By James Langton

(February 7 – 17:40 ET) – The Ontario Securities Commission will allow funds managed by Frank Russell Canada Ltd. to hold stock in the companies that distribute the funds, providing it can agree to certain conditions.

An OSC panel, composed of Jack Geller and Kerry Adams, found that although the Securities Act would normally prohibit the funds from owning the stock of companies that own its distributors — in this case TD Bank and Royal Bank. The full-service brokerage arms of banks distribute Russell’s Sovereign program. “However, the prohibitions are not absolute ones. 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 reaching its decision, the panel noted that Frank Russell generally isn’t directing portfolio trades; that the portfolio advisors of the funds have complete discretion within their mandate; that the portfolio advisors of the funds are at arm’s length with Russell; and that Russell does not in fact influence the decisions of the portfolio advisors.

Although it noted that there are provisions in the agreements between Russell and the advisors that could allow interference, the panel also noted that those agreements could change to allow even more interference over time.

To prevent future interference, the OSC said that the exemption will only apply to investments made or held at a time when:

  • Neither Russell nor any of the portfolio advisors of the funds is acting on a non-arm’s length basis with the relevant distribution company;
  • None of Russell, the banks, their affiliates, associates or substantial shareholders influences any investment decision;
  • There is no arrangement or understanding in effect which would enable any distribution company of a fund to influence portfolio decisions;
  • Russell can only make investment decisions when the portfolio advisor has resigned and hasn’t yet been replaced; and
  • Russell can’t make decisions about the stocks it would otherwise be banned from owning.

The panel also noted, “Staff should consider what additional terms and conditions would be appropriate, and discuss these with counsel for Russell.”

If an agreement cannot be reached, the matter will return to the panel. The panel also reserved the right to approve any agreement reached between OSC staff and Russell.