Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from the conflict of interest restrictions in the Securities Act (Ontario) to permit fund-of-fund structures where top funds are pooled funds that are not reporting issuers and underlying funds are pooled funds or public funds under common management subject to conditions.

Applicable Legislative Provisions

Securities Act (Ontario) R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(4) and 113.

March 16, 2018

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 BEUTEL, GOODMAN & COMPANY LTD. (THE FILER)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer, on behalf of each of the Filer, BG Private North American Balanced Fund (the Initial Top Fund) and one or more investment funds which are not reporting issuers under the securities legislation of the principal regulator (the Legislation) and which are now or in the future established, advised or managed by the Filer (the Future Top Funds and, together with the Initial Top Fund, the Top Funds) for a decision under the Legislation in respect of the Fund-on-Fund Investments (as defined below) exempting the Filer and the Top Funds from:

(a) the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder;

(b) the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in an issuer in which:

(i) any officer or director of the investment fund, its management company or distribution company or an associate of any of them; or

(ii) any person or company who is a substantial security holder of the investment fund, its management company or its distribution company,

has a significant interest; and

(c) the restriction in the Legislation that prohibits an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) or (b) above,

(collectively, the Fund-on-Fund Restrictions) to permit the Filer to cause the Top Funds to purchase and hold securities of Underlying Funds (as defined below) (the Exemption 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 the Application; and

(b) the Filer has provided notice that subsection 4.7(2) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in respect of the Exemption Sought in Alberta (together with Ontario, the Passport Jurisdictions).

Interpretation

Terms defined in the Legislation, MI 11-102, National Instrument 14-101 Definitions, NI 31-103, National Instrument 81-102 Investment Funds (NI 81-102), National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) or National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) have the same meanings in this decision, unless otherwise defined. In addition:

Fund means a Public Fund or a Pooled Fund;

NI 81-102 means National Instrument 81-102 Investment Funds;

NI 81-106 means National Instrument 81-106 Investment Fund Continuous Disclosure;

NI 81-107 means National Instrument 81-107 Independent Review Committee for Investment Funds;

Pooled Fund means an existing or future investment fund of which the Filer is the investment fund manager and to which neither NI 81-102 nor NI 81-107 apply;

Public Fund means an existing or future investment fund of which the Filer is the investment fund manager and to which NI 81-102 and NI 81-107 apply; and

Underlying Fund means a Fund in which a Pooled Fund holds securities.

Representations

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

1. The Filer is a corporation continued under the laws of Canada, with its registered head office located in Toronto, Ontario.

2. The Filer currently is registered as:

(a) a portfolio manager under the securities legislation of each province and territory of Canada;

(b) an investment fund manager under the securities legislation of Ontario, Québec, and Newfoundland and Labrador;

(c) a mutual fund dealer under the securities legislation of Ontario;

(d) a commodity trading manager under the Commodity Futures Act (Ontario); and

(e) a derivatives portfolio manager under the Derivatives Act (Québec).

3. The Filer:

(a) acts as the trustee of each Public Fund and as the investment fund manager of each Fund; and

(b) acts, or may act, as the portfolio adviser to each Fund.

4. The Filer is not in default of the securities legislation of any Passport Jurisdiction.

5. Each Pooled Fund is, or will be, an investment fund that is a trust established under the laws of Ontario.

6. The securities of each Pooled Fund are, or will be, distributed on a private placement basis pursuant to the securities legislation of the Passport Jurisdictions and no Pooled Fund is, or will be, a reporting issuer under the securities legislation of any Passport Jurisdiction.

7. Each Public Fund is, or will be, a reporting issuer under the securities legislation of one or more Passport Jurisdictions and whose securities are, or will be, qualified for distribution pursuant to a prospectus and, if applicable, annual information form and fund facts that have been, or will be, prepared and filed in accordance with the securities legislation of those Passport Jurisdictions.

8. Each existing Fund is not in default of the securities legislation of any Passport Jurisdiction.

9. The investment objective of the Initial Top Fund is to maximize returns through capital enhancement and investment income. The Initial Top Fund currently invests directly in a portfolio of equity and fixed income securities. Under its current investment strategies, the Initial Top Fund seeks to invest approximately 27% of its assets in government and corporate bonds.

10. BG Private Bond Fund (the Initial Underlying Fund) is a Pooled Fund. The Initial Underlying Fund invests primarily in bonds and other debt instruments issued by the Canadian federal and provincial governments, government agencies and corporations, as well as in other debt securities.

