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Securities Law

NIN 96/35 - Mutual Funds and Related Party Transactions [NIN - Rescinded]

Published Date: 1996-10-11
Effective Date: 1996-10-10

The Commission is issuing Blanket Order #96/17. BOR#96/17, effective immediately, provides 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 Blanket Order #96/18. BOR#96/18 revokes BOR#95/13 effective December 31, 1996. This notice provides background to the publication of the BORs.

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 the pricing requirement in BOR#95/13. In response, the Commission issued for comment, under NIN#96/22, a draft blanket order that sets out an alternative pricing requirement to that contained in BOR#95/13. BOR#96/17 containing the alternative pricing requirement is being issued as a replacement for BOR#95/13. BOR#95/13 is being revoked under BOR#96/18, effective December 31, 1996.

The alternative pricing requirement used in BOR#96/17 is similar to that used by the U.S. Securities and Exchange Commission 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 BOR#96/17 is that BOR#96/17 does not require the transaction to be effected at the "current market price" as defined. Rather, condition (d) of the BOR#96/17 requires that 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 the actual price received or amount paid is reasonable and fair to the mutual fund.

National Policy Statement 39 is currently being reviewed as part of the reformulation of policies into rules. The treatment of related party transactions under NP 39 is being reconsidered in the context of that project. Accordingly, the requirements applicable to related party transactions may change.

Notwithstanding the relief granted under BOR#96/17, the purchase or sale of securities by mutual funds continues to be subject to the applicable investment restrictions and practices set out in NP 39. The intention to engage in related party transactions is required to be disclosed in the prospectus. Related party transactions are also 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.

Transitional relief from the application of section 110.1 of the Securities Act has been provided under BOR#95/8, BOR#96/6, BOR#96/11 and BOR#96/13. The relief expires effective December 1, 1996. Accordingly, industry participants that intend to engage in related party transactions will have until December 1, l996 to put in place the necessary procedures to meet the requirements of BOR#96/17. During the period between December 1, l996 and December 31, l996, industry participants may rely on BOR#95/13 or BOR#96/17.

DATED at Vancouver, British Columbia, on October 10, 1996

Douglas M. Hyndman

REF: BOR#95/8