Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -exemption granted to permit Funds to store and hold portfolio assets in the form of physical bullion in and outside Canada through Brinks or Via Mat, for purposes other than facilitating portfolio transactions of the Funds. Applicable Legislative Provisions National Instrument 81-102 Mutual Funds, ss. 6.1(2), 6.1(3)(b), 6.2, 6.3 and 19.1.
September 27, 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
MACKENZIE FINANCIAL CORPORATION
(the Filer)
and
IN THE MATTER OF CANADIAN IMPERIAL BANK OF COMMERCE
(the Custodian)
and
IN THE MATTER OF THE BANK OF NOVA SCOTIA
(the Bullion Custodian)
and
MACKENZIE GLOBAL TACTICAL FUND, MACKENZIE UNIVERSAL CANADIAN RESOURCE FUND, MACKENZIE UNIVERSAL PRECIOUS METALS FUND, MACKENZIE UNIVERSAL WORLD PRECIOUS METALS CLASS AND MACKENIZE UNIVERSAL WORLD RESOURCE CLASS
(the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption, pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102), from the following provisions of NI 81-102:
(a) clause 6.1(2)(b), to permit physical bullion of each Fund to be held outside Canada by the Custodian or the Bullion Custodian, for purposes other than facilitating portfolio transactions of the Fund outside Canada;
(b) clause 6.1(3)(b), to permit the Custodian or the Bullion Custodian to appoint the Brinks Company or its subsidiaries or affiliates (Brinks), or Via Mat International Ltd. or its subsidiaries or affiliates (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 each Fund’s physical bullion;
(c) section 6.2 to permit Brinks and Via Mat to be appointed as sub-custodians of each Fund to hold the Funds’ physical bullion in Canada; and
(d) section 6.3, to permit Brinks and Via Mat to be appointed as sub-custodians of the Fund to hold each Fund’s physical bullion outside Canada (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 section 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, Québec, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, the Yukon Territory and Nunavut, where applicable.
Interpretation
Terms defined in NI 81-102, 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 Funds
The Filer is a corporation incorporated under the laws of the province of Ontario and is registered in the category of Portfolio Manager in, all of the provinces and territories of Canada. The head office of the Filer is in Toronto, Ontario.
The Filer is registered as an investment fund manager in the province of Ontario.
The Filer is the manager of Mackenzie Universal Canadian Resource Fund, Mackenzie Universal Precious Metals Fund, Mackenzie Universal World Precious Metals Class and Mackenzie Universal World Resource Class (each an Existing Fund). The Filer will act as manager of Mackenzie Global Tactical Fund (the Future Fund).
Mackenzie Universal Canadian Resource Fund and Mackenzie Universal Precious Metals Fund are open-end mutual fund trusts established under the laws of the province of Ontario, pursuant to which the Filer is trustee. Mackenzie Universal World Precious Metals Class and Mackenzie Universal World Resource Class are classes of shares of Mackenzie Financial Capital Corporation. The Future Fund will be an open-end mutual fund trust established under the laws of the province of Ontario by a declaration of trust, pursuant to which the Filer is the trustee.
Neither the Filer nor any of the mutual funds for which it acts as manager is in default of securities legislation in any Jurisdiction.
A preliminary simplified prospectus dated August 28, 2012 (the Preliminary Prospectus) for the Future Fund was filed via SEDAR under project No. 1952339. Once a final prospectus for the Future Fund is filed and receipt is obtained, the Future Fund will be a “reporting issuer” or equivalent in each Jurisdiction. Each Existing Fund is currently qualified for distribution in all provinces and territories of Canada pursuant to a simplified prospectus dated September 30, 2011, as amended.
The investment objective of the Future Fund is to seek total return over the long term by allocating its assets among all asset classes, including but not limited to equality securities, fixed-income securities, short-term instruments of issuers in markets around the globe, commodities and foreign currencies. As a subset of the Future Fund’s investments in commodities, the Future Fund may invest in gold and silver, and instruments (such as derivatives and ETFs) that provide exposure to these metals. The Future Fund’s investments in gold or silver bullion will at all times be made in accordance with the investment restrictions set forth in NI 81-102 or in accordance with exemptive relief therefrom, as described in the simplified prospectus of the Future Fund.
Each Existing Fund is permitted to invest directly in gold and silver. Each Existing Fund’s investments in gold and silver bullion will at all times be made in accordance with the investment restrictions set forth in NI 81-102 or in accordance with exemptive relief therefrom, as described in the simplified prospectus of each Existing Fund.
