December 19, 2025
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 MIDDLEFIELD LIMITED
(the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of existing and future investment funds of which the Filer or an affiliate is, or in the future will be, the investment fund manager and to which National Instrument 81-102 – Investment Funds (NI 81-102) applies (each a Fund and collectively, the Funds) for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption under section 19.1 of NI 81-102 from:
- the following provisions of NI 81-102 in order to permit the Funds to invest in securities of existing and future exchange-traded funds (ETFs, and each, an ETF) that are not index participation units (IPUs, and each, an IPU) and whose securities are, or will be, listed for trading on a stock exchange in the United States (the U.S. Underlying ETFs, and each a U.S. Underlying ETF):
(a) paragraph 2.2(1)(a) (the Control Restriction) to permit each Fund to purchase securities of a U.S. Underlying ETF even though, immediately after the purchase, the Fund would hold securities representing more than 10% of: (1) the votes attaching to the outstanding voting securities of the U.S. Underlying ETFs, or (2) the outstanding equity securities of the U.S. Underlying ETFs (the Control Relief);
(b) paragraph 2.5(2)(a) to permit each Fund that is a mutual fund other than an alternative mutual fund to purchase and/or hold securities of a U.S. Underlying ETF even though the U.S. Underlying ETF is not subject to NI 81-102;
(c) paragraph 2.5(2)(a.1) to permit each Fund that is an alternative mutual fund or a non-redeemable investment fund to purchase and/or hold securities of a U.S. Underlying ETF, even though the U.S. Underlying ETF is not subject to NI 81-102; and
(d) paragraph 2.5(2)(c) to permit each Fund to purchase and/or hold securities of a U.S. Underlying ETF even though the U.S. Underlying ETF is not a reporting issuer in any Canadian Jurisdiction (the U.S. Underlying ETF Exemption); and
- the following provisions of NI 81-102 in order to permit the Funds to invest in Fannie and Freddie Securities (as defined herein):
(a) subsection 2.1(1) of NI 81-102 to permit each Fund that is a mutual fund, other than an alternative mutual fund, to purchase a security of an issuer, enter into a specified derivative transaction or purchase index participation units (each a Purchase) when, immediately after the Purchase, more than 10 percent of the net asset value (NAV) of the Fund would be invested in debt obligations issued or guaranteed by either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac); and
(b) subsection 2.1(1.1) of NI 81-102 to permit each Fund that is an alternative mutual fund or a non-redeemable investment fund to make a Purchase when, immediately after the Purchase, more than 20 percent of the NAV of the Fund would be invested in debt obligations issued or guaranteed by either the Fannie Mae or Freddie Mac (the Fannie/Freddie Exemption and, together with the Control Relief and the U.S. Underlying ETF Exemption, 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 each of the other provinces and territories of Canada (together with Ontario, the Canadian Jurisdictions, and each, a Canadian Jurisdiction).
Interpretation
Terms defined in National Instrument 14-101 – Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this Application, unless otherwise defined. In addition:
- 1933 Act means the United States Securities Act of 1933, as amended from time to time;
- 1940 Act means the United States Investment Company Act of 1940, as amended from time to time;
- Fannie and Freddie Securities means debt obligations issued or guaranteed by either Fannie Mae or Freddie Mac including, without limitation, bonds and mortgage-backed securities and Fannie or Freddie Security means any one such debt obligation;
- Minimum Rating means a credit rating of BBB-- assigned by Standard & Poor's Rating Service or an equivalent rating by one or more other designated rating organizations; and
- U.S. Government Equivalent Rating means a credit rating assigned by Standard & Poor's Rating Services (Canada), or an equivalent rating assigned by one or more other designated rating organizations, to a Fannie or Freddie Security that is not less than the credit rating then assigned by such designated rating organization to the debt of the United States government of approximately the same term as the remaining term to maturity of, and denominated in the same currency as, the Fannie or Freddie Security.
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 Alberta. The Filer’s head office is located in Toronto, Ontario.
The Filer is registered as follows:
(a) under the securities legislation of Alberta, Ontario, Québec, and Newfoundland and Labrador as an investment fund manager, portfolio manager and exempt market dealer; and
(b) under the securities legislation of Nova Scotia as a portfolio manager and exempt market dealer.
The Filer, or an affiliate of the Filer, is, or will be, the investment fund manager of the Funds.
The Filer is not in default of securities legislation in any of the Canadian Jurisdictions.
The Funds
Each Fund is, or will be, an investment fund organized and governed by the laws of Canada or a Canadian Jurisdiction.
Each Fund is, or will be, governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.
The securities of each of the Funds are or will be qualified for distribution in some or all of the Canadian Jurisdictions under a prospectus or simplified prospectus.
