment and blanket relief. Comments are specifically requested on the following:

(a) whether the definition of responsible person is appropriate,

(b) what types of transactions currently being undertaken by mutual funds would be affected by the proposed provision and whether any transitional relief is required,

(c) whether the relief proposed should be made available to all of the parties,

(d) the adequacy or appropriateness of the conditions, including the pricing requirements, imposed under the draft BOR,

(e) the appropriateness of the ratings specified in Appendix “A” to the draft BOR,

(f) whether the relief proposed under the draft BOR should cover highly rated corporate debt or equity securities issued by substantial issuers, and

(g) whether relief from section 111 of the Act is also required.

Interested persons are invited to provide comments on the proposed amendments and draft BOR. Comment letters should be submitted by March 24, 1995 to:

Brenda Benham
A/Director, Policy & Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver, B.C.
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 confidentiality 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.

The Commission will be considering the comments received on the proposed relief set out in the draft BOR together with the comments made by Ontario Securities Commissioner Glorianne Stromberg in her report on the investment industry, entitled “Regulatory Strategies for the MID-90’s: Recommendations for Regulating Investment Funds in Canada” and the position of other CSA members with respect to the relief being considered under NP 39.

DATED at Vancouver, British Columbia, on February 16, l995.


Douglas M. Hyndman
Chair

References: NIN#94/28

104(1)

New Provision

Interpretation

"responsible person" means

(a) a person responsible for the management of a mutual fund or its portfolio or advising the mutual fund with respect to its portfolio and every individual who is a partner, director or officer of that person,

(b) a related mutual fund,

(c) every associate or affiliate of a responsible person,

(d) every individual who is a partner, director or officer of an associate or affiliate of the responsible person, if the individual participates in the formulation of, or has access prior to implementation to, investment decisions made on behalf of, or the advice given to, the mutual fund, and

(e) every individual who is an employee of a responsible person, if the individual participates in the formulation of, or has access prior to implementation to, investment decisions made on behalf of, or the advice given to, the mutual fund.

104 (1.1)

New Provision

(1.1) For the purposes of paragraph (a) of the definition of "responsible person", a person responsible for the management of a mutual fund includes a person that has a legal power or right to control the mutual fund or a person that, in fact, is able to do so.


110.1

New Provision

Interest of responsible person in investment portfolio

110.1(1) A mutual fund or responsible person shall not knowingly cause the mutual fund to

(a) invest in any issuer in which a responsible person is a partner, officer or director unless that fact is disclosed to the mutual fund security holders before the purchase,

(b) purchase or sell the securities of any issuer from or to the account of a responsible person, or

(c) make a loan to a responsible person.

(2) A mutual fund or a responsible person shall not knowingly enter into a contract or other arrangement that results in the mutual fund being directly or indirectly liable or contingently liable in respect of a transaction that is prohibited by this section.