Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Exemption from subsection 4.1(1) of National Instrument 81-102 Mutual Funds to allow dealer managed mutual funds to invest in subscription receipts and common shares of an issuer during the prohibition period -- affiliates of the dealer managers acted as an underwriter in connection with the distribution of securities of the issuer.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 4.1(1), 19.1.

February 9, 2007

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, AND THE

NORTHWEST TERRITORIES, NUNAVUT AND

THE YUKON

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM ("MRRS")

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

TD ASSET MANAGEMENT INC.,

JONES HEWARD INVESTMENT COUNSEL INC.,

CIBC ASSET MANAGEMENT INC.,

CIBC GLOBAL ASSET MANAGEMENT INC. AND

SCOTIA CASSELS INVESTMENT

COUNSEL LIMITED

(the "Applicants")

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Applicants (each a "Dealer Manager"), the managers or portfolio advisers or both 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") for:

    • an exemption from subsection 4.1(1) of NI 81-102 (the "Investment Restriction") to enable the Dealer Managed Funds to invest in subscription receipts (the "Subscription Receipts") of TransCanada Corporation (the "Issuer") during the period of distribution for the Offering (as defined below) (the "Distribution") and to invest in common shares (the "Common Shares") and Subscription Receipts (the Subscription Receipts and the Common Shares, collectively, the "Securities") of the Issuer during 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 new issue (the "Offering") of Subscription Receipts by way of bought deal to be offered pursuant to a short form base shelf prospectus dated January 31, 2007 (the "Prospectus") and a prospectus supplement dated February 6, 2007 (the "Prospectus Supplement") to be filed in accordance with the securities legislation of each of the Jurisdictions (the "Investment Restriction Relief").

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission (the "OSC") is the principal regular or for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 - Definitions have the same meanings in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Applicants:

1. Each Dealer Manager is a "dealer manager" with respect to its Dealer Managed Funds, and each Dealer Managed Fund is a "dealer managed mutual fund", as such terms are defined in section 1.1 of NI 81-102.

2. 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.

3. The head offices of each of the Dealer Managers are in Toronto, Ontario, except for the head office of CIBC Global Asset Management Inc., which is located in Montréal, Québec.

4. As disclosed in the Prospectus, the Issuer was established under the Canada Business Corporations Act on February 25, 2003 in connection with a plan of arrangement which established the Issuer as the parent company of TransCanada Pipelines Limited ("TCPL"), becoming effective on May 15, 2003. The Issuer, through TCPL, operates primarily in two business segments: pipelines and energy. The pipelines segment of the Issuer's business is principally comprised of TCPL's pipelines in Canada, the United States, Mexico and South America. The energy segment of the Issuer's business includes TCPL's power operations in Canada and the United States, natural gas storage business in Canada and liquefied natural gas projects in Canada and the United States.

5. According to the Prospectus Supplement in respect of the Offering, the Offering is being underwritten, subject to certain terms, by an underwriting syndicate which includes TD Securities Inc., CIBC World Markets Inc., Scotia Capital Inc. and BMO Nesbitt Burns Inc. (each a "Related Underwriter", and any other underwriters which are now or may become part of the syndicate, the "Underwriters"). Each Related Underwriter is an affiliate of one or more of the Dealer Managers.

6. According to the Prospectus Supplement, the Offering is comprised of 39,4700,000 Subscription Receipts, each representing the right to receive one Common Share, together with a Special Interest (defined below) at a price of $38.00 per Subscription Receipt with gross proceeds of $1,499,860,000. The Issuer has granted the Underwriters an option, exercisable at $38.00 per Subscription Receipt, for a period of up to 30 days following the closing of the offering, which is expected to occur on February 14, 2007 (the "Closing Date") to purchase up to an additional 15% of the Offering (the "Over-Allotment Option"). The Over-Allotment Option, if exercised, represents an additional 5,920,500 Subscription Receipts and additional gross proceeds of $224,979,000.

7. According to the Prospectus Supplement, the net proceeds of the Offering will be used to partially finance the acquisition by the Issuer of American Natural Resources Company and ANR Storage Company (the "Acquisition"), or to repay indebtedness incurred as a result of the Acquisition.

