Manulife Asset Management Limited

Decision

Headnote

National Policy 11–203 Process for Exemptive Relief Application in Multiple Jurisdictions – Relief granted from the self-dealing provision in s. 4.2(1) of NI 81-102 Investment Funds to permit inter-fund trades in debt securities between investment funds subject to NI 81-102 and Canadian pooled funds, and between investment funds subject to NI 81-102 and U.S. mutual funds and U.S. pooled funds, managed by the same or affiliated managers – Inter-Fund trades will comply with the conditions in subsection 6.1(2) of NI 81-107 Independent Review Committee for Investment Funds, including the requirement for independent review committee approval.

National Policy 11–203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief from s.13.5(2)(b)(ii) and (iii) of NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to permit inter-fund trades between Canadian mutual funds, Canadian pooled funds, Canadian managed accounts, U.S. mutual funds and U.S. pooled funds all managed by the same or affiliated fund managers – Inter-fund trades are subject to conditions, including IRC approval and pricing requirements – Trades involving exchange-traded securities permitted to occur at last sale price as defined in the Universal Market Integrity Rules – Exemption also granted from conflict of interest trading prohibition to permit in specie subscriptions and redemptions by separately managed accounts and pooled funds – relief subject to conditions.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 4.2(1), 4.3(1), 4.3(2), 19.2.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5 and 15.1.
National Instrument 81-107 Independent Review Committee for Investment Funds, s. 6.1(2).

May 9, 2019

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
MANULIFE ASSET MANAGEMENT LIMITED (MAML)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from MAML for a decision under the securities legislation of the Jurisdiction (the Legislation):

(a)           for an exemption from the prohibition in section 4.2(1) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the NI 81-102 Funds (as defined below) to purchase debt securities from, or sell debt securities to, a Canadian Pooled Fund (as defined below) or a U.S. Fund (as defined below) (the Section 4.2(1) Relief);

(b)           for an exemption from the prohibitions in sections 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of a responsible person, an associate of a responsible person or an investment fund for which a responsible person acts as an adviser, in order to permit:

(i)            a Canadian Fund (as defined below) to purchase securities from or sell securities to a Canadian Fund;

(ii)           a Canadian Client Account (as defined below) to purchase securities from or sell securities to a Canadian Fund;

(iii)           a Canadian Fund to purchase securities from or sell securities to a U.S. Fund;

(iv)          a Canadian Client Account to purchase securities from or sell securities to a U.S. Fund;

(v)           the transactions listed in (i) to (ii) (each, a Canadian Inter-Fund Trade) and (iii) and (iv) (each, a Cross-Border Inter-Fund Trade) to be executed at the last sale price, as defined in the Universal Market Integrity Rules of the Investment Industry Regulatory Organization of Canada, prior to the execution of the trade (the Last Sale Price) in lieu of the closing sale price (the Closing Sale Price) contemplated by the definition of “current market price of the security” in section 6.1(1)(a)(i) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) on that trading day where the securities involved in the Inter-Fund Trade are exchange-traded securities (which term shall include Canadian and foreign exchange-traded securities);

((b)(i), (ii), (iii), (iv) and (v) above are collectively referred to herein as the Inter-Fund Trading Relief);

(vi)          the purchase by a Canadian Client Account (as defined below) of securities of a Canadian Fund (as defined below), and the redemption of securities of a Canadian Fund held by a Canadian Client Account, and as payment:

(A)           for such purchase, in whole or in part, by the Canadian Client Account making good delivery of portfolio securities to the Canadian Fund; and

(B)           for such redemption, in whole or in part, by the Canadian Client Account receiving good delivery of portfolio securities from the Canadian Fund; and

(vii)         the purchase by a Canadian Fund (as defined below) of securities of another Canadian Fund (other than purchases by an NI 81-102 Fund of another NI 81-102 Fund in compliance with the provisions of Part 9 of NI 81-102), and the redemption of securities held by a Canadian Fund in another Canadian Fund (other than redemptions of securities held by an NI 81-102 Fund of another NI 81-102 Fund in compliance with the provisions of Part 10 of NI 81-102), and as payment:

(A)           for such purchase, in whole or in part, by the Canadian Fund making good delivery of portfolio securities to the other Canadian Fund; and

(B)           for such redemption, in whole or in part, by the Canadian Fund receiving good delivery of portfolio securities from the other Canadian Fund;

(a purchase or redemption described in (b)(vi) and (vii) above are referred to herein as an In Specie Transaction and the relief requested pursuant to such paragraphs is referred to herein as the In Specie Relief); and

(c)           to revoke and replace the Original Decisions (as defined below), with the Section 4.2(1) Relief, the Inter-Fund Trading Relief and the In Specie Relief (the Revocation, and together with the Section 4.2(1) Relief, the Inter-Fund Trading Relief and the In Specie Relief, the Exemption Sought).

Under National Policy 11-203 - Process for Exemptive Relief Applications in Multiple Jurisdictions (NP 11-203):

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

(b)           the MAML 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, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions, NI 81-102 or in MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein. The following terms have the following meanings:

(a)           40 Act means the U.S. Investment Company Act of 1940;

(b)           40 Act Funds means, collectively, the Existing 40 Act Funds and the Future 40 Act Funds;

(c)           Applicable Inter-Fund Trading Policies has the meaning given to it in Representation 38;

(d)           Canadian Client Account means an account managed by the Filer that is beneficially owned by a client that is resident or domiciled in Canada and is not a responsible person, and over which the Filer that is registered as a portfolio manager under the securities legislation of one or more provinces or territories of Canada, has discretionary authority;

(e)           Canadian Clients means, collectively, the NI 81-102 Funds, the Canadian Pooled Funds and the Canadian Client Accounts;

(f)            Canadian Funds means, collectively, the NI 81-102 Funds and the Canadian Pooled Funds;

(g)           Canadian Pooled Funds means, collectively, the Existing Canadian Pooled Funds and the Future Canadian Pooled Funds;

(h)           Closed End Funds means, collectively, the Existing Closed End Funds and the Future Closed End Funds;

(i)            Existing 40 Act Fund means each existing investment fund subject to the provisions of the 40 Act, for which John Hancock or another affiliate of the Filer acts as manager and/or portfolio adviser;

(j)            Existing Canadian Pooled Fund means each investment fund domiciled in Canada that is not a reporting issuer, and to which NI 81-102 and NI 81-107 do not apply, for which the Filer acts as manager and/or portfolio adviser;

(k)           Existing Closed End Fund means each non-redeemable investment fund that is a reporting issuer, and to which NI 81-102 and NI 81-107 apply, for which the Filer acts as manager and/or portfolio adviser;

(l)            Existing NI 81-102 Fund means each existing investment fund (including an existing Closed End Fund) that is a reporting issuer, and to which NI 81-102 and NI 81-107 apply, for which the Filer acts as manager and/or portfolio adviser;

(m)          Existing U.S. Pooled Fund means each investment fund domiciled in United States to which the 40 Act does not apply, for which John Hancock or another affiliate of the Filer acts as manager and/or portfolio adviser;

(n)           Filer means Manulife Asset Management Limited and any affiliate of Manulife Asset Management Limited;

(o)           Funds means, collectively, the Canadian Funds and the U.S. Funds (each, a Fund);

(p)           Future 40 Act Fund means each investment fund, to be established in the future, subject to the provisions of the 40 Act, for which John Hancock or another affiliate of the Filer will act as manager and/or portfolio adviser;

(q)           Future Canadian Pooled Fund means each investment fund, to be established in the future, that will be domiciled in Canada that will not be a reporting issuer, and to which NI 81-102 and NI 81-107 will not apply, for which the Filer will act as manager and/or portfolio adviser;

(r)            Future Closed End Fund means each non-redeemable investment fund that will be a reporting issuer, and to which NI 81-102 and NI 81-107 will apply, for which the Filer will act as manager and/or portfolio adviser;

(s)           Future NI 81-102 Fund means each investment fund (including a Future Closed End Fund) to be established in the future, that will be a reporting issuer, and to which NI 81-102 and NI 81-107 will apply, for which the Filer acts as manager and/or portfolio adviser;

(t)            Future U.S. Pooled Fund means each investment fund, to be established in the future, that will be domiciled in the United States and which will not be subject to the provisions of the 40 Act, for which John Hancock or another affiliate of the Filer will act as manager and/or portfolio adviser;

(u)           Inter-Fund Trades means, collectively, Canadian Inter-Fund Trades, Cross-Border Inter-Fund Trades and, where applicable, all trades pursuant to the Section 4.2(1) Relief;

(v)           Investment Management Agreement has the meaning given to it in Representation 14;

(w)          IRC means the independent review committee of the Canadian Funds;

(x)           John Hancock means John Hancock Advisers, LLC and John Hancock Investment Management Services, LLC, individually or collectively as applicable;

(y)           Manulife Asset Management means the global asset management organization known as “Manulife Asset Management”;

(z)           NI 81-102 Funds means, collectively, the Existing NI 81-102 Funds and the Future NI 81-102 Funds;

(aa)         Original 4.2 Decision means In the Matter of Manulife Asset Management Limited dated January 17, 2011;

(bb)         Original 13.5 Decision means In the Matter of Manulife Asset Management Limited dated December 14, 2016;

(cc)         Original Decisions means, collectively, the Original 4.2 Decision and the Original 13.5 Decision

(dd)         Trust Funds means, collectively, any of the Funds established as a trust;

(ee)         U.S. Client Account means an account managed by Manulife Asset Management that is beneficially owned by a client that is resident or domiciled in the United States and is not a responsible person and over which the Filer has discretionary authority;

(ff)           U.S. Funds means, collectively, the 40 Act Funds and the U.S. Pooled Funds;

(gg)         U.S. Inter-Fund Trading Rules means the United States Investment Company Act section 270.17a-7 and other applicable laws governing inter-fund trading in the United States; and

(hh)         U.S. Pooled Funds means, collectively, the Existing U.S. Pooled Funds and the Future U.S. Pooled Funds.

Representations

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

MAML/Filer

1.             MAML is a corporation amalgamated under the laws of Canada, with its registered head office located in Toronto, Ontario. MAML is an indirect wholly-owned subsidiary of The Manufacturers Life Insurance Company, which in turn is a wholly-owned subsidiary of Manulife Financial Corporation.

2.             MAML is currently registered in the categories of commodity trading manager, portfolio manager, derivatives portfolio manager and investment fund manager.

3.             The Filer is, or will be, the manager of the Canadian Funds.

4.             The Filer is, or will be, the portfolio manager(s) of the Canadian Funds. The Filer may also appoint sub-advisers for the Canadian Funds.

5.             The Filer is, or will be, the trustee of the Canadian Funds that are Trust Funds.

6.             MAML is not in default of securities legislation in any of the Jurisdictions.

The Canadian Funds

7.             Each NI 81-102 Fund (which includes Closed End Funds) is, or will be, established under the laws of Ontario or Canada as an investment fund that is a mutual fund trust, a class of shares of a mutual fund corporation or limited partnership and is, or will be, a reporting issuer in one or more of the Jurisdictions.

8.             The securities of each NI 81-102 Fund are, or will be, qualified for distribution in one or more of the Jurisdictions under, as applicable, a prospectus, simplified prospectus, annual information form, fund facts and/or ETF Facts, prepared and filed in accordance with the securities legislation of such Jurisdictions. Each NI 81-102 Fund is, or will be, subject to the provisions of NI 81-102.

9.             Each Closed End Fund is, or will be, established under the laws of Ontario or Canada as a non-redeemable investment fund that is, or will be, a reporting issuer in one or more of the Jurisdictions.

10.          Each Canadian Pooled Fund is, or will be, an investment fund established under the laws of Ontario or Canada as an open-ended mutual fund trust, open-ended mutual fund corporation or limited partnership that is not and will not be a reporting issuer in any of the Jurisdictions.

11.          The securities of the Canadian Pooled Funds will be distributed on a private placement basis pursuant to available exemptions from the prospectus requirement under applicable securities laws in the Jurisdictions. Other than as may be required pursuant to exemptive relief granted by the Canadian securities administrators, the Canadian Pooled Funds are not, and will not be, subject to NI 81-102.

12.          The existing Canadian Funds are not in default of securities legislation in any of the Jurisdictions.

Canadian Client Accounts

13.          The Filer offers discretionary investment management services to institutional and individual investors in Canada through the Canadian Client Accounts.

14.          Each Canadian client wishing to receive the discretionary investment management services from the Filer, has entered into, or will enter into, a written agreement (an Investment Management Agreement) whereby the client appoints the Filer, to act as portfolio manager in connection with an investment portfolio of the client with full discretionary authority to trade in securities for the Canadian Client Account without obtaining the specific consent of the client to execute the trade.

15.          Each Investment Management Agreement or other documentation in respect of each Canadian Client Account will contain authorization from the client for the portfolio manager of the Canadian Client Account to make Inter-Fund Trades and/or enter into In Specie Transactions.

John Hancock

16.          Each John Hancock entity is a Delaware limited liability company having its head office in Boston, Massachusetts.

17.          Each John Hancock entity is registered with the U.S. Securities and Exchange Commission (the SEC) as an adviser under the U.S. Investment Advisers Act of 1940 (the Advisers Act).

18.          In the U.S., all managers of U.S. registered investment companies are registered under, and subject to the requirements of the Advisers Act. In addition, with respect to their management of registered investment companies, registered investment advisers are subject to the requirements of the Investment Company Act of 1940.

19.          MAML and John Hancock are affiliates. MAML and John Hancock are indirectly controlled by Manulife Financial Corporation. Manulife Financial Corporation is a Canadian multinational insurance company and financial services provider headquartered in Toronto, Ontario, Canada. The company operates in Canada and Asia as “Manulife” and in the United States primarily through its John Hancock Financial division. As at December 31, 2018, the Manulife organization had over C$1 trillion in assets under management.

20.          John Hancock, or another affiliate of MAML is, or will be, the manager of the U.S. Funds. John Hancock, including affiliates of MAML, provide advisory services and portfolio manager(s) to the U.S. Funds. John Hancock or another affiliate of the Filer may also appoint sub-advisers for the U.S. Funds. Any affiliate of MAML providing advisory services to a U.S. Fund will be appropriately registered to act in such manner.

21.          Current advisory affiliates of MAML, other than the John Hancock entities, that are registered with the SEC and are entities currently applicable to this Application are listed in Appendix A hereto.

22.          John Hancock and other affiliates of MAML offer discretionary investment management services to institutional and individual investors in the United States through U.S. Client Accounts.

23.          The Filer understands that trades between Canadian Funds and U.S. Client Accounts are not subject to the prohibitions in sections 13.5(2)(b)(ii) and (iii) of NI 31-103.

U.S. Funds

24.          Each 40 Act Fund is, or will be, established as a series of a Massachusetts Business Trust (or under the laws of another U.S. jurisdiction) s an investment fund pursuant to the 40 Act and the securities of which are, or will be, registered for distribution to the public under the 40 Act.

25.          The securities of each 40 Act Fund are, or will be, registered for distribution pursuant to a registration statement prepared and filed in accordance with the 40 Act. Each 40 Act Fund is, or will be, subject to the provisions of the 40 Act.

26.          Each U.S. Pooled Fund is, or will be, an investment fund established under the laws of a U.S. jurisdiction as an open-ended mutual fund trust, open-ended mutual fund corporation or trust, limited liability company, limited partnership or closed-ended trust that will not be subject to the 40 Act.

27.          The securities of the U.S. Pooled Funds are, or will be, distributed on a private placement basis pursuant to available exemptions from the registration requirement under the 40 Act (or other applicable securities laws in the United States). The Existing U.S. Pooled Funds are not, and the Future U.S. Pooled Funds will not be, subject to the 40 Act.

Inter-Fund Trading

28.          The Filer wishes to be able to permit any Canadian Fund or Canadian Client Account to engage in Inter-Fund Trades of portfolio securities with a Fund.

29.          NI 31-103, NI 81-102 and NI 81-107 restrict inter-fund trading. Absent the Exemption Sought, neither the Canadian Funds nor Canadian Client Accounts, nor the Filer on their behalf, will be permitted to engage in Cross-Border Inter-Fund Trades as contemplated in this decision.

30.          The Filer is a responsible person for the purpose of section 13.5(2)(b) of NI 31-103 and, absent exemptive relief, is prohibited from effecting any Inter-Fund Trades between Canadian Funds or Canadian Client Accounts and certain Trust Funds (if an associate of the Filer) or other Funds (as investment funds for which the Filer, or other responsible person, acts as an adviser).

31.          Absent exemptive relief, each NI 81-102 Fund is prohibited under section 4.2(1) of NI 81-102 from purchasing a security from or selling a security to certain Trust Funds (if an associate of the Filer) and would also be prohibited under section 4.2(1) of NI 81-102 from purchasing a security from or selling a security to a Fund established in the future under a corporate structure that would be an affiliate of the Filer.

32.          The exception in section 4.3(1) of NI 81-102 which permits certain inter-fund trades of securities subject to public quotations is not available for any Inter-Fund Trades of debt securities because debt securities are typically not subject to public quotations.

33.          The exception in section 4.3(2) which permits certain inter-fund trades of debt securities is not available for any Inter-Fund Trades of debt securities between: (i) NI 81-102 Funds and Canadian Pooled Funds; and (ii) NI 81-102 Funds and U.S. Funds. In both instances, that exemption only applies where funds on both sides of the inter-fund trade are investment funds subject to NI 81-107. The Canadian Pooled Funds and U.S. Funds will not be subject to NI 81-107.

34.          The Filer cannot rely on the exception in subsection 6.1 of NI 81-107 for the Inter-Fund Trades unless each party to the transaction is a reporting issuer and the Inter-Fund Trade occurs at the “current market price of the security” which, in the case of exchange-traded securities, includes the Closing Sale Price but not the Last Sale Price.

35.          Each Inter-Fund Trade will be consistent with the investment objectives of the Fund or Canadian Client Account, as applicable.

36.          The Original 4.2 Decision was obtained to permit Inter-Fund Trades in unlisted debt securities between a NI 81-102 Fund and a Canadian Pooled Fund. The Original 4.2 Decision had also granted relief to address Inter-Fund trades in unlisted debt securities trades with Closed End Funds, however, given subsequent amendments to NI 81-102 since the granting of the Original 4.2 Decision, specific relief relating to Closed End Funds is no longer required.

37.          The Original 13.5 Decision was obtained to permit Canadian Inter-Fund Trades (other than those permitted under regulatory exceptions and the Original 4.2 Decision) between all of the Canadian Clients. For Canadian Client Accounts, which are not subject to an IRC approval process, the Original 13.5 Decision requires client authorization of Canadian Inter-Fund Trades in the Investment Management Agreement or other documentation.

38.          The Filer, John Hancock, and all Manulife Asset Management affiliates are subject to cross trade and transfer-in-kind policies (the Applicable Inter-Fund Trading Policies). Such Applicable Inter-Fund Trading Policies include a Canadian specific policy which ensures that Canadian Inter-Fund Trades are conducted in accordance with the requirements of applicable securities legislation, including NI 81-102 and NI 81-107, the Original 4.2 Decision and the Original 13.5 Decision.

39.          At the time of a Canadian Inter-Fund Trade, the Filer will have policies and procedures in place to enable the Canadian Funds and Canadian Client Accounts to engage in Canadian Inter-Fund Trades.

40.          At the time of a Cross-Border Inter-Fund Trade, the Filer will have policies and procedures in place to enable the Canadian Funds and Canadian Client Accounts to engage in Cross-Border Inter-Fund Trades.

41.          In respect of each NI 81-102 Fund, the Filer, as manager, has established or will establish an IRC in accordance with the requirements of NI 81-107.

42.          Inter-Fund Trades involving an NI 81-102 Fund will be referred to and approved by the IRC of the NI 81-102 Fund under subsection 5.2(1) of NI 81-107 and the Filer, as manager of an NI 81-102 Fund, and the IRC of the NI 81-102 Fund, will comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade. The IRC of the NI 81-102 Funds will not approve an Inter-Fund Trade involving an NI 81-102 Fund unless it has made the determination set out in subsection 5.2(2) of NI 81-107.

43.          In respect of each Canadian Pooled Fund, the Filer, as manager, has established or will establish an IRC (which may also be the IRC of the NI 81-102 Funds) to review and approve, including by way of standing instructions, any proposed Inter-Fund Trade involving a Canadian Pooled Fund.

44.          The mandate of the IRC of a Canadian Pooled Fund, among other things, includes or will include, approving Inter-Fund Trades. The IRC of a Canadian Pooled Fund is, or will be, created by the Filer, as manager of a Canadian Pooled Fund, in accordance with the requirements of section 3.7 of NI 81-107 and complies, or will comply, with the standard of care set out in section 3.9 of NI 81-107. The IRC of the Canadian Pooled Funds will not approve any Inter-Fund Trade involving a Canadian Pooled Fund unless it has made the determination set out in subsection 5.2(2) of NI 81-107.

45.          The mandate of the IRC of the NI 81-102 Funds and the Canadian Pooled Funds will be expanded to include approval of Cross-Border Inter-Fund Trades between a Canadian Fund and a U.S. Fund.

46.          Prior to the Filer engaging in Inter-Fund Trades on behalf of a Canadian Client Account, each Investment Management Agreement or other documentation will contain the authorization of the client for the Filer, as portfolio manager of the Canadian Client Account, to engage in Inter-Fund Trades.

47.          When the Filer engages in an Inter-Fund Trade of securities between Funds or between a Canadian Client Account and a Fund, including Cross-Border Inter-Fund Trades, each will comply with the following procedures:

(a)           the portfolio manager of one Client (Client A) will deliver the trade instructions in respect of a purchase or a sale of a security by Client A to a trader on the trading desk of the Filer, John Hancock or one of their affiliates;

(b)           the portfolio manager of the other Client (Client B) will deliver the trade instructions in respect of a purchase or a sale of a security by Client B to a trader on the trading desk of the Filer, John Hancock or one of their affiliates (this may be the same trading desk or a different trading desk than is handling the order for Client A);

(c)           each trader on each trading desk will request the approval of the trading desk compliance officer (the TDCO) to execute the trade as an Inter-Fund Trade between Client A and Client B;

(d)           once the approval of the TDCO is received, the trader on the trading desk will have the discretion to execute the trade as an Inter-Fund Trade between Client A and Client B in accordance with the requirements of paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107 provided that, for exchange-traded securities the Inter-Fund Trade may be executed at the Last Sale Price of the security, determined at the time of the receipt of the approval of the TDCO, prior to the execution of the trade;

(e)           the policies applicable to the trading desks will require that: (i) all orders are to be executed on a timely basis, (ii) orders will be executed for no consideration other than cash payment against prompt delivery of a security, (iii) the transaction is consistent with the investment policies of each Fund participating in the transaction as recited in its registration statement or offering documents, and (iv) the transaction complies with all other requirements of applicable law; and

(f)            the trader on each trading desk will advise the portfolio managers of Client A and Client B of the price at which the Inter-Fund Trade occurs.

48.          If the IRC of a Canadian Fund becomes aware of an instance where the Filer, did not comply with the terms of any decision document issued in connection with the Inter-Fund Trades, including any Cross-Border Inter-Fund Trades, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Canadian Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator which is the Canadian Fund's principal regulator.

In Specie Relief

49.          When acting for a Canadian Client Account of a client, a Filer wishes to be able, in accordance with the investment objectives and investment restrictions of the client, to cause the client’s Canadian Client Account to either invest in securities of a Canadian Fund, or to redeem such securities, pursuant to an In Specie Transaction.

50.          In acting on behalf of a Canadian Fund, a Filer wishes to be able, in accordance with the investment objectives and investment restrictions of the Fund, to cause the Fund to either invest in securities of another Canadian Fund, or to redeem such securities, pursuant to an In Specie Transaction.

51.          The only cost which will be incurred by a Canadian Fund or a Canadian Client Account for an In Specie Transaction is a nominal administrative charge levied by the custodian of the Canadian Fund in recording the trades and/or any commission charged by the dealer executing the trade.

52.          At the time of each In Specie Transaction, a Filer will have in place policies and procedures governing such transactions, including the following:

(a)           each In Specie Transaction involving an NI 81-102 Fund will be referred to the applicable IRC for approval in accordance with the requirements of subsection 5.2(2) of NI 81-107;

(b)           the Filer has obtained, or will obtain, the written consent of the relevant client before it engages in any In Specie Transaction in connection with the purchase or redemption of securities of the Canadian Funds for the Canadian Client Account;

(c)           the portfolio securities transferred in an In Specie Transaction will be consistent with the investment criteria of the Canadian Fund or Canadian Client Account, as the case may be, acquiring the portfolio securities;

(d)           the portfolio securities transferred in In Species Transactions will be valued on the same valuation day using the same valuation principles as are used to calculate the net asset value for the purpose of the issue price or redemption price of securities of the Canadian Fund;

(e)           with respect to the purchase of securities of a Canadian Fund, the portfolio securities transferred to the Canadian Fund in an In Specie Transaction as purchase consideration for those securities will be valued as if the portfolio securities were assets of the Canadian Fund and in accordance with subsection 9.4(2)(b)(iii) of NI 81-102. With respect to the redemption of securities, the portfolio securities transferred in consideration for the redemption price of those securities will have a value at least equal to the amount at which those portfolio securities were valued in calculating the net asset value per security used to establish the redemption price of the securities in accordance with subsection of 10.4(3)(b) of NI 81-102;

(f)            the valuation of any illiquid securities which would be the subject of an In Specie Transaction will be carried out according to the Filer’s policies and procedures for the fair valuation of portfolio securities, including illiquid securities. Should any In Specie Transaction involve the transfer of an “illiquid asset” (as defined in NI 81-102), the Filer will obtain at least one quote for the asset from an independent arm’s length purchaser or seller, immediately before effecting the In Specie Transaction;

(g)           if any illiquid securities are the subject of an In Specie Transaction, the illiquid securities would be transferred on a pro rata basis. The Canadian Funds generally invest in liquid securities. The Filer will not cause any Canadian Fund to engage in an In Specie Transaction if the applicable Canadian Fund or Canadian Client Account is not in compliance with the portfolio restrictions on the holding of illiquid securities described in section 2.4 of NI 81-102;

(h)           the Canadian Funds will keep written records of each In Specie Transaction, including records of each purchase and redemption of portfolio securities and the terms thereof for a period of five years commencing after the end of the financial year in which the trade occurred, the most recent two years in a reasonably accessible place.

53.          MAML has determined that it would be in the interests of the Canadian Funds and the Canadian Client Accounts to engage in In Species Transactions.

54.          In Specie Transactions will be subject to (i) compliance with the written policies and procedures of the Filer respecting In Specie Transactions that are consistent with applicable securities legislation and this decision and (ii) the oversight of MAML to ensure that the In Specie Transactions represent the business judgment of the Filer acting in its discretionary capacity with respect to the Canadian Funds and the Canadian Client Accounts, uninfluenced by considerations other than the best interests of the Canadian Funds and the Canadian Client Accounts. The results of the oversight and review by MAML will be submitted in the form of a report to the MAML’s board of directors on a semi-annual basis.

55.          MAML has determined that effecting the In Specie Transactions of securities between a Canadian Fund and a Canadian Client Account or between a Canadian Fund and another Canadian Fund will allow a Filer to manage each asset class more effectively and reduce transaction costs for the client, as applicable, and the Canadian Funds. For example, In Specie Transactions may:

(a)           reduce market impact costs, which can be detrimental to clients and/or the Canadian Funds;

(b)           also allow a portfolio adviser to retain within its control institutional-size blocks of securities that otherwise would need to be broken and re-assembled.

56.          A Filer will be the portfolio adviser of the Canadian Fund and is, or may be, the trustee of a Canadian Fund. As such, a Filer is, or may be, a “responsible person” within the meaning of the applicable provisions of the Legislation. Accordingly, a Canadian Fund may be considered to be an “associate of a responsible person” within the meaning of the applicable provisions of the Legislation.

57.          Accordingly, absent the In Specie Relief, a Filer would be prohibited from engaging in the In Specie Transactions.

Benefits of the Exemption Sought

58.          The securities regulatory authorities in the Jurisdictions granted the Original Decisions on the basis that it is in the best interests of the Canadian Clients.

59.          MAML has determined that it would be in the best interests of all Clients to permit Inter-Fund Trades, including Cross-Border Inter-Fund Trades, for the following reasons:

(a)           because of the various investment objectives and investment strategies that are or will be utilized by the Clients, it may be appropriate for different investment portfolios to acquire or dispose of the same securities. MAML has determined that engaging in these Inter-Fund Trades directly rather than with a third party has potential benefits such as lower trading costs, reduced market disruption and quicker execution;

(b)           making all Clients subject to the same set of rules governing the execution of transactions will result in cost and timing efficiencies in respect of the execution of transactions for all Clients, for example reducing market exposure risk due to delayed execution and improving liquidity for thinly traded securities; and

(c)           making all Clients subject to the same set of rules governing the execution of transactions will result in less complicated and more reliable compliance procedures, as well as simplified and more efficient monitoring thereof, for the Filer, in connection with execution of transactions on behalf of all Clients.

60.          The foregoing benefits are currently enjoyed by the Canadian Clients pursuant to existing regulatory exceptions and the Original Decisions. MAML has determined that the Exemption Sought is in the best interests of the Canadian Clients because it would extend these benefits to Cross-Border Inter-Fund Trades with U.S. Funds, significantly broadening the pool of potential inter-fund trading counterparties.

61.          U.S. Funds currently conduct inter-fund trading pursuant to the Applicable Inter-Fund Trading Policies which complies with U.S. Inter-Fund Trading Rules. From a procedural perspective, inter-fund trades involving 40 Act Funds are subject to oversight by the applicable U.S. fund board. Also, in order to comply with SEC rules governing inter-fund trades and the Applicable Inter-Fund Trading Policies as noted above, it is explicitly required that no brokerage commission, fee (except for customary transfer fees) or other remuneration be paid by the accounts in connection with the transition. Cross-Border Inter-Fund Trades would be conducted on Manulife Asset Management’ portfolio management system, which is monitored by an integrated compliance group including representatives of MAML, John Hancock and other affiliates.

62.          U.S. Inter-Fund Trading Rules impose similar requirements to the regulatory exceptions, and the Original Decisions respecting appropriate consideration, policies and procedures, governance and review, recordkeeping and pricing for inter-fund trades. Because the Original 13.5 Decision permits Canadian Inter-Fund Trades to be executed at the Last Sale Price instead of the Closing Sale Price, MAML has determined that there is no material difference between the pricing requirements that apply to Canadian Inter-Fund Trades under the Original 13.5 Decision and the pricing requirements that apply to inter-fund trades in the United States.

63.          MAML has determined that similar regulatory requirements applicable to inter-fund trading in Canada and the United States, together with Manulife Asset Management’s integrated portfolio management system and compliance group, creates a framework for conducting Cross-Border Inter-Fund Trades in a manner which minimizes conflicts of interest and promotes fairness and transparency for all Clients.

64.          MAML was previously granted the In Specie Relief in the Original 13.5 Decision. As MAML seeks to revoke and replace the Original 13.5 Decision as part of the Revocation, MAML also seeks the In Specie Relief on the same terms and conditions as the Original 13.5 Decision as part of the Exemption Sought.

Decision

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:

1.             the Revocation is granted;

2.             the Section 4.2(1) Relief is granted provided that the following conditions are satisfied:

(a)           the Inter-Fund Trade is consistent with the investment objectives of each of the Funds involved in the trade;

(b)           the IRC of the Canadian Fund involved in the trade has approved the transaction in respect of that Canadian Fund in accordance with the terms of section 5.2 of NI 81-107;

(c)           the fund board of the U.S. Fund, or the trust committee of the entity acting as trustee of the U.S. Fund, involved as a counterparty to the trade has approved policies and procedures that permit Cross-Border Inter-Fund Trades that require compliance with 40 Act Rule 17a-7; and

(d)           the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107;

3.             the Inter-Fund Trading Relief is granted provided that the following conditions are satisfied:

(a)           the Inter-Fund Trade is consistent with the investment objectives of each of the Canadian Clients involved in the trade;

(b)           the Filer, as manager of a Canadian Fund, refers the Inter-Fund Trade involving such Canadian Fund to the IRC of that Canadian Fund in the manner contemplated by section 5.1 of NI 81-107 and the Filer, and the IRC of the Canadian Fund comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with the Inter-Fund Trade;

(c)           in the case of an Inter-Fund Trade between Canadian Funds:

(i)            the IRC of each Canadian Fund has approved the Inter-Fund Trade in respect of the Canadian Fund in accordance with the terms of section 5.2(2) of NI 81-107; and

(ii)           the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107, except that for the purposes of paragraph (e) of subsection 6.1(2) of NI 81-107 in respect of exchange-traded securities, the current market price of the securities may be the Last Sale Price;

(d)           in the case of an Inter-Fund Trade between a Canadian Client Account and a Canadian Fund:

(i)            the IRC of the Canadian Fund has approved the Inter-Fund Trade in respect of the Canadian Fund in accordance with the terms of section 5.2(2) of NI 81-107;

(ii)           the investment management agreement or other documentation in respect of the Canadian Client Account authorizes the Inter-Fund Trade; and

(iii)           the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107, except that for the purposes of paragraph (e) of subsection 6.1(2) of NI 81-107 in respect of exchange-traded securities, the current market price of the securities may be the Last Sale Price;

(e)           in the case of an Inter-Fund Trade between a Canadian Fund and a U.S. Fund:

(i)            the IRC of the Canadian Fund has approved the Inter-Fund Trade in respect of the Canadian Fund in accordance with the terms of section 5.2(2) of NI 81-107;

(ii)           the fund board of the U.S. Fund, or the trust committee of the entity acting as trustee of the U.S. Fund, involved in the trade has approved policies and procedures that permit Cross-Border Inter-Fund Trades that require compliance with 1940 Act 17a-7;

(iii)           the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107, except that for the purposes of paragraph (e) of subsection 6.1(2) of NI 81-107 in respect of exchange-traded securities, the current market price of the securities may be the Last Sale Price;

(iv)          the Inter-Fund Trade shall only be executed for orders with a quantity of more than 50 standard trading units; and

(v)           the Inter-Fund Trade shall comply with the market integrity requirements as defined in s. 6.1(1)(b) of NI 81-107;

(f)            in the case of an Inter-Fund Trade between a Canadian Client Account and a U.S. Fund:

(i)            the investment management agreement or other documentation in respect of the Canadian Client Account authorizes the Inter-Fund Trade;

(ii)           the fund board of the U.S. Fund, or the trust committee of the entity acting as trustee of the U.S. Fund, involved in the trade has approved policies and procedures that permit Cross-Border Inter-Fund Trades that require compliance with 1940 Act 17a-7;

(iii)           the Inter-Fund Trade complies with paragraphs (c) to (g) of subsection 6.1(2) of NI 81-107, except that for the purposes of paragraph (e) of subsection 6.1(2) of NI 81-107 in respect of exchange-traded securities, the current market price of the securities may be the Last Sale;

(iv)          the Inter-Fund Trade shall only be executed for orders with a quantity of more than 50 standard trading units; and

(v)           the Inter-Fund Trade shall comply with the market integrity requirements as defined in s. 6.1(1)(b) of NI 81-107; and

(g)           with respect to Cross-Border Inter-Fund Trades only, this decision shall cease to be operative three years from the date of such decision; and

4.             the In Specie Relief is granted provided that the following conditions are satisfied:

(a)           in connection with an In Specie Transaction where a Canadian Client Account acquires securities of a Canadian Fund:

