Connor, Clark & Lunn Funds Inc. and Scheer, Rowlett & Associates Investment Management Ltd., 2012 CanLII 63052

Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions– relief granted from the mutual fund conflict of interest restrictions in the Securities Act (Ontario) to allow pooled funds to make and hold an investment from time to time in more than 20% of the outstanding voting securities of an underlying fund – relief subject to certain conditions.

Applicable Legislative Provisions

Securities Act (Ontario), R.S.O. 1990. c. S.5, as amended, sections 111(2)(b), 111(3) and 113.

Date: October 23, 2012

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

CONNOR, CLARK & LUNN FUNDS INC. (CC&L FI) and

SCHEER, ROWLETT & ASSOCIATES INVESTMENT MANAGEMENT LTD. (SRA)

(collectively, the Filers)

AND

CC&L SMALL CAP MARKET NEUTRAL FUND (Initial CC&L FI Top Fund) and

SRA/PCJ CANADIAN EQUITY CORE FUND AND SRA BALANCED FUND (Initial SRA Top Funds)

(collectively, the Initial Top Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers, on their behalf and on behalf of the Initial Top Funds and any other investment fund which is not a reporting issuer under the Securities Act (Ontario) (the Act) established, advised or managed by a Filer after the date hereof (the Future Top Funds and, together with the Initial Top Funds, the Top Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), exempting the Filers and the Top Funds from:

1. the restriction contained in paragraph 111(2)(b) and subsection 111(3) of the Act which prohibits:

(a) a mutual fund from knowingly making an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder; and

(b) a mutual fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) above

(the Exemption Sought).

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filers:

The Filers

1. CC&L FI is a corporation incorporated under the laws of Canada and SRA is a corporation continued under the laws of Saskatchewan. Each of the Filers has its head office in Toronto, Ontario. Each of the Filers is a member of the Connor Clark & Lunn Financial Group.

2. CC&L FI is registered as an investment fund manager in Ontario. CC&L FI currently intends to offer pooled funds on a private placement basis and does not have investment management agreements with clients.

3. SRA is registered as an investment fund manager, portfolio manager and exempt market dealer in Ontario and as an investment fund manager and portfolio manager in Nova Scotia, New Brunswick, Quebec, Manitoba, Saskatchewan, Alberta, British Columbia and Northwest Territories.

4. SRA enters into investment management agreements with clients and also offers pooled funds on a private placement basis.

5. Pursuant to management agreements, a Filer will be the investment fund manager of a Top Fund (the Manager) and, in the case of SRA, may also be a portfolio manager.

6. Pursuant to management agreements, each of the Filers either have the power and authority to make investment decisions for the relevant Initial Top Funds or appoint portfolio managers to manage the investment portfolios of the relevant Initial Top Fund and will have the power and authority to manage the investments or appoint portfolio managers to manage the investment portfolios of the Future Top Funds to be managed by such Filer. A portfolio manager will have complete discretion to invest and reinvest or to arrange for the investment and reinvestment of all or part of a Top Fund’s assets, and is or will be responsible for executing or arranging for the execution of all portfolio transactions in respect of the Top Fund. The portfolio manager(s) will have discretion to invest in Underlying Funds (as defined below) managed by it or its affiliates, if authorized by the relevant Filer.

7. The Filers are not in default of securities legislation in any of the provinces and territories of Canada.

The Top Funds

8. Each Top Fund is, or will be, a trust governed by the laws of Ontario, the securities of which are, or will be, offered for sale on a private placement basis pursuant to available prospectus exemptions under National Instrument 45-106 Prospectus Exemptions (NI 45-106).

9. Each Top Fund is, or will be, a “mutual fund” as defined in securities legislation of the jurisdictions in which the Top Funds are distributed.

10. None of the Top Funds is, or will be, a reporting issuer in any jurisdiction of Canada.

11. None of the Initial Top Funds is in default of any securities legislation of any jurisdiction in Canada.

12. Subject to obtaining the Exemption Sought, the Top Funds may invest all, or a certain portion, of their assets in voting securities of other investment funds established and managed by the Manager, or an affiliate of the Manager (an Underlying Fund or Underlying Funds).