8. According to the Prospectus Supplement, if the closing of the Acquisition (the "Acquisition Closing") does not occur on or before June 22, 2007 (the "Termination Date"), holders of Subscription Receipts will receive the full purchase price of the Subscription Receipt, together with their pro rata portion of interest earned theron between the Closing Date and the Termination Date. If the Acquisition Closing occurs prior to the Termination Date and record dates for one of more dividends on the common shares of the Issuer have occurred during the period from the Closing Date to and including the Acquisition Closing, then each holder of a Subscription Receipt will be entitled to receive an amount per Subscription Receipt equal to the amount of such dividends declared per common share upon the Acquisition Closing (the "Special Interest"). Holders of Subscription Receipts will not be entitled to receive any Special Interest if the Acquisition Closing does not occur on or prior to the Termination Date.

9. According to the Prospectus Supplement, the Issuer will apply to list the Subscription Receipts and the Common Shares represented thereby, on the Toronto Stock Exchange ("TSX"). The Issuer's outstanding Common Shares are listed on the TSX under the symbol "TRP".

10. The Prospectus Supplement does not disclose that the Issuer is a "related issuer" as defined in National Instrument 33-105 -- Underwriting Conflicts ("NI 33-105").

11. According to the Prospectus Supplement, the Issuer may be a "connected issuer" as defined in NI 33-105 of the Related Underwriters for the reasons set forth in the Prospectus Supplement. As disclosed in the Prospectus Supplement, these reasons include that each of the Related Underwriters are, directly or indirectly, subsidiaries of certain lenders (the "Lenders") which have extended credit facilities and bridge financing (collectively, the "Facilities") to the Issuer or its subsidiaries. Accordingly, the Issuer may be considered to be a "connected issuer" of the Related Underwriters under applicable securities legislation. The Facilities consist of a $1.5 billion syndicated revolving credit facility; a US$410 million syndicated revolving credit and term loan agreement; and certain other bank facilities with an aggregate commitment of $377 million. As of February 6, 2006, the Issuer has drawn US$397 million under the Facilities. The Issuer is in material compliance with all material terms of the agreements governing the Facilities and none of the Lenders has waived any material breach by the Issuer of those agreements since the Facilities were established. Neither the financial position of the Issuer nor the value of any security granted under the Facilities has changed substantially and adversely since the indebtedness under the Facilities was incurred. None of the Lenders have been or will be involved in the decision to offer the Subscription Receipts and none have been or will be involved in the determination of the terms of any distribution of the Subscription Receipts. Proceeds from the sale of Subscription Receipts may be used to reduce indebtedness which the Issuer or its subsidiaries may have with one or more Lenders which are related to an Underwriter.

12. Despite the affiliation between the Dealer Managers and the Related Underwriters, each Dealer Manager operates independently of its Related Underwriter. In particular, the investment banking and related dealer activities of the Related Underwriters and the investment portfolio management activities of each of their respective 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, each Dealer Manager and its Related Underwriter may communicate to enable the Dealer Manager to maintain up to date restricted-issuer lists to ensure that the Dealer Manager complies with applicable securities laws); and

(b) each Dealer Manager and its Related Underwriter may share general market information such as discussion on general economic conditions, bank rates, etc.

13. The Dealer Managed Funds are not required or obligated to purchase any Securities during the Prohibition Period.

14. Each Dealer Manager may cause its Dealer Managed Funds to invest in the Securities during the Prohibition Period. Any purchase of the Securities by a Dealer Managed Fund will be consistent with the investment objectives of that Dealer Managed Fund and represent the business judgment of the Dealer Manager for that Dealer Managed Fund 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.

15. 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 Securities 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.

16. Except as described above, 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 such Dealer Manager's Dealer Managed Funds will purchase Securities during the Prohibition Period.

17. There will be an independent committee (the "Independent Committee") appointed in respect of each Dealer Manager's Dealer Managed Funds to review such Dealer Managed Funds' investments in the Securities during the Prohibition Period.

18. 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 Funds, 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.

19. 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 then respective 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.

20. Each Dealer Manager, in respect of its Dealer Managed Funds, will notify a member of staff in the Investment Funds Branch of the Ontario Securities Commission, 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.

