In the Matter of CIBC Asset Management Inc., 2012 CanLII 69493

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -Variation of prior decision granting exemptive relief from the self-dealing prohibition in section 4.2 of NI 81-102 to permit a fund to engage in forward contracts with a related counterparty on a limited basis - Condition in prior decision requiring the fund's IRC to review and assess the policy in relation to the forward contracts entered into with the related counterparty on a quarterly basis - Condition amended to require an annual review - National Instrument 81-102 Mutual Funds. Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, sections 4.2 and 19.1.

November 14, 2012

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 CIBC ASSET MANAGEMENT INC. (THE FILER)

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) varying the decision issued to the Filer on September 19, 2011 (the Prior Decision). The Prior Decision is attached as Schedule "A". The variation of the Prior Decision is requested to vary condition (a) V. of the Prior Decision (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

i) the Ontario Securities Commission is the principal regulator for this application; and

ii) the Filer has provided the notice that section 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, the Northwest Territories, Nunavut and Yukon.

INTERPRETATION

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.

REPRESENTATIONS

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

1. The Prior Decision provides exemptive relief from section 4.2 of National Instrument 81-102 in order for the Renaissance Corporate Bond Capital Yield Fund (the Fund) to enter into forward contracts (the Forward Contracts) with Canadian Imperial Bank of Commerce or an affiliate hereof (CIBC), subject to certain conditions, including that the Filer's policy (Policy) in relation to the Forward Contracts entered into with CIBC will be reviewed and assessed on a quarterly basis by the Fund's independent review committee (IRC) in accordance with section 4.2 of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).

2. The Filer wishes to vary condition (a) V. of the Prior Decision to specify that the Filer's Policy in relation to the Forward Contracts with CIBC will be reviewed and assessed at least annually by the IRC in accordance with section 4.2 of NI 81-107.

3. There are no unique characteristics to this conflict that necessitates a different review standard for the Filer's Policy than is typically required for other conflict of interest policies under section 4.2 of NI 81-107.

4. It would not be prejudicial to the public interest to grant the Exemption Sought.

5. All other conditions under the Prior Decision continue to apply to the Exemption Sought.

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 and condition (a)V. of the Prior Decision is amended as follows:

(a)V. the Filer's policy in relation to the Forward Contracts with CIBC will be reviewed and assessed at least annually by the IRC in accordance with section 4.2 of NI 81-107.

"Raymond Chan"

Raymond Chan

Manager, Investment Funds Branch

Ontario Securities Commission

SEDAR# 1979053

Schedule "A"

September 19, 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 CIBC ASSET MANAGEMENT INC. (THE FILER)

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:

(a) an exemption from section 4.2 of National Instrument 81-102 Mutual Funds (NI 81-102) pursuant to section 19.1 of NI 81-102 (the Exemption Sought), in order for the Renaissance Corporate Bond Capital Yield Fund (the Fund) managed by the Filer to enter into forward contracts (the Forward Contracts) with Canadian Imperial Bank of Commerce or an affiliate thereof (CIBC); and

(b) a revocation of the decision dated August 31, 2011 (the Prior Decision) granting the Fund relief from section 4.2 of NI 81-102 to enter into the Forward Contracts with CIBC.

INTERPRETATION

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.

REPRESENTATIONS

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

The Filer

1. The Filer is a corporation organized under the laws of Canada and is registered as a portfolio manager, investment fund manager and commodity trading manager in all provinces and territories of Canada.

2. The Filer is the investment fund manager, portfolio manager and trustee of the Fund and of the Underlying Fund (defined below).

3. The Filer is a wholly-owned subsidiary of CIBC.

4. CIBC is a Schedule I bank under the Bank Act (Canada).

5. The Filer is not in default of securities legislation in any of the jurisdictions.

The Fund and the Underlying Fund

6. The Fund is an open-ended mutual fund trust established under the laws of the Province of Ontario on October 7, 2009.

7. The Fund is a reporting issuer in every jurisdiction in Canada. It offers its securities for sale to the general public under a simplified prospectus filed in every jurisdiction in Canada.

