National Policy 11-203 Process for Exemptive Relief applications in Multiple Jurisdictions - exemption from self-dealing prohibition in National Instrument 81-102 Mutual Funds to permit the Fund to sell floating rate notes to the Manager or its parent company at a price per security equal to cost plus accrued interest.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 4.2, 19.1.
September 14, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC and ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
IA CLARINGTON INVESTMENTS INC.
IA CLARINGTON MONEY MARKET FUND
(the Fund and, collectively with the Manager,
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Fund from the prohibition in section 4.2 of National Instrument 81-102 Mutual Funds (NI 81-102) against selling a security in the portfolio of the Fund to the Manager or an affiliate of the Manager (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers is the principal regulator for this application;
(b) the Filers have 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, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territories and Nunavut; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.
In this decision, the following additional terms have the following meanings:
ABCP means asset-backed commercial paper.
Floating Rate Notes means the floating rate notes issued by Superior Trust and currently owned by the Fund.
IAIM means Industrial Alliance Investment Management Inc.
Industrial Alliance means Industrial Alliance Insurance and Financial Services Inc.
IRC means the independent review committee established in accordance with NI 81-107.
NI 81-107 means National Instrument 81-107 -- Independent Review Committee for Investment Funds.
This decision is based on the following facts represented by the Filers:
1. The Manager is a corporation established under the laws of Canada. The head office of the Manager is located in Quebec City, Quebec.
2. IA Clarington Investment Inc. is the manager of the Fund.
3. The Fund is a reporting issuer in the Jurisdictions and is not in default of the Legislation.
4. The Fund is a "money market fund" as defined under NI 81-102.
5. IAIM is the portfolio adviser of the Fund.
6. Industrial Alliance calculates the net asset value of the Fund.
7. The Manager and IAIM are each affiliates of Industrial Alliance.
8. The Fund owns the Floating Rate Notes.
9. The Floating Rate Notes were originally issued as a commercial paper instrument. Superior Trust was not subject to the Montreal Accord in August 2007, or to the restructuring process initiated thereby. Following the ABCP collapse in August 2007, the Superior Trust commercial paper was restructured, pursuant to a voluntary restructuring proposal approved by its noteholders in July 2008, as a floating rate note with a maturity date equivalent to the maturity date of the underlying assets.
10. The "money market fund" definition in NI 81-102 requires that the Fund have all of its assets invested in a specified list of investments, including floating rate evidences of indebtedness if the principal amounts of the obligations will continue to have a market value of approximately par at the time of each change in the rate to be paid to holders of the evidences of indebtedness.
11. When acquired by the Fund, the Floating Rate Notes had a value of approximately par and IAIM, as portfolio adviser of the Fund, expected that the notes would continue to have a value of approximately par.
12. As there is currently no market for the Floating Rate Notes, the Manager is unable to conclude that the market value of the Floating Rate Notes would be other than par at the next interest rate setting date. However, the Manager has determined that it is extremely unlikely that the Floating Rate Notes would trade at an amount approximately equal to par at the next interest rate setting date.
13. In order to ensure that the Fund could continue to value the Floating Rate Notes at an amount equal to cost plus accrued interest, the Fund entered into a purchase agreement (Purchase Agreement) with the Manager, wherein the Manager agreed to purchase the Floating Rate Notes from the Fund if certain conditions are met.
14. The Purchase Agreement obligates the Manager, provided all stated conditions are met, to purchase the Floating Rate Notes from the Fund at an amount equal to cost plus accrued interest. If the Fund disposes of the Floating Rate Notes, the Purchase Agreement obligates the Manager to make up the difference between the price received for the securities and the price guaranteed under the Purchase Agreement.
15. The Floating Rate Notes continue to be valued at cost plus accrued interest on the strength of the Purchase Agreement, which guarantees that the Fund will not receive less than cost plus accrued interest on any disposition of the Floating Rate Notes.
16. Given the Manager's concerns about the value of the Floating Rate Notes and in the absence of a liquid market in which to sell the Floating Rate Notes, the Fund wishes to sell, and the Manager wishes to purchase, the Floating Rate Notes from the Fund. In the alternative, Industrial Alliance may purchase some or all of the Floating Rate Notes from the Fund.
17. The Manager and Industrial Alliance have determined that the appropriate method to value the Floating Rate Notes is cost plus accrued interest, which is the valuation methodology used in respect of other short term investments held by the Fund.
18. In order to ensure an appropriate level of confidence in the Fund, the Manager and/or Industrial Alliance propose to acquire all of the Floating Rate Notes held as of the date of this decision, at a price per security equal to cost plus accrued interest. Such transactions will occur as soon as practicable following the date of this decision and in any event will occur no later than September 30, 2009.
19. Consideration for the Floating Rate Notes will be paid in cash to the Fund.
20. The Fund is unable to rely on section 4.3 of NI 81-102 to sell the Floating Rate Notes to the Manager and/or Industrial Alliance, because neither of the Floating Rate Notes has its price reported on an available public quotation in common use.
21. Pursuant to section 5.2 of NI 81-107, the IRC of the Fund has approved the transactions.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:
(a) the Filers determine that the sale is in the best interests of the Fund;
(b) the sale occurs as soon as practicable following the date of this decision and in any event no later than September 30, 2009; and
(c) the price per security is equal to cost plus accrued interest.