Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Exemptive relief granted to exchange traded mutual fund from 10% limit on purchases of gold, prohibition on purchases of silver and platinum, custodial provisions to allow Brinks and Via Mat to act as sub-custodians of the fund, and certain mutual fund requirements and restrictions on: transmission of purchase or redemption orders, calculation and payment of redemptions and date of record for payment of distributions – National Instrument 81-102 Mutual Funds
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.3(e), 2.3(f), 3.3, 6.1(2)(b), 6.1(3)(b), 6.2, 6.3, 10.3, 10.4(1), 12.1(1), 14.1 and 19.1
August 13, 2009
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 Brompton Funds Management Limited (the Manager)
and
In the Matter of Precious Metals Bullion Trust (the Fund)
and
In the Matter of RBC Dexia Investor Services Trust (the Custodian)
and
In the Matter of The Bank of Nova Scotia (the Bullion Custodian)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Manager, in its capacity as manager of the Fund, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from the following provisions of NI 81-102 Mutual Funds ("NI 81-102"):
(a) Subsection 2.3(e), to permit the Fund to purchase gold or a permitted gold certificate if, immediately after the purchase, more than 10% of the assets of the mutual fund, taken at market value at the time of the purchase, would consist of gold and permitted gold certificates;
(b) Subsection 2.3(f), to permit the Fund to purchase silver, silver certificates, platinum and platinum certificates;
(c) Section 3.3, to permit the costs of incorporation, formation or initial organization of the Fund to be borne by the Fund;
(d) Paragraph 6.1(2)(b), to permit portfolio assets of the Fund to be held outside Canada by the Bullion Custodian, the Brinks Company or its subsidiaries or affiliates (Brinks), or Via Mat International Ltd. or its subsidiaries or affiliates (Via Mat), for purposes other than facilitating portfolio transactions of the Fund outside Canada;
(e) Paragraph 6.1(3)(b), to permit the Custodian or the Bullion Custodian to appoint Brinks and Via Mat, which are persons or companies that are not described in section 6.2 or 6.3, to act as sub-custodians to hold the Fund's physical bullion;
(f) Section 6.2, to permit Brinks and Via Mat to be appointed as sub-custodians of the Fund to hold the Fund's physical bullion in Canada;
(g) Section 6.3, to permit Brinks and Via Mat to be appointed as sub-custodians of the Fund to hold the Fund's physical bullion outside Canada;
(h) Section 10.3, to permit the redemption price of redeemable, transferable units of the Fund (Units) to which a redemption order pertains, to be a price other than the net asset value per Unit next determined after receipt by the Fund of the redemption order;
(i) Paragraph 10.4(1)(a), to permit payment for redeemed Units to be made later than three business days from the date of determination of the net asset value for the purpose of effecting such redemption;
(j) Subsection 12.1(1), to relieve the Fund from the requirement of completing and filing with the securities authorities the report required by that subsection; and
(k) Section 14.1, to permit the Fund to establish a record date for distributions in accordance with the rules of the Toronto Stock Exchange (TSX).
(collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Fund has provided notice that Section 4.7(1) of Multilateral Instrument 11-102 Passport System is intended to be relied upon in Alberta, British Columbia, Manitoba, Saskatchewan, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 Passport System have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Manager and the Fund:
Background: the Fund and the Manager
The Fund is a mutual fund that was established by a declaration of trust dated March 27, 2009, as amended and restated as of July 30, 2009.
The Manager is the manager of the Fund. The Manager's head office is located in Ontario.
Neither the Fund nor the Manager is in default of the securities legislation of any province or territory of Canada.
The Fund filed a preliminary long-form prospectus (the Preliminary Prospectus) on June 12, 2009. A final long-form prospectus (the Final Prospectus) was filed on SEDAR under project no. 1436517 and a receipt for the Final Prospectus was issued on July 31, 2009. The Fund is a reporting issuer under the securities legislation of each province and territory of Canada. The Final Prospectus qualified the initial public offering (the Offering) of Combined Units of the Fund at a price of $12.00 per Combined Unit. Each Combined Unit consists of one Unit and one transferable warrant of the Fund (a Warrant). Each Warrant entitles its holder to purchase one Unit at a subscription price of $12.00, on or before 5:00 p.m. (Toronto time) on January 31, 2010. The Fund does not intend to be in continuous distribution.
The Fund has been granted exemptive relief from NI 81-106 Investment Fund Continuous Disclosure to calculate its net asset value (Net Asset Value) per Unit as at the close of business on each Valuation Date. At a minimum, a Valuation Date will be the Thursday of each week, or if any Thursday is not a business day, then the immediately preceding business day, and also the last business day of each month.
Units may be redeemed quarterly, on the second last business day of January, April, July and October, commencing in April, 2010 (Quarterly Redemptions, and each such date being a Quarterly Redemption Date). In order to effect a Quarterly Redemption, the Units must be surrendered no later than the last business day in the month prior to the applicable Quarterly Redemption Date. Holders of Units (Unitholders) who redeem Units on a Quarterly Redemption Date will receive a redemption price per Unit equal to 100% of the Net Asset Value per Unit (less any costs and expenses associated with the redemption) on the Quarterly Redemption Date. A Unitholder may elect to receive the proceeds of a Quarterly Redemption in physical bullion provided that the proceeds payable to the redeeming Unitholder in respect of that Quarterly Redemption are at least $1.5 million, or such other amount as may be determined and announced by the Manager from time to time.
Units may also be redeemed on the last business day of each month other than January, April, July and October (Monthly Redemptions, and each such date being a Monthly Redemption Date). In order to effect a Monthly Redemption, the Units must be surrendered no later than the last business day in the month prior to the applicable Monthly Redemption Date. Unitholders who redeem Units on a Monthly Redemption Date will receive a redemption price per Unit equal to 94% of the diluted Net Asset Value per Unit on the Monthly Redemption Date (less any costs and expenses associated with the redemption).
Redemption payments for Units surrendered in connection with a Quarterly Redemption or a Monthly Redemption will be made on the 10th business day of the month immediately following the applicable Quarterly Redemption Date or Monthly Redemption Date.
The TSX has conditionally approved the listing of the Units and the Warrants, subject to the Fund fulfilling all of the requirements of the TSX on or before September 18, 2009.
In respect of the Offering, the Fund will pay an agents' fee equal to 5.25% of the gross proceeds of the Offering, and Offering expenses, not to exceed 1.5% of the gross proceeds of the Offering.
The Fund's Investment Objective and Investment Restrictions
The investment objective of the Fund is to provide Unitholders with a secure, low cost and convenient method of investing in gold, silver and platinum bullion on a Canadian dollar-hedged basis. The Fund does not anticipate making regular distributions.
The net proceeds of the Offering will be used to purchase approximately equal dollar amounts of each of physical gold, silver and platinum bullion as soon as practicable following closing of the Offering, in accordance with the investment objective and restrictions of the Fund. The Fund will hold a minimum of 90% of the Net Asset Value in physical gold, silver and platinum bullion, and up to 5% of the Net Asset Value may be invested in gold, silver or platinum certificates. The Fund may also invest up to 5% of its assets in cash and cash equivalents to fund operations and redemptions.
Substantially all of the value of the Fund's portfolio will be hedged to the Canadian dollar.
All bullion purchased by the Fund will be certified by the relevant vendor as bullion conforming to the good delivery standards of the London Bullion Market Association, the London Platinum and Palladium Market, or another internationally recognized bullion trading body.
The Fund's Custody Arrangements
This decision is also based on the following facts represented by the Manager, the Fund, the Custodian (with respect to matters relating to the Custodian) and the Bullion Custodian:
The Custodian will be appointed to be the Fund's custodian pursuant to the terms of a custodian agreement with the Manager (the Custodian Agreement). The Custodian will hold the property of the Fund other than the Fund's physical gold, silver and platinum bullion. The terms of the Custodian Agreement will comply with all requirements in Part 6 of NI 81-102.
The Custodian will appoint the Bullion Custodian to be a sub-custodian of the Fund, to hold the Fund's physical gold, silver and platinum bullion. The custody arrangements with respect to the Fund's physical gold, silver and platinum bullion will be governed by the terms of an agreement between the Custodian and the Bullion Custodian (the Bullion Custodian Agreement). Except as represented below, the terms of the Bullion Custodian Agreement will comply with all requirements in Part 6 of NI 81-102.
The Fund's physical gold, silver and platinum bullion will be stored and held on an allocated and segregated basis in the vault facilities of ScotiaMocatta, a division of the Bullion Custodian, in Canada, London or New York. ScotiaMocatta is one of the largest providers of physical precious metals trading and custodial services in the world. The Manager has determined that the Bullion Custodian would be the appropriate choice to provide custodial services to the Fund, because ScotiaMocatta is experienced in providing gold, silver and platinum storage and custodial services, and is familiar with the requirements relating to the physical handling and storage of gold, silver and platinum bullion required in connection with the redemption of Units for physical bullion.
The Fund will not insure its physical gold, silver or platinum bullion. The Bullion Custodian maintains insurance on such terms and conditions as it considers appropriate against all risk of physical loss of, or damage to, bullion stored in ScotiaMocatta's vaults except the risk of war, nuclear incident, terrorism events or government confiscation. Neither the Manager, the Fund nor the Custodian is a beneficiary of any such insurance and none of them have the ability to dictate the existence, nature or amount of coverage.
The Manager has discussed such insurance coverage with the Bullion Custodian, and believes that the insurance that the Bullion Custodian has obtained will be appropriate for the Fund. The Bullion Custodian Agreement shall provide that the Bullion Custodian shall not cancel its insurance except upon 30 days prior written notice to the Manager. The Fund disclosed the material details of that insurance arrangement in its Final Prospectus.
The Bullion Custodian has advised the Manager and the Custodian that due to physical storage capacity constraints, having regard to the amount of gold, silver and platinum bullion which the Fund may acquire in connection with Offering, as well as in contemplation of the exercise of any Warrants, there will not be sufficient space in the vault facilities of ScotiaMocatta, in Canada, London and New York, to store all of the Fund's physical gold, silver and platinum bullion.
As a result, the Bullion Custodian will be required to use the services of sub-custodians to store some of the Fund's physical gold, silver and platinum bullion.
The Bullion Custodian has advised the Custodian and the Manager that it proposes to use Brinks and Via Mat, as sub-custodians to hold the physical gold, silver and platinum bullion of the Fund. Brinks and Via Mat are not entities that are currently approved to act as a custodian or sub-custodian for assets held in Canada, or to act as a sub-custodian for assets held outside of Canada as Brinks and Via Mat are not, among other things, a bank listed in Schedule I, II or III of the Bank Act (Canada) or a trust company incorporated under the laws of Canada.
Brinks and Via Mat are leading providers of secure logistics for valuables, including diamonds, jewellery, precious metals, securities, currency and secure data, serving banks, retailers, governments, mines, refiners, metal traders, and diamantaires. Brinks and Via Mat are both authorized depositories for the London Bullion Market Association and have vault facilities that are accepted as warehouses for the London Bullion Market Association. Brinks is also an authorized depository for NYMEX/COMEX.
The number of entities in Canada which are eligible to act as sub-custodians for the physical storage of silver bullion is limited. Of these eligible entities, some already have exclusive relationships with other investment funds for storage purposes whereas others simply do not have the excess capacity needed to store the amount of physical silver bullion contemplated by the Offering and have advised that they would be required to secure additional space through the vaulting facilities of service providers. These capacity constraints have been intensified due to the relatively recent run-up in demand for physical commodities and the corresponding need to arrange for safe-keeping.
The Manager and the Bullion Custodian believe that both Brinks and Via Mat are appropriate sub-custodians for the Fund's physical gold, silver and platinum bullion. The Bullion Custodian has engaged in a review of the facilities, procedures, records and the level of insurance coverage of Brinks and Via Mat, and will engage in a similar review annually, to satisfy itself as to the continuing appropriateness of using Brinks and Via Mat as sub-custodians of the Fund's physical bullion.
The custody arrangements with respect to the holding of the Fund's physical gold, silver and platinum bullion by Brinks or Via Mat will be governed by the terms of an agreement between the Bullion Custodian and Brinks or Via Mat, as applicable (the Bullion Sub-Custodian Agreements), the terms of which will comply with Sections 6.4 and 6.5 of NI 81-102.
The sub-custodial activities of Brinks and Via Mat will be limited to holding the Fund's physical gold, silver and platinum bullion. All physical gold, silver and platinum bullion of the Fund held by Brinks and Via Mat will be held in vault facilities in Canada, London or New York, on an allocated and segregated basis. The Bullion Custodian will exercise its audit rights under each Bullion Sub-Custodian Agreement on an on-going basis in order to satisfy itself that Brinks and Via Mat are in substantial compliance with the terms of the relevant Bullion Sub-Custodian Agreement and, in particular, that the bullion of the Fund which the Bullion Custodian has transferred to Brinks and Via Mat on behalf of the Fund (i) is held by Brinks and Via Mat at vault facilities that are accepted as warehouses for the London Bullion Market Association, (ii) is physically segregated and specifically identified, both in the vault facilities in which such bullion is held by Brinks and Via Mat and on the books and records of Brinks and Via Mat, as constituting the property of the Bullion Custodian or the Fund, (iii) has not sustained loss, damage or destruction (but with no obligation on the part of the Bullion Custodian to verify the weight, quality, fineness, assay characteristics, authenticity or composition of such bullion or that such bullion conforms to any good delivery standards of the London Bullion Market Association, NYMEX/COMEX, the London Platinum and Palladium Market Association or any other bullion trading body or that such bullion is otherwise fit for any purpose), and (iv) remains the subject of a subsisting policy of insurance that covers Brinks's and Via Mat's liability for the loss, damage or destruction of such bullion.
The Bullion Custodian has advised the Fund and the Manager that each of Brinks and Via Mat have arranged for sufficient insurance coverage in respect of any of the Fund's physical gold, silver and/or platinum bullion material held by the Bullion Custodian through the vault facilities of Brinks or Via Mat. The Manager has discussed the insurance coverage obtained by Brinks and Via Mat with the Bullion Custodian, and believes that the insurance coverage obtained by Brinks and Via Mat is appropriate for the Fund.