8. The Fund is not in default of securities legislation in any of the jurisdictions.

9. The investment objective of the Fund is to seek to generate tax-efficient returns, primarily through exposure to a corporate bond fund that will invest primarily in bonds, debentures, notes, and other debt instruments of Canadian issuers (the Reference Securities). The Fund may, however, also invest directly in the Reference Securities where the Fund considers it would be beneficial to unitholders to do so.

10. To achieve its investment objective, the Fund currently obtains exposure to Renaissance Corporate Bond Fund (the Underlying Fund) by investing in equity securities of Canadian public issuers and entering into Forward Contracts with one or more counterparties under which the Fund will forward-sell the Canadian equity securities for a price determined with reference to the total return of an investment in units of the Underlying Fund.

11. The Underlying Fund is a reporting issuer in every jurisdiction in Canada. It currently offers Class O units under a simplified prospectus. Such units are not offered for sale to the general public but rather are only available to certain eligible investors. The Underlying Fund invests primarily in bonds, debentures, notes, and other debt instruments of Canadian issuers.

12. The Underlying Fund is not in default of securities legislation in any of the jurisdictions.

13. In order to hedge its obligation under the Forward Contracts, the counterparty will likely, but is not required to, purchase securities of the Underlying Fund. As a result, other than any units continued to be held by the Filer due to the obligation to seed the Underlying Fund, all of the units of the Underlying Fund will be held by the counterparties.

14. The investment exposure of the Fund to the Underlying Fund does, and will continue to, comply with the requirements of section 2.5 of NI 81-102 relating to investments in other funds.

The Forward Contracts

15. The Forward Contracts provide exposure to the performance of the Underlying Fund.

16. The Forward Contracts consist of monthly rolling forward contracts. The terms of the Forward Contracts provide that they may be partially settled prior to their maturity. If there is a partial pre-settlement, the Fund will sell Canadian equity securities of one or more issuers to the counterparty of an amount equal to the actual redemption proceeds (together with any cash distributions in respect of the redeemed securities) that an investor in the Underlying Fund would receive at the relevant time for a related number of securities of the Underlying Fund. If there is a partial pre-settlement prior to maturity, the Fund will realize a capital gain or a capital loss for tax purposes on the sale of Canadian equity securities, even if the Fund elects to use the proceeds from the pre-settlement to invest in other Canadian equity securities.

17. The underlying interest of the Forward Contracts, being the units of the Underlying Fund, has objective and transparent pricing because the net asset value of the Underlying Fund is determined daily in accordance with the Filer's valuation policies and is calculated by a third party valuation agent, which policies are identical for all of the funds under its management.

18. The underlying interest of the Forward Contracts is selected by the Filer and is not influenced by a counterparty.

19. The Forward Contracts are entered into by the Fund in accordance with the requirements of NI 81-102, including in particular sections 2.7 and 2.8 thereof.

The Counterparties

20. Since the Fund began offering its securities to the public in October 2009, the Fund has been using a single counterparty (Counterparty 1) under the Forward Contracts. Counterparty 1 is a major financial institution that is at arm's length with the Fund and the Filer.

21. The Filer wishes to cause the Fund to use another counterparty in addition to Counterparty 1 for the Fund's Forward Contracts for the following reasons:

(a) The Fund has grown dramatically since inception and, as at August 23, 2011, has a net asset value of approximately $ 1.2 Billion. Given the large size of the Fund, the Filer now considers that there is significant risk to the Fund of continuing to deal with Counterparty 1 as the sole counterparty under the Forward Contracts and therefore wishes to diversify the Fund's counterparty risk by dealing with at least one other counterparty;

(b) Counterparty 1 has advised the Filer that it is quickly reaching current capacity for the Fund and will cap the size of the Forward Contracts when the capacity has been reached.

22. The Filer has considered causing the Fund to invest directly in the Reference Securities. However, in order not to compromise the investment objective of the Fund that is to generate tax efficient returns, the Filer has determined that it could not invest directly in the Reference Securities an amount of the net asset value of the Fund sufficient to achieve the Filer's goal of diversifying the Fund's counterparty risk. As a result, the Fund would remain largely exposed to Counterparty 1 as the current counterparty.

