October 19, 2016
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)
Decision
I. Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Purpose Canadian Financial Income Fund (the Fund), which is a separate class of shares of Purpose Fund Corp., for a decision (the Decision) under the securities legislation of the Jurisdiction (the Legislation) granting the Fund relief from Section 2.1(1) of National Instrument 81-102 – Investment Funds (NI 81-102) (the Requested Relief) to permit the Fund to invest more than 10% of its net asset value (NAV) in securities of one or more Canadian Banks (defined below), subject to certain conditions proposed in this Decision.
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 all of the provinces and territories of Canada other than Ontario (together with Ontario, the Jurisdictions).
II. 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.
(a) Canadian Bank means the Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank or in the event of a merger, acquisition or other significant corporate action or event of or affecting any such bank, the top six Canadian banks listed on the Toronto Stock Exchange or other recognized exchange in Canada by market capitalization.
(b) Canadian Insurance Company means Great West Lifeco Inc., Industrial Alliance Insurance & Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc. or in the event of a merger, acquisition or other significant corporate action or event of or affecting any such insurance company, the top four Canadian insurance companies listed on the Toronto Stock Exchange or other recognized exchange in Canada by market capitalization.
(c) Exchange means the Toronto Stock Exchange (TSX) or another stock exchange recognized by the Ontario Securities Commission.
(d) Shareholder means a holder of one or more ETF Shares or Mutual Fund Shares of the Fund.
Unless otherwise specified, all references to money amounts are to the lawful currency of Canada.
III. Representations
This Decision is based on the following facts represented by the Filer.
The Filer is a corporation incorporated under the laws of Ontario.
The registered office of the Filer is located at 130 Adelaide Street West, Suite 1700, Toronto, Ontario.
The Filer is registered as an investment fund manager, portfolio manager and an exempt market dealer under the Securities Act (Ontario).
The manager of the Fund will be the Filer or an affiliate thereof.
The Fund is a separate class of shares of Purpose Fund Corp. and is divided into five series which currently consists of ETF Shares, Series A Shares, Series F Shares, Series XA Shares and Series XF Shares.
The Filer is not in default of securities legislation in any of the Jurisdictions.
The Fund is or will be a mutual fund governed by the laws of Ontario and a reporting issuer under the laws of all of the Jurisdictions. The Fund will offer ETF Shares and Mutual Fund Shares.
The Fund’s investment objectives are to provide Shareholders with (i) long-term capital appreciation through investment in a portfolio of Canadian Banks (up to 70% on an equal weighted basis) and Canadian Insurance Companies (up to 30% on an equal weighted basis) and (ii) monthly distributions.
To achieve its investment objectives, the Fund will invest primarily in equity securities of Canadian Banks and to a lesser extent Canadian Insurance Companies. The Fund may write covered call options from time to time in respect of the securities it holds to (i) enhance the Fund’s total returns, (ii) enhance the dividend yield of the portfolio securities and (iii) lower the overall volatility of the Fund’s portfolio.
The common shares of the Canadian Banks and Canadian Insurance Companies are listed on the TSX.
The common shares of Canadian Banks and Canadian Insurance Companies are some of the most liquid equity securities listed on the TSX and are less likely to be subject to liquidity concerns than the securities of other issuers. The initial portfolio of Canadian Banks that the Fund initially expects to invest in as described above has an average market capitalization that exceeds $65 billion and average daily trading volume of over $200 million. The initial portfolio of Canadian Insurance Companies that the Fund initially expects to invest in as described above has an average market capitalization that exceeds $24 billion and average daily trading volume of over $60 million.
The liquidity of the common shares of the Canadian Banks and Canadian Insurance Companies is also evidenced by the markets for options in connection with them. A liquid two-way market for options on the common shares of the Canadian Banks and Canadian Insurance Companies is provided on a daily basis by the Montreal Exchange.
The Filer will apply to list the ETF Shares of the Fund on the TSX. The Filer will not file a final simplified prospectus and annual information form of the Fund in respect of the ETF Shares until the TSX or another recognized stock exchange has conditionally approved the listing of the ETF Shares.
