June 7, 2019
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
BMO Asset Management Inc.
(the Filer)
and
the Top Funds
(as defined below)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer, the Filer’s affiliates, and BMO AM Balanced Fund (the Initial Top Fund) and any other existing or future mutual fund that is not, or will not be, a reporting issuer, that is, or will be, managed by the Filer or one of its affiliates (the Future Top Funds and, together with the Initial Top Fund, the Top Funds) and that invests, or will invest, its assets in BMO International Value Fund (the Initial Underlying Fund) and/or in any other existing or future investment fund that is, or will be, managed by the Filer or one of its affiliates (the Future Underlying Funds and, together with the Initial Underlying Fund, the Underlying Funds), for a decision under the securities legislation of the Jurisdiction (the Legislation):
(a) exempting the Top Funds from the restriction in the Legislation which prohibits:
(i) an investment fund from knowingly making an investment in a person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder;
(ii) an investment fund from knowingly making an investment in an issuer in which:
(1) any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or
(2) any person or company who is a substantial security holder of the investment fund, its management company or its distribution company,
has a significant interest; and
(iii) an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (i) or (ii) above (collectively, the Related Issuer Relief); and
(b) exempting the Filer and each of its affiliates, with respect to each of the Top Funds that invests in an Underlying Fund, from the restriction in clause 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), which prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as adviser, to invest in securities of any issuer in which a responsible person or an associate of a responsible person is a partner, officer or director, unless the fact is disclosed to the client and the written consent of the client to the investment is obtained before the purchase (the Consent Requirement Relief and, together with the Related Issuer 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) 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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Québec, Prince Edward Island, Saskatchewan and Yukon (together with Ontario, 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.
AIMF Directive means Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers, including, where the context so requires, any delegated acts and implementing legislation made thereunder which applies in England and Wales.
AIFM Regulation means Commission Delegated Regulation No. 231/2013 of 19 December, 2012.
Ireland UCITS Directive means Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities as amended by Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014 as regards depositary functions, remunerations policies and sanctions, including its mandatory implementing regulations on an EU or Home Member State level and as may be further amended from time to time and including the Delegated Regulation (once effective) and any further supplementing European Commission delegated regulations in force from time to time.
Luxembourg UCITS Directive means Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities as amended, notably by Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014 as regards depositary functions, remunerations policies and sanctions, including its implementing legislation and regulations on an EU or Home Member State level which are of mandatory application as and when they have come into force and have become applicable, and as amended from time to time.
UCITS means Undertaking for Collective Investment in Transferable Securities and refers to the investment funds authorized by the European Union as investment funds suitable to be distributed in more than one country of Europe.
UK UCITS Directive means Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities as amended by Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014 as regards depositary functions, remunerations policies and sanctions, including its mandatory implementing regulations on an EU or Home Member State level.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation with its head office located in Toronto, Ontario.
2. The Filer is registered as an investment fund manager (IFM) in each of Ontario, Québec and Newfoundland and Labrador, as a portfolio manager (PM) and an exempt market dealer in each of the Jurisdictions, and as a commodity trading manager in Ontario.
3. The Filer is the IFM of the Initial Top Fund. An affiliate of the Filer, BMO Investments Inc. (BMOII) is the IFM of the Initial Underlying Fund, which is qualified under a mutual fund prospectus dated May 10, 2019, as amended. The Filer or an affiliate of the Filer will be the IFM of the Future Top Funds and the Future Underlying Funds. To the extent that the Filer or an affiliate of the Filer is the IFM of any Future Top Fund or Future Underlying Fund, the representations set out in this decision will apply to the same extent to such Future Top Fund and/or Future Underlying Fund.
4. The Filer or its affiliates are, or will be, “responsible persons” of the Top Funds and the Underlying Funds, as that term is defined in NI 31-103.
5. Bank of Montreal is a substantial securityholder of the Filer and BMOII, as each of the Filer and BMOII is a direct or indirect wholly owned subsidiary of Bank of Montreal.
6. The Filer is not in default of securities legislation in any Jurisdiction.
7. An officer and/or director of the Filer or an affiliate of the Filer may have a significant interest in an Underlying Fund from time to time.
8. A person or company who is a substantial security holder of a Top Fund, the Filer, or an affiliate of the Filer, such as Bank of Montreal, may also have a significant interest in an Underlying Fund from time to time.
The Top Funds
9. The Initial Top Fund is an investment trust established by the Filer on August 1, 2001 and is governed by the laws of Ontario.
