Standard exemption from subsection 4.1(1) of National Instrument 81-102 Mutual Funds allowing dealer managed mutual funds to invest in the units of an issuer during the period and the 60 days after the period in which an affiliate of the dealer manager has acted as an underwriter in connection with the distribution of the units of the issuer.
National Instrument 81-102 Mutual Funds, ss. 4.1(1), 19.1.
September 20, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA,
ONTARIO, QUEBEC, NEW BRUNSWICK, NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR,
THE NORTHWEST TERRITORIES, NUNAVUT AND THE YUKON
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
CIBC ASSET MANAGEMENT INC. AND
NATCAN INVESTMENT MANAGEMENT INC.
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Applicants (or "Dealer Managers"), the portfolio advisers of the mutual funds named in Appendix "A" (the "Funds" or "Dealer Managed Funds"), for a decision under section 19.1 of National Instrument 81-102 Mutual Funds ("NI 81-102") (the "Legislation") for:
• an exemption from subsection 4.1(1) of NI 81-102 to enable the Dealer Managed Funds to invest in the units (the "Units") of Morneau Sobeco Income Fund (the "Issuer") on the Toronto Stock Exchange (the "TSX") during the period of distribution for the Offering (as defined below) (the "Distribution") and the 60-day period following the completion of the Distribution (the "60-Day Period") (the Distribution and the 60-Day Period together, the "Prohibition Period") notwithstanding that the Dealer Managers or their associates or affiliates act or have acted as an underwriter in connection with the initial public offering (the "Offering") of Units of the Issuer pursuant to a preliminary prospectus filed by the Issuer and a final prospectus that the Issuer will file in accordance with the securities legislation of each of the Jurisdictions (the "Requested Relief").
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.
It is the responsibility of each of the Decision Makers to make a global assessment of the risks involved in granting exemptive relief from subsection 4.1(1) of NI 81-102 in relation to the specific facts of each application.
Defined terms contained in National Instrument 14-101 -- Definitions have the same meanings in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Applicants:
1. Each Dealer Manager is a "dealer manager" with respect to the Dealer Managed Funds, and each Dealer Managed Fund is a "dealer managed fund", as such terms are defined in section 1.1 of NI 81-102.
2. The head office of the CIBC Asset Management Inc. is in Toronto, Ontario. The head office of Natcan is in Montreal, Quebec.
3. The securities of the Dealer Managed Funds are qualified for distribution in one or more of the provinces and territories of Canada pursuant to simplified prospectuses that have been prepared and filed in accordance with their respective securities legislation.
4. A preliminary prospectus (the "Preliminary Prospectus") of the Issuer dated August 24, 2005 has been filed for which an MRRS decision document evidencing receipt by the regulators in each of the provinces and territories of Canada was issued on August 24, 2005.
5. According to the Preliminary Prospectus, the Units will be priced at $10.00 per Unit. According to the Preliminary Prospectus, the Underwriters will be granted an over-allotment option (the "Over-allotment Option") to be exercised in full within 30 days following the closing date of the Offering (as defined below). According to the term sheet in respect of the Offering (the "Term Sheet"), the Offering is expected to be for approximately 18.3 million Units with the gross proceeds of the Offering expected to be approximately $183 million. Currently, closing of the Offering is expected to occur on or about September 26, 2005 (the "Closing Date").
6. The co-lead underwriters are BMO Nesbitt Burns Inc. and National Bank Financial Inc.
7. As disclosed in the Preliminary Prospectus, the Issuer is an open-ended trust established under the laws of Ontario to indirectly acquire and hold, through Morneau Sobeco Trust, an interest in the limited partnership units of Morneau Sobeco Group Limited Partnership ("Morneau Sobeco Group LP").
8. According to the Preliminary Prospectus, W.F. Morneau Services Inc. ("Morneau Sobeco") is the largest Canadian-owned pension and benefits consulting and outsourcing firm providing services to organizations across Canada and in the United States.
