Headnote National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions - Related issuer relief and fund on fund relief – related issuer relief conditional on IRC approval, compliance with independent pricing and transparency requirements, investment restrictions for primary offerings – fund on fund relief conditional on compliance with requirements similar to section 2.5 of NI 81-102.
Applicable Legislative Provisions
Securities Act (Ontario), sections 111(2)(a), 111(2)(b) 111(2)(c)(ii), 111(3) and 113.
National Instrument 31-103 – Registration Requirements and Exemptions, sections 13.5(2)(a) and 15.
National Instrument 81-107 – Independent Review Committee for Investment Funds, section 6.2.
January 18, 2011
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
Manulife Asset Management Limited
(THE FILER) AND THE Funds (as defined below)
Decision
Background
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting:
(a) the Mutual Funds (as defined below) from the requirements of securities legislation (the Related Issuer Requirements) that prohibit a mutual fund from knowingly making or holding an investment: (i) in any person or company who is a substantial securityholder of the mutual fund, its management company or distribution company; or (ii) in any person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial securityholder; or (iii) in an issuer in which any person or company who is a substantial securityholder of the mutual fund, its management company or distribution company has a significant interest, to permit the following proposed transactions (the Related Issuer Relief):
(i) the Mutual Funds to invest in non-exchange-traded debt securities of Manulife Financial Corporation (MFC) and The Manufacturers Life Insurance Company (MLI), each of which is a substantial securityholder of the Filer, and of other issuers in which MFC or MLI has a significant interest (these issuers, together with MFC and MLI, the Related Issuers) in the secondary market or on a primary distribution or treasury offering (a Primary Offering); and
(ii) the Pooled Funds (as defined below) to invest in:
(A) exchange-traded securities of Related Issuers in the secondary market; and
(B) securities of other Pooled Funds (the Underlying Funds); and
(b) the Filer, or an affiliate of the Filer, as the registered adviser of a Fund (each, an Investment Portfolio Manager), from the prohibition in Section 13.5(2)(a) of National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) against a registered adviser knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director unless the specific fact is disclosed to the client and the written consent of the client is obtained, to permit the following proposed transactions (the NI 31-103 Relief):
(i) the Funds to purchase non-exchange-traded debt securities of Related Issuers in the secondary market or on a Primary Offering; and
(ii) the Pooled Funds to purchase:
(A) exchange-traded securities of Related Issuers in the secondary market; and
(B) securities of the Underlying Funds.
The proposed transactions outlined above are referred to below as the Related Issuer Transactions.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the Application;
(b) the Filer has provided notice that subsection 4.7(2) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta in respect of the Related Issuer Relief, and in each of the Provinces and Territories of Canada other than Ontario (together with Ontario, the Passport Jurisdictions) in respect of the NI 31-103 Relief.
Interpretation
Terms defined in the Legislation, MI 11-102, National Instrument 14-101 – Definitions, NI 31-103, National Instrument 81-102 – Mutual Funds (NI 81-102) 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 the following existing or future investment funds of which the Filer or an affiliate of the Filer is the manager: existing or future mutual funds to which NI 81-102 and NI 81-107 apply (the NI 81-102 Funds); existing or future mutual funds to which NI 81-102 and NI 81-107 do not apply (the Pooled Funds and, together with the NI 81-102 Funds, the Mutual Funds); and existing or future investment funds to which NI 81-107 applies but to which NI 81-102 does not apply (the Closed-End Funds).
Representations
This decision is based on the following facts represented by the Filer:
The Investment Portfolio Managers
The Filer is a corporation incorporated under the laws of Ontario, with its registered head office located in Toronto, Ontario. The Filer is an indirect wholly-owned subsidiary of MLI, which in turn is a wholly-owned subsidiary of MFC.
The Filer is registered in the categories of commodity trading manager, exempt market dealer, mutual fund dealer, portfolio manager and investment fund manager.
An Investment Portfolio Manager acts, or will act, as the investment fund manager of the Funds. An Investment Portfolio Manager acts, or will act, as the portfolio advisor of the Funds. An Investment Portfolio Manager may also act as the trustee of a Fund constituted as a trust.
The Filer and each of the existing Funds are not in default of securities legislation, except to the extent that (i) an NI 81-102 Fund engaged in related issuer trades (Related Issuer Trades) before the date of this decision document and following the expiry of previously obtained exemptive relief dated December 19, 2002 relating to the investment by the Funds in debt securities of related issuers (the 2002 Relief); and (ii) a Pooled Fund engaged in Related Issuer Trades or fund on fund trades before the date of this decision document. The Related Issuer Trades involved the purchase by certain NI 81-102 Funds and Pooled Funds of non-exchanged traded debt securities of affiliates of the Filer (certain of which would have been permitted by the 2002 Relief). Such Related Issuer Trades were reviewed and approved by the relevant IRC (as defined below) and each IRC was satisfied that the Related Issuer Trades were made uninfluenced by considerations other than the best interests of the Funds involved.
