October 2, 2020
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
Ninepoint Partners LP (Ninepoint) or an affiliate
(collectively, the Filer)
AND
Ninepoint Alternative Credit Opportunities Fund, Ninepoint Return Advantaged U.S. Equity Index Class and any other existing or future investment funds managed by the Filer to which National Instrument 81-102 Investment Funds (NI 81-102) applies
(the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Funds from the requirement in subsection 6.1(1) of NI 81-102, namely that all portfolio assets of an investment fund be held under the custodianship of one custodian that satisfies the requirements of section 6.2 of NI 81-102, solely to permit each Fund to appoint more than one custodian, each of which is qualified to be a custodian under section 6.2 of NI 81-102 and each of which is subject to all of the other requirements in Part 6 of NI 81-102 other than the prohibition against the Fund appointing more than one custodian in subsection 6.1(1) of NI 81-102 pursuant to this decision (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 the application; and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11102 Passport System (MI 11102) 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 14101 Definitions, MI 11102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
- Ninepoint is a limited partnership formed and organized under the laws of the province of Ontario. The general partner of Ninepoint is Ninepoint Partners GP Inc., a corporation incorporated under the laws of the province of Ontario. The head office of Ninepoint is located in Ontario.
2 Ninepoint is registered as (i) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, (ii) a portfolio manager in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador, and (iii) an exempt market dealer in the Jurisdictions listed in (ii) as well as Quebec.
3 The Filer is the manager of the existing Funds and will be the manager of the future Funds.
4 Each of Ninepoint Alternative Credit Opportunities Fund and Ninepoint Return Advantaged U.S. Equity Index Class is an alternative mutual fund governed by the laws of Canada or of one of the Jurisdictions. Each Fund is, or will be, a reporting issuer in one or more Jurisdictions.
5 Neither the Filer nor any of the existing Funds is in default of securities legislation in any of the Jurisdictions.
6 Securities of each existing Fund are, and it is expected that securities of each future Fund will be, qualified for distribution in some or all of the Jurisdictions under a simplified prospectus, annual information form, and fund facts and/or ETF facts prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure or National Instrument 41-101 General Prospectus Requirements. Each Fund is, or will be, governed by NI 81102, subject to any relief therefrom granted by the securities regulatory authorities.
Reasons for the Exemption Sought
7 The Filer would like the flexibility for each Fund to engage prime brokers, which are entities that act as a lender or borrowing agent, as the case may be, to one or more investment funds, whether the investment fund is an alternative mutual fund or a conventional mutual fund (each, a Prime Broker), as custodians in addition to the Fund’s custodian provided that such Prime Brokers are qualified to act as a custodian under subsection 6.2(3) of NI 81-102 (each, an Additional Custodian). The Filer and any Additional Custodian would be subject to all requirements applicable to custodians under Part 6 of NI 81 -102, other than the requirement in subsection 6.1(1) of NI 81-102 that there only be one custodian.
8 The Filer has requested the Exemption Sought in order to provide additional flexibility for the Funds to engage in the short selling of securities under Section 6.8.1 of NI 81-102, as portfolio assets deposited with a borrowing agent that is the custodian or a sub-custodian of the Fund are not subject to the 10% and 25% of net asset value (NAV) limitations in subparagraph 6.8.1(1)(a) and 6.8.1(1)(b), respectively.
9 An important investment strategy for each Fund is or will be to enter into securities lending, repurchase or reverse repurchase transactions between the Fund, as lender of the securities, third party borrowers and the Fund’s securities lending agent, as a means of generating additional revenues for the Fund and to enhance returns of its securityholders.
10 An Additional Custodian may also be appointed as a securities lending agent of the Funds and, in such circumstances, would provide the Funds with the opportunity to enter into a greater number of agreements which effect securities lending, repurchase or reverse repurchase transactions between a Fund, as lender of the securities, third party borrowers and the Fund’s securities lending agent (Securities Lending Agreements) than would be the case with a single custodian and would therefore have the potential to increase revenues to the Funds from securities lending activities.
11 Prime Brokers are not widely appointed as sub-custodians by custodians under NI 81-102 as it can be both operationally challenging for the custodian and the Filer to appoint them to act in such capacity. This is especially true in circumstances where the custodian of a Fund is a Prime Broker.
12 If the Exemption Sought is granted, an Additional Custodian’s responsibility for custody of the Funds’ assets will apply only to the assets held by the Additional Custodian on behalf of the Funds (the Relevant Assets). The custodial arrangements between the Funds and each Additional Custodian will comply with the requirements of Part 6 of NI 81-102 other than subsection 6.1(1).
13 Any Additional Custodian will meet the requirements of NI 81-102 to act as a custodian for an investment fund and will have experience acting as custodian of the assets of public investment funds governed by Nl 81-102. As custodian of the Relevant Assets, an Additional Custodian will comply with the standard of care applicable to qualified custodians under Section 6.6 of NI 81-102, will hold the Relevant Assets in the name of the applicable Fund in accordance with Section 6.5 of NI 81-102 and will include the provisions prescribed in Section 6.4 of NI 81-102 in its custody agreement with the Filer and the Funds. Each Additional Custodian will complete the review and provide compliance reports to the Filer as contemplated in Section 6.7 of NI 81-102.
14 The ability to terminate an Additional Custodian as custodian of the Relevant Assets of a Fund at any time without cause on written notice will ensure that the Filer maintains ultimate control over all of the portfolio assets of the Funds and can restore all assets to the custody of the Fund’s custodian at any time if the Filer considers it to be in the best interests of the Funds and their respective unitholders to do so.
15 The appointment of an Additional Custodian should have no impact on the safety of the portfolio assets of the Funds while enhancing the Funds’ abilities to engage in the short selling of securities under Section 6.8.1 of NI 81-102 and to enter into additional Securities Lending Agreements.
16 Disclosure regarding the Exemption Sought and particulars of the appointment of any Additional Custodian of the Funds with respect to the Relevant Assets will be included in the simplified prospectus and annual information form of the applicable Funds that is filed at the next annual renewal.
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 Fund may appoint one or more Additional Custodians if:
(a) a single entity reconciles all the portfolio assets of the Fund and provides the Fund with valuation and unitholder recordkeeping services and will complete daily reconciliations amongst the custodians before striking a daily NAV;
(b) the Filer maintains such operational systems and processes, as between two or more custodians and the single entity referred to in condition (a) above, in order to keep a proper reconciliation of all the portfolio assets that will move amongst the custodians, as appropriate; and
(c) each Additional Custodian will act as custodian and securities lending agent only for the portion of portfolio assets of the Fund transferred to it.
“Darren McKall”
Darren McKall, Manager,
Investment Funds and Structured Products
Ontario Securities Commission
Application #2020/0412
SEDAR Project #3093346