Tralucent Asset Management Inc. (Re), 2023 CanLII 70373

August 3, 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

TRALUCENT ASSET MANAGEMENT INC. (the Filer)

AND

TRALUCENT GLOBAL ALT (LONG/sHORT) EQUITY FUND (the Existing Fund)

decision

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Existing Fund and any additional mutual fund that offers ETF Securities (as defined below) and that is or may be managed by the Filer, or an affiliate of the Filer, in the future (the Future Funds, and together with the Existing Fund, the Funds, and each a Fund) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that exempts:

(a) the Filer and each Fund from the requirement to include a certificate of the underwriter(s) in that Fund’s prospectus in respect of each class of ETF Securities (the Underwriter’s Certificate Requirement) (the Underwriter’s Certificate Relief); and

(b) a person or company purchasing ETF Securities in the normal course through the facilities of the Toronto Stock Exchange (the TSX) or another Marketplace (as defined below) from the Take-Over Bid Requirements (as defined below) (the Take-Over Bid Relief)

(collectively, 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 provinces of Canada other than Québec and the Jurisdiction (together with the Jurisdiction, the Jurisdictions).

Interpretation

Capitalized terms used herein have the meaning ascribed thereto below (or in MI 11-102, National Instrument 14-101 Definitions, National Instrument 41-101 General Prospectus Requirements (NI 41-101) and National Instrument 81-102 Investment Funds (NI 81-102), as applicable) unless otherwise defined in this decision:

(a) Affiliate Dealer means a registered dealer that is an affiliate of an Authorized Dealer or the Designated Broker and that participates in the re-sale of Creation Units (as defined below) of a Fund from time to time.

(b) Authorized Dealer means a registered dealer that has entered, or intends to enter, into an agreement with the manager of a Fund authorizing the dealer to subscribe for, purchase and redeem Creation Units from the Fund on a continuous basis from time to time.

(c) Basket of Securities means, in relation to the ETF Securities of a Fund, a group of securities or assets representing the constituents of the Fund.

(d) Designated Broker means a registered dealer that has entered, or intends to enter, into an agreement with the Filer or an affiliate of the Filer on behalf of a Fund to perform certain duties in relation to the ETF Securities of the Fund, including the posting of a liquid two-way market for the trading of the Fund’s ETF Securities on the TSX or another Marketplace.

(e) ETF Facts means an ETF facts document prepared, filed and delivered in accordance with Part 3B of NI 41-101 and Form 41-101F4 Information Required in an ETF Facts Document (Form 41-101F4).

(f) ETF Securities means securities of an exchange-traded class of a Fund that will be listed on the TSX or another Marketplace and that will be distributed pursuant to a: (i) simplified prospectus prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1); or (ii) a long form prospectus prepared in accordance with NI 41-101 and Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2).

(g) Fund Facts means a fund facts document prepared, filed and delivered in accordance with Form 81-101F3 Contents of Fund Facts Document.

(h) Marketplace means a “marketplace” as defined in National Instrument 21-101 Marketplace Operation that is located in Canada.

(i) Market Price means the weighted average trading price of the ETF Securities of a Fund on the TSX or another marketplace on which the ETF Securities of the Fund have traded on the effective date of a redemption.

(j) Mutual Fund Securities means securities of a non-exchange-traded class of a Fund that will be distributed pursuant to a simplified prospectus prepared in accordance with NI 81-101 and Form 81-101F1.

(k) Other Dealer means a registered dealer that is not an Authorized Dealer, the Designated Broker or an Affiliate Dealer.

(l) Prescribed Number of ETF Securities means, in relation to a Fund, the number of ETF Securities of the Fund determined by the Filer from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.

(m) Prospectus Delivery Requirement means the requirement that a dealer, not acting as agent of the purchaser, who receives an order or subscription for a security offered in a distribution to which the prospectus requirement of the Legislation applies, send or deliver to the purchaser or its agent, unless the dealer has previously done so, the latest prospectus and any amendment either before entering into an agreement of purchase and sale resulting from the order or subscription, or not later than midnight on the second business day after entering into that agreement.

(n) Securityholders means beneficial or registered holders of Mutual Fund Securities or ETF Securities of a Fund, as applicable.

(o) Take-over Bid Requirements means the requirements of National Instrument 62-104 Take-Over Bids and Issuer Bids (NI 62-104) relating to take-over bids, including the requirement to file a report of a take-over bid and to pay the accompanying fee, in each Jurisdiction.

Representations

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

The Filer

1The Filer is a corporation formed and organized under the laws of the Jurisdiction. The head office of the Filer is located in Toronto, Ontario.

2The Filer is registered as a portfolio manager, investment fund manager and exempt market dealer in the Jurisdiction, and as a portfolio manager and exempt market dealer in New Brunswick, Québec, Alberta and British Columbia.

3The Filer is not a reporting issuer in any Jurisdiction and is not in default of securities legislation in any of the Jurisdictions.

4The Filer is the investment fund manager and portfolio manager of the Existing Fund. The Filer or an affiliate of the Filer will be the investment fund manager of the Future Funds.

The Funds

5Each Fund is or will be an open-ended mutual fund trust, governed by the laws of the Jurisdiction.

6The Filer established the Existing Fund in March 2020 and previously offered its classes of units to qualified investors by means of the prospectus exemptions in National Instrument 45-106 Prospectus Exemptions on a private placement basis.

7The Filer has obtained relief exempting each Fund that offers ETF Securities along with Mutual Fund Securities from the requirement to prepare and file a long form prospectus for the ETF Securities in the form prescribed by Form 41-101F2 provided that the Filer files (i) a prospectus for the ETF Securities in accordance with the provisions of NI 81-101, other than the requirements pertaining to the Fund Facts and (ii) an ETF Facts in accordance with Part 3B of NI 41-101 and Form 41-101F4. Accordingly, the Filer may distribute ETF Securities pursuant to a simplified prospectus or a long form prospectus.

8On April 19, 2023, a preliminary simplified prospectus in respect of each class of Mutual Fund Securities and ETF Securities of the Existing Fund, Fund Facts in respect of each class of Mutual Fund Securities of the Existing Fund, and ETF Facts in respect of the ETF Securities of the Existing Fund were filed with the securities regulatory authorities in each of the Jurisdictions.

9The Existing Fund and each Future Fund will be a reporting issuer in the Jurisdictions in which it offers its Mutual Fund Securities and ETF Securities.

10Subject to any exemptions that may be granted by the applicable securities regulatory authorities, each Fund will be subject to NI 81-102 and the Securityholders of each Fund will have the right to vote at a meeting of Securityholders in respect of any matter prescribed by NI 81-102.

11ETF Securities of the Funds will be (subject to satisfying the listing requirements of the applicable exchange) listed on the TSX or another Marketplace.

12The Filer has applied to list the ETF Securities of the Existing Fund on the TSX. The Filer will not file a final simplified prospectus for a Fund in respect of the ETF Securities of the Fund until the TSX or another applicable Marketplace has conditionally approved the listing of the ETF Securities of the Fund.

13The Filer will file a prospectus prepared in accordance with the Legislation in respect of each Fund, subject to any exemptions that may be granted by the applicable securities regulatory authorities.

14The Existing Fund is not in default of securities legislation in any of the Jurisdictions.

Underwriter’s Certificate and Take-over Bid

15Mutual Fund Securities may be subscribed for or purchased directly from a Fund through mutual fund dealers, investment dealers and their representatives that are registered under applicable securities legislation in the Jurisdictions in which they are offered for sale.

16ETF Securities will be distributed on a continuous basis in one or more of the Jurisdictions under a prospectus in the form prescribed by Form 41-101F2 or Form 81-101F1, as applicable. ETF Securities may generally only be subscribed for or purchased directly from the Funds (Creation Units) by Authorized Dealers or the Designated Broker. Generally, subscriptions or purchases may only be placed for a Prescribed Number of ETF Securities (or a multiple thereof) on any day when there is a trading session on the TSX or another Marketplace. Authorized Dealers and/or the Designated Broker subscribe for Creation Units for the purpose of facilitating investor purchases of ETF Securities on the TSX or another Marketplace.

17In addition to subscribing for and re-selling their Creation Units, Authorized Dealers, the Designated Broker and Affiliate Dealers will also generally be engaged in purchasing and selling ETF Securities of the Fund as Creation Units in the secondary market. Other Dealers may also be engaged in purchasing and selling ETF Securities of the Fund as Creation Units in the secondary market despite not being an Authorized Dealer, Designated Broker or Affiliate Dealer that has entered in an agreement with the Filer.

18The Designated Broker and each Authorized Dealer that subscribes for Creation Units must deliver, in respect of each Prescribed Number of ETF Securities to be issued, a Basket of Securities and/or cash in an amount sufficient so that the value of the Basket of Securities and/or cash delivered is equal to the net asset value of the ETF Securities subscribed for, next determined following the receipt of the subscription order for Creation Units.

19Upon notice given by the Filer from time to time and, in any event, not more than once quarterly, the Designated Broker may be contractually required to subscribe for Creation Units for cash in an amount not to exceed a specified percentage of the net asset value of the Fund or such other amount established by the Filer.

20The Designated Broker and the Authorized Dealers will not receive any fees or commissions in connection with the issuance of Creation Units to them. On the issuance of Creation Units, the Filer or the Fund may, in the Filer’s discretion, charge a fee to the Designated Broker or an Authorized Dealer to offset the expenses incurred in issuing the Creation Units.

21The Designated Broker performs certain other functions, which include standing in the market with a bid and ask price for ETF Securities for the purpose of maintaining liquidity for the ETF Securities.

22Except for Authorized Dealers and the Designated Broker subscriptions for Creation Units , as described above, and other distributions that are exempt from the Prospectus Delivery Requirement under the Legislation, ETF Securities generally will not be able to be purchased directly from the Fund. Investors are generally expected to purchase and sell ETF Securities, directly or indirectly, through dealers executing trades through the facilities of the TSX or another Marketplace in Canada. ETF Securities may also be issued directly to Securityholders upon a reinvestment of distributions of income or capital gains.

23Securityholders that are not the Designated Broker or an Authorized Dealer that wish to dispose of their ETF Securities may generally do so by selling their ETF Securities on the TSX or other Marketplace, through a registered dealer, subject only to customary brokerage commissions. A Securityholder that holds a Prescribed Number of ETF Securities or a multiple thereof may exchange such ETF Securities for Baskets of Securities and/or cash in the discretion of the Filer. Securityholders may also redeem ETF Securities for cash at a redemption price equal to the lesser of 95% of the Market Price of the ETF Securities of the Fund on the TSX or another Marketplace on the date of redemption and the net asset value per ETF Security of the Fund.

Reasons for the Exemption Sought

Underwriter’ Certificate Relief

24Authorized Dealers and the Designated Broker will not provide the same services in connection with a distribution of Creation Units as would typically be provided by an underwriter in a conventional underwriting.

25The Filer will generally conduct its own marketing, advertising and promotion of the ETF Securities.

26Authorized Dealers and the Designated Broker will not be involved in the preparation of the Fund’s simplified prospectus and will not perform any review or any independent due diligence of the contents of such simplified prospectus. In addition, the Authorized Dealers and the Designated Broker will not incur any marketing costs or receive any underwriting fees or commissions from the Fund or the Filer in connection with the distribution of ETF Securities. The Authorized Dealers and the Designated Broker generally seek to profit from their ability to create and redeem ETF Securities by engaging in arbitrage trading to capture spreads between the trading prices of ETF Securities and their underlying securities and by making markets for their clients to facilitate client trading in ETF Securities.

27In addition, neither the Filer nor the Funds offering ETF Securities will pay any fees or commissions to the Designated Broker and Authorized Dealers. As the Designated Broker and Authorized Dealers will not receive any remuneration in connection with distributing ETF Securities and as the Authorized Dealers will change from time to time, it is not practical to provide an underwriters’ certificate in the prospectus of the Funds offering ETF Securities.

Take-Over Bid Relief

28As equity securities that will trade on the TSX or another Marketplace, it is possible for a person or company to acquire such number of ETF Securities so as to trigger the application of the Take-Over Bid Requirements. However:

(a) it will be difficult for one or more Securityholders to exercise control or direction over a Fund offering ETF Securities, as the constating documents of each Fund will provide that there can be no changes made to such Fund which do not have the support of the Filer;

(b) it will be difficult for purchasers of ETF Securities to monitor compliance with the Take-Over Bid Requirements because the number of outstanding ETF Securities will always be in flux as a result of the ongoing issuance and redemption of ETF Securities by the Fund; and

(c) the way in which the ETF Securities will be priced deters anyone from either seeking to acquire control or offering to pay a control premium for the outstanding ETF Securities because the pricing for each ETF Security will generally reflect the net asset value of the ETF Securities of the Fund.

29The application of the Take-over Bid Requirements to the ETF Securities would have an adverse impact on the liquidity of the ETF Securities, because they could cause the Designated Broker and any other large Securityholders to cease trading ETF Securities once the Designated Broker or any other large Securityholders of the Fund reach the prescribed threshold at which the Take-over Bid Requirements apply. This, in turn, could serve to provide Mutual Fund Securities with a competitive advantage over ETF Securities.

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 is that the Exemption Sought is granted.