POSSIBLE CONFLICTS OF INTEREST

Canadian securities laws require the Manager to take reasonable steps to identify and respond to existing and reasonably foreseeable material conflicts of interest in its clients’ best interests and inform clients about them, including how the conflicts might impact clients and how the Manager plans to address them in the best interests of its clients. This section describes the material conflicts of interest that we have identified that arise or may arise in the Manager’s capacity as a portfolio manager for our managed account clients, investment fund manager and portfolio advisor of our funds and in our capacity as an exempt market dealer for clients that purchase securities of our private equity funds through the Manager. 

What is a Conflict of Interest?

A conflict of interest may arise in circumstances where (i) the Manager’s interests or those of its representatives and the interests of a client may be inconsistent or different, (ii) the Manager or its representatives may be influenced to put its or their interests ahead of a client’s interests, or (iii) monetary or non-monetary benefits available to the Manager or its representatives, or potential negative consequences for the Manager or its representatives, may compromise the trust that a client has in the Manager or its representatives.

How do we address Conflicts of Interest?

The Manager and its representatives always seek to resolve all material conflicts of interest in a client's best interest. Where it is determined that a material conflict of interest cannot be resolved in a client's best interest, the Manager and its representatives will avoid that conflict.

The Manager has adopted policies and procedures to assist it in identifying and controlling any conflicts of interest that the Manager and its representatives may face.

Material Conflicts of Interest

A description of the material conflicts of interest that the Manager has identified, the potential impact and risk that each conflict of interest could pose, and how each conflict of interest has been or will be addressed, is set out below. Please note that the conflicts of interest are listed in alphabetical order and not in order of importance. 

Allocation of expenses amongst client accounts and Pooled Funds

There is a conflict of interest between the interests of the Manager and its clients in relation to the allocation of expenses among Client Accounts and the firm’s Pooled Funds. This conflict creates a risk that the Manager may allocate expenses to Client Accounts or funds that are not appropriate, or may allocate expenses disproportionately to certain Client Accounts or funds or otherwise in a manner that is not fair and equitable to all clients and funds.

To manage this conflict, each Client Account and fund pays its own operating expenses and fees of third-party service providers. The Manager has established policies and procedures to ensure that expenses charged to Client Accounts and the firm’s Pooled Funds are reasonable and appropriate and the method of allocating such expenses amongst Client Accounts and the funds is fair and equitable to all Client Accounts and the funds. Non portfolio specific operating expenses that cannot be directly linked to a particular Client Account or Pooled Fund are allocated fairly amongst respective Client Accounts and the funds that used the services, typically based on the respective net asset values.

Similarly, if a fund has more than one series of units, the common expenses will be shared fairly amongst such series, typically based on the respective net asset values of the relevant series.

Fee schedules may incorporate a base fee percentage plus a periodic adjustment based on positive performance in excess of the benchmark or hurdle rate. All fees are set out in the funds’ offering documents, or the subscription agreement you sign with us, as applicable. As management and performance fees may be paid to related parties, there is a potential conflict in the valuation of such assets, as our perceived lack of independence and objectivity could lead us to determine performance fees to the advantage of our own related parties which are receiving fees from the funds, and thus interfere with our respective duty to clients.

Broker-dealer selection/best execution

There is a potential conflict that could arise in relation to the decision made by the sub-advisors with respect to the to the execution of transactions for Client Accounts and the firm’s funds, including the selection of execution venues, the broker-dealer and the negotiation, where applicable, of commissions or spreads. This conflict creates a risk that sub-advisors execute trades with broker-dealers for relationship or other reasons and pay higher commissions or other fees than those that may be charged by other broker-dealers or otherwise do not obtain best execution for clients or the funds.

To manage this conflict, the sub-advisors have written policies for best execution. The sub-advisors employ trading techniques, methods and venues in an effort to seek the best overall price and execution available to meet its clients’ specific needs. The subadvisor’s overall goal is to execute client and fund transactions at the most favorable prices and in the most efficient manner possible.

