Connor, Clark & Lunn Roc Pref Corp. - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- Exemption provided from certain requirements of National Instrument 81-102 Mutual Funds since issuer is fundamentally different from a conventional mutual fund. -- Issuer also exempted from the requirement in National Instrument 81-106 Investment Fund Continuous Disclosure to calculate its net asset value on a daily basis, subject to certain conditions and requirements.
Rules Cited
National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.4(1), 2.4(2), 2.4(3), 2.5(2), 2.7(1), 2.7(2), 2.7(4), 3.3, 10.3, 10.4, 12.1, 14.1, 19.1.
National Instrument 81-106 Investment Fund Continuous Disclosure, ss. 14.2(3), 17.1.
February 28, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUÉBEC, NEWFOUNDLAND
AND LABRADOR, NEW BRUNSWICK, NOVA SCOTIA,
PRINCE EDWARD ISLAND,
NORTHWEST TERRITORIES,
YUKON, AND NUNAVUT
(the "Jurisdictions")
AND
IN THE MATTER OF
NATIONAL INSTRUMENT 81-102
MUTUAL FUNDS
("NI 81-102")
AND
IN THE MATTER OF
NATIONAL INSTRUMENT 81-106
INVESTMENT FUND CONTINUOUS DISCLOSURE
("NI 81-106")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
CONNOR, CLARK & LUNN ROC PREF CORP.
(the "Filer")
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 Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") for exemptive relief from (i) certain provisions of NI 81-102 Mutual Funds ("NI 81-102") pursuant to section 19.1 thereof; and (ii) the daily calculation of net asset value ("NAV") requirement of section 14.2(3)(b) of NI 81-106 pursuant to section 17.1 thereof (collectively, 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.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
In this decision
"CLN Portfolio" means an equally-weighted portfolio of approximately 120 to 140 companies all of which are currently rated investment grade by S&P;
"Canadian Securities Portfolio" means a specified portfolio consisting of securities of Canadian public issuers that are "Canadian securities" for the purposes of the Tax Act with a value equal to an amount determined based on the economic return generated by the Credit Linked Note;
"Credit Linked Note" means a credit linked note issued by The Bank of Nova Scotia, the return on which will be linked to the credit performance of the CLN Portfolio;
"Credit Trust IV" means a newly created investment trust to be established under the laws of Ontario;
"Counterparty" means The Bank of Nova Scotia;
"Forward Agreement" means a forward purchase and sale agreement between the Counterparty and the Filer which will provide the Filer with the economic return generated by the Canadian Securities Portfolio;
"Holders" means the holders of Preferred Shares;
"Investment Manager" means Connor, Clark & Lunn Investment Management Ltd., the investment manager to Credit Trust IV;
"Manager" means Connor, Clark & Lunn Capital Markets Inc., the manager of the Filer;
"Preliminary Prospectus" means the preliminary prospectus of the Filer dated January 25, 2006;
"Preferred Shares" means the preferred shares of the Filer; and
"Prospectus" means the final prospectus of the Filer;
"Redemption Date" means a date that is approximately five years from the closing date of the offering of Preferred Shares under the Prospectus;
"S&P" means Standard & Poor's, a division of The McGraw Hill Companies, Inc.;
"Termination Date" means a date that is approximately five years from the closing of the offering; and
"TSX" means the Toronto Stock Exchange.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a mutual fund corporation established under the laws of British Columbia.
2. The Manager is the promoter of the Filer and has been retained to act as manager for the Filer and Credit Trust IV and will be responsible for providing or arranging for the provision of administrative services required by the Filer and Credit Trust IV. The head office of the Manager is in Ontario.
3. The Investment Advisor is responsible for the execution of the investment strategy of Credit Trust IV. The Investment Advisor is registered as an advisor in the categories of investment counsel and portfolio manager.
4. The Filer will make an offering to the public of Preferred Shares pursuant to the Preliminary Prospectus that has been filed with the securities regulatory authorities in each of the provinces and territories of Canada. Unlike a conventional mutual fund in which the fund's securities are offered to the public on a continuous basis, the Filer does not intend to continuously offer Preferred Shares once the Filer is out of primary distribution.
5. The Preferred Shares are expected to be listed and posted for trading on the TSX. This is unlike securities of a conventional mutual fund in which there is normally no such market and where, as a result, holders of such securities who wish to liquidate their holdings must cause the fund to redeem their securities. Because the Preferred Shares will be listed for trading on the TSX, Holders will not have to rely solely on the retraction feature of the Preferred Shares in order to provide liquidity for their investment. An application requesting conditional listing approval has been made on behalf of the Filer to the TSX.
6. It is a condition of closing that the Preferred Shares be rated at least P-1(low) by S&P, in accordance with the rating criteria applicable to conventional preferred shares issued by a non-mutual fund issuer.
7. The Filer's investment objectives are: (i) to pay Holders an amount per Preferred Share equal to the original subscription price of $25.00 per Preferred Share on the Redemption Date; and (ii) to provide Holders with quarterly fixed cumulative preferential distributions.
