Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from the mutual fund conflict of interest investment restrictions in the Securities Act (Ontario) and from the self-dealing prohibition in National Instrument 31-103 -- Registration Requirements and Exemptions to allow pooled funds to invest in underlying pooled funds under common management -- relief granted subject to certain conditions.

Applicable Legislative Provisions

Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(3), 113.

National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5(2)(a), 15.1.

October 1, 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

LEGG MASON CANADA INC.

(the Filer)

AND

LEGG MASON WESTERN ASSET CANADIAN

CORE PLUS BOND FUND, LEGG MASON

WESTERN ASSET CANADIAN CORE PLUS

LONG BOND FUND

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on the Filer's behalf and on behalf of the Legg Mason Western Asset Canadian Core Plus Bond Fund and Legg Mason Western Asset Canadian Core Plus Long Bond Fund (collectively, the Pooled Funds and individually, a Pooled Fund), for a decision:

(i) under the securities legislation of Ontario and Alberta for an exemption from the restriction prohibiting a mutual fund in Ontario or a mutual fund, as the case may be, from knowingly making or holding an investment in any person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder, or in any issuer in which any officer or director of the mutual fund, its management company or distribution company or an associate of any of them, or any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company, has a significant interest (the Investment Restriction); and

(ii) under the securities legislation of the Passport Jurisdictions (defined below) for an exemption from the restriction prohibiting a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as adviser, to invest in the securities of any issuer in which a responsible person or an associate of a responsible person is a partner, officer or director, unless the fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase (the Consent Requirement);

(collectively, the Requested Relief).

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

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

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

Interpretation

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

The following additional terms shall have the following meanings:

ASA means the Securities Act (Alberta);

OSA means the Securities Act (Ontario);

Passport Jurisdictions means each of the provinces and territories of Canada;

SEC means the U.S. Securities and Exchange Commission;

UCITS means Undertakings for Collective Investment in Transferable Securities and refers to the investment funds authorized by the European Union as investment funds suitable to be distributed in more than one country of Europe;

Underlying Funds means, collectively, the sub-funds of Legg Mason Global Funds PLC, and Western Asset Mortgage Backed Securities Portfolio, Ltd., Western Asset Mortgage Backed Securities Portfolio, LLC and Western Asset Opportunistic Structured Securities Portfolio, LLC.

Representations

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

The Filer

1. The Filer is a company incorporated under the laws of Canada. The head office of the Filer is located in Toronto, Ontario.

2. The Filer is registered as a portfolio manager in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador, as a commodity futures manager under the Commodity Futures Act (Ontario), and an exempt market dealer in Ontario and Newfoundland and Labrador. In accordance with National Instrument 31-103 -- Registration Requirements and Exemptions (NI 31-103), the Filer will be registering as an Investment Fund Manager in Ontario prior to September 28, 2010 and as an exempt market dealer in British Columbia, Alberta, Manitoba, Saskatchewan, Quebec, Nova Scotia, New Brunswick and Prince Edward Island prior to September 28, 2010.

3. The Filer is not in default of securities legislation in any of the provinces and territories of Canada.

4. The Filer typically enters into fully discretionary investment management agreements with clients and pursuant to such agreements, it is allowed to carry out its mandate by investing the clients in pooled funds. In addition, investors may subscribe for the pooled funds from time to time. In all cases, the pooled funds managed by the Filer are distributed only on a private placement basis pursuant to available prospectus exemptions in each of the provinces and territories of Canada.

The Pooled Funds

5. The Filer is currently taking the necessary steps to establish the two new Pooled Funds, and will be the trustee, manager and portfolio manager of the Pooled Funds. Like other pooled funds managed by the Filer, the Filer will retain an affiliate of the Filer to be the sub-advisor of each of the Pooled Funds, namely Western Asset Management Company (Western).

6. Each of the Pooled Funds will be an open-end mutual fund trust established under the laws of Ontario by declaration of trust.

7. The Pooled Funds will be mutual funds in Ontario (in the case of the OSA) or mutual funds (in the case of the ASA), but are not reporting issuers.

8. Like all other pooled funds managed by the Filer, units of the Pooled Funds will be available to investment management clients of the Filer and may also be invested in by other investors, which are typically institutional investors who do not require an investment management relationship.

Western Asset Management Company

9. Western, a California corporation and an affiliate of the Filer, will be the sub-advisor of the Pooled Funds. Western is registered in the United States with the SEC as an investment adviser pursuant to the Investment Advisers Act. It is also registered as a commodity trading advisor and a commodity pool operator under the U.S. Commodity Exchange Act.

