Securities Law & Instruments

Headnote

Subsection 74(1) - Exemption from sections 25 and 53 of the Act in connection with the writing of over-the-counter covered call options and cash covered put options by the issuer, subject to certain conditions.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53 and 74(1).

IN THE MATTER OF

THE SECURITIES ACT

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

AND

IN THE MATTER OF

THE FUNDS LISTED IN SCHEDULE "A"

 

RULING AND EXEMPTION

(Subsection 74(1) of the Act)

UPON the application of AIC Limited (the "Manager") to the Ontario Securities Commission (the "Commission") for a ruling, pursuant to subsection 74(1) of the Act, that the writing of certain over-the-counter covered call options and cash covered put options (collectively, the "OTC Options") by the Funds set out in Schedule A hereto shall not be subject to sections 25 and 53 of the Act;

AND UPON considering the application and the recommendation of the staff of the Commission;

AND UPON the Manager having represented to the Commission as follows:

1. The Funds are or will be either open-ended mutual fund trusts or separate classes of a mutual fund corporation governed by the laws of Ontario.

2. The Funds are or will be reporting issuers under the Act or the equivalent thereof in each of the provinces and territories of Canada (the "Jurisdictions") and are not in default of any requirements of the securities legislation of the Jurisdictions.

3. The Funds are or will be distributed under simplified prospectuses, and subject to the regulation of National Instrument 81-102 -- Mutual Funds ("NI 81-102").

4. AIC Investment Services Inc. ("AISI"), a wholly-owned subsidiary of the Manager, is the investment manager of the Funds.

5. AISI is registered under the Act as an adviser in the categories of investment counsel and portfolio manager and as a dealer in the categories of mutual fund dealer and limited market dealer, and registered advising officers of AISI meet the proficiency requirements for advising with respect to options in Ontario, being the principal jurisdiction in Canada in which AISI carries on its business.

6. The proceeds of each Fund are or will be invested in stocks, bonds, cash, other mutual funds and/or derivatives, depending on the investment objectives of the Fund (in respect of each Fund, the "Portfolio").

7. AISI intends to write covered call options or cash covered put options on a portion of the securities held in a Portfolio to generate additional returns, when it determines it is in the interest of a Fund to do so. The purchasers of OTC Options written by the Funds will generally be major Canadian financial institutions and all purchasers of such OTC options will be persons or entities described in Schedule B to this ruling.

8. The writing of covered call options and cash covered put options will be managed by AISI in a manner consistent with the investment objectives of the Funds. Call options will be written only in respect of common shares (which includes: common shares, installment receipts for common shares, ADRs and other securities that are convertible into, exchangeable for, or carry the right to purchase, common shares of an issuer) that are in a Portfolio and the call options will be "covered" at all times.

9. The Funds may, from time to time, hold a portion of their assets in cash cover, as defined in NI 81-102. The Funds may utilize such cash cover to provide cover in respect of the writing of cash covered put options. Such cash covered put options will only be written in respect of securities in which the Funds are permitted to invest.

10. The Funds have disclosed or will disclose in their prospectuses that the Funds intend to write OTC Options.

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

IT IS RULED, pursuant to subsection 74(1) of the Act, that the writing of OTC Options by the Funds, as contemplated by this ruling, shall not be subject to sections 25 and 53 of the Act, provided that:

(a) the portfolio adviser advising the Funds with respect to such activities is registered as an adviser under the Act and meets the proficiency requirements in Ontario for advising with respect to options, and

(b) each purchaser of an OTC Option written by the Fund is a person or entity described in Appendix B to this ruling.

September 7, 2004.

"Robert L. Shirriff"
"Paul K. Bates"

 

SCHEDULE A

The Funds

Trust Funds
___________
 
AIC Advantage Fund
AIC Canadian Focused Fund
AIC Advantage Fund II
AIC American Focused Fund
AIC American Advantage Fund
AIC Canadian Balanced Fund
AIC Global Advantage Fund
AIC American Balanced Fund
AIC Diversified Canada Fund
AIC Global Balanced Fund
AIC Value Fund
AIC Dividend Income Fund
AIC World Equity Fund
AIC Bond Fund
AIC Global Diversified Fund
AIC Global Bond Fund
AIC Diversified Science & Technology Fund
 
Corporate Funds
_______________
 
AIC Advantage II Corporate Class
AIC Global Diversified Corporate Class
AIC American Advantage Corporate Class
AIC Diversified Science & Technology Corporate Class
AIC Global Advantage Corporate Class
AIC Canadian Focused Corporate Class
AIC Diversified Canada Corporate Class
AIC American Focused Corporate Class
AIC Value Corporate Class
AIC Canadian Balanced Corporate Class
AIC World Equity Corporate Class
AIC American Balanced Corporate Class
 
Private Portfolio Counsel Pools
___________________________
 
AIC Private Portfolio Counsel Canadian Pool
AIC Private Portfolio Counsel Bond Pool
AIC Private Portfolio Counsel Global Pool

And any other NI 81-102 mutual funds that the Manager manages from time to time and AISI is the investment manager of.

 

SCHEDULE B

QUALIFIED PARTIES

Interpretation

(1) The terms "subsidiary" and "holding body corporate" used in paragraphs (w), (x) and (y) of subsection (3) of this Appendix have the same meaning as they have in the Business Corporations Act (Ontario).