Decision

Each of the Decision Makers has assessed the conflict of interest risks associated with granting an exemption in this instance from the Investment Restriction 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 NI 81-102 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 Investment Restriction 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 of Securities (a "Purchase") 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 Securities 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 Securities for the Dealer Managed Funds;

IV. The Related Underwriter does not purchase Subscription Receipts in the Offering for its own account except Subscription Receipts sold by the Related Underwriter on Closing;

V. The Dealer Managed Fund has an Independent Committee to review the Dealer Managed Funds' investments in the Securities during the Prohibition Period;

VI. The Independent Committee has a written mandate describing its duties and standard of care which, at a minimum, sets out the applicable 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 Securities purchased by the Dealer Managed Funds of the Dealer Manager;

(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 Securities;

(iv) if the Securities 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 Securities 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 a 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 Securities 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 Securities 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 Securities 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 Subscription Receipts 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 Subscription Receipts (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 closing of the Offering;

(c) does not place an order with an underwriter of the Offering to purchase an additional number of Subscription Receipts 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 of the closing of the Offering for the purposes of the Closing, the Dealer Manager may place an additional order for such number of additional Subscription Receipts equal to the difference between the Fixed Number and the number of Subscription Receipts allotted to the Dealer Manager at the time of the closing of the Offering in the event the Underwriters exercise the Over-Allotment Option; and

(d) does not sell Subscription Receipts purchased by the Dealer Manager under the Offering, prior to the listing of Securities on the TSX.

XIV. Each Purchase of Securities during the 60-Day Period is made on the TSX.

XV. For Purchases of Securities 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.

"Leslie Byberg"
Manager, Investment Funds Branch
Ontario Securities Commission

 

APPENDIX "A"

TD Mutual Funds

TD Balanced Growth Fund

TD Balanced Income Fund

TD Canadian Blue Chip Equity Fund

TD Canadian Equity Fund

TD Canadian Value Fund

TD Dividend Growth Fund

TD Dividend Income Fund

TD Energy Fund

TD Global Dividend Fund

TD Monthly High Income Fund

TD Monthly Income Fund

TD North American Dividend Fund

TD Resource Fund

TD Private Funds

TD Private Canadian Dividend Fund

Scotia Mutual Funds

Scotia Canadian Balanced Fund

Scotia Canadian Blue Chip Fund

Scotia Canadian Dividend Fund

Scotia Canadian Growth Fund

Scotia Cassels Canadian Equity Fund

Scotia Diversified Monthly Income Fund

BMO Mutual Funds (consolidated)

BMO Asset Allocation Fund

BMO Canadian Equity Class

BMO Diversified Income Fund

BMO Dividend Class

BMO Dividend Fund

BMO Equity Fund

BMO Monthly Income Fund

BMO North American Dividend Fund

(formerly BMO NAFTA Advantage Fund)

BMO Resource Fund

BMO Harris Private Portfolios

BMO Harris Canadian Dividend Income Portfolio

Imperial Pools

Imperial Canadian Dividend Income Pool

Imperial Canadian Dividend Pool

Imperial Canadian Equity Pool

Imperial Canadian Income Trust Pool

Renaissance Talvest Mutual Funds

Renaissance Canadian Balanced Fund

Renaissance Canadian Balanced Value Fund

Renaissance Canadian Core Value Fund

Renaissance Canadian Dividend Income Fund

Renaissance Canadian Growth Fund

Renaissance Canadian Monthly Income Fund

Renaissance Canadian Small Cap Fund

Renaissance Diversified Income Fund

Talvest Cdn. Asset Allocation Fund

Talvest Cdn. Equity Value Fund

Talvest Dividend Fund

Talvest Millennium High Income Fund

Talvest Millennium Next Generation Fund

Talvest Small Cap Cdn. Equity Fund

CIBC Mutual Funds and CIBC Family of Managed Portfolios

CIBC Balanced Fund

CIBC Balanced Index Fund

CIBC Canadian Equity Fund

(formerly CIBC Core Canadian Equity Fund)

CIBC Canadian Equity Value Fund

(formerly Canadian Imperial Equity Fund)

CIBC Canadian Small Companies Fund

CIBC Capital Appreciation Fund

CIBC Diversified Income Fund

CIBC Dividend Fund

CIBC Financial Companies Fund

CIBC Global Monthly Income Fund

CIBC Monthly Income Fund

Frontiers Pools

Frontiers Canadian Equity Pool

Frontiers Canadian Monthly Income Pool