May 16, 2024
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
Sun Life Capital Management (Canada) Inc.
(Filer)
and
the Funds (defined below)
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) exempting the Filer from the restriction in paragraphs 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from, or to, the investment portfolio of (a) an associate of a responsible person, and (b) an investment fund for which a responsible person acts as an adviser, to cause a Fund to purchase or sell securities from, or to, the investment portfolio of another Fund (each, a Cross-Trade Transaction) in accordance with the Inter-Fund Trading Exception (defined below) other than, in respect of PFI Securities and mortgages (defined below) as described in paragraph 35 below (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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in MI 11-102, NI 31-103, National Instrument 14-101 Definitions and NI 81-107 Independent Review Committee for Investment Funds (NI 81-107) have the same meaning, unless otherwise defined.
CCM Fund means SLC Management Canadian Commercial Mortgage Fund (formerly, Sun Life Canadian Commercial Mortgage Fund);
Existing Funds means each of the PFI Funds and the CCM Fund, which are not investment funds under the Legislation, and each of SLC Management Core Plus Bond Fund and SLC Management Long Core Plus Bond Fund, which are investment funds under the Legislation;
Funds means the Existing Funds together with the Future Funds;
Future Funds means each future pooled investment vehicle, including an investment fund under the Legislation, that is similar to the Existing Funds, and managed by the Filer or an affiliate and advised by the Filer or an affiliate;
IFRS means International Financial Reporting Standards;
IRC means independent review committee of the Funds;
Inter-Fund Trading Exception means the exception in section 6.1(2) of NI 81-107;
Long PFI Fund means SLC Management Long Term Private Fixed Income Plus Fund;
Mid PFI Fund means SLC Management Private Fixed Income Plus Fund (formerly, Sun Life Private Fixed Income Plus Fund);
NI 45-106 means National Instrument 45‑106 Prospectus Exemptions;
NP 29 means National Policy Statement 29 Mutual Funds Investing in Mortgages;
PFI Funds means the Short PFI Fund, the Mid PFI Fund and the Long PFI Fund;
PFI Securities means private fixed income securities;
Public Fixed Income Assets means fixed income assets available in public markets; and
Short PFI Fund means SLC Management Short Term Private Fixed Income Plus Fund.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation incorporated under the laws of Canada with its head office in Toronto, Ontario.
The Filer is an indirect, wholly owned subsidiary of Sun Life Financial Inc., a company, the shares of which are listed on, among others, the Toronto Stock Exchange.
The Filer is registered: (a) under the securities legislation of each Jurisdiction as an investment fund manager, an exempt market dealer and a portfolio manager; and (b) under the Commodity Futures Act (Ontario) as a commodity trading manager.
The Filer is the portfolio manager of the Existing Funds and the Filer or an affiliate may, in the future, be the portfolio manager of Future Funds.
The Filer is the investment fund manager of SLC Management Core Plus Bond Fund, SLC Management Long Term Core Plus Bond Fund and other Existing Funds that meet the definition of investment fund under the Legislation, and the Filer or an affiliate will be the investment fund manager of any Future Fund that meets the definition of investment fund under the Legislation.
Each of the CCM Fund and the PFI Funds is a pooled investment vehicle that does not meet the definition of investment fund under the Legislation. These Funds are administered by the Filer, and the Filer or an affiliate will act in this capacity for any Future Fund that does not meet the definition of investment fund under the Legislation.
The Filer is, or will be, a “responsible person” of a Fund, as that term is defined in NI 31-103.
The Filer is not in default of securities legislation in any Jurisdiction.
The Funds
- Securities of each Fund are and will be sold, pursuant to available exemptions from the prospectus requirements, only to investors who are:
(a) “permitted clients” as such term is defined in NI 31-103, other than managed accounts described in paragraph (k) of the definition, unless the client of the managed account is otherwise a permitted client; or
(b) “accredited investors” as such term is defined in NI 45-106 (and section 73.3 of the Legislation) who are:
(i) executive officers and directors of the Filer or its affiliates, or their permitted assigns; or
(ii) employees or consultants of the Filer or its affiliates that are directly involved in the provision of management, distribution or portfolio advisory services to the Funds, or their permitted assigns
(collectively, the Permitted Investors).