In connection with the selection of brokers and the placing of orders for equity transactions, the subadvisors seek the best overall price and execution available from responsible brokerage firms, taking into account all factors deemed relevant, including by way of illustration, price, the size of the transaction, the nature of the market or the security, the amount of the commission, the timing and impact of the transaction taking into account market prices and trends, the reputation, the need for anonymity in the market, experience and financial stability of the brokers or dealers involved, and the quality of services rendered by the broker in other transactions.

The sub-advisors maintain an approved list of brokers. The performance of brokers is monitored regularly, and brokers are evaluated based on an assessment of execution, service and value provided. The commissions generated are reviewed at least annually to ensure that brokerage commissions paid align with the brokers’ ranking, and to identify any adjustments that may be required as a result of changes in service levels and/or execution.

While commission rates are monitored as an aspect of best execution, the sub-advisors may determine that the broker charging the lowest commission may not necessarily provide the best execution for a client. Commissions are only one factor considered when determining overall transaction costs. Where the sub-advisor uses soft dollars, the sub-advisor may cause a client to pay a broker that provides brokerage and/or research services to the subadvisor an amount of commissions for effecting a securities transaction for the client in excess of the amount of commissions other brokers or dealers would have charged for the transaction. This can occur only if the sub-advisor determines in good faith that the amount of the commission to be paid is reasonable in relation to the value of the brokerage and research services provided by the broker either in terms of a particular transaction or the subadvisors’ overall responsibilities for discretionary accounts.

For fixed income fund transactions, the Manager and sub-advisors must seek best execution for all Client Accounts and Pooled Funds by executing at the most favourable prices and in the most effective manner possible. The sub-advisors utilize an order process to execute new issue trades and either an order process or a competitive bidding process to execute secondary market trades. The sub-advisor will execute trades only with brokers that have been reviewed and approved by the sub-advisor’s appropriate designee.

In determining which venue or venues and process (order approach or competitive bids/offers) to employ to effect secondary market trades, traders may consider factors such as execution price, speed of execution, the size of the order(s), the trading characteristics of the security involved, execution capability, a broker-dealer’s status as primary market maker in the security or other factors deemed relevant by the trader.

The Manager receives a quarterly certification from the sub-advisors confirming that they have complied with their best execution policy, trade allocation and soft dollars.

Brokerage arrangements and soft dollars

The Manager and sub-advisors may use brokerage commissions generated by client accounts (or “soft dollars”) in accordance with National Instrument 23-102 Use of Client Brokerage Commissions (“NI 23-102”). The Manager has adopted a Soft Dollar Policy. In certain circumstances, the Manager and/ or the sub-advisors will receive the benefit of soft dollars in connection with trades in securities on behalf of clients. Soft dollars create a perceived conflict of interest to the extent that the Manager or the sub-advisors may use soft dollars for services that benefit the Manager or the sub-advisors. Brokerage commissions used to generate soft dollars are an asset of the client and the use by the firm or the subadvisors of such brokerage commissions to generate soft dollars is an inherent conflict of interest.

This conflict creates a risk that the Manager and the sub-advisors use the brokerage commissions generated in the firm’s Pooled Funds and Client Accounts for the purchase of research, services or goods that are not permitted under NI 23-102 to the detriment of the Manager’s clients.

To manage this conflict, the Manager and the sub-advisors may decide to utilize soft dollars in accordance with NI 23-102. This decision is made after considering the following four factors:

• the particular transaction;
• the value of research and brokerage services provided in connection to the Manager or the sub-advisors and their overall relationship with the broker;
• ensuring that the research services are permissible expenses under NI 23-102; and
• the overall responsibilities of the Manager or the sub-advisors to the Client Account and the clients.

The Manager and the sub-advisors will also review the Manager’s and the sub-advisors soft dollar usage on an annual basis in order to gauge the policy’s efficacy and assess the value of the services provided. The Manager’s compliance team and Chief Investment Officer will review soft dollar trades regularly.