The Funds
Each Fund is or will be, an investment fund that is a trust, a corporation or a limited partnership that is established under the laws of Ontario, Canada or other jurisdiction of Canada.
Each Mutual Fund is or will be, a mutual fund in Ontario under the Legislation.
A Fund’s reliance on the Exemption Sought will be compatible with its investment objective and strategies.
Each NI 81-102 Fund is, or will be, a reporting issuer in one or more Passport Jurisdictions whose securities are, or will be, qualified for distribution pursuant to prospectuses and annual information forms that have been, or will be, prepared and filed in accordance with the securities legislation of those Passport Jurisdictions.
Each Closed-End Fund is, or will be, a reporting issuer in Ontario and one or more of the other Passport Jurisdictions whose securities are, or will be, qualified for distribution pursuant to prospectuses that have been, or will be, prepared and filed in accordance with the securities legislation of Ontario and those other Passport Jurisdictions.
The securities of each of the Pooled Funds are, or will be, distributed on a private placement basis pursuant to the Legislation and the Pooled Funds will not be reporting issuers.
Substantial Securityholders, Significant Issuers and Common Officers/Directors
MFC and MLI are both substantial securityholders of the Filer. MFC has a significant interest in MLI and may have a significant interest in other issuers, including an Underlying Fund. MLI may also have a significant interest in other issuers.
Officers and directors of an Investment Portfolio Manager that is the registered adviser of a Fund may also be officers and directors of a Related Issuer or an Underlying Fund.
A Pooled Fund, alone or together with one or more Pooled Funds, may be a substantial securityholder of an Underlying Fund.
The Independent Review Committees of the Funds
Each NI 81-102 Fund and Closed-End Fund has, or will have, an independent review committee (an IRC) in accordance with the requirements of NI 81-107. Each Related Issuer Transaction involving a NI 81-102 Fund or a Closed-End Fund will be authorized by the relevant IRC of the NI 81-102 Fund or Closed-End Fund under Section 5.2 of NI 81-107 and the manager and the IRC of the NI 81-102 Fund or the Closed-End Fund, as applicable, will comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Related Issuer Transaction.
Though the Pooled Funds are not, or will not be, subject to the requirements of NI 81-107, each Pooled Fund has, or will have, an IRC at the time the Pooled Fund conducts a Related Issuer Transaction. All existing Pooled Funds have already established an IRC in order to comply with conditions attached to the 2002 Relief. The mandate of the IRC of each Pooled Fund will include approving Related Issuer Transactions involving a Pooled Fund, other than investments in Underlying Funds.
The IRC of a Pooled Fund will now be composed in accordance with Section 3.7 of NI 81-107 and will now be expected to comply with the standard of care set out in Section 3.9 of NI 81-107. The IRC of a Pooled Fund will not approve a Related Issuer Transaction subject to its mandate unless the IRC has made the determination set out in Section 5.2(2) of NI 81-107.
If the IRC of a Pooled Fund becomes aware of an instance where the Filer or an affiliate of the Filer, as manager of the Pooled Fund, did not comply with the terms of this decision or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Pooled Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the jurisdiction under which the Pooled Fund is organized.
Investment in Securities of Related Issuers
- The Related Issuers are or may be issuers of highly rated commercial paper and debt instruments. The Filer considers that it would be in the best interest of the Funds to have access to non-exchange-traded debt securities of the Related Issuers for the following reasons:
(a) there is a limited supply of highly rated corporate debt;
(b) diversification is reduced to the extent that a Fund is limited with respect to investment opportunities; and
(c) to the extent that a Fund is trying to track or outperform a benchmark, it is important for the Fund to be able to purchase any securities included in the benchmark. Debt securities of Related Issuers are included in certain Canadian indices and may also be included in foreign debt indices.
Section 6.2(2) of NI 81-107 provides relief from the Related Issuer Requirements and Section 13.5(2)(a) of NI 31-103 for the NI 81-102 Funds and the Closed-End Funds, as applicable, but only if, among other conditions, the purchase is made on an exchange on which the securities of the issuer are listed and traded, which may not be the case with debt securities.
As the Pooled Funds are not subject to NI 81-107, the exemption from the Related Issuer Requirements and section 13.5(2)(a) of NI 31-103 under Section 6.2(2) of NI 81-107 is not available to the Pooled Funds.
