Exemption Orders (Discretionary)
MAXXUM FINANCIAL SERVICES CO.
2001 BCSECCOM 459
Headnote:
Mutual Reliance Review System for Exemptive Relief Applications – Relief from the self-dealing prohibitions and reporting requirements of the Act to permit RSP clone fund structure, subject to certain conditions.
Applicable British Columbia Provisions
Securities Act, R.S.B.C. 1996, c. 418, ss. 121(2)(b), 121(2)(c)(ii), 123, 126(a), 126(d) and 130
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, ONTARIO, NOVA SCOTIA and NEWFOUNDLAND
AND
IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF MAXXUM FINANCIAL SERVICES CO.
AND
JANUS RSP AMERICAN VALUE FUND
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of the provinces of British Columbia, Alberta, Saskatchewan, Ontario, Nova Scotia and Newfoundland (the "Jurisdictions") has received an application (the "Application") from Maxxum Financial Services Co. (“Maxxum Financial”), Janus RSP American Value Fund and other mutual funds managed by Maxxum Financial on or after the date of this Decision (defined herein) having an investment objective that is linked to the returns or portfolio of another specified Maxxum Financial managed mutual fund (collectively referred to as the “Top Funds”) (the funds in which such investments are to be made being collectively referred to as the "Underlying Funds") for a decision by each Decision Maker (the “Decision”) pursuant to the securities legislation of the Jurisdictions (the “Legislation”) that:
1. the provisions contained in the Legislation prohibiting a mutual fund from knowingly making or holding an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder shall not apply in respect of investments to be made by the Top Fund in its corresponding Underlying Fund;
2. the provisions contained in the Legislation requiring a management company (or in British Columbia, a mutual fund manager) to file a report relating to a purchase or sale of securities between the mutual fund and any related person or company, or any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, the mutual fund is a joint participant with one or more of its related persons or companies shall not apply in respect of investments to be made by the Top Fund in its corresponding Underlying Fund; and
3. the provisions contained in the Legislation prohibiting a mutual fund from knowingly making an investment in an issuer in which any person or company who is a substantial security holder of the mutual fund, its management company or distribution company has a significant interest shall not apply in respect of investments to be made by the Top Fund in its corresponding Underlying Fund;
AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the “System”), the Ontario Securities Commission is the principal regulator for this application;
AND WHEREAS it has been represented by Maxxum Financial to the Decision Makers that:
1. Maxxum Financial is a general partnership formed under the laws of Ontario. Maxxum Financial is, or will be, the manager and promoter of the Top Funds and the Underlying Funds.
2. The Top Funds and Underlying Funds will be open-end mutual fund trusts established under the laws of the Province of Ontario. The units of such Funds will be qualified for distribution in all of the provinces and territories of Canada pursuant to simplified prospectuses and annual information forms.
3. The Top Funds and Underlying Funds will be reporting issuers in each of the provinces and territories of Canada.
4. The simplified prospectuses will disclose the investment objectives, investment strategies, risks and restrictions of the Top Funds and the Underlying Funds. The investment objective of the Top Funds will include disclosure of the names of the Underlying Funds.
5. Upon the creation of a Top Fund and an Underlying Fund, Maxxum Financial will invest seed money so that for a short period of time Maxxum Financial will have a significant interest in, and be a substantial securityholder of, both the Top Fund and the Underlying Fund.
6. The investment objectives of the Underlying Funds will be achieved through investment primarily in foreign securities.
7. To achieve their investment objective, the Top Funds will invest their assets in securities such that their units will, in the opinion of tax counsel to the Top Funds, be “qualified investments” for registered retirement savings plans, registered retirement income funds, and deferred profit sharing plans (collectively, “Registered Plans”) under the Income Tax Act (Canada) (the “Tax Act”). This will primarily be achieved through the implementation of a derivative strategy that provides a return linked to the returns of the Underlying Fund. The Top Fund will also invest a portion of its assets directly in securities of the Underlying Fund. This investment will at all times be below the maximum foreign property limit described for Registered Plans (the “Permitted Limit”).
8. The amount of direct investment by each Top Fund in its corresponding Underlying Fund will be adjusted from time to time so that, except for the transitional cash, the aggregate of the derivative exposure to, and direct investment in, the Underlying Fund will equal 100% of the assets of that Top Fund.
