May 31, 2023
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 (the Filer or Manager)
AND
BROMPTON ENHANCED MULTI-ASSET INCOME ETF
(the Top Fund)
DECISION
BACKGROUND
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Top Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting an exemption from paragraph 2.5(2)(b) of National Instrument 81-102 – Investment Funds (NI 81-102) to permit the Top Fund to purchase securities of Brompton Split Corp. Preferred Share ETF (the Underlying Fund), which will hold more than 10% of its net asset value (NAV) in securities of other investment funds (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 all of the other provinces and territories of Canada (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.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer 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.
The Filer is not in default of securities legislation in any of the Jurisdictions.
The Filer acts as investment fund manager and portfolio manager of the Top Fund and will act as investment fund manager and portfolio manager of the Underlying Fund.
The Filer is registered with the Ontario Securities Commission as an investment fund manager, exempt market dealer, portfolio manager and commodity trading manager.
The Top Fund
The Top Fund is an exchange-traded ‘alternative mutual fund’ organized and governed by the laws of the Province of Ontario.
The Top Fund is governed by the provisions of NI 81-102, subject to any exemption therefrom that may be granted by the securities regulatory authorities.
The Top Fund is a reporting issuer in each of the Jurisdictions. It currently distributes its securities on a continuous basis under a long form prospectus dated March 24, 2023 prepared pursuant to National Instrument 41-101 – General Prospectus Requirements (NI 41-101) in the form of Form 41-101F2 – Information Required in an Investment Fund Prospectus (Form 41-101F2) and Form 41-101F4 – Information Required in an ETF Facts Document (Form 41-101F4). Its securities began trading on the Toronto Stock Exchange (TSX) under the ticker symbol BMAX on October 20, 2022.
The investment objectives of the Top Fund are to provide unitholders with: (a) attractive monthly distributions and (b) the opportunity for capital appreciation by investing, directly or indirectly, on a leveraged basis, in a portfolio of equity and fixed income securities. The Top Fund seeks to hedge substantially all of its direct exposure to foreign currencies back to the Canadian dollar.
The Top Fund currently seeks to achieve its investment objectives by investing in securities of investment funds (exchange-traded funds (ETFs) and/or split share corporations (Split Share Corporations)) managed by the Manager which invest in equity and/or fixed income securities. The Manager expects that the Top Fund will invest substantially all of its NAV in equity covered-call ETFs, fixed income ETFs and preferred shares issued by Split Share Corporations (Split Corp. Preferred Shares) and that the asset allocation of the Top Fund, which may change from time to time at the Manager’s discretion, will be approximately 70% equity covered-call ETFs, 20% fixed income ETFs and 10% Split Corp. Preferred Shares. The Manager does not expect that the Top Fund’s allocation to Split Corp. Preferred Shares will exceed 20% of NAV (at the time of purchase).
The Top Fund is subject to National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107).
The Top Fund wishes to have the ability to purchase securities of the Underlying Fund which will hold more than 10% of its NAV in securities of other investment funds, as described below.
Each investment by the Top Fund in securities of the Underlying Fund will be made in accordance with the investment objectives of the Top Fund and will represent the business judgement of responsible persons uninfluenced by considerations other than the best interest of the Top Fund.
The Top Fund will not sell short securities of the Underlying Fund.
The Underlying Fund
The Underlying Fund will be an exchange-traded ‘alternative mutual fund’ organized and governed by the laws of the Province of Ontario.
The Underlying Fund will be governed by the provisions of NI 81-102, subject to any exemption therefrom that may be granted by the securities regulatory authorities.
The Manager filed a preliminary long form prospectus and preliminary ETF Facts dated May 12, 2023 pursuant to NI 41-101 in the Form of 41-101F2 and 41-101F4 to qualify the distribution of units of the Underlying Fund in the Jurisdictions on a continuous basis. The Manager intends to file a final long form prospectus and final ETF Facts for the Underlying Fund in respect of which it expects to be granted a final receipt, upon which the Underlying Fund will become a reporting issuer in each of the Jurisdictions.
Subject to the approval of the TSX, the units of the Underlying Fund will be listed on the TSX.
The investment objectives of the Underlying Fund will be to provide its unitholders with: (a) monthly distributions and (b) the opportunity for capital preservation, primarily through investment in a portfolio of Split Corp. Preferred Shares of Split Share Corporations.
The investment strategy of the Underlying Fund will be to primarily invest in an actively managed portfolio of Split Corp. Preferred Shares offered by Split Share Corporations listed on a Canadian exchange and that are managed by the Manager or by third party managers. The Underlying Fund may also invest in preferred shares of other issuers, ETFs and other investment funds managed by the Manager or a third-party manager (the ETFs and other investment funds are together referred to herein as the Other Funds), equities or income-generating securities, and securities that are convertible into any of the above noted securities provided such investments are consistent with the Underlying Fund’s investment objectives.
The Underlying Fund will be subject to NI 81-107.
The Top Fund and the Underlying Fund are related parties. The Filer will comply with its obligations under NI 81-107 in respect of any purchase by the Top Fund of securities of the Underlying Fund. All such related party transactions will be disclosed to securityholders of the Top Fund in its management report of fund performance.
As it is proposed that the securities of the Underlying Fund be listed on the TSX, the market for them will be highly liquid as the market for the securities will be supported by a designated broker which acts as an intermediary between investors and the Underlying Fund, standing in the market with bid and ask prices for such securities to maintain a liquid market for the securities of the Underlying Fund. As a result, the Filer expects the Top Fund will be able to dispose of securities of the Underlying Fund through market facilities in order to raise cash, including to fund the redemption requests of its securityholders.