Each Fund is, or will be, a reporting issuer in one or more Canadian Jurisdictions.
Each Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds.
The Funds may, from time to time, wish to invest in the U.S. Underlying ETFs and Fannie and Freddie Securities.
Each existing Fund is not in default of applicable securities legislation in any Canadian Jurisdiction.
U.S. Underlying ETF Exemption
- The securities of a U.S. Underlying ETF will not meet the definition of IPU in NI 81-102 because the only purpose of the U.S. Underlying ETF will not be to:
(a) hold the securities that are included in a specified widely quoted market index in substantially the same proportion as those securities are reflected in that index; or
(b) invest in a manner that causes the U.S. Underlying ETF to replicate the performance of that index.
The securities of a U.S. Underlying ETF are, or will be, listed on an exchange in the United States that is registered with the Securities Exchange Commission (SEC) under Section 6 of the Securities Exchange Act of 1934 as a national securities exchange and the market for them is, or will be, liquid because it is, or will be, supported by designated brokers. As a result, the Filer expects a Fund to be able to dispose of such securities through market facilities in order to raise cash, including to fund the redemption requests of its securityholders.
No U.S. Underlying ETF will hold more than 10% of its NAV in securities of another investment fund unless (i) the U.S. Underlying ETF is a clone fund, as defined in NI 81-102, (ii) the other investment fund is a money market fund, as defined in NI 81-102, or (iii) securities of the other investment fund are IPUs.
A U.S. Underlying ETF may be managed by the Filer and sales fees or redemption fees may be payable by a Fund in relation to its purchase or redemption of the securities of the U.S. Underlying ETF.
Each U.S. Underlying ETF is, or will be, a publicly offered ETF subject to the 1933 Act and/or the 1940 Act.
No Fund will pay management or incentive fees, which to a reasonable person would duplicate a fee payable by a U.S. Underlying ETF for the same service.
Absent the U.S. Underlying ETF Exemption, an investment by a Fund in a U.S. Underlying ETF would:
(a) be prohibited by paragraphs 2.5(2)(a) and 2.5(2)(a.1) of NI 81-102, as applicable, because such U.S. Underlying ETF may not be subject to NI 81-102;
(b) be prohibited by paragraph 2.5(2)(c) of NI 81-102 because such U.S. Underlying ETF may not be a reporting issuer in any Canadian Jurisdiction; and
(c) not qualify for the exception in paragraph 2.5(3)(a) of NI 81-102 because the securities of the U.S. Underlying ETF are not IPUs.
The Filer has concluded that it could not currently gain exposure to applicable asset classes, sectors and/or markets entirely through existing Canadian mutual funds or ETFs.
Absent the Control Relief, an investment by a Fund in securities of a U.S. Underlying ETF will not qualify for the exemption set out in paragraph 2.2(1.1)(b) of NI 81-102 in respect of the Control Restriction because securities of the U.S. Underlying ETFs are not IPUs.
The key benefits of a Fund investing in the U.S. Underlying ETFs are greater choices, improved portfolio diversification and potentially enhanced returns. For example:
(a) an investment in the U.S. Underlying ETFs will provide the Funds with access to specialized knowledge, expertise and/or analytical resources of the investment adviser to the U.S. Underlying ETFs;
(b) the U.S. Underlying ETFs provide a potentially better risk profile, diversification and improved liquidity/tradability than direct holdings of asset classes to which the U.S. Underlying ETFs provide exposure; and
(c) the investment strategies of the U.S. Underlying ETFs offer significantly broader exposure to asset classes, sectors and markets than those available in the existing Canadian ETF market.
The Filer submits that having the option to allocate a portion of each Fund’s assets to U.S. Underlying ETFs will increase diversification opportunities and may improve a Fund’s overall risk/reward profile.
An investment in a U.S. Underlying ETF by a Fund is an efficient and cost effective alternative to obtaining exposure to securities held by the Underlying ETF rather than purchasing those securities directly by the Fund.
An investment in a U.S. Underlying ETF by a Fund should pose limited investment risk to the Fund because each U.S. Underlying ETF will be subject to the 1933 Act and/or the 1940 Act, subject to any exemption therefrom that may in the future be granted by the securities regulatory authorities.
Due to the potential size disparity between the Funds and the U.S. Underlying ETFs, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively larger Fund in securities of a U.S. Underlying ETF could result in such Fund holding securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the U.S. Underlying ETF, or (ii) the outstanding equity securities of that U.S. Underlying ETF, contrary to the Control Restriction.