10. Western is registered as a portfolio manager after transitioning from international adviser (Investment Counsel & Portfolio Manager) with the OSC. This registration will be revoked effective September 28, 2010 and Western intends to rely on the exemption for international advisers available in Section 8.26 of NI 31-103 prior to the revocation date. Western is also registered as a commodity trading manager under the Commodity Futures Act (Ontario).

11. Western currently serves as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds, as well as to individual investors. Those clients include pooled funds managed by the Filer (which will include the Pooled Funds), and funds managed by an affiliate of the Filer, including the Underlying Funds.

Underlying Funds

The Sub-Funds of the Irish Company

12. Legg Mason Global Funds PLC (the Irish Company) is an umbrella fund with segregated liability between funds (the Sub-Funds), established as an open-ended, variable capital investment company incorporated with limited liability under the laws of Ireland. The Articles of Association provide for separate funds, each representing interests in a defined portfolio of assets and liabilities, which may be established from time to time.

13. The Sub-Funds may only be established with the prior approval of the Irish Financial Services Regulatory Authority (the Irish Financial Regulator). The Irish Company has been authorised by the Irish Financial Regulator as a UCITS.

14. The Irish Company and the Sub-Funds are subject to the UCITS Regulations, and any notices issued by the Irish Financial Regulator (collectively, the Irish Regulations). The Irish Regulations include, amongst other requirements, investment and borrowing restrictions that are similar in many respects to those contained in National Instrument 81-102 -- Mutual Funds.

15. The Sub-Funds have filed, with the Irish Financial Regulator, a prospectus which contains disclosure regarding the Sub-Funds.

16. Affiliates of the Filer, including Legg Mason Capital Management Inc. and Legg Mason Investments (Europe) Ltd. are the portfolio advisors to the Sub-Funds.

17. At least one of the directors of the Irish Company is an officer of an affiliate of the Filer and is a responsible person in respect of a Pooled Fund.

Cayman Company

18. Western Asset Mortgage Backed Securities Portfolio, Ltd. (the Cayman Company) is an exempted company formed under the laws of the Cayman Islands providing limited liability in accordance with the laws of the Cayman Islands for all holders of shares of the Cayman Company.

19. The Cayman Company is a "feeder" fund in a "master/feeder" structure that invests all or substantially all of its assets (the other asset being a cash float only in relation to subscriptions and redemptions) in another fund, which has an investment objective that is consistent with that of the Cayman Company.

20. The underlying "master" fund in which the Cayman Company invests, is Western Asset Mortgage Backed Securities Portfolio, LLC (the U.S. Master Fund).

21. At least one of the directors of the Cayman Company is employed by an affiliate of the Filer and is a responsible person in respect of a Pooled Fund.

22. Western is the portfolio manager of the Cayman Company and of the U.S. Master Fund. The Cayman Company and the U.S. Master Fund share the same accounting principles (U.S. GAAP), use the same administrator, the same U.S. external counsel and the same group of auditors (PwC).

23. The Cayman Company is a "mutual fund" in terms of the Mutual Funds Law (as amended) of the Cayman Islands (the Mutual Funds Law) and is regulated in terms of the Mutual Funds Law. However, the Cayman Company is not required to be licensed or to employ a licensed mutual fund administrator since the minimum aggregate investment purchasable by a prospective investor in the Cayman Company exceeds the relevant threshold.

24. As a regulated mutual fund, the Cayman Company is subject to the supervision of the Cayman Islands Monetary Authority (the Monetary Authority). The Monetary Authority does not impose any investment or borrowing restrictions on the Cayman Company. The Cayman Company is only available to accredited investors as defined in the relevant laws, including Canada and the U.S.

U.S. Funds

25. Western Asset Opportunistic Structured Securities Portfolio, LLC, and the U.S. Master Fund (the U.S. Funds) are organized as limited liability companies under the laws of the State of Delaware.

26. The U.S. Funds are exempt from the requirements to register as an investment company under the U.S. Investment Company Act of 1940. They are offered to accredited investors on a private placement basis in accordance with the U.S. securities law requirements.

27. Western is the portfolio manager of the U.S. Funds. Since the Cayman Company and the U.S. Funds are advised by Western, a registered U.S. adviser, there are many U.S. securities provisions which apply in respect of the management of both the Cayman Company and the U.S. Funds.

