Scotia Asset Management L.P.

Decision

Headnote

National Policy 11-203 -- Process for Exemptive Relief applications in Multiple Jurisdictions Middle funds in three-tier structure granted relief from seed capital requirements in subsection 3.1(1) of NI 81-102-- Mutual funds granted relief from certain restrictions in NI 81-102 on securities lending transactions, including (i) the 50% limit on lending; (ii) the requirement to use the fund's custodian or sub-custodian as lending agent; and (iii) the requirement to hold the collateral during the course of the transaction -- Mutual funds invest their assets in a basket of Canadian equity securities that are pledged to a Counterparty for performance of the funds' obligations under forward contracts giving the funds exposure to underlying interests -- Mutual funds wanting to lend 100% of the basket of Canadian equity securities -- not practical for custodian to act as securities lending agent as it does not have control over the Canadian equity securities -- counterparties must release its security interest in the Canadian equity securities in order to allow the funds to lend such securities, provided the funds grant the Counterparties a security interest in the collateral held by the fund for the loaned securities -- National Instrument 81-102 Mutual Funds

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.12(1)1, 2.12(1)2, 2.12(1)12, 2.12(3), 2.15, 2.16, 3.1(1), 6.8(5), 19.1.

May 15, 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

SCOTIA ASSET MANAGEMENT L.P.

(SAM)

AND

THE UNDERLYING FUNDS (as defined below)

(collectively, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision (the "Exemptions Sought") under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting:

(a) the Filers from the requirements of subsection 3.1(1) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit the filing of a simplified prospectus for an Underlying Fund notwithstanding that the investment required under paragraph 3.1(1)(a) of NI 81-102 will be provided, and the securities beneficially-owned, by one or more Funds and not by one of, or a combination of, the persons named in paragraph 3.1(1)(a) of NI 81-102 (the "Seed Capital Relief"); and

(b) the Underlying Funds, together with all other mutual funds now or in the future managed by SAM or an affiliate thereof in respect of which the representations set out below under "Facts -- Securities Lending Funds" are applicable (each a "Securities Lending Fund" and collectively, the "Securities Lending Funds"), from:

(i) paragraph 2.12(1)1 of NI 81-102 to permit each Securities Lending Fund to enter into securities lending transactions that will not be administered in compliance with all the requirements of sections 2.15 and 2.16 of NI 81-102;

(ii) paragraph 2.12(1)2 of NI 81-102 to permit each Securities Lending Fund to enter into written agreements pertaining to its securities lending transactions that implement the requirements of section 2.12 of NI 81-102, except as set out herein;

(iii) paragraph 2.12(1)12 of NI 81-102 to permit each Securities Lending Fund to enter into securities lending transactions in which the aggregate market value of all securities loaned by the Securities Lending Fund exceeds 50 percent of the total assets of the Securities Lending Fund;

(iv) subsection 2.12(3) of NI 81-102 to permit each Securities Lending Fund, during the term of a securities lending transaction, to not hold or to dispose of any non-cash collateral delivered to it as a collateral in the transaction;

(v) section 2.15 of NI 81-102 to permit each Securities Lending Fund to appoint an agent (the "Agent"), other than the custodian or sub-custodian of the Securities Lending Fund, as agent for administering the securities lending transactions entered into by the Securities Lending Fund;

(vi) section 2.16 of NI 81-102 to the extent this section contemplates that securities lending transactions be entered into through an agent appointed under section 2.15 of NI 81-102; and

(vii) subsection 6.8(5) of NI 81-102 to permit the collateral delivered to each Securities Lending Fund in connection with a securities lending transaction to not be held under the custodianship of the custodian or a sub-custodian of the Securities Lending Fund,

(collectively, the "Securities Lending Relief").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(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 respect of the Exemption Sought in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions).

Interpretation

Defined terms in National Instrument 14-101 -- Definitions, MI 11-102 or NI 81-102 have the same meanings if used in this decision, unless otherwise defined.

