First Asset Investment Management Inc. (Re), 2014 CanLII 49690

Headnote

National Policy 11-203 Process for Exemption Relief Applications in Multiple Jurisdictions– The ETF is granted concentration restriction relief to invest up to 15% of its net assets taken at market value at the time of transaction in each of the 10 largest American and/or Canadian life insurance companies to pursue its investment objectives and strategies. Relief also granted to permit a closed-end fund converting into a mutual fund to show pre-conversion past performance in sales communications – the closed-end fund has had the same investment strategies as the ETF and any differences that may affect the performance will be disclosed.

Applicable Legislative Provisions

Section 2.1(1), 15.6(a), 15.6(d) and 19.1 of NI 81-102.

August 26, 2014

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 First Asset Investment Management Inc. (the Manager)

and

First Asset U.S. & Canada LifeCo Income Fund (the Fund)

DECISION

Background

The securities regulatory authority or regulator in the Jurisdiction (the Decision Maker) has received an application from the Manager for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption relieving the Fund from the prohibitions in subsections 2.1(1), 15.6(a) and 15.6(d) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit the Fund to (a) purchase a security of an issuer, enter into a specified derivatives transaction or purchase an index participation unit, notwithstanding the fact that, immediately after the transaction, more than 10 percent of the net asset value of the mutual fund will be invested in securities of a single issuer, subject to certain restrictions, and (b) show the historic performance data of its Common Units (as defined below) and Advisor Units (as defined below) in sales communications notwithstanding that it has not, as a mutual fund, distributed its units under a prospectus for 12 consecutive months and to permit sales communications relating to the Fund to contain performance data of the Fund for the period prior to the Fund offering its securities under a prospectus, as a mutual fund (the Requested Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (the Commission) is the principal regulator for this application, and

(b) the Manager 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, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Yukon, Nunavut and Northwest Territories (collectively, 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 herein.

Representations

This decision is based on the following facts represented by the Manager:

Organization and Structure of the Funds

1. The Fund is a closed-end investment fund and is in the process of converting into an exchange-traded fund (the Conversion). A press release announcing the conversion was issued on July 16, 2014.

2. Until the completion of the Conversion, the Fund is not a “mutual fund” as defined under applicable securities legislation and does not operate in accordance with the requirements of securities legislation applicable to mutual funds. After the Conversion, the Fund will be a mutual fund subject to NI 81‑102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities.

3. The prospectus of the Fund dated July 26, 2013 (the Closed-End Prospectus) stated, under the heading “Exemptions and Approvals”, that “prior to the Conversion, the Fund will apply for exemptive relief from subsection 2.1(1) of NI 81-102 which prohibits the Fund from purchasing a security of an issuer if, immediately after the transaction, more than 10 percent of its net asset value would be invested in securities of any issuer”.

4. The Manager is the trustee, portfolio adviser and manager of the Fund. The Manager is registered as an investment fund manager, a portfolio manager and an exempt market dealer under the Securities Act (Ontario) and a commodity trading manager under the Commodity Futures Act (Ontario). It is also registered as an investment fund manager under the Securities Act (Newfoundland and Labrador) and Securities Act (Quebec). The head office of the Manager is located at 95 Wellington Street West, Suite 1400, Toronto, Ontario, M5J 2N7.

5. The Manager filed the Closed-End Prospectus with the securities regulatory authority in each province and territory of Canada to qualify the units of the Fund (the Closed-End Units) for distribution to the public. The Commission issued a receipt for the Closed-End Prospectus on July 29, 2013.

6. Pursuant to the Declaration of Trust of the Fund, the Fund will automatically convert into an exchange-traded fund after March 31, 2014 if, for a period of 10 consecutive trading days, the daily weighted average trading price (or, in the event there has been no trading on a particular day, the average of the closing bid and ask prices) of the Closed-End Units is at a discount greater than 2% of the net asset value per Closed-End Unit for that day and, in any event, no later than March 31, 2015, subject to applicable regulatory approvals.

7. The Fund is a reporting issuer as defined under the applicable securities legislation of each province and territory of Canada and is not in default of any of the requirements of the securities legislation of the provinces and territories of Canada.

8. In connection with the Conversion, the Declaration of Trust of the Fund will be amended and restated in order to effect the Conversion and to permit the Fund to offer two classes of units: common units (the Common Units) and advisor units (the Advisor Units, and together with the Common Units, the ETF Units). The only difference between the Common Units and the Advisor Units is the management fee payable by the Fund due to the service fee payable by the Manager in respect of the Advisor Units.

9. Unitholders will not be required to take any action in connection with the Conversion, and on the date of the Conversion, the Closed-End Units outstanding will be redesignated as Common Units. Post-Conversion unitholders will have daily redemption rights.

10. The Manager filed a preliminary long form prospectus on July 21, 2014 (the ETF Prospectus) to qualify the distribution of the ETF Units under National Instrument 41-101 – General Prospectus Requirements in each of the provinces and territories of Canada.

11. A material change report in connection with the filing of the ETF Prospectus and the initiation of the Conversion as a result of the triggering of the Fund’s automatic conversion feature in accordance with the Declaration of Trust of the Fund was filed on July 22, 2014.

12. The Closed-End Units are listed on the Toronto Stock Exchange (the TSX) and will remain listed on the TSX after the Conversion as Common Units. The Manager, on behalf of the Fund, has applied to list the Advisor Units on the TSX.

13. Following the Conversion, the Fund will be renamed “First Asset U.S. & Canada Lifeco Income ETF”, and will be a mutual fund subject to NI 81-102.

Concentration Restriction

14. The Fund was created to invest (the “Proposed Investments”) in a portfolio (the Portfolio) of publicly-traded common equity securities (the Portfolio Securities) of the ten largest U.S. and Canadian life insurance companies by market capitalization (LifeCo Companies).

15. As of the date hereof, the LifeCo Companies are comprised of Sun Life Financial Inc., Manulife Financial Corp., Lincoln National Corp., Torchmark Corp., Principal Financial Group, Unum Group, Metlife Inc., Great West Lifeco Inc., Prudential Financial Inc., and Aflac Inc., with an average market capitalization of US$26.6 billion as of July 31, 2014.

16. The Portfolio Securities are some of the most liquid equity securities listed on the NYSE and, if applicable, the TSX, and are less likely to be subject to liquidity concerns than the securities of other issuers. The average daily trading volume of the Portfolio Securities on the NYSE and, if applicable, the TSX, in the month of July 2014 was approximately $1.8 million.

17. The investment objectives of the Fund are to provide unitholders of the Fund with: (i) quarterly cash distributions; (ii) the opportunity for capital appreciation; and (iii) lower overall volatility of Portfolio returns than would be experienced by owning a portfolio of common equity securities of LifeCo Companies directly.

18. The investment strategy of the Fund is to invest in and hold the Portfolio Securities of the LifeCo Companies on an approximately equal weighted basis.

19. The Fund may also sell call options each month on up to 25% of the Portfolio Securities of each LifeCo Company. The Manager may decide, in its discretion, not to sell call options in any month.

20. The Portfolio will not be rebalanced upon Conversion, but will be rebalanced and reconstituted annually after each calendar year or in connection with corporate events, such as mergers or take-over bids, so that immediately following such rebalancing, the Portfolio is comprised of publicly-traded common equity securities of LifeCo Companies on an approximately equal weight basis based on the market capitalization at the end of the calendar year with respect to an annual rebalancing or the prior business day with respect to other rebalancings.

21. Between such rebalancings, the investment of premiums from call options in excess of amounts required to pay expenses and distributions is or, following Conversion, the investment of net proceeds from the sale of additional Units will be, subject to applicable regulatory relief, invested on a pro rata basis. Accordingly, depending on the relative value of the Portfolio Securities at the time of investment, it is possible that immediately after such investment, more than 10% of the Fund’s net asset value would be invested in the securities of one issuer.

22. The investment objectives and investment strategies of the Fund, as well as the risk factors associated therewith, were disclosed in the Closed-End Prospectus and the ETF Prospectus and will be disclosed in each renewal prospectus of the Fund.

23. The Portfolio Securities are listed on, among others, either the TSX and/or the New York Stock Exchange (NYSE).

24. The LifeCo Companies are the ten largest LifeCo Companies by market capitalization, have a combined market capitalization of approximately $286 billion and represent approximately 87% of the total market capitalization of life insurance companies listed on a North American stock exchange.

25. The liquidity of the Portfolio Securities is further evidenced by the markets for options in connection with the Portfolio Securities. A liquid market for options on the Portfolio Securities is primarily provided by the Montreal Exchange, the NYSE, the Chicago Board Options Exchange, the International Securities Exchange and the NASDAQ, as applicable to each Lifeco Company.

Performance Data Restrictions

26. Following the Conversion, the investment objectives and investment restrictions of the Fund as described in the Closed-End Prospectus will remain substantially similar, except as may be necessary to comply with applicable law, including NI 81-102, subject to the Requested Relief.

27. The Manager expects that the Fund will be managed in a substantially similar manner post-Conversion as it was pre-Conversion. Any changes between the Fund pre- and post-Conversion that could have a material effect on the performance of the Fund will be disclosed in sales communications pertaining to the Fund.

28. For the Common Units, there will be no change in the management fee (0.75% of the net asset value) charged for the Common Units pre- and post-Conversion. For the Advisor Units, post-Conversion the management fee will be 1.50% of the net asset value, which includes a servicing fee of 0.75%.

29. Without the Requested Relief, sales communications pertaining to the Fund will only be permitted to include performance data pertaining to the Common Units for the period commencing after approximately August 25, 2014, being the date on which the Fund is expected to have commenced distributing securities, as a mutual fund.

Decision

The Decision Maker is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Maker under the Legislation is that the Requested Relief is granted, provided that, with respect to the relief for the Concentration Restriction:

(a) The Proposed Investments are in accordance with the investment objectives of the Fund;

(b) The Fund will not purchase equity securities of any LifeCo Company or enter into any transaction to obtain indirect exposure to equity securities of any LifeCo Company if immediately after the transaction, more than 15 percent of the net assets of the Fund, taken at market value at the time of the transaction, would be invested, directly or indirectly, in securities of such LifeCo Company; and

(c) the prospectus of the Fund will disclose the fact that the Fund has obtained the Requested Relief on the terms described in this decision.

Signed

Vera Nunes

Manager, Investment Funds and Structured Products

Ontario Securities Commission