While the individuals described in paragraph 9(b) above do not meet the definition of “permitted client”, as such term is defined in NI 31-103, they do meet the definition of “accredited investor” as such term is defined in NI 45-106 (and section 73.3 of the Legislation), and they are sophisticated investors who are uniquely positioned to understand the risks associated with an investment in the Funds.
None of the Funds is or will be a reporting issuer under the securities legislation of any Jurisdiction.
Each of the PFI Funds and the CCM Fund is a limited partnership and therefore is a controlled entity of its respective general partner. Each general partner is wholly-owned by the Filer. As a result, each of the PFI Funds and the CCM Fund is an affiliate of the Filer and each Future Fund structured as a limited partnership will be an affiliate of the Filer if the general partner is an affiliate of the Filer.
The Existing Funds are not in default of securities legislation in any Jurisdiction.
The investment objectives of the PFI Funds are to invest primarily in a diverse portfolio of PFI Securities and other private fixed income assets and Public Fixed Income Assets.
The investment objectives of the CCM Fund are to invest primarily in a portfolio of first mortgage loans secured by properties located in Canada.
16. The investment objectives of the remaining Existing Funds, which meet the definition of investment fund, involve investing directly or indirectly in Public Fixed Income Assets, PFI Securities and mortgages, among other types of assets.
17. Each of the CCM Fund and the PFI Funds is operated in a manner similar to how the Filer operates its investment funds and each Future Fund that is not an investment fund will be operated in a similar manner, including in respect of the calculation of net asset value for each Fund which is, or will be, used for the purposes of determining the purchase and redemption price of the securities of the Fund.
Cross-Trade Transactions
From time to time, the Filer proposes to cause a Fund to engage in a Cross-Trade Transaction.
The assets that the CCM Fund or a similar Future Fund purchases from, or sells to, another Fund may include mortgages, and the assets that the PFI Funds or a similar Future Fund purchases from, or sells to, another Fund may include PFI Securities. Certain of these assets may include PFI Securities or mortgages that are or were originated, as described under “Prior Decisions” below. The Funds may also purchase or sell equities, Public Fixed Income Assets and other assets from or to the portfolio of another Fund.
The Filer believes that:
(a) permitting the Funds to purchase mortgages and PFI Securities from another Fund will allow the purchasing Funds to access investments that they may not be otherwise able to access in the market, and in a manner that will be efficient for the purchasing Funds;
(b) permitting the Funds to sell mortgages and PFI Securities to another Fund will provide liquidity for the selling Funds; and
(c) permitting the Funds to purchase and sell securities from or to the investment portfolio of another Fund in accordance with the Inter-Fund Trading Exception other than, in respect of PFI Securities and mortgages,
(i) the requirement that the bid and ask price of the security is readily available, and
(ii) the requirement that the transaction be executed at the “current market price of the security” (as defined in NI 81-107), as further described in this decision,
will provide greater efficiencies to the Funds than otherwise trading such securities in the market.
Each general partner of the PFI Funds and the CCM Fund is an affiliate of the Filer and each such Existing Fund is an “associate” of its respective general partner. Certain individuals are directors and officers of the general partners of these Existing Funds and of the Filer and have access to, or participate in formulating, the investment decisions made on behalf of these Existing Funds or the advice given to these Existing Funds, and accordingly, these individuals have access to investment decisions made on behalf of a client of the Filer or advice given to a client of the Filer. Therefore each general partner is a “responsible person” (as defined in section 13.5(1) of NI 31 103) and each of these Existing Funds is an associate of a responsible person (as defined in section 13.5(1) of NI 31-103).
A Future Fund may be formed as a limited partnership, the general partner of which will be an affiliate of the Filer and so, for similar reasons as set forth above, this Future Fund may be an associate of a responsible person.
In addition, the Future Funds may be formed as trusts or corporations, which may be affiliates or associates of the Filer due to investments in the Future Funds made by the Filer or an affiliate of the Filer, or due to another affiliate or associate relationship of the Future Fund with the Filer or a responsible person.