9. The Issuer will use the proceeds of the Offering to subscribe for units and Series 1 notes of the Trust. The Trust will, in turn, subscribe for Class A LP units of Morneau Sobeco Group LP. Morneau Sobeco Group LP will use these funds, together with the proceeds from certain new credit facilities, to:
(i) pay a portion of the purchase price in connection with Morneau Sobeco Group LP's direct or indirect acquisition of the outstanding common shares in the capital of Morneau Sobeco from the current holders of shares of Morneau Sobeco;
(ii) directly or indirectly pay the expenses of the Offerings; and
(iii) directly or indirectly repay existing debt.
10. The Issuer, the Trust, Morneau Sobeco Group LP and the Underwriters will enter into an underwriting agreement (the "Underwriting Agreement") in respect of the Offering prior to the Issuer filing the final prospectus for the Offering. Pursuant to the terms of the Underwriting Agreement, the Issuer will agree to sell to the Underwriters, and the Underwriters will agree to purchase, as principals, from the Issuer all but not less than all of the Units offered under the Offering for a price of $10.00 per Unit payable in cash to the Issuer against delivery of the Units on closing.
11. According to the Term Sheet, the Issuer will be applying to list the Units that will be distributed under the final prospectus on the Toronto Stock Exchange under the symbol "MS1.VN"
12. The Preliminary Prospectus does not disclose that the Issuer is a "related issuer" of any of the Related Underwriters as defined in National Instrument 33-105 -- Underwriting Conflicts ("NI 33-105").
13. The Issuer may be considered a "connected issuer", as defined in NI 33-105, of certain of the Related Underwriters for the reasons set forth in the Preliminary Prospectus. As disclosed in the Preliminary Prospectus, the Canadian chartered bank affiliate of National Bank Financial Inc. has agreed to make credit facilities available to Morneau Sobeco Group LP. Consequently, the Issuer may be considered to be a "connected issuer" of National Bank Financial Inc. under applicable Canadian securities legislation.
14. The Dealer Managed Funds are not required or obligated to purchase any Units during the Prohibition Period.
15. Despite the affiliation between the Dealer Managers and their Related Underwriters, they operate independently of each other. In particular, the investment banking and related dealer activities of the Related Underwriters and the investment portfolio management activities of the Dealer Managers are separated by "ethical" walls. Accordingly, no information flows from one to the other concerning their respective business operations or activities generally, except in the following or similar circumstances:
(a) in respect of compliance matters (for example, a Dealer Manager and its Related Underwriter may communicate to enable the Dealer Manager to maintain an up to date restricted-issuer list to ensure that the Dealer Manager complies with applicable securities laws); and the Purchase
(b) a Dealer Manager and its Related Underwriter may share general market information such as discussion on general economic conditions, bank rates, etc.
16. The Dealer Managers may cause the Dealer Managed Funds to invest in the Units during the Prohibition Period. Any purchase of the Units will be consistent with the investment objectives of the Dealer Managed Fund and represent the business judgment of the Dealer Manager uninfluenced by considerations other than the best interests of the Dealer Managed Fund or in fact be in the best interests of the Dealer Managed Fund.
17. To the extent that the same portfolio manager or team of portfolio managers of a Dealer Manager manages two or more Dealer Managed Funds and other client accounts that are managed on a discretionary basis (the "Managed Accounts"), the Units purchased for them will be allocated:
(a) in accordance with the allocation factors or criteria stated in the written policies or procedures put in place by the Dealer Manager for its Dealer Managed Funds and Managed Accounts, and
(b) taking into account the amount of cash available to each Dealer Managed Fund for investment.
18. There will be an independent committee (the "Independent Committee") appointed in respect of each Dealer Managed Fund to review each Dealer Managed Fund's investments in the Units during the Prohibition Period.
19. The Independent Committee will have at least three members and every member must be independent. A member of the Independent Committee is not independent if the member has a direct or indirect material relationship with its Dealer Manager, the Dealer Managed Fund, or any affiliate or associate thereof. For the purpose of this Decision, a material relationship means a relationship which could, in the view of a reasonable person, reasonably interfere with the exercise of the member's independent judgment regarding conflicts of interest facing the Dealer Manager.