For purposes of this decision:

"Funds" means Scotia Short Term Yield Class, Scotia Conservative Government Bond Capital Yield Class, Scotia Canadian Corporate Bond Capital Yield Class, Scotia INNOVA Income Portfolio Class, Scotia INNOVA Balanced Income Portfolio Class, Scotia INNOVA Balanced Growth Portfolio Class, Scotia INNOVA Growth Portfolio Class and any other similar open-end investment classes of Scotia Corporate Class Inc. of which SAM or an affiliate thereof will be the investment fund manager in the future and which is permitted by its investment strategies to seek exposure to fixed-income securities through investments in other mutual funds.

"Underlying Funds" means Scotia Canadian Income LP, Scotia Conservative Government Bond LP and Scotia Canadian Corporate Bond LP and any other mutual fund that is, or in the future becomes, managed by SAM or an affiliate thereof and which seeks to provide exposure to a portfolio of fixed income securities by investing primarily in a basket of equity securities issued by Canadian public issuers and by entering into one or more specified derivatives contracts (each a "Forward Agreement" and collectively, the "Forward Agreements") with one or more counterparties (each a "Counterparty") in order to obtain exposure to a Reference Fund.

"Reference Funds" means Scotia Private Short-Mid Government Bond Pool, Scotia Canadian Income Pool, Scotia Canadian Corporate Bond Pool and any other mutual fund that is, or in the future becomes, managed by SAM or an affiliate thereof and that invests in a portfolio of fixed income securities.

Representations

This decision is based on the following facts represented by the Filers:

1. SAM is an Ontario limited partnership, which is wholly-owned, directly or indirectly, by The Bank of Nova Scotia ("BNS").

2. The general partner of SAM is Scotia Asset Management G.P. Inc., an Ontario corporation wholly-owned, directly or indirectly, by BNS with its head office in Toronto, Ontario.

3. SAM is registered as an investment fund manager, exempt market dealer and commodity trading manager in Ontario and as a portfolio manager in each of the provinces and territories of Canada, excluding the Northwest Territories and Nunavut.

4. SAM, or an affiliate, is or will be the investment fund manager to each of the Funds, Underlying Funds and Reference Funds.

5. SAM is not in default of the Legislation or the securities legislation of any Passport Jurisdiction.

The Funds

6. Each Fund is or will be:

(a) an open-end investment class of Scotia Corporate Class Inc. (the "Corporation"), a mutual fund corporation to be incorporated under the laws of Canada in respect of which SAM will be the investment fund manager;

(b) a reporting issuer under the securities laws of some or all of the provinces and territories of Canada;

(c) governed by the provisions of NI 81-102; and

(d) qualified for distribution in some or all provinces and territories of Canada under a simplified prospectus and annual information form prepared in accordance with National Instrument 81-101 -- Mutual Fund Prospectus Disclosure ("NI 81-101") and filed with and receipted by the securities regulators in the applicable jurisdictions.

7. Each Fund has the ability to invest in securities of one or more Underlying Funds from time to time in order to obtain exposure to a portfolio of fixed income securities.

8. Each Fund will only invest in securities of an Underlying Fund if such investment is permitted by, and consistent with, the investment objectives of that Fund. Investments by the Funds in the securities of the Underlying Funds will be made in accordance with the requirements of section 2.5 of NI 81-102.

The Underlying Funds

9. Each Underlying Fund is or will be:

(a) a newly-created open-ended mutual fund organized as a limited partnership governed by the laws of Ontario pursuant to a limited partnership agreement;

(b) a reporting issuer under the securities laws of some or all of the provinces and territories of Canada;

(c) governed by the provisions of NI 81-102; and

(d) qualified for distribution in some or all provinces and territories of Canada under a simplified prospectus and annual information form prepared in accordance with NI 81-101.

10. Each Underlying Fund will be organized as a limited partnership (and not as a trust) because there is no intention to distribute securities of an Underlying Fund to investors other than to the Corporation in respect of one or more class of mutual fund shares of the Corporation. An Underlying Fund organized as a trust is not tax efficient in these circumstances, because to obtain flow-through treatment of income for tax purposes a trust must have at least 150 unitholders. A limited partnership, however, can provide flow-through tax treatment, without the necessity of having 150 holders of its securities.

11. SAM is of the view that organizing an Underlying Fund as a limited partnership (as opposed to a trust) does not pose any significant incremental risks to the shareholders of the Corporation.

