April 3, 2017
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 FRANKLIN TEMPLETON INVESTMENTS CORP. (the Filer)
AND
IN THE MATTER OF Franklin TARGET RETURN FUND (the Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting relief (the Exemption Sought) from section 3.2 of National Instrument 81-104 Commodity Pools (NI 81-104) to permit the Filer to comply with the seed capital requirements in subsections 3.1(1) and 3.1(2) of National Instrument 81-102 Investment Funds (NI 81-102).
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 the Jurisdiction (together with the Jurisdiction, the 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. Capitalized terms used in this decision have the following meanings:
Seed Investor means, in respect of the Fund, each manager, portfolio adviser, promoter or sponsor, or any of their respective partners, directors, officers or securityholders, who invests in Units of the Fund before the time of filing the final prospectus of the Fund.
Outside Investor means each investor, other than a Seed Investor, who invests in Units of the Fund.
Units means Series A Units, Series F Units, Series PF Units and Series O Units of the Fund.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is a corporation amalgamated under the laws of the Province of Ontario, with its head office in Toronto, Ontario.
The Filer is registered as an investment fund manager in Ontario, Québec, Alberta, British Columbia, Manitoba, Nova Scotia and Newfoundland and Labrador, as a mutual fund dealer, portfolio manager and exempt market dealer in each province of Canada and the Yukon, and as a commodity trading manager in Ontario.
The Filer will be the manager and trustee of the Fund.
The Filer is not in default of securities legislation in any of the Jurisdictions.
The Fund will be a mutual fund subject to NI 81-102 and a commodity pool, as such term is defined under NI 81-104, in that the Fund will adopt fundamental investment objectives that permit the Fund to invest, directly or indirectly, in specified derivatives in a manner that is not permitted under NI 81-102.
The Fund filed in accordance with National Instrument 41-101 General Prospectus Requirements (NI 41-101) a preliminary prospectus with respect to the proposed offering of Units of the Fund under SEDAR Project No 2583151.
Upon the filing of the final prospectus of the Fund, prepared in accordance with NI 41-101 (the Final Prospectus), and obtaining a receipt therefor, the Units will be qualified for distribution and the Fund will be a reporting issuer in each of the Jurisdictions.
Pursuant to section 3.2(1) of NI 81-104, the Final Prospectus may not be filed unless:
(a) investments totalling at least $50,000 in Units have been made, and those Units are beneficially owned, before the time of filing, by Seed Investors; and
(b) the Final Prospectus states that the Fund will not issue Units to Outside Investors until the Fund has received and accepted subscriptions aggregating not less than $500,000 from Outside Investors.
Pursuant to section 3.2(2) of NI 81-104, a Seed Investor may redeem, repurchase or return its initial investment in Units only if: (i) Units issued to Seed Investors that had an aggregate issue price of $50,000 remain outstanding and at least $50,000 invested by Seed Investors remains invested in the Fund, or (ii) the redemption, repurchase or return is effected as part of the dissolution or termination of the Fund (the Permanent Seed Capital Requirement).
The Filer understands that the policy rationale behind the Permanent Seed Capital Requirement under NI 81-104 is to encourage promoters to ensure that the commodity pool is being properly run for the benefit of its investors by requiring that the promoter of a commodity pool, or a related party, will itself be an investor in the commodity pool at all times.
The Fund will be properly managed for the benefit of investors for the following reasons:
(a) as trustee of the Fund, the Filer will be obliged in accordance with the terms of the declaration of trust governing the Fund, and in accordance with its fiduciary duty, to act as a reasonably prudent person and to manage the Fund in the best interests of its unitholders; and
(b) as manager of the Fund, the Filer will be obliged in accordance with applicable securities law to act honestly and in good faith, and in the best interests of the Fund, and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Having regard to the fiduciary obligations and standard of care applicable to the Filer as set out in paragraph 11 above, requiring the Filer (or another Seed Investor) to maintain $50,000 in the Fund at all times will not change how Filer performs it duties in managing the Fund.
The Filer is an experienced investment fund manager with a past track record of managing many other mutual funds governed by NI 81-102 and will manage the Fund in accordance will all applicable securities legislation in Canada and its contractual requirements.
On September 22, 2016, the Canadian Securities Administrators (the CSA) published proposed amendments to NI 81-102, NI 81-104 and related instruments (the Alternative Funds Proposal). If adopted, the Alternative Funds Proposal would repeal NI 81-104 and, among other changes, impose on commodity pools the initial investment requirements applicable to mutual funds as contained in section 3.1 of NI 81-102, such that:
(a) the Final Prospectus may be filed if either:
(i) the Filer receives investments totalling at least $150,000 in Units, those Units being beneficially owned, before the time of filing, by Seed Investors, or
(ii) the Final Prospectus states that the Fund will not issue Units to Outside Investors until the Fund has received and accepted subscriptions aggregating not less than $500,000 from Outside Investors; and
(b) a Seed Investor may redeem its initial investment in Units only if subscriptions aggregating not less than $500,000 have been received from Outside Investors and accepted by the Fund.
- In keeping with the Alternative Funds Proposal and the initial investment requirements in section 3.1 of NI 81-102, the Filer wishes to seed the Fund by investing an aggregate of at least $150,000 in the Fund before filing the Final Prospectus, and wishes to be able to redeem such amount once the Fund has received and accepted subscriptions aggregating not less than $500,000 from Outside Investors.
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) the Filer complies with the seed capital requirements in subsections 3.1(1) and 3.1(2) of NI 81-102 in respect of the Fund; and
(b) the basis on which a Seed Investor may redeem any of its initial investment in the Fund is disclosed in the Final Prospectus.
“Darren McKall”
Darren McKall Manager, Investment Funds and Structured Products Branch
ONTARIO SECURITIES COMMISSION