National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Mutual funds granted relief from certain restrictions in Regulation 81-102 respecting Mutual Funds on securities lending transactions, including (i) the 50% limit on lending (ii) 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 Counterpart 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 -- 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 securities interest in the collateral received by the fund for the loaned securities -- Regulation 81-102 respecting Mutual Funds.
Applicable Legislative Provisions
Regulation 81-102 respecting Mutual Funds, ss. 2.12(1)12, 2.12(3), 6.8(5), 19.1.
August 3, 2011
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
O'LEARY FUND MANAGEMENT LP
O'LEARY STRATEGIC YIELD ADVANTAGED CLASS
(the Present Fund)
The securities regulatory authority or the regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption under section 19.1 of Regulation 81-102 respecting Mutual Funds (Regulation 81-102) for the Present Fund, together with all other mutual funds now or in the future managed by the Filer in respect of which the representations set out below are applicable (collectively, the Funds and each, a Fund), from the following provisions of Regulation 81-102:
(a) paragraph 2.12(1)(2) of Regulation 81-102 to permit each Fund to enter into securities lending transactions pursuant to a written agreement that does not implement all the requirements of section 2.12 of Regulation 81-102;
(b) paragraph 2.12(1)(12) of Regulation 81-102 to permit each Fund to enter into securities lending transactions even if immediately after a Fund enters into a transaction, the aggregate market value of securities loaned by the Fund exceeds 50% of the total assets of the Fund;
(c) subsection 2.12(3) of Regulation 81-102 to permit each 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 under the transaction; and
(d) subsection 6.8(5) of Regulation 81-102 to permit the collateral delivered to each Fund in connection with a securities lending transaction to not be held under the custodianship of the custodian or sub-custodian of the Fund.
Paragraphs (a) through (d) are collectively referred as 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 Filer has provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System (Regulation 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador (together with Ontario and Quebec, collectively, the Qualifying Jurisdictions); and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined contained in Regulation 14-101 -- Definitions, Regulation 11-102 and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer on behalf of each Fund:
1. The Filer is a limited partnership established under the laws of Ontario, having its head office in Montreal, Quebec, and is registered as an investment fund manager in the Province of Quebec.
2. Each Fund is or will be a mutual fund to which Regulation 81-102 applies. The Present Fund is a class of shares of O'Leary Funds Inc., a mutual fund corporation incorporated under the laws of Canada. Each Fund will be either a mutual fund trust or a class of shares of O'Leary Funds Inc. The securities of each Fund are or will be qualified for distribution in each of the Qualifying Jurisdictions pursuant to a simplified prospectus and annual information form that has been prepared and filed in accordance with the requirements of Regulation 81-101 respecting Mutual Fund prospectus. Each Fund is or will be, accordingly, a reporting issuer in each of the Qualifying Jurisdictions.
3. The Autorité des marchés financiers is the principal regulator for this application, as the head office of the Filer is in the Province of Quebec.
4. The Filer and the Funds are not in default of securities legislation in any of the Qualifying Jurisdictions.
5. Each Fund's investment objectives include seeking the provision of tax-efficient returns. Each Fund's investment objectives state that it uses specified derivatives to seek to provide these returns.
6. Generally, each Fund invests its assets in Canadian equity securities (an Equity Portfolio). The Equity Portfolio of a Fund is not actively managed and its composition varies only in limited circumstances. Each Fund also enters into one or more forward contracts (each, a Forward Contract) with one or more financial institutions (each, a Counterparty) to effectively replace the return on its Equity Portfolio with the return on an underlying interest (such as another mutual fund, one or more indices, or a non actively managed notional basket of different securities) to achieve the Fund's investment objectives. The Present Fund's Counterparty is the Canadian Imperial Bank of Commerce (CIBC). CIBC is also the sub-custodian of the Present Fund.
