Securities Law & Instruments

Headnote

MP 11-102 and NP 11-203 -- application requesting new relief under NP 11-203 which replaces and varies a decision made under the Mutual Reliance Review System for Exemptive Relief Applications before March 17, 2008 -- exemption granted from s. 2.3(e) of NI 81-102 to permit a Fund to invest up to 100% of its net assets in gold -- National Instrument 81-102 Mutual Funds.

Applicable Legislative Provisions

National Instrument NI 81-102 Mutual Funds, ss. 2.3(e), (f) and (h), 19.1.

September 14, 2009

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

BULLION MANAGEMENT SERVICES INC. (BMS),

BMG BULLIONFUND (the Existing Fund) AND

BMG GOLD BULLIONFUND (the Gold Fund)

(collectively the Filers)

 

DECISION

MRRS Decision Background

In September 2000, the local securities regulatory authority or regulator in each of the provinces and territories of Canada (the MRRS Jurisdictions) received an application from BMS on behalf of the Existing Fund (then known as The Millennium BullionFund) for an exemption from the following provisions of National Instrument 81-102 Mutual Funds (NI 81-102):

(i) paragraph 2.3(e), to permit the Existing Fund to invest in excess of 10% of its net assets, taken at the market value thereof at the time of investment, in gold bullion; and

(ii) paragraph 2.3(f), to permit the Existing Fund to invest in silver and platinum

(the MRRS Relief).

The MRRS Jurisdictions granted the MRRS Relief in the Mutual Reliance Review System Decision Document dated January 8, 2002 (the MRRS Decision).

Application Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction (the Legislation) requesting:

(i) an exemption to vary the MRRS Decision so as to more closely align the representations provided in the MRRS Decision with the Existing Fund's actual operations and to allow the simplified prospectus and annual information form of the Existing Fund to be combined with other mutual funds managed by BMS that have substantially similar investment objectives of investing substantially all of their assets in physical bullion;

(ii) exemptive relief from section 2.3(e) of NI 81-102 to permit the Gold Fund to invest substantially all of its assets in gold bullion; and

(iii) an update to the MRRS Relief and the conditions of the MRRS Decision into a new passport decision under NI 81-102

(the Current Relief Sought).

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

1. the Ontario Securities Commission is the principal regulator for this application; and;

2. the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (collectively, with Ontario, the Jurisdictions).

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 Filers:

1. The Existing Fund is, and the Gold Fund will be, a mutual fund trust established under the laws of Ontario pursuant to a trust agreement made by BMS as the manager and trustee of the Existing Fund and the Gold Fund.

2. The head office of BMS is located in the city of Markham, Ontario.

3. The Existing Fund is, and the Gold Fund will be, a reporting issuer under the laws of all of the Jurisdictions.

4. The Filers are not in default of securities legislation in any of the Jurisdictions.

5. The investment objective of the Existing Fund is to seek to achieve capital preservation and long-term appreciation through investments in equal proportions of gold, silver and platinum bullion (each a Precious Metal). The maintenance of equal weightings in each of gold, silver and platinum bullion will be subject to the availability of each of the Precious Metals. Accordingly, where one of the Precious Metals is temporarily unavailable, the Fund may become temporarily overweighted in the remaining Precious Metals on a pro rata basis.

6. The Existing Fund will maintain a fixed investment policy of investing one third of its assets in each of gold, silver and platinum bullion regardless of market conditions. The Existing Fund may also hold cash in amounts not exceeding more than five percent (5%) of the Existing Fund's net assets in order to pay expenses and to facilitate redemptions. The Existing Fund will not base its investment decisions on changes in the prices of gold, silver and platinum bullion.

7. BMS believes there is adequate liquidity for each Precious Metal in the marketplace such that the Existing Fund should not have any problem achieving its investment objective or satisfying redemptions.

8. If a Precious Metal is unavailable, which is not expected to occur, the Existing Fund's investments are overweighted in one or more of the Precious Metals, the Existing Fund's investments will be rebalanced in accordance with the Existing Fund's investment objective as soon as possible once such Precious Metal becomes available.

