Headnote
National Policy 11-203 – Process for Exemptive Relief applications in Multiple Jurisdictions – commodity pools granted relief from certain restrictions in National Instrument 81-102 Mutual Funds for securities lending transactions - funds invest assets in a passive portfolio of Canadian equity securities that are pledged to a Counterparty as security for performance of fund’s obligations under forward contracts with the Counterparty that give fund tax-efficient exposure to underlying interests – funds to lend up to 100% of the Canadian equity portfolio – funds will use an agent that is not the fund’s custodian or subcustodian - agents will meet the qualifications of a mutual fund custodian.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, subsections 2.12(1)1, 2.12(1)2, 2.12(1)12, 2.12(3), 2.15(3) and 6.8(5) and sections 2.16 and 19.1.
April 20, 2010
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
Man Investments Canada Corp.
(the Filer)
and
Man Canada AHL Alpha Fund
(the Present Fund)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for exemptive relief for the Present Fund, together with all other mutual funds now or in the future managed by the Filer in respect of which the representations set out below are applicable (collectively, the Funds and each, a 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 sections 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;
subsection 2.15(3) of NI 81-102 to permit each Fund to appoint an agent (an Agent), other than the custodian or sub-custodian of the Fund, as agent for administering the securities lending transactions entered into by the Fund;
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
subsection 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 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 this application; and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11‑102 Passport System (MI 11-102) is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, collectively, the Qualifying Jurisdictions).
Interpretation
Defined terms contained in NI 81-102, 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
The Filer was incorporated under the Canada Business Corporations Act by articles of incorporation dated March 22, 2006 as Man Alternative Investments Canada Corp. The Filer’s name was changed to Man Investments Canada Corp. pursuant to articles of amendment dated June 26, 2006.
The Filer is registered as an adviser in the category of Portfolio Manager in Ontario and Alberta. The Filer is also registered and as a dealer in the category of Exempt Market Dealer in Ontario. The Filer’s head office is located in Toronto, Ontario.
Each Fund is a mutual fund to which NI 81-102 applies. Each Fund is also a commodity pool subject to National Instrument 81-104 Commodity Pools. The securities of each Fund are qualified for distribution in each of the Qualifying Jurisdictions pursuant to a prospectus that has been prepared and filed in accordance with the securities legislation of the Qualifying Jurisdictions. Each Fund is, accordingly, a reporting issuer in each of the Qualifying Jurisdictions.
The OSC is the principal regulator to review and grant the Requested Relief as the head office of the Filer is in the Province of Ontario.
The Filer and the Funds are not in default of securities legislation in any of the Qualifying Jurisdictions.
Each Fund’s investment objectives include seeking the provision of tax-efficient returns similar to those of a specific type of investment. Each Fund’s investment objectives state that it may use specified derivatives to seek to provide these returns.
Each Fund pursues its investment objectives by means of specified derivatives. Generally, each Fund invests its assets in a portfolio of non-dividend paying common shares of Canadian public companies (the 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 contracts (each, a Forward Contract) with one or more financial institutions (each, a Counterparty) to effectively replace the economic return on its Common Share Portfolio with the economic return on an underlying interest (such as another mutual fund, one or more indices, or a notional basket of different securities) to achieve the Fund’s investment objectives.
Each Fund pledges its Common Share Portfolio to the Counterparty (or the portion thereof that is subject to the relevant Forward Contract with that Counterparty) as collateral security for performance of the Fund’s obligations under the Forward Contract with that Counterparty. The Common Share Portfolio (or that portion thereof) is held by the Counterparty pursuant to the applicable Forward Contract.
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 the Fund. The Filer proposes to arrange for the Common Share Portfolio to be lent to one or more borrowers indirectly through one or more Agents, other than the Fund’s custodian or sub-custodian.
Each Agent shall be acceptable to the Fund and the Counterparty and shall be either a Canadian financial institution (including a Counterparty) or an affiliate of a Canadian financial institution. It is not commercially practical for a Fund’s custodian or sub-custodian to act as Agent with respect to the Fund’s Common Share Portfolio for the reason set out in paragraph 8 above.
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.
A Counterparty must release its security interest in the securities of the Common Share Portfolio in order to allow the Fund to lend such securities, but will generally only do so provided that the Fund grants the Counterparty a security interest in the collateral.
To facilitate the Counterparty’s release of its security interest in the Common Share Portfolio of a Fund, securities in the Common Share Portfolio will be loaned only to borrowers that are acceptable to the Fund and the Counterparty, and that have an approved credit rating as defined in NI 81-102 or whose obligations are unconditionally guaranteed by persons or companies that have such a credit rating. A borrower may include an affiliate of the Counterparty.
The collateral received by a Fund in respect of a securities lending transaction, and in which the Counterparty will have a security interest, will be in the form of cash, qualified securities and/or other collateral permitted by NI 81-102, other than collateral described in subsection 2.12(1)6(d) or in paragraph (b) of the definition of qualified security under NI 81-102. The non-cash collateral will be held by the Agent in the name of the Counterparty and 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 test contained in the Legislation that provides the principal regulator with the jurisdiction to make the decision has been met.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) with respect to the exemption from subsection 2.12(1)12 of NI 81-102, each Fund enters into a Forward Contract with an applicable Counterparty and grants that Counterparty a security interest in the securities subject to that Forward Contract and, in connection with a securities lending transaction relative to those securities,
(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;
(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, 2.12(1)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 are acceptable to the Fund and the Counterparty, and that have an approved credit rating (as defined in NI 81-102) or 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 13;
(c) with respect to the exemption from subsection 2.15(3) of NI 81-102:
(i) each Fund enters into a written agreement with an Agent that complies with each of the requirements set forth in subsection 2.15(4) of NI 81-102, except as set out herein;
(ii) the Agent administering the securities lending transaction of each Fund:
(A) is in compliance with the standard of care prescribed in subsection 2.15(5) of NI 81-102; and
(B) shall be acceptable to the Fund and Counterparty and shall be either 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, the Filer and the Funds comply with the requirements of section 2.16 of NI 81-102 as if references to an agent appointed under section 2.15 in that section are references to an agent appointed by the manager; 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 13; and
(ii) the collateral delivered to the Fund pursuant to the securities lending transaction is held by the Agent, as described in representations 14 and 15.
“Darren McKall”
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR Project # 1552696