Compensation structure - Wealth Advisors

A number of inherent conflicts of interest arise from elements of the compensation structure for our Wealth Advisors, including the fact that their compensation is primarily based on net revenues earned by the Manager (other than for new Wealth Advisors who receive a guaranteed salary) and includes modest awards for new revenues and the potential to become a shareholder of the Manager based on their ability to generate and retain revenues. This structure creates a conflict between the interests of our clients and our Wealth Advisors because it creates an incentive for our Wealth Advisors to attract and retain new clients and increase assets managed by the Manager for our clients in order to increase their compensation even where our services might not be appropriate for the client or the services of other parties may be more appropriate for the client, and could create an incentive for our Wealth Advisors to provide prioritized service to clients who generate the greatest revenues. Although this compensation structure will give rise to conflicts of interest, the Manager believes that compensation based on net revenues is preferable to other compensation structures (including a structure based purely on “sales”) for a number of reasons, including that it provides an incentive for excellent service in order to support client retention.

These conflicts are addressed through compliance by the Manager and its Wealth Advisors and other registered representatives with the KYC, suitability determination and fair dealing obligations under applicable securities laws, and the related policies and procedures established by the Manager to ensure compliance with these obligations. In particular, before the Manager opens an account for a client, purchases or sells a security or takes any other investment action for a client, or makes a recommendation or exercises discretion to take any such action, the Manager and its registered representatives are required to take reasonable steps to ensure that the action is suitable for the client and puts the client’s interest first in accordance with the requirements of applicable securities laws.

In addition, the Manager has also implemented a number of other measures to address these conflicts including centralized investment decision-making based on the application of an investment process as the primary mechanism to ensure that all clients receive similar investments based on their risk profile, regardless of who their Wealth Advisor is and the size of the client’s account.

Fee Arrangements

The Manager may negotiate and enter into different fee arrangements for products and services offered to its clients subject to the Manager’s sole discretion. Fees may vary due to certain client accounts being subject to grandfathered fees, pre-existing client relationships and fee schedules, account size, account aggregation for fee assessment, or other circumstances. This presents a potential conflict regarding application of charges unfairly. To address this conflict the Manager has established processes to ensure clients are treated fairly, honestly, and in good faith.

Gifts and business entertainment

A perceived or potential conflict of interest could arise if an employee, officer or director of the Manager or the sub-advisors gives or accepts gifts, entertainment, compensation or gratuities from clients, business partners or other parties of more than a minimal value in connection with the services provided to clients. This conflict creates the risk is that the gifts, donations, entertainment, compensation or gratuities will compromise the independence or objectivity of the Manager or its employees, officers or directors or otherwise influence their decision-making.

To manage this conflict, the Manager and the subadvisors retained by the Manager have adopted policies relating to gifts and entertainment that prohibit employees, officers and directors from accepting gifts or entertainment beyond what we consider consistent with reasonable business practice and applicable laws and pursuant to internal guidelines and limits. Pursuant to these policies, an employee, officer or director may only receive or provide a gift and/or entertainment that is of de minimis value or that is neither excessive nor frequent within the meaning of the policies so that there cannot be a perception that the gifts or entertainment will influence decision-making.

Outside Activities

A perceived or potential conflict of interest may arise as a result of an employee’s, officer’s or director’s activities, interests or associations outside of their position(s) with the Manager (referred to as “outside activities” or “OAs”). In particular, a perceived or potential conflict can arise from such an individual engaging in such activities as a result of compensation received, the time commitment required or the position held by the individual in respect of the outside activities. The risk of this conflict is that outside activities may call into question or interfere with an individual’s ability to carry out their responsibilities to the Manager or its clients or to properly provide services to the Manager or its clients, may give rise to confusion as to which entity(ies) the individual is acting for when providing services to the Manager or its clients, and/or place the individual in a position of power or influence over clients or potential clients.

