Securities Law & Instruments

Headnote

National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- mutual funds granted relief from certain restrictions in National Instrument 81-102 Mutual Funds for 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 transactions -- mutual funds invest their assets in a basket of Canada equity securities that are pledged to a counterparty as security for funds' performance under a forward contract -- funds to lend up to 100% of basket of Canadian equity securities -- counterparty will only release securities for lending in exchange for security interest over collateral received by the fund for the loaned securities -- not practical for custodian to act as lending agent as it may not have possession or control over the basket of Canadian equity securities -- decision revokes and replaces earlier decision to permit manager to lend securities directly as well as through an agent that is not the funds' custodian -- manager or agent lending securities will comply with sections 2.15 and 2.16 as if they were the agent appointed under those provisions.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.12(1), 2.12(1)2, 2.12(1)12, 2.12(3), 2.15, 2.16, 6.8(5), 19.1.

July 14, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

MAN INVESTMENTS CANADA CORP.

(the Filer)

AND

MAN CANADA AHL ALPHA FUND

(the Present Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for:

(a) exemptive relief (the Securities Lending Relief) for the Present Fund, together with all other mutual funds now or in the future managed by the Filer in respect of which the representations set out below are applicable (collectively, the Funds and each, a Fund), from the following provisions of National Instrument 81-102 -- Mutual Funds (NI 81-102):

(i) paragraph 2.12(1)1 of NI 81-102 to permit each Fund to enter into securities lending transactions that will not be administered in compliance with all the requirements of sections 2.15 and 2.16 of NI 81-102;

(ii) paragraph 2.12(1)2 of NI 81-102 to permit each Fund to enter into securities lending transactions that do not fully comply with all the requirements of section 2.12 of NI 81-102;

(iii) paragraph 2.12(1)12 of NI 81-102 to permit each Fund to enter into securities lending transactions in which the aggregate market value of securities loaned by the Fund exceeds 50% of the total assets of the Fund;

(iv) paragraph 2.12(3) of NI 81-102 to permit each Fund, during the term of a securities lending transaction, to not hold or to dispose of any non-cash collateral delivered to it as a collateral in the transaction;

(v) section 2.15 of NI 81-102 to permit the Filer to lend securities of each Fund either through an agent ("Agent") that is not the custodian or sub-custodian of the Fund or directly to a borrower;

(vi) section 2.16 of NI 81-102 to the extent this section contemplates that securities lending transactions be entered into through an agent appointed under section 2.15 of NI 81-102;

(vii) subsection 6.8(5) of NI 81-102 to permit the collateral delivered to each Fund in connection with a securities lending transaction to not be held under the custodianship of the custodian or a sub-custodian of the Fund; and

(b) revocation of the decision granted by the principal regulator to the Filer and the Funds on April 20, 2010 (the Prior Decision), to be replaced in its entirety by the decision herein (the Revocation Relief).

The Securities Lending Relief and the Revocation Relief are collectively referred to as the Exemption Sought.

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, collectively, the Qualifying Jurisdictions).

Interpretation

Defined terms contained in NI 81-102, National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer on behalf of each Fund:

Facts

1. The Filer was incorporated under the Canada Business Corporations Act by articles of incorporation dated March 22, 2006 as Man Alternative Investments Canada Corp. The Filer's name was changed to Man Investments Canada Corp. pursuant to articles of amendment dated June 26, 2006.

2. The Filer is registered as an adviser in the category of Portfolio Manager in Ontario and Alberta. The Filer is also registered as a dealer in the category of Exempt Market Dealer in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia. The Filer's head office is located in Toronto, Ontario.

3. Each Fund is a mutual fund to which NI 81-102 applies. Each Fund is also a commodity pool subject to National Instrument 81-104 Commodity Pools. The securities of each Fund are qualified for distribution in each of the Qualifying Jurisdictions pursuant to a prospectus that has been prepared and filed in accordance with the securities legislation of the Qualifying Jurisdictions. Each Fund is, accordingly, a reporting issuer in each of the Qualifying Jurisdictions.

4. The OSC is the principal regulator to review and grant the Exemption Sought as the head office of the Filer is in the Province of Ontario.

5. The Filer and the Funds are not in default of securities legislation in any of the Qualifying Jurisdictions.

6. Each Fund's investment objectives include seeking the provision of tax-efficient returns based on returns of specific types of investments. Each Fund's investment objectives state that it may use specified derivatives to seek to provide these returns.

7. Each Fund pursues its investment objectives by means of specified derivatives. Generally, each Fund invests its assets in a portfolio of non-dividend paying common shares of Canadian public companies (Common Share Portfolio). The Common Share Portfolio of a Fund is generally a static portfolio that is not actively managed except in limited circumstances. Each Fund also enters into one or more forward contracts (each, a Forward Contract) with one or more financial institutions (each, a Counterparty) to effectively replace the economic return on its Common Share Portfolio with the economic return on an underlying interest (such as another mutual fund, one or more indices, or a notional basket of different securities) to achieve the Fund's investment objectives.

8. Each Fund pledges its Common Share Portfolio to the Counterparty (or the portion thereof that is subject to the relevant Forward Contract with that Counterparty) as collateral security for performance of the Fund's obligations under the Forward Contract with that Counterparty. The Common Share Portfolio (or that portion thereof) is held by the Counterparty pursuant to the applicable Forward Contract.

