Exemptive relief granted to a mutual fund listed on the Toronto Stock Exchange from certain restrictions and requirements on mutual funds entering into securities lending transactions, including: (i) the 50% limit on lending; (ii) the requirement to use a custodial lending agent; and (iii) the requirement to hold the collateral during the course of the transaction.
National Instrument 81-102 - Mutual Funds, ss. 2.12(1)1., 2.12(1)2., 2.12(1)12., 2.12(3) , 2.15, 2.16(1), and 19.1.
August 25, 2005
IN THE MATTER OF
NATIONAL INSTRUMENT 81-102 MUTUAL FUNDS
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM FOR
EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
CONNOR, CLARK & LUNN PRINTS TRUST
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (each, a Decision Maker, and together, the Decision Makers) in each of the provinces of Canada except Québec (together, the Jurisdictions) has received an application (the Application) from the Trust for a decision under NI 81-102 that the following sections of NI 81-102 (collectively, the Securities Lending Requirements) will not apply to the Trust with respect to securities lending transactions conducted by the Trust:
(a) subsection 2.12(1)1., which requires that such transactions be administered and supervised by an agent;
(b) subsection 2.12(1)12., which requires that the aggregate value of all securities loaned by the Trust and not yet returned to it does not exceed 50% of the total assets of the Trust;
(c) subsection 2.12(1)2., which requires that such transactions are made pursuant to a written agreement that implements the requirements of section 2.12;
(d) subsection 2.12(3), which requires that during the course of such a transaction, the Trust will hold all, and shall not dispose of any, non-cash collateral delivered to it as collateral in the transaction;
(e) section 2.15, which requires that such transactions be administered by an agent that is either the custodian or sub-custodian of the Trust; and
(f) subsection 2.16(1), which requires that for transactions entered into through an agent, the manager of the Trust must have reasonable grounds to believe that such agent has established and maintains appropriate internal controls and procedures and records.
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, as applicable
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 the Trust:
1. The Trust was established under the laws of Ontario pursuant to a trust agreement (the Trust Agreement) entered into between the Manager as manager and The Royal Trust Company as trustee (the Trustee) on November 29, 2001.
2. Connor, Clark & Lunn Capital Markets Inc. (the Manager) manages the ongoing business and administration of the Trust. Connor, Clark & Lunn Investment Management Ltd. provides investment advisory and portfolio management services to the Trust.
3. The units of the Trust are listed and posted for trading on the Toronto Stock Exchange. The Trust will terminate on or about December 2, 2013 (the Termination Date), subject only to extension by the holders of Units (the Holders) by extraordinary resolution. On such date, after paying or making adequate provision for all of the Trust's liabilities, the Trust will distribute its net assets to Holders on a pro rata basis.
Investment Objectives and Strategy
4. The Trust's investment objectives are:
• Distributions: to provide Holders with a stable stream of quarterly distributions of at least $0.50 per Unit ($2.00 per annum to yield 8.0% on the subscription price of $25.00 per Unit);
• Capital Repayment: to pay to Holders, on or about the Termination Date, an amount per Unit equal to the subscription price of $25.00 (the Original Investment Amount); and
• Capital Appreciation: to pay to Holders on the Termination Date, in addition to the Original Investment Amount, the value per Unit, if any, in excess of the Original Investment Amount.
5. In order to achieve the Trust's distribution and capital appreciation objectives, the Trust invested the net proceeds of the Offering in a diversified portfolio (the Managed Portfolio) consisting principally of equity securities issued by mid- and large-capitalization companies which were selected from the S&P 500 Index (the Managed Portfolio Universe).
6. To achieve the capital repayment objective, upon the closing of the Offering, the Trust entered into an agreement (the Forward Agreement) with TD Global Finance (the Counterparty), pursuant to which the Trust agreed to identify and purchase a portfolio of equity securities (the Capital Portfolio) (for sale to the Counterparty on the Termination Date) on the date (the Determination Date) that is the earlier of (i) December 13, 2004, and (ii) the date of the occurrence of any of the following events:
(a) the Counterparty, in its sole discretion after consultation with the Manager, determines that (A) there has been any amendment to, clarification of, or change (including any prospective change) in the laws, or any regulations thereunder, of Canada or any political subdivision or taxing authority thereof, or (B) any other circumstances not within the control of the Counterparty have occurred, which in either case could have an adverse effect on the Counterparty or the Trust if the Determination Date is not designated immediately;
(b) the Counterparty, in its sole discretion after consultation with the Manager, determines that it would be appropriate for the Determination Date to be designated immediately, including without limitation as a result of the Trust not meeting the collateralization requirements described in the Forward Agreement or a material diminution in the value of the Managed Portfolio securities; or
(c) the Manager, on behalf of the Trust, in its sole discretion after consultation with the Counterparty, determines that it would be in the best interests of the Holders for the Determination Date to be designated immediately.
7. Under the Forward Agreement, the Counterparty will be required to pay the Original Investment Amount to the Trust on the Termination Date in exchange for the Capital Portfolio securities.