11. The Filer has determined it would be in the best interests of the Initial Top Fund to invest a portion of its assets in securities of the Initial Underlying Fund to achieve diversification for the Initial Top Fund's exposure to government and corporate bonds. The Filer believes that, in the future, there may be circumstances where the Filer determines it would be in the best interests of a Future Top Fund to invest a portion of its assets in securities of one or more Underlying Funds for diversification. For example, each Top Fund may invest in Beutel Goodman Money Market Fund for more efficient investment of its uninvested cash. All of the investments by Top Funds in securities of Underlying Funds described above are referred to herein as Fund-on-Fund Investments. The Filer believes that Fund-on-Fund Investments provide an efficient and cost-effective manner of pursuing portfolio diversification on behalf of a Top Fund rather than through the direct purchase of securities.

12. Implementing diversification in a Top Fund by investing in one or more Underlying Funds will provide economies of scale, allow the Top Fund to achieve its investment objective in a cost-efficient manner, and will not be detrimental to the interests of other securityholders of the Underlying Funds.

13. No Underlying Fund will be a Top Fund.

14. Not more than 10% of the net asset value of each Underlying Fund will be invested in securities of other investment funds except to the extent the Underlying Fund:

(a) is a "clone fund" (as defined in NI 81-102);

(b) purchases or holds securities of a "money market fund" (as defined in NI 81-102); or

(c) purchases or holds securities that are "index participation units" (as defined by NI 81-102).

15. Each Fund-on-Fund Investment will be effected at an objective price. According to the Filer's policies and procedures, an objective price for this purpose, will be the net asset value (NAV) per security of the applicable class or series of the applicable Underlying Fund, calculated in accordance with section 14.2 of NI 81-106.

16. The Underlying Funds will primarily hold publicly traded securities and will not hold greater than 10% of their assets in "illiquid assets", as defined in NI 81-102.

17. No management fees or incentive fees will be payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service.

18. No sales fee or redemption fees will be payable by a Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund.

19. The Filer will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds in the Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund, who are not the Filer or an officer, director or substantial security holder of the Filer.

20. A disclosure document, including an offering memorandum where available, of a Top Fund will be provided to each new investor in a Top Fund prior to the time of the investor's investment, which discloses:

(a) that the Top Fund may purchase securities of Underlying Funds from time to time;

(b) that the Filer is the manager of both the Top Fund and the Underlying Funds;

(c) the approximate or maximum percentage of net assets of the Top Fund that is intended be invested in securities of Underlying Funds;

(d) the fees, expenses and any performance or special incentive distributions payable by an Underlying Fund in which the Top Fund invests;

(e) the process or criteria used to select an Underlying Fund;

(f) for each officer, director and/or substantial security holder of the Filer, or of a Top Fund, that has a significant interest in an applicable Underlying Fund, and for the officers and directors and substantial security holders who together in aggregate hold a significant interest in an applicable Underlying Fund, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the applicable Underlying Fund's net asset value, and the potential conflicts of interest which may arise;

(g) that investors are entitled to receive from the Filer, on request and free of charge:

(i) a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available; and

(ii) the annual audited financial statements and interim financial reports (if any) relating to each Underlying Fund in which the Top Fund invests.

The disclosure document described above also will be provided to each existing investor in a Top Fund prior to the Top Fund making its first Fund-on-Fund Investment.

21. The Filer will annually inform investors in a Top Fund of their right to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available, and the annual audited financial statements and interim financial reports (if any) relating to each Underlying Fund in which the Top Fund invests.

22. The amount invested, from time to time, in an Underlying Fund either by a Top Fund alone or when aggregated with the investments of other Funds in the Underlying Fund, may exceed 20% of the outstanding voting securities of the Underlying Fund. Accordingly, each Top Fund could, either alone or together with other Funds, become a substantial security holder of an Underlying Fund.

23. In addition, Fund-on-Fund Investments may result in a Top Fund investing in an Underlying Fund:

(a) in which an officer or director of the Top Fund, of the Filer or of an associate of any of them has a significant interest; or

(b) where a substantial security holder of the Top Fund or the Filer has a significant interest.

24. Each Underlying Fund has, or will have, other securityholders in addition to the Top Funds.

25. Securities of each Top Fund and of the Underlying Funds held by the Top Fund have, or will have, matching redemption dates and matching valuation dates.