Mutual Fund Shares will not be listed and may be subscribed for or purchased directly from the Fund through qualified financial advisors and brokers.
The Fund is subject to NI 81-102 and accordingly is not permitted to purchase securities of an issuer if, immediately after the transaction more than 10% of its NAV would be invested in securities of such issuer pursuant to Section 2.1(1) of NI 81-102.
The Fund will invest up to 70% of its NAV in common shares of the Canadian Banks and up to 30% of its NAV in common shares of the Canadian Insurance Companies. The Fund will invest the amount allocated to (i) the Canadian Banks in each Canadian Bank on an equal weighted basis and (ii) the Canadian Insurance Companies in each Canadian Insurance Company on an equal weighted basis.
In order to achieve its investment objectives, the Fund will be required to invest more than 10% of its NAV in securities of one or more Canadian Banks and accordingly the Fund will need an exemption from Section 2.1(1) of NI 81-102.
The ability to invest more than 10% of the Fund’s NAV in common shares of Canadian Banks is fundamental to the Fund’s investment strategies and integral to achieving the Fund’s investment objectives.
The Fund may sell call options each month on up to 25% of the securities of each Canadian Bank and each Canadian Insurance Company in the Fund’s portfolio (“Portfolio Securities”). The Filer may decide, in its discretion, not to sell call options in any month.
If required to facilitate distributions or pay expenses of the Fund, securities of each Canadian Bank and Canadian Insurance Company will be sold pro-rata across the Fund’s portfolio according to their relative market values at the time of such sale.
Future subscriptions for ETF Shares and Mutual Fund Shares, if any, will be used to acquire securities of each Canadian Bank and Canadian Insurance Company in the same weights as the Portfolio Securities exist in the Fund’s portfolio, based on their relative market values at the time of such subscription.
In the absence of: (i) new subscriptions for ETF Shares and/or Mutual Fund Shares, (ii) sales of Portfolio Securities, if any, required to facilitate distributions, redemptions or pay expenses of the ETF Shares and Mutual Fund Shares, or (iii) corporate actions of the Canadian Banks or Canadian Insurance Companies such as stock splits or consolidations, it is expected that the number of common shares of each of the Canadian Banks and Canadian Insurance Companies referable to the Fund’s portfolio will not change. The Fund’s portfolio will not be actively managed by the Filer, and will be rebalanced on a quarterly basis.
As the names of each of the Canadian Banks and Canadian Insurance Companies will be listed in the stated investment objectives of the Fund, and the Fund will not invest in securities other than securities of the Canadian Banks and Canadian Insurance Companies, Shareholders will be fully aware of the risks involved with an investment in the securities of the Fund.
The investment objectives and investment strategies of the Fund, as well as the risk factors associated therewith, will be disclosed in the Fund’s final simplified prospectus and the investment objectives and investment strategies of the Fund, as well as the risk factors associated therewith, will be disclosed in each renewal of the Fund’s simplified prospectus.
The Requested Relief will enhance the ability of the Fund to pursue and achieve its investment objectives in a cost-effective manner and will provide greater flexibility with respect to implementing its investment strategies.
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) the investment in Canadian Banks is made in accordance with the Fund’s investment objectives and investment strategies;
(b) the Fund’s investment objectives disclose that the Fund will invest in the Canadian Banks and the Canadian Insurance Companies in the stated fixed percentages described in paragraph 16 of this Decision;
(c) the Fund’s investment strategies disclose that the Fund’s portfolio will be rebalanced quarterly;
(d) the Fund will not purchase Portfolio Securities, or enter into any transaction to obtain indirect exposure to Portfolio Securities if:
(i) immediately after the transaction, more than 15% 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 any one Canadian Bank; or
(ii) the Fund becomes an insider of any Canadian Bank as a result of such investment; and
(e) the Fund includes in its final simplified prospectus (a) disclosure regarding this Decision under the heading “Exemptions and Approvals” and (b) a risk factor regarding the concentration of the Fund’s investments in Canadian Banks and the risks associated therewith.
“Darren McKall”
Darren McKall
Manager, Investment Funds and Structured Products
Ontario Securities Commission
SEDAR Project No. 2513439