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First Asset Investment Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- A non-redeemable investment fund converting into an ETF granted relief from the concentration restriction in NI 81-102 to permit it to invest up to 20% of net asset value in each of six Canadian banks named in its investment objectives.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.1(1), 19.1.
September 9, 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 FIRST ASSET INVESTMENT MANAGEMENT INC. (THE MANAGER)
DECISION
Background
The securities regulatory authority or regulator in the Jurisdiction (the Decision Maker) has received an application from the Manager for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption relieving Canbanc Income Corp. (the Fund), upon conversion into an exchange traded fund (ETF), from the prohibition in subsection 2.1(1) of National Instrument 81-102 -- Investment Funds (NI 81-102) to permit the Fund to purchase a security of a Bank (as defined below), enter into a specified derivatives transaction or purchase index participation units, notwithstanding the fact that, immediately after the transaction, more than 10 percent of the net asset value of the mutual fund will be invested in securities of a single issuer, subject to certain restrictions (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the Commission) is the principal regulator for this application; and
(b) the Manager 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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Yukon, Nunavut and Northwest Territories.
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 herein.
Representations
This decision is based on the following facts represented by the Manager:
Organization and Structure of the Fund
1. The Fund is a non-redeemable investment fund.
2. On July 10, 2015, the holders of equity shares (Closed-End Shares) of the Fund approved a conversion (the Conversion) of the Fund from a non-redeemable investment fund into a class of exchange traded traded fund shares (ETF Shares).
3. Until the completion of the Conversion, the Fund is not a "mutual fund" as defined under applicable securities legislation and does not operate in accordance with the requirements of securities legislation applicable to mutual funds.
4. The Manager is the portfolio adviser and manager of the Fund. The Manager is registered as an investment fund manager, a portfolio manager and an exempt market dealer under the Securities Act (Ontario) and a commodity trading manager under the Commodity Futures Act (Ontario). It is also registered as an investment fund manager under the Securities Act (Newfoundland and Labrador) and Securities Act (Quebec). The head office of the Manager is located at 95 Wellington Street West, Suite 1400, Toronto, Ontario, M5J 2N7.
5. The Manager filed a prospectus dated July 26, 2010 (the Closed-End Prospectus) with the securities regulatory authority in each province and territory of Canada to qualify the Closed-End Shares for distribution to the public. The Commission issued a receipt for the Closed-End Prospectus on July 27, 2010.
6. The Fund is a reporting issuer as defined under the applicable securities legislation of each province and territory of Canada and is not in default of any of the requirements of the securities legislation of the provinces and territories of Canada.
7. The Manager is not in default of any of the requirements of the securities legislation of the provinces and territories of Canada.
8. In connection with the Conversion, the constating documents of the Fund will be amended in order to effect the Conversion and to permit it to continuously offer two classes of shares: ETF Shares and exchange traded fund advisor shares (the ETF Advisor Shares, and together with the ETF Shares, the Shares). The only difference between the ETF Shares and the ETF Advisor Shares is the management fee payable by the Fund due to the service fee payable by the Manager in respect of the ETF Advisor Shares.
9. After the Conversion, the Closed-End Shares of the Fund will become ETF Shares of a class to be named "First Asset CanBanc Income ETF", and the Shares will become a mutual fund subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities.
10. Following the Conversion, Canbanc Income Corp. will be renamed "First Asset Fund Corp.", or such other name as the Manager may determine.
11. Shareholders will not be required to take any action in connection with the Conversion. Post-Conversion, holder of Shares will have daily redemption rights.
12. The Manager filed a preliminary long form prospectus on June 29, 2015 (the ETF Prospectus) to qualify the distribution of the Shares under National Instrument 41-101 -- General Prospectus Requirements in each of the provinces and territories of Canada.
13. A material change report in connection with the results of the meeting of shareholders approving the Conversion was filed on July 10, 2015 by the Manager.
14. The Closed-End Shares are listed on the Toronto Stock Exchange (the TSX) and will remain listed on the TSX after the Conversion as ETF Shares. The Manager, on behalf of the ETF Advisor Shares, has applied to list the ETF Advisor Shares on the TSX.
Concentration Restriction
15. The investment objectives of the ETF will be to provide shareholders with: (a) quarterly distributions; (b) the opportunity for capital appreciation; and (c) lower overall volatility of portfolio returns than would be experienced by owning a portfolio of common shares (the "Proposed Investments") of the Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank (collectively, the "Banks") directly.
16. The ETF may also sell call options each month on up to 25% of the securities of each Bank in the Fund's portfolio ("Portfolio Securities"). The Manager may decide, in its discretion, not to sell call options in any month.
17. If required to facilitate distributions or pay expenses of the ETF, securities of each Bank will be sold pro-rata across the ETF's portfolio according to their relative market values at the time of such sale.
18. Future subscriptions for Shares, if any, will be used to acquire securities of each Bank in the same weights as the Portfolio Securities exist in the portfolio, based on their relative market values at the time of such subscription.
19. In the absence of: (i) new subscriptions for Shares, (ii) sales of Portfolio Securities, if any, required to facilitate distributions, redemptions or pay expenses of the Shares, or (iii) corporate actions of the Banks such as stock splits or consolidations, it is expected that the number of common shares of each of the Banks referable to the portfolio of the Shares will not change. The ETF's portfolio will not be actively managed by the Manager.
20. The Portfolio Securities are listed on, among others, the New York Stock Exchange (NYSE) and/or the TSX.
21. The Banks are some of the most liquid equity securities listed on the TSX, and are less likely to be subject to liquidity concerns than the securities of other issuers. The liquidity of the Portfolio Securities is further evidenced by the markets for options in connection with the Portfolio Securities. A liquid market for options on the Portfolio Securities is primarily provided by the Montreal Exchange.
22. As the names of each of the Banks are listed in the stated investment objectives of the ETF, and the ETF will not invest in securities other than securities of the Banks, holders of the Shares will be fully aware of the risks involved with an investment in the Shares.
23. The investment objectives and investment strategies of the Fund, as well as the risk factors associated therewith, were disclosed in the Closed-End Prospectus and the investment objectives and investment strategies of the ETF, as well as the risk factors associated therewith, will be disclosed in the ETF Prospectus and each renewal prospectus thereof.
Decision
The Decision Maker 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 Maker under the Legislation is that the Requested Relief is granted, provided that:
(a) The Proposed Investments are in accordance with the investment objectives of the ETF;
(b) The ETF will not purchase Portfolio Securities, or enter into any transaction to obtain indirect exposure to Portfolio Securities if:
(i) immediately after the transaction, more than 20 percent of the net assets of the Fund, taken at market value at the time of the transaction, would be invested, directly or indirectly, in securities of any one Bank; or
(ii) the ETF becomes an insider of any Bank as a result of such investment;
(c) The ETF Prospectus discloses the fact that the ETF has obtained the Requested Relief to permit the Proposed Investments on the terms described in this decision.
"Darren McKall"
Manager, Investment Funds and Structured Products
Ontario Securities Commission