As the Underlying Fund’s portfolio is expected to consist primarily of an actively managed portfolio of Split Corp. Preferred Shares of Split Share Corporations which are ‘investment funds’ within the meaning of the Legislation, and may also include securities of Other Funds, the Underlying Fund will hold more than 10% of its NAV in securities of other investment funds.
Each of the Split Share Corporations and the Other Funds held in the portfolio of the Underlying Fund are or will be reporting issuers in the Jurisdictions and will be subject to the provisions of NI 81-102.
The Underlying Fund will not invest in physical commodities, use specified derivatives or engage in short selling.
General
In satisfaction of its targeted allocation to Split Corp. Preferred Shares, the Top Fund wishes to invest up to 20% of its NAV (calculated at the time of purchase) in securities of the Underlying Fund as an efficient and cost-effective alternative to investing directly in a portfolio of individual Split Corp. Preferred Shares.
An investment in the Underlying Fund by the Top Fund will enable the Top Fund to diversify its portfolio holdings as the Underlying Fund is expected to hold securities of 15-20 Split Share Corporations and Other Funds.
Absent the Exemption Sought, an investment by the Top Fund in the Underlying Fund is prohibited by the multi-tiering restriction in paragraph 2.5(2)(b) of NI 81-102 because the Underlying Fund will hold more than 10% of its NAV in securities of other investment funds, consisting of Split Share Corporations and Other Funds.
An investment by the Top Fund in the Underlying Fund would not qualify for the exemptions in paragraph 2.5(4) of NI 81-102 from the multi-tiering restriction in paragraph 2.5(2)(b) of NI 81-102 because the Underlying Fund will not issue index participation units and will not be a clone fund or money market fund.
Except for paragraph 2.5(2)(b) of NI 81-102, each investment by the Top Fund in securities of the Underlying Fund will be made in accordance with the provisions of section 2.5 of NI 81-102.
There will be no duplication of management fees or incentive fees between the Top Fund and the Underlying Fund, and between the Underlying Fund and the Split Share Corporations and Other Funds.
Specifically, the Top Fund does not pay the Manager an annual management fee for the services that the Manager provides to the Top Fund. Instead, the Manager is paid an annual management fee by the related underlying funds in which the Top Fund invests. The prospectus of the Top Fund discloses the range of management fees payable by the underlying funds in which the Top Fund invests. Accordingly, there will be no duplication of management fees payable by the Top Fund and the Underlying Fund for the same service. Furthermore, no sales fees or redemption fees are payable by the Top Fund in relation to purchases or redemptions of the securities of the underlying funds in which it invests if such underlying funds are managed by the Manager or an affiliate or associate of the Manager and no sales fees or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of securities of any unrelated investment fund that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund.
Similarly, when the Underlying Fund invests in Split Corp. Preferred Shares of Split Share Corporations and securities of Other Funds that are managed by the Manager or third-party managers, there shall be no management fees or incentive fees that are payable by the Underlying Fund that, to a reasonable person, would duplicate a fee payable by the Split Share Corporations and Other Funds for the same service. In addition, no sales fees or redemption fees will be payable by the Underlying Fund in relation to purchases and redemptions of Split Corp. Preferred Shares of Split Share Corporations and securities of Other Funds in which it invests if such investment funds are managed by the Manager or an affiliate and no sales fees or redemption fees will be payable by the Underlying Fund in relation to its purchases or redemptions of securities of any unrelated investment fund that, to a reasonable person, would duplicate a fee payable by an investor in the Underlying Fund.
An investment in the Underlying Fund by the Top Fund should pose little investment risk to the Top Fund because the Underlying Fund, as well as the Split Share Corporations and Other Funds in which the Underlying Fund will invest, will be subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities.
The Filer is of the view that granting the Exemption Sought is in the best interests of the Top Fund and is not prejudicial to the public interest or to securityholders 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:
(a) the Filer is the investment fund manager and portfolio manager of the Top Fund and the Underlying Fund;
(b) an investment by the Top Fund in securities of the Underlying Fund is in accordance with the investment objectives and strategies of the Top Fund;
(c) the investment strategies of the Top Fund, as disclosed in the long form prospectus of the Top Fund that is next receipted after the Top Fund purchases securities of the Underlying Fund, state that the Top Fund may invest in the Underlying Fund which may in turn invest more than 10% of its net assets in other investment funds that are related or unrelated to the Manager;
(d) an investment by the Top Fund in securities of the Underlying Fund will, immediately after purchase, comprise, in aggregate, no more than 20% of the NAV of the Top Fund;
(e) neither the Underlying Fund nor any of the Split Share Corporations and Other Funds rely on any discretionary relief permitting the investment fund to exceed the leverage exposure otherwise permitted under NI 81-102 through the use of borrowing, short selling and specified derivatives;
(f) there is no duplication of management fees or incentive fees between the Top Fund and the Underlying Fund, and between the Underlying Fund and the Split Share Corporations and Other Funds; and
(g) the Top Fund’s investment in securities of the Underlying Fund is otherwise made in compliance with all other requirements of section 2.5 of NI 81-102, except to the extent that discretionary relief has been granted from any such requirement.
“Darren McKall”
Darren McKall
Manager, Investment Funds and Structured Products
Ontario Securities Commission
Application No. 2023/0197
Sedar No. 3548879