Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption granted to a precious metals fund to permit the fund to invest up to 100% of its net assets in silver bullion and silver certificates and to permit the Fund to store silver bullion in and outside Canada with Brinks or Via Mat as sub-sub-custodians.

Applicable Legislative Provisions

National Instrument NI 81-102 Mutual Funds, ss. 2.3(f), 6.1(2)(b), 6.1(3)(b), 6.2, 6.3, 19.1.

April 29, 2011

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

SPROTT ASSET MANAGEMENT LP

(the Filer or the Manager)

AND

IN THE MATTER OF

SPROTT SILVER BULLION FUND

(the Fund)

AND

IN THE MATTER OF

RBC DEXIA INVESTOR SERVICES TRUST

(the Custodian)

AND

IN THE MATTER OF

THE BANK OF NOVA SCOTIA

(the Bullion Custodian)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption, pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) from the following provisions of NI 81-102:

(a) section 2.3(f) of NI 81-102 to permit the Fund to invest up to 100% of its net asset, taken at market value at the time of investment, in silver and/or silver certificates;

(b) clause 6.1(2)(b) of NI 81-102, to permit the physical silver bullion of the Fund to be held outside of Canada by the Bullion Custodian or Brinks or Via Mat (each of Brinks and ViaMat, as defined below) for purposes other than facilitating portfolio transactions of the Fund;

(c) clause 6.1(3)(b) of NI 81-102, to permit the Custodian or Bullion Custodian to appoint the Brinks Company, or its subsidiaries or affiliates (Brinks) or Via Mat International Ltd., or its subsidiaries or affiliates (Via Mat), which are persons or companies that are not described in section 6.2 or 6.3 of NI 81-102, to act as sub-custodians to hold the Fund's physical silver bullion;

(d) section 6.2 of NI 81-102 to permit Brinks or Via Mat to be appointed as sub-custodians of the Fund to hold the Fund's physical silver bullion in Canada; and

(e) section 6.3 of NI 81-102 to permit Brinks and Via Mat to be appointed as sub-custodians of the Fund to hold the Fund's physical silver bullion outside Canada.

(collectively, theExemption 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions).

Interpretation

Terms defined in NI 81-102, National Instrument 14-101 Definitions, 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 and the Fund

2. The Filer is a limited partnership established under the laws of the Province of Ontario with its head office in Toronto and is registered as an adviser in the category of portfolio manager in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador and as an exempt market dealer in Ontario. The Filer has submitted an application for registration as an investment fund manager in Ontario.

3. The Filer is not in default of securities legislation in any province or territory of Canada.

4. The Fund will be an open-end mutual fund trust established pursuant to a trust agreement governed under the laws of Ontario.

5. The Filer will be the manager and portfolio adviser for the Fund.

6. A preliminary simplified prospectus in respect of the Fund was filed on SEDAR under project No. 1693456 on February 2, 2011. Once a final prospectus for the Fund is filed and a receipt therefor is obtained, the Fund will be a "reporting issuer" or equivalent in each province and territory of Canada.

7. The investment objective of the Fund will be to seek to provide a secure, convenient alternative for investors seeking to hold silver. The Fund will invest primarily in unencumbered, fully allocated silver bullion and silver certificates. The Fund may also invest a portion of its assets in cash, money market instruments and/or treasury bills.

8. The Fund will not invest in securities of issuers that produce silver.

9. The Filer will consider that other funds managed by it or its affiliates hold the underlying assets of the Fund directly for the purposes of such other funds' compliance with sections 2.3(f) of NI 81-102 or conditions contained in a decision granting such other funds an exemption from section 2.3(f).

Investment in Silver

10. The Manager requests exemptive relief that would permit the Fund to invest up to 100% of its net asset value, taken at the market value at the time of investment, in silver bullion and/or silver certificates.

11. All silver bullion purchased by the Fund will be in London Good Delivery bar form.

12. Similar to the market for gold bullion and gold certificates, the Filer submits that the markets for silver bullion and silver certificates are also highly liquid, and there are no liquidity concerns with permitting the Fund to invest in this precious metal.

