Decision: In the Matter of Frank Russell Canada Limited

Hearing:January 31, 2001

Panel:John A. Geller, Q.C.- Commissioner
Kerry D. Adams, FCA-Commissioner

Counsel:Tim Moseley-For the Staff of the Ontario Securities Commission

James D.G. Douglas-For the Respondent
David Di Paolo

DECISION

1.In our view, subsection 111(2) prohibits the mutual funds (the "Funds") managed by Frank Russell Canada Limited ("FRC") from making, and subsection 111(3) of the Act prohibits the Funds from continuing to hold, investments in the securities of substantial security holders of distribution companies of the Funds.

2.However, the prohibitions are not absolute ones. Section 113 of the Act provides us with a road map as to when it is appropriate, in a specific situation, to order that these prohibitions do not apply. In our view, making a determination under section 113 that the test set out in clause 113(a) has been satisfied, and that it is appropriate to make an order under the section, does not represent a major change in the statutory scheme to protect against conflicts of interest which ought not to be implemented in the context of a specific application for exemptive relief. Rather, it involves us in nothing more than applying the scheme expressly provided in the Act.

3.On the evidence, we are of the view that the undertaking given by FRC does not make it inappropriate for us to grant FRC relief under section 113.

4.On the evidence, we are satisfied that (a) neither FRC nor its parent company, Frank Russell Company (the "Parent"), purchases or sells securities for the Funds, with the exception of securities of Nortel Networks Corporation which FRC directs purchases and sales of in the Sovereign Canadian Equity Pool and index futures contracts which the Parent, as portfolio adviser, buys and sells for the Funds, (b) the portfolio advisers for the Funds have complete discretion to purchase and sell securities for the segments of the portfolios of the Funds within their mandate, subject only to the Funds’ investment objectives, policies and restrictions, (c) with the exception of the Parent, all portfolio advisers of the Funds are at arm’s length with FRC, and (d) FRC does not in fact influence the decisions of the portfolio advisers as to the purchase or sale of specific securities or securities of a specific issuer or class or group of issuers.

5.However, there are provisions of the agreements with portfolio managers which could be read as technically enabling FRC to interfere with the investment decisions of portfolio advisers. In addition, we have to be concerned that the contractual arrangements with portfolio advisers could change over time, as could FRC’s attitude towards interfering in the investment decisions of its portfolio advisers.

6.We have concluded that, provided suitable terms and conditions are imposed in an order made under section 113, FRC meets the test set out in clause 113(a), and that there is no reason why we should not make the requested section 113 order.

7.The terms and conditions to which the order is subject should provide that the exemption will only apply to investments made or held at a time when:

a)neither FRC nor any of the portfolio advisers of the Funds is acting on a non-arm’s length basis withthe relevant distribution company;

b)none of FRC, the Parent or any of their respective affiliates, associates or substantial shareholders in fact influences any investment decision of a portfolio adviser (other than the Parent) of any of the Funds with respect to the purchase, sale or holding of any specific security or the securities of a specific issuer or class or group of issuers;

c)none of FRC, the Parent or their respective affiliates, associates or substantial shareholders has therefore taken any action referred to in b) above;

d)there is no agreement, arrangement or understanding in effect which would enable any distribution company of a Fund to influence any decision of a portfolio adviser of a Fund; and

e)unless, at the time, a portfolio adviser has resigned or been removed within 60 days prior to the time and has not yet been replaced, in which case FRC may make the investment decisions which were within the mandate of that portfolio adviser except that no such decision shall involve the purchase of securities which, were it not for the order, a fund would be prohibited by subsection 111(2) of the Act from purchasing, none of FRC, the Parent or any of their respective affiliates, associates or substantial shareholders makes or participates in making any investment decision with respect to the purchase, sale or holding by a Fund of any specific security or the securities of a specific issuer or class or group of issuers, except as specified in 4 above.

8.Staff should consider what additional terms and conditions would be appropriate, and discus these with counsel for FRC. If agreement cannot be reached, the matter should be brought back before this panel for our decision. If agreement can be reached, an appropriate order should be prepared for our consideration. We may also be spoken to about the specific language for the terms and conditions which we have outlined above.

9.FRC shall not be required by Staff to comply with its undertaking to dispose of securities until the order provided for in this Decision has been made unless, after hearing the parties, the Commission otherwise orders.

February 6, 2001

"J. A. Geller""K. D. Adams"