Headnote
NP 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from mutual fund conflict of interest investment restrictions in ss. 111(2)(b), 111(2)(c)(ii) and 111(3) of the Act to allow pooled funds to invest in underlying pooled funds and public mutual funds under common management – Relief granted subject to certain conditions.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5, as amended, sections 111(2)(b), 111(2)(c)(ii), 111(3) and 113.
May 14, 2010
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 BLACKROCK ASSET MANAGEMENT CANADA LIMITED (the Filer)
AND
IN THE MATTER OF THE POOLED FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction received an application from the Filer on behalf of each of the existing mutual funds and future mutual funds of which the Filer, or an affiliate of the Filer, is the investment fund manager to which National Instrument 81-102 – Mutual Funds (NI 81-102) does not apply (each, a Pooled Fund and, collectively, the Pooled Funds) for a decision exempting the Pooled Funds from the requirement in the securities legislation of the Jurisdiction that prohibits a mutual fund from knowingly making or holding an investment in:
(a) any person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial securityholder, or
(b) an issuer in which, any person or company who is a substantial securityholder of the mutual fund, its management company or its distribution company, has a significant interest,
in order to permit a Pooled Fund (a Top Fund) to invest in securities of another Pooled Fund (an Underlying Fund) or of a mutual fund (also, an Underlying Fund) to which NI 81-102 applies (an NI 81-102 Fund) of which the Filer, or an affiliate of the Filer, is the investment fund manager (the Exemption Sought).
Under the Process for Exemptive Relief applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for this application;
(b) The Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 – Passport System is intended to be relied upon in Alberta (the Passport Jurisdiction).
Interpretation
Terms defined in the securities legislation of the Jurisdiction and the Passport Jurisdiction (together, the Jurisdictions) or in National Instrument 14-101 – Definitions have the same meanings if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The head office of the Filer is located in Toronto, Ontario.
The Filer is registered as a portfolio manager in the Jurisdiction and in the Passport Jurisdiction, as a commodity trading manager in the Jurisdiction and as an exempt market dealer in the Jurisdiction. The Filer expects that, in due course, it will be registered as an exempt market dealer in the Passport Jurisdiction and as an investment fund manager in the Jurisdiction and in the Passport Jurisdiction as necessary.
The Filer, or an affiliate of the Filer that is appropriately registered or exempt from registration, is, or will be, the investment fund manager of each of the Pooled Funds that is a Top Fund and the Filer, or an affiliate of the Filer that is appropriately registered or exempt from registration, is, or will be, the investment fund manager of each of the Pooled Funds and the NI 81-102 Funds that is an Underlying Fund.
Each of the Top Funds is, or will be, organized under the laws of the Jurisdiction and is, or will be, a “mutual fund in Ontario” under the legislation of the Jurisdiction and a “mutual fund” under the legislation of the Passport Jurisdiction. The Top Funds are not, or will not be reporting issuers in the Jurisdictions.
The Filer, or an affiliate of the Filer that is appropriately registered or exempt from registration, is, or will be, the portfolio adviser of each of the Top Funds and the Underlying Funds.
Each of the NI 81-102 Funds is, or will be, subject to NI 81-102 and may also be subject to National Instrument 81-104 – Commodity Pools.
Each Top Fund will manage its investments in an Underlying Fund with discretion to buy and sell units of the Underlying Fund, selected in accordance with the Top Fund’s investment objective, as well as to alter its holdings in any Underlying Fund in which it invests.
Investing in the Underlying Funds will allow the Top Funds to achieve their investment objectives in the most cost effective way and will not be detrimental to the interests of other securityholders of the Underlying Funds. Such an investment can provide greater diversification for a Top Fund in particular asset classes, on a less expensive basis, than investing directly in the securities held by the applicable Underlying Fund. This investment structure will also allow investors with smaller investments to have access to a larger variety of investments than would otherwise be available.
Securities of each of the Top Funds will be distributed only to “accredited investors”, within the meaning of National Instrument 45-106 – Prospectus and Registration Exemptions, or to other investors pursuant to exemptions from the prospectus requirement.
Securities of an Underlying Fund will be acquired by a Top Fund in the secondary market or from the Underlying Fund under a prospectus or pursuant to an exemption from the prospectus requirement and the Filer, acting as an exempt market dealer, or another registered dealer will act as the market intermediary in respect of the acquisition.