9. The investment objective of the Gold Fund will be to seek to achieve capital preservation and long-term appreciation by investing substantially all of its assets in gold bullion.

10. The Gold Fund will maintain a fixed investment policy of investing all of its assets in gold bullion regardless of market conditions. The Gold Fund may also hold cash in amounts generally not exceeding more than five percent (5%) of it's net assets in order to pay expenses and to facilitate redemptions. The Gold Fund will not base its investment decisions on changes in the prices of gold bullion.

11. BMS believes there is adequate liquidity for gold bullion in the marketplace such that the Gold Fund should not have any problem achieving its investment objective or satisfying redemptions.

12. If gold bullion is unavailable, which is not expected to occur, the Gold Fund will continue to hold any pending investments in cash until gold bullion becomes available again. At that time, the Gold Fund will immediately invest any cash in excess of five percent (5%) of its net assets in gold bullion.

13. The Bank of Nova Scotia (BNS) is the custodian of the Existing Fund and will be the custodian of the Gold Fund. All of the Precious Metals held by the Existing Fund and all of the gold bullion held by the Gold Fund will be physically held in the Canadian vaults of BNS or by another qualified or acceptable Canadian sub-custodian(s) on a segregated and allocated basis.

14. BNS will be given standing instructions to invest one third of the Existing Fund's assets in each of gold, silver and platinum bullion.

15. BNS, on the direction of BMS, will invest the assets of the Gold Fund in gold bullion.

16. The custody arrangements between the Existing Fund, the Gold Fund and BNS, as applicable, will be governed by the terms of a Bullion Trading Account Agreement and a Holding Account Agreement for each of the bullions held by the applicable fund. The terms of the Bullion Trading Account Agreement and the Holding Account Agreement satisfy the custody provisions of Part 6 of NI 81-102.

17. The MRRS Decision contained a representation stating that the Existing Fund's auditors would perform a physical count of all bullion held by the Existing Fund in bar form in the vaults of BNS twice a year. Since inception, however, the actual practice has been for the Existing Fund's auditor to perform a physical count of all bullion held by the Fund in bar form in the vaults of BNS once a year.

18. On a going forward basis, the auditors of the Existing Fund and the Gold Fund will perform a physical count of all bullion held by the Existing Fund and the Gold Fund, respectively, at least once a year.

19. The MRRS Decision contained a representation stating that the Existing Fund's gold, silver and platinum bullion would at all times be insured to full current market value against destruction, disappearance or misappropriation. Since inception, however, the actual practice has been for the bullion holdings of the Existing Fund to be covered by the custodian's insurance.

20. On a going forward basis, BNS and/or any sub-custodian of the Existing Fund and the Gold Fund will maintain insurance as BNS and/or such sub-custodian deems appropriate against all risks of physical loss or damage except the risk of war, nuclear incident, terrorism events or government confiscation. BNS and/or any such sub-custodian shall maintain insurance with regard to its business on such terms and conditions as it deems appropriate.

21. BMS has determined that neither it nor the Existing Fund nor the Gold Fund require any additional insurance at this time.

22. BMS believes that BNS will obtain and will provide adequate insurance coverage at all times. The Holding Account Agreement shall provide that BNS shall not cancel its insurance except upon 30 days' prior written notice to BMS.

23. Neither the Existing Fund nor the Gold Fund will use specified derivatives, engage in hedging, use leverage or lease any bullion.

24. Neither the Existing Fund nor the Gold Fund will at any time invest in a "security" a such term is defined in subsection 1(1) of the Securities Act (Ontario) (the OSA), including securities or certificates of companies that produce gold, silver or platinum bullion.

25. Fund valuation services will be provided to the Existing Fund and the Gold Fund pursuant to the terms of a Valuation and Record Keeping Agreement between BMS and RBC Dexia Investor Services Trust (RBC Dexia).

26. All of the cash of the Existing Fund and the Gold Fund will be held by RBC Dexia as a sub-custodian of BNS, who will have access to the cash of the Existing Fund and the Gold Fund to, among other things, pay expenses of the Existing Fund and the Gold Fund.

