Canadian Financial Income Fund et al. - MRRS Decision
Headnote
Exemption from the self-dealing prohibition in paragraph 118(2)(a) of the Securities Act (Ontario). Portfolio manager exempted from provision prohibiting knowingly causing any investment portfolio managed by it to invest in any issuer in which a "responsible person" (as defined in the Act) is an officer and/or director unless the specific fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase, subject to conditions including review by an independent advisory board.
Statutes Cited
Securities Act, R.S.O. 1990 c. S.5, as am.,s. 118(2)(a).
September 2, 2005
IN THE MATTTER OF
THE SECURITIES LEGISLATION OF
ONTARIO, ALBERTA, SASKATCHEWAN, QUEBEC,
NEWFOUNDLAND AND LABRADOR, NOVA SCOTIA
AND NEW BRUNSWICK
(the "Jurisdictions")
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
CANADIAN FINANCIAL INCOME FUND (the "Fund")
AND
CLAYMORE INVESTMENTS, INC. AND
MFC GLOBAL INVESTMENT MANAGEMENT (CANADA),
A DIVISION OF ELLIOTT & PAGE LIMITED
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from Claymore Investments, Inc. (the "Manager") and MFC Global Investment Management (Canada), a division of Elliott & Page Limited ("MFC Global", and together with the Fund and the Manager, the "Filers") for a decision under the securities legislation of the Jurisdictions (the "Legislation") that:
• the provision prohibiting a portfolio manager from causing any investment portfolio managed by it to invest in any issuer in which a "responsible person" as defined in the Legislation, or an associate of a responsible person, is an officer or director unless the specific fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase;
shall not apply to investments made by MFC Global in securities of Manulife Financial Corporation ("Manulife") and other affiliates of Manulife (collectively, the "Manulife Securities") for the investment portfolio of the Fund (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 Decisions Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless the are defined in this decision.
Representations
This decision is based on the following facts represented by the Filers:
The Fund
1. The Fund is an investment trust established under the under the laws of the Province of Ontario. The principal office of the Fund and the Manager is located in Toronto, Ontario.
2. The Manager is a corporation established under the federal laws of Canada and is registered as an adviser in Ontario in the categories of investment counsel and portfolio manager.
3. Units of the Fund (the "Units") are offered to the public in each of the provinces and territories of Canada (the "Offering") pursuant to a prospectus dated July 27, 2005. The Fund is not in default under the Legislation.
4. The investment objectives of the Fund are: (i) to maximize total return for holders of Units ("Unitholders"), consisting of distributions and capital appreciation; and (ii) to provide Unitholders with a stable stream of monthly cash distributions.
5. To achieve its investment objectives, the Fund will invest the net proceeds of the Offering in a diversified and actively managed portfolio comprised primarily of common shares, preferred shares, corporate bonds and income trust units of issuers in the Canadian financial sector.
6. As disclosed in the Fund's prospectus, the investment restrictions of the Fund provide, among other things, that:
(a) Not more than 25% of the assets of the Fund (determined at the time of purchase) will be invested in the securities of any one issuer; and
(b) The Fund will not own more than 10% of the outstanding equity securities of an issuer or purchase the securities of an issuer for the purpose of exercising control over management of that issuer.
MFC Global
7. The Manager, on behalf of the Fund, has retained MFC Global to act as the investment advisor of the Fund.
8. MFC Global is a division of Elliott & Page Limited,("EPL"). EPL is a corporation incorporated under the laws of Ontario. The principal office of EPL is located in Toronto, Ontario. EPL is registered as an adviser in Ontario in the categories of investment counsel and portfolio manager and is registered under the equivalent categories in the other Jurisdictions except Newfoundland and Labrador.
9. In 1982, EPL was acquired by North American Life Assurance Company, which is now The Manufacturers Life Insurance Company ("MLIC"). Manulife holds all of the outstanding shares of MLIC and therefore, EPL is an indirect wholly-owned subsidiary of Manulife.