To address this conflict, the Manager has adopted policies and procedures that require disclosure and approval of all outside activities, disclosure of outside activities to securities regulatory authorizes where required, and periodic monitoring by our compliance team to ensure compliance with such policies and procedures. Outside activities will only be approved where we determine that such activities will not interfere with the proper discharge of the individual’s duties to us and our clients.

Personal trading

Trading of securities by the Manager’s directors, officers and employees creates a perceived or potential conflict of interest because there is a potential that they take advantage of investment opportunities to the detriment of clients or the firm’s Pooled Funds. In addition, personnel with knowledge of trading decisions for our clients and funds could use that information for their own benefit.

This creates a risk that directors, officers and employees may utilize non-public information regarding the trading of securities for clients or the Pooled Funds for their own personal benefit, potentially to the detriment of clients or the funds, or otherwise take advantage of investment opportunities to the detriment of clients or the funds.

To manage this conflict, the Manager as well as the sub-advisors that are retained by the Manager, have a Code of Ethics that sets out standards of conduct aimed at preventing possible conflicts of interest arising from personal trading. All employees of the Manager with knowledge of ongoing trading decisions and current holdings are required to preclear personal trading activity. The Manager and each of the sub-advisors have established personal trading guidelines in accordance with the Standards of Personal Conduct of the CFA Institute, as well as a process for pre-clearing, monitoring and recording personal trading activity. 

Pricing and account errors

The Manager may have a potential conflict of interest when determining when, and how, to deal with a pricing error or other type of client account error. The risk is that the Manager may be incented not to take steps to correct or otherwise address the error due to the cost or other implications to the Manager.

To address this conflict and related risk, the Manager implements the following measures:

• the Manager uses external third-party service providers to calculate the net asset values of the funds and to record unitholder transactions;
• the Manager has in place a policy that establishes the standard for the correction of discrepancies in the calculation of net asset value in a consistent manner across the funds in accordance with industry guidelines;
• the Manager looks to the service providers to process corrections pursuant to the Manager’s written policy and monitors the service providers in the performance of their duties; and
• the Manager generally reimburses client accounts or the funds for losses where the Manager or a Wealth Advisor fails to meet their standard of care in providing services to the client account or to the funds. The Wealth Advisor may share in the cost of any reimbursement.

Proprietary products & related funds only (limitation on product offering)

The Manager only offers investment funds and other products manufactured or sub-advised by the Manager or affiliated firms within the Connor, Clark & Lunn Financial Group (referred to as “proprietary products”), and does not offer the products of unaffiliated investment managers. Given the Manager’s relationship with these products, a conflict of interest arises when the Manager makes a decision to offer these products or the investment team makes an investment decision or recommendation for our clients in relation to the products, including any decision or recommendation to purchase, redeem or continue to hold the products or to shift investments from one product to another product or investment.

This conflict of interest creates the risk that the Manager is only providing clients with access to a proprietary product because the Manager is related to the manufacturer (or sub-advisor) of the product, receives direct or indirect compensation related to the product, and/or may have direct or an indirect interest in the success of the product. In addition, our relationship with this type of product may cause us to follow a ‘know your product’ process that is less robust than it otherwise would be for non-proprietary products. The Manager’s review of this type of product may also be conducted with a less independent view than would be done by an arm’s length party. Further, because we do not offer investments in third-party products, any suitability determination conducted by the Manager and its representatives will not consider the larger market of non-proprietary products or whether those non-proprietary products would be better, worse, or equal in meeting the investment needs and objectives of our clients.

To address this conflict, the Manager has adopted a number of measures including the following:

• Unless a client is a “permitted client” and has requested that we not make suitability determinations for its account, the Manager conducts a suitability assessment to ensure that each investment is suitable for a client and in its best interests, having regard to their financial and other circumstances.
• The Manager periodically compares its products to certain other similar products on the market, to ensure the Manager’s products’ competitiveness.
• The Manager complies with KYC, KYP and suitability determination obligations and requirements.

Despite the steps the Manager takes to manage these conflicts, clients may wish to get independent advice from a trusted professional before investing in the proprietary products offered by the Manager.