Each of SLC Management Core Plus Bond Fund and SLC Management Long Term Core Plus Bond Fund is an investment fund formed as a trust for which the Filer acts as an adviser and, in the future, the Filer may act as adviser in respect of Future Funds that are investment funds formed as trusts.
Absent the Exemption Sought, the Filer is prohibited by paragraphs 13.5(2)(b)(ii) and (iii) of NI 31‑103 from causing the Funds to purchase securities from, or sell securities to, another Fund, as each is an associate of a responsible person or an investment fund for which a responsible person acts as an adviser who has access to, or participates in formulating, an investment decision made on behalf of a client of the Filer or advice given to a client of the Filer.
Prior Decisions
2017 Decision
Pursuant to a decision dated December 17, 2017 (the 2017 Decision), the Filer (formerly, Sun Life Institutional Investments (Canada) Inc.) was granted principal and in-specie trading relief to permit the Mid PFI Fund and the CCM Fund to purchase and sell PFI Securities and mortgages, originated by the Filer’s affiliate, Sun Life Assurance Company of Canada (SLA) or by such Funds, from or to SLA, in exchange for fund securities or cash.
The 2017 Decision pertains only to transactions between the Mid PFI Fund or the CCM Fund and SLA. Where the Mid PFI Fund or CCM Fund engages in a principal or in-specie trade with SLA, the Filer will rely on the 2017 Decision and comply with the conditions therein.
The Filer will rely on this Decision where a Fund, including the Mid PFI Fund and the CCM Fund, engages in a Cross-Trade Transaction with another Fund, including where the PFI Securities or mortgages being traded were:
(a) originally acquired pursuant to the 2017 Decision; or
(b) originated by a Fund that is not an investment fund (through the Filer or an affiliate acting on behalf of the Fund), such that the initial Cross-Trade Transaction after such origination is a principal trade.
As of the date of this Decision, any PFI Securities or mortgages originally acquired by a Fund pursuant to the 2017 Decision, have not been cross-traded to another Fund.
The Funds that are investment funds do not originate securities. The Funds that are not investment funds originate PFI Securities and mortgages for their own portfolio (through the Filer or an affiliate acting on behalf of the Fund).
2022 Decision
Pursuant to a decision dated June 30, 2022 (the 2022 Decision), the Filer and its affiliates were granted self-dealing relief from the restrictions in the Legislation set out in that decision to, amongst other things, permit investments by Private Funds (defined in that decision to mean investment funds managed by a Filer as at and after the date of the decision that are not, and will not be, reporting issuers) in the PFI Funds, the CCM Fund and future collective investment vehicles managed by the Filer or an affiliate that are not a reporting issuer or an investment fund (collectively, the Underlying Investments).
Paragraph 47 of the 2022 Decision contained the representation that: Each Private Fund will not invest more than 20% of its net asset value, at the time of purchase, in securities of an Underlying Investment.
Each of SLC Management Core Plus Bond Fund and SLC Management Long Core Plus Bond Fund and any Future Fund which is an investment fund (as such term is defined in the Legislation), will not engage in a Cross-Trade Transaction that results in such Fund acquiring PFI Securities or mortgages that, when added with such Fund’s investment in Underlying Investments, represent more than 20% of its net asset value, at the time of purchase.
Inter-Fund Trading Exception is Unavailable
Pursuant to the Inter-Fund Trading Exception, a Fund is granted an exemption from paragraphs 13.5(2)(b)(ii) and (iii) of NI 31-103 to engage in Cross-Trade Transactions with another Fund that is an investment fund managed by the Filer or an affiliate of the Filer, if certain conditions are met, including that the bid and ask price of the security is readily available, and that the transaction is executed at the “current market price of the security” (as defined in NI 81-107).
The Filer is unable to rely upon the Inter-Fund Trading Exception to effect the Cross-Trade Transactions because:
(a) the bid and ask price of mortgages and PFI Securities may not be readily available;
(b) transactions involving mortgages or PFI Securities cannot be executed at the “current market price of the security” (as defined in NI 81-107); and
(c) the CCM Fund and the PFI Funds are not, and certain Future Funds may not be, investment funds.
