July 29, 2021
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
Manulife Investment Management Limited (MIML)
and
IN THE TOP FUNDS (as defined below)
Decision
Background
The principal regulator in the Jurisdiction has received an application (the Application) from MIML and its affiliates (collectively, the Filer) and on behalf of Manulife Real Asset Fund (MRAF or the Initial Top Fund), and each investment fund that is or will be established in the future, that will not be a reporting issuer and that will not be subject to National Instrument 81-102 Investment Funds (NI 81-102) or National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) and for which the Filer acts as investment fund manager (the Future Top Funds and together with the Initial Top Fund, the Top Funds), for an order exempting the Top Funds and the Filer from
- the restriction in the Legislation which prohibits:
(a) 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; and
(b) an investment fund from knowingly making an investment in an issuer in which:
(i) any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or
(ii) 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
(c) an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) or (b) above
(collectively, the Related Issuer Relief);
the requirement to prepare a report in accordance with the requirements of the Legislation of every transaction of purchase of securities from or sale of securities to any related person or company (the Reporting Relief); and
the restrictions in section 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibit 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, together with the Related Issuer Relief and the Reporting Relief, the Requested Relief);
to permit the Top Funds to invest, directly or indirectly, in Hancock U.S. Real Estate REIT I, LLC (the US REIT or the Initial Underlying Investment) and in any other future collective investment scheme that is, or will be, managed by the Filer, and that has, or will have, similar non-traditional investment strategies as the Initial Underlying Investment (the Future Underlying Investments and, together with the Initial Underlying Investment, the Underlying Investments).
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;
(b) the Filer has provided notice that subsection 4.7(2) of Multilateral Instrument 11-102 Passport System (MI 11-102) that:
(i) the Related Issuer Relief and the Reporting Relief is to be relied upon in Alberta; and
(ii) the Consent Requirement Relief is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in the Legislation, MI 11-102 and National Instrument 14-101 – Definitions have the same meanings in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation amalgamated under the laws of Canada, with its registered head office located in Toronto, Ontario.
The Filer is currently registered as: (i) a commodity trading manager in Ontario; (ii) a portfolio manager in each province and territory of Canada; (iii) a derivatives portfolio manager in Québec; and (iv) an investment fund manager in each of Ontario, Québec, and Newfoundland and Labrador.
The Filer is the general partner, investment fund manager and portfolio manager of MRAF.
The Filer is, or will be, the investment fund manager and portfolio manager of the other Top Funds. The Filer or a third party, is, or will be, the trustee of each Top Fund structured as a trust.
The Filer is, or will be, the portfolio manager of the Underlying Investments. The Filer or a third party, is, or will be, the trustee of each Underlying Investment structured as a trust.
As the Filer is, or will be, the portfolio manager of the Top Funds and the Underlying Investments, the Filer would be considered to be a “responsible person” of the Top Funds and the Underlying Investments, as that term is defined in NI 31-103.
An officer and/or director of the Filer may have a significant interest in an Underlying Investment from time to time. A person or company who is a substantial securityholder of a Top Fund or the Filer may also have a significant interest in an Underlying Investment from time to time.
The Filer is not a reporting issuer in any Jurisdiction.
The Filer is not currently in default of securities legislation in any Jurisdiction, except for breaches that occurred when MRAF invested, indirectly, in the US REIT, resulting in the inadvertent non-compliance with sections 111(2)(b), 111(2)(c), 111(3) and 111(4) of the Ontario Act and paragraph 13.5(2)(a) of NI 31-103 (collectively, the MRAF Breach). Upon issuance of this decision, the Filer will not be in default of securities legislation of any jurisdiction of Canada.
The Top Funds
MRAF is a limited partnership that was formed under the laws of the Province of Ontario on October 21, 2015. MRAF’s investment objective is to achieve long term growth of capital. MRAF seeks positive returns over the Canadian Consumer Price Index (CPI) by investing in direct real assets and liquid assets globally. MRAF’s exposure to real assets (such as real estate, timberland and farmland and infrastructure) and other private market asset classes (such as private debt) is obtained by investing in securities of underlying direct real asset funds/vehicles, including the US REIT.
