June 3, 2015
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 PURPOSE INVESTMENTS INC. (the Filer)
AND
IN THE MATTER OF THE TOP FUNDS (defined below)
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 (the Legislation) granting an exemption to the existing commodity pools (as defined by National Instrument 81 – 104 – Commodity Pools (NI 81-104)) listed at Schedule “A” (the Existing Top Funds) and such commodity pools that may be managed by the Filer or its affiliates in the future (the Future Top Funds, and together with the Existing Top Funds, the Top Funds and individually, a Top Fund) that are subject to National Instrument 81-102 – Investment Funds (NI 81-102) and NI 81-104 from the following prohibitions in NI 81-102 (the Requested Relief):
(a) subsection 2.1(1) of NI 81-102 (the Concentration Restriction), to permit each Top Fund to purchase a security of an Underlying ETF (as defined below) or enter into a specified derivatives transaction with respect to an Underlying ETF even though, immediately after the transaction, more than 10% of the net asset value of the Top Fund would be invested, directly or indirectly, in the securities of the Underlying ETF;
(b) paragraph 2.2(1)(a) of NI 81-102 to permit each Top Fund to purchase securities of an Underlying ETF such that, after the purchase, the Top Fund would hold securities representing more than 10% of:
(i) the votes attaching to the outstanding voting securities of the Underlying ETF; or
(ii) the outstanding equity securities of the Underlying ETF;
(c) paragraph 2.5(2)(a) of NI 81-102, to permit each Top Fund to invest in securities of an Underlying ETF; and
(d) paragraph 2.5(2)(e) of NI 81-102, to permit each Top Fund to pay brokerage commissions in relation to its purchase and sale on a recognized exchange (as defined in the Securities Act (Ontario)) in Canada of securities of an Underlying ETF.
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 paragraph 4.7(1)(c) 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, Yukon, Northwest Territories and Nunavut.
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
The Filer
The Filer is a corporation incorporated under the laws of the Province of Ontario. The Filer is registered as an investment fund manager, portfolio manager and an exempt market dealer under the Securities Act (Ontario). The head office of the Filer is located at 130 Adelaide Street West, Suite 1700, Toronto, Ontario, M5H 3P5.
The Filer or an affiliate of the Filer acts or will act as the investment fund manager of the Top Funds.
None of the Filer, the existing Top Funds or the Existing Underlying ETFs (as defined below), is in default of any of its obligations under the securities legislation of any of the provinces and territories of Canada.
The Top Funds
The Top Funds are, or will be, exchange traded open-ended mutual funds organized and governed by the laws of a jurisdiction of Canada.
Each of the Top Funds is, or will be, a “commodity pool” for purposes of National Instrument 81-104 – Commodity Pools (NI 81-104) and its securities are, or will be, governed by the provisions of NI 81-102 and NI 81-104, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.
Each Top Fund has distributed, distributes, or will distribute, its securities pursuant to a long form prospectus prepared pursuant to National Instrument 41-101 – General Prospectus Requirements (NI 41-101) and Form 41-101F2 – Information Required in an Investment Fund Prospectus (Form 41-101F2) and are, or will be, governed by the applicable provisions of NI 81-102 and NI 81-104, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.
The Top Funds are, or will be, reporting issuers in the provinces and territories of Canada in which their securities are distributed.
Each Top Fund wishes to have the ability to invest up to 100% of its net asset value in any one or more of the exchange traded mutual funds (the Existing Underlying ETFs) listed in Schedule “B” each of which is a commodity pool and such other similar exchange traded mutual funds as may be established and managed by the Filer or an affiliate of the Filer in the future (the Future Underlying ETFs and, together with the Existing Underlying ETFs, the Underlying ETFs or individually, an Underlying ETF).
Each investment by a Top Fund in securities of an Underlying ETF will be made in accordance with the investment objectives and investment restrictions of the Top Fund and will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund.
The prospectus of each Top Fund discloses, or will disclose the next time it is renewed after the date of this decision, that the fund will or may obtain exposure to securities of an Underlying ETF and the risks associated with such an investment.
The Underlying ETFs
The Filer, or an affiliate of the Filer acts or will act, as the investment fund manager of the Underlying ETFs.
Each Underlying ETF is, or will be:
(a) a commodity pool, as defined by NI 81-104,;
(b) a reporting issuer in the provinces and territories of Canada in which its securities are distributed; and
(c) listed on the Toronto Stock Exchange (the TSX) or another “recognized exchange” in Canada as that term is defined in securities legislation.
Each Underlying ETF distributes, or will distribute, its securities pursuant to a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2.
No Underlying ETF holds, or will hold more than 10% of its net asset value in securities of other investment funds unless the securities of the other investment funds are securities of a money market fund, as defined in NI 81-102, or index participation units (IPUs), as defined in NI 81-102, issued by an investment fund.
The securities of the Underlying ETFs do not, or will not, constitute IPUs.
Each Underlying ETF does not, or will not, pay management or incentive fees which to a reasonable person would duplicate a fee payable by the Top Fund for the same service.
If the investment fund manager of a Top Fund (the Top Fund Manager) determines that the management fees and incentive fees payable by an Underlying ETF to its investment fund manager (the Underlying ETF Manager) would duplicate a fee payable by the Top Fund for the same service, the Underlying ETF Manager will pay a management fee rebate to the Top Fund that will not exceed the management fee payable by the Top Fund to the Top Fund Manager in respect of the Top Fund’s investment in the Underlying ETF.
No Top Fund that holds securities of an Underlying ETF will vote any of those securities.
Holders of securities of an Underlying ETF may:
(a) sell such securities on the TSX or other recognized exchange in Canada on which the securities are listed for trading;
(b) redeem such securities in any number for cash at a redemption price equal to 95% of the market price of the security on the applicable exchange on the effective day of redemption; or
(c) exchange a prescribed number of securities (a PNU) (or an integral multiple thereof) of the Underlying ETF for cash and/or securities at an exchange price equal to the net asset value of the securities of the Underlying ETF tendered for exchange on the effective day of the exchange request.
Each Underlying ETF primarily achieves, or primarily will achieve, its investment objectives through direct holdings of cash and securities and, in some circumstances, through investments in specified derivatives for hedging and non-hedging purposes, in each case in accordance with its investment objectives and strategies and in compliance with NI 81-102 and NI 81-104.
All brokerage costs related to trades in securities of the Underlying ETFs will be borne by the Top Funds in the same manner as any other portfolio transactions made on an exchange.
Each Top Fund is, or will be, subject to National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107) generally and including in respect of conflicts of interest matters arising from trades in securities of an Underlying ETF. If a Top Fund makes a trade in securities of an Underlying ETF with or through an affiliate or associate of the Filer acting as dealer, the Filer will comply with its obligations under NI 81-107 in respect of any proposed related party transactions and all such related party transactions will be disclosed to securityholders of such Top Fund in the applicable management report of fund performance for such Top Fund.
The securities of each Underlying ETF are, or will be, highly liquid, as designated brokers act as intermediaries between investors and each Underlying ETF, standing in the market with bid and ask prices for such securities to maintain a liquid market for them.
Reasons for the Requested Relief
An investment in an Underlying ETF by a Top Fund is an efficient and cost effective alternative to administering one or more investment strategies directly.
Absent the Requested Relief, a Top Fund that is a mutual fund would be prohibited by subsection 2.1(1) of NI 81-102 from investing more than 10% of its net asset value in the securities of an Underlying ETF. The Requested Relief would only grant each Top Fund relief from the Concentration Restriction in respect of the Top Fund’s direct or indirect holdings of the securities issued by an Underlying ETF. The Requested Relief would not relieve a Top Fund from the application of the Concentration Restriction in respect of the Top Fund’s indirect holdings held by an Underlying ETF and each Top Fund will comply with the Concentration Restriction in respect of such Top Fund’s indirect holdings in securities held by an Underlying ETF and will apply subsections 2.1(3) and 2.1(4) of NI 81-102 in connection therewith.
Due to the potential size disparity between the Top Funds and the Underlying ETFs, it is possible that a relatively small investment, on a percentage of net asset value basis, by a relatively larger Top Fund in an Underlying ETF could result in such Top Fund holding securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of such Underlying ETF; or (ii) the outstanding equity securities of that Underlying ETF, contrary to the restrictions in paragraph 2.2(1)(a) of NI 81-102.
Absent the Requested Relief, an investment by a Top Fund in securities of an Underlying ETF would not qualify for the exemptions in:
(a) paragraph 2.1(2)(d) of NI 81-102 from paragraph 2.1(1) of NI 81-102;
(b) paragraph 2.2(1.1)(b) of NI 81-102 from paragraph 2.2(1)(a) of NI-81-102; and
(c) subsection 2.5(3) of NI 81-102 from paragraph 2.5(2)(a) of NI 81-102;
because the securities of the Underlying ETF would not be index participation units.
The only material difference between an Underlying ETF and a mutual fund governed by NI 81-102 and NI 81-104 is the method of acquisition and disposition of its units. If the Requested Relief is granted, the Top Funds will be permitted to purchase securities of a mutual fund that are listed on the TSX (or another recognized exchange in Canada) in the same manner that they are permitted to invest in a mutual fund that is not listed on a recognized exchange (i.e., a mutual fund governed by NI 81-102 and NI 81-104).
An investment by a Top Fund in an Underlying ETF would not qualify for the exemption in paragraph 2.5(3) of NI 81-102 from paragraph 2.5(2) of NI 81-102 because the Underlying ETF does not issue IPUs.
It is anticipated that many of the trades conducted by the Top Funds would not be of the size necessary for a Top Fund to be eligible to purchase or redeem a PNU directly from the Underlying ETF. As a result, it is anticipated that the majority of trading in respect of securities of the Underlying ETFs will be conducted in the secondary market using the facilities of the TSX or other recognized exchange in Canada.
An investment by a Top Fund in an Underlying ETF would not qualify for the exemption in subsection 2.5(5) of NI 81-102 from paragraph 2.5(2)(e) of NI 81-102 because the Underlying ETF does not issue IPUs. As such, absent the Requested Relief, when a Top Fund trades securities of an Underlying ETF on the TSX or other recognized exchange in Canada, paragraph 2.5(2)(e) would not permit the Top Fund to pay any brokerage fees incurred in connection with the trade.
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 Requested Relief is granted, provided that:
(a) each Top Fund and Underlying ETF is a commodity pool subject to NI 81-102 and NI 81-104;
(b) the investment by a Top Fund in securities of an Underlying ETF is in accordance with the investment objectives of the Top Fund;
(c) an Underlying ETF does not rely on exemptive relief that would allow a Top Fund, through their investment in the Underlying ETF, to do indirectly what it cannot do directly under NI 81-102 and NI 81-104;
(d) a Top Fund does not sell securities of an Underlying ETF short;
(e) in connection with the Requested Relief from subsection 2.1(1) of NI 81-102 under this decision allowing a Top Fund to invest more than 10% of its net asset value in the securities of an Underlying ETF, the Top Fund shall, for each investment it makes in the securities of an Underlying ETF, apply subsections 2.1(3) and 2.1(4) of NI 81-102 as if those provisions applied to a Top Fund’s investments in securities of an Underlying ETF, and accordingly limit a Top Fund’s indirect holdings in securities of an issuer held by one or more Underlying ETFs to no more than 10% of the Top Fund’s net asset value;
(f) the investment by a Top Fund in securities of an Underlying ETF is made in compliance with section 2.5 of NI 81-102, with the exception of paragraph 2.5(2)(a) and, in respect only of brokerage fees incurred for the purchase and sale of Underlying ETFs by the Top Funds, paragraph 2.5(2)(e); and
(g) the prospectus of each Top Fund discloses, or will disclose the next time it is renewed after the date of this decision, that (i) the Top Funds have obtained the Requested Relief to permit the relevant transactions on the terms described in this decision and (ii) the Top Funds will or may obtain exposure to securities of an Underlying ETF and the risks associated with such an investment.
“Raymond Chan”
Raymond Chan
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission
SEDAR Project #2305216
SCHEDULE “A”
EXISTING TOP FUNDS
Purpose Diversified Real Asset Fund
Purpose Enhanced US Equity Fund
Purpose Multi-Strategy Market Neutral Fund
SCHEDULE “B”
EXISTING UNDERLYING ETFS
Purpose Diversified Real Asset Fund
Purpose Multi-Strategy Market Neutral Fund
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from subsection 2.1(1) and paragraphs 2.2(1)(a), 2.5(2)(a) and 2.5(2)(e) of National Instrument 81-102 – Investment Funds to allow exchange-traded commodity pools to invest in other exchange-traded commodity pools under common management or managed by an affiliate, and to allow the top commodity pools to pay brokerage commissions for the purchase and sale of the securities of the underlying commodity pools – Commodity pools are subject to NI 81-102 and National Instrument 81-104 – Commodity Pools – Relief subject to terms and conditions based on investment restrictions of NI 81-102 and NI 81-104 such that top commodity pools cannot do indirectly via investment in underlying commodity pool what they cannot do directly under NI 81-102 and NI 81-104.
Applicable Legislative Provisions
National Instrument 81-102 – Investment Funds, ss. 2.1(1), 2.2(1)(a), 2.5(2)(a) and 2.5(2)(e).