National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from section 12.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations -- Registered firm exempted from including the full amount of parent debt guaranteed by it on Line 11 of Form 31-103F1 Calculation of Excess Working Capital
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 12.1, 15.1.
In the Matter of CI Investments Inc., (2010) 33 OSCB 8214.
In the Matter of CI Investments Inc., (2015) 38 OSCB 6725.
September 28, 2015
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 CI INVESTMENTS INC. (the Filer)
The principal regulator in the Jurisdiction has received an application from the Filer and CI Financial Corp (collectively, the Applicants) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption under section 15.1 of NI 31-103 (as defined below) from the requirement in section 12.1 of NI 31-103 that would otherwise require the Filer, in calculating its excess working capital using Form 31-103F1 (as defined below) to deduct Specified Guaranteed Amounts (as defined below) under Line 11 of Form 31-103F1 (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) 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) intended to be relied upon in each province and territory of Canada other than the Jurisdiction.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
The following terms shall have the following meanings:
(a) "2010 Decision" means the decision of the Director of the OSC dated September 10, 2010, In the Matter of CI Investments Inc., which provided the Filer with a conditional exemption from the requirement in section 12.1 of NI 31-103 to include, in calculating its excess working capital using Form 31-103 F1, the full amount of certain debt of CIX that it had guaranteed, for a limited time period;
(b) "2015 Extension Decision" means the decision of the Director of the OSC dated July 23, 2015, In the Matter of CI Investments Inc., which had the effect of restating for a temporary period, ending on September 30, 2015, the conditional exemption provided for in the 2010 Decision;
(c) "CII Debentures" means an aggregate of $300 million principal amount of debentures issued by the Filer due December 14, 2016;
(d) "CIX" means CI Financial Corp.;
(e) "CIX Undertaking" means the undertaking from CIX dated September 24, 2015 in favor of the Director of the OSC to deliver to the Director the following:
(i) a copy of each compliance certificate that it provides to its lenders under any Specified CIX Debt, and
(ii) notice, as soon as commercially practicable, if CIX should fail to meet any of its financial covenants under any Specified CIX Debt or if an event occurs that could reasonably expected to give rise to an event of default under any of its financial arrangements related to any Specified CIX Debt;
(f) "Form 31-103F1" means Form 31-103F1 Calculation of Excess Working Capital in NI 31-103;
(g) "NI 31-103" means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;
(h) "OSC" means the Ontario Securities Commission;
(i) "Specified CIX Debt" means the liability of CIX in respect of amounts borrowed by CIX that have been guaranteed by the Filer, where, at the relevant time:
(i) the liability of CIX in respect of any of that borrowed amount is not recorded as a liability in the financial statements of the Filer, and is not required to be recorded as a liability in the financial statements of the Filer in accordance with International Financial Reporting Standards; and
(ii) the borrowed amount has either been lent by CIX to the Filer under an inter-company loan agreement, which loan to the Filer by CIX is subject to a Subordination Agreement, or transferred by CIX to the Filer in exchange for equity capital of the Filer and, in each such case, the proceeds from the borrowed amount are recorded as an asset on the balance sheet of the Filer in accordance with International Financial Reporting Standards;
(j) "Subordination Agreement" means a subordination agreement in the form set out in Appendix B of NI 31-103 that has been delivered to the regulator in Ontario;
(k) "Specified Guaranteed Amount" means, for any Specified CIX Debt, the portion of the Specified CIX Debt that would, at the relevant time, not be required to be recorded as a current liability on the balance sheet of CIX in accordance with International Financial Reporting Standards.
This decision is based on the following facts represented by the Applicants:
1. The Filer is a corporation established under the laws of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered under the securities legislation of Ontario as a portfolio manager, investment fund manager, and exempt market dealer. The Filer is registered as a portfolio manager in each of the other provinces of Canada, and as an investment fund manager in Quebec and Newfoundland and Labrador. The Filer is also registered under the Commodity Futures Act (Ontario) as a commodity trading counsel and commodity trading manager.
3. The Filer is not in default of securities legislation in any jurisdiction of Canada.
4. The Filer is one of Canada's leading investment fund managers. In its capacity as investment fund manager, as of June 30, 2015, the Filer manages approximately 200 publicly distributed mutual funds and 11 closed-end investment funds, as well as approximately 440 segregated funds. The Filer's managed funds are known collectively as the "CI Funds." The Filer's assets under management as of June 30, 2015 were approximately $109 billion. All of the Filer's assets under management are held by third-party custodians as required by applicable securities legislation.