Further to paragraph 35(c) above, while a Cross-Trade Transaction involving equities or Public Fixed Income Assets would be able to comply with the Inter-Fund Trading Exception, including the conditions that the bid and ask price of the security is readily available and that the transaction is executed at the “current market price of the security”, the exemption is only available where the transaction involves an investment fund.
Except as described in paragraph 35 above, Cross-Trade Transactions will otherwise meet the criteria of the Inter-Fund Trading Exception.
There is a limited supply of PFI Securities and mortgages available to the Funds in the open market, and frequently the only source or buyer of PFI Securities and mortgages may be another Fund, and thus the Filer may be unable to obtain a quote from an independent, arm’s length purchaser or seller, immediately before the Cross-Trade Transaction.
Cross-Trading Policies and Procedures
The Filer will have policies and procedures in place to address any potential conflicts of interest that may arise as a result of any purchase or sale of securities between two Funds.
Each Fund will only purchase securities from another Fund that are consistent with, or necessary to meet, the purchasing Fund’s investment objectives. Each Fund will only sell securities to another Fund if the Filer has determined that disposing of such securities is appropriate for the selling Fund.
All decisions to purchase or sell securities on behalf of each Fund’s portfolio from or to another Fund will be made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
The Filer, on behalf of the PFI Funds and the CCM Fund, has established an IRC consistent with section 3.7 of NI 81-107. The IRC of the PFI Funds and the CCM Fund complies with the standard of care set out in section 3.9 of NI 81-107 as if the PFI Funds and the CCM Fund were subject to that rule. Prior to relying on the Exemption Sought in respect of SLC Management Core Plus Bond Fund, SLC Management Long Core Plus Bond Fund and any Future Funds formed by the Filer or an affiliate, the mandate of the IRC will be expanded to include such Funds.
The Filer will refer Cross-Trade Transactions between two Funds to the IRC of such Funds.
Prior to a Fund making a purchase or sale of securities from or to another Fund:
(a) the IRC of the Funds (as applicable) will approve the transaction in accordance with section 5.2(2) of NI 81‑107;
(b) the Filer will comply with section 5.1 of NI 81‑107; and
(c) the Filer and the IRC of the Fund or Funds (as applicable) will comply with section 5.4 of NI 81‑107 for any standing instructions the IRC provides in connection with the transaction.
45. Each Fund will value portfolio securities under a Cross-Trade Transaction using the same values to be used to calculate the net asset value for the purpose of the issue price or redemption price of the securities of the Fund.
46. None of the securities which will be the subject of a Cross-Trade Transaction will be securities of an issuer that is a related party of the Filer.
47. The Filer will receive no remuneration with respect to any purchase or sale of securities between two Funds, and with respect to the delivery of securities, the only expenses which will be incurred by a Fund will be nominal administrative charges levied by the custodian and/or recordkeeper of the Fund for recording the trades and/or any charges by a dealer in transferring the securities, if applicable. In the case of syndicated PFI Securities in the Funds, an agent bank may charge the Funds nominal fees for the transfer or assignment of such syndicated PFI Securities.
48. For each purchase or sale of securities from or to another Fund, each Fund will keep written records in a financial year of the Fund. These records will reflect details of the securities received or delivered by the Fund and the value assigned to such securities. These records will be retained for five years after the end of the financial year, the most recent two years in a reasonably accessible place.
- The Filer will disclose to each investor in the Funds that purchases and sale of securities between two Funds may occur from time to time. The Filer will also disclose how the price of such securities is determined and the valuation procedure for such securities, as discussed below.
Valuation of Mortgages and PFI Securities
The CCM Fund and any other Fund that invests in mortgages will value the mortgages in their portfolio in accordance with section III(2.5) of NP 29, as if the Funds were subject to that policy.
A Fund will purchase mortgages from another Fund in a Cross-Trade Transaction at a price determined in accordance with section III(2.4) of NP 29, as if the Funds were subject to that policy.
52. The PFI Securities to be purchased or sold by a Fund from or to another Fund will be securities that are investment grade credit quality at the time of purchase, as determined by the internal policies and procedures used by an affiliate of the Filer, under which the ratings cannot be higher than the highest rating provided by a Designated Rating Organization (as defined in NI 81-102) for assets with similar credit quality and risk characteristics.
