One time trade of securities between mutual funds in the same family of funds to implement a reallocation of assets under a fund of fund structure as part of a change in investment strategy is exempted from the investment restrictions and reporting requirements of sections 111(2)(c), 117(1), 118(2)(b) and subsection 115(6) of the Regulation.
Securities Act, R.S.O. 1990, c.S.5, as am., ss. 111(2)(c), 112, 113, 117(1), 117(2), 118(2)(b), 121(2) and 147.
Regulation made under the Securities Act, R.R.O. 1990, Reg. 1015, as am., s. 115(6).
April 29, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA,
ONTARIO, NEW BRUNSWICK, NOVA SCOTIA
AND NEWFOUNDLAND AND LABRADOR
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM FOR
EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
FRANK RUSSELL CANADA LIMITED
IN THE MATTER OF
BALANCED INCOME PORTFOLIO
BALANCED GROWTH PORTFOLIO
LONG-TERM GROWTH PORTFOLIO
ALL EQUITY PORTFOLIO
ALL EQUITY RSP PORTFOLIO
RUSSELL GLOBAL EQUITY FUND
RUSSELL US EQUITY FUND
RUSSELL OVERSEAS EQUITY FUND
SOVEREIGN GLOBAL EQUITY RSP POOL
SOVEREIGN DIVERSIFIED MONTHLY INCOME PORTFOLIO
SOVEREIGN US EQUITY POOL
SOVEREIGN OVERSEAS EQUITY POOL
MRRS DECISION DOCUMENT
The securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from FRCL on its own behalf and on behalf of the Funds for a decision (the "Decision") under the securities legislation of the Jurisdictions (the "Legislation") that:
(a) the restrictions contained in the Legislation prohibiting a mutual fund from knowingly making an investment in any issuer in which any person or company who is a substantial securityholder of the mutual fund, its management company or its distribution company, has a significant interest;
(b) the restrictions contained in the Legislation prohibiting a mutual fund from knowingly entering into any contract or other arrangement that results in its being directly or indirectly liable or contingently liable in respect of the foregoing;
(c) the Legislation requiring a management company or, in British Columbia, a mutual fund manager, to file a report relating to a purchase or sale of securities between the mutual fund and any related person or company, or any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, the mutual fund is a joint participant with one or more of its related persons or companies;
(d) the restriction contained in the Legislation prohibiting a portfolio manager from knowingly causing an investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager; and
(e) the restriction contained in the Legislation prohibiting a purchase or sale of any securities in which an investment counsel or any partner, officer or associate of an investment counsel has a direct or indirect beneficial interest from or to any portfolio managed or supervised by the investment counsel;
(the "Applicable Requirements") shall not apply to the steps relating to certain transfers of assets between the Funds.
Under the Mutual Reliance Review System for Exemptive Relief Applications:
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this Decision unless they are otherwise defined in this Decision.
This Decision is based on the following facts represented by FRCL:
1. RCL is registered under the Legislation as an adviser. FRCL also is the trustee and manager of each of:
(a) Balanced Income Portfolio, Balanced Growth Portfolio, Long-Term Growth Portfolio, All Equity Portfolio and All Equity RSP Portfolio (the "LifePoints Top Funds");
(b) Russell US Equity Fund and Russell Overseas Equity Fund (the "Russell Bottom Funds");
(c) Russell Global Equity Fund (the "New Russell Fund");
(d) Sovereign Global Equity RSP Pool (the "Sovereign Pool");
(e) Sovereign Diversified Monthly Income Portfolio (the "Income Portfolio"); and
(f) Sovereign US Equity Pool and Sovereign Overseas Equity Pool (the "Sovereign Bottom Funds").
The LifePoints Top Funds, the Sovereign Pool (prior to changing its investment strategies as described below) and the Income Portfolio are referred to herein as the "Top Funds". The Russell Bottom Funds and the Sovereign Bottom Funds are referred to herein as the "Current Bottom Funds". The New Russell Fund and the Sovereign Pool (after it changes its investment strategies as described below) are referred to herein as the "New Bottom Funds" and, together with the Current Bottom Funds, are referred to herein as the "Bottom Funds".
2. Each Fund is a reporting issuer (or the equivalent) as defined in the securities legislation of each Jurisdiction and currently distributes its units in each Jurisdiction pursuant to:
(a) in the case of the LifePoints Top Funds and Russell Bottom Funds, a simplified prospectus and annual information form dated July 14, 2004;
(b) in the case of the Sovereign Pool, the Income Portfolio and the Sovereign Bottom Funds, a simplified prospectus and annual information form dated November 4, 2004; and
(c) in the case of the New Russell Fund, a simplified prospectus and annual information form dated April 12, 2005.