26. Each Top Fund and Underlying Fund prepares, or will prepare, annual audited financial statements in accordance with NI 81-106 and complies with the requirements of NI 81-106 applicable to it. Pursuant to an order of the Ontario Securities Commission dated May 9, 1989 (the Interim Financial Reporting Relief), the Pooled Funds are not required to prepare interim financial reports. Each Top Fund, and each Underlying Fund that is a Pooled Fund, that does not rely on the Interim Financial Reporting Relief prepares, or will prepare, interim financial reports in accordance with NI 81-106.

27. When purchasing or redeeming securities of an Underlying Fund, the Filer, as the manager of the Top Fund and Underlying Fund, shall act honestly, in good faith and in the best interests of the Top Fund and the Underlying Fund, respectively, and will exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances.

28. Fund-on-Fund Investments represents the business judgment of responsible persons as of the date hereof, uninfluenced by considerations other than the best interests of the Funds.

29. In the absence of the Exemption Sought, the Top Funds may be precluded by the Fund-on-Fund Restrictions from making and holding Fund-on-Fund Investments. Specifically, a Top Fund is prohibited from:

(a) becoming a substantial security holder of an Underlying Fund; and

(b) investing in an Underlying Fund in which an officer or director of the Filer has a significant interest, or in an Underlying Fund in which a substantial security holder of the Top Fund or the Filer has a significant interest.

30. Each Top Fund's reliance on the Exemption Sought will be compatible with its investment objective and strategies.

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) securities of a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement under applicable securities legislation;

(b) the investment by a Top Fund in an Underlying Fund is consistent with the investment objective of the Top Fund;

(c) the investment in an Underlying Fund by a Top Fund is effected at an objective price, calculated in accordance with section 14.2 of NI 81-106;

(d) the Top Fund does not invest in an Underlying Fund unless the Underlying Fund prepares annual audited financial statements and, unless relying on the Interim Financial Reporting Relief, interim financial reports in accordance with NI 81-106 and complies with the requirements of NI 81-106 applicable to it;

(e) the Top Fund does not purchase or hold a security of an Underlying Fund unless, at the time of purchasing securities of the Underlying Fund, the Underlying Fund holds no more than 10% of its NAV in securities of other investment funds except to the extent that the Underlying Fund:

(i) is a "clone fund" (as defined in NI 81-102);

(ii) purchases or holds securities of a "money market fund" (as defined in NI 81-102); or

(iii) purchases or holds securities that are "index participation units" (as defined by NI 81-102);

(f) no management fees or incentive fees are payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;

(g) no sales fee or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of securities of the Underlying Fund that, to a reasonable person, would duplicate a fee payable by an investor in the Top Fund;

(h) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds in the Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund, who are not the Filer or an officer, director or substantial security holder of the Filer;

(i) when purchasing and/or redeeming securities of an Underlying Fund, the Filer as the investment fund manager of the Top Fund and Underlying Fund, acts honestly, in good faith and in the best interests of the Top Fund and the Underlying Fund, respectively, and exercises the care and diligence that a reasonably prudent person would exercise in comparable circumstances;

(j) a disclosure document, including an offering memorandum where available, of a Top Fund is provided to each new investor in a Top Fund prior to the time of the investor's investment, which discloses:

(i) that the Top Fund may purchase securities of Underlying Funds from time to time;

(ii) that the Filer is the manager of and adviser to both the Top Fund and the Underlying Funds;

(iii) the approximate or maximum percentage of net assets of the Top Fund that is intended be invested in securities of Underlying Funds;

(iv) the fees, expenses and any performance or special incentive distributions payable by an Underlying Fund in which the Top Fund invests;

(v) the process or criteria used to select an Underlying Fund;

(vi) for each officer, director and/or substantial security holder of the Filer, or of a Top Fund, that has a significant interest in an applicable Underlying Fund, and for the officers and directors and substantial security holders who together in aggregate hold a significant interest in an applicable Underlying Fund, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the applicable Underlying Fund's net asset value, and the potential conflicts of interest which may arise;

(vii) that investors are entitled to receive from the Filer, on request and free of charge:

(A) a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available;

(B) the annual audited financial statements and interim financial reports (if any) relating to each Underlying Fund in which the Top Fund invests; and

(k) the disclosure document described in paragraph (i) above is provided to each existing investor in a Top Fund prior to the Top Fund making its first Fund-on-Fund Investment; and

(l) the Filer annually informs investors in each Top Fund of their right to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of each Underlying Fund, if available, and the annual audited financial statements and interim financial reports (if any) relating to each Underlying Fund in which the Top Fund invests.

"Deborah Leckman"
"J.A.Leiper"
Commissioner
Commissioner
Ontario Securities Commission
Ontario Securities Commission