12. Pursuant to applicable partnership law, a limited partner may lose its limited liability by taking part in the control of the business of a limited partnership. However, SAM will act as the investment fund manager and portfolio manager of both the Corporation and each Underlying Fund and as such will direct the business, operations and affairs of each entity. SAM will clarify in its relations on behalf of an Underlying Fund that it is not acting on behalf of any limited partner when acting as investment fund manager or portfolio manager of an Underlying Fund. Since the Corporation will not take part in the control of the business of any Underlying Fund, there should not be a risk of the Corporation losing its limited liability on this basis.

13. It is also the case that, where a limited partner has received the return of all or part of its contribution to a limited partnership, the limited partner will be liable to the limited partnership or, where the limited partnership is dissolved, to its creditors for any amount, not in excess of the amount returned with interest, necessary to discharge the liabilities of the limited partnership to creditors who extend credit or whose claims otherwise arose before the return of the contribution. Given the proposed activities of the Underlying Funds, however, all of which will be subject to NI 81-102 (subject to any exemptions therefrom that may be available under applicable securities legislation or granted by the securities regulatory authorities), it is difficult to envisage circumstances in which an Underlying Fund will not have the assets necessary to discharge its liabilities. Further, SAM does not intend to return contributions that would lead to the foregoing type of liability. Moreover, any contracts that an Underlying Fund enters will contain a limitation of liability, pursuant to which the Counterparty to the contract will agree that its only recourse will be to the assets of the Underlying Fund. While this limitation will not apply in the circumstances described above, for the foregoing reasons SAM does not consider this to be a significant risk. In any event, as the Corporation is a corporation, the liability of its shareholders will be limited to the amount of their investment in the Corporation.

14. The investment objective of Scotia Conservative Government Bond LP is to provide income and modest capital gains by primarily providing exposure to bonds and treasury bills issued or guaranteed by Canadian federal, provincial and municipal governments or agency of such governments, and money market instruments of Canadian issuers, including commercial paper, bankers' acceptances, asset-backed or mortgage-backed securities and guaranteed investment certificates. The Underlying Fund will obtain such exposure using forward contracts, deposit notes or other derivatives to gain exposure to the return of Scotia Private Short-Mid Government Bond Pool (the "Reference Fund").

15. The investment objective of Scotia Canadian Corporate Bond LP is to provide a high level of income and modest capital gains by primarily providing exposure to bonds issued by Canadian corporations. The Underlying Fund will obtain such exposure using forward contracts, deposit notes or other derivatives to gain exposure to the return of Scotia Private Canadian Corporate Bond Pool (the "Reference Fund").

16. The investment objective of Scotia Canadian Income LP is to provide income returns with a high level of income and modest capital gains by gaining exposure primarily to bonds and treasury bills issued or guaranteed by Canadian federal, provincial and municipal governments and Canadian corporations, Canadian money market instruments and high-quality dividend-paying shares of Canadian corporations. The Underlying Fund will obtain such exposure using forward contracts, deposit notes or other derivatives to gain exposure to the return of Scotia Canadian Income Fund (the "Reference Fund").

17. The investment objectives of each future Underlying Fund will be determined in the future and will be consistent with the investment objectives of the related Reference Fund.

18. Each Underlying Fund is, and future Underlying Fund will be, a "clone fund" as defined in NI 81-102.

19. In seeking its investment objective, an Underlying Fund may obtain exposure to a Reference Fund by investing primarily in a basket of equity securities issued by Canadian public issuers and by entering into one or more Forward Agreements with one or more Counterparties.

20. SAM expects that gains derived from the disposition of securities under the Forward Agreements will be treated as capital gains and will be allocated to Funds which are limited partners in the Underlying fund, as capital gains for income tax purposes.

21. All aspects of the Forward Agreement will comply with the requirements of NI 81-102 relating to the use of specified derivatives by mutual funds.

Reference Funds

22. Each Reference Fund is or will be:

(a) an open-end mutual fund established under the laws of Ontario in respect of which SAM or an affiliate thereof acts as investment fund manager;

(b) a reporting issuer under the securities laws of some or all of the provinces and territories of Canada;

(c) governed by the provisions of NI 81-102; and

(d) qualified for distribution in some or all provinces and territories of Canada under a simplified prospectus and annual information form prepared in accordance with NI 81-101.