(i)            if the transaction involves the purchase of securities in an NI 81-102 Fund, the IRC of the NI 81-102 Fund has approved the In Specie Transaction on behalf of the NI 81-102 Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

(ii)           the Filer and the applicable IRC complies with section 5.4 of NI 81-107 in respect of any standing instructions the applicable IRC provides in connection with the In Specie Transaction;

(iii)           the Filer obtains the prior written consent of the client of the Canadian Client Account before it engages in any In Specie Transaction;

(iv)          the Canadian Fund would, at the time of payment, be permitted to purchase the portfolio securities;

(v)           the portfolio securities are acceptable to the portfolio manager of the Canadian Fund and meet the investment criteria of the Canadian Fund;

(vi)          the value of the portfolio securities is at least equal to the issue price of the securities of the Canadian Fund for which they are used as payment, valued as if the portfolio securities were portfolio assets of that Canadian Fund;

(vii)         the account statement next prepared for the Canadian Client Account will describe the portfolio securities delivered to the Canadian Fund and the value assigned to such portfolio securities; and

(viii)         the Canadian Fund will keep written records of each In Specie Transaction in a financial year of the Canadian Fund, reflecting details of the portfolio securities delivered to the Canadian Fund and the value assigned to such portfolio securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(b)           in connection with an In Specie Transaction where a Canadian Client Account redeems securities of a Canadian Fund:

(i)            if the transaction involves the redemption of securities in an NI 81-102 Fund, the IRC of the NI 81-102 Fund has approved the In Specie Transaction on behalf of the NI 81-102 Fund, in accordance with the terms of subsection 5.2(2) of NI 81-107;

(ii)           the Filer and the applicable IRC complies with section 5.4 of NI 81-107 in respect of any standing instructions the applicable IRC provides in connection with the In Specie Transaction;

(iii)           the Filer obtains the prior written consent of the client of the Canadian Client Account before it engages in any In Specie Transaction, and such consent has not been revoked;

(iv)          the portfolio securities meet the investment criteria of the Canadian Client Account acquiring the portfolio securities and are acceptable to the Filer;

(v)           the value of the portfolio securities is equal to the amount at which those portfolio securities were valued by the Canadian Fund in calculating the net asset value per unit or share used to establish the redemption price;

(vi)          the account statement next prepared for the Canadian Client Account will describe the portfolio securities received from the Canadian Fund and the value assigned to such portfolio securities; and

(vii)         the Canadian Fund will keep written records of each In Specie Transaction in a financial year of the Canadian Fund, reflecting details of the securities delivered by the Canadian Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(c)           in connection with an In Specie Transaction where a Canadian Fund acquires portfolio securities of a Canadian Fund:

(i)            if the transaction involves the purchase of securities in an NI 81-102 Fund, the IRC of the NI 81-102 Fund has approved the In Specie Transaction on behalf of the NI 81-102 Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

(ii)           the Filer and the applicable IRC comply with section 5.4 of NI 81-107 in respect of any standing instructions the applicable IRC provides in connection with the In Specie Transaction;

(iii)           the Canadian Fund acquiring the portfolio securities would, at the time of payment, be permitted to purchase the portfolio securities;

(iv)          the portfolio securities are acceptable to portfolio manager of the Canadian Fund acquiring the portfolio securities and meet the investment objective of such Canadian Fund;

(v)           the value of the portfolio securities is at least equal to the issue price of the units or shares of the Canadian Fund issuing the units or shares for which they are used as payment, valued as if the portfolio securities were portfolio assets of that Canadian Fund; and

(vi)          each of the Canadian Funds will keep written records of each In Specie Transaction in a financial year of the Canadian Fund, reflecting details of the securities delivered to the Canadian Fund and the value assigned to such portfolio securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place;

(d)           in connection with an In Specie Transaction where a Canadian Fund redeems securities of a Canadian Fund:

(i)            if the transaction involves the redemption of securities in an NI 81-102 Fund, the IRC of the NI 81-102 Fund has approved the In Specie Transaction on behalf of the NI 81-102 Fund in accordance with the terms of subsection 5.2(2) of NI 81-107;

(ii)           the Filer and the applicable IRC comply with section 5.4 of NI 81-107 in respect of any standing instructions the applicable IRC provides in connection with the In Specie Transaction;

(iii)           the portfolio securities are acceptable to the portfolio manager of the Canadian Fund and are consistent with the investment objective of the Canadian Fund acquiring the portfolio securities;

(iv)          the value of the portfolio securities is equal to the amount at which those securities were valued by the Canadian Fund in calculating the net asset value per security used to establish the redemption price; and

(v)           the Canadian Fund will keep written records of each In Specie Transaction in a financial year of the Canadian Fund, reflecting details of the portfolio securities delivered by the Canadian Fund and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place; and

(e)           the Filer does not receive any compensation in respect of any In Specie Transaction and, in respect of any delivery of portfolio securities further to an In Specie Transaction, the only charges paid by the Canadian Client Account or the applicable Canadian Fund is the commission charged by the dealer executing the trade (if any) and/or any administrative charges levied by the custodian.

“Darren McKall”
Investment Funds & Structured Products Branch
Ontario Securities Commission

 

APPENDIX A

1.             Manulife Asset Management (North America) Limited

2.             Manulife Asset Management (US) LLC