9. Except to the extent evidenced by this Decision and specific approvals granted by the Canadian securities administrators pursuant to National Instrument 81-102 Mutual Funds (“NI 81-102"), the investment by each Top Fund in the relevant Underlying Fund has been and will be structured to comply with the investment restrictions of the Legislation and NI 81-102.
10. In the absence of this Decision, pursuant to the Legislation, each of the Top Funds is prohibited from (a) knowingly making an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial securityholder; and (b) knowingly holding an investment referred to in subsection (a) hereof. As a result, in the absence of this Decision, the Top Funds would be required to divest themselves of any investments referred to in subsection (a) herein.
11. In the absence of this Decision, the Legislation requires Maxxum Financial to file a report on every purchase or sale of securities of the Underlying Funds by the Top Funds.
12. The Top Funds’ investment in or redemption of units of their corresponding Underlying Funds will represent the business judgment of “responsible persons” (as defined in the Legislation”) uninfluenced by considerations other than the best interests of the Top Funds.
AND WHEREAS pursuant to the System this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the “Decision”);
AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met;
THE DECISION of the Decision Makers pursuant to the Legislation is that the applicable requirements shall not apply so as to prevent a Top Fund from making or holding an investment in securities of an Underlying Fund or require Maxxum Financial to file a report relating to the purchase or sale of such securities.
PROVIDED IN EACH CASE THAT:
1. the Decision, as it relates to the jurisdiction of a Decision Maker, will terminate one year after the publication in final form of any legislation or rule of that Decision Maker dealing with the matters in section 2.5 of NI 81-102; and
2. the Decision shall only apply if, at the time a Top Fund makes or holds an investment in an Underlying Fund, the following conditions are satisfied:
a. the securities of both the Top Fund and the Underlying Fund are being offered for sale in the jurisdiction of the Decision Maker pursuant to a simplified prospectus and annual information form which has been filed with and accepted by the Decision Maker;
b. the investment by the Top Fund in the Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;
c. the investment objective of the Top Fund discloses that the Top Fund invests directly and indirectly (through derivative exposure) in the Underlying Fund, the name of the Underlying Fund and that the Top Fund is fully eligible for registered plans.
d. the Underlying Fund is not a mutual fund whose investment objective includes investing directly or indirectly in other mutual funds;
e. the Top Fund restricts its direct investment in the Underlying Fund to a percentage of its assets that is within the Permitted Limit;
f. there are compatible dates for the calculation of the net asset value of the Top Fund and the Underlying Fund for the purpose of the issue and redemption of securities of such mutual funds;
g. no sales charges are payable by the Top Fund in relation to its purchases of securities of the Underlying Fund;
h. no redemption fees or other charges are charged by the Underlying Fund in respect of the redemption by the Top Fund of securities of the Underlying Fund owned by the Top Fund;
i. no fees and charges of any sort are paid by the Top Fund and the Underlying Fund, by their respective managers or principal distributors, or by any affiliate or associate of any of the foregoing entities to anyone in respect of the Top Fund’s purchase, holding or redemption of the securities of the Underlying Fund;
j. the arrangements between or in respect of the Top Fund and the Underlying Fund are such as to avoid the duplication of management fees;
k. any notice provided to securityholders of the Underlying Fund, as required by applicable laws or the constating documents of the Underlying Fund, has been delivered by the Top Fund to its securityholders;
l. all of the disclosure and notice material prepared in connection with a meeting of securityholders of the Underlying Fund and received by the Top Fund has been provided to its securityholders, the securityholders have been permitted to direct a representative of the Top Fund to vote its holdings in the Underlying Fund in accordance with their direction, and the representative of the Top Fund has not voted its holdings in the Underlying Funds except to the extent the securityholders of the Top Fund have directed;
m. in addition to receiving the annual and, upon request, the semi-annual financial statements of the Top Fund, securityholders of the Top Fund have received the annual and, upon request, the semi-annual financial statements, of the Underlying Fund in either a combined report, containing financial statements of the Top Fund and the Underlying Fund, or in a separate report containing the financial statements of the Underlying Fund; and
n. to the extent that the Top Fund and the Underlying Fund do not use a combined simplified prospectus and annual information form containing disclosure about the Top Fund and the Underlying Fund, copies of the simplified prospectus and annual information form of the Underlying Fund have been provided upon request to securityholders of the Top Fund and this right is disclosed in the simplified prospectus of the Top Fund.
DATED March 19, 2001.
J.A. Geller Stephen N. Adams