National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from the single custodian requirement to permit the use of more than one custodian for securities lending purposes only – relief is required to appoint a securities lending agent that is not a custodian or sub-custodian of the funds – the funds will have a single administrator that will reconcile all the portfolio assets of the funds and provide valuation services – the other custodian will meet all the Part 6 requirements of National Instrument 81-102 Investment Funds – the other custodian will only act as custodian and securities lending agent for in demand securities of the funds transferred to them – exemptive relief granted from subsection 6.1(1) of National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 6.1(1) and 19.1.
August 23, 2019
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
PURPOSE INVESTMENTS INC.
IN THE MATTER OF
PURPOSE MARIJUANA OPPORTUNITIES FUND,
PURPOSE GLOBAL INNOVATORS FUND,
PURPOSE STRATEGIC YIELD FUND,
PURPOSE MULTI-ASSET INCOME FUND,
PURPOSE ENERGY CREDIT FUND
(the Existing Funds)
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the Existing Funds and similarly structured investment funds managed by the Filer (the Future Funds, and collectively, with the Existing Funds, the Funds) for a decision under the securities legislation of the Jurisdiction (the Legislation) that exempts the Funds from subsection 6.1(1) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the Funds to appoint two custodians, each of which satisfies the requirements of section 6.2 of NI 81-102, subject to certain conditions proposed in this Application (the Requested Relief).
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(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 Ontario (together with Ontario, 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. In addition, the following terms have the following meanings:
(a) Administrator means CIBC Mellon Global Securities Services Company or any successor.
(b) AIF means the annual information form of each Fund.
(c) Custodian Agreement means the custodian agreement dated as of August 8, 2013, as amended from time to time (or any successor agreement), among CIBC Mellon Trust Company, as custodian and the Filer, as trustee and manager of various Purpose Funds, including the Existing Funds.
(d) Fund Administration Agreement means the fund administration agreement dated as of February 12, 2013, as amended from time to time, between the fund administrator, and the Filer, as trustee and manager of various Purpose Funds, including the Existing Funds, or any other agreement between the Filer, as trustee and manager of one or more Funds, and the Administrator, in respect of such Funds.
(e) IIROC means the Investment Industry Regulatory Organization of Canada.
(f) In Demand Security and In Demand Securities each have the meaning given to it in representation 9.
(g) Purpose Funds means investment funds in respect of which the Filer acts as an investment fund manager and/or portfolio manager.
(h) Prospectus means the simplified prospectus of each Fund.
(i) Securities Lending Agreements means agreements which effect securities lending, repurchase or reverse repurchase transactions between each Fund, as lender of the securities, third party borrowers, and the securities lending agent of the Fund.
Unless otherwise specified, all references to money amounts are to the lawful currency of Canada.
This decision is based on the following facts represented by the Filer.
1. The Filer is a corporation amalgamated under the laws of the Province of Ontario.
2. The registered office of the Filer is located at 130 Adelaide Street West, 31st Floor, Toronto, Ontario.
3. The Filer is registered as an investment fund manager, portfolio manager and an exempt market dealer under the Securities Act (Ontario).
4. The Filer is the trustee and/or manager of the Funds.
5. The Filer is not in default of securities legislation in any of the Jurisdictions.
6. The Funds are or will be reporting issuers under the laws of all of the Jurisdictions.
7. The Funds offer or will offer their units or shares in the Jurisdictions pursuant to the Prospectus and AIF of the Funds, as applicable.
8. The Existing Funds are not in default of securities legislation in any of the Jurisdictions.
Investment Objectives and Investment Strategies of the Funds
9. The investment objectives and strategies of the Existing Funds, as noted below, and the Future Funds focus or may focus on industries, sectors and strategies which include smaller capitalization issuers, more volatile and less liquid securities than the majority of the Purpose Funds. As a result, the portfolios of these Funds include a significant number of securities which may from time to time be in demand by short sellers (each an In Demand Security, and collectively, In Demand Securities) who wish to borrow such securities.
10. The investment objective of Purpose Marijuana Opportunities Fund is to provide unitholders with attractive long-term capital appreciation by investing in global issuers with interest in the marijuana or marijuana related industries.