Fund-on-Fund Structure

28. In order for the Pooled Funds to achieve its investment objective on a diversified basis and obtain broad exposure to the asset classes it proposes to invest in, it is important that it be permitted to invest in an Underlying Fund.

29. The Filer believes it is in the best interests of the Pooled Funds for investments to be made in the Underlying Funds. Investing directly in separate securities instead of allowing direct exposure to the securities invested in by the Underlying Fund is a less desirable option owing to the increased costs and inefficiencies that are associated with such direct investing.

30. Investment by the Pooled Funds in the Underlying Funds will increase the asset base of the Underlying Funds, enabling the Underlying Funds to further diversify their portfolios to the benefit of all their investors. The larger asset base will also benefit investors in the Underlying Funds through achieving favourable pricing and transaction costs on portfolio trades, increased access to investments where there is a minimum subscription or purchase amount and economies of scale through greater administrative efficiency.

31. Each Pooled Fund will manage its investments in an Underlying Fund with discretion to buy and sell units of the Underlying Fund, selected in accordance with the Pooled Fund's investment objective, as well as to alter its holdings in any Underlying Fund in which it invests.

32. Relief from the Investment Restriction is necessary because the amounts invested from time to time in an Underlying fund by a Pooled Fund may exceed 20% of the outstanding voting securities of any single Underlying Fund. Accordingly, each Pooled Fund could, either alone or together with the other Pooled Fund, become a substantial securityholder of an Underlying Fund.

33. The Filer, an officer or director of the Filer, or a substantial securityholder of the Filer may have a significant interest in an Underlying Fund that the Filer or an affiliate of the Filer establishes and manages in the future, at the time of the establishment of the Underlying Fund as a result of investing seed capital in such Underlying Fund. Accordingly, each Pooled Fund will be prohibited by the Act from investing in such Underlying Fund, unless the relief from the Investment Restriction is granted.

34. In the absence of relief from the Consent Requirement, the portfolio manager of the Pooled Funds would be prohibited from knowingly causing the Pooled Funds to invest in Underlying Funds in which a responsible person or an associate of a responsible person is an officer or director unless the specific fact is disclosed to the securityholders of the Pooled Funds and the written consent of the securityholders of the Pooled Funds to the investment is obtained before the purchase.

35. The investments by the Pooled Funds in the shares of the Underlying Funds will represent the business judgment of 'responsible persons' uninfluenced by considerations other than the best interests of the Pooled Funds.

36. Investors in each Pooled Fund are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other disclosure documents (if any) or, once available, the annual or semi-annual financial statements, relating to all Underlying Funds in which the Pooled Fund may invest its assets.

37. Investors in each Pooled Fund will also be provided with annual financial statements of the Pooled Funds in accordance with securities legislation, including an auditors report.

Decision

The principal regulator is satisfied that the decision meets the test set out in the securities legislation of the Jurisdiction (the Legislation) for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Requested Relief is granted as follows:

(a) in Ontario and Alberta under the OSA and the ASA, respectively, the Investment Restriction shall not apply to the Pooled Funds in respect of each Pooled Fund's investment in securities of the Underlying Funds; and

(b) in the Passport Jurisdictions under the legislation of the Passport Jurisdictions, the Consent Requirement shall not apply to the Filer or an affiliate of the Filer,

provided that, in each case:

(i) securities of each Pooled Fund are distributed only on a private placement basis pursuant to available prospectus exemptions;

(ii) the investment by each Pooled Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Pooled Fund;

(iii) each Pooled Fund does not vote any of the securities it holds of an Underlying Fund except that the Pooled Fund may, if the Filer so chooses, arrange for all the securities it holds of an Underlying Fund to be voted by the beneficial holders of securities of the Pooled Fund;

(iv) no management fees or incentive fees are payable by a Pooled Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;

(v) no sales or redemption fees are payable by the Pooled Fund in relation to its purchases or redemptions of securities of an Underlying Fund; and

(vi) investors in each Pooled Fund receive written disclosure that discloses:

(1) the intent of the Pooled Fund to invest its assets directly or indirectly in securities of the Underlying Funds;

(2) that the Underlying Funds are managed by the Filer or an affiliate of the Filer;

(3) the percentage of net assets of the Pooled Fund dedicated to the investment in securities of the Underlying Funds; and

(4) the process or criteria used to select the Underlying Funds.

"Darren McKall"
Assistant Manager, Investment Funds Branch
 
"Wes M. Scott"
Commissioner
 
"Margot Howard"
Commissioner