Securities Law & Instruments

Headnote

Society that provides administrative, accountingand regulatory services to a brokered specialist insurance marketexempted from adviser registration requirements in clause 25(1)(c)of the Act in connection with the society acting as an adviserin respect of the assets that comprise certain trust funds -Trust funds established to comply with regulatory capital requirementsunder the Insurance Companies Act (Canada).

Statutes Cited

Lloyd's Act 1871 (U.K.), 1871, c. 21.

Securities Act, R.S.O. 1990, c. S.5, as amended,ss. 25, 74(1).

Insurance Companies Act, S.C. 1991, c. 47.

Lloyd's Act 1982 (U.K.), 1982, c. 14.

Canada Business Corporations Act, R.S.C. 1985,c. C-44.

Financial Services and Markets Act 2000 (U.K.),2000, c. 8.

Insurance Act, R.S.O. 1990, c. I.8.

Regulation Cited

Regulation made under the Securities Act, R.R.O.1990, Reg. 1015, as am.

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, CHAPTER S.5,AS AMENDED (THE "Act")

AND

IN THE MATTER OF

THE SOCIETY OF LLOYD'S

 

RULING

(Subsection 74(1)

UPON the application (the "Application")of the Society incorporated by Lloyd's Act 1871 (U.K.) by thename of Lloyd's (the "Lloyd's Corporation") to theOntario Securities Commission (the "Commission") fora ruling, pursuant to subsection 74(1) of the Act, that Lloyd'sCorporation shall not be subject to clause 25(1)(c) of the Actin connection with Lloyd's Corporation acting as a portfolioadviser for funds deposited in trust by underwriting members("Members") of Lloyd's Corporation pursuant to theInsurance Companies Act (Canada) (the "Federal InsuranceCompanies Act");

AND UPON considering the Applicationand the recommendation of staff of the Commission;

AND UPON Lloyd's Corporation having representingto the Commission that:

1. Lloyd's is a self-regulating organisationoperating under the provisions of Lloyd's Act 1982(U.K.) (the "Lloyd's Act").

2. The governing body of Lloyd's Corporationis the Council of Lloyd's (the "Council"). Section6(1) of the Lloyd's Act provides that the Council shall haveresponsibility for the management and superintendence of theaffairs of the Lloyd's Corporation and the power to regulateand direct the business of insurance at Lloyd's (the "Lloyd'sMarket"). The Council is ultimately responsible for regulatingthe Lloyd's Market under the Lloyd's Act. Lloyd's Corporationprovides administrative, accounting and regulatory servicesto the Lloyd's Market.

3. Lloyd's Corporation has also recently incorporatedLloyd's Canada Inc. (the "Canadian Subsidiary"),a wholly-owned subsidiary under the Canada Business CorporationsAct, to perform some of its functions in Canada.

4. Lloyd's Corporation is not registered asan adviser under the Act or under the securities legislationof any other Canadian jurisdiction.

5. None of Lloyd's Corporation, the CanadianSubsidiary nor the Lloyd's Market is an "insurance company"as referred to in the Act.

6. The Lloyd's Market is a brokered marketthat focuses on, among other things, high risk, specialistinsurance for businesses. The Lloyd's Market is comprisedof a number of underwriting syndicates ("Syndicates")that both compete and co-operate.

7. The capital supporting risks underwrittenby Syndicates at Lloyd's Market is provided by either individualMembers, who trade with unlimited liability, or corporateMembers, who trade with limited liability. Members must satisfyfinancial requirements laid down by the Council. Individualmembers are sometimes known as "Names".

8. There are currently 86 Syndicates underwritingin the Lloyd's Market for the 2002 year of account, nearlyall of whom underwrite Canadian business. In 2001, there were143 Members resident in Canada, of whom 73 were resident inOntario.