13. Future Top Funds for which CC&L FI will be the investment fund manager may invest in Underlying Funds managed by CC&L FI or its affiliated entities.

14. The Initial SRA Top Funds and Future Top Funds for which SRA will be the investment fund manager invest and may continue to invest in Underlying Funds managed by SRA or its affiliated entities.

15. Currently, none of the pooled funds managed by SRA other than the Initial SRA Top Funds invest in one or more Underlying Funds.

The Underlying Funds

16. Each of the Underlying Funds is, or will be, a trust under the laws of the Province of Ontario or of another province of Canada, the securities of which are, or will be, offered for sale on a private placement basis pursuant to available prospectus exemptions under NI 45-106.

17. Each of the Underlying Funds is, or will be, a “mutual fund” as defined in the securities legislation of the jurisdictions in which the Underlying Funds are distributed.

18. None of the Underlying Funds is, or will be, a reporting issuer in any jurisdiction of Canada.

19. None of the Underlying Funds is in default of any securities legislation of any jurisdiction in Canada.

20. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.

Fund-on-Fund Investing

21. Each Top Fund may provide investors with exposure to the investment portfolios of the Underlying Funds and their respective investment strategies (the Fund-on-Fund Structure).

22. To achieve their investment objectives, a Top Fund may invest in Underlying Funds which are managed by various portfolio managers affiliated with the Filers (Fund-on-Fund Investing).

23. While in certain cases, the portfolio manager(s) may determine to invest the assets of the Top Funds in securities, in other cases, it may be in the best interests of the Top Fund to invest in an Underlying Fund due to the efficiencies and diversification which will be achieved by combining the assets of the Top Fund with those of an Underlying Fund or Underlying Funds.

24. The Filers believe that a Fund-on-Fund Structure provides an efficient and cost-effective manner of pursuing portfolio diversification on behalf of the Top Funds, rather than through the direct purchase of securities or the use of managed accounts with the various fund managers (which would yield the same results with greater administrative costs to both the Top Funds and the Underlying Funds’ managers but which might not be available to investors). Through investing in the Underlying Funds, the Top Funds will be able, where available, to achieve greater diversification at a lower cost than investing directly in the securities held by the applicable Underlying Funds.

25. The Fund-on-Fund Structure will allow investors with smaller investments to have access to a larger variety of investments than would otherwise be available.

26. Investment by the Top Funds in the Underlying Funds will increase the asset base of the Underlying Funds, enabling the Underlying Funds to further diversify their portfolios to the benefit of all their investors. The larger asset base will also benefit investors in the Underlying Funds through achieving favourable pricing and transaction costs on portfolio trades, increased access to investments where there is a minimum subscription or purchase amount, and economies of scale through greater administrative efficiency.

27. The actual weightings of the investment by a Top Fund in an Underlying Fund will require review and will be adjusted by the portfolio manager to ensure that the investment weighting continues to be appropriate for the Top Fund's investment objectives.

28. Any investment made by a Top Fund in an Underlying Fund will be aligned with the investment objectives, investment strategy, risk profile and other principal terms of the Top Fund.

29. The amounts invested from time to time in an Underlying Fund by a Top Fund, either alone or together with other Top Funds, may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Top Fund could, either alone or together with other Top Funds, become a “substantial securityholder” of an Underlying Fund for purposes of the Act. The Top Funds are, or will be, related mutual funds to the Underlying Funds by virtue of the common management by the Filers or an affiliate or related party of the Filer.

30. The Underlying Funds invest in, or will invest in, primarily publicly traded equity securities, fixed income securities or cash equivalent securities, as applicable pursuant to their investment objectives, strategies and/or restrictions. Further, an Underlying Fund will not invest more than 10% of its assets, at the time of investment, in securities which are illiquid within the meaning of National Instrument 81-102 - Mutual Funds (NI 81-102).