10. Certain directors and/or officers of EPL who are, or may be, "responsible persons" in respect of the Fund, are or may be officers and/or directors of Manulife or its affiliates (the "Related Officers and Directors"). The Related Officers and Directors will not participate in the formulation of, or generally have access prior to implementation to, the day to day investment decisions made by MFC Global on behalf of the Fund.
11. All Related Officers and Directors will not provide investment advice to the Fund. Furthermore, no trading officer of EPL who will provide portfolio management services to the Fund is under the direct supervision of a Related Officer or Director in respect of the provision of such portfolio management services.
12. All Related Officers and Directors who have access to material information in relation to Manulife that has not been generally disclosed (an "Access Person") are subject to Manulife's written policies including Manulife's Code of Business Conduct and Ethics and/or MFC Global's Code of Ethics, which, among other things, prohibit Access Persons from engaging in any trading of Manulife Securities while the trading window is closed or while the Access Person is in possession of undisclosed material information in relation to Manulife.
Proposed Investments by the Fund in Manulife Securities
13. Manulife, the indirect parent company of EPL, is one of the leading life insurance based financial services organizations in Canada.
14. MFC Global believes that it would be in the best interests of the Unitholders of the Fund for the Fund to be permitted to invest in Manulife Securities, in keeping with the investment objectives, strategies and restrictions of the Fund.
15. Because the Units of the Fund are being offered to the public through a syndicate of investment dealers and, upon closing of the Offering, will be listed for trading on the Toronto Stock Exchange, it is impractical to obtain the written consent of each Unitholder to the investment by MFC Global in Manulife Securities.
16. The Manager has appointed an advisory board (the "Independent Advisory Board"), which will review the Fund's purchases, sales and continued holdings of Manulife Securities to ensure that these investment decisions: have been made free from any influence by Manulife, have not taken into account any consideration relevant to Manulife or any associate or affiliate of Manulife, and do not cause the portfolio of the Fund to exceed the investment concentration limits for the Fund for any one issuer.
17. In reviewing the Fund's purchases, sales and continued holdings of Manulife Securities, the Independent Advisory Board will take into account the best interests of the Unitholders and no other factors.
18. All fees and expenses of the Independent Advisory Board incurred in connection with its duties with respect to the Fund will be paid by the Fund.
19. In the absence of the Requested Relief, because it is impractical to obtain the consent of Unitholders, MFC Global would be prohibited from investing in Manulife Securities on behalf of the Fund because certain directors and/or officers of EPL who are or may be "responsible persons" in respect of the Fund, are or may be officers and/or directors of Manulife or its affiliates.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the authority to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:
1. The Manager has appointed an Independent Advisory Board to review the Fund's purchases, sales and continued holdings of Manulife Securities;
2. The Independent Advisory Board has at least three members, and every member of the Independent Advisory Board will be independent of Manulife, the Manager, MFC Global and EPL, and any associate or affiliate of Manulife, the Manager, MFC Global and EPL.
