Goodman & Company, Investment Counsel Ltd. - MRRS Decision
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 fund to invest in securities of an issuer during the prohibition period -- affiliate of the dealer manager acted as an underwriter in connection with the distribution of securities of the issuer.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, subsection 4.1(1) and section 19.1
July 5, 2007
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUÉBEC, NEW BRUNSWICK,
NOVA SCOTIA, PRINCE EDWARD ISLAND,
NEWFOUNDLAND AND LABRADOR,
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
GOODMAN & COMPANY, INVESTMENT COUNSEL LTD.
(the Applicant or Dealer Manager)
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 Applicant, the manager and portfolio adviser of the Dynamic Focus+ Resource Fund (the Fund or Dealer Managed Fund), 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 Fund to invest in the Securities (as defined below) of Orleans Energy Ltd. (the Issuer) during the distribution of the Securities (the Distribution) and the 60-day period (the 60-Day Period) following completion of the Distribution (the Distribution and the 60-Day Period together, the Prohibition Period), all in connection with the offering (the Offering) of common shares (the Common Shares) and common shares to be issued on a flow-through basis (the Flow Through Shares and together with the Common Shares, the Securities) of the Issuer under a short form prospectus to be filed with the securities regulatory authorities in all of the provinces in Canada, except Québec, as described in a Term Sheet dated June 11, 2007 (the Term Sheet).
Under the MRRS for Exemptive Relief Applications:
(a) the Ontario Securities Commission (the OSC) is the principal regulator for this application, and
(b) this MRRS decision document evidences the decision of each Decision Maker.
It is the responsibility of each of the Decision Makers to make a global assessment of the risks involved in granting exemptive relief from the Investment Restriction in relation to the specific facts of each application.
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 Applicant:
1. The Dealer Manager is a dealer manager with respect to the Dealer Managed Fund, and the Dealer Managed Fund is a dealer managed fund, as such terms are defined in section 1.1 of NI 81-102.
2. The head office of the Dealer Manager is in Toronto, Ontario.
3. The securities of the Dealer Managed Fund are qualified for distribution in all of the provinces and territories of Canada pursuant to a simplified prospectus that has been prepared and filed in accordance with the applicable securities legislation.
4. The Issuer is a Calgary, Alberta based crude oil and natural gas company involved in the acquisition, exploration and development of crude oil and natural gas assets within the province of Alberta, Canada.
5. According to the Term Sheet, the Offering is expected to be of 2,800,000 Common Shares priced at $4.30 per Common Share and 1,500,000 Flow Through Shares priced at $5.45 per Flow Through Share, with the gross proceeds of the Offering expected to be $20,215,000 representing $12,040,000 from the offering of Common Shares and $8,175,000 from the offering of Flow Through Shares. In addition, the Issuer will grant the Underwriters an over-allotment option (the Over Allotment Option) to purchase from treasury up to an additonal 420,000 Common Shares (equal to 15% of the number of Common Shares sold pursuant to the Offering) at the offering price for Common Shares. The Over Allotment is exercisable by the Underwriters for a period of 30 days form the Closing Date for addional gross proceeds of $1,806,000.
6. According to the Term Sheet, the Issuer will use the net proceeds of the Offering to fund the Issuer's recent acquisiton of additional land holdings at Kaybob in West Central Alberta and on an expanded drilling program at the Kaybob site. The proceeds for the sale of the Flow Through Shares will be used by the Issuer to incur eligible Canadian Exploration Expenses (or Canadian Development Expenses which can be renounced as Canadian Exploration Expenses) which will be renounced in favour of the purchasers of such Securities effective for the 2007 taxation year.
7. The common shares of the Issuer are currently listed for trading on the TSX Venture Exchange (TSXV) under the symbol "OEX" and the Dealer Manager understands that the Issuer will apply to the TSXV to have the Common Shares and Flow Through Shares issued in connection with the Offering listed on the TSXV. The listing of the Common Shares and Flow Through Shares will be conditional upon the Issuer fulfilling all listing requirements and conditions of the TSXV.
8. The Offering is being underwritten, subject to certain terms, by a syndicate which is expected to include Dundee Securities Corporation (the Related Underwriter), an affiliate of the Dealer Manager, among others (the Related Underwriter and any other underwriters, which are now or may become part of the syndicate prior to closing, the Underwriters).
