SLGI Asset Management Inc., 2020 CanLII 99210

November 26, 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

SLGI ASSET MANAGEMENT INC. (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from the restriction contained in section 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 an adviser, to purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director unless (i) this fact is disclosed to the client and (ii) the written consent of the client is obtained before the investment is made (the Requested Relief), in order to permit the Filer to cause Sun Life Core Advantage Credit Private Pool (the Top Fund) to invest in units of SLC Management Short Term Private Fixed Income Plus Fund (the Short Term PFI Fund).

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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (the Other Jurisdictions and, with Ontario, the Jurisdictions).

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless otherwise defined.

Representations

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

The Filer

1. The Filer is a corporation incorporated under the laws of Canada with its head office in Toronto, Ontario and is a wholly-owned indirect subsidiary of Sun Life Financial Inc. (SLF).

2. The Filer is registered as: (i) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; (ii) a commodity trading manager in Ontario; (iii) a portfolio manager in Ontario; and (iv) a mutual fund dealer in each of the Jurisdictions.

3. The Filer is the investment fund manager of the Top Fund.

4. The Filer is not in default of the securities legislation of any jurisdiction of Canada.

The Top Fund

5. The Top Fund is an open-ended mutual fund trust established under the laws of Ontario.

6. The Top Fund is a "mutual fund" as defined in securities legislation of the Jurisdictions and is subject to National Instrument 81-102 Investment Funds (NI 81-102).

7. Units of the Top Fund are qualified for distribution pursuant to a simplified prospectus dated July 21, 2020, as the same may be amended or renewed from time to time. The Top Fund is a reporting issuer in each of the Jurisdictions.

8. The investment objective of the Top Fund is to seek to provide income while preserving capital primarily by investing directly in debt securities or indirectly by investment in mutual funds (including exchange-traded funds) that invest in such securities.

9. To achieve its investment objective, the Top Fund proposes to invest no more than 10% of its assets in units of the Short Term PFI Fund, which investment will be consistent with the Top Fund's investment objectives and strategies.

The Short Term PFI Fund

10. The Short Term PFI Fund is an investment vehicle established as a limited partnership under the laws of Ontario.

11. Sun Life Capital Management (Canada) Inc. (SLC) is the manager of the Short Term PFI Fund and SLC Management Short Term PFIP GP Inc. (the GP) is the general partner of the Short Term PFI Fund.

12. Each of SLC and the GP is a wholly-owned indirect subsidiary of SLF.

13. As the Filer and the GP are both wholly-owned indirect subsidiaries of SLF, the Filer is therefore an affiliate of the GP.

14. Due to the nature of being a general partner of the Short Term PFI Fund, the GP will have access to the investment decisions made on behalf of the Short Term PFI Fund and will therefore be considered a responsible person as defined under section 13.5(1) of NI 31-103.

15. The Short Term PFI Fund seeks to achieve total return by providing income while preserving capital, by investing primarily in a diverse portfolio of short term private and public fixed income and floating rate assets.

16. The Short Term PFI Fund considers investment opportunities from a range of developed markets, including Canada and the United States.

17. The private fixed income assets held by Short Term PFI Fund will primarily be comprised of loans originated by SLC, such as: secured and unsecured loans to large corporate borrowers; debt financing of real assets, which may include real property and infrastructure, with access to stable and enduring cash flow streams through the monetization of contractual payments or through loans secured by cash flow generating real assets that are difficult to replicate; loans to mid-market companies with revenues of less than $500 million that tend to have limited access to public capital markets generally with strong equity sponsorship, where transactions provide access to diverse fixed and floating rate private investment opportunities across North America and select developed markets overseas, and investments in securitized lease/loan obligations supported by well diversified pools of assets such as manufacturing equipment and transportation assets with added levels of credit enhancement (collectively, Private Assets).

18. The Short Term PFI Fund also invests in a wide range of securities available in public fixed income markets (collectively, Public Assets) to seek to neutralize exposure to unintended risks and to support ongoing cash flow management.