53. PFI Securities held by the Funds are independently valued on a monthly basis by a valuation agent at arm’s length to the Filer and its affiliates.
54. A Fund will purchase PFI Securities from another Fund in a Cross-Trade Transaction at a price determined by a valuation agent who is at arm’s length to the Filer and its affiliates.
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 the following conditions are satisfied:
securities of each Fund are sold pursuant to available exemptions from the prospectus requirements, only to Permitted Investors;
the Cross-Trade Transaction is consistent with the investment objectives of each Fund involved in the trade;
except as described in paragraph 35 above, the Cross-Trade Transaction is effected in accordance with the Inter-Fund Trading Exception, provided that in the case of syndicated PFI Securities in the Funds, an agent bank may charge the Funds nominal fees for the transfer or assignment of such syndicated PFI Securities;
prior to a Fund effecting its first Cross-Trade Transaction in reliance on this decision, the Filer will:
a. for existing investors in the Fund, send a written notice disclosing:
i. that the Fund may engage in Cross-Trade Transactions from time to time, including of PFI Securities or mortgages that were acquired pursuant to the 2017 Decision, or originated by a Fund that is not an investment fund (through the Filer or an affiliate acting on behalf of the Fund) such that the initial Cross-Trade Transaction after such origination is a principal trade,
ii. that any Cross-Trade Transaction will be effected in accordance with the Inter-Fund Trading Exception, other than, in respect of PFI Securities and mortgages, the conditions that:
the bid and ask price of the security be readily available, and
the transaction be executed at the “current market price of the security” (as defined in NI 81-107),
iii. how the price of such PFI Securities or mortgages, as applicable, is determined,
iv. the valuation procedure for such PFI Securities or mortgages, as applicable,
v. that the Filer is relying on this decision, and
vi. a summary of the conditions of this decision, and
b. for new investors in the Fund, include the disclosure in (a) in the offering document for the Fund or, if the Fund does not have an offering document, provide the above disclosure in writing to each such investor, at the time of, or prior to, making their initial investment in the Fund;
the Filer (or its affiliate) has referred the Cross-Trade Transaction to the IRC of each Fund, in the manner contemplated by section 5.1 of NI 81-107, and the Filer (or its affiliate) and the IRC comply with section 5.4 of NI 81-107 in respect of any standing instructions that the IRC provides in connection with the Cross-Trade Transaction, as if the Filer (or its affiliate), the IRC and the Funds were subject to NI 81-107;
the IRC of each Fund has approved the Cross-Trade Transaction in respect of the Fund in accordance with the terms of subsection 5.2(2) of NI 81-107, as if the IRC were subject to NI 81-107;
if the Cross-Trade Transaction involves a mortgage:
a. the transaction is executed at a price determined in accordance with section III(2.4) of NP 29;
b. the mortgages are valued in accordance with section III(2.5) of NP 29; and
c. paragraphs a and b above are determined by a reputable valuation firm that is independent of the Filer and its affiliates, which firm the Filer has determined to have sufficient expertise in valuing mortgages;
- if the Cross-Trade Transaction involves a PFI Security, the transaction is executed at the fair value of the PFI Security, as determined by a reputable valuation firm that is independent of the Filer and its affiliates, which firm the Filer has determined to have sufficient expertise in valuing PFI Securities;
9. each Fund prepares financial statements on an annual basis, in accordance with Canadian generally accepted accounting principles applicable to publicly accountable enterprises, that present the portfolio assets of the Funds, including PFI Securities and mortgages, at fair value, as defined in IFRS 13 Fair Value Measurement, as the same may be amended or replaced from time to time. The annual financial statements of the Funds are audited by a qualified public accounting firm registered with the Canadian Public Accountability Board in accordance with Canadian generally acceptable auditing standards; and
- the written records kept by the Funds involved in the Cross-Trade Transaction reflect details of the securities received or delivered by the Fund, including PFI Securities and mortgages, and the value assigned to such securities. These records will be retained for five years after the end of the financial year in which the Cross-Trade Transaction was effected, and records for the most recent two years will be kept in a reasonably accessible place.
“Darren McKall”
Darren McKall
Manager, Investment Management Ontario Securities Commission
Application # 2023/0165