Custody of Bullion Held by the Fund

13. Pursuant to a Master Trust Agreement dated September 9, 1997, as amended and restated on October 16, 2001 and February 13, 2004, as amended (the Custodian Agreement) the Custodian acts as the custodian for all mutual funds managed by the Manager. The Custodian will hold the property of the Fund other than the Fund's physical silver bullion. The terms of the Custodian Agreement comply with all requirements in Part 6 of NI 81-102.

14. The Custodian has appointed the Bullion Custodian to be a sub-custodian of the Fund and to hold the Fund's physical silver bullion. The custody arrangements with respect to the Fund's physical silver bullion are governed by the terms of a sub-custodian agreement between the Custodian and the Bullion Custodian (the Bullion Custodian Agreement). Except as represented below, the terms of the Bullion Custodian Agreement will comply with all requirements in Part 6 of NI 81-102.

15. The Fund's physical silver bullion will be stored and held either on an allocated and segregated basis in the vault facilities of the Bullion Custodian, in Canada, London, England or New York, U.S.A, or will be stored in the vault of a sub-custodian on an allocated and segregated basis in Canada, London, England or New York, U.S.A, where in the latter case it shall be identified as the property of the Bullion Custodian. The Bullion Custodian shall at all times record and identify in the books and records maintained by the Bullion Custodian that such bullion is being held on behalf of the Custodian. The Bullion Custodian is one of the largest providers of physical precious metals trading and custodial services in the world. The Manager has determined that the Bullion Custodian will be the appropriate choice to provide custodial services to the Fund because the Bullion Custodian is experienced in providing silver storage and custodial services, and is familiar with the requirements relating to the physical handling and storage of silver bullion.

16. The Fund will not insure its physical silver bullion. The Bullion Custodian Agreement requires that the Bullion Custodian or any sub-custodian maintain insurance on such terms and conditions as it considers appropriate against all risk of physical loss of, or damage to, bullion stored in the Bullion Custodian's or such sub-custodian's vaults except the risk of war, nuclear incident, terrorism events or government confiscation. Neither the Manager, the Fund nor the Custodian are beneficiaries of any such insurance and none of them have the ability to dictate the existence, nature or amount of coverage.

17. The Manager has discussed such insurance coverage with the Bullion Custodian, and believes that the insurance that the Bullion Custodian or any sub-custodian has obtained will be appropriate for the Fund. The Bullion Custodian Agreement provides that the Bullion Custodian shall not cancel its insurance or permit its sub-custodian to cancel such insurance except upon 30 days prior written notice to the Manager. The Fund will disclose the material details of that insurance arrangement in its final annual information form.

18. The Bullion Custodian has advised the Manager and the Custodian that due to physical storage capacity constraints, having regard to the amount of silver bullion which the Fund may acquire, there may not be sufficient space in the vault facilities of the Bullion Custodian to store all of the Fund's physical silver bullion.

19. As a result, the Bullion Custodian may be required to use the services of sub-custodians to store some of the Fund's physical silver bullion.

20. The Bullion Custodian has advised the Custodian and the Manager that it proposes to use Brinks and Via Mat, as sub-custodians, if necessary, to hold the physical silver bullion of the Fund. Brinks and Via Mat are not entities that are currently approved to act as a custodian or sub-custodian for assets held in Canada, or to act as a sub-custodian for assets held outside of Canada as Brinks and Via Mat are not, among other things, a bank listed in Schedule I, II or III of the Bank Act (Canada) or a trust company incorporated under the laws of Canada.

21. Brinks and Via Mat are leading providers of secure logistics for valuables, including diamonds, jewellery, precious metals, securities, currency and secure data, serving banks, retailers, governments, mines, refiners and metal traders. Brinks and Via Mat are both authorized depositories for the London Bullion Market Association and have vault facilities that are accepted as warehouses for the London Bullion Market Association. Brinks is also an authorized depository for NYMEX/COMEX.

22. The number of entities in Canada which are eligible to act as sub-custodians for the physical storage of silver bullion is limited. Of these eligible entities, some already have exclusive relationships with other investment funds for storage purposes whereas others simply may not have the excess capacity that the Fund may need to store physical silver bullion. These capacity constraints have been intensified due to the increased demand for physical commodities and the corresponding need to arrange for safe-keeping.