23. Each Reference Fund invests in a portfolio of fixed-income securities.

24. The Reference Funds are not in default of the Legislation or the securities legislation of any Passport Jurisdiction.

Seed Capital of the Underlying Funds

25. One or more Funds may invest in an Underlying Fund. SAM or an affiliate will invest more than $150,000 in a Fund that intends to make an investment in an Underlying Fund. The amount above $150,000 to be invested by SAM or an affiliate in each such Fund will be used by such Fund to make an investment in units of one or more Underlying Funds such that after such investments, each Underlying Fund will have an amount of not less than $150,000 (the "Underlying Fund Seed Capital") and each Fund will have an amount of not less than $150,000 (the "Fund Seed Capital"). No Fund will redeem any of the mutual fund shares of the Fund that relate to the Fund Seed Capital and no Underlying Fund will redeem any of the units of the Underlying Fund that relate to the Underlying Fund Seed Capital until at least $500,000 has been received by the Fund from investors other than SAM or an affiliate. Initially, the Underlying Fund Seed Capital amount will be invested directly in fixed income securities until the first derivatives transaction is entered into.

Securities Lending Funds

26. Each Securities Lending Fund will be (a) an open-end mutual fund established under the laws of Ontario; (b) a reporting issuer under the Legislation and each Passport Jurisdiction; (c) initially qualified for distribution in Ontario and each Passport Jurisdiction pursuant to a simplified prospectus and annual information form that has been prepared and filed in accordance with the Legislation; and (d) a mutual fund to which NI 81-102 applies.

27. Each Securities Lending Fund's investment objectives will include seeking the provision of returns similar to those of a specific type of investment. Each Securities Lending Fund's investment objectives will state that it may use specified derivatives to achieve such investment objectives.

28. A Securities Lending Fund may pursue its investment objectives by means of specified derivatives. Generally, each Securities Lending Fund will invest its assets in a portfolio (an "Equity Portfolio") consisting of securities of Canadian public issuers that are Canadian securities for the purposes of the Income Tax Act (Canada). The Equity Portfolio of a Securities Lending Fund will generally be a portfolio that is not actively managed except in limited circumstances. Each Securities Lending Fund will also enter into one or more Forward Agreements, with one or more Counterparties to effectively replace the economic return on its Equity Portfolio with the economic return on an underlying interest (such as another mutual fund, one or more indices or a notional basket of different securities) to achieve the Securities Lending Fund's investment objectives.

29. Each Securities Lending Fund will pledge its Equity Portfolio to its Counterparty (or the portion thereof that is subject to the relevant Forward Agreement with that Counterparty) as collateral security for performance of the Securities Lending Fund's obligations under its Forward Agreement with that Counterparty. The Equity Portfolio (or that portion thereof that has been pledged) will be held by the Counterparty as security for the Securities Lending Fund's obligations under the applicable Forward Agreement.

30. SAM may propose to engage in securities lending transactions on behalf of a Securities Lending Fund that may represent up to 100 percent of the net assets of that Securities Lending Fund, in order to earn additional returns for that Securities Lending Fund. The Filer proposes to arrange for the Equity Portfolio (or a portion thereof) to be lent to one or more borrowers, indirectly through one or more Agents, other than the Securities Lending Fund's custodian or sub-custodian.

31. Each Agent shall be acceptable to the Securities Lending Fund and Counterparty and shall be either a Canadian financial institution or an affiliate thereof. It is not practical for a Securities Lending Fund's custodian or sub-custodian to act as an Agent with respect to the Securities Lending Fund's securities lending transactions as the custodian or sub-custodian will not have control over the Securities Lending Fund's Equity Portfolio because the Equity Portfolio (or a portion thereof) will be pledged as described in paragraph 29 above. SAM will ensure that any Agent through which a Securities Lending Fund lends securities maintains appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.

32. A Counterparty must release its security interest in the securities in the Equity Portfolio of a Securities Lending Fund in order to allow the Securities Lending Fund to lend such securities, but will generally only do so provided that the Securities Lending Fund grants to it a security interest in the collateral held by the Securities Lending Fund pursuant to the securities lending transaction.

33. To facilitate the Counterparty's release of its security interest in the securities of the Equity Portfolio of a Securities Lending Fund, securities in the Equity Portfolio will be loaned only to borrowers that are acceptable to the Securities Lending Fund and the Counterparty, and that have an approved credit rating or whose obligations to the Securities Lending Fund are fully and unconditionally guaranteed by persons or companies that have such a credit rating. A borrower may include an affiliate of the Counterparty. Whether a borrower is an affiliate or is not an affiliate of the Counterparty or an Agent will not affect the revenues from securities lending transactions received by the Securities Lending Fund. To facilitate the Counterparty's perfection of its security interest in the collateral for the loaned securities, SAM will ensure that such collateral is held by a registered dealer and member of the Investment Industry Regulatory Organization of Canada ("IIROC") or a custodian that meets the requirements of section 6.2 of NI 81-102.

34. Revenue generated from a Securities Lending Fund's securities lending transactions will be paid to such Fund.

35. The collateral received by a Securities Lending Fund in respect of a securities lending transaction, and in which the Counterparty will have a security interest, will be in the form of cash, qualified securities or other collateral permitted by paragraph 2.12(1)6 of NI 81-102, other than collateral described in subparagraph 2.12(1)6(d) or in paragraph (b) of the definition of "qualified security". The non-cash collateral will be held by the Agent in the name of the Counterparty and will not be reinvested in any other types of investment products.

36. The prospectus and annual information form of each Securities Lending Fund will disclose that the Securities Lending Fund may enter into securities lending transactions. Other than as set forth herein, any securities lending transactions on behalf of a Securities Lending Fund will be conducted in accordance with the provisions of NI 81-102.

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 Exemptions Sought are granted; provided that:

(a) with respect to the exemption from paragraph 2.12(1)12 of NI 81-102, each Securities Lending Fund enters into a Forward Agreement with an applicable Counterparty and grants that Counterparty a security interest in the securities subject to that Forward Agreement and, in connection with a securities lending transaction relative to those securities,

(i) receives the collateral that

A. is prescribed by paragraphs 2.12(1)3 to 6 of N1 81-102 other than collateral described in subparagraph 2.12(1)6(d) or in paragraph (b) of the definition of "qualified security"; and

B. is marked to market on each business day in accordance with paragraph 2.12(1)7 of NI 81-102;

(ii) has the rights set forth in paragraphs 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81-102;

(iii) complies with paragraph 2.12(1)10 of NI 81-102; and

(iv) lends its securities only to borrowers that are acceptable to the Securities Lending Fund and the Counterparty, and that have an approved credit rating or whose obligations to the Securities Lending Fund are fully and unconditionally guaranteed by persons or companies that have such a credit rating;

(b) with respect to the exemption from subsection 2.12(3) of NI 81-102, each Securities Lending Fund provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 32;

(c) with respect to the exemption from subsection 2.15 of NI 81-102:

(i) SAM and the Securities Lending Fund enter into a written agreement with the Agent that complies with each of the requirements set forth in subsection 2.15(4) of NI 81-102;

(ii) the Agent administering the securities lending transaction of each Securities Lending Fund:

A. is in compliance with the standard of care prescribed in subsection 2.15(5) of NI 81-102; and

B. shall be acceptable to the Securities Lending Fund and Counterparty and shall either be a bank or trust company described in paragraphs 1 or 2 of section 6.2 of NI 81-102 or an investment bank affiliate of such bank or trust company that is registered as an investment dealer or in an equivalent category of registration;

(d) with respect to the exemption from section 2.16 of NI 81-102, the Filer and the Securities Lending Fund comply with the requirements of section 2.16 of NI 81-102 as if the Agent appointed by the Filer were the agent contemplated in that section; and

(e) with respect to the exemption from subsection 6.8(5) of NI 81-102, each Securities Lending Fund:

(i) provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 32; and

(ii) the collateral delivered to the Securities Lending Fund pursuant to the securities lending transaction is held by a registered dealer and member of the IIROC or a custodian that meets the requirements of section 6.2 of NI 81-102, as described in representation 33.

"Raymond Chan"
Manager, Investment Funds
Ontario Securities Commission