TD Asset Management Inc. and The Funds
National Policy 11-203, Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from conflict of interest provisions to allow mutual funds to purchase equity securities pursuant to offerings made in Foreign Jurisdictions in which a related dealer acts as underwriter -- relief required as growing status of filer's related dealers in equity underwriting activities in these jurisdictions was limiting ability of funds to acquire securities in these jurisdictions pursuant to a distribution -- impact of this created a "market necessity" for relief -- all purchases subject to independent review committee approval and securities must be distributed pursuant to prospectus qualified in these jurisdictions or by private placement of securities of a public issuer in these jurisdictions -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 -- Investment Funds, ss. 4.1 and 19.1.
November 16, 2023
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
TD ASSET MANAGEMENT INC. (TDAM)
IN THE MATTER OF
(as defined below)
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the existing mutual funds and any future mutual funds to which National Instrument 81-102 Investment Funds (NI 81-102) applies for which the Filer, or an affiliate of the Filer, acts as the investment fund manager and/or portfolio adviser (each, a Fund and collectively, the Funds) for a decision under the securities legislation of the Jurisdiction (the Legislation) for relief from the restriction in subsection 4.1(1) of NI 81-102 (the Restriction) to permit the Funds to make an investment in a class of equity securities (Securities) of an issuer during the period of a distribution (a Distribution) of the securities or during the period of 60 days after the Distribution (the 60-Day Period), notwithstanding that an associate or an affiliate of the Filer acts as an underwriter in the Distribution ( the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the Application; and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-202 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (collectively, together with the Jurisdiction, the Other Jurisdictions).
Terms defined in National Instrument 14-101 Definitions, NI 81-102, National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) and MI 11-102 have the same meaning if used in this Decision, unless otherwise defined. Certain other defined terms have the meanings given to them above or below under "Representations".
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation continued under the laws of the province of Ontario.
2. The Filer is a wholly-owned subsidiary of The Toronto-Dominion Bank, a Schedule 1 Canadian chartered bank. The head office of the Filer is located in Toronto, Ontario.
3. The Filer is registered in: (i) each of the Jurisdictions as an adviser in the category of portfolio manager (PM) and as a dealer in the category of exempt market dealer; (ii) Ontario, Québec, Saskatchewan and Newfoundland and Labrador in the category of investment fund manager (IFM); (iii) Ontario in the category of commodity trading manager; and (iv) Québec as a derivatives portfolio manager.
4. The Filer, or an affiliate of the Filer, is or will be, the IFM and/or principal portfolio adviser of each of the Funds; the principal portfolio adviser of a Fund may, from time to time, hire one or more related or unrelated sub-advisers to provide investment advisory services to the Fund.
5. Each of the Funds is or will be an open-ended mutual fund trust or corporation established under the laws of the province of Ontario or another province or territory of Canada; certain of the Funds are or will be an "index mutual fund" pursuant to paragraph (a) of that definition in section 1.1 of NI 81-102 (each an Index Fund and, collectively, the Index Funds).
6. The securities of each of the Funds are or will be qualified for distribution in one or more of the Jurisdictions pursuant to a prospectus or a simplified prospectus prepared and filed in accordance with the securities legislation of one or more Jurisdictions; each of the Funds is or will be a reporting issuer in each of the Jurisdictions in which its securities are distributed.
7. The Filer is or will be a "dealer manager" (as such term is defined in NI 81-102) with respect to the Funds and each of the Funds is or will be a "dealer managed investment fund" (as such term is defined in NI 81-102).
8. The Filer and each of the existing Funds are not in default of securities legislation in any of the Jurisdictions, except with respect to non-compliance with s. 4.1(1) of NI 81-102 arising from past purchases by certain existing Funds of equity securities of non-reporting issuers underwritten by an affiliate of the Filer. In the past, the Filer's control processes did not distinguish between Canadian reporting issuers and non-Canadian public issuers. However, once the issue was self-identified by the Filer, applicable controls and trading restrictions were promptly enhanced and/or implemented to adequately address the matter, and the Filer initiated the process for the Exemption Sought.
9. An independent review committee (the IRC) has been or will be appointed for each of the Funds under NI 81-107.
10. The Filer is currently an associate or affiliate of a number of dealers that act as underwriters in Distributions (the Current Related Dealers). The Current Related Dealers are set out in Appendix A.
