Sun Life Global Investments (Canada) Inc. and Sun Life Milestone Global Equity Fund

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption from sections 2.8(1)(d) and (f)(i) of NI 81-102 to permit the Fund when it opens or maintains a long position in a standardized future or forward contract or when it enters into or maintains a swap position and during the periods when the Fund are entitled to receive payments under the swap, to use as cover, an option to sell an equivalent quantity of the underlying interest of the standardized future, forward or swap.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, s. 2.8(1).

March 16, 2012

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

SUN LIFE GLOBAL INVESTMENTS (CANADA) INC.

(the Filer)

AND

IN THE MATTER OF

SUN LIFE MILESTONE GLOBAL EQUITY FUND

(the Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption, pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102), from sections 2.8(1)(d) and 2.8(1)(f)(i) of NI 81-102 (the Exemption Sought) to permit the Fund, when the Fund:

(i) opens or maintains a long position in a debt-like security that has a component that is a long position in a forward contract or in a standardized future or forward contract, or

(ii) enters into or maintains a swap position and during the periods when the Fund is entitled to receive payments under the swap,

to use as cover, a right or obligation to sell an equivalent quantity of the underlying interest of the standardized future, forward or swap.

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

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

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions).

Interpretation

Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer.

1. The Filer is a corporation incorporated under the laws of Canada and has its head office in Toronto. The Filer is registered as a commodity trading manager, investment fund manager and portfolio manager in Ontario.

2. The Filer is the manager and portfolio manager of the Fund. As portfolio manager, the Filer manages the derivatives strategies of the Fund.

3. The Fund is an open-ended mutual fund established under the laws of Ontario.

4. Units of the Fund are offered by a simplified prospectus filed in each province and territory of Canada and, accordingly, the Fund is a reporting issuer in each province and territory of Canada.

5. To the knowledge of the Filer, neither the Fund nor the Filer is in default of securities legislation in any jurisdiction of Canada.

6. The investment objective and investment strategies of the Fund are set out in the Fund's simplified prospectus. As part of its investment strategies, the Fund invests in specified derivatives in order to seek exposure to global equity markets. The Fund may also use derivatives to hedge against potential loss.

7. When specified derivatives are used for non-hedging purposes, the Fund is subject to the cover requirements of NI 81-102.

8. As a result of discussions with staff of the principal regulator, the Filer has decided to seek this exemptive relief in order to allow the Fund to satisfy the cover requirements of NI 81-102 in the manner described below.

9. The Fund currently uses a short-term payment obligation issued by an entity with an approved credit rating as cash cover. Once the Exemption Sought is granted, the Fund will no longer use the short-term payment obligation as cash cover.

10. Sections 2.8(1)(d) and 2.8(1)(f)(i) of NI 81-102 do not permit covering the position in long positions in futures and forwards and long positions in swaps for a period when the Fund is entitled to receive payments under the swap, in whole or in part, with a right or obligation to sell an equivalent quantity of the underlying interest of the future, forward or swap. In other words, those sections of NI 81-102 do not permit the use of put options or short future, forward or swap positions to cover long future, forward or swap positions.

11. Other countries and common investment practices recognize the hedging properties of options for all categories of derivatives, including long positions evidenced by standardized futures or forwards or in respect of swaps where a fund is entitled to receive payments from the counterparty, provided they are covered by an amount equal to the difference between the market price of a derivative holding and the strike price of the option that was bought or sold to hedge that derivative holding. NI 81-102 effectively imposes the requirement to overcollateralize, since the maximum liability to the fund under the scenario described is equal to the difference between the market value of the long derivative position and the exercise price of the option. Overcollateralization imposes a cost on a mutual fund.

12. Section 2.8(1)(c) of NI 81-102 permits a mutual fund to write a put option and to cover it by holding a right or obligation to sell an equivalent quantity of the underlying interest of the written put option. This position has similar risks as a long position in a future, forward or swap. Therefore, the Filer submits that the Fund should be permitted to cover a long position in a future, forward or swap with a put option or a short future position.