19. The Short Term PFI Fund's allocation between Private Assets and Public Assets is managed by SLC. Approximately 70% to 100% of the Short Term PFI Fund's portfolio is comprised of Private Assets at any given time, including floating rate securities and commercial mortgages. Approximately 0%-30% of the Short Term PFI Fund's portfolio is comprised of Public Assets at any given time, and the balance of its net assets, if any, is invested in government treasury bills and government guaranteed bonds maturing in less than one year, demand deposits, bankers' acceptances and short term bank paper or short term corporate paper issued by Canadian companies (collectively, Money Market Instruments) or cash. Investments in cash or Money Market Instruments are limited to 10% of the Short Term PFI's Fund's net assets, but this limit may be exceeded for short periods in order to match timing inflows and outflows of investments, to fund payments to investors or for other purposes.

20. The investments of the Short Term PFI Fund, which consist primarily of Private Assets, are primarily illiquid.

21. The Short Term PFI Fund is not considered to be an investment fund because of the active nature of its Private Asset investments, as described above. Nevertheless, the Short Term PFI is operated in a manner similar to how the Top Fund is operated. The Short Term PFI Fund is administered by SLC, as manager, its assets are managed by SLC, as portfolio manager, and SLC calculates a net asset value (NAV) in respect of the Short Term PFI Fund that is used for purposes of determining the purchase and redemption price of its units.

22. The Short Term PFI Fund is not in default of the securities legislation of any jurisdiction of Canada.

23. Units of the Short Term PFI Fund are currently only available to investors who meet the definition of "permitted client", as such term is defined in NI 31-103. Units are sold solely to accredited investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus Exemptions.

24. The Short Term PFI Fund is not a reporting issuer in any jurisdiction of Canada.

Fund-on-Underlying Investment Structure

25. An investment by the Top Fund in the Short Term PFI Fund will be compatible with the investment objectives of the Top Fund and will allow the Top Fund to obtain exposure to securities in which the Top Fund may otherwise invest directly, but for the active nature required to originate the loans contained in the Private Asset portion of the Short Term PFI Fund's portfolio (the Fund-on-Underlying Investment Structure).

26. The Filer believes that the Fund-on-Underlying Investment Structure will provide the Top Fund with an efficient and cost-effective manner of pursuing portfolio diversification instead of purchasing such securities directly as part of a loan syndication or loan participation, as well as providing the Top Fund with exposure to investment opportunities that it would not otherwise be able to access due to lack of scale and the exclusive nature of the private loan market.

27. Investments by the Top Fund in the Short Term PFI Fund will be effected at an objective price. According to the Filer's policies and procedures, an objective price, for this purpose, shall be the NAV of the Short Term PFI Fund.

28. The Top Fund will not actively participate in the business or operations of the Short Term PFI Fund. As an investor in the Short Term PFI Fund, the Top Fund will have no responsibility for administering any loan contained in the Short Term PFI Fund's portfolio in relation to the borrower.

29. As the Short Term PFI Fund is not an investment fund, the requirements of section 2.5 of NI 81-102 do not apply. An investment by the Top Fund in units of the Short Term PFI Fund is akin to an investment by the Top Fund in securities of a structured product or other non-investment fund issuer.

Valuation of the Short Term PFI Fund

30. The Short Term PFI Fund is valued monthly and units of the Short Term PFI Fund are redeemable monthly with the consent of SLC, provided SLC receives 60 days' prior written notice and SLC determines that the Short Term PFI Fund has sufficient available cash to satisfy the redemption request.

31. SLC is in the process of selecting an independent external valuator to value the Private Assets held by the Short Term PFI Fund for each NAV calculation and expects to have the independent valuator in place by the end of the first quarter of 2021 (the New Valuation Process). The valuator will be an industry-leading service provider of independent valuations, risk and liquidity metrics. Its valuation services will be designed to fulfill the statutory and policy requirements of investors, regulators and business managers for independent calculations and validation of net asset value. Specific to private assets, the valuator will provide independent valuations of hard-to-value private equity and credit by leveraging a team of expert analysts that use a broad range of market data, along with client inputs. The New Valuation Process will replace the current internally developed valuation methodology.