Pursuant to the Custodian Agreement, in safekeeping the property of the Fund the Custodian is required to exercise (a) the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances; or (b) at least the same degree of care as it exercises with respect to its own property of a similar kind, if this is a higher degree of care than the degree of care referred to in (a). The Custodian will not be entitled to an indemnity from the Fund in the event the Custodian breaches its standard of care. The Bullion Custodian Agreement will include a similar standard of care in respect of the obligations of the Bullion Custodian. The Bullion Custodian has satisfied itself that the degree of care to which Brinks and Via Mat are subject in respect of the Bullion Sub-Custodian Agreements is no less than the degree of care referred to in (a).
The Custodian Agreement provides that if the Fund suffers a direct loss as a result of any act or omission of the Custodian, the Bullion Custodian, Brinks or Via Mat, or any other sub-custodian appointed by the Custodian, and if such loss is directly attributable to the failure of (a) the Custodian to comply with its standard of care in the provision of any service to be provided by it under the Custodian Agreement, (b) the Bullion Custodian to comply with its standard of care in the provision of any service to be provided by it under the Bullion Custodian Agreement, (c) Brinks or Via Mat to comply with their standard of care in the provision of any service to be provided by them under the applicable Bullion Sub-Custodian Agreement, (d) another sub-custodian to comply with its standard of care in the provision of any service to be provided by it under its custody agreement with the Custodian, then the Custodian shall assume liability for such loss directly, and shall reimburse the Fund accordingly.
The Fund's auditors will be present during, and will verify, a physical count of all of the Fund's physical gold, silver and platinum bullion, whether held by the Bullion Custodian, Brinks or Via Mat, at least once every year. The Fund and its auditors will have the ability, with sufficient advance notice to the Bullion Custodian, Brinks and/or Via Mat, to attend at the vaults of the Bullion Custodian, Brinks and/or Via Mat as required to verify the gold, silver and platinum bullion held by the Bullion Custodian, Brinks or Via Mat on behalf of the Fund.
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 Exemption Sought is granted provided that:
(a) the Manager, on behalf of the Fund, ensures that any silver certificates purchased by the Fund are certificates representing silver if the silver is:
(i) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate,
(ii) of a minimum fineness of 999 parts per 1,000,
(iii) held in Canada,
(iv) in the form of either bars or wafers, and
(v) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a jurisdiction.
(b) the Manager, on behalf of the Fund, ensures that any platinum certificates purchased by the Fund are certificates representing platinum if the platinum is:
(i) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate,
(ii) of a minimum fineness of 999 parts per 1,000,
(iii) held in Canada,
(iv) in the form of either bars or wafers, and
(v) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a jurisdiction.
(c) the Fund, the Manager, the Custodian and the Bullion Custodian are limited to using Brinks and Via Mat as sub-custodians for the Fund's physical gold, silver and platinum bullion;
(d) in respect of the compliance reports to be prepared by the Custodian pursuant to Section 6.7 of NI 81-102, in lieu of including the information required by paragraphs 6.7(1)(a), 6.7(1)(b), 6.7(1)(c) and 6.7(2)(b) and (c) in respect of the Custodian's review of the sub-custodial arrangements involving Brinks and Via Mat, the Custodian shall instead be entitled to rely on a certificate of the Bullion Custodian prepared in respect of the Bullion Custodian's annual review process for Brinks and Via Mat referred to in paragraph 25 above, and whether the Bullion Custodian remains of the view that Brinks and Via Mat continue to be appropriate sub-sub-custodians to hold the Fund's physical gold, silver and platinum bullion;
(e) the Manager, on behalf of the Fund, ensures that prospectus of the Fund contains disclosure regarding the unique risks associated with an investment in the Fund, including the risk that direct purchases of precious metals by the Fund may generate higher transaction and custody costs than other types of investments, which may impact the performance of the Fund; and
(f) the Fund complies with applicable TSX requirements in setting the record date for payment of distributions.
"Darren McKall"
Name: Darren McKall
Title: Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR #1440454
Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Exemptive relief granted to exchange traded mutual fund from 10% limit on purchases of gold, prohibition on purchases of silver and platinum, custodial provisions to allow Brinks and Via Mat to act as sub-custodians of the fund, and certain mutual fund requirements and restrictions on: transmission of purchase or redemption orders, calculation and payment of redemptions and date of record for payment of distributions – National Instrument 81-102 Mutual Funds
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.3(e), 2.3(f), 3.3, 6.1(2)(b), 6.1(3)(b), 6.2, 6.3, 10.3, 10.4(1), 12.1(1), 14.1 and 19.1