9. The Filer proposes to engage in securities lending transactions on behalf of each Fund that may represent up to 100% of the net assets of that Fund, in order to earn additional returns for that Fund. The Filer may lend the securities of a Fund to one or more borrowers indirectly through an Agent, other than the custodian or sub-custodian of the Fund, which shall be acceptable to the Filer and the Counterparty and shall be either a Canadian financial institution (including a Counterparty) or an affiliate of a Canadian financial institution. It is not commercially practical for a Fund's custodian or sub-custodian to act as Agent with respect to the Fund's Common Share Portfolio for the reason set out in paragraph 8 above.

10. The Filer will ensure that any Agent through which a Fund lends securities maintains appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.

11. If the Filer lends securities to borrowers directly on behalf of a Fund, the Filer will, 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 will ensure that the borrower maintains appropriate internal controls, procedures, and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.

12. A Counterparty must release its security interest in the securities of the Common Share Portfolio in order to allow the Fund to lend such securities, provided that the Fund grants the Counterparty a security interest in the collateral held by the Fund for the loaned securities.

13. To facilitate the Counterparty's release of its security interest in the securities in the Common Share Portfolio of a Fund, the Filer will ensure the securities of the Common Share Portfolio of the Fund are loaned to an affiliate of the Counterparty, which will be a registered dealer and a member of the Investment Industry Regulatory Organization of Canada (IIROC) or another borrower that is acceptable to both the Filer and the Counterparty. To facilitate the Counterparty's perfection of its security interest in the collateral held by the Fund for the loaned securities, the Filer will ensure that the Fund's collateral for the loan is held by an affiliate of the Counterparty, which will be a registered dealer and a member of IIROC.

14. The collateral received by a Fund in respect of a securities lending transaction, and in which the Counterparty will have a security interest, will be in the form of cash, qualified securities and/or other collateral permitted by NI 81-102, other than collateral described in sub-paragraph 2.12(1)6(d) or in paragraph (b) of the definition of "qualified security" under NI 81-102. The non-cash collateral received by a Fund in respect of a securities lending transaction, and in which the Counterparty will have a security interest, will not be re-invested in any other types of investment products.

15. The prospectus of each Fund discloses that the Fund may enter into securities lending transactions. Other than as set forth herein, any securities lending transactions on behalf of a Fund will be conducted in accordance with the provisions of NI 81-102.

16. Upon obtaining the Exemption Sought, the Funds will no longer rely on the Prior Decision.

Decision

The principal regulator is satisfied that the test contained in the Legislation that provides the principal regulator with the jurisdiction to make the decision has been met.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

(a) with respect to the exemption from paragraph 2.12(1)12 of NI 81-102, each Fund enters into a Forward Contract with an applicable Counterparty and grants that Counterparty a security interest in the securities subject to that Forward Contract and, in connection with a securities lending transaction relative to those securities,

(i) receives the collateral that

(A) is prescribed by paragraphs 2.12(1)3 to 6 of NI 81-102 other than collateral described in subparagraph 2.12(1)6(d) or in paragraph (b) of the definition of qualified security; and

(B) is marked to market on each business day in accordance with paragraph 2.12(1)7 of NI 81-102;

(ii) has the rights set forth in paragraphs 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81-102;

(iii) complies with paragraph 2.12(1)10 of NI 81-102; and

(iv) lends its securities only to borrowers that are acceptable to the Fund and the Counterparty, and that have an approved credit rating (as defined in NI 81-102) or whose obligations to the Fund are fully and unconditionally guaranteed by persons or companies that have such a credit rating;

(b) with respect to the exemption from subsection 2.12(3) of NI 81-102, each Fund provides a security interest to the applicable 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 subsection 2.15 of NI 81-102:

(i) where the Filer lends securities of a Fund directly to a borrower, the Filer complies with the requirements of section 2.15 of NI 81-102 as if it were the agent contemplated by that section; and

(ii) where the Filer lends securities of a Fund through an Agent,

(A) the Filer and the Fund enter into a written agreement with the Agent that complies with each of the requirements set forth in subsection 2.15(4) of NI 81-102; and

(B) the Agent administering the securities lending transaction of each Fund:

(I) is in compliance with the standard of care prescribed in subsection 2.15(5) of NI 81-102; and

(II) is a bank or trust company described in paragraph 1 or 2 of section 6.2 of NI 81-102 or the investment bank affiliate of such bank or trust company that is registered as an investment dealer or in an equivalent registration category;

(d) with respect to the exemption from section 2.16 of NI 81-102,

(i) where the Filer lends securities of a Fund directly to a borrower, the Filer and the Fund comply with the requirements of section 2.16 of NI 81-102 as if the Filer itself were the agent contemplated in that section; and

(ii) where the Filer lends securities of a Fund through an Agent, the Filer and the Fund comply with the requirements of section 2.16 of NI 81-102 as if the Agent appointed by the Filer were the agent contemplated in that section; and

(e) with respect to the exemption from subsection 6.8(5) of NI 81-102, each Fund:

(i) provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 12; and

(ii) the collateral delivered to the Fund pursuant to the securities lending transaction is held by an affiliate of the Counterparty, which will be a registered dealer and a member of IIROC, as described in representation 13.

"Vera Nunes"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission