June 22, 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
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, the investment funds managed by the Filer or by an affiliate of the Filer that are reporting issuers subject to National Instrument 81-102 Investment Funds (NI 81-102) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) (the Existing Top Funds) and any future investment funds managed by the Filer or an affiliate of the Filer that are, or will be, reporting issuers subject to NI 81-102 and NI 81-107 (the Future Top Funds, and together with the Existing Top Funds, the Top Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
- exempting the Top Funds from the restrictions in the Legislation which prohibit:
(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,
(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);
exempting the Filer and each affiliate that acts as manager of a Top Fund from the requirement to prepare a report in accordance with the requirements of the Legislation of every transaction by a Top Fund involving a purchase of securities from, or sale of securities to, any related person or company (the Reporting Relief);
exempting the Filer and each affiliate that is a registered adviser from the prohibition in paragraph 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) against knowingly causing a Top Fund 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 and the Reporting Relief, the Self-Dealing and Reporting Relief);
to permit each Top Fund to invest a portion of its assets in any collective investment scheme that is not an investment fund, and is, or will be, managed by the Filer or an affiliate of the Filer (the Underlying Investments); and
- exempting each Top Fund from the restrictions in paragraphs 2.5(2)(a) and 2.5(2)(c) of NI 81-102 that prohibit an investment fund from investing in securities of an investment fund that is not subject to NI 81-102 and is not a reporting issuer in any Jurisdiction (the Fund-of-Fund Relief),
to permit each Top Fund to invest a portion of its assets in (i) BMO Georgian Alignment II Access Fund LP, an Ontario limited partnership which is a non-redeemable investment fund that is not a reporting issuer (BMO Georgian Fund), and (ii) BMO Partners Group Private Markets Fund, an Ontario trust which is a mutual fund that is not a reporting issuer (BMO PG Fund, and together with BMO Georgian Fund, the Initial Underlying Funds), and (iii) any future investment fund that is, or will be, managed by the Filer or an affiliate of the Filer that will have similar non-traditional investment strategies (the Future Underlying Funds and, together with the Initial Underlying Funds, the Underlying Funds).
The Self-Dealing and Reporting Relief and the Fund-of-Fund Relief are collectively referred to as 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 subsection 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, NI 81-102, NI 81-107 and MI 11-102 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 Ontario with its head office located in Toronto, Ontario.
The Filer is registered as an investment fund manager (IFM) in each of Ontario, Québec and Newfoundland and Labrador, as a portfolio manager and an exempt market dealer in each of the Jurisdictions, as a derivatives portfolio manager in Québec, and as a commodity trading manager in Ontario.
The Filer or an affiliate of the Filer is the IFM of the Existing Top Funds and Initial Underlying Funds, and the Filer or an affiliate of the Filer will be the IFM of the Future Top Funds and 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 or Future Underlying Fund.
The Filer or an affiliate of the Filer is, or will be, the manager of the Underlying Investments. To the extent that the Filer or an affiliate of the Filer is the manager of any Future Underlying Investment, the representations set out in this decision will apply to the same extent to such Future Underlying Investment.
The Filer or an affiliate of the Filer is, or will be, a “responsible person” (as that term is defined in NI 31-103 of each Top Fund and each Underlying Investment.
The Filer is not in default of securities legislation in any of the Jurisdictions.
The Top Funds
The securities of each Top Fund are, or will be, distributed to investors pursuant to a prospectus prepared in accordance with National Instrument 41-101 General Prospectus Requirements or National Instrument 81-101 Mutual Fund Prospectus Disclosure, as applicable.
The securities of each Top Fund are, or will be, qualified for distribution in one or more Jurisdictions.
Each Top Fund is, or will be, a reporting issuer under the securities legislation of one or more Jurisdictions.
Each Top Fund may wish to invest in securities of the Underlying Funds and Underlying Investments, provided the investment is consistent with the Top Fund’s investment objectives and strategies.
Each Top Fund will comply with the investment restrictions and practices provided in Part 2 of NI 81-102 in making any investment in an Underlying Fund or Underlying Investment and, in particular, will comply with the concentration restriction in section 2.1, the control restriction in section 2.2 and the illiquid assets restriction in section 2.4. Each Top Fund will treat securities of the Underlying Funds and Underlying Investments as illiquid assets for these purposes.
Each Top Fund qualifies to invest in securities of the Underlying Funds and Underlying Investments pursuant to applicable exemptions from the prospectus requirement under National Instrument 45-106 Prospectus Exemptions (NI 45-106) and/or the Legislation.
The Existing Top Funds are not in default of securities legislation of any of the Jurisdictions.
Each Top Fund is, or will be, subject to NI 81-107 and the manager of each Top Fund has established an independent review committee (the IRC) in order to review conflict of interest matters pertaining to its management of the Top Funds as required by NI 81-107.
The Underlying Funds and the Underlying Investments
Securities of the Initial Underlying Funds are, and any Future Underlying Funds or Underlying Investments will be, distributed solely to investors pursuant to exemptions from the prospectus requirements in accordance with NI 45-106 and/or the Legislation.
Each Initial Underlying Fund has an offering memorandum which is provided to investors.
Each Underlying Fund and 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.
BMO Georgian Fund
BMO Georgian Fund is a non-redeemable investment fund established as a limited partnership under the laws of Ontario.
The investment objective of the BMO Georgian Fund is to invest substantially all of its assets in securities of Georgian Alignment Fund II, LP (the Georgian Master Fund), a limited partnership formed under the laws of Ontario. The Georgian Master Fund is managed by a third party that is independent of the Filer.
BMO Georgian Fund is an “investment fund” under the securities legislation of the Jurisdictions as it will invest substantially all of its assets in securities of Georgian Master Fund and generally will not invest for the purpose of exercising or seeking to exercise control over Georgian Master Fund or any other issuer.
BMO Georgian Fund is not subject to NI 81-102 and is not a reporting issuer in any of the Jurisdictions.
The net asset value (the NAV) per security of the BMO Georgian Fund is calculated quarterly by a party that is independent of the Filer.
BMO Georgian Fund is not in default of securities legislation of any of the Jurisdictions.
The investment objective of the Georgian Master Fund is to achieve superior returns principally through long-term capital appreciation, by investing in the equity and equity-related securities of “best-in-class” software as a service and business software companies identified by the portfolio manager of the Georgian Master Fund. Specifically, its criteria for investment in such target companies includes: (i) strong unit economics; (ii) revenue between $50-150 million; (iii) enterprise value between $400 million – $1.5 billion; (iv) projected revenue growth of approximately 25% on a compounded annual growth basis; and (v) positive EBITDA or a clear path to breakeven within 24 months of acquisition.
The Georgian Master Fund is not an “investment fund” as such term is defined under Canadian securities legislation as its investment portfolio will include direct investments which may include “control” characteristics including the right to appoint voting or observer members to an issuer’s board of directors (or similar).
No Top Fund will actively participate in the business or operations of BMO Georgian Fund or Georgian Master Fund.
BMO PG Fund
BMO PG Fund is a mutual fund established as a trust under the laws of Ontario.
The investment objective of BMO PG Fund is to invest substantially all of its assets directly into non-voting participating shares of Partners Group BMO Master Limited, a Cayman Islands exempted company (PG BMO Master Fund). The PG BMO Master Fund is managed by a third party that is independent of the Filer.
BMO PG Fund is an “investment fund” under the securities legislation of the Jurisdictions as it will invest substantially all of its assets in securities of PG BMO Master Fund and generally will not invest for the purpose of exercising or seeking to exercise control over PG BMO Master Fund or any other issuer.
The NAV per security of the BMO PG Fund is calculated monthly by a party that is independent of the Filer.
BMO PG Fund is not subject to NI 81-102 and is not a reporting issuer in any of the Jurisdictions.
The investment objective of PG BMO Master Fund is to invest substantially all of its assets, directly or indirectly, into private market investments including: (i) private real estate, (ii) private infrastructure, (iii) private debt, (iv) private equity, and (v) other private market assets, and will do in part through investments in other funds and/or investment vehicles.
PG BMO Master Fund is not an “investment fund” as such term is defined under Canadian securities legislation as its investment portfolio will include “control” characteristics including the right to appoint voting or observer members to an issuer’s board of directors (or similar).
No Top Fund will actively participate in the business or operations of BMO PG Fund or PG BMO Master Fund.
