Securities Law & Instruments

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-102 Mutual Funds (NI 81-102) -- s.19.1 -- s. 2.5(a) and (c) -- investments by mutual funds in non-redeemable investment funds.

A mutual fund seeks relief from the restrictions in 2.5(2)(a) and (c) of NI 81-102 to permit the fund to continue to invest in U.S. and Canadian non-redeemable investment funds trading on an exchange -- The investment by a fund in securities of underlying closed-end funds is in accordance with the fundamental investment objectives of the fund; the fund may only invest in underlying closed-end funds that are traded on a stock exchange in Canada or the United States; the underlying Canadian funds otherwise comply with NI 81-102 and the underlying US funds comply with the US Investment Companies Act of 1940; for US underlying funds, the requirements/industry standard relating to investment restrictions, reporting and governance are comparable to Canadian regulations, including the investment restrictions in NI 81-102; the fund may not invest more than 10% of its net asset value in closed-end funds and does not exceed 5% leverage exposure.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, s. 19.1, 2.5(a) and (c).

March 18, 2016

IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF PENDERFUND CAPITAL MANAGEMENT LTD. (the Filer) AND PENDER CORPORATE BOND FUND (the Fund)

DECISION

Background

1 The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for a decision granting an exemption to the Fund from:

(a) subsection 2.5(2)(a) of National Instrument 81-102 Investment Funds (NI 81-102), which restricts a mutual fund from purchasing or holding a security of another investment fund unless the other investment fund is a mutual fund that is subject to NI 81-102 and offers or has offered securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101); and

(b) subsection 2.5(2)(c) of NI 81-102, which restricts a mutual fund from purchasing or holding a security of another investment fund unless the other investment fund is a reporting issuer in the local jurisdiction,

in order to permit the Fund to invest in Credit Closed-End Funds, as defined below (the Exemption Sought).

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

(a) the British Columbia Securities Commission is the principal regulator for this application;

(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System is intended to be relied upon in Alberta, Saskatchewan, Manitoba; and

(c) the decision is a decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

2 Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision unless otherwise defined.

The following additional terms used in this decision have the following meanings:

"Credit Closed-End Fund" means a Canadian Credit Closed-End Fund or a US Credit Closed-End Fund;

"Canadian Credit Closed-End Fund" means a non-redeemable investment fund:

(a) whose securities are traded on a recognized exchange in Canada and are distributed in one or more jurisdictions of Canada,

(b) is subject to NI 81-102, and

(c) invests primarily in fixed income; and

"US Credit Closed-End Fund" means a non-redeemable investment fund:

(a) whose securities are traded on a recognized exchange in the United States and are distributed in the United States,

(b) is a registered investment company under the Investment Companies Act of 1940, and

(c) invests primarily in fixed income.

Representations

3 This decision is based on the following facts represented by the Filer:

1. the Filer is a corporation that was incorporated under the laws of British Columbia on May 28, 2003;

2. the head office of the Filer is located in Vancouver, British Columbia;

3. the Filer is registered as an investment fund manager in British Columbia and Ontario, a portfolio manager in British Columbia, and an exempt market dealer in British Columbia, Alberta and Ontario;

4. the Filer is the investment fund manager, portfolio manager and trustee of the Fund;

5. in addition to the Fund, the Filer manages other mutual funds as part of the Pender Mutual Funds, which are offered via simplified prospectus;

6. the Fund is an open-ended mutual fund organized and governed by the laws of British Columbia; the Fund was formed on May 26, 2009;

7. the Fund is governed by the 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;

8. the Fund distributes its securities pursuant to a simplified prospectus prepared under NI 81-101;

9. the Fund is a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario;

10. neither the Filer nor the Fund is in default of securities legislation in any of the provinces or territories of Canada;

11. the investment objective of the Fund is to preserve capital and generate returns by employing a value-based, fundamental research process by identifying and exploiting private and public securities that, in the view of the portfolio advisor, are priced inefficiently; the Fund generates returns through current income and capital appreciation by primarily investing in investment and non-investment grade fixed income securities of North American corporations; along with its primary investment strategy, the Fund also invests in closed-end funds, preferred equities and common equities;

12. the Fund invests in Credit Closed-End Funds primarily to take advantage of variance between the trading price of a closed-end fund and that closed-end fund's daily-reported NAV;

13. the Filer has determined that it is in the best interest of the Fund to limit investments in Credit Closed-End Funds to only credit oriented closed-end funds traded on a recognized stock exchange in Canada or the United States; the Filer has determined that it is in the best interest of the Fund to limit the aggregate investment by the Fund in Credit Closed-End Funds to 10% of the Fund's NAV taken at market value at the time of purchase;

14. the Fund does not, and will not, pay management fees or incentive fees that, to a reasonable person, would duplicate a fee payable by a Credit Closed-End Fund for the same service;

15. an investment by the Fund in securities of each Credit Closed-End Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund and will be made in accordance with the investment objective of the Fund; and

16. the requirements/industry standards relating to reporting, fund governance and investment restrictions in the United States on the US Credit Closed-End Funds are comparable to those in the Canadian regulations.

Decision

4 Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

(a) the investment by the Fund in securities of one or more Credit Closed-End Funds is in accordance with the fundamental investment objectives of the Fund;

(b) the securities of each Credit Closed-End Fund are traded on a recognized stock exchange in Canada or the United States;

(c) the Fund does not purchase securities of a Credit Closed-End Fund if, immediately after the transaction, more than 10% of the NAV of the Fund, taken at market value at the time of the transaction, would consist in securities of Credit Closed-End Funds;

(d) in the event that the regulatory regime applicable to Closed-End Funds traded on a recognized stock exchange in the United States is materially changed, the Fund will not purchase further securities, and will dispose of securities of any such Fund;

(e) subject to (f) below, other than with respect to paragraphs 2.12(1)10, 2.13(1)9 and 2.14(1)8 of NI 81-102, each Credit Closed-End Fund complies with the investment restrictions in NI 81-102 applicable to mutual funds;

(f) the Fund's weighted average leverage exposure does not exceed 5% of the NAV of the Fund; the Fund's weighted average leverage exposure is determined by multiplying (i) the leverage employed by each Credit Closed-End Fund, by (ii) the percentage of the Fund's NAV invested in such Credit Closed-End Fund;

(g) the Filer uses pre-trade compliance controls to monitor the restrictions in paragraphs (c), (e) and (f) above; and

(h) the Fund will disclose, in its next simplified prospectus, the details of the Exemption Sought, and information about the Credit Closed-End Funds in which the Fund has made investments, including the risks associated with such investments.

"Nigel P. Cave"
Vice Chair
British Columbia Securities Commission