9. The Members of each Syndicate appoint aLloyd's Corporation underwriting agent (a "Managing Agent")to act as agent of the Member for the purpose of acceptingrisks on behalf of the Syndicate, including conducting thatpart of the Canadian business carried on by the Member asa member of that Syndicate. While Managing Agents are permittedby Lloyd's Corporation to carry on business as underwritingagents at Lloyd's Market and are regulated and supervisedby Lloyd's Corporation, Lloyd's Corporation does not own them.The Managing Agents are resident in the U.K.

10. The investment management activities ofthe Lloyd's Corporation and of each of the Managing Agentsare conducted in accordance with the Financial Servicesand Markets Act 2000 (U.K.) (the "UK Financial ServicesAct"). Under the UK Financial Services Act, a personwho carries on a "regulated activity" such as investmentmanagement, needs to be either an "authorised person"or an "exempt person" and, where authorised, needsto have permission either expressly given to the person bythe Financial Services Authority (the " UK FinancialServices Authority") under Part IV of the UK FinancialServices Act or resulting from any other provision of theUK Financial Services Act. The Lloyd's Corporation is an "authorisedperson" under the UK Financial Services Act and has permissionunder that Act to act as an investment manager under thatAct in connection with the carrying on by Members of the insurancebusiness. Each of the Managing Agents is also an "authorisedperson" under the UK Financial Services Act and has beengiven permission by the UK Financial Services Authority toact as an investment manager in connection with managing theinsurance business of Syndicates.

11. Under the Federal Insurance CompaniesAct, Lloyds Members, collectively, are authorised to insurerisks as a "foreign company". Under the FederalInsurance Companies Act, "foreign company" is definedto include an "association", within the meaningof Part XIII of the Federal Insurance Companies Act, the insuranceof risks in Canada of which has been approved by order ofthe Superintendent of Financial Institutions (the "FederalSuperintendent") under Part XIII of the Federal InsuranceCompanies Act; and, an "association" is definedto mean an association of persons formed in a foreign countryon the plan known as Lloyd's, whereby each member of the associationparticipating in a policy becomes liable for a stated, limitedor proportionate part of the whole amount payable under thepolicy. In addition to being governed by the Federal InsuranceCompanies Act, Members, collectively, are licensed as insurersunder applicable insurance legislation in all provinces andterritories to transact most classes of insurance, and therelevant Canadian business of Members is subject to and governedin accordance with the applicable requirements of such legislationin the same manner as any other licensed insurer. Syndicates,in turn, accept business from around 580 approved local brokerfirms, or "correspondents", across Canada.

12. None of the mind or management of Lloyd'sCorporation or the Managing Agents is in Ontario.

13. Under the Federal Insurance CompaniesAct, all insurers that are foreign companies are requiredto maintain a trust fund for solvency purposes. Lloyd's CorporationMembers comply with this requirement in the form of the Lloyd'sCanadian Trust Fund (the "Canadian Trust Fund")and the Lloyd's Canadian margin fund (the "Canadian MarginFund"). The Canadian Trust Fund and Canadian Margin Fundhave been established to comply with the regulatory capitalrequirements under the Federal Insurance Companies Act. TheFederal Superintendent has approved, and is a party to, trustagreements (each, a "Trust Deed") for each of theCanadian Trust Fund and the Canadian Margin Fund.

14. The Federal Insurance Companies Act requireseach Member to maintain a trust fund in relation to its insurancerisks in Canada. The Canadian Trust Fund is a collective termfor a number of distinct and separate funds of individualtrusts which have been established for each Member (each,a "Member's Canadian Trust Fund"). Each Member'sCanadian Trust Fund receives all Canadian situs risk net insurancepremiums, and is used to pay all claims and expenses relatedto the Canadian situs risk insurance underwriting businessof the Member.

15. The Canadian Margin Fund is a joint trustfund which is available to satisfy "matured claims"against any Member, the beneficiaries of which are policyholders,third-party claimants and, ultimately, certain Members thatare current contributors. The Council has discretionary investmentpowers under the Canadian Margin Fund.

16. At December 31, 2001, the Canadian TrustFund was valued at approximately $1,138,000,000 and the CanadianMargin Fund was valued at approximately $176,000,000.

17. Royal Trust Corporation of Canada, atits Toronto offices, acts as trustee (the "Trustee")for each of the Canadian Trust Fund and the Canadian MarginFund, and each Fund is governed by a Trust Deed between Lloyd'sCorporation, the Trustee and the Federal Superintendent.

18. Pursuant to the Trust Deed for the CanadianTrust Fund, each Managing Agent has investment discretionwith respect to that portion of the Canadian Trust Fund attributableto the Canadian business of Members carried on by the ManagingAgent.

19. In order to enhance returns and reducecosts, Lloyd's Corporation is proposing to invite ManagingAgents to invest the assets of the Canadian Trust Fund, inrespect of which they have investment discretion, in a commingledinvestment account (the "Commingled Account") establishedfor the assets of the Canadian Margin Fund, by way of an undividedpro rata share of each investment in the CommingledAccount.

20. The Council has appointed the Lloyd'sTreasury Services ("Treasury Services") department,which comprises officers and employees of Lloyd's Corporation,as investment manager of the Canadian Margin Fund, which investmentmanagement functions are over-seen by an employee of Lloyd'sTreasury Services department who is a person approved by theUK Financial Services Authority. Because the Canadian MarginFund will provide a substantial portion of the assets forthe Commingled Account, the Treasury Services department willalso act as investment manager for the Commingled Accountand as such will have the exclusive authority to make allinvestment decisions with respect to funds available for investment.

21. The investment activities of the ManagingAgents and the Treasury Services department are functionallythe same as the investment activities of any other insurancecompany in respect of its regulatory and working capital.

22. Although an "association" (asdefined in the Federal Insurance Companies Act) is a "foreigncompany" for purposes of the Federal Insurance CompaniesAct, neither the Act nor the Insurance Act (Ontario)contains a similar definition. Neither the Act nor the InsuranceAct (Ontario) defines the term "insurance company".The word "company" is defined in the Act, but itrequires an entity to be incorporated. The term "insurancecompany" is used in the Insurance Act (Ontario),but specific references are also made to licensing syndicates,suggesting that Syndicates are not insurance companies withinthe meaning of the Insurance Act (Ontario). Section42(1) of the Insurance Act (Ontario) enumerates classesof insurers to whom licences may be issued, including "underwritersor syndicates of underwriters operating under the plan knownas Lloyd's".

23. Each of the Canadian Trust Fund and theCanadian Margin Fund is constituted to provide regulatorycapital or "assets in Canada" as required underthe Federal Insurance Companies Act for the protection ofthe interests of policyholders and not primarily as an investmentfund for Members.

24. To the extent Lloyd's Corporation is consideredto be acting as an adviser in Ontario in connection with itsTreasury Services acting as investment manager for the CommingledAccount, it cannot rely on the exemption from clause 25(1)(c)of the Act that is made available in clause 34(a) of the Actto an "insurance company licensed under the InsuranceAct". Nor can Lloyd's Corporation rely on the exemptionfrom clause 25(1)(c) that is made available to such insurancecompanies that are regulated by the federal Office of theSuperintendent of Financial Institutions in accordance withclause 209(10)(b) of Regulation 1015 made under the Act.

AND UPON the Commission being satisfiedthat to do so would not be prejudicial to the public interest;

IT IS RULED, pursuant to subsection 74(1)of the Act, that Lloyd's Corporation is not subject to the requirementsof clause 25(1)(c) of the Act in connection with Lloyd's Corporationacting an adviser in respect of the assets that comprise theCanadian Trust Fund or the Canadian Margin Fund.

June 4, 2002.

"Paul M. Moore"                    "RobertW. Korthals"