Proxy voting and other corporate actions

A conflict may arise if the proxy voting decisions are not made in the long- term economic interests of the shareholders of the corporation holding the proxy vote but instead made in the interest of the Manager’s or the sub-advisor’s own corporate interests, including its institutional relationships or the distribution of the Manager’s or the sub-advisor’s fund units.

This conflict creates the risk that proxy votes may be voted in ways that prefer the interests of the Manager, the sub-advisors, or other special interest groups to the detriment of the long-term economic interests of the shareholders of the corporation that is holding the proxy vote.

To manage this conflict, the Manager has implemented the following measures:

• proxies are voted by each of our sub-advisors in accordance with their respective Proxy Voting policies. Quarterly, the Manager receives a compliance certificate from each of the subadvisors specifying that they have voted all proxies in compliance with their proxy voting policy. Clients may obtain information about how proxies were voted by contacting the Manager; and
• ongoing oversight including analyzing, documenting and reporting on such potential material conflicts of interest and ultimately vote the relevant proxies in what the sub-advisor believes to be the best way to enhance long term shareholder value. The sub-advisors are responsible for monitoring and reporting with respect to such potential material conflicts of interest. The sub-advisor has to note the exceptions (if any) and confirm that the proxies were voted in accordance with the Manager’s Proxy Voting Policy (if applicable).

Referral arrangements with third parties

The Manager may enter into referral arrangements from time to time whereby the Manager pays or provides a fee or other benefit for the referral of a client to it, or whereby the Manager receives a fee or other benefit for the referral of a client to another entity. Referral arrangements may be entered into both with other registrants and with non registrants. Referral arrangements typically give rise to conflicts of interest as a result of the fee or other benefit provided for the referral or due to the relationship among the parties to the arrangement, and in most cases those conflicts will be material conflicts of interest that must be addressed in the best interest of each affected client.

In all cases, the referral arrangement will be set out in a written agreement which will be entered into in advance of any referrals being made. The Manager records all referral fees on its records. Each affected client will receive disclosure of the referral arrangement that includes, among other things, the names of each party to the referral agreement, the purpose and material terms of the referral agreement, any conflicts of interest resulting from the relationship between the parties and from any other element of the referral arrangement, the method of calculating any referral fee and to the extent possible, the amount of the fee, and any other information that a reasonable client would consider important.

We also have policies and procedures that are designed to ensure that the referral arrangements we enter into are in the best interest of clients. We undertake periodic reviews and initial and ongoing oversight of existing referral arrangements. Clients do not pay any additional charges and fees to the Manager in connection with referrals, and are not obligated to purchase any product or service in connection with a referral.

Sub-advisor fees

The Manager pays the fees payable to sub-advisors for their services in relation to the various asset classes and funds into which client and fund assets are invested. The Manager has the ability to shift investments between asset classes and funds in its discretion within agreed investment objectives and restrictions for each client and fund. This gives rise to a conflict of interest between the interests of the Manager and those of clients and funds to the extent that the Manager is incentivized to allocate client and fund assets to the asset classes that have the lowest sub-advisory fees. The risk is that the Manager will allocate assets to sub-advisors with the lowest fees even if the allocation to such sub-advisors is not in the best interests of the clients and funds.

To address this conflict, the Manager has implemented the following measures:

• centralized investment decision-making based on the application of an investment process as the primary mechanism to ensure that all clients receive similar investments based on their risk profile;
• board oversight of investment performance;
• managing the performance of each model portfolio against reported benchmarks; and
• agreeing upon risk/return metrics with all clients in the statement of investment policies and procedures (or similar document). 

Trade allocation

The sub-advisors may aggregate orders for a number of client accounts for the purchase of a particular security. The selection of which client accounts will participate in the allocation may result in a conflict of interest.

This conflict of interest creates a risk that the subadvisors allocate trades (e.g. IPOs) in a manner that is more favourable to certain accounts rather than treating all accounts equally. Reasons for such preferential allocation could relate to performance fee accounts, or accounts where the sub-advisors have either an economic interest or a personal relationship with the account holder.