10. The investment objective of the Initial Top Fund is to achieve stable long term rates of return through long term capital growth and current income. Portfolio volatility is reduced through investment in fixed income, Canadian equities, foreign equities and cash asset categories. The Initial Top Fund’s return objective is to outperform a benchmark which consists of 5% FTSE/TMX 91-Day T-Bill Index, 35% FTSE/TMX Universe Bond Index, 35% S&P/TSX Composite Index and 25% MSCI World Index (net) on a four year moving average basis.
11. The Initial Top Fund wishes to invest in units of the Initial Underlying Fund and, as a result, the Filer is seeking the Exemption Sought in order to permit the Initial Top Fund to make these investments.
12. A Future Top Fund may:
(a) invest in one or more of the Underlying Funds, which investment or investments will be consistent with the Future Top Fund’s investment objectives and strategies; or
(b) invest all or substantially all of its assets in an Underlying Fund with the objective of tracking the performance of that Underlying Fund (a Clone Fund). Investing all or substantially all of its assets in an Underlying Fund may provide an efficient and cost effective way for the Future Top Fund to achieve diversification and obtain unique exposures to the markets in which the Underlying Fund invests.
13. The securities of each of the Top Funds are, or will be, sold solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus Exemptions (NI 45-106) or the Legislation.
14. Each of the Top Funds is, or will be, a “mutual fund” as defined in securities legislation of the Jurisdictions in which the Top Funds are distributed.
15. None of the Top Funds investing in Underlying Funds in reliance on this decision is, or will be, a reporting issuer in any jurisdiction of Canada.
16. The Initial Top Fund is not in default of the securities legislation of any Jurisdiction.
The Underlying Funds
17. The Initial Underlying Fund is an investment trust established by BMOII on December 23, 2013 and is governed by the laws of Ontario.
The investment objective of the Initial Underlying Fund is to achieve long-term capital growth consistent with the preservation of capital by investing primarily in equity securities of mid to large capitalization companies located outside of Canada and the United States that have long-term growth potential or that pay or are expected to pay above-average dividends.
The Initial Underlying Fund is not in default of the securities legislation of any Jurisdiction.
20. Each of the Underlying Funds is, or will meet the definition of, a “mutual fund” as defined in the Legislation.
21. Each Underlying Fund is, or will be, structured as a limited partnership, a trust or a corporation governed by the laws of a jurisdiction of Canada or may be governed by the laws of the United States of America, Hong Kong, United Kingdom, Ireland or Luxembourg. In its home jurisdiction, each Underlying Fund will either be distributed pursuant to a prospectus or prospectus exemption.
22. The investment fund manager of each Underlying Fund will be an affiliate of the Filer. The portfolio manager of each Underlying Fund may or may not be an affiliate of the Filer.
23. Each of the Underlying Funds has, or will have, separate investment objectives and investment strategies.
24. Securities of the Underlying Funds are, or will be, sold to Canadian investors either pursuant to exemptions from the prospectus requirements in accordance with NI 45-106 and the Legislation or pursuant to a prospectus qualified in one or more of the Jurisdictions.
Fund-on-Underlying Fund Structure
25. An investment by a Top Fund in an Underlying Fund is, or will be, compatible with the investment objectives of the Top Fund and allows, or will allow, the Top Fund to obtain exposure to securities in which the Top Fund may otherwise invest directly (the Fund-on-Underlying Fund Structure).
26. The Filer believes that the Fund-on-Underlying Fund Structure provides the Top Funds with an efficient and cost-effective manner of pursuing portfolio diversification instead of purchasing securities directly. The Fund-on-Underlying Fund Structure also provides the Top Funds with access to the investment expertise of the portfolio adviser of the applicable Underlying Funds.
27. Investments by a Top Fund in an Underlying Fund are, or will be, effected at an objective price. The Filer’s policies and procedures provide that an objective price, for this purpose, is the net asset value (NAV) per security of the applicable class or series of that Underlying Fund.
28. Each Underlying Fund holds, or will hold, primarily liquid assets. To the extent that such Underlying Fund holds any assets whose resale is restricted or that cannot be readily disposed of through market facilities on which public quotations in common use are widely available, such illiquid assets comprise, or will comprise, no more than 10% of the Underlying Fund’s NAV.
