National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief from NI 81-104 – requirement to maintain permanent seed capital in a commodity pool – relief granted to allow commodity pool to comply with seed capital requirements applicable to all other mutual funds under NI 81-102.
Applicable Legislative Provisions
National Instrument 81-104 Commodity Pools, sections 3.2 and 10.1.
National Instrument 81-102 Investment Funds, section 3.1.
April 6, 2017
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
BMO NESBITT BURNS INC. (BMONB)
IN THE MATTER OF
BMO FINTECH SECTOR TACTIC™ FUND
BMO CANADIAN TOP 15 SMALL CAP TACTIC™ FUND
BMO U.S. TOP 15 SMALL CAP TACTIC™ FUND
(the Proposed TACTIC Funds)
The principal regulator in the Jurisdiction has received an application from BMONB on behalf of the Proposed TACTIC Funds and any such other commodity pools as BMONB, or an affiliate of BMONB (BMONB and its affiliates are together, the Filer), may manage in the future (the Future TACTIC Funds, and together with the Proposed TACTIC Funds, the TACTIC Funds and individually, a TACTIC Fund) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting relief (the Exemption Sought) from section 3.2 of National Instrument 81-104 Commodity Pools (NI 81-104) to permit the Filer to comply with the seed capital requirements in subsections 3.1(1) and 3.1(2) of National Instrument 81-102 Investment Funds (NI 81-102).
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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein. Capitalized terms used in this decision have the following meanings:
Seed Investor means, in respect of the TACTIC Funds, each manager, portfolio adviser, promoter or sponsor, or any of their respective partners, directors, officers or securityholders, who invests in Units of the TACTIC Funds before the time of filing the final prospectus of the TACTIC Funds.
Outside Investor means each investor, other than a Seed Investor, who invests in Units of the TACTIC Funds.
Units means Class A Units, Class F Units and Class I Units of the Proposed TACTIC Funds and such classes of Units as may be created in respect of a Future TACTIC Fund.
This decision is based on the following facts represented by the Filer:
1. BMONB is a corporation established under the laws of Canada, with its head office in Toronto, Ontario.
2. BMONB is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, and as an investment dealer in each of the Jurisdictions.
3. The Filer is, or will be, the manager of the TACTIC Funds.
4. BMONB is not in default of securities legislation in any of the Jurisdictions.
5. Each TACTIC Fund will be a mutual fund subject to NI 81-102 and a commodity pool, as such term is defined under NI 81-104, in that each TACTIC Fund will adopt fundamental investment objectives that permit each TACTIC Fund to invest, directly or indirectly, in specified derivatives in a manner that is not permitted under NI 81-102.
6. The Filer filed in accordance with National Instrument 41-101 General Prospectus Requirements (NI 41-101) a preliminary prospectus with respect to the proposed offering of Units of the Proposed TACTIC Funds under SEDAR Project No 2568232.
7. Upon the filing of a final prospectus prepared in accordance with NI 41-101 (the Final Prospectus) for the Proposed TACTIC Funds, and obtaining a receipt therefor, the Units will be qualified for distribution and each Proposed TACTIC Fund will be a reporting issuer in each of the Jurisdictions.
8. Pursuant to section 3.2(1) of NI 81-104, the Final Prospectus may not be filed unless:
(a) investments totaling at least $50,000 in Units have been made, and those Units are beneficially owned, before the time of filing, by Seed Investors; and
(b) the Final Prospectus states that a TACTIC Fund will not issue Units to Outside Investors until that TACTIC Fund has received and accepted subscriptions aggregating not less than $500,000 from Outside Investors.
9. Pursuant to section 3.2(2) of NI 81-104, a Seed Investor may redeem, repurchase or return its initial investment in Units only if: (i) Units issued to Seed Investors that had an aggregate issue price of $50,000 remain outstanding and at least $50,000 invested by Seed Investors remains invested in the applicable TACTIC Fund, or (ii) the redemption, repurchase or return is effected as part of the dissolution or termination of the applicable TACTIC Fund (the Permanent Seed Capital Requirement).
10. The Filer understands that the policy rationale behind the Permanent Seed Capital Requirement under NI 81-104 is to encourage promoters to ensure that the commodity pool is being properly run for the benefit of its investors by requiring that the promoter of a commodity pool, or a related party, will itself be an investor in the commodity pool at all times.
11. The TACTIC Funds will be properly managed for the benefit of investors because, as manager of the TACTIC Funds, the Filer will be obliged in accordance with applicable securities law to act honestly and in good faith, and in the best interests of the TACTIC Funds, and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
12. Having regard to the fiduciary obligations and standard of care applicable to the Filer as set out in paragraph 11 above, requiring the Filer (or another Seed Investor) to maintain $50,000 in each of the TACTIC Funds at all times will not change how the Filer performs it duties in managing the TACTIC Funds.
13. The Filer is an experienced investment fund manager with a past track record of managing many other investment funds and will manage the TACTIC Funds in accordance with all applicable securities legislation in Canada and its contractual requirements.
14. On September 22, 2016, the Canadian Securities Administrators (the CSA) published proposed amendments to NI 81-102, NI 81-104 and related instruments (the Alternative Funds Proposal). If adopted, the Alternative Funds Proposal would repeal NI 81-104 and, among other changes, impose on commodity pools the initial investment requirements applicable to mutual funds as contained in section 3.1 of NI 81-102, such that:
(a) the Final Prospectus may only be filed if either:
(i) the Filer receives investments totaling at least $150,000 in Units, those Units being beneficially owned, before the time of filing, by Seed Investors, or
(ii) the Final Prospectus states that a TACTIC Fund will not issue Units to Outside Investors until that TACTIC Fund has received and accepted subscriptions aggregating not less than $500,000 from Outside Investors; and
(b) a Seed Investor may redeem its initial investment in Units only if subscriptions aggregating not less than $500,000 have been received from Outside Investors and accepted by the TACTIC Fund.
15. In keeping with the Alternative Funds Proposal and the initial investment requirements in section 3.1 of NI 81-102, the Filer confirms that it will only file a Final Prospectus on behalf of a TACTIC Fund if (i) the Filer wishes to seed the TACTIC Fund by investing an aggregate of at least $150,000 in the TACTIC Fund before filing the Final Prospectus and will only redeem such amount once the TACTIC Fund has received and accepted subscriptions aggregating not less than $500,000 from Outside Investors, or (ii) as will be disclosed in the Final Prospectus of the TACTIC Fund by the Filer, the TACTIC Fund does not issue Units to Outside Investors until the TACTIC Fund has received and accepted subscriptions aggregating not less than $500,000 from Outside Investors.
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 Filer complies with the seed capital requirements in subsections 3.1(1) and 3.1(2) of NI 81-102 in respect of each TACTIC Fund; and
(b) the basis on which a Seed Investor may redeem any of its initial investment in the TACTIC Fund is disclosed in the Final Prospectus.
Manager, Investment Funds and Structured Products Branch
ONTARIO SECURITIES COMMISSION