Purpose Investments Inc.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from paragraphs 2.1(1), 2.2(1)(a), 2.5(2)(a), 2.5(2)(e) and 2.5(2)(f) of NI 81-102 to permit mutual funds to invest without restriction in an ETF under common management, and to allow the top funds to pay brokerage commissions for the purchase and sale of the securities of the underlying ETF -- Relief needed because the underlying ETF is a mutual fund that do not file a simplified prospectus under NI 81-101 and is not an index participation unit eligible for exemptions under the rule -- Underlying ETF securities will be primarily bought or sold over the exchange on the same conditions as other securities traded on the exchange -- Relief granted restricted to underlying ETF subject to NI 81-102 and continuing to qualify as a money-market fund as defined by NI 81-102.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.2(1)(a), 2.5(2)(a), 2.5(2)(e), 2.5(2)(f),19.1.

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
PURPOSE INVESTMENTS 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 a decision granting exemptive relief (the Exemption Sought) to the existing mutual funds listed in Schedule "A" (the Existing Top Funds) and such mutual funds that may be managed by the Filer or an affiliate thereof in the future (the Future Top Funds, and together with the Existing Top Funds, the Top Funds and individually, a Top Fund) from:

(a) section 2.1(1) of NI 81-102 to permit each Top Fund to purchase units of the Purpose High Interest Savings ETF (the Underlying ETF) or enter into a specified derivatives transaction with respect to the Underlying ETF even though immediately after the transaction, more than 10% of the net asset value of the Top Fund would be invested, directly or indirectly, in units of the Underlying Fund;

(b) paragraph 2.2(1)(a) of NI 81-102 to permit each Top Fund to purchase units of the Underlying ETF such that, after the purchase, the Top Fund would hold securities representing more than 10% of (i) the votes attaching to the outstanding voting securities of the Underlying ETF or (ii) the outstanding equity securities of the Underlying ETF;

(c) paragraph 2.5(2)(a) of National Instrument 81-102 -- Mutual Funds (NI 81-102), to permit each Top Fund to invest in units of the Underlying ETF which is not subject to NI 81-101; and

(d) paragraphs 2.5(2)(e) and 2.5(2)(f) of NI 81-102, to permit each Top Fund to pay brokerage commissions in relation to its purchase and sale on a recognized exchange (as defined in theSecurities Act (Ontario)) in Canada of units of the Underlying ETF.

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 paragraph 4.7(1)(c) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.

Interpretation

Terms defined in 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 the Province of Ontario. The head office of the Filer is located in Toronto, Ontario.

2. The Top Funds are, or will be, open-ended mutual funds organized and governed by the laws of a jurisdiction of Canada.

3. The Top Funds are, or will be, 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.

4. Each Top Fund distributes, or will distribute, securities pursuant to a simplified prospectus and annual information form prepared pursuant to NI 81-101 or a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2 -- Information Required in an Investment Fund Prospectus (Form 41-101F2).

5. The Top Funds are, or will be, reporting issuers in one or more of the provinces and territories of Canada.

6. The Top Funds may wish to invest in units of Purpose High Interest Savings ETF (the Underlying ETF).

7. Each investment by a Top Fund in securities of the Underlying ETF is required to be made in accordance with the fundamental investment objectives of the Top Fund and to represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund.

8. The Filer acts as the investment fund manager of the Underlying ETF.

9. The Underlying ETF is:

(a) an open-ended mutual fund, subject to NI 81-102 and NI 41-101;

(b) a reporting issuer in the provinces and territories of Canada; and

(c) listed on the Toronto Stock Exchange (the TSX).

10. The Underlying ETF seeks to maximize monthly income for holders of its units while preserving capital and liquidity by investing in high interest deposit accounts. The Underlying ETF invests substantially all its assets in high interest deposit accounts with one or more Schedule I, II, or III banks under theBank Act (Canada) or credit unions or leagues to which the Credit Union and Caisse Populaires Act, 1994 applies or an association to which the Cooperative Credit Associations Act (Canada) applies. Accordingly, the Underlying ETF is a money market fund within the meaning of NI 81-102.

11. The Underlying ETF does not borrow cash or provide a security interest over any of its portfolio assets except in accordance with NI 81-102.

12. The Underlying ETF does not and will not hold any of its net assets in securities of other mutual funds.

13. As the Underlying ETF is a money market fund it will not seek relief from the concentration restrictions in subsection 2.1(1) of NI 81-102.

14. The units of the Underlying ETF do not constitute index participation units.

15. The Underlying ETF does not have, and will not have, a net market exposure greater than 100% of its net asset value.

16. In accordance with applicable securities law, no management fees or incentive fees will be payable by the Underlying ETF that, to a reasonable person, would duplicate a fee payable by a Top Fund for the same service.

17. If the investment fund manager of a Top Fund (the Top Fund Manager) determines that the management fees and incentive fees paid by the Underlying ETF to its investment fund manager (the Underlying ETF Manager) would duplicate a fee payable by the Top Fund for the same service, as prohibited by paragraph 2.5(2)(d) of NI 81-102, the Underlying ETF Manager will pay a management fee rebate to the Top Fund that will not exceed the management fee payable by the Top Fund to the Top Fund Manager in respect of the Top Fund's investment in the Underlying ETF.