20. The members of the Independent Committee will exercise their powers and discharge their duties honestly, in good faith, and in the best interests of investors in its Dealer Managed Funds and, in so doing, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
21. Each Applicant, in respect of its Dealer Managed Funds, will notify a member of staff in the Investment Funds Branch of the Decision Maker in Ontario, in writing of any SEDAR Report (as defined below) filed on SEDAR, as soon as practicable after the filing of such a report, and the notice shall include the SEDAR project number of the SEDAR Report and the date on which it was filed.
22. Each Dealer Manager has not been involved in the work of its Related Underwriter and each Related Underwriter has not been and will not be involved in the decisions of its Dealer Manager as to whether the Dealer Manager's Dealer Managed Funds will purchase Units during the Prohibition Period.
Each of the Decision Makers has assessed the conflict of interest risks associated with granting an exemption in this instance from subsection 4.1(1) of NI 81-102 and is satisfied that, at the time this Decision is granted, the potential risks are sufficiently mitigated.
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 the Requested Relief is granted, notwithstanding that the Related Underwriters act or have acted as underwriters in the Offering provided that, in respect of each Dealer Manager and its Dealer Managed Funds, independent of any of the other Applicants and their Dealer Managed Funds, the following conditions are satisfied:
I. At the time of each purchase (the "Purchase") of Units by a Dealer Managed Fund pursuant to this Decision, the following conditions are satisfied:
(a) the Purchase
(i) represents the business judgment of the Dealer Manager uninfluenced by considerations other than the best interests of the Dealer Managed Fund, or
(ii) is, in fact, in the best interests of the Dealer Managed Fund;
(b) the Purchase is consistent with, or is necessary to meet, the investment objective of the Dealer Managed Fund as disclosed in its simplified prospectus; and
(c) the Dealer Managed Fund does not place the order to purchase, on a principal or agency basis, with its Related Underwriter;
II. Prior to effecting any Purchase pursuant to this Decision, the Dealer Managed Fund has in place written policies or procedures to ensure that,
(a) there is compliance with the conditions of this Decision; and
(b) in connection with any Purchase,
(i) there are stated factors or criteria for allocating the Units purchased for two or more Dealer Managed Funds and other Managed Accounts, and
(ii) there is full documentation of the reasons for any allocation to a Dealer Managed Fund or Managed Account that departs from the stated allocation factors or criteria;
III. The Dealer Manager does not accept solicitation by its Related Underwriter for the Purchase of Units for the Dealer Managed Funds;
IV. The Related Underwriter does not purchase Units in the Offering for its own account except Units sold by the Related Underwriter on Closing;
V. Each Dealer Managed Fund has an Independent Committee to review the Dealer Managed Funds' investments in the Units during the Prohibition Period;
VI. The Independent Committee has a written mandate describing its duties and standard of care which, as a minimum, sets out the conditions of this Decision;
VII. The members of the Independent Committee exercise their powers and discharge their duties honestly, in good faith, and in the best interests of investors in the Dealer Managed Funds and, in so doing, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances;
VIII. The Dealer Managed Fund does not relieve the members of the Independent Committee from liability for loss that arises out of a failure to satisfy the standard of care set out in paragraph VII above;
IX. The Dealer Managed Fund does not incur the cost of any portion of liability insurance that insures a member of the Independent Committee for a liability for loss that arises out of a failure to satisfy the standard of care set out in paragraph VII above;
X. The cost of any indemnification or insurance coverage paid for by the Dealer Manager, any portfolio manager of the Dealer Managed Funds, or any associate or affiliate of the Dealer Manager or any portfolio manager of the Dealer Managed Funds to indemnify or insure the members of the Independent Committee in respect of a loss that arises out of a failure to satisfy the standard of care set out in paragraph VII above is not paid either directly or indirectly by the Dealer Managed Funds;
XI. The Dealer Manager files a certified report on SEDAR (the "SEDAR Report") in respect of each Dealer Managed Fund, no later than 30 days after the end of the Prohibition Period, that contains a certification by the Dealer Manager that contains:
