Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from section 4.1 of NI 81-102 to permit dealer-managed mutual funds to invest in (a) private placement of equity securities where issuer is a reporting issuer in Canada, or (b) distributions of debt securities that do not have “approved rating” by “credit rating organization” as required by subsection 4.1(4), where dealer-manager acts as underwriter during the distribution period or 60 day period following the distribution – relatively specific focus of filer and related entities’ business creates market necessity for relief - relief conditional on approval by the funds’ independent review committee - private placement relief also conditional on funds complying with conditions under s. 4.1(4)(c)(ii), and (d) of NI 81-102 – debt offerings must have at least one independent underwriter and arm’s length purchaser and related funds can collectively purchase no more than 20% of offering and pay no more than lowest price paid by arm’s length purchaser(s) – debt offerings cannot be for asset backed commercial paper.
Applicable Legislative Provisions National Instrument 81-102 Mutual Funds sections 4.1 and 19.1.
February 2, 2012
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
SPROTT ASSET MANAGEMENT LP
(the Filer)
AND
IN THE MATTER OF
THE FUNDS
(as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of existing mutual funds subject to National Instrument 81-102 Mutual Funds (NI 81-102) for which the Filer currently acts as the manager and the portfolio adviser, and any future mutual funds that will be subject to NI 81-102 and for which the Filer acts as the manager and/or the portfolio adviser (each, a Fund and collectively, the Funds) for a decision exempting the Funds from the restrictions in section 4.1(1) of NI 81-102 to permit the Funds to:
(a) purchase equity securities (Equity Securities) of a reporting issuer during the period of distribution (the Distribution) of such equity securities pursuant to a private placement offering (a Private Placement) and for the 60-day period (the 60-day Period) following completion of the Distribution (the Distribution and the 60-day Period together are hereinafter referred to as the Prohibition Period), notwithstanding that the dealer manager of the Funds or an associate or affiliate thereof acts or has acted as underwriter in connection with the Distribution; and
(b) purchase debt securities (Debt Securities) of an issuer during the Prohibition Period, notwithstanding that the dealer manager of the Funds or an associate or affiliate thereof acts or has acted as underwriter in connection with the Distribution and notwithstanding that the debt securities do not have an “approved rating” by an “approved credit rating organization” as contemplated by section 4.1(4)(b) of NI 81-102.
(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 Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer.
The Filer is a limited partnership established under the laws of the Province of Ontario and is registered as an adviser in the category of portfolio manager in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador and as an exempt market dealer in Ontario. The Filer is also registered an investment fund manager in Ontario.
The Filer and the existing Funds are not in default of securities legislation in any province or territory of Canada.
Each Fund is or will be an open-ended mutual fund established under the laws of Canada or a jurisdiction of Canada. The securities of each Fund are or will be qualified for distribution in each of the provinces and territories of Canada pursuant to a simplified prospectus and annual information form prepared in accordance with applicable securities legislation. None of the Funds are or will be a “money market fund” as that term is defined in NI 81-102.
The Filer, or an affiliate of the Filer, is, or will be, the manager and/or portfolio adviser for the Funds.
Each of the Funds has or will have an independent review committee (“IRC”) appointed in accordance with National Instrument 81-107 Independent Review Committee for Investment Funds (“NI 81-107”).
The general partner of the Filer, Sprott Asset Management GP Inc., is an indirect wholly-owned subsidiary of Sprott Inc. (Sprott), a corporation established under the laws of the Province of Ontario. Sprott is also the sole limited partner of the Filer.
Sprott Private Wealth LP (“SPW”) is an affiliate of the Filer and is a “specified dealer” as such term is defined in NI 81-102. The general partner of SPW is Sprott Private Wealth GP Inc., which is also an indirect wholly-owned subsidiary of Sprott. SPW may act as an underwriter to an offering of Equity Securities or Debt Securities from time to time.
Global Resource Investments Limited (“GRIL”), a U.S. financial services institution and an indirect wholly-owned subsidiary of Sprott, is an affiliate of the Filer and SPW. GRIL may also act as an underwriter to an offering of Equity Securities or Debt Securities from time to time. GRIL currently carries on its investment banking business in countries outside of Canada, but primarily in the United States and may in the future carry on investment banking business in Canada (SPW, GRIL and any future related dealer to the Filer as described in paragraph 11 are collectively, the “Related Dealers”).