Each of Mackenzie Universal Precious Metals Fund, Mackenzie Universal World Precious Metals Class and Mackenzie Universal World Resource Class is permitted to invest directly in platinum and palladium. Each of Mackenzie Universal Precious Metals Fund, Mackenzie Universal World Precious Metals Class and Mackenzie Universal World Resource Class investments in platinum and palladium bullion will at all times be made in accordance with the investment restrictions set forth in NI 81-102 or in accordance with exemptive relief therefrom, as described in the simplified prospectus of each of these Funds.
Custody of Bullion Held by the Funds
Pursuant to a Master Custodian Agreement dated February 24, 2005, as amended (the Custodian Agreement) the Custodian acts as the custodian for all mutual funds managed by the Manager. The Custodian holds, or in the case of the Future Fund, will hold, the property of each Fund other than each Fund’s physical bullion. Except as stated herein, 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 each Fund, to hold the Funds’ physical gold and silver bullion, and, in the case of Mackenzie Universal Precious Metals Fund, Mackenzie Universal World Precious Metals Class and Mackenzie Universal World Resource Class, to hold platinum and palladium bullion (in addition to gold and/or silver bullion). These custody arrangements will be governed by the terms of an agreement among the Custodian, the Bullion Custodian and the Filer (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 Funds’ physical gold, silver, platinum and palladium bullion will be stored and held either on an allocated and segregated basis in the vault facilities of the Bullion Custodian, in Canada, London, England or New York, U.S.A, or will be stored in the vault of a sub-custodian on an allocated and segregated basis in Canada, London, England or New York, U.S.A, where in the latter case it shall be identified as the property of the Bullion Custodian. The Bullion Custodian shall at all times record and identify in the books and records maintained by the Bullion Custodian that such bullion is being held on behalf of the Custodian. The Bullion Custodian 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 will be the appropriate choice to provide custodial services to the Funds because the Bullion Custodian is experienced in providing gold, silver, platinum and palladium storage and custodial services, and is familiar with the requirements relating to the physical handling and storage of gold, silver, platinum and palladium bullion.
The Funds will not insure their physical gold, silver, platinum or palladium. The Bullion Custodian requires that the Bullion Custodian or any sub-custodian maintain insurance on such terms and conditions as it considers appropriate against all risk of physical loss of, or damage to, bullion stored in the Bullion Custodian or any sub-custodian’s vaults except the risk of war, nuclear incident, terrorism events or government confiscation. None of the Manager, the Funds, nor the Custodian are 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 or any sub-custodian has obtained will be appropriate for the Funds. The Bullion Custodian Agreement provides that the Bullion Custodian shall not cancel its insurance or permit its sub-custodian to cancel such insurance except upon 30 days prior written notice to the Manager. The Fund will disclose the material details of that insurance arrangement in its final annual information form.
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, platinum and palladium bullion which the Fund may acquire, there may not be sufficient space in the vault facilities of the Bullion Custodian to store all of the Funds’ physical gold, silver, platinum and palladium bullion.
As a result, the Bullion Custodian may be required to use the services of sub-custodians to store some of the Funds’ physical gold, silver, platinum and palladium bullion.
The Bullion Custodian has advised the Custodian and the Manager that it proposes to use Brinks and Via Mat, as sub-custodians, if necessary, to hold the physical gold, silver, platinum and palladium bullion of the Funds. 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 and metal traders. 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 may not have the excess capacity that the Funds may need to store physical silver bullion. These capacity constraints have been intensified due to the increased 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 Funds’ physical gold, silver, platinum and palladium 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 Funds’ physical gold, silver, platinum and palladium 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 the case may be, (the Bullion Sub-Custodian Agreements), the terms of which will comply with Part 6 of NI 81-102, except as represented herein.
To the best of the Manager's, the Fund's, the Custodian's and the Bullion Custodian's knowledge, the Custodian Agreement, the Bullion Custodian Agreement and the Bullion Sub-Custodian Agreements are consistent with industry practice.
In relation to the Funds, the sub-custodial activities of Brinks and Via Mat will be limited to holding the Funds’ physical gold, silver, platinum and palladium bullion. All physical gold, silver, platinum and palladium bullion of the Funds held by Brinks and Via Mat will be held in vault facilities in Canada, London, England or New York, U.S.A, 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 Funds 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 Funds, (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 for 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' and Via Mats' liability for the loss, damage or destruction of such bullion.