29. Each Top Fund and Underlying Fund is, or will be, valued and redeemable daily.
30. The custodian of the assets of each Top Fund is, or will be, one or more financial institutions and/or their affiliates, or such third party or parties as may be appointed by the Filer or its affiliates, which meets, or will meet, the qualifications for a custodian of an investment fund under Division 3 of Part 14 of NI 31-103. The custodian of each Underlying Fund will meet one of the following requirements:
(a) meet the requirements of Part 6 of National Instrument 81-102 Investment Funds (NI 81-102) (or any successor instrument or provisions thereto), where the securities of the Underlying Fund are offered in Canada under a prospectus qualified in one or more of the Jurisdictions,
(b) meet the requirements of Division 3 of Part 14 of NI 31-103 (or any successor instrument or provisions thereto), where the Underlying Fund is governed under the laws of a Jurisdiction or of Canada and the securities of which are offered in Canada pursuant to exemptions from the prospectus requirements under the Legislation,
(c) meet the requirements of Section 17(f) of the Investment Company Act of 1940 (1940 Act) (or any successor instrument or provisions thereto) for entities acting as custodians to registered investment companies, where the Underlying Fund is a registered investment company under the 1940 Act,
(d) meet the requirements under the Hong Kong Securities and Future Commission (SFC) Code on Unit Trusts and Mutual Funds for entities acting as custodian/trustee where the Underlying Fund is a SFC authorised fund,
(e) meet the requirements of Articles 23(1) and 23(2) of the UK UCITS Directive for entities acting as custodians to UCITS (or any successor instrument or provisions thereto), where the Underlying Fund is a UCITS under the UK UCITS Directives,
(f) meet the requirements of Article 21(3)(b) of the AIFM Directive and AIFM Regulation for entities acting as custodians (or any successor instrument or provisions thereto), where the Underlying Fund is an alternative investment fund under the AIFM Directive and AIFM Regulation,
(g) meet the requirements of Articles 23(1) and 23(2) of the Ireland UCITS Directive (or any successor instrument or provisions thereto), where the Underlying Fund is a UCITS under the Ireland UCITS Directive, or
(h) meet the applicable requirements of Articles 23(1) and 23(2) of the Luxembourg UCITS Directive (or any successor instrument or provisions thereto), where the Underlying Fund is a UCITS SICAV under the Luxembourg UCITS Directive.
Generally
31. The amount invested from time to time in an Underlying Fund by a Top Fund, either alone or together with one or more other funds managed by the Filer or an affiliate of the Filer, may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Top Fund could, either alone or together with one or more other funds managed by the Filer or an affiliate of the Filer, become a substantial security holder of an Underlying Fund. The Top Funds and other funds managed by the Filer or the Top Funds and other funds managed by an affiliate of the Filer are, or will be, related mutual funds by virtue of common management by the Filer or by an affiliate of the Filer, respectively.
32. In addition, the Fund-on-Underlying Fund Structure may result in a Top Fund investing in an Underlying Fund in which an officer or director of the Filer or of an affiliate of the Filer has a significant interest and/or a Top Fund investing in an Underlying Fund in which a person or company who is a substantial security holder of the Top Fund, the Filer or an affiliate of the Filer has a significant interest. As at February 28, 2019, Bank of Montreal, a substantial securityholder of the Filer, held 10.13% of the outstanding units of the Initial Underlying Fund.
33. Since the Top Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Top Funds are unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102.
34. In the absence of the Related Issuer Relief, each Top Fund would be limited by the investment restrictions in the Legislation in terms of the extent to which they could implement the Fund-on-Underlying Fund Structure. Specifically, a Top Fund would be prohibited from: (i) becoming a substantial securityholder of an Underlying Fund, either alone or together with related investment funds; and (ii) investing in an Underlying Fund in which an officer or director of the Filer has a significant interest or in which a person or company who is a substantial securityholder of the Top Fund or the Filer, has a significant interest.
35. The Fund-on-Underlying Fund Structure may also result in a Top Fund investing in an Underlying Fund that is a limited partnership or corporation in which a responsible person or an associate of a responsible person is a partner, officer or director, or performs a similar function or occupies a similar position.
36. In the absence of the Consent Requirement Relief, the Filer or its affiliates would be precluded from causing each Top Fund to invest in an Underlying Fund in these circumstances unless the consent of each investor in the Top Fund is obtained. The Top Funds may have a number of existing investors and, as a result, obtaining the consent of each such investor is not practical.
37. A Top Fund’s investment in an Underlying Fund represents the business judgment of a responsible person uninfluenced by considerations other than the best interests of the investment funds concerned.
38. The investment by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund.
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: