Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions - Mutual funds granted relief from certain restrictions in National Instrument 81-102 Mutual Funds on securities lending transactions, including (i) the 50% limit on lending; (ii) the requirement to use a custodial lending agent; and (iii) the requirement to hold the collateral during the course of the transaction - Mutual funds invest their assets in a basket of Canadian equity securities that are pledged to a Counterparty for performance of the funds' obligations under a forward contract giving exposure to underlying interests - Mutual funds wanting to lend up to 100% of basket of Canadian equity securities - Not practical for custodian to act as securities lending agent as it may not have control over the Canadian equity securities - Counterparty must release its security interest in the Canadian equity securities in order to allow the fund to lend such securities, provided the fund grants the Counterparty a security interest in the collateral held by the fund for the loaned securities - National Instrument 81-102 Mutual Funds. Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, sections 2.12(1)1, 2.12(1)2, 2.12(1)12, 2.12(3), 2.15, 2.16, 6.8(5) and 19.1.
August 12, 2008
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 CI Investments Inc. (the Filer)
and
CI Short-Term Advantage Corporate Class CI Global High Dividend Advantage Corporate Class CI Global High Dividend Advantage Fund
(the Funds)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for exemptive relief for each Fund from the following provisions of National Instrument 81-102 Mutual Funds (NI 81-102):
subsection 2.12(1)1 of NI 81-102 to permit each Fund to enter into securities lending transactions that will not be administered in compliance with all the requirements of section 2.15 and 2.16 of NI 81-102;
subsection 2.12(1)2 of NI 81-102 to permit each Fund to enter into securities lending transactions that do not fully comply with all the requirements of section 2.12 of NI 81-102;
subsection 2.12(1)12 of NI 81-102 to permit each Fund to enter into securities lending transactions in which the aggregate market value of securities loaned by the Fund exceeds 50% of the total assets of the Fund;
subsection 2.12(3) of NI 81-102 to permit each Fund, during the term of a securities lending transaction, to not hold or to dispose of any non-cash collateral delivered to it as a collateral in the transaction;
section 2.15 of NI 81-102 to permit the Filer to lend securities of each Fund either through an agent (Agent) that is not the custodian or sub-custodian of the Fund or directly to a borrower;
section 2.16 of NI 81-102 to the extent this section contemplates that securities lending transactions be entered into through an agent appointed under section 2.15 of NI 81-102; and
section 6.8(5) of NI 81-102 to permit the collateral delivered to each Fund in connection with a securities lending transaction to not be held under the custodianship of the custodian or a sub-custodian of the Fund.
Paragraphs 1 through 7 are collectively referred to as the Requested Relief.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission (OSC) is the principal regulator for this application; and
(b) the Filer on behalf of each Fund has provided notice that subsection 4.7(1)(c) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.
Representations
This Decision is based on the following facts represented by the Filer on behalf of each Fund:
Facts
Each Fund is a mutual fund to which NI 81-102 applies. Each Fund is a reporting issuer under the securities legislation of each province and territory of Canada.
The Filer, a corporation incorporated under the laws of the Province of Ontario, acts as the trustee, manager and portfolio adviser of each Fund. Pursuant to the requirements of MI 11-102, the OSC is the principal regulator to review and grant the Requested Relief as the head office of the Filer is in Ontario.
The Filer and the Funds are not in default of securities legislation in any province or territory of Canada.
Each Fund’s investment objective reflects the Fund’s goal of providing tax-efficient returns for investors based on the returns of specific types of securities. The investment objective of each Fund includes the ability of each Fund to obtain such returns through use of specified derivatives.
Each Fund pursues its investment objective by means of a specified derivative. Each Fund invests its assets in a basket of Canadian equity securities (a Common Share Portfolio). The Common Share Portfolio of a Fund is generally a static portfolio that is not actively managed except in limited circumstances. Each Fund also enters into one or more forward share purchase agreements or other equivalent financial instruments (a Forward Contract) with a Canadian chartered bank (a Counterparty) to effectively replace the risks and returns of its Common Share Portfolio with returns based on the returns of an underlying interest (such as another mutual fund, index or notional basket of securities).
Each Fund pledges the securities within its Common Share Portfolio to its Counterparty as collateral security for performance of the Fund’s obligations under its Forward Contract. The Common Share Portfolio of a Fund is held by either the Fund’s custodian or the Counterparty.
The Filer proposes to engage in securities lending transactions on behalf of each Fund that may represent up to 100% of the net assets of that Fund, in order to earn additional returns for that Fund. The Filer may lend the securities of a Fund to one or more borrowers indirectly through an Agent, other than the custodian or sub-custodian of the Fund, which will be a Canadian financial institution or the investment bank affiliate of a Canadian financial institution. It is not practical for the custodian of a Fund to act as Agent with respect to the Fund’s securities lending transactions as it may not have control over the securities in the Fund’s Common Share Portfolio for the reason set out in paragraph 6 above.
Each Fund may appoint its Counterparty or, in appropriate circumstances, an affiliated dealer of its Counterparty to act as that Fund’s Agent in administering that Fund’s securities lending activities.
The Filer will ensure that any Agent through which a Fund lends securities maintains appropriate internal controls, procedures, and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.
If the Filer lends securities to borrowers directly on behalf of a Fund, the Filer will, in administering such securities lending transactions, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances, and will ensure that the borrower maintains appropriate internal controls, procedures, and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.
A Counterparty must release its security interest in the securities in the Common Share Portfolio of a Fund in order to allow the Fund to lend such securities, provided that the Fund grants the Counterparty a security interest in the collateral held by the Fund for the loaned securities.
To facilitate the Counterparty’s release of its security interest in the securities in the Common Share Portfolio of a Fund, the Filer will ensure the securities of the Common Share Portfolio of the Fund are loaned to an affiliate of the Counterparty, which will be a registered dealer and a member of the Investment Industry Regulatory Organization of Canada (IIROC) or another borrower that is acceptable to both the Filer and the Counterparty. To facilitate the Counterparty’s perfection of its security interest in the collateral held by the Fund for the loaned securities, the Filer will ensure that the Fund’s collateral for the loan is held by an affiliate of the Counterparty, which will be a registered dealer and a member of IIROC.
The non-cash collateral received by a Fund in respect of a securities lending transaction, and in which the Counterparty will have a security interest, will not be reinvested in any other types of investment products.
The prospectus of each Fund discloses that the Fund may enter into securities lending transactions. Other than as set forth herein, any securities lending transactions on behalf of a Fund will be conducted in accordance with the provisions of NI 81-102.
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 Requested Relief is granted provided that:
(a) with respect to the exemption from subsection 2.12(1)12 of NI 81-102, each Fund, in connection with a securities lending transaction is using a Forward Contract and,
(i) receives the collateral that
(A) is prescribed by subsections 2.12(1)3 to 6 of NI 81-102 other than collateral described in subsection 2.12(1)6(d) or in paragraph (b) of the definition of “qualified security”, and
(B) is marked to market on each business day in accordance with subsection 2.12(1)7 of NI 81-102,
(ii) has the rights set forth in subsections 2.12(1)8 to 9 and 2.12(1)11 of NI 81-102,
(iii) complies with subsection 2.12(1)10 of NI 81-102, and
(iv) lends its securities only to borrowers that have an approved credit rating (as defined in NI 81-102) or to borrowers whose obligations to the Fund are fully and unconditionally guaranteed by persons or companies that have such a credit rating;
(b) with respect to the exemption from subsection 2.12(3) of NI 81-102, each Fund provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 11;
(c) with respect to the exemption from section 2.15 of NI 81-102:
(i) where the Filer lends securities of a Fund directly to a borrower, the Filer complies with the requirements of section 2.15 of NI 81-102 as if it were the agent contemplated by that section; and
(ii) where the Filer lends securities of a Fund through an Agent,
(A) the Filer and the Fund enter into a written agreement with the Agent that complies with each of the requirements set forth in subsection 2.15(4) of NI 81-102; and
(B) the Agent administering the securities lending transaction of each Fund
(I) is in compliance with the standard of care prescribed in subsection 2.15(5) of NI 81-102; and
(II) is a bank or trust company described in paragraph 1 or 2 of section 6.2 of NI 81-102 or the investment bank affiliate of such bank or trust company that is registered as an investment dealer or in an equivalent registration category;
(d) with respect to the exemption from section 2.16 of NI 81-102,
(i) where the Filer lends securities of a Fund directly to a borrower, the Filer and the Funds comply with the requirements of section 2.16 of NI 81-102 as if the Filer itself were the agent contemplated in that section; and
(ii) where the Filer lends securities of a Fund through an Agent, the Filer and the Funds comply with the requirements of section 2.16 of NI 81-102 as if the Agent appointed by the Filer were the agent contemplated in that section; and
(e) with respect to the exemption from subsection 6.8(5) of NI 81-102, each Fund:
(i) provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 11; and
(ii) the collateral delivered to the Fund pursuant to the securities lending transaction is held by an affiliate of the Counterparty, which will be a registered dealer and a member of IIROC, as described in representation 12.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR #1278289
Headnote
National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Mutual funds granted relief from certain restrictions in National Instrument 81-102 Mutual Funds on securities lending transactions, including (i) the 50% limit on lending; (ii) the requirement to use a custodial lending agent; and (iii) the requirement to hold the collateral during the course of the transaction – Mutual funds invest their assets in a basket of Canadian equity securities that are pledged to a Counterparty for performance of the funds’ obligations under a forward contract giving exposure to underlying interests – Mutual funds wanting to lend up to 100% of the basket of Canadian equity securities – Not practical for custodian to act as securities lending agent as it may not have control over the Canadian equity securities - Counterparty must release its security interest in the Canadian equity securities in order to allow the fund to lend such securities, provided the fund grants the Counterparty a security interest in the collateral held by the fund for the loaned securities – National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, sections 2.12(1)1, 2.12(1)2, 2.12(1)12, 2.12(3), 2.15, 2.16, 6.8(5) and 19.1.