The Bullion Custodian has advised the Funds and the Manager that each of Brinks and Via Mat have arranged for sufficient insurance coverage in respect of any of the Funds’ physical gold, silver, platinum and palladium bullion 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 Funds.
Pursuant to the Custodian Agreement, in safekeeping the property of the Funds, the Custodian is required to exercise (i) the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances; or (ii) 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 (i). In addition, pursuant to the Custodian Agreement, the Custodian is not entitled to an indemnity from the Funds in the event the Custodian breaches its standard of care. The Bullion Custodian Agreement includes a similar standard of care in respect of the obligations of the Bullion Custodian and a similar provision in respect of the Bullion Custodian's indemnity. 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 Agreement is no less than the degree of care referred to in (i).
The Bullion Custodian Agreement provides that, in addition to any other rights of the Funds thereunder, the Bullion Custodian shall indemnify and hold harmless the Funds in respect of all direct loss, damage or expense arising out of any negligence, willful misconduct, fraud or lack of good faith by the Bullion Custodian or any sub-custodian or sub-sub-custodian (including Brinks and Via mat), in respect of the services contemplated thereunder, provided however, that the liability for any loss, damage or expense to which the above indemnity would apply shall be limited to losses, damages or expenses as follows:
a. in the case of the loss of bullion, such bullion or other property shall be replaced where commercially practicable and reasonably feasible; provided, however, that, in the context of bullion, the replacement bullion which is to be provided by the Bullion Custodian shall be of the same fineness and shall be in the same form as the allocated bullion actually delivered and then held by the Bullion Custodian at the time of the incurrence of the relevant loss (and, in such respect, the Bullion Custodian's opinion shall be determinative as to such fineness and form);
b. where replacement of such bullion or other property is not commercially practicable and reasonably feasible, the Fund shall be paid the market value of such bullion based upon fineness and the form of the allocated bullion actually delivered and then held by the Custodian at the time of the incurrence of the relevant loss (and, in such respect, the Bullion Custodian's opinion shall be determinative as to such fineness and form) or other property at the time the loss is discovered; and
c. in any other case, the amount of any interest or income to which the Fund is entitled, but which is not received by the Fund, shall be paid to it.
The Bullion Custodian Agreement provides that if a Fund suffers a loss as a result of any act or omission of a sub-custodian (including Brinks and Via mat), or of any other agent appointed by the Bullion Custodian (rather than appointed by the Manager) and if such loss is directly attributable to the failure of such agent to comply with its standard of care in the provision of any service to be provided by it under the Bullion Custodian Agreement or the applicable Bullion Sub-Custodian Agreement, then the Bullion Custodian shall assume liability for such loss directly, and shall reimburse the Fund accordingly.
The Funds’ auditors will be present during, and will verify, a physical count of all of the Funds’ physical gold, silver, platinum and palladium bullion, whether held by the Bullion Custodian, Brinks, or Via Mat, at least once every year. The Funds and their auditors will have the ability, with sufficient advance notice to the Bullion Custodian, who shall make arrangements with Brinks or Via Mat, where required, to attend at the vaults of the Bullion Custodian, Brinks and/or Via Mat as required to verify the gold, silver, platinum and palladium bullion held by the Bullion Custodian, Brinks or Via Mat on behalf of the Funds.
The Bullion Custodian shall, to the best of its ability, monitor the most recent audited financial statements of Brinks and Via Mat or their respective affiliates or subsidiaries, in order to ensure that the shareholders' equity of such entities is sufficient with what the Bullion Custodian believes to be appropriate for an entity acting as custodian of physical bullion and, in any event at sufficient levels in order to meet the Bullion Custodian's own internal requirements as though the Bullion Custodian were seeking to deposit its own physical bullion with such sub-custodians.
All bullion purchased by the Funds 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.
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) so long as the simplified prospectus of each Fund contains disclosure regarding the unique risks associated with an investment in the Funds, including the risk that direct purchases of bullion by the Funds may generate higher transaction and custody costs than other types of investments, which may impact the performance of the Funds;
(b) in respect of the relief granted from the requirements of sections 6.1(2)(b), 6.1(3)(b), 6.2 and 6.3, the Funds, the Manager, the Custodian and the Bullion Custodian are limited to using Brinks and Via Mat as sub-custodians for the gold, silver, platinum and palladium bullion of the Funds which will be held only in Canada, London, England or New York (U.S.A.); and
(c) 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-custodian 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 20 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 Funds’ physical gold, silver, platinum and palladium bullion.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR #1952349