11. Each of the Filer, related sub-advisers and the Current Related Dealers is an associate or affiliate of The Toronto-Dominion Bank and its subsidiaries (collectively, the TD Bank Group). TD Bank Group serves more than 27 million customers in key financial markets around the globe.
12. Current Related Dealers carry on their investment banking businesses in Canada and in other countries. The Current Related Dealers have been expanding their investment banking businesses in the United States, United Kingdom, Europe and Israel, among other countries and regions (the Foreign Jurisdictions).
13. The Current Related Dealers are prominent underwriters, both in terms of the number of Distributions they underwrite, and the dollar value of the securities underwritten. In addition, certain Current Related Dealers may act as the sole underwriter in Distributions in certain Foreign Jurisdictions.
14. From time to time there may be additional dealers that are or become affiliates or associates of the Filer and act as underwriters in Distributions (each, a Future Related Dealer and, collectively with the Current Related Dealers, the Related Dealers).
15. In circumstances where a Related Dealer acts as an underwriter in a Distribution of Securities, the Restriction will generally prevent a Fund from investing in the Securities being offered during the Distribution and during the 60-Day Period; however, pursuant to subsection 4.1(4) of NI 81-102, the Funds will not be restricted by the Restriction from investing in the Securities if, in accordance with subsection 4.1(4) of NI 81-102, certain conditions are met, including that the Distribution is made pursuant to a prospectus filed with one or more securities regulatory authorities or regulators in one or more Jurisdictions and the IRC of the Funds has approved the transaction in accordance with subsection 5.2(2) of NI 81-107.
16. As a prospectus will not be filed in any province or territory of Canada in connection with a Distribution in a Foreign Jurisdiction, the Funds cannot rely on the exemption from the Restriction contained in subsection 4.1(4) of NI 81-102.
17. There have been numerous Distributions in Foreign Jurisdictions in which a Current Related Dealer acted as an underwriter and in which the Funds could not purchase Securities during the Distribution or during the 60-Day Period because the Distribution was not made by a prospectus filed with one or more securities regulatory authorities or regulators in Canada and the issuer of the securities was not a reporting issuer and, accordingly, subsection 4.1(4) of NI 81-102 could not be relied upon.
18. The issue for the Funds is significant. The global footprint of the TD Bank Group, including the significant number of Related Dealers and the growing prominence of their investment banking activities in Foreign Jurisdictions, has significantly hindered the ability of the Funds to participate in Distributions in Foreign Jurisdictions.
19. In addition, the assets under management for the Funds that are classified as U.S., global or international funds have grown significantly in recent years; for example, since December 31, 2018, assets under management for these Funds have grown by at least 115%. This growth has had a direct impact on the Funds since there are a limited number of Distributions in Foreign Jurisdictions where no Related Dealer is participating as an underwriter. As a result, the Funds are competing with each other for these investment opportunities, as well as with other competitor retail investment funds that have obtained relief similar to the Requested Relief.
20. The Funds would be negatively impacted by not being able to purchase Securities, during a Distribution or in the 60-Day Period, in a Foreign Jurisdiction; forgoing participation in these investment opportunities represents a significant opportunity cost for the relevant Funds, as they are unable to access certain investment opportunities as a result of the coincidental participation of a Related Dealer in the relevant transaction, particularly when there is a regulatory and governance framework in place to oversee participation in similar transactions.
21. The significant opportunity cost referred to above is two-fold; first, Securities issued in a Distribution are frequently "underpriced" to ensure that all Securities are sold in the Distribution and the Securities often trade at a significantly higher price shortly after public trading begins. Because the Funds are prevented from purchasing Securities in the Distribution and during the 60-Day Period, they are not able to profit from any price increases during that period; second, Distributions are a source of liquidity for the Funds; a portfolio manager of a Fund may obtain a block of Securities in a Distribution in one trade, at a competitive price; if a portfolio manager were to purchase a similar size block of Securities in the secondary market, this may take time (often several trades over several days) and prices may rise in the process (often solely due to limited liquidity in the market and the trading activity undertaken by the portfolio manager to purchase a large block of Securities).
22. The Restriction is also detrimental for the Funds as their position in an issuer will be diluted if the Funds are prevented from supplementing existing positions when issuers whose securities the Funds already hold are raising capital by distributing additional securities (for instance, pursuant to a rights offering); in addition, while Funds that are not "index mutual funds" as defined in NI 81-102 do not have investment objectives that require those Funds to track the performance of an index, the performance of those Funds is benchmarked against an index; the Restriction may prevent those Funds from maintaining either their strategic percentage holdings in a given issuer relevant to their overall portfolio holdings or their percentage holdings in a given issuer relevant to the benchmark index holdings.
23. Further, the Index Funds have investment objectives that require the Funds to track the performance of an index; the Index Funds achieve their investment objective by investing directly in Securities that are represented by the applicable index in substantially the same proportion as those securities are represented in the index; the Restriction will almost certainly prevent the Index Funds from investing directly in Securities that are represented by the applicable index in substantially the same proportion as those securities are represented in the index and impede the ability of the Index Fund to meet its investment objective when the related Distribution occurs in a Foreign Jurisdiction.
24. The prejudice that results for a Fund that is restricted from purchasing Securities is that the portfolio manager's discretion with respect to managing the portfolio is negatively impacted. If the portfolio manager cannot make appropriate commitments or expressions of interest in respect of Securities due to the participation of a Related Dealer in the Distribution, the portfolio manager is delayed in making appropriate decisions with respect to other Securities of a Fund. The portfolio manager would be delayed in that purchases may not be made in the 60-Day Period even though the Filer would want to immediately acquire such Securities. The portfolio manager would then have to decide whether to make an investment in another issuer altogether until the 60-Day Period expires in respect of the Securities.
25. The Restriction also puts the Funds at a competitive disadvantage to most other Canadian funds since the Filer is among the few firms in Canada that have related party dealers that are active in the Distribution of equity securities in Foreign Jurisdictions.
26. Further, since the Funds are dealer managed investment funds, the Restriction is applicable even in circumstances where an unrelated sub-adviser is exercising discretion with respect to a purchase if a Related Dealer underwrites a Distribution of Securities in Foreign Jurisdictions.
27. When the Filer or its sub-advisers make a decision to purchase Securities in a Distribution, it is based only on factors unrelated to any involvement of a Related Dealer in the Distribution and free from any influence from a third-party dealer or Related Dealer; these factors generally include the Filer's or its sub-adviser's view of the issuer, the investment merits of the Distribution and the proposed use of the capital raised in the Distribution by the issuer; for certain Funds, investment decisions are made based on fundamental issuer valuation models; in addition, investment decisions are also made to ensure consistency with the overall investment objectives and investment strategies of the Funds; for certain Funds, investment decisions are based on quantitative investment methodologies, such strategies involve rules based investment decisions.
28. The Filer has generally, to date, been made aware of a Distribution in a Foreign Jurisdiction and been invited to participate on behalf of a Fund by an underwriter that is not a Related Dealer; however, the Filer, upon learning about the involvement of a Related Dealer in the underwriting, is nonetheless unable to participate in Distributions even in cases where the Filer's intention was to supplement existing positions on behalf of certain Funds.
29. In almost all Distributions in respect of which a Related Dealer acts as an underwriter, the Related Dealer's involvement as an underwriter in the Distribution will not be known by the portfolio adviser or sub-adviser making a particular investment decision sufficiently long enough in advance to make an application for exemptive relief on a case-by-case basis; this is a particular issue where the sub-adviser is unrelated to the Filer.
30. The Filer and its sub-advisers generally engage with Related Dealers and third-party dealers equally; despite the affiliation between the Filer and each Related Dealer, they operate independently of each other; in particular, the investment banking and related dealer activities of the Related Dealer and the investment portfolio management activities of the Filer on behalf of the Funds are separated by information barriers or "ethical" walls; accordingly, no information flows from one to the other concerning the above activities generally, except in the following or similar circumstances:
(a) in respect of compliance matters (for example, the Filer and a Related Dealer may communicate to enable the Filer to maintain an up to date list of Securities underwritten by a Related Dealer to ensure that the Filer complies with applicable securities laws);
(b) in respect of normal-course dealer activities (for example, a Related Dealer is on the list of brokers that may execute normal course trades in securities in the secondary market);
(c) the Filer or its sub-advisers, on behalf of the Funds as investors in The Toronto-Dominion Bank securities, may meet with The Toronto-Dominion Bank in respect of The Toronto-Dominion Bank securities in accordance with policies and procedures that govern such meetings; and
(d) the Filer or its sub-advisers and a Related Dealer may share general market information such as discussion on general economic conditions, etc.
31. Further, in circumstances where an unrelated sub-adviser has been appointed, there is clear separation between the investment decisions being made on behalf of the Funds and the investment banking and related dealer activities of the Related Dealers.
32. Each of the Funds relying on the Exemption Sought will follow the following policies and procedures:
(a) the IRC will determine, after reasonable inquiry, whether the Securities purchased in a Distribution or during the 60-Day Period met the requirements of subsection 5.2(2) of NI 81-107;
(b) for actively managed Funds, the IRC will receive a written analysis with respect to each issuer of Securities purchased in a Distribution or during the 60-Day Period. Each written analysis will include: a description of the business of the issuer; the reason for investing in the issuer; the particular Funds involved; the number of Securities purchased or sold; and Fund holdings and weight of the issuer relative to the overall holdings in the Fund at the start and the end of each reporting period;
(c) for Index Funds, the IRC will receive confirmation that the Securities purchased in a Distribution or during the 60-Day Period are represented in the Index Fund's permitted index (as defined in NI 81-102) and the acquisition was necessary for the Index Fund to continue to meet its investment objectives;
(d) the IRC will receive confirmation that there were no material NI 81-102 compliance, valuation, trading or settlement issues for such purchases, and all transactions were effected in accordance with the standing instructions of the IRC;
(e) at the request of the IRC, the Filer will coordinate for the IRC to receive presentations from portfolio managers, or representatives thereof, to review and discuss Securities purchased in a Distribution or during the 60-Day Period; and
(f) to the extent applicable, the Filer and the IRC of each Fund will comply with subsection 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Exemption Sought.
33. The Funds will not be required or obligated to purchase any Securities under a Distribution or during the 60-Day Period.
34. The investment by a Fund in the Securities purchased in a Distribution or during the 60-Day Period will be made in furtherance of the Fund's investment objective(s) and will be consistent with its investment objectives and strategies.
35. At the time of purchase by a Fund, the Securities will be Securities of a public issuer in a Foreign Jurisdiction (or an entity that will become a public issuer in a Foreign Jurisdiction at the time of purchase of the Securities by the Fund).
36. A Distribution in respect of which the Exemption Sought is requested will be made by means of a prospectus, or similar public offering document, or by means of a private placement in the Foreign Jurisdiction in which the Distribution is taking place; the Securities issued in the Distribution will be listed on a stock exchange.
37. The Filer has implemented policies and procedures and obtained the approval of or standing instructions from the IRC of the Funds in order to rely on subsection 4.1(4) of NI 81-102.
38. The Filer has discussed this matter with the IRC in anticipation of the Funds receiving the Exemption Sought and the IRC has indicated that it would give its approval (subject to complying with the terms and conditions of the Exemption Sought imposed by the principal regulator) to permit the Funds to make investment in reliance on the Exemption Sought in accordance with policies and procedures similar to those applicable to situations where investments are made in reliance on subsection 4.1(4) of NI 81-102.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) the investment by a Fund in Securities purchased in a Distribution or during the 60-Day Period is made in furtherance of the Fund's investment objective(s) and is consistent with its investment objective(s) and strategies;
(b) the IRC of the Fund must approve the transaction in accordance with the requirements of subsection 5.2(2) of NI 81-107;
(c) the Securities purchased by the Fund are distributed by means of a prospectus or similar public offering document or a private placement in the Foreign Jurisdiction in which the Distribution is taking place;
(d) any Related Dealer that is involved as an underwriter in a Distribution is regulated in respect of its underwriting activities in the Foreign Jurisdiction in which the Distribution is taking place;
(e) the Securities issued in the Distribution are listed on a stock exchange;
(f) if the Securities are acquired during the 60-Day Period, they are acquired on a stock exchange; and
(g) no later than the time the Funds file their annual financial statements, the Filer includes the particulars of each investment made by the Funds in reliance on the Exemption Sought during their most recently completed financial year in the report of purchases of securities underwritten by a related party in accordance with subsection 4.1(4)(c) of NI 81-102 filed on SEDAR+.
Application File #: 2023/0451
SEDAR+ File #: 6030188
List of Related Dealers
Cowen and Company, LLC
Cowen Execution Services Limited
TD Bank Europe Limited
TD Global Finance unlimited company
TD Securities Inc.
TD Securities (USA) LLC