National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from section 4.4 of National Instrument 81-106 Investment Fund Continuous Disclosure for the purposes of the relief requested from Form 81-106F1, Items 3.1(7), 4.1(1), 4.1(2), 4.2(1), 4.3(1) and 4.3(2) of Part B of Form 81-106F1, and Items 3(1) and 4 of Part C of Form 81-106F1, to permit mutual funds to include in annual and interim management reports of fund performance the financial highlights and past performance of the funds that are derived from the funds' annual financial statements that pertain to time periods when the funds were not a reporting issuer.
Applicable Legislative Provisions
National Instrument 81-106 Mutual Fund Continuous Disclosure, ss. 4.4, 17.1.
Items 3.1(7), 4.1(1), 4.1(2), 4.2(1), 4.3(1) and 4.3(2) of Part B of Form 81-106F1 and Items 3(1) and 4 of Part C of Form 81-106F1.
February 14, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO
IN THE MATTER OF DAVIS-REA LTD. (the Filer)
IN THE MATTER OF DAVIS-REA BALANCED FUND (the Balanced Fund), DAVIS-REA EQUITY FUND (the Equity Fund)
AND DAVIS-REA FIXED INCOME FUND (the Income Fund) (each a Fund, and collectively, the Funds)
The Ontario Securities Commission (the OSC) has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of Ontario (the Legislation) exempting the class O units of the Funds and the class A units of the Balanced Fund from:
(a) section 4.4 of National Instrument 81-106Investment Funds Continuous Disclosure (NI 81-106), for the purposes of the relief requested from Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance (Form 81-106F1); and
(b) items 3.1(7), 4.1(1) in respect of the requirement to comply with sections 15.3(2) and 15.3(4)(c) of National Instrument 81-102 Mutual Funds (NI 81-102), 4.1(2), 4.2(1), 4.3(1) and 4.3(2) of Part B of Form 81-106F1 and items 3(1) and 4 of Part C of Form 81-106F1, to permit each Fund to include in its annual and interim management reports of fund performance (each, a MRFP), the past performance data of that Fund notwithstanding that such performance data relates to a period prior to that Fund offering its securities under a prospectus
(collectively, the Requested Relief).
Defined terms contained in NI 81-102, NI 81-106 and National Instrument 14-101 Definitions have the same meaning in this decision, unless they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the laws of Ontario and is registered as a portfolio manager in Ontario, Alberta, British Columbia, Manitoba, Nova Scotia and Québec. The Filer is also registered as an exempt market dealer in Ontario and Alberta, and as investment fund manager in Ontario. The Filer's head office is located in Toronto, Ontario.
2. The Filer is the investment fund manager, portfolio manager and promoter of the Funds.
3. The Balanced Fund (formerly called the Davis-Rea Balanced Pooled Fund) was established on February 7, 2003 and is governed by an amended and restated mutual fund trust agreement dated as of the 12th day of September 2013 (the Master Trust Agreement).
4. The Equity Fund (formerly called the Davis-Rea Equity Pooled Fund) and the Income Fund (formerly called the Davis-Rea Fixed Income Pooled Fund) were each established on May 31, 2011 and are also governed by the Master Trust Agreement.
5. Since the inception date of each Fund, until the simplified prospectus and the annual information form for the Funds dated March 18, 2013 (collectively, the Prospectus), which were filed pursuant to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), were receipted by the OSC on March 20, 2013, class O units of the Funds and class A units of the Balanced Fund (collectively, the Units) were previously distributed to investors across Canada on a prospectus-exempt basis in accordance with the requirements National Instrument 45-106Prospectus and Registration Exemptions.
6. The Filer and the Funds are not in default of securities legislation in Ontario or any other province or territory of Canada.
7. Upon the issuance of the receipt for the Funds' Prospectus on March 20, 2013, the Funds have been permitted to commence distributing their Units to the public and the Funds have become reporting issuers under the securities laws of Ontario. The Funds became subject to the requirements of NI 81-102 and all aspects of NI 81-106 at that time. Previously, the Funds had distributed their annual audited and semi-annual unaudited financial statements to all holders of its securities in accordance with the requirements of NI 81-106.