The Exemption Sought would permit the Funds to have the same ability to purchase debt and equity securities of Related Issuers in the secondary market and to purchase certain debt securities of Related Issuers in a Primary Offering.
Each non-exchange-traded debt security of a Related Issuer purchased by a Fund in the secondary market will have, at the time of the purchase, an “approved credit rating” by an “approved credit rating organization” within the meaning of those terms in NI 81-102.
The debt securities of Related Issuers that are purchased by a Fund in a Primary Offering will be non-exchange-traded debt securities, other than asset backed commercial paper securities, with a term to maturity of 365 days or more, the issuer of which has been given and continues to have, at the time of purchase, an “approved credit rating” by an “approved credit rating organization” and will be purchased in a Primary Offering where the terms, such as the size and the pricing, will be a matter of public record as evidenced in a prospectus, offering memorandum, press release or other public document.
Investment in Underlying Funds by the Pooled Funds
The Filer believes investment by the Pooled Funds in the Underlying Funds will be in the best interests of the Pooled Funds and help them achieve their investment objective on a diversified basis and obtain broad exposure to the asset classes each proposes to invest in. Investing directly in the securities held by the Underlying Funds is a less desirable option owing to the increased costs and inefficiencies that are associated with such direct investing. Investment by the Pooled Funds in the Underlying Funds will also increase the asset base of the Underlying Funds, enabling the Underlying Funds to further diversify their portfolios and achieve economies of scale.
Each Pooled Fund will manage its investments in an Underlying Fund with discretion to buy and sell securities of the Underlying Fund, selected in accordance with the Pooled Fund’s investment objective, as well as to alter its holdings in any Underlying Fund in which it invests.
Relief from the Related Issuer Requirements is necessary because the amounts invested from time to time in an Underlying Fund by a Pooled Fund may exceed 20% of the outstanding voting securities of any single Underlying Fund. Accordingly, each Pooled Fund could, either alone or together with other Pooled Funds, become a substantial securityholder of an Underlying Fund. Relief is also required as the Filer, or a substantial securityholder of the Filer, may have a significant interest in an Underlying Fund. Accordingly, each Pooled Fund would be prohibited from investing in such Underlying Funds, unless relief from the Related Issuer Requirements is granted.
In the absence of relief from Section 13.5(2)(a) of NI 31-103, an Investment Portfolio Manager of a Pooled Fund would also be prohibited from knowingly causing the Pooled Fund to invest in Underlying Funds that have officers or directors in common with the Investment Portfolio Manager of the Pooled Fund without prior disclosure and consent.
Investors in a Pooled Fund will be entitled to receive from the Filer, on request and free of charge, a copy of any offering memorandum or other disclosure document and, once available, the annual and semi-annual financial statements, for all Underlying Funds in which the Pooled Fund may invest its assets.
Investors in a Pooled Fund will also be provided with annual financial statements of the Pooled Fund in accordance with securities legislation, including an auditor’s report.
As the Pooled Funds are not subject to NI 81-102, the exemption from the Related Issuer Requirements and section 13.5(2)(a) of NI 31-103 under Section 2.5(7) of NI 81-102 is not available to them.
Related Issuer Transactions
- Each Related Issuer Transaction conducted by a Fund will represent the business judgment of ‘responsible persons’ uninfluenced by considerations other than the best interests of the Funds.
The 2002 Relief
The 2002 Relief was granted in a decision document dated December 19, 2002.
The Filer is seeking the Exemption Sought to vary the 2002 Relief as it applies to the Pooled Funds by updating it. This decision updates the 2002 Relief by:
(a) extending the relief to permit investments in Related Issuers beyond those contemplated by the 2002 Relief;
(b) permitting the investment by a Pooled Fund in an Underlying Fund; and
(c) conforming the representations and conditions to those of more recent decisions which have granted exemptive relief similar to the Exemption Sought.
- As of the date of this decision, the Pooled Funds will no longer rely on the 2002 Relief which, as of the date of this decision, will be considered succeeded by this decision.