Each Future Top Fund will be structured as a limited partnership, trust or class of shares of a corporation under the laws of Ontario, another jurisdiction of Canada, or a foreign jurisdiction.
Each Top Fund is, or will be, a “mutual fund” for the purposes of the Legislation.
No Top Fund is, or has current plans to become, a reporting issuer in any province or territory of Canada.
Securities of the Top Funds are, or will be, distributed solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus Exemptions (NI 45-106) and the Legislation. Each Top Fund has, or will have, an offering memorandum or statement of investment policies and guidelines, which is provided or made available to investors. Each investor is, or will be, responsible for making its own investment decisions regarding its purchases and/or redemptions of securities of a Top Fund.
Each Top Fund may wish to invest in securities of one or more Underlying Investments, which investment or investments will be consistent with the Top Fund’s investment objectives and strategies.
MRAF currently invests, indirectly, through a Blocker (as defined below), in securities of the US REIT and, as a result, may inadvertently not be in compliance with paragraphs 111(2)(b) and 111 (2)(c) and subsections 111(3) and 111(4) of the Ontario Act and paragraph 13.5(2)(a) of NI 31-103.
Except for MRAF in respect of the MRAF Breach, the Top Funds are not in default of securities legislation of any jurisdiction of Canada. Upon issuance of this decision, the Top Funds will not be in default of securities legislation of any jurisdiction of Canada.
Underlying Investments
Each Underlying Investment is, or will be, structured as a limited partnership, trust or a class of shares of a corporation under the laws of Ontario, another jurisdiction of Canada or a foreign jurisdiction.
No Underlying Investment is, or has current plans to become a, reporting issuer in any of the Jurisdictions. Securities of the Initial Underlying Investments are, and any Future Underlying Investment will be, distributed in the Jurisdictions solely to investors pursuant to exemptions from the prospectus requirements in accordance with NI 45-106 and the Legislation. Each Underlying Investment has, or will have, an offering memorandum or statement of investment policies and guidelines which is provided or made available to investors. Any such investor is, or will be, responsible for making its own investment decisions regarding its purchases and/or redemptions of securities of an Underlying Investment.
Each Underlying Investment provides, or will provide, exposure to non-traditional asset classes, such as real estate, real assets, timberland, farmland, infrastructure, private credit, private equity and venture capital.
The US REIT is a Delaware limited liability corporation. The administrator and the investment manager of the US REIT is Manulife Investment Management Private Markets (US) LLC (MIMPMUS), an investment adviser registered with the U.S. Securities and Exchange Commission. MIMPMUS and the Filer are affiliates.
The US REIT has been formed to invest primarily in income-producing core-plus and core real estate properties in select markets located in the United States. Specifically, the US REIT will invest in core-plus and core assets and will target a total net return, including income and capital appreciation, of 9-12%. In structuring its portfolio, the US REIT will target an allocation of 60% core-plus assets (including up to 10% in ground-up development assets) and 40% core investments, in each case based upon the gross asset value of the US REIT’s portfolio at the time of investment.
The underlying portfolio assets of the US REIT will be valued annually, with quarterly updates. Such valuations will be performed by one or more nationally, independent, accredited appraisal and/or accounting firms and will be verified as to the properties’ fair market value quarterly by one or more independent firms. The US REIT will also be subject to the oversight of a valuation committee. The valuation committee (the Committee) is responsible for overseeing the independent valuation process of the US REIT’s assets. The Committee is chaired by the Filer’s finance function. Members of the US REIT’s portfolio management team are not members of the Committee. The Committee meets at least quarterly to review MIM Private Markets’ valuation activities. The Committee oversight responsibilities include ensuring that valuation policies and processes are followed and continue to be reasonably designed to ensure the fair valuation of real estate assets. The valuation of the portfolio assets of each other Underlying Investment is, or will be, conducted in a substantially similar manner.
The Underlying Investments are not, or will not be, investment funds as such term is defined under Canadian securities legislation. Nevertheless, the Underlying Investments are, or will be, operated in a manner similar to how the Filer operates its investment funds. The Underlying Investments are, or will be, administered by the Filer as manager, and their assets are, or will be, managed by the Filer as portfolio manager. A net asset value (NAV) of each Underlying Investment is, or will be, calculated and which is, or will be, used for the purposes of determining the purchase and redemption price of the securities of the Underlying Investment.
Each Underlying Investment produces, or will produce, audited financial statements on an annual basis, in accordance with generally accepted accounting principles with a qualified auditing firm as the auditor of those financial statements. The Filer will have access to audited financial statements prepared in respect of each underlying asset that is invested in by the Underlying Investments.
No Underlying Investment is in default of the securities legislation of any Jurisdiction.
No Top Fund will actively participate in the business or operations of an Underlying Investment.
Fund-on-Investment Structure
An investment by a Top Fund, directly or indirectly, in an Underlying Investment will only be made if the investment is compatible with the investment objective of the Top Fund. Such an investment will allow the Top Fund (and its investors) to obtain indirect exposure to the investment portfolio of the Underlying Investment and its investment strategies and asset classes (in which the Top Fund may otherwise directly invest) through direct investments by the Top Funds in securities of the Underlying Investments (the Fund-on-Investment Structure).
If an investment by a Top Fund in an Underlying Investment is made indirectly, such investment may be made through a legal entity formed for tax purposes by the Filer (a Blocker). A Blocker is not, or will not be, considered to be an investment fund.
The Filer believes that the investment by a Top Fund in an Underlying Investment, whether directly or indirectly, will provide the Top Fund with an efficient and cost-effective manner of pursuing portfolio diversification and asset diversification instead of purchasing securities, or the underlying assets of each Underlying Investment, directly. The Top Fund will gain access to the investment expertise of the portfolio manager to the underlying assets of each Underlying Investment, as well as to their investment strategies and asset classes.
The Fund-on-Investment Structure therefore provides economies of scale, allows the Top Funds to achieve their investment objectives in a cost-efficient manner and is not detrimental to the interest of other securityholders of an Underlying Investment.
An investment in an Underlying Investment, whether directly or indirectly, by a Top Fund is, or will be, effected at an objective price. An objective price, for this purpose, will be the NAV per security of the applicable class or series of the Underlying Investment.
Top Funds Liquidity
MRAF is valued every day except if that day falls on a Saturday, Sunday, a statutory holiday in Toronto, Ontario or another day on which the Toronto Stock Exchange is not open for trading. Investors may submit a notice of redemption on each valuation day, however, redemptions of units with a NAV of under $100 million require that written notice must be delivered at least 12 months prior to the applicable redemption day. Redemptions of units with a NAV of $100 million or more require that written notice must be delivered at least 24 months prior to the applicable redemption day. The NAV utilized for redemption purposes will be (i) based on valuations of the US REIT that have been conducted no more than one quarter prior to a redemption day and (ii) subject to daily updates by the Filer in accordance with its fair value pricing process.
In all cases, the Filer manages, or will manage, the liquidity of each Top Fund having regard to the redemption features of the corresponding Underlying Investment(s) to ensure that it can meet redemption requests from investors of the Top Funds.
Underlying Investment Liquidity
The investments of the Underlying Investments, which, as noted, consist primarily of real estate/real assets, private equity, venture capital and private credit, have limited liquidity.
Securities of the US REIT may be redeemed on a quarterly basis. Investors are required to provide 60 days’ notice of a redemption.
Each Underlying Investment has, or may have, other investors in addition to a Top Fund.
Generally
The amount invested from time to time, directly or indirectly, in an Underlying Investment by a Top Fund, either alone or together with one or more other “related investment funds” (as such term is defined in section 106(1) of the Ontario Act) may exceed 20% of the outstanding voting securities of the Underlying Investment. As a result, each Top Fund could, either alone or together with one or more other Top Funds and other “related investment funds”, become a “substantial security holder” of an Underlying Investment within the meaning of section 110 of the Ontario Act and contrary to section 111(2)(b). As noted, MRAF is currently a substantial securityholder of the US REIT.
The Filer does not anticipate that any fees or sales charges would be incurred, directly or indirectly, by a Top Fund with respect to an investment in an Underlying Investment that, to a reasonable person, would duplicate a fee payable to the Filer by the Top Fund or its investors.
The Fund-on-Investment Structure may result in a Top Fund, directly or indirectly, investing in an Underlying Investment: (i) in which an officer or director of the Top Fund, of the Filer or of any associate of them, has a significant interest; and/or (ii) where a person or company who is a substantial securityholder of the Top Fund or the Filer, has a significant interest.
Currently, there is no officer or director of any Top Fund, such Top Fund’s management company, or its distribution company, or any associate of them, who has a significant interest in an Underlying Investment, however, there may be circumstances in the future which may cause them to have a significant interest.
Since the Top Funds and the Underlying Investments are not reporting issuers and, in the case of the Underlying Investments, are not “investment funds” pursuant to Canadian securities legislation, 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 for investments by investment funds subject to NI 81-102 in other investment funds.
In the absence of the Related Issuer Relief, the Top Funds would be constrained by the investment restrictions in Canadian securities legislation in terms of the degree to which they could implement a Fund-on-Investment Structure. Specifically, the Top Funds would be prohibited from: (i) becoming substantial securityholders of the Underlying Investments, either alone or together with related investment funds; and (ii) investing in an Underlying Investment in which an officer or director of the Top Fund's management company has a significant interest and/or investing in an Underlying Investment in which a person or company who is a substantial securityholder of the Top Fund or the Top Fund’s management company, has a significant interest.
In the absence of the Consent Requirement Relief, each Top Fund would be precluded from investing, directly or indirectly, in one or more Underlying Investments unless the specific fact is disclosed to securityholders of the Top Fund and the written consent of the securityholders of the Top Fund to the investment is obtained prior to the purchase, since an officer and/or director of the Filer, who may be considered a “responsible person” (as per section 13.5 of NI 31-103) or an associate of a responsible person may also be a partner, officer and/or director of the applicable Underlying Investment. The Top Funds may have a number of existing investors and, as a result, obtaining the consent of each such investor is not practical. In addition, the Filer expects that many Top Fund investors may be clients for which the Filer provides discretionary management services. As such, investment decisions are made by the individual portfolio manager consistent with the investment policies for each client, and client consent is not required for trades. The Filer submits that such consent is impractical and is therefore seeking the Consent Requirement Relief.
According to the Legislation, every management company shall, in respect of each investment fund to which it provides services or advice, file a report of every transaction of purchase or sale of securities between the investment fund and any related person or company within 30 days after the end of the month in which it occurs.
In the absence of the Reporting Relief, the Filer acting as the management company (as defined in the Legislation) of the Top Funds would be required to file a report of every purchase and sale of securities of the Underlying Investments by the Top Funds or every purchase or sale effected by the Top Funds through any related person or company with respect to which the related person or company received a fee either from the Top Funds or from the other party to the transaction or from both within 30 days after the end of the month in which such purchase or sale occurs (the Reporting Requirement).
It would be costly and time-consuming for the Top Funds to comply with the Reporting Requirement, the costs of which will ultimately be borne by the investors. In addition, the disclosure provided in a Top Fund’s offering document along with the disclosure of portfolio holdings provided in a Top Fund’s ongoing continuous disclosure documents such as annual and interim financial statements, will inform investors of any meaningful investments held by a Top Fund in an Underlying Investment.
The Fund-on-Investment Structure represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the investors in the Top Funds.
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) securities of a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement under applicable securities legislation;
(b) the investment by a Top Fund in an Underlying Investment is compatible with the fundamental investment objectives of the Top Fund;
(c) an investment by a Top Fund in an Underlying Investment will be effected at an objective price;
(d) no Top Fund will purchase or hold a security of an Underlying Investment unless at the time of purchasing securities of the Underlying Investment, the Underlying Investment holds no more than 10% of its NAV in securities of investment funds or the Underlying Investment:
(i) has adopted a fundamental investment objective to track the performance of an investment fund or similar investment product;
(ii) purchases or holds securities of a “money market fund” (as defined in NI 81-102); or
(iii) purchases or holds securities that are “index participation units” (as defined in NI 81-102) issued by an investment fund;
(e) no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Investment for the same service;
(f) no sales fees or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Investment that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund, unless the Top Fund redeems its securities of an Underlying Investment during a lock-up period, in which case an early redemption fee may be payable by the Top Fund;
(g) the Filer does not cause the securities of an Underlying Investment held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds of an Underlying Investment to be voted by the beneficial owners of the securities of the Top Fund who are not the Filer or an officer, director or substantial securityholder of the Filer;
(h) when purchasing and/or redeeming securities of an Underlying Investment, the Filer shall as manager of the applicable Top Fund and Underlying Investment, act honestly, in good faith and in the best interests of the Top Fund and the Underlying Investment, respectively, and shall exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances;
(i) a disclosure document, including an offering memorandum where available, of a Top Fund shall be provided to each new investor in a Top Fund prior to the time of investment, and will disclose:
(i) that a Top Fund may purchase securities of one or more applicable Underlying Investments;
(ii) that the Filer is the manager and portfolio manager of both the Top Fund and the Underlying Investments;
(iii) that the Top Fund may invest all, or substantially all, of its assets in securities of Underlying Investments;
(iv) the fees, expenses and any performance or special incentive distributions payable by the Underlying Investments in which a Top Fund invests;
(v) the process or criteria used to select the Underlying Investments, if applicable;
(vi) for each officer, director and/or substantial securityholder of the Filer or of a Top Fund, that has a significant interest in an applicable Underlying Investment, and for the officers and directors and substantial securityholders who together in aggregate hold a significant interest in an applicable Underlying Investment, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the applicable Underlying Investment's NAV, and the potential conflicts of interest which may arise from such relationship;
(vii) that investors are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of the Underlying Investments, if available; and
(viii) that investors are entitled to receive from the Filer, on request and free of charge, the annual audited financial statements and interim financial reports relating to the Underlying Investments in which the Top Fund invests;
(j) the Filer shall annually inform investors in a Top Fund of their right to receive from the Filer on request and free of charge, a copy of the disclosure document of each Underlying Investment, if available, and the annual audited financial statements and interim financial reports relating to each Underlying Investment in which the Top Fund invests;
(k) where an investment is made by a Top Fund in an Underlying Investment, the records of portfolio transactions maintained by the Top Fund include, separately for every portfolio transaction effected by a Top Fund by the Filer, the name of the related person in which an investment is made, being an Underlying Investment;
(l) a Top Fund will invest in, and redeem, each Underlying Investment at the NAV of the applicable securities of the Underlying Investment, which will be based on the valuation of the applicable portfolio assets to which the Underlying Investment has exposure, independently determined by an arm’s length third party; and
(m) a Top Fund will invest, directly or indirectly, in a Future Underlying Investment only where it is structured in similar ways to the Existing Underlying Investments, including investing in other collective investment schemes that are managed by entities that are arm's length third parties to the Filer, the NAV of the Future Underlying Investment is based on the valuation of those other collective investment schemes that are independently determined by the arm's length third party and provide the Future Underlying Investment with audited annual financial statements.
The Consent Requirement Relief
“Darren McKall”
Darren McKall
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission
The Related Issuer Relief and the Reporting Relief
“Lawrence Haber”
“Mary Anne De Monte-Whelan”
Lawrence Haber
Mary Anne De Monte-Whelan
Commissioner
Commissioner
Ontario Securities Commission
Ontario Securities Commission
Application # 2021/0225