23. The Manager and the Bullion Custodian believe that both Brinks and Via Mat are appropriate sub-custodians for the Fund's physical silver bullion. The Bullion Custodian has engaged in a review of the facilities, procedures, records and the level of insurance coverage of Brinks and Via Mat, and will engage in a similar review annually, to satisfy itself as to the continuing appropriateness of using Brinks and Via Mat as sub-custodians of the Fund's physical bullion.

24. The custody arrangements with respect to the holding of the Fund's physical silver bullion by Brinks or Via Mat will be governed by the terms of an agreement between the Bullion Custodian and Brinks or Via Mat, as the case may be, (the Bullion Sub-Custodian Agreements), the terms of which will comply with Part 6 of NI 81-102, except as represented herein.

25. To the best of the Manager's, the Fund's, the Custodian's and the Bullion Custodian's knowledge, the Custodian Agreement, the Bullion Custodian Agreement and the Bullion Sub-Custodian Agreements are consistent with industry practice.

26. In relation to the Fund, the sub-custodial activities of Brinks and Via Mat will be limited to holding the Fund's physical silver bullion. All physical silver bullion of the Fund held by Brinks and Via Mat will be held in vault facilities in Canada, London, England or New York, U.S.A, on an allocated and segregated basis. The Bullion Custodian will exercise its audit rights under each Bullion Sub-Custodian Agreement on an on-going basis in order to satisfy itself that Brinks and Via Mat are in substantial compliance with the terms of the relevant Bullion Sub-Custodian Agreement and, in particular, that the bullion of the Fund which the Bullion Custodian has transferred to Brinks and Via Mat on behalf of the Fund (i) is held by Brinks and Via Mat at vault facilities that are accepted as warehouses for the London Bullion Market Association, (ii) is physically segregated and specifically identified, both in the vault facilities in which such bullion is held by Brinks and Via Mat and on the books and records of Brinks and Via Mat, as constituting the property of the Bullion Custodian or the Fund, (iii) has not sustained loss, damage or destruction (but with no obligation on the part of the Bullion Custodian to verify the weight, quality, fineness, assay characteristics, authenticity or composition of such bullion or that such bullion conforms to any good delivery standards for the London Bullion Market Association, NYMEX/COMEX or any other bullion trading body or that such bullion is otherwise fit for any purpose), and (iv) remains the subject of a subsisting policy of insurance that covers Brinks' and Via Mats' liability for the loss, damage or destruction of such bullion.

27. The Bullion Custodian has advised the Fund and the Manager that each of Brinks and Via Mat have arranged for sufficient insurance coverage in respect of any of the Fund's physical silver bullion held by the Bullion Custodian through the vault facilities of Brinks or Via Mat. The Manager has discussed the insurance coverage obtained by Brinks and Via Mat with the Bullion Custodian and believes that the insurance coverage obtained by Brinks and Via Mat is appropriate for the Fund.

28. Pursuant to the Custodian Agreement, in safekeeping the property of the Fund, the Custodian is required to exercise (i) the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances; or (ii) at least the same degree of care as it exercises with respect to its own property of a similar kind, if this is a higher degree of care than the degree of care referred to in (i). In addition, pursuant to the Custodian Agreement, the Custodian is not entitled to an indemnity from the Fund in the event the Custodian breaches its standard of care. The Bullion Custodian Agreement includes a similar standard of care in respect of the obligations of the Bullion Custodian and a similar provision in respect of the Bullion Custodian's indemnity. The Bullion Custodian has satisfied itself that the degree of care to which Brinks and Via Mat are subject in respect of the Bullion Sub-Custodian Agreement is no less than the degree of care referred to in (i).

29. The Bullion Custodian Agreement provides that the Bullion Custodian shall, at all times, indemnify and save harmless the Custodian from and against any and all losses, charges, damages, actions, demands, costs, expenses, claims and liabilities (except for indirect, incidental, exemplary, punitive, consequential or special damages) arising from the Bullion Custodian's own negligence or willful misconduct in the performance or non-performance of its duties under the Bullion Custodian Agreement.