8. The Filer will provide exposure to the Credit Linked Note. It is a condition of closing of the offering that the Credit Linked Note be rated at least A- by S&P. The Credit Linked Note will be issued by The Bank of Nova Scotia whose long-term debt is currently rated AA- by S&P. The return on the Credit Linked Note will be linked to the credit performance of the CLN Portfolio of approximately 120 to 140 companies all of which are currently rated investment grade by S&P.
9. In order to provide the Filer with the means to meet its investment objectives, the Filer will use the net proceeds of the offering to pre-pay its purchase obligations under the Forward Agreement which the Filer will enter into with the Counterparty. Pursuant to the Forward Agreement, the Filer will receive on or before the Termination Date the Canadian Securities Portfolio.
10. Under the terms of the Forward Agreement, the Counterparty will deliver, on the Termination Date, the Canadian Securities Portfolio with an aggregate value related to the net redemption proceeds of a corresponding number of units of Credit Trust IV.
11. The Credit Linked Note will be owned by Credit Trust IV.
12. The Filer will partially settle the Forward Agreement prior to the Redemption Date in order to fund quarterly distributions as well as retractions of Preferred Shares by Holders and expenses and other liabilities of the Filer. Pursuant to the terms of the Forward Agreement, the Counterparty will, in connection with a requested partial settlement deliver to the Filer securities of certain of the issuers in the Canadian Securities Portfolio with an aggregate value based on the partial settlement amount. The Filer will then sell such securities into the market in order to fund the quarterly distribution, retraction or other expense or liability of the Filer.
13. From time to time, the Filer may hold a portion of its assets in Canadian Securities, cash, cash equivalents or other evidences of indebtedness; provided that such debt instruments must be rated a minimum of A- by S&P (or an equivalent rating from another recognized rating agency) at the time of investment.
14. The NAV per Preferred Share will be calculated twice monthly. The Manager will post the NAV per Preferred Share on its website.
Decision
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 from the following requirements of NI 81-102:
(a) Section 2.1(1) -- to permit the Filer to enter into and maintain a position in the Forward Agreement for which the payment obligations of the Counterparty will be determined by reference to performance of Credit Trust IV;
(b) Subsections 2.4(1), (2) and (3) -- to permit the Filer's exposure under the Forward Agreement (and any replacement or assignment of that agreement) to exceed the limitations relating to investment in illiquid assets, provided that the mark-to-market exposure to the Counterparty under the Forward Agreement (and any replacement or assignment of that Agreement), for a period of 60 days or more, shall not exceed 30 percent of the assets of the Counterparty;
(c) Section 2.5(2)(a) and (c) -- to permit the Filer to enter into and maintain a position in the Forward Agreement for which the payment obligations of the Counterparty will be determined by reference to the performance of Credit Trust IV, in order to provide the Filer with exposure to the Credit Linked Note as described in the Preliminary Prospectus;
(d) Subclause 2.7(1)(a) -- to permit the Filer to enter into the Forward Agreement (and any replacement or assignment of that agreement) that has a remaining term to maturity of greater than five years on the condition that the Company does not and will not enter into any other specified derivative transaction that does not satisfy the requirement of subclause 2.7(1)(a);
(e) Subsection 2.7(2) -- to exempt the Filer from the requirement to close out or terminate its position under the Forward Agreement prior to the scheduled Termination Date if the credit rating of the debt of the provider of the Forward Agreement falls below the level of approved credit rating, in order to provide the Filer with sufficient flexibility in the event of a ratings downgrade of the debt of the Counterparty;
(f) Subsection 2.7(4) -- to exempt the Filer from the prescribed exposure limit under the Forward Agreement (and any replacement or assignment of that agreement), provided that the mark-to-market exposure to the Counterparty under the Forward Agreement (and any replacement or assignment of that agreement) shall not exceed, for a period of 60 days or more, 30 percent of the net assets of the Filer;
(g) Section 3.3 -- so that the organizational costs and expenses of the Offering can be borne by the Filer;
(h) Section 10.3 -- to permit the Filer to calculate the retraction price of the Preferred Shares in the manner described in the Preliminary Prospectus and on the applicable Valuation Date, as defined in the Preliminary Prospectus, following the surrender of Preferred Shares for retraction;
(i) Section 10.4 -- to permit the Filer to pay the retraction price of the Preferred Shares on the Retraction Payment Date, as defined in the Preliminary Prospectus;
(j) Section 12.1(1) -- to relieve the Filer from the requirement to file the prescribed compliance report; and
(k) Section 14.1 -- to relieve the Filer from the requirement relating to the record date for payment of dividends or other distributions of the Filer, provided that it complies with the applicable requirements of the TSX.
Further, the decision of the Decision Makers under the Legislation is that the Requested Relief is granted from the requirements of Section 14.2(3)(b) of NI 81-106 provided that the Prospectus discloses:
(i) that the NAV calculation of the Filer is available to the public upon request; and
(ii) a website that the public can access for this purpose;
for so long as:
(iii) the Preferred Shares are listed on the TSX; and
(iv) the Filer calculates its NAV at least twice monthly.