Fannie/Freddie Exemption
The investment objectives of each Fund that will rely on the Fannie/Freddie Exemption is or will permit the Fund to invest a majority of its assets in fixed income securities. The ability to invest in Fannie and Freddie Securities is or will be an important feature of each such Fund due to the size and role of Fannie Mae and Freddie Mac in the US mortgage industry and the expertise of the Filer and its sub-advisers in investing in such securities.
Fannie Mae is a financial services corporation originally established by the United States Congress in 1938 to provide United States federal government money to local banks to finance home mortgages during the Great Depression. Its business includes borrowing money in the debt markets by selling bonds and providing liquidity to mortgage originators by purchasing whole loans which it then securitizes by issuing mortgage-backed securities. Fannie Mae also earns guarantee fees for assuming the credit risk on mortgage loans.
Freddie Mac is a financial services corporation that was created by the United States Congress in 1970 to expand the secondary market for mortgages in the United States. It was established to provide competition to Fannie Mae. Similar to Fannie Mae, the business of Freddie Mac includes buying mortgages in the secondary market, pooling them, and issuing mortgage-backed securities, as well as earning guarantee fees for assuming the credit risk on mortgage loans.
Fannie and Freddie Securities provide a substantial portion of the financing for residential mortgages in the United States.
Originally, the obligations of Fannie Mae were explicitly guaranteed by the United States government. The explicit guarantee was removed as part of a reorganization of Fannie Mae in 1968. Like Fannie Mae, there is no explicit guarantee of the obligations of Freddie Mac by the United States government.
Notwithstanding the absence of an explicit guarantee, it is widely assumed that there is an implied guarantee of the obligations of both Fannie Mae and Freddie Mac by the United States government. This assumption is based on the view that Fannie Mae and Freddie Mac each are considered to be "too big to fail" due to the critical roles they play as instrumentalities of the United States government existing to support the liquidity of the residential real estate mortgage market. Accordingly, it is widely believed that the United States government implicitly guarantees the obligations of Fannie Mae and Freddie Mac. This is reflected in Fannie and Freddie Securities currently having a U.S. Government Equivalent Rating.
The implied guarantee was evidenced during the 2008 financial crisis. At that time, Fannie Mae and Freddie Mac together owned or guaranteed approximately half of the United States' US$12 trillion mortgage market and were at risk of defaulting on their obligations. Such a default would have increased the cost of obtaining mortgage financing from other sources, thereby exacerbating the decline in the US residential real estate market, as well as negatively impacting investors (including retirement funds and money market funds) that held Fannie and Freddie Securities. As a result, on September 7, 2008, Fannie Mae and Freddie Mac were placed into conservatorship of the United States Federal Housing Financing Agency in order to stabilize them. The United States government avoided creating an explicit guarantee of the obligations of Fannie Mae and Freddie Mac due to the negative impact it would have had on the United States Treasury. Fannie Mae and Freddie Mac were expressly excluded from the bail-in regime created under Title II of the United States Dodd-Frank Wall Street Reform and Consumer Protection Act to preclude future US government bail-outs of large financial companies. It is expected that a further act of the US Congress would be required to remove the implied guarantee of Fannie and Freddie Securities as part of a larger reform of the US residential real estate market. No such initiative currently is a priority of the US Congress.
Under the 1940 Act, an investment company registered with the SEC seeking to qualify as a "diversified company" is required, among other matters, to invest at least 75% of its total assets in a manner whereby not more than 5% of the value of its total assets is invested in the securities of any single issuer. This restriction is analogous to the diversification requirement imposed on public mutual funds in Canada by subsection 2.1(1) of NI 81-102 on public mutual funds in Canada. Similar to paragraph 2.1(2)(a) of NI 81-102, the 1940 Act excludes a "government security" from the 5% limit described.
The definition of "government security" in the 1940 Act differs from that contained in NI 81-102 by including any security issued by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States (a U.S. government instrumentality). Each of Fannie Mae and Freddie Mac is considered to be a US government instrumentality and Fannie and Freddie Securities therefore are "government securities" under the 1940 Act.
The definition of "government security" in NI 81-102 does not include US government instrumentalities. Accordingly, the only United States securities which qualify as government securities are those directly issued by, or fully and unconditionally guaranteed by, the United States government. Fannie and Freddie Securities do not meet this definition since their obligations are not explicitly fully and unconditionally guaranteed by the United States government.
As a result, the restriction in subsections 2.1(1) and 2.1(1.1) apply to each investment by a Fund in Fannie and Freddie Securities.
Fannie and Freddie Securities represent a large, attractive and unique category of investment that cannot be replicated by any other issuer. For this reason, it is important to the Funds that they be entitled to maximize their opportunity to invest in Fannie and Freddie Securities.
Investments in Fannie and Freddie Securities are considered by the Filer to be more prudent than investments in equivalent bonds and mortgage-backed securities of other issuers due to the implied guarantee by the United States government. Accordingly, if the Fannie/Freddie Exemption is granted, each Fund will have the opportunity to maintain a more prudent portfolio through greater exposure to securities implicitly guaranteed by the United States government.
The Filer intends, either directly or through sub-advisers, to research and monitor the investment attributes and trading operations for Fannie and Freddie Securities. Such ongoing research and monitoring will include monitoring proposals to restructure the US residential housing market that may impact the implied guarantee of Fannie and Freddie Securities by the US government. If the US Congress proposes legislation to change or remove the implied guarantee and the Filer determines in its judgement that, as a result of the announced proposed legislation, there is a significant risk that the Fannie and Freddie Securities held by the Funds could cease to have a US Government Equivalent Rating or their credit ratings could decline below a Minimum Rating, the Funds will take steps that are reasonably required to dispose of their Fannie and Freddie Securities in an orderly and timely fashion such that the Fannie and Freddie Securities held by the Fund comply with subsection 2.1(1) of NI 81-102.
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 U.S. Underlying ETF Exemption is granted provided that:
(a) the investment by a Fund in securities of a U.S. Underlying ETF is in accordance with the investment objectives of the Fund;
(b) a Fund does not purchase securities of a U.S. Underlying ETF if, immediately after the purchase, more than 10% of the NAV of the Fund, in aggregate, taken at market value at the time of the purchase, would consist of securities of U.S. Underlying ETFs;
(c) securities of each U.S. Underlying ETF are listed on an exchange in the United States that is registered with the SEC under Section 6 of the Securities Exchange Act of 1934 as a national securities exchange;
(d) each U.S. Underlying ETF is, immediately before the purchase by a Fund of securities of that U.S. Underlying ETF, an investment company subject to the Investment Company Act in good standing with the SEC; and
(e) the prospectus of each Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit investments in U.S. Underlying ETFs on the terms described in this decision.
The decision of the principal regulator under the Legislation is that the Fannie/Freddie Exemption is granted provided that:
(a) at the time of Purchase, the Fannie or Freddie Security has a U.S. Government Equivalent Rating and a rating not less than the Minimum Rating;
(b) the prospectus of each Fund that is a mutual fund, alternative mutual fund or non-redeemable investment fund distributing its securities and the prospectus or annual information form of each Fund that is not distributing its securities discloses, or will disclose in the next renewal of its simplified prospectus or prospectus (as applicable) following the date of this decision:
(i) that the Fund has received permission to invest more than 10% (or, in the case of an alternative mutual fund or a non-redeemable investment fund, 20%) of its net assets in each of Fannie Mae and Freddie Mac provided the Fannie and Freddie Securities maintain a U.S. Government Equivalent Rating and a rating not less than the Minimum Rating;
(ii) the maximum amount the Fund may invest in Fannie and Freddie Securities under the heading or sub-heading "Investment Strategies"; and
(iii) risk factors that:
(A) the U.S. government may not guarantee payment of Fannie and Freddie Securities; and
(B) describe the risks associated with the Fund investing more than 10% (or, in the case of an alternative mutual fund or a non-redeemable investment fund, 20%) of its net assets in securities of Fannie Mae or Freddie Mac;
(c) if the rating of a Fannie or Freddie Security held by a Fund ceases to have a U.S. Government Equivalent Rating or declines below the Minimum Rating, the Fund will take the steps that are reasonably required to dispose of such Fannie or Freddie Security in an orderly and timely fashion such that the Fannie and Freddie Securities held by the Fund comply with subsection 2.1(1) or 2.1(1.1) of NI 81-102, as applicable; and
(d) if the U.S. Congress:
(i) proposes legislation intended to change or remove the implied guarantee by the U.S. government of Fannie Mae and/or Freddie Mac and the Filer determines in its judgement that, as a result of the announced proposed legislation, there is a significant risk that the Fannie and Freddie Securities held by the Funds could cease to have a U.S. Government Equivalent Rating or their credit ratings could decline below the Minimum Rating; or
(ii) enacts legislation that:
(A) removes the implied guarantee by the U.S. government of Fannie Mae and/or Freddie Mac; or
(B) specifies a future effective date on which the implied guarantee by the U.S. government of Fannie Mae and/or Freddie Mac will end,
the Funds will take the steps that are reasonably required to dispose of such Fannie and Freddie Securities in an orderly and timely fashion such that the Fannie and Freddie Securities held by the Funds comply with subsection 2.1(1) or 2.1(1.1) of NI 81-102, as applicable.
“Darren McKall”
Darren McKall
Associate Vice President, Investment Management Division
Ontario Securities Commission
Application File #: 2025/0720
SEDAR+ File #: 6371756