27. Neither BMS nor its officers or directors are registered as an adviser or advising officers, respectively, under the OSA or as a commodity trading manager or commodity trading representatives, respectively, under the Commodity Futures Act (Ontario).

28. BMS will not provide any investment advice to the Existing Fund or the Gold Fund.

29. The MRRS Decision contained a condition prohibiting the simplified prospectus and the annual information form of the Existing Fund from being combined with the simplified prospectus and the annual information form of any other mutual fund.

30. BMS has determined that it would be appropriate to combine the Existing Fund, the Gold Fund and other similar mutual funds in a combined simplified prospectus and annual information form.

31. The MRRS Decision contained a condition requiring the prospectus of the Existing Fund to include risk disclosure related to the fact that BMS has never managed a precious metals fund and that each of its officers has limited experience with gold, silver and platinum. Given that the Existing Fund has existed since 2002, it is no longer necessary for the simplified prospectus of the Existing Fund, the Gold Fund or other similar mutual funds managed by BMS to contain such disclosure.

32. Following the issuance of this decision, BMS and the Existing Fund will no longer rely on the MRRS Decision.

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 Current Relief Sought is granted provided that each of BMS, the Existing Fund and the Gold Fund, as applicable, ensures that:

1. the simplified prospectus and the annual information form (collectively, the Prospectus) of the Existing Fund and the Gold Fund may only be combined with the simplified prospectus and the annual information form of other mutual funds managed by BMS that have substantially similar investment objectives of investing substantially all of their assets in physical bullion;

2. the Prospectus of the Existing Fund and the Gold Fund, including each renewal thereof, shall at all times contain the following disclosure regarding the risks associated with an investment in those funds:

(i) the risk that direct purchases of the bullion that each respective fund invests in may generate higher transaction and custody costs than other types of investments, which may impact the performance of that fund;

(ii) the risk that the bullion that each respective fund invests in may at times be unavailable thus preventing that fund from achieving its investment objective of being substantially invested in relevant bullion; and

(iii) the risk that BMS is not registered as an adviser with the OSC;

3. the Prospectus of the Existing Fund discloses in its investment objective that the maintenance of equal weightings in each of gold, silver and platinum bullion will be subject to the availability of each of the Precious Metals, with the result that where one of the Precious Metals is temporarily unavailable, the Fund may become overweighted in the remaining Precious Metals on a pro rata basis;

4. the Prospectus of the Gold Fund discloses in its investment objective that investing substantially all of its assets in gold bullion will be subject to the availability of gold bullion, with the result that if gold bullion is temporarily unavailable, the Gold Fund may not be able to achieve its investment objective for a period of time;

5. BMS will provide staff at the OSC with 30 days prior written notice of any proposed material changes to any material contracts pertaining to the Existing Fund and the Gold Fund;

6. BMS will make available on its website:

(i) the current holdings of the Existing Fund and the Gold Fund on a daily basis;

(ii) will periodically list the number of ounces of bullion that each of the Existing Fund and the Gold Fund hold; and

(iii) will disclose in the Prospectus of the Existing Fund and the Gold Fund, and in each renewal thereof, that up-to-date information about the amount of bullion held by that fund may be found on BMS' website;

7. the Existing Fund will disclose in its investment strategies section of each renewal Prospectus and in its continuous disclosure:

(i) whether one or more of the Precious Metals represented more than one third of the net assets of the Existing Fund for the 12 month period immediately preceding the date of the renewal Prospectus;

(ii) the name of such Precious Metal(s);

(iii) the maximum percentage of the Existing Fund's net assets that the Precious Metal(s) referred to in (ii) above represented in the 12 month period; and

(iv) the percentage of the Existing Fund' net assets that the Precious Metal(s) referred to in (ii) above represented at the most recent date for which such information is available; and

8. the Existing Fund and the Gold Fund will each disclose in its continuous disclosure documents the percentage of its assets that were invested in each Precious Metal, as applicable, as of the most recent date for which such information is required.

"Darren McKall"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission