NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption from National Instrument 81-106 Investment Fund Continuous Disclosure to permit investment funds that use specified derivatives to calculate their NAV on a weekly basis and not on a daily basis, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-106 Investment Fund Continuous Disclosure, s. 14.2(3)(b).
March 27, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
MANULIFE BROMPTON ADVANTAGED BOND FUND
IN THE MATTER OF
The principal regulator in the Jurisdiction has received an application from the Fund and MBB Trust for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from the requirement in section 14.2(3)(b) of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) that the net asset value of an investment fund must be calculated at least once every business day if the investment fund uses specified derivatives (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;
(b) the Fund 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 Alberta, British Columbia, Manitoba, Saskatchewan, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut; and
(c) MBB Trust has provided notice that Section 4.7(1) of MI 11-102 is intended to be relied upon in Quebec.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Fund and MBB Trust:
1. The Fund and MBB Trust are investment trusts established under the laws of Ontario.
2. Brompton Funds Management Limited (the Manager) is the promoter and manager of the Fund and MBB Trust. The Manager will be responsible for providing or arranging for the provision of administrative services required by the Fund and MBB Trust. The head office of the Manager is located in Ontario.
3. The Fund filed a preliminary prospectus dated February 12, 2009 on SEDAR with respect to a public offering (the Offering) of Class A Units and Class F Units (collectively, the Fund Units) a receipt for which was issued by the Ontario Securities Commission on February 19, 2009. The Offering of the Fund Units is a one-time offering and the Fund will not continuously distribute the Fund Units.
4. MBB Trust filed a preliminary non-offering prospectus dated March 9, 2009 on SEDAR, a receipt for which was issued by the Ontario Securities Commission on March 11, 2009.
5. The Fund's investment objectives are to provide holders of Fund Units (the Fund Unitholders) with attractive monthly tax-advantaged cash distributions together with the opportunity for capital appreciation. The Fund will seek to achieve its investment objectives through exposure to an actively managed bond portfolio (the Portfolio) consisting primarily of North American corporate bonds by entering into the Forward Agreement (as defined below). The Fund may also directly hold a small amount of the same securities as are held in the Portfolio.
6. MBB Trust was established to hold the Portfolio. MBB Trust's investment objectives are to provide holders of units of MBB Trust (each, a Trust Unit) with attractive monthly distributions together with the opportunity for capital appreciation. MBB Trust intends to use derivatives for hedging purposes, including hedging the Portfolio's U.S. dollar exposure to the Canadian dollar.
7. The Trust Units will not be offered to the public under a prospectus. A Canadian financial institution or one of its affiliates (the Counterparty) will be the beneficial owner of all of the Trust Units pursuant to an exempt distribution of Trust Units upon the closing of the Offering. The Fund will seek to achieve its investment objective by entering into a forward purchase and sale agreement (the Forward Agreement) with the Counterparty. Under the terms of the Forward Agreement, the Counterparty will agree to deliver to the Fund on the earlier of: (i) a date to be determined in the year 2029; or (ii) at the option of the Fund, on the annual redemption date that occurs in October, 2019 (such earlier date being the Forward Termination Date), a portfolio consisting of Canadian public issuers that are "Canadian securities" as defined under subsection 39(6) of the Income Tax Act (Canada) (the Canadian Securities Portfolio). The aggregate value of the Canadian Securities Portfolio will be equal to the redemption proceeds of the relevant number of Trust Units, net of any amount owing by the Fund to the Counterparty. The Forward Agreement provides that the Fund may settle the Forward Agreement, in whole or in part, prior to the Forward Termination Date: (i) to fund monthly distributions on the Fund Units; (ii) to fund redemptions and repurchases of Fund Units from time to time; (iii) to fund operating expenses and other liabilities of the Fund; and (iv) for any other reason. For the purposes of calculating the net asset value of the Fund, the value of the Forward Agreement at any time will be equivalent to the net asset value of MBB Trust.
8. The Trust Units will not be listed on a stock exchange. The Trust Units may be redeemed by the holders thereof at any time for a redemption price per Trust Unit equal to the net asset value per Trust Unit calculated as at the applicable redemption date, to enable the Fund and the Counterparty to pre-settle the Forward Agreement from time to time as set out in the paragraph above.
9. To provide liquidity for the Class A Units, an application requesting conditional listing approval has been made on behalf of the Fund to the Toronto Stock Exchange (the TSX). The TSX has conditionally approved the listing of the Class A Units subject to the Fund fulfilling all of the requirements of the TSX on or before May 13, 2009, including distribution to a minimum number of public Unitholders.
10. The Class F Units are designed for fee-based accounts and differ from the Class A Units in the following ways: (i) Class F Units will not be listed on a stock exchange; (ii) the fees payable to the syndicate of agents with respect to the Offering on the issuance of the Class F Units are lower than the Class A Units; and (iii) the service fee component of the management fee payable to the Manager, being 0.50% per annum of the net asset value attributable to the Class A Units, plus applicable taxes, is only payable with respect to the Class A Units. The Class F Units are convertible into Class A Units as described below and it is expected that liquidity for the Class F Units will be obtained by means of conversion into Class A Units and the sale of those Class A Units through the facilities of the TSX.
11. Class F Units may be converted in any month on the first business day of the month (the Conversion Date) by delivering a notice and surrendering such Class F Units by 5:00 p.m. (Toronto time) at least 10 business days prior to the Conversion Date. For each Class F Unit so converted, a holder will receive that number of Class A Units equal to the net asset value per Class F Unit as of the close of trading on the business day immediately preceding the Conversion Date divided by the net asset value per Class A Unit as of the close of trading on the business day immediately preceding the Conversion Date.
12. Class A Units and Class F Units may be redeemed on the second last business day of October of any year commencing in 2010 (the Annual Redemption Date), subject to certain conditions, at a redemption price per Fund Unit equal to 100% of the Net Assets per Unit (as defined in the prospectus of the Fund) of the relevant class, as applicable (less any costs associated with the redemption, including brokerage costs). The Net Assets per Unit of each class will be calculated on the Annual Redemption Date. For the purposes of calculating the Net Assets per Unit, the value of the Forward Agreement will be determined on the basis that any bonds, debentures and other debt obligations that are owned by MBB Trust will be valued by taking the bid price on the Annual Redemption Date and any short position of MBB Trust will be valued by taking the ask price on the Annual Redemption Date, calculated on a fully diluted basis, if applicable.
13. In addition to such annual redemption right, Class A Units and Class F Units may be redeemed on the second last business day of each month, other than in the month of October, subject to certain conditions, at a redemption price computed by reference to the market price of the Class A Units on the applicable monthly redemption date (and less any costs associated with the redemption, including brokerage costs).
14. Under section 14.2(3)(b) of NI 81-106, an investment fund that is a reporting issuer that uses or holds specified derivatives, such as the Fund and MBB Trust intend to do, must calculate its net asset value on a daily basis.
15. The Fund will calculate its net asset value on the Thursday of each week (or if any Thursday is not a business day, the immediately preceding business day) and the last business day of each month. The Trust will calculate its net asset value on the same dates that the Fund calculates its net asset value and on any other day upon request of a holder of Trust Units.
16. The preliminary prospectus of the Fund discloses, and the final prospectus of the Fund will disclose, that the net asset value per Fund Unit of each class of Fund Units will be calculated and made available to the financial press for publication on a weekly basis and that the Manager will post the net asset value per Fund Unit of each class of Fund Units on its website.
17. The preliminary prospectus of the MBB Trust discloses, and the final prospectus of MBB Trust will disclose, that the net asset value per Trust Unit will be made available to holders of Trust Units upon request.
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 final prospectus of the Fund discloses:
(i) that the net asset value per Fund Unit of each class of Fund Units is available to the public upon request; and
(ii) a website that the public can access to obtain the net asset value calculation per Fund Unit;
for so long as: (x) the Class A Units are listed on the TSX; and (y) the Fund calculates the net asset value per Fund Unit of each class of Fund Units at least weekly; and
(b) the final prospectus of MBB Trust discloses the net asset value calculation per Trust Unit will be provided to holders of Trust Units on request, for so long as (x) the Trust Units are not offered to the public; and (y) MBB Trust calculates the net asset value per Trust Unit at least weekly.