Sprott Inc., owns, directly or indirectly, 99.99% of the voting securities of the Filer, SPW and GRIL.
The Filer is therefore a “dealer manager” as such term is defined in NI 81-102 and accordingly, the Funds are “dealer managed mutual funds” as such term is defined in NI 81-102.
The Related Dealers may, from time to time, expand their investment banking businesses such that the Filer, or an affiliate of the Filer, may become an affiliate or associate of additional specified dealers (each also a Related Dealer), any of which may act as an underwriter for an offering of Equity Securities or Debt Securities from time to time.
To the extent that a Related Dealer participates as an underwriter in an offering, the investment prohibition contained in section 4.1(1) of NI 81-102 (the “Prohibition”) restricts the Funds from making certain investments in Equity Securities or Debt Securities during the relevant Prohibition Period.
Section 4.1(1) of NI 81-102 provides an exemption from the Prohibition if the Filer or any of its associates or affiliates acts as a member of a selling group distributing 5% or less of the underwritten securities. However, this de minimis exemption is not available to entities that are underwriting a Distribution (as opposed to being in the selling group) and therefore the Funds cannot avail themselves of this exemption.
The Funds would also not be restricted by the Prohibition if, in accordance with section 4.1(4) of NI 81-102, certain conditions are met, including: (i) the IRC of the Funds has approved the transaction in accordance with section 5.2(2) of NI 81-107; (ii) for Equity Securities, a prospectus is filed with one or more securities regulatory authorities or regulators in Canada in connection with the Distribution, and during the 60-day Period the investment is made on an exchange on which the Equity Securities are listed and traded; and (iii) for Debt Securities, the securities have been given and continue to have an approved rating by an approved credit rating organization.
The Related Dealers may from time to time, act as an underwriter to an offering of Equity Securities made by Private Placement. The Filer may wish to cause a Fund to invest in such Equity Securities offered under the Private Placement during the Prohibition (a Related Dealer Private Placement).
The Related Dealers may from time to time, act as an underwriter to an offering of Debt Securities in which the applicable Debt Securities do not have an “approved rating” by an “approved credit rating organization”. The Filer may wish to cause a Fund to invest in such offering of Debt Securities during the Prohibition Period (a Related Dealer Debt Offering).
Absent the Exemption Sought, the Prohibition would not permit the Funds to invest in such Related Dealer Private Placements or Related Dealer Debt Offerings.
In respect of a Related Dealer Private Placement, the Filer would not be able to rely on section 4.1(4) of NI 81-102 because a prospectus would not be filed with the applicable securities regulatory authorities in such circumstance.
In respect of a Related Dealer Debt Offering, the Filer would not be able to rely on section 4.1(4) of NI 81-102 because the Debt securities would not have an approved rating by an approved credit rating organization.
As a business objective, Sprott is committed to developing the underwriting businesses of the Related Dealers. The businesses of the Filer and the Related Dealers are heavily focused in specific sectors of the market, namely the energy and materials sectors. The Prohibition is impacting the development of the businesses of the Related Dealers due to the extensive market participation of the Filer and the Funds in the mutual fund and asset management businesses in the energy and materials sectors.
The Funds significantly participate in (i) offerings of Equity Securities made by Private Placement; and (ii) offerings of Debt Securities in which the applicable Debt Securities do not have an “approved rating” by an “approved credit rating organization” in the energy and materials sectors in Canada. Due to the Prohibition, the Related Dealers have been precluded by Sprott from participating in these transactions in the energy and materials sectors because their participation would trigger the Prohibition and the Funds and the Filer would no longer be able to invest in such transactions. Foregoing participation in these underwriting opportunities, particularly in the energy and materials sectors, is a significant impairment to the proposed development of the underwriting businesses of the Related Dealers as they are being denied access to these underwritings purely as a result of the coincidental participation of the Filer and the Funds in the transactions.
The Filer and the Funds make investment decisions independently of the Related Dealers concerning Distributions in which Related Dealers act as underwriters, and this is reflected in the policies and procedures approved by the IRCs of the Funds.
As a result, in almost all Distributions in respect of which the Exemption Sought is required, the details of the Distribution and a Related Dealer’s involvement as an underwriter in the particular Distribution will not be known by the Filer sufficiently long enough in advance to make an application for relief on a case-by-case basis.
None of the Funds will be required or obligated to purchase any Equity Securities or Debt Securities pursuant to a Related Dealer Private Placement or Related Dealer Debt Offering.
At the time of purchase by a Fund, the Equity Securities offered under the Related Dealer Private Placement will either be (i) equity securities of a reporting issuer; or (ii) convertible securities, such as special warrants, which automatically permit the holder to purchase, convert or exchange such convertible securities into other equity securities of the reporting issuer once such other equity securities are listed and traded on an exchange.
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) Any purchase of Equity Securities or Debt Securities by a Fund will be consistent with the investment objectives of the Fund and represent the business judgment of the Filer uninfluenced by considerations other than the best interests of the Fund or in fact is in the best interests of the Fund.
(b) At the time of each purchase of Equity Securities or Debt Securities by a Fund during a Prohibition Period for a relevant offering:
(i) the investment will be in compliance with the investment objectives of the Fund;
(ii) the manager of the Fund complies with section 5.1 of NI 81-107 and the manager and IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investments in the securities;
(iii) at the time of the investment, the IRC of the Fund has approved the transaction in accordance with section 5.2(2) of NI 81-107; and
(iv) the Fund complies with paragraphs 4.1(4)(c)(ii) of NI 81-102 for purchases of Equity Securities during the 60 Day Period;
(c) For a purchase of Equity Securities, each issuer of the Equity Securities in the offering is a reporting issuer under the applicable securities legislation in a Canadian jurisdiction at the time of each purchase by a Fund during the Prohibition Period for the relevant offering;
(d) if Debt Securities are acquired in a relevant offering during the Distribution:
(i) there will be at least one underwriter acting as underwriter in the Distribution that is not a Related Dealer;
(ii) at least one purchaser who is independent and arm’s length to the Fund(s) and the Related Dealers must purchase at least 5% of the securities distributed under the Distribution,
(iii) the price paid for the securities by a Fund in the Distribution shall be no higher than the lowest price paid by any of the arm’s length purchasers who participate in the Distribution, and
(iv) a Fund and any related Funds for which a Filer or its affiliate or associate acts as manager and/or portfolio adviser can collectively acquire no more than 20% of the securities distributed under the Distribution in which a Related Dealer acts as underwriter;
(e) if Debt Securities are acquired in a relevant offering during the 60-Day Period,
(i) the ask price of the securities is readily available as provided in Commentary 7 to section 6.1 of NI 81-107,
(ii) the price paid for the securities by a Fund is not higher than the available ask price of the security, and
(iii) the purchase is subject to market integrity requirements as defined in NI 81-107;
(f) any Debt Securities acquired by the Funds pursuant to the Exemption Sought cannot be asset-backed commercial paper;
(g) prior to the first reliance on this Decision by a Fund,
(i) the website of the Fund or Filer, as applicable, discloses, and
(ii) on the date which is the earlier of:
(1) the date when an amendment to the simplified prospectus of the Fund is filed for reasons other than this Decision; and
(2) the date on which the initial or renewal simplified prospectus of the Fund is receipted, Part A of the simplified prospectus of the Fund discloses,
that the Fund may invest in Equity Securities or Debt Securities during the Prohibition Period pursuant to this Decision, notwithstanding that a Related Dealer has acted as underwriter in the relevant offering of the same class of such securities;
(h) on the date which is the earlier of:
(i) the date when an amendment to the annual information form of the Fund is filed for reasons other than this Decision; and
(ii) the date on which the initial or renewal annual information form of the Fund is receipted,
the annual information form of the Fund discloses the information referred to in paragraph (g) above and describes the policies or procedures and standing instructions if any, that have been approved by the IRC in relation to investments that can only be made pursuant to this Decision;
(i) no later than the time a Fund files it annual financial statements, the manager of the Fund will file particulars of each investment made by the Fund pursuant to the Exemption Sought during its most recently completed financial year; and
(j) this Decision will terminate on the coming into force of any legislation or rule of the principal regulator in the Jurisdiction dealing with Related Dealer Private Placements or Related Dealer Debt Offerings in the context of section 4.1 of NI 81-102.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds Branch
Ontario Securities Commission
sedar project#1728396