To counter any potential conflict, all trade executions are allocated by the sub-advisors in accordance with their trade allocation policies which generally, and in so far as practicable, allocate trades in proportion to the size of the orders (pro rata). Allocation of investment opportunities among accounts is managed on the basis of the suitability of the investment for each managed account with regard to:

• the type of proposed transaction;
• the investment merits of the security or securities to be purchased or sold;
• the substance of the existing fund of the managed account; and
• the investment objectives of the client.

The Manager also implements ongoing oversight, including relying on the policies of the sub-advisors where they are not permitted to deviate from our model funds in asset mix or security selection. Each Client Account with a similar mandate is managed in line with similar models. The allocation policies of the individual sub-advisors require that they allocate trades to the Manager accounts on a pro-rata basis.

Trading errors

The Manager or the sub-advisors are responsible to the respective Pooled Funds or client accounts for any loss that arises out of the failure of the Manager or the sub-advisors to meet the standard of care in trading the funds’ or client account assets. If trading activity results in a loss, the Manager must determine the cause of the trading loss and whether it constitutes a breach of the standard of care, and the Manager will have a conflict of interest in making that determination as the decision may benefit either the Manager or the sub-advisors.

The Manager or the sub-advisors may have a conflict of interest when a trade error has caused a loss in a client account or in a fund which would not be visible to the client, the correction of which error would require the Manager or the sub-advisor making a compensatory payment either to the fund or to a client account.

To manage this conflict of interest, the Manager has implemented the following measures:

• the sub-advisors maintain trade error correction policies and procedures designed to prevent the use of clients’ assets to correct the sub-advisors’ errors;
• the Manager has a dedicated risk team to review and correct errors. Further, this team will conduct a process analysis to help prevent such errors from occurring in the future. The risk team will meet and discuss errors regularly; and
• the Manager conducts ongoing oversight, including reviewing the policies and procedures in place, annually. Further, the Manager and/ or the applicable Wealth Advisor may elect to compensate funds or accounts directly for losses resulting from an error so as to rectify the error, or, where appropriate, the Manager may require the sub-advisor to compensate the account for losses resulting from actions of the sub-advisor. 

Valuation of investments

As management fees paid to the Manager are based on the net asset value of the funds or the value of the securities held in client segregated accounts, the Manager receives more revenue when the net asset value of funds and the segregated accounts are higher. This creates a perceived or potential conflict of interest when the Manager is involved in the valuation of securities held by the funds or the segregated accounts.

This conflict of interest creates the risk that the Manager is incentivized to alter the NAV of the funds and client segregated accounts in order to increase the revenues earned by the Manager.

To manage this risk, the Manager has implemented the following measures:

• the value of any asset held by the Funds or any of its liabilities will be determined by the trustee or the valuation agent of the fund using its usual pricing sources. The Manager and the sub-advisors shall not substitute a different value for the value determined by the trustee or the valuation agent, absent manifest error. Should the trustee or the valuation agent seek guidance from the Manager or the sub-advisors (as necessary) as to the value of an asset due to the lack of pricing sources, and the Manager or the sub-advisors shall use recognized pricing methodologies to determine the fair value of the asset in accordance with regulatory requirements and policies;
• individual securities client segregated accounts are valued on a daily basis using market prices, foreign exchange rates and forward exchange rates obtained from independent sources following a defined hierarchy. In the case of both equities and bonds, prices are sourced from independent third-party sources and loaded directly into our portfolio administration system. Checks are in place at Connor, Clark & Lunn Financial Group’s back-office teams to ensure pricing / valuation accuracy; and
• in relation to certain private investments and illiquid assets where a published market does not exist and third-party pricing is not available, an independent advisory committee is tasked with reviewing and approving the valuation of such assets and in certain situations, an independent valuation firm retained by this committee is engaged to perform an external assessment of the valuation of investments.