Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief applications in Multiple Jurisdictions -- non-redeemable investment fund granted temporary relief from certain restrictions in National Instrument 81-102 Investment Funds regarding securities lending transactions, including (i) the 50% limit on lending; (ii) the requirement to use the fund's custodian or sub-custodian as lending agent; and (iii) the requirement to hold the collateral during the course of the transaction -- investment fund invest its assets in a basket of Canadian equity securities that are pledged to a Counterparty for performance of the fund's obligations under forward contracts giving the fund exposure to underlying interests -- investments fund wishes to lend 100% of the basket of Canadian equity securities -- not practical for custodian to act as securities lending agent as it does not have control over the Canadian equity securities -- counterparty must release its security interest in the Canadian equity securities in order to allow the fund to lend such securities, provided the fund grants the Counterparty a securities interest in the collateral held by the fund for the loaned securities -- National Instrument 81-102 Investment Funds.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.12(1)1, 2.12(1)2, 2.12(1)12, 2.12(3), 2.15, 2.16, 6.8(5), 19.1.

September 18, 2015

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 BROOKFIELD NEW HORIZONS INCOME FUND AND BROOKFIELD HIGH YIELD STRATEGIC INCOME FUND AND IN THE MATTER OF BROOKFIELD INVESTMENT MANAGEMENT (CANADA) INC. (the Filer)

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 (the "Legislation") for exemptive relief for Brookfield New Horizons Income Fund ("BIF") and Brookfield High Yield Strategic Fund ("BHY" and, together with BIF, the "Funds") which are non-redeemable investment funds managed by the Filer in respect of which the representations set out below are applicable (collectively, the "Funds" and each a "Fund"), from the following provisions of National Instrument 81-102 -- Investment Funds ("NI 81-102"):

1. paragraph 2.12(1)1 to permit each Fund to maintain its current securities lending arrangement that will not otherwise fully comply with all the requirements of sections 2.15 and 2.16 of NI 81-102;

2. paragraph 2.12(1)2 to permit each Fund to maintain its current securities lending arrangement that will not fully comply with all the requirements of section 2.12 of NI 81-102;

3. paragraph 2.12(1)12 to permit each Fund to maintain its current securities lending arrangement in which the aggregate market value of securities loaned by the Fund exceeds 50% of the net asset value of the Fund;

4. subsection 2.12(3) to permit each Fund, during the term of its current securities lending arrangement to deliver collateral received in connection with its current securities lending arrangement to its Forward Counterparty as collateral for the Fund's obligations under its Forward Contracts (as such terms are defined below);

5. section 2.15 to permit each Fund to continue lending securities through an agent (an "Agent") that is not the custodian or sub-custodian of the Fund;

6. section 2.16 to the extent this section contemplates that securities lending transactions be entered into through an agent appointed under section 2.15 of NI 81-102; and

7. subsection 6.8(5) in connection with its current securities lending arrangement to deliver collateral received in connection with its current securities lending arrangement to its Forward Counterparty as collateral for the Fund's obligations under its Forward Contracts (as such terms are defined below),

such relief to apply for each Fund until the earlier of (a) the currently scheduled termination date of the Forward Contract (as defined below) for the Fund and (b) the actual termination date of the Forward Contract for the Fund (for each Fund, the "Termination Date").

Paragraphs 1 through 7 are collectively referred to as the "Exemption Sought".

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(i) the Ontario Securities Commission is the principal regulator for this application; and

(ii) 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 each of the other provinces of Canada for BIF and each of the other provinces and territories of Canada for BHY (collectively, with Ontario, the "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.

1. The Filer is a corporation incorporated under the laws of Ontario.

2. The registered office of the Filer is located at 181 Bay Street, Suite 300, P.O. Box 762, Toronto, Ontario M5J 2T3.

3. The Filer is registered as an adviser for securities in the category of portfolio manager, as a dealer in the category of exempt market dealer and an investment fund manager, under the Securities Act (Ontario).

4. The investment fund manager of each Fund is the Filer.

5. Brookfield Investment Management Inc. (BIM) acts as the portfolio manager of BHY.

6. BIM is registered as an adviser for securities in the category of portfolio manager and as an adviser for commodities in the category of commodity trading manager, under the Securities Act (Ontario).

7. BIF is a reporting issuer under the securities laws of each of the provinces of Canada and BHY is a reporting issuer under the securities laws of each of the provinces and territories of Canada.

8. The Filer and each of the Funds is not in default of securities legislation in any of the Jurisdictions.

9. Each Fund (a) is a non-redeemable investment fund established under the laws of Ontario; (b) has issued securities qualified for distribution in all provinces and territories of Canada pursuant to a prospectus prepared and filed in accordance with the securities legislation of Ontario; (c) is a non-redeemable investment fund to which NI 81-102 applies and in particular from September 21, 2015, sections 2.12, 2.15 and 2.16 of NI 81-102 will apply to each of the Funds due to the expiry of the transition period which currently provides that certain non-redeemable investment funds are not subject to these provisions.

10. Each Fund obtains economic exposure to the returns of a managed portfolio of securities held by an investment fund also managed by the Filer (the "Bottom Fund") through the use of a forward contract. In particular, to achieve the Fund's investment objectives: (a) each Fund has invested its assets in Canadian equity securities (an "Equity Portfolio") which is generally a static portfolio that is not actively managed and its composition varies only in limited circumstances and (b) each Fund has also entered into one or more forward contracts (each a "Forward Contract") with a Canadian Schedule I bank with a designated rating (as defined in NI 81-102) (each a "Counterparty") to effectively replace the economic return on its Equity Portfolio with the economic return on an investment in the related Bottom Fund.

11. Each Fund has pledged and delivered its Equity Portfolio to its Counterparty or an affiliate thereof as collateral security for performance of the Fund's obligations under its Forward Contract with that Counterparty. The Equity Portfolio is held by the Counterparty or its affiliate pursuant to that applicable Forward Contract prior to the commencement of securities lending.

12. Each Fund's current securities lending arrangements involve securities loans of up to 100% of the securities owned by the Fund in order to earn additional returns for that Fund and offset costs of the Forward Contract, and each Fund proposes to continue lending up to 100% of the securities owned by that Fund after September 21, 2015. The Filer proposes to continue to permit up to 100% of the Equity Portfolio for each Fund to be lent to one or more borrowers through the existing Agent for each Fund, which Agent in each case is not the Fund's custodian or sub-custodian.

13. Under the current securities lending arrangements of each Fund, each Agent is considered acceptable to the Fund and Counterparty and is either the Canadian financial institution that is the Counterparty or an affiliate of such Canadian financial institution. It is not commercially practical for a Fund's custodian to act as Agent with respect to the Funds' securities lending transactions since the custodian will not have control over the Fund's Equity Portfolio that has been delivered by way of a pledge to the Counterparty.

14. The Filer has ensured that the Agents through which the Funds lend securities maintain appropriate internal controls, procedures, and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.

15. A Counterparty must release its security interest in the securities in the Equity Portfolio of a Fund in order to allow the Fund to lend such securities, but will generally only do so provided that the Fund grants the Counterparty a security interest in, and delivers into its control, the collateral received by the Fund for the loaned securities.

16. Securities in the Equity Portfolio have been loaned only to borrowers that have been considered acceptable to the Fund and the Counterparty as contemplated by subsection 2.16(2) of NI 81-102.

17. To facilitate the Counterparty's perfection by control of its security interest in the collateral received by the Fund for the loaned securities, the Filer has ensured that the received collateral for each loan is delivered to the Counterparty which is a Canadian chartered bank or to an affiliate of the Counterparty which is a registered dealer and a member of the Investment Industry Regulatory Organization of Canada ("IIROC").

18. The collateral received by each Fund in respect of a securities lending transaction, and in which the Counterparty has a security interest, is in the form of cash, qualified securities and/or other collateral permitted by NI 81-102.

19. The collateral received by each Fund in respect of a securities lending transaction, and in which the Counterparty has a security interest, is not re-invested in any other types of investment products (but to the extent cash collateral is received it will be deposited with the Counterparty or the relevant affiliate thereof).

20. The prospectus and current annual information form of each Fund has disclosed that the Fund may enter into securities lending transactions.

21. Other than as set forth herein, any securities lending transactions on behalf of a Fund is currently being conducted in accordance with the provisions of NI 81-102.

22. For each Fund, it would not be practicable or economical to transition the securities lending arrangements given the costs and time required to negotiate and implement new securities lending arrangements and the limited remaining term of the Forward Contracts.

23. The Forward Contract of BHY is set to terminate on April 1, 2016 and will not be renewed. The Forward Contact of BIF is set to terminate on June 19, 2017 and will not be renewed. Upon or prior to termination of the applicable Forward Contract, the foregoing securities lending transactions will be terminated and each Fund will no longer rely on the Exemption Sought in respect of any securities lending transactions entered into by the Funds.

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) with respect to the exemption from paragraph 2.12(1)12 of NI 81-102, each Fund has entered into a Forward Contract with an applicable Counterparty and has granted that Counterparty a security interest in the securities subject to that Forward Contract and, in connection with a securities lending transaction relative to those securities,

(1) receives the collateral that

(A) is prescribed by paragraphs 2.12(1)3 to 6 of NI 81-102, other than collateral described in subsection 2.12(1)6(d) or in paragraph (b) of the definition of "qualified security"; and

(B) is marked to market on each business day in accordance with paragraph 2.12(1)7 of NI 81-102;

(2) has the rights set forth in paragraphs 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81-102;

(3) complies with paragraph 2.12(1)10 of NI 81-102; and

(4) lends its securities only to borrowers that are acceptable to the Fund and the Counterparty;

(b) with respect to the exemption from subsection 2.12(3) of NI 81-102, each Fund has provided a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 15;

(c) with respect to the exemption from section 2.15 of NI 81-102:

(1) each Fund has entered into a written agreement with an Agent that complies with each of the requirements set forth in subsection 2.15(4) of NI 81-102, except as set out herein; and

(2) the Agent administering the securities lending transaction of each Fund:

(A) is in compliance with the standard of care prescribed in subsection 2.15(5) of NI 81-102; and

(B) shall be acceptable to the Fund and Counterparty and shall be a financial institution that is permitted to act as custodian of the Fund pursuant to section 6.2 of NI 81-102;

(d) with respect to the exemption from section 2.16 of NI 81-102, the Filer and the Funds comply with the requirements of section 2.16 of NI 81-102 as if the Agent appointed by the Filer were the agent contemplated in that section; and

(e) with respect to the exemption from subsection 6.8(5) of NI 81-102, each Fund:

(1) provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 15; and

(2) the collateral delivered to the Fund pursuant to the securities lending transaction is held by the Counterparty or an affiliate of the Counterparty, which will be a registered dealer and a member of IIROC, as described in representation 17.

This decision expires, in respect of each Fund, on the Fund's Termination Date. In any event, this decision expires no later than (i) April 1, 2016 in respect of BHY, and (ii) June 19, 2017 in respect of BIF.

"Raymond Chan"
Manager
Investment Funds and Structured Products
Ontario Securities Commission