(a) the following particulars of each Purchase:
(i) the number of Units purchased by the Dealer Managed Funds;
(ii) the date of the Purchase and purchase price;
(iii) whether it is known whether any underwriter or syndicate member has engaged in market stabilization activities in respect of the Units;
(iv) if the Units were purchased for two or more Dealer Managed Funds and other Managed Accounts of the Dealer Manager, the aggregate amount so purchased and the percentage of such aggregate amount that was allocated to each Dealer Managed Fund; and
(v) the dealer from whom the Dealer Managed Fund purchased the Units and the fees or commissions, if any, paid by the Dealer Managed Fund in respect of such Purchase;
(b) a certification by the Dealer Manager that the Purchase:
(i) was made free from any influence by the Related Underwriter or any affiliate or associate thereof and without taking into account any consideration relevant to the Related Underwriter or any associate or affiliate thereof; and
(ii) represented the business judgment of the Dealer Manager uninfluenced by considerations other than the best interest of the Dealer Managed Fund, or
(iii) was, in fact, in the best interests of the Dealer Managed Fund;
(c) confirmation of the existence of the Independent Committee to review the Purchase of the Units by the Dealer Managed Funds, the names of the members of the Independent Committee, the fact that they meet the independence requirements set forth in this Decision, and whether and how they were compensated for their review;
(d) a certification by each member of the Independent Committee that after reasonable inquiry the member formed the opinion that the policies and procedures referred to in Condition II(a) above are adequate and effective to ensure compliance with this Decision and that the decision made on behalf of each Dealer Managed Fund by the Dealer Manager to purchase Units for the Dealer Managed Funds and each Purchase by the Dealer Managed Fund:
(i) was made in compliance with the conditions of this Decision;
(ii) was made by the Dealer Manager free from any influence by the Related Underwriter or any affiliate or associate thereof and without taking into account any consideration relevant to the Related Underwriter or any associate or affiliate thereof; and
(iii) represented the business judgment of the Dealer Manager uninfluenced by considerations other than the best interests of the Dealer Managed Fund, or
(iv) was, in fact, in the best interests of the Dealer Managed Fund.
XII. The Independent Committee advises the Decision Makers in writing of:
(a) any determination by it that the condition set out in paragraph XI(d) has not been satisfied with respect to any Purchase of the Units by a Dealer Managed Fund;
(b) any determination by it that any other condition of this Decision has not been satisfied;
(c) any action it has taken or proposes to take following the determinations referred to above; and
(d) any action taken, or proposed to be taken, by the Dealer Manager or a portfolio manager of a Dealer Managed Fund, in response to the determinations referred to above.
XIII. For Purchases of Units during the Distribution only, the Dealer Manager:
(a) expresses an interest to purchase on behalf of Dealer Managed Funds and Managed Accounts a fixed number of Units (the "Fixed Number") to an Underwriter other than its Related Underwriter;
(b) agrees to purchase the Fixed Number or such lesser amount as has been allocated to the Dealer Manager no more than five (5) business days after the final prospectus has been filed;
(c) does not place an order with an underwriter of the Offering to purchase an additional number of Units under the Offering prior to the completion of the Distribution, provided that if the Dealer Manager was allocated less than the Fixed Number at the time the final prospectus was filed for the purposes of the Closing, the Dealer Manager may place an additional order for such number of additional Units equal to the difference between the Fixed Number and the number of Units allotted to the Dealer Manager at the time of the final prospectus in the event the Underwriters exercise the over-allotment option as described in the Preliminary Prospectus; and
(d) does not sell Units purchased by the Dealer Manager under the Offering, prior to the listing of such Units on the TSX.
XIV. Each Purchase of Units during the 60-Day Period is made on the TSX; and
XV. For Purchases of Units during the 60-Day Period only, an underwriter provides to the Dealer Manager written confirmation that the "dealer restricted period" in respect of the Offering, as defined in Ontario Securities Commission Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions, has ended.
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