A member of the Independent Advisory Board is not independent if the member has a direct or indirect material relationship with the Filers, or an entity related to the Filers. A material relationship is any relationship that a reasonable person would consider might interfere with the exercise of the member's independent judgement of regarding conflicts of interest facing the Filers;
3. The trust agreement of the Fund prescribes the duties and standard of care of the Independent Advisory Board and the Independent Advisory Board has been provided with a copy of this Decision;
4. The members of the Independent Advisory Board exercise their powers and discharge their duties honestly, in good faith and in the best interests of Unitholders and, in doing so, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances;
5. The Fund does not relieve the members of the Independent Advisory Board from liability for los
es that arises out of a failure to satisfy the standard of care set out in paragraph 4 above;6. The Fund does not indemnify the members of the Independent Advisory Board against legal fees, judgments and amounts paid in settlement as a result of a breach of the standard of care set out in paragraph 4 above;
7. The Fund does not incur the cost of any portion of liability insurance that insures a member of the Independent Advisory Board for a liability for loss that arises out of a failure to satisfy the standard of care set out in paragraph 4 above;
8. The cost of any indemnification or insurance coverage paid for by the Manager, MFC Global, EPL or any other investment adviser of the Fund, or any associate or affiliate of the Manager, MFC Global, EPL or any other investment adviser of the Fund, to indemnify or insure the members of the Independent Advisory Board in respect of a loss that arises out of a failure to satisfy the standard of care set out in paragraph 4 above is not paid either directly or indirectly by the Fund;
9. Prior to effecting a purchase pursuant to this Decision, the Manager has in place written policies and procedures to ensure that there is compliance with the conditions of this Decision;
10. The Manager will ensure that there is compliance with the conditions of this Decision;
11. The Independent Advisory Board reviews the Fund's purchases, sales and continued holdings of Manulife Securities on a regular basis, but not less frequently than once every calendar quarter;
12. The Independent Advisory Board forms the opinion, after reasonable inquiry, that the Decision made on behalf of the Fund by MFC Global to purchase, sell or continue to hold Manulife Securities was, and continues to be, in the best interests of the Fund and:
(a) represents the business judgement of MFC Global, uninfluenced by considerations other than the best interests of the Fund,
(b) was made free from any influence by Manulife and without taking into account any consideration relevant to Manulife or any associate or affiliate of Manulife, and
(c) does not exceed the limitations of the applicable legislation;
13. The determination made by the Independent Advisory Board pursuant to paragraph 12 above is included in detailed written minutes provided to MFC Global not less frequently than quarterly;
14. Within 30 days after the end of each quarter in which MFC Global purchases or sells Manulife Securities on behalf of the Fund, a Filer will file on SEDAR
:(a) a report disclosing:
(i) the date of each purchase and sale,
(ii) the volume weighted average price paid or received for the Manulife Securities by the Fund on a given date, and
(iii) whether a purchase, sale or equity position was determined by the Independent Advisory Board to not comply with paragraph 12 above and, if so, why the purchase, sale or equity position was either completed, continued or not liquidated notwithstanding the Independent Advisory Board's determination;
(b) a certificate of MFC Global certifying that:
(i) at the time of each trade the trade represented the business judgement of MFC Global uninfluenced by considerations other than the best interest of the Fund and was, in fact, in the best interests of the Fund,
(ii) the trades were made free from any influence by Manulife or any affiliate or associate thereof and without taking any consideration relevant to Manulife or any associate or affiliate thereof, and
(iii) the trades were not part of a series of transactions aiming to support or otherwise influence the price of the Manulife Securities; and
(c) a certificate by each member of the Independent Advisory Board certifying that after reasonable inquiry the member formed the opinion that the policies and procedures referred to in paragraph 9 above are adequate and effective to ensure compliance with this Decision and that the decision made on behalf of the Fund by MFC Global to purchase Manulife Securities for the Fund and the purchase by the Fund:
(i) was made in compliance with the conditions of this Decision;
(ii) represented the business judgment of MFC Global uninfluenced by considerations other than the best interests of the Fund; and
(iii) was, in fact, in the best interests of the Fund;
15. The Independent Advisory Board advises the Decision Makers in writing of:
(a) any determination by it that paragraph 12 has not been satisfied with respect to any purchase, sale or holding of Manulife Securities,
(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 Manager or MFC Global in response to the determinations referred to above;
16. The existence, purpose, duties and obligations of the Independent Advisory Board, the names of its members, whether and how they are compensated by the Funds, and the fact that they are independent are disclosed:
(a) in the prospectus of the Fund, and
(b) on the Manager's internet website; and
17. The Decision, as it relates to the Jurisdiction of a Decision Maker will terminate one year after the publication in final form of any legislation or rule of that Decision Maker dealing with investment fund governance in a manner that conflicts with or makes inapplicable any provision of this Decision.