Purchasers of securities of a Top Fund will enter into an investment management agreement (the IMA) with the Filer governing their investment in any Top Fund. The IMA will provide authority to the Filer to invest in one or more Top Funds and may provide authority to the Filer to rebalance, when there is an investment in more than one Top Fund, from time to time.
The investment objectives and restrictions applicable to a Top Fund are described in the Declaration of Trust and Supplemental Declaration of Trust of a Top Fund (together, the Declaration of Trust) as are the fees, compensation and expenses payable by a Top Fund and matters relating to the structure of the Top Fund, the calculation of net asset value, distributions, the powers and duties of the investment fund manager and all other matters material to the Top Fund. The Declaration of Trust also discloses that in pursuing its investment objectives a Top Fund may invest in an Underlying Fund as an investment strategy. All of the foregoing are discussed with a purchaser before the execution of an IMA and the purchaser is advised that a copy of the Declaration of Trust is available on request.
Clients who hold securities of a Top Fund receive an account statement on a monthly basis showing the client’s holdings of securities of a Top Fund.
Each of the Top Funds and the NI 81-102 Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 – Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106 applicable to them. Each of the Underlying Funds will prepare annual audited financial statements and interim unaudited financial statements. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.
The securityholders of a Top Fund will receive, on request, a copy of the prospectus or other offering document, if available, and the audited annual financial statements and interim unaudited financial statements of any Underlying Fund in which the Top Fund invests.
There will be no sales fees or redemption fees payable by a Top Fund in respect of an acquisition, disposition or redemption of securities of an Underlying Fund by a Top Fund other than brokerage fees incurred on the purchase or disposition of securities of an Underlying Fund that are purchased or disposed of in the secondary market.
There will be no management fees or incentive fees payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service.
The investment fund manager will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of an Underlying Fund, except that it may, but is not required to, arrange for the securities of an Underlying Fund held by a Top Fund to be voted by the securityholders of the Top Fund.
An investment by a Top Fund in securities of an Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund and the Underlying Fund.
No Top Fund will invest more than 10% of its net assets in an Underlying Fund that is a Pooled Fund unless the Pooled Fund invests less than 10% of its net assets in other mutual funds other than mutual funds that are money market funds or that issue index participation units.
Underlying Funds that are NI 81-102 Funds are subject to the restrictions in NI 81-102 with respect to investments in other mutual funds.
The Exemption Sought is necessary because a Top Fund together with one or more related mutual funds, including other Top Funds, may be a substantial securityholder of an Underlying Fund.
A person who is a substantial securityholder of the Filer or a person who is a substantial securityholder of a Top Fund, may have a significant interest in an Underlying Fund. This could arise in a number of circumstances, including if such a person provides the seed capital for an Underlying Fund or an Underlying Fund is an appropriate investment for such a person as principal. Without the Exemption Sought, a Top Fund may be prohibited from investing in such Underlying 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 is that the Exemption Sought is granted provided that the following conditions are satisfied:
(a) Securities of the Top Funds are distributed in Canada solely to investors pursuant to an exemption from the prospectus requirements.
(b) No Top Fund will invest more than 10% of its net assets in an Underlying Fund that is a Pooled Fund unless the Pooled Fund invests less than 10% of its net assets in other mutual funds other than mutual funds that are money market funds or that issue index participation units.
(c) There will be no sales fees or redemption fees payable by a Top Fund in respect of an acquisition, disposition or redemption of securities of an Underlying Fund by a Top Fund other than brokerage fees incurred on the purchase or disposition of securities of an Underlying Fund that are purchased or disposed of in the secondary market.
(d) There will be no management fees or incentive fees payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service.
(e) The investment fund manager will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of an Underlying Fund, except that it may, but is not required to, arrange for the securities of an Underlying Fund held by a Top Fund to be voted by the securityholders of the Top Fund.
“Wes M. Scott”
“James D. Carnwath”
Wes. M. Scott (Name)
James D. Carnwath (Name)
Commissioner (Title)
Commissioner (Title)
Ontario Securities Commission
Ontario Securities Commission
Headnote
NP 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from mutual fund conflict of interest investment restrictions in ss. 111(2)(b), 111(2)(c)(ii) and 111(3) of the Act to allow pooled funds to invest in underlying pooled funds and public mutual funds under common management – Relief granted subject to certain conditions.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5, as amended, sections 111(2)(b), 111(2)(c)(ii), 111(3) and 113.