3. For purposes of obtaining exposure to foreign equity securities, each Top Fund currently invests a portion of its assets in the certain Current Bottom Funds. In order to provide investors in the Top Funds with optimal portfolio diversification by emphasizing industry sector rather than geographic location, FRCL:
(a) has created, and currently is the sole unitholder of, the New Russell Fund which will emphasize sector rather than geographic specialization in the selection of its investment managers;
(b) proposes to change the name, investment strategies and current investment portfolio of the Sovereign Pool to reflect investing directly in a portfolio of global equity securities which will emphasize sector rather than geographic specialization; and
(c) proposes to effect a one-time reallocation of a portion of the assets of each Top Fund currently invested in its Current Bottom Funds to its New Bottom Fund (the "Reallocation") as summarized below:
Top Fund Current Bottom Funds in Which the Top Fund Invests a Portion of its Assets New Bottom Fund to Which a Portion of the Top Fund's Assets in its Current Bottom Funds will be Reallocated Balanced Income Portfolio Russell US Equity Fund Russell Global Equity Fund Russell Overseas Equity Fund Balanced Growth Portfolio Russell US Equity Fund Russell Global Equity Fund Russell Overseas Equity Fund Long-Term Growth Portfolio Russell US Equity Fund Russell Global Equity Fund Russell Overseas Equity Fund All Equity Portfolio Russell US Equity Fund Russell Global Equity Fund Russell Overseas Equity Fund All Equity RSP Portfolio Russell US Equity Fund Russell Global Equity Fund Russell Overseas Equity Fund Sovereign Global Equity RSP Pool Sovereign US Equity Pool N/A (the Fund will invest directly in securities) Sovereign Overseas Equity Pool Sovereign Diversified Monthly Income Portfolio Sovereign US Equity Pool Sovereign Global Equity Pool Sovereign Overseas Equity Pool
4. If FRCL effects the Reallocation by redeeming units of the Current Bottom Funds held by the Top Funds and reinvesting the redemption proceeds in units of the New Bottom Funds, then the cost of disposing of a significant portion of the investment portfolios of the Current Bottom Funds will be borne by other unitholders of the Current Bottom Funds. In addition, to the extent that a New Bottom Fund purchases the same securities that were disposed of by its corresponding Current Bottom Funds, the New Bottom Fund will incur transaction costs in the form of brokerage commissions. In order to arrange for the costs of liquidating any portfolio securities to be effectively borne by unitholders of the Top Funds and to eliminate unnecessary brokerage commission costs, FRCL proposes to implement the Reallocation as follows:
(a) each Top Fund will submit its request to redeem some units of its Current Bottom Funds. In the case of the Sovereign Pool, the redemption request will relate to all units it holds of Current Bottom Funds;
(b) each Top Fund and its Current Bottom Funds will agree that payment of the redemption price for the units of the Current Bottom Funds will be satisfied through the delivery of portfolio securities (the "Transferred Securities") of the Current Bottom Funds having a value which is equal to the amount at which the Transferred Securities are valued in calculating the net asset value per unit used to establish the redemption price of the units of the Current Bottom Fund redeemed by the Top Fund, as contemplated by section 10.4(3)(b) of National Instrument 81-102;
(c) the Sovereign Pool will change its investment strategies to reflect investing directly in a portfolio of global equity securities and will retain the Transferred Securities it receives from its Current Bottom Funds;
(d) each Top Fund (other than the Sovereign Pool) will subscribe for units of its New Bottom Fund and pay for such units by delivering to its New Bottom Fund the Transferred Securities the Top Fund has received from its Current Bottom Funds;
(e) FRCL will redeem all the units it then holds of the New Russell Fund; and
(f) to the extent any Transferred Securities are considered to be unsuitable for a New Bottom Fund, the portfolio advisor of the New Bottom Fund will arrange for such Transferred Securities to be liquidated and replaced with suitable securities.
5. The Transferred Securities of each Current Bottom Fund will be comprised of a pro rata number of all portfolio securities held by such Current Bottom Fund (subject to adjustment for de minimus holdings).
6. No new investors will be permitted to purchase units of the New Russell Fund until the Reallocation relating to it has been completed (including the liquidation and replacement of any Transferred Securities considered to be unsuitable for the New Russell Fund by its portfolio advisor).
7. If the requested relief is not granted, FRCL will be unable to effect the Reallocation because:
(a) the subscription by each LifePoints Top Fund for units of the New Russell Fund may be an investment knowingly made by each LifePoints Top Fund in an issuer in which Frank Russell Company (a substantial securityholder of FRCL which is the management company and distribution company of each LifePoints Top Fund) may be considered to have a significant interest;
(b) by submitting an order to purchase units of the New Russell Fund, each LifePoints Top Fund may be considered to have knowingly entered into a contract or other arrangement that results in its being directly liable in respect of an investment that is prohibited;
(c) the transfer of the Transferred Securities: (a) by each Current Bottom Fund to its Top Funds in payment of the redemption price for units of the Current Bottom Fund redeemed by such Top Funds, and (b) by each Top Fund to its New Bottom Fund in payment of the purchase price for the units of the New Bottom Fund subscribed for by such Top Fund, may, in each case, be considered to be:
(i) a sale of securities knowingly caused by FRCL from an investment portfolio managed by FRCL to the account of an associate of FRCL; and
(ii) a purchase of securities knowingly caused by FRCL from an investment portfolio managed by FRCL to the account of an associate of FRCL; and
(d) the Reallocation may be considered to be a sale of Transferred Securities from portfolios managed by FRCL to an account in which FRCL will have a direct beneficial interest.
8. The steps of the Reallocation involve transactions between the Funds and persons who may be considered to be a related person or company of the Funds. Consequently, if the requested relief is not granted, FRCL would be required to file reports relating to the Reallocation.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met.
The decision of the Decision Makers under the Legislation is that FRCL and the Funds are exempt from the Applicable Requirements so as to enable FRCL and the Funds to implement the steps associated with the Reallocation.