18. Holders of units of the Underlying ETF may:

(a) sell such units on the TSX;

(b) redeem such units in any number for cash at a redemption price equal to 95% of the closing price for the units on the TSX on the effective day of redemption; or

(c) exchange a prescribed number of units (a PNU) (or an integral multiple thereof) of the Underlying ETF for cash, the exchange price being equal to the net asset value of the securities of the Underlying ETF tendered for exchange on the effective day of the exchange request.

19. The units of the Underlying ETF are highly liquid, as designated brokers act as intermediaries between investors and the Underlying ETF, standing in the market with bid and ask prices for such securities to maintain a liquid market for them.

20. All brokerage costs related to trades in securities of the Underlying ETF will be borne by the Top Funds in the same manner as any other portfolio transactions made on an exchange.

21. If a Top Fund makes a trade in units of the Underlying ETF with or through an affiliate or associate of the Filer acting as dealer, the Filer will comply with its obligations under National Instrument 81-107 -- Independent Review Committee for Investment Funds in respect of any proposed related party transactions. All such related party transactions will be disclosed to securityholders of the applicable Top Fund in its management report of fund performance.

22. None of the Filer, the existing Top Funds or the Underlying ETF is in default of any of its obligations under securities legislation in any of the provinces or territories of Canada.

23. An investment in the Underlying ETF by a Top Fund is an efficient and cost effective alternative for a Top Fund to invest cash it may hold from time to time.

24. Absent the Exemption Sought, an investment by a Top Fund in units of the Underlying ETF would be restricted by the concentration restriction in subsection 2.1(1) to no more than 10% of the net asset value of the Top Fund. Furthermore, due to the potential size disparity between the various Top Funds and the Underlying ETF, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively large Top Fund in the Underlying ETF could result in that Top Fund holding securities representing more than 10% of (i) the votes attaching to the outstanding voting securities of the Underlying ETF, or (ii) the outstanding equity securities of that Underlying ETF, contrary to the control restriction in paragraph 2.2(1)(a) of NI 81-102.

25. An investment in the Underlying ETF by a Top Fund should pose little investment risk to the Top Fund, because the Underlying ETF is subject to NI 81-102 and is a money market fund. As a money market fund, the Underlying ETF's investments are highly restricted, primarily to cash, cash equivalents and short term (less than one year) debt. Moreover, the Underlying ETF does not, and will not in the future, invest in underlying funds or use specified derivatives.

26. Absent the Exemption Sought, an investment by a Top Fund in the Underlying ETF would be prohibited by paragraph 2.5(2)(a) of NI 81-102 solely because the Underlying ETF is not governed by NI 81-101. An investment by a Top Fund in the Underlying ETF would not qualify for the exception in subsection 2.5(3) of NI 81-102 from paragraph 2.5(2)(a) of NI 81-102 because the Underlying ETF does not issue index participation units.

27. The only material difference between the Underlying ETF and a mutual fund governed by NI 81-101 is the method of distribution and disposition of its units. If the Exemption Sought is granted, the Top Funds will be permitted to purchase securities of a mutual fund that is listed on the TSX or another recognized exchange in Canada in the same manner that they are permitted to invest in securities of a mutual fund that is not listed on such an exchange.

28. The trades conducted by a Top Fund may not be of the size necessary for the Top Fund to be eligible to purchase or exchange units of the Underlying ETF directly from the Underlying ETF at its net asset value per unit. Trades in units of the Underlying ETF are therefore likely to be conducted by the Top Funds in the secondary market through the facilities of a recognized exchange. Absent the Exemption Sought, paragraphs 2.5(2)(e) and 2.5(2)(f) would not permit a Top Fund to pay brokerage fees incurred in connection with such a trade.

29. The units of the Underlying ETF are listed on the TSX and the market for them is liquid because it is supported by designated brokers. As a result, a Top Fund will be well positioned to dispose of such units to, for example, fund the redemption requests of its securityholders.

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) the investment by a Top Fund in units of the Underlying ETF is in accordance with the investment objectives of the Top Fund;

(b) a Top Fund does not sell units of the Underlying ETF short;

(c) the Underlying ETF is and continues to qualify as a money-market fund (as defined by NI 81-102);

(d) the relief from paragraphs 2.5(2)(e) and 2.5(2)(f) will only apply to the brokerage fees incurred for the purchase and sale of the Underlying ETF by the Top Funds; and

(e) the prospectus of each Top Fund discloses, or will disclose the next time it is renewed after the date of this decision, the fact that the Top Funds have obtained the Exemption Sought to permit the relevant transactions on the terms described in this decision.

"Raymond Chan"
Manager, Investment Funds
Ontario Securities Commission

 

SCHEDULE "A"

Purpose Core Dividend Fund

Purpose Tactical Hedged Equity Fund

Purpose Monthly Income Fund

Purpose Total Return Bond Fund

Purpose Diversified Real Asset Fund

Purpose Short Duration Emerging Markets Bond ETF

Purpose Short Duration Global Bond ETF