32. Deloitte LLP, a public accounting firm that is registered with CPAB, has been retained to act as auditor of the Short Term PFI Fund and will carry out an audit, in accordance with Canadian generally accepted auditing standards, of the annual financial statements of the Short Term PFI Fund. The annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements will present the Private Assets and any Public Assets at their fair values, which will be determined based on all applicable fair valuation principles set out in IFRS 13 Fair Value Measurement, as the same may be amended or replaced from time to time. These principles will consider the credit spreads and yields used by market participants in the fair market valuation of private debt securities and other market value influencing assumptions, to the extent that such information is publicly available, as well as other information considered to be relevant by SLC.

Information Provided to Short Term PFI Fund Investors

33. As an investor in the Short Term PFI Fund, the Top Fund will receive the following disclosure documents and other information pertaining to the Short Term PFI Fund:

(a) Offering memorandum, as updated from time to time;

(b) Limited partnership agreement, as amended or amended and restated from time to time;

(c) An annual report consisting of audited financial statements and the auditors' report thereon within 120 days of the Short Term PFI Fund's financial year-end;

(d) Such tax slips and information required by unitholders of the Short Term PFI Fund to complete their tax returns within the time limits prescribed by the Income Tax Act (Canada);

(e) A monthly unitholder update consisting of: (i) a statement showing the number and value of units held by the Top Fund in the Short Term PFI Fund; (ii) a summary of the Top Fund's transactions during such month; and (iii) a statement of the Top Fund's annualized rates of return;

(f) A quarterly Short Term PFI Fund update consisting of: (i) a summary of the Short Term PFI Fund's portfolio holdings; (ii) a statement of the Short Term PFI Fund's annualized rates of return; (iii) commentary on the Short Term PFI Fund's recent performance; (iv) the Short Term PFI Fund's current profile by asset class and credit rating; and (v) general market commentary;

(g) The NAV per unit of the Short Term PFI Fund on a monthly basis; and

(h) A description of the general characteristics (i.e. issuer description, industry, maturity date, indicative yield) of each asset held by the Short Term PFI Fund as of the most recent valuation date, upon the Top Fund's request and provided that the Top Fund executed a confidentiality agreement.

Top Fund Liquidity

34. The Top Fund will hold primarily liquid assets. It is expected that the Top Fund will invest no more than 10% of its assets in units of the Short Term PFI Fund, which it will treat as "illiquid assets" pursuant to 2.4 of NI 81-102, and the remainder of its assets in assets that are not considered "illiquid assets", as such term is defined in NI 81-102.

35. Units of the Top Fund are valued and redeemable daily at NAV, calculated in accordance with Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure.

Valuation of Short Term PFI Fund Units by the Top Fund

36. An illiquid asset under NI 81-102 is one that cannot be readily disposed of through market facilities on which public quotations in common use are widely available at an amount that at least approximates the amount at which the portfolio asset is valued in calculating the NAV per security of the Top Fund.

37. The Filer will value the units of the Short Term PFI Fund held by the Top Fund in accordance with its valuation policy and NI 81-106, which requires it to determine the fair value of the Top Fund's assets.

38. The Filer anticipates that the fair value of the Short Term PFI Fund units will be the NAV most recently calculated by SLC. However, due to the timing difference between the daily NAV calculation of the Top Fund and the monthly NAV calculation of the Short Term PFI Fund, the Filer expects it will need to rely upon external sources in order to determine fair value of the Short Term PFI Fund units during the month, until the next NAV of the Short Term PFI Fund has been determined by SLC.

39. In order to arrive at the fair value of the Short Term PFI Fund units on a daily basis and prevent material differences between the value ascribed to the Short Term PFI Fund units in the daily NAV calculation of the Top Fund and the monthly NAV calculation of the Short Term PFI Fund, the Filer will monitor the public debt markets daily for indications that changes in market factors since the most recent month-end NAV of the Short Term PFI Fund may result in a change to the fair value of the Short Term PFI Fund units. Specifically, the valuation of the Short Term PFI Fund assets and its NAV will be monitored for significant changes in risk-free rates and credit spreads, as well as the occurrence of any significant events (including fund level and security level events) related to the Short Term PFI Fund and its assets.