8. Since the inception date of each Fund, each Fund has, except as noted in the next sentence, complied with the investment restrictions and practices contained in NI 81-102. From August 30, 2012 until September 21, 2012 the Equity Fund held one security that represented 10.44% of the net asset value of the Equity Fund on the purchase date, and from March 22, 2012 until June 6, 2012 the Equity Fund held one security that represented 12.61% of the net asset value of the Equity Fund on the purchase date.
9. As reporting issuers in Ontario, the Funds are being managed in the same way as they were managed before they became reporting issuers in Ontario. As a result of becoming reporting issuers in Ontario:
(a) the Funds' investment objectives have not changed, other than to provide additional detail as required by NI 81-101;
(b) the management fees charged to the holders of the Class O units of the Funds, and the Class A units of the Balanced Fund, which were the only units of the Funds that were offered before the Funds became reporting issuers in Ontario, have not changed;
(c) the day-to-day administration of the Funds has not changed, other than to comply with the additional regulatory requirements associated with being a reporting issuer in Ontario (none of which will impact the portfolio management of any Fund) and to provide additional features that are available to investors who decide to buy Units as described in the Prospectus; and
(d) the management expense ratio of the Funds has not increased by more than 0.10%, which the Filer considers to be an immaterial amount.
10. As a reporting issuer in Ontario, each Fund is required by NI 81-106 to prepare and send annual and interim MRFPs to all holders of its securities on an annual and interim basis.
11. The most recent financial statements prepared by the Funds under NI 81-106 were the unaudited semi-annual financial statements for the period ended June 30, 2013, which did not reflect the Exemption Sought or the NI 81-102 and NI 81-101 Relief (defined below).
12. Without the Requested Relief, the MRFPs of the Funds in Ontario cannot include financial highlights and performance data derived from their annual and interim financial statements for the time periods prior to them becoming reporting issuers in Ontario.
13. The Filer proposes in Ontario to present the performance data of the class O units of the Funds and the class A units of the Balanced Fund for the time period since the inception of that Fund in sales communications and Fund Facts pertaining to that Fund based on the financial statements (annual and interim) of that Fund. The past performance data of the Manager's composites, which included Units of the Funds, complied with the Global Investment Performance Standards (GIPS), and have been verified by an independent auditor.
14. The Filer has filed a separate application for exemptive relief form certain provisions of NI 81-102 and Form 81-101F3 Contents of Fund Facts Document to permit the Funds in Ontario, in respect of the class O units of the Funds and the class A units of the Balanced Fund, to include their performance data since their inception in their sales communications and fund facts (the NI 81-102 and NI 81-101 Relief).
15. The performance and other financial data of the Funds for the time periods before they became reporting issuers in Ontario is significant and meaningful information for existing and prospective of the class O units of the Funds and the class A units of the Balanced Fund.
The OSC is satisfied that the decision meets the test set out in the Legislation for the OSC to make this decision.
The decision of the OSC under the Legislation is that the Requested Relief is granted provided that:
(a) any MRFP that includes performance data of the class O units of the Funds and the class A units of the Balanced Fund relating to a period prior to when that Fund was a reporting issuer in Ontario discloses:
(i) that the Fund was not a reporting issuer in Ontario during such period;
(ii) that the expenses of that Fund would have been higher during such period had that Fund been subject to the additional regulatory requirements applicable to a reporting issuer in Ontario; and
(iii) that the financial statements of that Fund for such period are posted on that Fund's website and are available to investors upon request;
(b) the Filer posts the financial statements of each Fund for the past 10 years, or since that Fund's inception, whichever period is lesser, on that Fund's website and makes those financial statements available to investors upon request; and
(c) the Funds prepare their simplified prospectus, fund facts and sales communications in accordance with the NI 81-102 and NI 81-101 Relief.