MD Financial Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- Relief granted to permit public investment funds to engage in principal trading in debt securities with certain related parties that are principal dealers in the Canadian debt securities market on terms which include compliance with market integrity requirements or equivalent transparency and trade reporting requirements.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 4.2, 19.1.
National Instrument 81-107 Independent Review Committee for Investment Funds, s. 6.2.
September 21, 2018
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF MD FINANCIAL MANAGEMENT INC. (the Filer) AND THE FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) exempting the Funds (as defined below) from the restriction contained in subsection 4.2(1) of NI 81-102 to permit the Funds to purchase from, or sell to, a related person or company (a Related Dealer) that acts, or that may in the future act as a principal dealer (Principal Dealer) in the Canadian debt securities market, debt securities of an issuer other than the Canadian federal or a provincial government (Non-Government Debt Securities), or debt securities issued or fully and unconditionally guaranteed by the Canadian federal or a provincial government (Government Debt Securities), both as traded in the secondary markets (the Exemption Sought).
Under National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (together with Ontario, the Jurisdictions)
Interpretation
Terms defined in NI 81-102, National Instrument 14-101 Definitions or National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) have the same meanings in this decision, unless otherwise defined.
"Funds" means all mutual funds subject to NI 81-102, and any mutual funds subject to NI 81-102 subsequently established in the future for which the Filer acts, or will act, as investment fund manager.
Representations
The decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of Canada with its head office located in Ottawa, Ontario. The Filer is registered as a portfolio manager in each of the provinces and territories of Canada and is registered in Ontario in the category of commodity trading manager and investment fund manager. The Filer is also registered as an investment fund manager in the provinces of Québec and Newfoundland and Labrador.
2. The Filer is, or will be, the investment fund manager of each Fund.
3. Each Fund is, or will be, a reporting issuer in one or more of the Jurisdictions and subject to NI 81-102. The securities of each Fund are, or will be, qualified for distribution pursuant to a simplified prospectus, fund facts and annual information form that have been prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
4. The Filer and the Funds are not in default of applicable securities legislation in any Jurisdiction.
5. On May 31, 2018, the Canadian Medical Association and The Bank of Nova Scotia (Scotiabank) announced that they entered into a share purchase agreement pursuant to which Scotiabank will indirectly acquire 100% of the issued and outstanding shares of CMA Holdings, which indirectly holds the outstanding shares of the Filer. Assuming timely receipt of all necessary regulatory non-objections/approvals and the satisfaction of all other conditions, the closing of the proposed transaction is expected to occur on or about September 26, 2018 or on such other later date when all of the conditions precedent have been satisfied or waived, and all non-objections/approvals have been obtained, subject to extension by the parties (the Closing).
6. Upon Closing, the Filer will be an affiliate of Scotia Capital Inc., because each of the Filer and Scotia Capital Inc. will, directly or indirectly, be owned by Scotiabank, which is a Schedule I bank formed and existing under the Bank Act (Canada). Therefore, Scotia Capital Inc. will be considered a Related Dealer for the purposes of this decision. Among other things, Scotia Capital Inc. is a registered investment dealer and a dealer member of the Investment Industry Regulatory Organization of Canada.
7. Scotia Capital Inc., as a Related Dealer and each other Related Dealer that acts as a Principal Dealer, is a Principal Dealer in the Canadian debt securities market -- for Non-Government Debt Securities and for Government Debt Securities, both in the secondary markets.
8. The Funds have an independent review committee constituted as required under NI 81-107.
9. The purchase and sale of Non-Government Debt Securities or Government Debt Securities by a Fund from and to a Related Dealer that is a Principal Dealer of Non-Government Debt Securities and Government Debt Securities in the secondary markets, following the Closing will be subject to subsection 4.2(1) NI 81-102 which prohibits such transactions.
10. The Funds require the Exemption Sought following the Closing because:
(a) there is a limited supply of Non-Government Debt Securities and Government Debt Securities available to the Funds; and
(b) frequently, the only source of Non-Government Debt Securities and Government Debt Securities will be a Related Dealer that is a Principal Dealer.
11. The Funds require the Exemption Sought in order to continue to pursue their investment objectives and strategies effectively following the Closing.
12. Related Dealers that act as Principal Dealers in the Canadian debt securities market will not influence the business judgement of the Filer or any of the portfolio advisors engaged by the Filer to manage the Funds, in connection with the determination of the suitability of investments and information and influence barriers will be in place. Decisions made by the Filer or any of the portfolio advisors engaged by the Filer to manage the Funds, as to which investments a Fund should hold will be based on the best interests of such Fund, without consideration given to the interest of the party with whom a purchase or sale is transacted. This principle will be reflected in the policies and procedures regarding dealing with related parties following the Closing that will be implemented by the Filer and communicated by it to the portfolio advisors that are engaged by the Filer to manage the Funds, and approved by the independent review committee of the Funds immediately following the Closing.
13. The investment strategies of each Fund that will rely on the Exemption Sought permit, or will permit, the Fund to invest in the securities purchased, either as a principal strategy in achieving its investment objective or as a temporary strategy, pending the purchase of other securities.
Decision
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 the Closing occurs and that:
(a) the purchase or sale is consistent with, or is necessary to meet, the investment objectives of the Fund;
(b) the Filer, as manager of the Funds, complies with the requirements of section 5.1 of NI 81-107, and the Filer and the IRC of the Funds each comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the transaction;
(c) the IRC of the Funds approves each transaction in accordance with subsection 5.2(2) of NI 81-107;
(d) the bid and ask price of the applicable Non-Government Debt Security or the Government Debt Security is readily available, as provided in Commentary 7 to section 6.1 of NI 81-107;
(e) a purchase is not executed at a price which is higher than the available ask price of the security, and a sale is not executed at a price which is lower than the available bid price;
(f) the purchase or sale is subject to "market integrity requirements" as defined in clause 6.1(1)(b) of NI 81-107; and
(g) the Funds keep the written records required by clause 6.1(2)(g) of NI 81-107.
This decision is effective as of the date of Closing.