7. Each Fund pledges its Equity Portfolio to the Counterparty (or the portion thereof that is subject to the relevant Forward Contract with that Counterparty) as collateral security for performance of the Fund's obligations under the Forward Contract with that Counterparty. The Equity Portfolio (or that portion thereof) is held by an entity that is qualified to act as a securities intermediary (a Securities Intermediary) under the Securities Transfer Act, 2006 (Ontario) (the STA) or any equivalent legislation in any of the Qualifying Jurisdictions and that is appointed by the Filer and the Counterparty pursuant to a securities pledge agreement between the Filer and the Counterparty. The securities pledge agreement is known under the STA as a control agreement (the Control Agreement) which establishes the Counterparty's control of the Equity Portfolio for purposes of the STA and the Personal Property Security Act (Ontario).
8. The Securities Intermediary for the Present Fund is CIBC Mellon Trust Company (CIBC Mellon). CIBC Mellon is also the custodian of the Present Fund. The Securities Intermediary need not be the Fund's custodian and it is possible, in the future, that another qualified entity could be appointed as Securities Intermediary.
9. The Filer proposes to engage in securities lending transactions on behalf of each Fund that may represent up to 100% of the net assets of that Fund, in order to earn additional returns for that Fund. The Filer proposes to arrange for the Equity Portfolio of a Fund to be lent to one or more borrowers indirectly, through an agent.
10. Each agent shall be acceptable to the Filer and the Counterparty and shall be either a Canadian financial institution (including a Counterparty) or an affiliate of a Canadian financial institution. The agent of the Present Fund will be CIBC.
11. The Filer will ensure that any agent through which a Fund lends securities maintains appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of Regulation 81-102.
12. A Counterparty must release its security interest in the securities of the Equity Portfolio in order to allow the Fund to lend such securities, but will generally only do so provided that the Fund grants the Counterparty a security interest in the collateral delivered to the Fund under the securities lending transaction (the Delivered Collateral).
13. To facilitate the Counterparty's release of its security interest in the securities of the Equity Portfolio of a Fund, these securities will be loaned only to borrowers that are acceptable to the Filer and the Counterparty, and that have an "approved credit rating" as defined in Regulation 81-102 or whose obligations are unconditionally guaranteed by persons or companies that have such approve credit rating. A borrower may include an affiliate of the Counterparty that is a registered dealer and a member of the Investment Industry Regulatory Organization of Canada (IIROC). To facilitate the Counterparty's control over the Delivered Collateral for purposes of perfecting its security interest in such Delivered Collateral, the Filer will ensure that the Delivered Collateral will be held by the Securities Intermediary under the Control Agreement.
14. The Delivered Collateral received by a Fund and held by the Securities Intermediary, in which the Counterparty will have a security interest, will be in the form of cash, qualified securities and/or other collateral permitted by Regulation 81-102. The Securities Intermediary will not dispose of the non-cash Delivered Collateral.
15. The prospectus of each Fund discloses that the Fund may enter into securities lending transactions. Other than as set forth herein, any securities lending transactions on behalf of a Fund will be conducted in accordance with the provisions of Regulation 81-102.
Each of the Decision Maker 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 Maker under the Legislation is that the Exemption Sought is granted provided that:
(a) with respect to the exemption from paragraph 2.12(1)(12) of Regulation 81-102, each Fund enters into a Forward Contract with an applicable Counterparty and grants that Counterparty a security interest in the securities subject to that Forward Contract 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 2.12(1)(6) of Regulation 81-102; and
(B) is marked to market on each business day in accordance with paragraph 2.12(1)(7) of Regulation 81-102;
(ii) has the rights set forth in paragraphs 2.12(1)(8), 2.12(1)(9) and 2.12(1)(11) of Regulation 81-102;
(iii) complies with paragraph 2.12(1)(10) of Regulation 81-102; and
(iv) lends its securities only to borrowers that are acceptable to the Filer and the Counterparty, and that have an approved credit rating (as defined Regulation 81-102) or whose obligations to the 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 Regulation 81-102, each Fund provides a security interest to the applicable Counterparty in the Delivered Collateral as described in representation 12 above; and
(c) with respect to the exemption from subsection 6.8(5) of Regulation 81-102, each Fund:
(i) provides a security interest to the applicable Counterparty in the Delivered Collateral as described in representation 12 above; and
(ii) the Delivered Collateral is held by an entity qualified to set as a Securities Intermediary under the STA pursuant to a Control Agreement between the Filer, the Counterparty and the Securities Intermediary, as described in representations 13 and 14 above.