8. On June 4, 2003, the Manager, on behalf of the Trust, determined that due to adverse market conditions it was in the best interests of the Holders to designate the Determination Date immediately. As a result, the Trust liquidated the Managed Portfolio and used the proceeds to acquire the Capital Portfolio, which the Trust agreed to sell to the Counterparty pursuant to the terms and conditions of the Forward Agreement. Other than the Capital Portfolio, the only assets of the Trust now consist of its rights under the Forward Agreement (being the right to receive $25.00 per Unit on the Termination Date in exchange for the Capital Portfolio securities) and cash which will be used to pay the expenses of the Trust until the Termination Date. Effectively, as a result of equity market declines and decreased interest rates, no Managed Portfolio remains.
9. Due to the adverse market conditions since the formation of the Trust, the Trust has been forced to cease making distributions on the Units and there will likely be no capital appreciation to pass on to Holders on the Termination Date. Such adverse market conditions consisted of the prolonged deterioration of the equity markets that had occurred since the inception of the Trust to the period just prior to the liquidation of the Managed Portfolio on June 4, 2003. The benchmark S&P 500 index had fallen by 26% to May 30, 2003 and had been down as much as 34% in Canadian dollar terms since the Trust's inception in December 2001, and the cost per Unit of executing the forward sale had increased by over 25% in the same period as a result of declining bond yields. As the Managed Portfolio was comprised principally of equity securities of companies selected from the S&P 500 Index, the decline in this index resulted in a decline in the value of the Managed Portfolio.
10. On June 4, 2003 the Trust filed a material change report and issued a press release with respect to the designation of the Determination Date under the Forward Agreement.
Securities Lending Transactions
11. The Trust proposes to engage in securities lending transactions with respect to the securities in the Capital Portfolio in order to earn additional revenue which it expects will defray some of its ongoing operating costs, and thereby increase the amount available for payment to the Holders on the Termination Date. In order to maximize the revenues it will generate through securities lending transactions, the Trust proposes to lend the securities in the Capital Portfolio, which will represent greater than 50% of the total assets of the Trust. The Trust may lend securities to one or more borrowers directly, or may lend securities indirectly through an agent, which agent may not be the Trust's custodian but would be a Canadian financial institution or the investment bank affiliate of a Canadian financial institution.
12. The securities in the Capital Portfolio have been pledged to the Counterparty as collateral for the obligations of the Trust under the Forward Agreement. The Counterparty will need to release its security interest in the securities in the Capital Portfolio in order to allow the Trust to lend such securities, provided that the Trust grants to the Counterparty a security interest in the collateral held by the Trust for the loaned securities.
13. The Trust shall ensure that any agent through which the Company lends securities has established, and shall maintain, appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.
14. If the Trust lends securities to borrowers directly, each of the Trust and the Manager shall, in administering such securities lending transactions, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances, and each of the Trust and the Manager shall ensure that appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102 are established and maintained.
15. The Trust will enter into a written agreement with any agent or direct borrower which will comply with each of the requirements set forth in subsection 2.15(4) of NI 81-102.
16. If direct lending is conducted, the Manager will fulfill the annual obligations set forth in subsection 2.16(3) with respect to any direct borrowers as if references to the agent in such subsection were references to direct borrowers.
17. The Capital Portfolio is a static portfolio that is not traded except in limited circumstances.
18. The Manager is part of the Connor, Clark & Lunn Financial Group with approximately $26 billion in assets under administration. The Manager has approximately $1,150 million in assets under administration and acts as manager for eight investment funds listed on The Toronto Stock Exchange.
19. The Prospectus contains disclosure with respect to the Trust's intention to enter into securities lending transactions following the Determination Date.
20. Any securities lending transactions will be conducted in accordance with the provisions of NI 81-102 other than the Securities Lending Requirements.
Each of the Decision Makers is satisfied that, based on the information and representations contained in the Application and this decision, and for the purposes described in the Application, the Decision Makers hereby grant the Trust exemption from the Securities Lending Requirements, provided that:
(a) with respect to the exemption from subsection 2.12(1)12., the Trust, in connection with each securities lending transaction,
(i) receives the collateral prescribed by subsections 2.12(1)3. to 6.,
(ii) has the rights set forth in subsections 2.12(1)7. to 9. and 2.12(1)11., and
(iii) complies with subsection 2.12(1)10.;
(b) with respect to the exemption from section 2.12(3), the Company provides a security interest to the Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 12;
(c) with respect to the exemption from section 2.15,
(i) the Trust enter into a written agreement with an agent or direct borrower that complies with each of the requirements set forth in subsection 2.15(4);
(ii) the Trust, if lending to a direct borrower, or the agent administers the securities lending transactions in compliance with subsection 2.15(5); and
(iii) if the Trust lends indirectly through an agent, the agent is a bank or trust company described in paragraph 1 or 2 of section 6.2 of NI 81-102 (an Eligible Agent) or the investment bank affiliate of an Eligible Agent that is registered as an investment dealer in the Jurisdictions; and
(d) with respect to the exemption from subsection 2.16(1), the Manager, itself, meets the requirements of section 2.16 as if it were the agent.