23. The Filer has performed an assessment of the market availability of providers of forward-sale contracts which resulted in only two financial institutions currently being available to act as counterparty under the monthly rolling forward structure of the Fund.

24. Those two Canadian financial institutions that are, as of the date of this Decision, available to enter into the Forward Contracts with the Fund include CIBC and an arm's length financial institution (Counterparty 2).

25. Subject to the Fund being granted the Exemption Sought, CIBC is available to act as related counterparty under the Forward Contracts at a price that is currently more favourable than the price and terms offered by Counterparty 1 and Counterparty 2.

Conflict of Interest

26. In the interest of maintaining a service that is fundamental for the Fund to achieve its investment objective of generating tax-efficient returns, without having to necessarily incur increased costs for the Fund and its securityholders, the Filer wishes to retain CIBC as additional counterparty under the Fund's Forward Contracts.

27. But for the Exemption Sought, section 4.2 of NI 81-102 would prohibit the Fund from purchasing a security from, or selling a security to, an affiliate or associate of the Filer, unless the conditions of section 4.3 of NI 81-102 are met.

28. On settlement of the Forward Contracts, the Fund will sell to CIBC the Canadian equity securities for a price that is different from the price prescribed in the exception available under paragraph 4.3(1)(b).

29. The Filer will only enter into the Forward Contracts with CIBC if the pricing terms offered by CIBC under the Forward Contracts are at least as favourable as the pricing terms the Filer can get from third party counterparties for similar size exposure and at least as favourable as the pricing terms committed by CIBC to managers of third party funds of similar size to the Fund.

30. The benefit of the transaction to CIBC is the forward fee that CIBC will receive on the transaction.

31. The Filer has established policies relating to the use of a related party as a counterparty in derivative transactions with the Fund.

32. The entering into of the Forward Contracts with CIBC by the Fund will represent the business judgment of the Filer uninfluenced by considerations other than the best interests of the Fund.

Prior Decision

33. The Prior Decision granted the Exemption Sought subject to a number of conditions, including that the mark-to-market value of the exposure of the Fund under the Forward Contracts with CIBC not exceed 33⅓% of the net asset value of the Fund. That condition imprecisely stated how the Fund's exposure to CIBC as counterparty was to be calculated and must be clarified.

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:

(a) the Exemption Sought is granted provided that:

I. the Filer , in accordance with subsection 5.2(1) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), obtain the approval of the Fund's Independent Review Committee (IRC) before it may use CIBC as counterparty under the Forward Contracts with the Fund, and the IRC provides such approval in accordance with subsection 5.2(2) of NI 81-107;

II. the Filer complies with section 5.1 of NI 81-107, and the Filer 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 Fund's use of CIBC as counterparty under the Forward Contracts;

III. the underlying market exposure of the Forward Contracts with CIBC does not exceed 33⅓% of the net asset value of the Fund on a daily mark-to-market basis;

IV. the pricing terms of the Forward Contracts offered by CIBC to the Fund are at least as favourable as the pricing terms the Filer can get from arm's length counterparties for similar size exposure and at least as favourable as the pricing terms committed by CIBC to managers of third party funds of similar size to the Fund;

V. the Filer's policy in relation to the Forward Contracts with CIBC will be reviewed and assessed on a quarterly basis by the IRC in accordance with section 4.2 of NI 81-107; and

VI. the simplified prospectus of the Fund discloses in the Investment Strategy section of the prospectus:

(i) the fact that subject to the Exemption Sought being granted, the Fund may enter into the Forward Contracts with CIBC;

(ii) the relationship that exists between the Fund, the Filer and CIBC; and

(ii) the extent to which the Fund may be exposed to CIBC, in accordance with condition III above; and

(b) the Prior Decision is revoked and replaced by this decision.

"Raymond Chan"

Raymond Chan

Manager, Investment Funds Branch

ONTARIO SECURITIES COMMISSION

SEDAR #1733232