5. The Filer is a wholly owned subsidiary of CIX. CIX is a reporting issuer in each province of Canada, and its common shares are listed on the Toronto Stock Exchange. CIX is the third-largest investment fund company in Canada and has a market share of approximately 9 per cent. CIX's market capitalization is close to $10 billion. CIX is a financially robust public company, with relatively little indebtedness. CIX is not in breach of any of its financial covenants.
6. The Filer is the major operating subsidiary of CIX: 95 per cent of CIX revenues are derived from the operations of the Filer and the market capitalization of CIX is directly related to the value of the Filer.
7. CIX and the Filer have common management and the Board of Directors of the Filer is presently comprised of independent directors, who are also independent directors on the Board of Directors of CIX. There is a commonality of purpose between CIX and the Filer and their management have a fiduciary responsibility to ensure that both entities are operated in the best interests of all stakeholders.
8. CIX has, historically, financed the operations of its operating subsidiaries through guaranteed long-term debt financing, which, in the case of the Filer, has been used to finance:
(a) the payment by the Filer of deferred sales commissions; and
(b) capital expenditures by the Filer, including acquisitions.
9. As the major operating subsidiary of CIX, the Filer is the guarantor of CIX's long-term debt. Historically, the long-term debt incurred by CIX has been borrowed to build the business of the Filer, except for acquisitions where the acquired business was not amalgamated into the business of the Filer.
10. In order to finance an acquisition which arose in 2010 after the date of the 2010 Decision, the Filer issued the CII Debentures, which are fully and unconditionally guaranteed by CIX. The CII Debenture offering resulted in the Filer becoming a reporting issuer in each province and territory of Canada, with all of the attendant regulatory requirements associated with this status, including the requirement to have a board of directors with independent directors.
11. CIX has determined that it is not practical or economical to continue to use CII as its financing subsidiary. The approach taken in 2010 in respect of the CII Debentures was adopted to permit CII to comply with required working capital requirements that were then anticipated to be applicable after the expiry of the 2010 Decision. However, CIX does not consider it to be in the best interests of CIX and its shareholders or that of the CIX group of companies including the Filer, to use the Filer as the CIX financing subsidiary. CIX continues to consider that CIX should be the entity borrowing money needed to finance its operations, including those of its subsidiaries. CIX does not wish for the Filer to continue to be a reporting issuer once the CII Debentures are paid out.
12. CIX has determined that it is not commercially practical for CIX to obtain debt financing without a guarantee of such debt by the Filer, given the Filer's status as CIX's major operating subsidiary. CIX's bankers have advised CIX that if CIX had issued debentures equivalent to the CII Debentures without the benefit of a guarantee from the Filer, the interest rates would have been at least 10 basis points higher. CIX considers that the additional cost is not reasonable in the circumstances and is not in the best interests of its shareholders. CIX's bankers have also advised CIX that there would be a substantially similar impact on the cost of any credit facility which did not have the benefit of an operating company guarantee.
13. In the absence of the Exemption Sought, the Applicants submit that it would not be commercially practical for the Filer to maintain the excess working capital otherwise required by Form 31-103F1. Nor, the Applicants submit, would it be commercially practical for the Filer to cease to be a guarantor of the indebtedness of CIX.
14. The Applicants submit that there is no reasonable indication that CIX will not be able to meet its financial obligations as they become due in the foreseeable future. Nevertheless, CIX has agreed with the Filer to use all commercially reasonable efforts to refinance any debt of CIX that is guaranteed by the Filer if it becomes necessary to do so in order to avoid any lender calling upon the Filer to pay any amount of such debt pursuant to the Filer's guarantee. Accordingly, the Applicants submit that it is very unlikely that the Filer will be called to perform under the guarantees.
15. CIX is confident that even in the event that financial markets were to suffer a significant downturn, the operations of the Filer, when combined with CIX's other operations, will generate more than sufficient cash to service any debt of CIX that is then guaranteed by the Filer and repay this debt as it comes due.
16. The Applicants consider their relationship to be unique in the marketplace. The Applicants are not aware of any of their competitors operating through a similar parent-holding-company/subsidiary-operating-company structure, where the parent holding company is a reporting issuer.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted, but only if and so long as:
A. CIX continues to be a reporting issuer in each of the provinces of Canada;
B. CII continues to be a wholly owned subsidiary of CIX;
C. CIX continues to file the financial statements that it is required to file as a reporting issuer, in accordance with the applicable time limits;
D. CIX complies with the CIX Undertaking; and
E. Assets under management by the Filer continue to be held by third-party custodians.
This decision will terminate on the first business day after January 1, 2021.