9. The Term Sheet does not disclose that the Issuer is a related issuer or connected issuer as defined in National Instrument 33-105 -- Underwriting Conflicts (NI 33-105), of the Related Underwriter.
10. Despite the affiliation between the Dealer Manager and the Related Underwriter, they operate independently of each other. In particular, the investment banking and related dealer activities of the Related Underwriter and the investment portfolio management activities of the Dealer Manager 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, the Dealer Manager and the Related Underwriter may communicate to enable the Dealer Manager to maintain an up to date restricted-issuer list to ensure that the Dealer Manager complies with applicable securities laws); and
(b) the Dealer Manager and the Related Underwriter may share general market information such as discussion on general economic conditions, bank rates, etc.
11. The Dealer Managed Fund is not required or obligated to purchase any Securities during the Prohibition Period.
12. The Dealer Manager may cause the Dealer Managed Fund to invest in Securities during the Prohibition Period. Any purchase of Securities will be consistent with the investment objectives of the Dealer Managed Fund and represent the business judgment of the Dealer Manager 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.
13. To the extent that the same portfolio manager or team of portfolio managers of the Dealer Manager manages the Dealer Managed Fund 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 the Dealer Managed Fund and Managed Accounts, and
(b) taking into account the amount of cash available to each Dealer Managed Fund for investment.
14. Except as described above, the Dealer Manager has not been involved in the work of the Related Underwriter and the Related Underwriter has not been and will not be involved in the decisions of the Dealer Manager as to whether the Dealer Managed Fund will purchase Securities during the Prohibition Period.
15. There will be an independent committee (the Independent Committee) appointed in respect of the Dealer Managed Fund to review the Dealer Managed Fund's investments in Securities during the Prohibition Period.
16. 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 Fund, 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.
17. 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 the Dealer Managed Fund and, in so doing, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
18. The Dealer Manager, in respect of the Dealer Managed Fund, will notify a member of staff in the Investment Funds Branch of the Ontario Securities Commission, in writing of the filing of the SEDAR Report (as defined below) on SEDAR, as soon as practicable after the filing of such 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 the NI 81-102 that provides the Decision Maker with the jurisdiction to make the Decision has been met.
The Decision of the Decision Makers is that the Requested Relief is granted, notwithstanding that the Related Underwriter acts or has acted as underwriter in the Offering provided the following conditions are satisfied:
I. At the time of each purchase of Securities (the 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 the 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 the Dealer Managed Fund 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 Fund.
IV. The Related Underwriter does not purchase Securities in the Offering for its own account except Securities that are sold by the Related Underwriter on Closing.
V. The Dealer Managed Fund has an Independent Committee to review the Dealer Managed Fund's investments in Securities during the Prohibition Period.
VI. The Independent Committee has a written mandate describing its duties and standard of care which, as a minimum, sets out the 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 Fund 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 Fund, or any associate or affiliate of the Dealer Manager or any portfolio manager of the Dealer Managed Fund 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 Fund.
XI. The Dealer Manager files a certified report on SEDAR (the SEDAR Report) 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 Fund;
(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 Securities were purchased for the Dealer Managed Fund and other Managed Accounts of the Dealer Manager, the aggregate amount so purchased and the percentage of such aggregate amount that was allocated to the 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 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 Fund, 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 the Dealer Managed Fund by the Dealer Manager to purchase Securities for the Dealer Managed Fund 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 the 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 the Dealer Managed Fund, in response to the determinations referred to above.
XIII. For Purchases of Securities during the Distribution only, the Dealer Manager:
(a) expresses an interest to purchase on behalf of the Dealer Managed Fund and Managed Accounts a fixed number of Securities (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 Securities 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 of the Offering, the Dealer Manager may place an additional order for such number of additional Securities equal to the difference between the Fixed Number and the number of Securities allotted to the Dealer Manager, in the event that the Over Allotment Option is exercised at the time of the closing of the Offering; and
(d) does not sell Securities purchased by the Dealer Manager under the Offering, prior to the listing of the Securities issued in the Offering on the TSXV.
XIV. Each Purchase of Securities during the 60-Day Period is made on the TSXV.
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 OSC Rule 48-501 - Trading During Distributions, Formal Bids and Share Exchange Transactions, has ended.