40. Where the Filer or SLC expects that, due to intra-month changes in the valuation of Short Term PFI Fund units, the NAV of the Top Fund has been impacted by more than 0.5%, SLC will calculate a new (intra-month) NAV for the Short Term PFI Fund within three days of the Filer or SLC making such a determination.

41. In the absence of the Requested Relief, the Top Fund would be precluded from purchasing and holding units of the Short Term PFI Fund unless the specific fact is disclosed to unitholders of the Top Fund and the written consent of the unitholders of the Top Fund to the investment is obtained prior to the purchase, since the GP, who may be considered a responsible person (as per section 13.5 of NI 31-103), is also a partner of the Short Term PFI Fund.

42. As the Top Fund is a public mutual fund that is sold through third party dealers rather than directly by the Filer, the Top Fund has a significant number of investors and the Filer does not have a direct client relationship with such investors. Accordingly, it is impractical for the Filer to obtain the written consent of unitholders of the Top Fund to the investment in the Short Term PFI Fund, as required by section 13.5 of NI 31-103.

43. The Fund-on-Underlying Investment Structure will be compatible with the investment objectives of the Top Fund and will allow the Top Fund to obtain exposure to securities in which the Top Fund may otherwise invest directly, but for the active nature required to originate the loans contained in the Private Asset portion of the Short Term PFI Fund's portfolio.

44. Due to the nature of the Private Asset market requiring significant capital contributions to participate and the relatively small amount of net assets available by the Top Fund to invest in the Private Asset class, it is more efficient and cost-effective for the Top Fund to gain exposure to this asset class using the Fund-on-Underlying Investment Structure.

45. The Filer believes that the Fund-on-Underlying Investment Structure will provide the Top Fund with greater portfolio diversification in the Private Asset class than purchasing such securities directly as part of a loan participation or syndication.

46. The investment by the Top Fund in the Short Term PFI Fund will represent a small portion of the overall investments in the Short Term PFI Fund. As a result, the Top Fund will not be in a position to influence the business, operations or investments of the Short Term PFI Fund.

47. The Top Fund's investment in the Short Term PFI Fund will represent the business judgment of a responsible person uninfluenced by considerations other than the best interests 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 Requested Relief is granted provided that:

(a) the Short Term PFI Fund is valued under the New Valuation Process;

(b) the investments in the Short Term PFI Fund are included as part of the calculation for the purposes of the illiquid assets restriction in section 2.4 of NI 81-102;

(c) the Top Fund's independent review committee (IRC) will review and provide its approval, including by way of standing instructions, prior to an investment by the Top Fund in the Short Term PFI Fund in accordance with subsection 5.2(2) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107);

(d) the Filer complies with Section 5.1 of NI 81-107 and the Filer and the Top Fund's IRC comply with Section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the Top Fund's investment in the Short Term PFI Fund;

(e) no management fees or incentive fees will be payable by the Top Fund to invest in the Short Term PFI Fund that, to a reasonable person, would duplicate a fee payable by the Short Term PFI Fund for the same service;

(f) no sales fees or redemption fees will be payable by the Top Fund in relation to its purchases or redemptions of units of the Short Term PFI Fund;

(g) the Filer does not cause the units of the Short Term PFI Fund held by the Top Fund to be voted at any meeting of the holders of such units, except that the Filer may arrange for the Short Term PFI Fund units to be voted by the beneficial owners of the Top Fund; and

(h) the prospectus of the Top Fund will provide disclosure to investors in the Top Fund regarding its investment in the Short Term PFI Fund, including:

(i) that the Top Fund will purchase units of the Short Term PFI Fund;

(ii) the approximate or maximum percentage of the NAV of the Top Fund that may be invested in units of the Short Term PFI Fund;

(iii) the relationship between the Filer, SLC, the GP and the Short Term PFI Fund;

(iv) the fees and expenses payable by the Short Term PFI Fund, including any incentive fee; and

(v) that unitholders of the Top Fund are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other disclosure document, if any, and the annual and interim financial statements of the Short Term PFI Fund, if any.

"Darren McKall"

Darren McKall

Manager

Investment Funds and Structured Products Branch

ONTARIO SECURITIES COMMISSION

Application No. 2020/0287