NIN 96/09 - Blanket Orders #96/5 and #96/6 Mutual Funds and Related Party Transactions [NIN - Rescinded]

The Commission is issuing Blanket Orders #96/5 and #96/6. BOR#96/5 provides relief from the recently enacted section 110.1(1)(b) of the Securities Act to permit certain related party transactions between mutual funds and responsible persons with respect to mortgages. BOR#96/6 extends the period for transitional relief provided under BOR#95/8 with respect to section 110.1. This notice provides background to the issuance of these blanket orders.

Section 110.1 came into force on January 1, 1996. It 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.

Under NIN#95/58, the Commission issued BOR#95/13 providing relief from section 110.1(1)(b) to permit principal transactions between mutual funds and responsible persons with respect to certain debt securities. In that notice, the Commission indicated its intention to consider additional relief with respect to mortgages. The Commission has determined that it would be appropriate to provide relief from the provisions of section 110.1(1)(b) to allow mutual funds to purchase mortgages from related parties where adequate investor protection safeguards are in place to address potential conflicts of interests.

Prior to the enactment of section 110.1, non-arm's length transactions for mortgage funds were governed primarily by National Policy Statement No. 29 ("NP 29"). NP 29 sets out guidelines, in section III (2.4), for the valuation methods to be used in non-arm's length transactions. A number of mortgage mutual funds have adopted one of the three valuation methods for non-arm's length transactions. The Commission has determined that it would be appropriate to provide relief from section 110.1(1)(b) for:

• government insured mortgages, where the mutual fund has adopted one of the three valuation methods set out in section III (2.4) of NP 29; and 
  
•  uninsured mortgages, where the mutual fund has adopted the valuation method set out in section III (2.4)(c) of NP 29.

The relief under BOR#96/5 is also subject to the requirement that the terms of the proposed transaction are reasonable, fair and in the best interests of the mutual fund. For example, it is unlikely that the discounted interest rate permissible under section III (2.4)(c) of NP 29 would be reasonable and fair where the transaction involves government insured mortgages.

NP 29 is currently being reviewed as part of the reformulation of policies into rules. The treatment of non-arm's length transactions under NP 29 is being reconsidered in the context of that project. Accordingly, the requirements applicable to non-arm's length transactions involving mortgage mutual funds may change.

Notwithstanding the relief granted under BOR#96/5, the purchase or sale of securities by the mutual fund continues to be subject to the applicable investment restrictions and practices set out in NP 29. The intention to engage in related party transactions is required to be disclosed in the prospectus and such transactions are required to be reported in accordance with section 109 of the Securities Act. Responsible persons are also reminded of the front running prohibitions set out in section 111 of the Securities Act.

Although section 110.1 became effective January 1, 1996, BOR#95/8 provides transitional relief for a period of 3 months to allow time for the mutual fund industry to become aware of the new prohibitions. This relief has been extended under BOR#96/6 for two additional months to allow mutual funds to put systems in place to address the conditions of the relief provided under BOR#96/5 and to allow staff additional time to consider comments received regarding BOR#95/13.

The Commission encourages industry participants to comment on BOR#96/5 during the transitional period. Comment letters should be submitted by May 1, 1996 to:

Brenda Benham
Director
Policy and Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver, British Columbia
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.

DATED at Vancouver, British Columbia, on March 27, 1996.

Douglas M. Hyndman
Chair

REF: BOR#96/5
BOR#96/6
BOR#95/8
BOR#95/13
NIN#95/58
NP 29