The Future Underlying Funds and Underlying Investments
Future Underlying Funds and Underlying Investments may be structured as limited partnerships, trusts or corporations governed by the laws of any of the Jurisdictions.
Each Future Underlying Fund will be an “investment fund” as such term is defined under the Legislation and will not be subject to NI 81-102.
Each Underlying Investment will not be an “investment fund” as such term is defined under the Legislation.
The Future Underlying Funds and Underlying Investments will not be reporting issuers in any of the Jurisdictions.
Each Underlying Investment will be operated in a manner similar to how the Filer operates its investment funds, including being administered by the Filer or an affiliate, having its assets managed by a portfolio manager, and calculating a NAV that is used to determine the purchase and redemption price of the securities of the Underlying Investment.
The holdings of any Future Underlying Fund or Underlying Investment are expected to consist of securities of a future master fund that is either managed by a third party who is independent of the Filer or by the Filer or an affiliate of the Filer.
Investments by Top Funds in the Underlying Funds and Underlying Investments
An investment by a Top Fund in an Underlying Fund or Underlying Investment will only be made if the investment is compatible with the investment objectives of the Top Fund.
The Filer believes that an investment by a Top Fund in an Underlying Fund or Underlying Investment will provide the Top Fund with an efficient and cost-effective way for the Top Funds to obtain exposure to diversified alternative and private asset classes (including private equity, private credit, private infrastructure, and private real estate), which are generally not available through investment funds that are reporting issuers or through direct investment. The Top Fund will also gain access to the investment expertise of the portfolio manager to the underlying assets of each Underlying Fund or Underlying Investment, as well as to their investment strategies and asset classes.
The Filer believes that a meaningful allocation to private equity, private credit, private infrastructure, private real estate and other alternative investments provides Top Fund investors with unique diversification opportunities and represents an appropriate investment tool for the Top Fund that has not been widely available in the past.
The Filer believes that it is in the best interests of the Top Funds to leverage the clone-fund structure and strategy of each Underlying Fund or Underlying Investment in order to access the expertise and strategy of the manager of the collective investment vehicle in which each Underlying Fund or Underlying Investment invests (each, a “Master Fund”), to provide the Top Funds with exposure to a diversified array of alternative and private assets. The managers of the existing Master Funds possess, and the managers of future Master Funds will possess, expertise with respect to their focused asset classes that the portfolio management teams of the Top Funds do not have, and employ investment approaches that the Filer cannot replicate internally.
Investments by a Top Fund in an Underlying Fund or Underlying Investment will be effected at an objective price. The Filer’s policies and procedures provide that an objective price, for this purpose, will be the NAV per security of the applicable class or series of the Underlying Fund or Underlying Investment.
Each Top Fund is, or will be, valued and redeemable daily and the Underlying Funds or Underlying Investments may be potentially subject to redemption limitations, including lock-up periods, early redemption penalties and other restrictions on redemptions in a given period of time (collectively, Redemption Limitations).
An investment by a Top Fund in an Underlying Fund or Underlying Investment will only be made if such investment represents the business judgment of a responsible person uninfluenced by considerations other than the best interests of that Top Fund.
Generally
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 Fund or Underlying Investment that, to a reasonable person, would duplicate a fee payable by the Top Fund to the Filer or its investors.
In respect of an investment by a Top Fund in an Underlying Fund or Underlying Investment, no management fees or incentive fees will be payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund or Underlying Investment for the same service.
Where applicable, a Top Fund’s investment in an Underlying Fund or Underlying Investment will be disclosed to investors in that Top Fund’s quarterly portfolio holding reports, financial statements, and fund facts or ETF facts documents.
Where an investment is made by a Top Fund in an Underlying Fund or Underlying Investment, the annual and interim management reports of fund performance for the Top Fund will disclose the name of the related person in which an investment is made, being an Underlying Fund or Underlying Investment.
Where an investment is made by a Top Fund in an Underlying Fund or Underlying Investment, the records of portfolio transactions maintained by the Top Fund will include, separately for every portfolio transaction effected for the Top Fund by the Filer or through any affiliate of the Filer, the name of the related person in which an investment is made, being an Underlying Fund or Underlying Investment.
There will be no established, publicly available secondary market for securities of the Underlying Funds or Underlying Investments, nor will there generally be any redemption rights applicable to the Top Funds as investors in the Underlying Funds or Underlying Investments. As such, the Top Funds will not be able to readily dispose of their interests in an Underlying Fund or Underlying Investment and any interest that a Top Fund holds in an Underlying Fund or Underlying Investment will be considered an “illiquid asset” under NI 81-102.
The prospectus of each Top Fund will disclose in the next renewal or amendment thereto following the date of a decision evidencing the Exemption Sought, the fact that the Top Fund may invest, directly or indirectly, in an Underlying Fund, which are investment funds managed by the Filer or an affiliate of the Filer, and/or Underlying Investments, which are collective investment vehicles managed by the Filer or an affiliate of the Filer.
Each Underlying Fund or 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.
Subject to compliance with section 2.2 of NI 81-102, the amount invested from time to time in an Underlying Investment by a Top Fund, together with one or more Top Funds, may exceed 20% of the outstanding voting securities of the Underlying Investment. This may result by reason of a group of Top Funds providing initial investments into the Underlying Investment on the start-up of the Underlying Investment. As a result, each Top Fund could, together with one or more other Top Funds, become a “substantial security holder” of an Underlying Investment within the meaning of the Legislation, further to which the Top Fund would be prohibited under the Legislation from knowingly purchasing and holding securities of an Underlying Investment. The Top Funds are, or will be, “related investment funds”, as such term is defined in the Legislation by virtue of common management by the Filer or by an affiliate of the Filer.
In addition, an officer or director of the Filer or of an affiliate of the Filer may have a “significant interest” in an Underlying Investment and/or a person or company who is a substantial security holder of the Top Fund, the Filer or an affiliate of the Filer may have a “significant interest” in the Underlying Investment within the meaning of the Legislation, which would prohibit the Top Fund from investing in the Underlying Investment.
Paragraph 13.5(2)(a) of NI 31-103 prohibits the Filer or an affiliate that acts as portfolio manager of a Top Fund from knowingly causing a Top Fund to invest in an Underlying Investment that is structured as a limited partnership, where the general partner of the Underlying Investment is an affiliate of the Filer and the Filer or its affiliate is a responsible person of the Top Funds unless (i) this fact is disclosed to the client and (ii) the written consent of the client to the purchase is obtained before the purchase. It is impractical for the Filer to obtain the prior written consent from each investor in the Top Fund, given the widely held nature of the Top Funds.
Absent the Exemption Sought,
a. each Top Fund would be prohibited from (i) becoming a substantial securityholder of an Underlying Investment, together with other Top Funds, and (ii) investing in an Underlying Investment in which an officer or director of the Filer or of an affiliate 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;
b. each Top Fund would be prohibited from purchasing or holding securities of an Underlying Fund because such Underlying Fund (i) is not, or will not be, subject to NI 81-102, and (ii) is not, or will not be, a reporting issuer in the Jurisdictions; and
c. the Filer, or an affiliate of 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 transaction of purchase or sale of securities between the Top Funds and the Underlying Investments 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 Filer considers that an investment by the Top Funds in the Underlying Funds or Underlying Investments raises “conflict of interest” matters within the meaning of NI 81-107 and, therefore, if the Exemption Sought is granted, the manager of the Top Fund will request approval from the IRC of the Top Funds to permit the investment of the Top Funds in the Underlying Funds and Underlying Investments, including by way of standing instructions. No such investments will be made until the IRC provides its approvals under section 5.2 of NI 81-107. The manager of the Top Funds will comply with section 5.1 of NI 81-107 and the manager of the Top Funds and the IRC of the Top Funds will comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions. If the IRC becomes aware of an instance where the manager of a Top Fund did not comply with the terms of any decision evidencing the Exemption Sought, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Top Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the Jurisdiction under which the Top Fund is organized.
Subsection 6.2(3) of NI 81-107 provides an exemption for investment funds from the “investment fund conflict of interest investment restrictions” (as defined in NI 81-102) for purchases of related issuer securities if the purchase is made on an exchange. However, the exemption in subsection 6.2(3) of NI 81-107 does not apply to purchases of non-exchange-traded securities and, therefore, does not apply to purchases of an Underlying Fund or Underlying Investment by a Top Fund.
Investments in Underlying Funds and Underlying Investments are considered illiquid investments under NI 81-102 and, therefore, are not permitted to exceed 10% of the NAV of a Top Fund. Such investments are included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102 for a Top Fund. NI 81-102 allows holdings in illiquid investments so long as the aggregate exposure to illiquid investments is within the thresholds of the rule. The Filer has its own liquidity policy and manages each Top Fund’s liquidity prudently under the policy. Given the readily available liquidity of the remainder of each Top Fund’s investment portfolio, the Filer believes that the risk of a Top Fund needing to liquidate its investment in these illiquid assets when markets are under stress or in other environments where liquidity may be reduced is remote.
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) a direct or indirect investment by a Top Fund in an Underlying Fund or Underlying Investment will be compatible with the investment objective and strategy of such Top Fund and included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102;
(b) at the time of the purchase by a Top Fund of securities of an Underlying Fund or Underlying Investment, either (A) the Underlying Fund or Underlying Investment holds no more than 10% of its NAV in securities of other investment funds, or (B) the Underlying Fund or Underlying Investment:
(i) has adopted a fundamental investment objective to track the performance of another investment fund or similar investment product;
(ii) purchases or holds securities of investment funds that are “money market funds” (as such term is defined in NI 81-102); or
(iii) purchases or holds securities that are “index participation units” (as such term is defined in NI 81-102) issued by an investment fund;
(c) in respect of an investment by a Top Fund in an Underlying Fund or Underlying Investment, no sales or redemption fees will be paid as part of the investment in the Underlying Fund or Underlying Investment, unless the Top Fund redeems its securities of the Underlying Fund or Underlying Investment during a Redemption Limitation, in which case a fee may be payable by the Top Fund;
(d) in respect of an investment by a Top Fund in an Underlying Fund or Underlying Investment, no management fees or incentive fees will be payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund or Underlying Investment for the same service;
(e) the securities of an Underlying Fund or Underlying Investment held by a Top Fund will not be voted at any meeting of the security holders of the Underlying Fund or Underlying Investment, except that the Top Fund may arrange for the securities of the Underlying Fund or Underlying Investment it holds to be voted by the beneficial holders of securities of the Top Fund;
(f) where applicable, a Top Fund’s investment in an Underlying Fund or Underlying Investment will be disclosed to investors in such Top Fund’s quarterly portfolio holding reports, financial statements, and fund facts or ETF facts documents;
(g) the prospectus of a Top Fund discloses, or will disclose, in the next renewal or amendment thereto following the date of this decision, the fact that the Top Fund may invest in an Underlying Fund, which is an investment fund managed by the Filer or an affiliate, or in an Underlying Investment, which is an investment vehicle managed by the Filer or an affiliate;
(h) the IRC of a Top Fund will review and provide its approval, including by way of standing instructions, prior to the purchase of securities of an Underlying Fund or Underlying Investment, directly or indirectly, by the Top Fund, in accordance with subsection 5.2(2) of NI 81-107;
(i) the Filer complies with section 5.1 of NI 81-107, and the Filer and the IRC of the Top Fund comply with section 5.4 of NI 81-107, for any standing instructions the IRC provides in connection with the transactions;
(j) if the IRC becomes aware of an instance where the Filer or an affiliate of the Filer, in its capacity as the manager of a Top Fund, did not comply with the terms of this decision, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Top Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the Jurisdiction under which the Top Fund is organized;
(k) where an investment is made by a Top Fund in an Underlying Investment or Underlying Fund, the annual and interim management reports of fund performance for the Top Fund disclose the name of the related person in which an investment is made, being the Underlying Investment or Underlying Fund, as the case may be;
(l) where an investment is made by a Top Fund in an Underlying Investment or Underlying Fund, the records of portfolio transactions maintained by the Top Fund include, separately for every portfolio transaction effected for a Top Fund by the Filer or through any affiliate of the Filer, the name of the related person in which an investment is made, being the Underlying Investment or Underlying Fund, as the case may be; and
(m) a Top Fund will not invest in an Underlying Fund or Underlying Investment unless the NAV of the Underlying Fund or Underlying Investment is independently calculated by an arm’s length third party and the annual financial statements of the Underlying Fund or Underlying Investment are audited and made available to the Top Fund.