Brompton Funds Limited (Re), 2018 CanLII 89401

September 21, 2018

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 BROMPTON FUNDS LIMITED (Brompton)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from Brompton on behalf of exchange-traded mutual funds subject to National Instrument 81-102 – Investment Funds (NI 81-102) that it currently manages (the Existing Funds) and such exchange-traded mutual funds as Brompton or an affiliate of Brompton (the Filer) may establish in the future (the Future ETFs, and together with the Existing Funds, the Funds and each, a Fund) for a decision under the securities legislation of the principal regulator (the Legislation) that exempts each Fund from the following provisions of NI 81-102:

(a) paragraph 2.5(2)(a) of NI 81-102 to permit each Fund to invest in securities of one or more Closed-End Funds (as defined below) that do not offer securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) (the Fund of Fund Relief); and

(b) paragraph 2.5(2)(e) of NI 81-102 to permit each Fund to pay brokerage fees in relation to its purchase and sale of securities of a Closed-End Fund (the Brokerage Fee Relief, together with the Fund of Fund Relief, 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) Brompton 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, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.

Closed-End Fund means a non-redeemable investment fund or mutual fund split share corporation existing under the laws of Canada or a Province of Canada that is managed by the Filer or associate of the Filer.

Representations

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

The Filer

1. Brompton is a corporation incorporated under the laws of the Province of Ontario, with its head office located at Suite 2930, Bay Wellington Tower, Brookfield Place, 181 Bay Street, Toronto, Ontario, M5J 2T3.

2. Brompton is registered with the Ontario Securities Commission as an investment fund manager, exempt market dealer, portfolio manager and commodity trading manager.

3. Neither Brompton nor the Existing Funds are in default of securities legislation in any of the Jurisdictions.

The Funds

4. Each Fund is, or will be, an exchange-traded mutual fund whose units are issued and sold on a continuous basis.

5. Each Fund is or will be a mutual fund governed by the laws of the Province of Ontario and a reporting issuer under the laws of each of the Jurisdictions. Each Fund offers or will offer one or more classes of units.

6. Each Fund 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 is, or will be, governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.

7. Each Fund is, or will be, subject to National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107).

8. The Funds’ investment strategies include, or will include, as the case may be, the ability to invest in one or more other investment funds, including other investment funds managed by the Filer.

9. The Funds may, from time to time, wish to invest in securities of one or more Closed-End Funds in accordance with their investment objectives. The Funds will not invest in securities of Closed-End Funds that are not managed by the Filer.

10. No Fund will invest in securities of a Closed-End Fund if after the purchase thereof more than 10% of the net asset value (NAV) of the Fund will be invested in securities of Closed-End Funds.

The Closed-End Funds

11. Each Closed-End Fund is, or will be, a non-redeemable investment fund or mutual fund split share corporation existing under the laws of the Province of Ontario and a reporting issuer under the laws of the Jurisdictions.

12. Each Closed-End Fund is, or will be, subject to NI 81-102, subject to any exemption therefrom that may be granted by the securities regulatory authorities.

13. Securities of each Closed-End Fund are, or will be:

(a) distributed pursuant to a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2, a short form prospectus prepared pursuant to National Instrument 44-101 – Short Form Prospectus Distributions and Form 44-101F1, or a base shelf prospectus and prospectus supplement prepared pursuant to National Instrument 44-102 – Shelf Distributions, as applicable; and

(b) listed on the Toronto Stock Exchange or another “recognized exchange” in Canada, as that term is defined in securities legislation.

14. Each Closed-End Fund is, or will be, subject to NI 81-107.

15. No Closed-End Fund (at the time of purchase by the Fund) will hold more than 10% of its NAV in securities of another investment fund unless (a) the other investment fund is a clone fund or money market fund, as defined in NI 81-102; or (b) securities of the other investment fund are index participation units.

16. No Fund will pay management or incentive fees which to a reasonable person would duplicate a fee payable by a Closed-End Fund for the same service.

The Fund of Fund Relief

17. Absent the Fund of Fund Relief, an investment by a Fund in a Closed-End Fund would be prohibited by paragraph 2.5(2)(a) of NI 81-102 because such Closed-End Fund does not offer its securities under a simplified prospectus in accordance with NI 81-101.

18. The Filer considers that an investment in a Closed-End Fund may be an efficient and cost effective alternative to implementing one or more investment strategies similar to that of the applicable Fund and to obtain exposure to the markets and asset classes in which the applicable Fund invests and in which the investment objectives and strategies of the Fund may contemplate.

19. Under the Canadian Securities Administrators’ (CSA) Modernization of Investment Fund Product Regulation Project, the CSA proposed on September 22, 2016, amendments to NI 81-102 that would permit mutual funds to invest up to 10% of their net assets in securities of non-redeemable investment funds that are subject to NI 81-102 (the Modernization Amendments). The Fund of Fund Relief is consistent with the proposed Modernization Amendments.

20. An investment in a Closed-End Fund by a Fund will represent the business judgement of responsible persons uninfluenced by considerations other than the best interests of the applicable Fund.

The Brokerage Fee Relief

21. Trades in securities of a Closed-End Fund may be conducted by a Fund in the secondary market through the facilities of a recognized exchange. Absent the Brokerage Fee Relief, paragraph 2.5(2)(e) of NI 81-102 would not permit a Fund to pay brokerage fees incurred in connection with a purchase or sale of securities of a Closed-End Fund.

22. All brokerage fees related to trades in securities of a Closed-End Fund will be borne by the Funds in the same manner as any other portfolio transactions made on an exchange.

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 is that:

1. the Exemption Sought is granted, provided that:

(a) the investment by a Fund in securities of a Closed-End Fund is in accordance with the investment objectives of the Fund;

(b) the securities of each Closed-End Fund trade on a recognized exchange in Canada;

(c) a Fund does not purchase securities of a Closed-End Fund if, immediately after the purchase, more than 10% of the NAV of the Fund, taken at market value at the time of the purchase, would consist of securities of Closed-End Funds; and

(d) the prospectus of each Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit investments in one or more Closed-End Funds on the terms described in this decision; and

2. this decision expires upon the coming into force of the Modernization Amendments or substantially similar rules.

“Darren McKall” Manager, Investment Funds and Structured Products Ontario Securities Commission

SEDAR Project Numbers: 2818987 & 2818990