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:
- to permit a Pooled Fund to make and hold an investment in exchange-traded securities of a Related Issuer in the secondary market on the following conditions:
(a) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Pooled Fund;
(b) at the time of the purchase, the IRC of the Pooled Fund has approved the investment in accordance with Section 5.2(2) of NI 81-107;
(c) the manager of the Pooled Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Pooled Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment;
(d) the purchase is made on an exchange on which the securities are listed and traded;
(e) the transaction complies with any applicable “market integrity requirements” as defined in NI 81-107; and
(f) no later than the 90th day after the financial year-end of the Pooled Fund, the Filer, or an affiliate of the Filer, as manager of the Pooled Fund, files with the securities regulatory authority or regulator the particulars of any such investments;
- to permit a Pooled Fund to make and hold an investment in an Underlying Fund on the following conditions:
(a) securities of each Pooled Fund are distributed only on a private placement basis pursuant to available exemptions from the prospectus and dealer registration requirements;
(b) the investment is consistent with, or is necessary to meet, the investment objective of the Pooled Fund;
(c) each Pooled Fund does not vote any of the securities it holds of an Underlying Fund except that the Pooled Fund may, if the Filer so chooses, arrange for all the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Pooled Fund;
(d) no management fees or incentive fees are payable by a Pooled Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;
(e) no sales or redemption fees are payable by the Pooled Fund in relation to its purchases or redemptions of securities of an Underlying Fund; and
(f) investors in each Pooled Fund receive written disclosure that discloses:
(i) the intent of the Pooled Fund to invest its assets directly or indirectly in securities of the Underlying Funds;
(ii) that the Underlying Funds are managed by the Filer or an affiliate of the Filer;
(iii) the percentage of net assets of the Pooled Fund dedicated to the investment in securities of the Underlying Funds; and
(iv) the process or criteria used to select the Underlying Funds.
- to permit a Fund to make and hold an investment in non-exchange-traded debt securities of a Related Issuer in the secondary market on the following conditions:
(a) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Fund;
(b) at the time of the purchase, the IRC of the Fund has approved the investment in accordance with Section 5.2(2) of NI 81-107;
(c) the manager of the Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment;
(d) the security has been given and continues, at the time of the purchase, to have an “approved credit rating” by an “approved credit rating organization” within the meaning of those terms in NI 81-102;
(e) the price payable for the security is not more than the ask price of the security;
(f) the ask price of the security is determined as follows:
(i) if the purchase occurs on a marketplace, the price payable is determined in accordance with the requirements of that marketplace; or
(ii) if the purchase does not occur on a marketplace,
(A) the Fund may pay the price for the security at which an independent, arm’s-length seller is willing to sell the security; or
(B) if the Fund does not purchase the security from an independent arm’s-length seller, the Fund must pay the price quoted publicly by an independent marketplace or obtain, immediately before the purchase, at least one quote from an independent, arm’s-length purchaser or seller and not pay more than that quote;
(g) the transaction complies with any applicable “market integrity requirements” as defined in NI 81-107; and
(h) no later than the time the Fund files its annual financial statements, in the case of a NI 81-102 Fund or a Closed-End Fund, and no later than the 90th day after each financial year-end, in the case of a Pooled Fund, the Filer, or an affiliate of the Filer, as manager of the Fund, files with the securities regulatory authority or regulator the particulars of any such investments;
- to permit a Fund to make and hold an investment in non-exchange-traded debt securities of Related Issuer in a Primary Offering on the following conditions:
(a) the purchase or holding is consistent with, or is necessary to meet, the investment objective of the Fund;
(b) at the time of the purchase, the IRC of the Fund has approved the investment in accordance with Section 5.2(2) of NI 81-107;
(c) the manager of the Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment;
(d) the size of the Primary Offering is at least $100 million;
(e) at least 2 purchasers who are independent, arm’s-length purchasers, which may include “independent underwriters” within the meaning of National Instrument 33-105 - Underwriting Conflicts, collectively purchase at least 20% of the Primary Offering;
(f) no Fund shall participate in the Primary Offering if following its purchase the Fund would have more than 5% of its net assets invested in non-exchange-traded debt securities of a Related Issuer;
(g) no Fund shall participate in the Primary Offering if following its purchase the Fund together with related Funds will hold more than 20% of the securities issued in the Primary Offering;
(h) the price paid for the securities by a Fund in the Primary Offering shall be no higher than the lowest price paid by any of the arm’s-length purchasers who participate in the Primary Offering; and
(i) no later than the time the Fund files its annual financial statements, in the case of a NI 81-102 Fund or a Closed-End Fund, and no later than the 90th day after each financial year-end, in the case of a Pooled Fund, the Filer, or an affiliate of the Filer, as manager of the Fund, files with the securities regulatory authority or regulator the particulars of any such investments.
Related Issuer Relief
“Paulette L. Kennedy”
“Mary G. Condon”
Paulette L. Kennedy
Mary G. Condon
Commissioner
Commissioner
Ontario Securities Commission
Ontario Securities Commission
NI 31-103 Relief
“Vera Nunes”
Vera Nunes
Assistant Manager, Investment Funds
Ontario Securities Commission