(2) All requirements contained in this Appendix that are based on the amounts shown on the balance sheet of an entity apply to the consolidated balance sheet of the entity.

Qualified Parties Acting as Principal

(3) The following are qualified parties for all OTC derivatives transactions, if acting as principal:

Banks

(a) A bank listed in Schedule I, II or III to the Bank Act (Canada).

(b) The Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada).

(c) A bank subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the bank has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency.

Credit Unions and Caisses Populaires

(d) A credit union central, federation of caisses populaires, credit union or regional caisse populaire, located, in each case, in Canada.

Loan and Trust Companies

(e) A loan corporation or trust corporation registered under the Loan and Trust Corporations Act (Ontario) or under the Trust and Loan Companies Act (Canada), or under comparable legislation in any other province or territory of Canada.

(f) A loan company or trust company subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the loan company or trust company has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency.

Insurance Companies

(g) An insurance company licensed to do business in Canada or a province or territory of Canada.

(h) An insurance company subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the insurance company has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency.

Sophisticated Entities

(i) A person or company that, together with its affiliates

(i) has entered into one or more transactions involving OTC derivatives with counterparties that are not its affiliates, if

(A) the transactions had a total gross dollar value of or equivalent to at least $1 billion in notional principal amount; and

(B) any of the contracts relating to one of these transactions was outstanding on any day during the previous 15-month period, or

(ii) had total gross marked-to-market positions of or equivalent to at least $100 million aggregated across counterparties, with counterparties that are not its affiliates in one or more transactions involving OTC derivatives on any day during the previous 15-month period.

Individuals

(j) An individual who, either alone or jointly with the individual's spouse, has a net worth of at least $5 million, or its equivalent in another currency, excluding the value of his or her principal residence.

Governments/Agencies

(k) Her Majesty in right of Canada or any province or territory of Canada and each crown corporation, instrumentality and agency of a Canadian federal, provincial or territorial government.

(l) A national government of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules of the Basel Accord, and each instrumentality and agency of that government or corporation wholly-owned by that government.

Municipalities

(m) Any Canadian municipality with a population in excess of 50,000 and any Canadian provincial or territorial capital city.

Corporations and other Entities

(n) A company, partnership, unincorporated association or organization or trust, other than an entity referred to in paragraph (a), (b), (c), (d), (e), (f), (g) or (h), with total revenue or assets, in excess of $25 million or its equivalent in another currency, as shown on its last financial statement, to be audited only if otherwise required.

Pension Plan or Fund

(o) A pension fund that is regulated by either the Office of the Superintendent of Financial Institutions (Canada) or a provincial pension commission, if the pension fund has total net assets, as shown on its last audited balance sheet, in excess of $25 million, provided that, in determining net assets, the liability of a fund for future pension payments shall not be included.

Mutual Funds and Investment Funds

(p) A mutual fund or non-redeemable investment fund if each investor in the fund is a qualified party.

(q) A mutual fund that distributes securities in Ontario, if the portfolio manager of the fund is registered as an adviser, other than a securities adviser, under the Act or securities legislation elsewhere in Canada.

(r) A non-redeemable investment fund that distributes its securities in Ontario if the portfolio manager is registered as an adviser, other than a securities adviser, under the Act or securities legislation elsewhere in Canada.

Brokers/Investment Dealers

(s) A person or company registered under the Act or securities legislation elsewhere in Canada as a broker or an investment dealer or both.

(t) A person or company registered under the Act as an international dealer if the person or company has total assets, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency.

Futures Commission Merchants

(u) A person or company registered under the CFA as a dealer in the category of futures commission merchant, or in an equivalent capacity elsewhere in Canada.

Charities

(v) A registered charity under the Income Tax Act (Canada) with assets not used directly in charitable activities or administration, as shown on its last audited balance sheet, of at least $5 million or its equivalent in another currency.

Affiliates

(w) A wholly-owned subsidiary of any of the organizations described in paragraph (a), (b), (c), (d), (e), (f), (g), (h), (j), (n), (o), (s), (t) or (u).

(x) A holding body corporate of which any of the organizations described in paragraph (w) is a wholly-owned subsidiary.

(y) A wholly-owned subsidiary of a holding body corporate described in paragraph (x).

(z) A firm, partnership, joint venture or other form of unincorporated association in which one or more of the organizations described in paragraph (w), (x) or (y) have a direct or indirect controlling interest.

Guaranteed Party

(aa) A party whose obligations in respect of the OTC derivatives transaction for which the determination is made is fully guaranteed by another qualified party.

Qualified Party Not Acting as Principal

(4) The following are qualified parties, in respect of all OTC derivative transactions:

Managed Accounts

1. Accounts of a person, company, pension fund or pooled fund trust that are fully managed by a portfolio manager or financial intermediary referred to in paragraphs (a), (d), (e), (g), (s), (t), (u) or (w) of subsection (3) or a broker or investment dealer acting as a trustee or agent for the person, company, pension fund or pooled fund trust under section 148 of the Regulation.

Subsequent Failure to Qualify

(5) A party is a qualified party for the purpose of any OTC derivatives transaction if it, he or she is a qualified party at the time it, he or she enters into the transaction.