30. The Custodian Agreement provides that if the Fund suffers a loss as a result of any act or omission of the Custodian or of any other agent appointed by the Custodian (rather than appointed by the Manager), including the Bullion Custodian, and if such loss is directly attributable to the failure of such agent to comply with its standard of care in the provision of any service to be provided by it under the Custodian Agreement, then the Custodian shall assume liability for such loss directly, and shall reimburse the Fund accordingly.

31. The Bullion Custodian Agreement provides that if the Custodian suffers a loss as a result of any act or omission of a sub-custodian (including Brinks or Via Mat) or of any other agent appointed by the Bullion Custodian (rather than appointed by the Custodian) and if such loss is directly attributable to the failure of such agent to comply with its standard of care in the provision of any service to be provided by it under the Bullion Custodian Agreement or the applicable Bullion Sub-Custodian Agreement, then the Bullion Custodian shall assume liability for such loss directly (except for indirect, incidental, exemplary, punitive, consequential or special damages) and shall reimburse the Custodian accordingly.

32. The Fund's auditors will be present during, and will verify, a physical count of all of the Fund's physical silver bullion, whether held by the Bullion Custodian, Brinks, or Via Mat, at least once every year. The Fund and its auditors will have the ability, with sufficient advance notice to the Bullion Custodian, who shall make arrangements with Brinks or Via Mat, where required, to attend at the vaults of the Bullion Custodian, Brinks and/or Via Mat as required to verify the silver bullion held by the Bullion Custodian, Brinks or Via Mat on behalf of the Fund.

33. The Bullion Custodian shall, to the best of its ability, monitor the most recent audited financial statements of Brinks and Via Mat or their respective affiliates or subsidiaries, in order to ensure that the shareholders' equity of such entities is sufficient with what the Bullion Custodian believes to be appropriate for an entity acting as custodian of physical bullion and, in any event at sufficient levels in order to meet the Bullion Custodian's own internal requirements as though the Bullion Custodian were seeking to deposit its own physical bullion with such sub-custodians.

34. All bullion purchased by the Fund will be certified by the relevant vendor as bullion conforming to the good delivery standards of the London Bullion Market Association or another internationally recognized bullion trading body.

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 investment by the Fund in silver (including silver certificates) is in accordance with the fundamental investment objectives of the Fund;

(b) the Manager, on behalf of the Fund, ensures that any silver certificates purchased by the Fund, represent silver which is:

(i) available for delivery in Canada, free of charge, to or to the order of the holder of the certificate;

(ii) of minimum fineness of 999 parts per 1,000;

(iii) held in Canada;

(iv) in the form of either bars or wafers; and

(v) if not purchased from a bank listed in Schedule I, II or III of the Bank Act (Canada), fully insured against loss and bankruptcy by an insurance company licensed under the laws of Canada or a jurisdiction;

(c) the simplified prospectus of the Fund contains disclosure regarding the unique risks associated with an investment in the Fund including the risk that direct purchases of silver by the Fund may generate higher transaction and custody costs than other types of investments, which may impact the performance of the Fund;

(d) the simplified prospectus of the Fund, including each renewal, will not be combined with the simplified prospectus and annual information form of any other mutual fund that the Filer manages, unless the investment objective of such other mutual fund is to invest a substantial portion of such fund's assets in one or more types of precious metals;

(e) in respect of the relief granted from the requirements of sections 6.1(2)(b), 6.1(3)(b), 6.2 and 6.3, the Fund, the Manager, the Custodian and the Bullion Custodian are limited to using Brinks and Via Mat as sub-custodians for the silver bullion of the Fund which will be held only in Canada, London or New York; and

(f) in respect of the compliance reports to be prepared by the Custodian pursuant to section 6.7 of NI 81-102, in lieu of including the information required by paragraphs 6.7(1)(a), 6.7(1)(b), 6.7(1)(c) and 6.7(2)(b) and (c) in respect of the Custodian's review of the sub-custodian arrangements involving Brinks and Via Mat, the Custodian shall instead be entitled to rely on a certificate of the Bullion Custodian prepared in respect of the Bullion Custodian's annual review process for Brinks and Via Mat referred to in paragraph 22 above, and whether the Bullion Custodian remains of the view that Brinks and Via Mat continue to be appropriate sub-sub-custodians to hold the Fund's physical silver bullion.

"Darren McKall"
Manager, Investment Funds
Ontario Securities Commission