31. The Underlying Funds in which a Top Fund invests, or will invest, will have either the same valuation date or be valued more frequently than the Top Fund.

32. Securities of both the Top Funds and the Underlying Funds can be redeemed on any valuation date, unless redemptions have been suspended in accordance with its trust agreement.

33. A Top Fund will not purchase or hold voting securities of an Underlying Fund unless:

(a) at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds no more than 10% of the market value of its net assets in securities of other mutual funds, or

(b) the Underlying Fund:

(i) is a “clone fund” as defined in NI 81-102, or

(ii) purchases or holds securities of a “money market fund” as defined in NI 81-102.

34. The Filers will ensure that the arrangements between or in respect of a Top Fund and an Underlying Fund in respect of Fund-on-Fund Investing avoid the duplication of management fees and incentive fees. The Filers and their affiliates do not charge, and will not charge, any management fee or incentive fee to the Underlying Funds held by the Top Funds. Each client of a Filer that invests in any of the Top Funds either enters into an agreement with the Filer under which fees for its services are paid, or agrees to have the Top Funds pay, a management fee in respect of the client’s units in the Top Fund.

35. There will be no sales fees or redemption fees payable by a Top Fund in respect of an acquisition, disposition or redemption of securities of an Underlying Fund by the Top Fund.

36. Each of the Top Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106 applicable to them. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.

37. Prior to time of purchase of securities of a Top Fund, a purchaser will be provided with a copy of the Top Fund’s offering memorandum, where available, as well as disclosure about the relationships and potential conflicts of interest between the Top Fund and the Underlying Funds.

38. The Filers will provide to investors in a Top Fund written disclosure (which may include disclosure in an offering memorandum, where available, or other disclosure document of a Top Fund) which sets out:

(a) the intent of the Top Fund to invest its assets in voting securities of the Underlying Funds;

(b) that the Underlying Funds are managed by the Filers or an affiliate of the Filers;

(c) the approximate percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds; and

(d) the process or criteria used to select the Underlying Funds.

39. The securityholders of a Top Fund will receive, on request, a copy of the prospectus, offering memorandum or other similar document, if available, and the audited financial statements and interim financial statements of any Underlying Fund in which the Top Fund invests.

40. The Filers will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of an Underlying Fund, except that a Top Fund may arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund.

41. A Top Fund's investments in the Underlying Funds represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Funds.

42. In the absence of the Exemption Sought, a Top Fund would be precluded from purchasing voting securities when implementing Fund-on-Fund Investing if the Top Fund, together with its related mutual funds, would thereby become a substantial securityholder of an Underlying Fund. Since the Top Funds and Underlying Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore are unable to rely upon the exemption codified under sub-section 2.5(7) 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 Exemption Sought is granted provided that:

(a) securities of a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in accordance with NI 45-106;

(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;

(c) no management fees or incentive fees are payable by a Top Fund or an investor in a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;

(d) no sales or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of the securities of the Underlying Funds;

(e) a Top Fund will not purchase or hold securities of an Underlying Fund unless:

(i) at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds no more than 10% of the market value of its net assets in securities of other mutual funds, or

(ii) the Underlying Fund:

A. is a “clone fund” as defined in NI 81-102, or

B. purchases or holds securities of a “money market fund” as defined in NI 81-102.

(f) where an Underlying Fund is managed or advised by the same investment fund manager or portfolio manager(s) as the Top Fund, the investment fund manager or portfolio manager(s), as applicable, do not cause the securities of the Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of an Underlying Fund, except that a Top Fund may arrange for the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Top Fund; and

(g) the offering memorandum, where available, or other disclosure document of a Top Fund will disclose:

(i) the intent of the Top Fund to invest its assets in securities of the Underlying Funds;

(ii) that the Underlying Funds are managed by the Filers or an affiliate of the Filers;

(iii) the approximate percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds; and

(iv) the process or criteria used to select the Underlying Funds.

“Edward Kerwin”

“James Carnwath”

Name:

Name:

Title: Commissioner

Title: Commissioner

Ontario Securities Commission

Ontario Securities Commission