13. The Filer has written policies and procedures relating to the use of derivatives by the Fund. The Chief Compliance Officer of the Filer is responsible for maintaining the policies and procedures, oversight of the derivative strategies used by the Fund and monitoring and assessing compliance with all applicable legislation. The Chief Compliance Officer reports to the board of directors of the Filer on her compliance assessments. Limits and controls on the use of derivatives are part of the Filer's fund compliance regime and include reviews by analysts who ensure that the derivative positions of the Fund are within applicable policies.

14. The annual information form of the Fund discloses the internal controls and risk management processes of the Filer regarding the use of derivatives. The simplified prospectus and annual information form, upon renewal, will include disclosure of the nature of the Exemption Sought.

15. Without the Exemption Sought, the Fund will not have the flexibility to enhance yield and to manage more effectively its exposure under specified derivatives.

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 the Exemption Sought is granted provided that:

(a) when the Fund enters into or maintains a swap position for periods when the Fund would be entitled to receive fixed payments under the swap, the Fund holds:

(i) cash cover in an amount that, together with margin on account for the swap and the market value of the swap, is not less than, on a daily mark-to-market basis, the underlying market exposure of the swap;

(ii) a right or obligation to enter into an offsetting swap on an equivalent quantity and with an equivalent term and cash cover that, together with margin on account for the position, is not less than the aggregate amount, if any, of the obligations of the Fund under the swap less the obligations of the Fund under such offsetting swap; or

(iii) a combination of the positions referred to in subparagraphs (i) and (ii) that is sufficient, without recourse to other assets of the Fund, to enable the Fund to satisfy its obligations under the swap;

(b) when the Fund opens or maintains a long position in a debt-like security that has a component that is a long position in a forward contract, or in a standardized future or forward contract, the Fund holds:

(i) cash cover in an amount that, together with margin on account for the specified derivative and the market value of the specified derivative, is not less than, on a daily mark-to-market basis, the underlying market exposure of the specified derivative;

(ii) a right or obligation to sell an equivalent quantity of the underlying interest of the future or forward contract, and cash cover that, together with margin on account for the position, is not less than the amount, if any, by which the market price of the future or forward contract exceeds the strike price of the right or obligation to sell the underlying interest; or

(iii) a combination of the positions referred to in subparagraphs (i) and (ii) that is sufficient, without recourse to other assets of the Fund, to enable the Fund to acquire the underlying interest of the future or forward contract;

(c) the Fund will not (i) purchase a debt-like security that has an option component or an option; or (ii) purchase or write an option to cover any position under section 2.8(1)(b), (c), (d), (e) and (f) of NI 81-102, if immediately after the purchase or writing of such option, more than 10% of the net assets of the Fund, taken at market value at the time of the transaction, would be made up of (A) purchased debt-like securities that have an option component or purchased options, in each case, held by the Fund for purposes other than hedging, or (B) options used to cover any positions under section 2.8(1)(b), (c), (d), (e) and (f) of NI 81-102;

(d) on the date that is the earlier of (i) the date when an amendment to the annual information form of the Fund is filed for reasons other than the Exemption Sought and (ii) the date that the renewal annual information form of the Fund is receipted, the Fund shall

(i) disclose the nature and terms of the Exemption Sought in the annual information form of the Fund; and

(ii) include a summary of the nature and terms of the Exemption Sought in the simplified prospectus of the Fund under the Investment Strategies section or in the introduction to Part B of the simplified prospectus with a cross reference thereto under the Investment Strategies section for the Fund; and

(e) this decision will terminate on the coming into force of any securities legislation relating to the use as cover of a right or obligation to sell an equivalent quantity of the underlying interest of the standardized future, forward or swap in compliance with section 2.8 of NI 81-102.