11. Purpose Marijuana Opportunities Fund will primarily invest in equity securities from domestic and global issuers that are involved in marijuana and marijuana related businesses, including research and development and other ancillary businesses to the marijuana industry. The business activities of these companies may include marijuana production and distribution, edible and infused marijuana products, hemp products, consumption devices, biopharmaceuticals, biotechnology, nutraceuticals, real estate, technology, security solutions, investing and financing, delivery systems, retail distribution, media, entertainment and technology. The number of holdings and percentages by region will vary over time and will be based on the most attractive risk/reward opportunities across each region. Purpose Marijuana Opportunities Fund may invest in various types of securities of companies in domestic and/or international markets, including, but not limited to, common shares, ADRs, preferred shares, convertible securities, debt securities, subscription receipts, options and warrants.
12. The investment objective of Purpose Global Innovators Fund is to provide shareholders with long term capital growth through the selection, management and strategic sector rotation and trading of global positions in equity, debt and derivative securities. Purpose Global Innovators Fund may have exposure to all sectors of the economy, with the ability to focus its assets in specific industry sectors and asset classes based on analysis of business cycles, industry sectors and market outlook. Purpose Global Innovators Fund will be global in nature and invest in small, medium and large cap companies.
13. Purpose Global Innovators Fund will examine macroeconomic events that result in shifts in behaviour and supply and demand in the market in both traditional and new industries. In traditional industries such as oil and gas and mining, Purpose Global Innovators Fund will focus on investing in companies with emerging technologies and new discoveries that improve and enhance operations and productivity but may consider other investment factors such as cash flow and liquidity requirements, hold periods and restrictions, risk factors, stop-loss containment and tax efficient distributions.
14. The investment objective of Purpose Strategic Yield Fund is to provide investors with a high yield by investing primarily in, or obtaining exposure primarily to, fixed income securities of corporate issuers located in Canada or the United States. Investments in fixed income securities generally will be below investment grade.
15. Purpose Strategic Yield Fund will invest in an actively managed portfolio comprised primarily of Canadian and U.S. dollar denominated high yield debt securities, convertible bonds and loans and also may invest in any other yield-based security or asset class that develops over time. Purpose Strategic Yield Fund seeks to select securities based on their expected return relative to risk characteristics, taking into consideration factors such as industry attractiveness, issuer credit quality, yield, duration and call protection. Purpose Strategic Yield Fund seeks to maintain a portfolio diversified by company, market capitalization, sector, industry, credit rating and, where appropriate, region. To a lesser extent, Purpose Strategic Yield Fund may invest in other types of fixed income securities and dividend-paying common shares. Purpose Strategic Yield Fund may hold other equity securities from time to time resulting from the conversion or restructuring of Purpose Strategic Yield Fund’s other investments, and may take short positions in equity securities as a hedge for Purpose Strategic Yield Fund’s long positions in convertible bonds of such issuers. Purpose Strategic Yield Fund may hold Canadian or U.S. government debt and/or cash equivalents may be held from time to time as market conditions dictate. There is no limit on the percentage of the Purpose Strategic Yield Fund’s assets that may be invested outside Canada.
16. The investment objective of Purpose Multi-Asset Income Fund is to provide shareholders with (i) long-term capital appreciation through investment in a portfolio of high quality North American dividend-paying equity securities; and (ii) monthly distributions.
17. Purpose Multi-Asset Income Fund can invest up to 100% of its assets in foreign securities. Income-producing securities may include, but are not limited to, equity securities, common and preferred shares, real estate investment trusts, convertible securities, investment grade fixed income securities, higher yielding, lower quality fixed income securities, floating rate debt instruments and asset-backed securities and mortgage-backed securities. Purpose Multi-Asset Income Fund can invest in these securities either directly or indirectly through investments in underlying funds.
18. The investment objective of Purpose Energy Credit Fund is to provide unitholders with (i) a stable stream of monthly distributions and (ii) the opportunity for growth in the net asset value per unit.
19. Under normal market conditions, Purpose Energy Credit Fund will invest at least 75% of its net assets in debt securities issued by energy and alternative energy companies. Energy and alternative energy related companies include companies involved in the ownership, exploration, development, production or supply of energy, as well as issuers that service such industries. Purpose Energy Credit Fund will at all times invest in accordance with the requirements of NI 81-102. Purpose Energy Credit Fund may hold cash for strategic reasons.
Custodian of the Funds
20. CIBC Mellon Trust Company (CIBC Mellon) acts as custodian of the Funds’ assets pursuant to the terms of the Custodian Agreement which complies with all of the requirements in Part 6 of NI 81-102. CIBC Mellon will only be responsible for the assets of the Funds that are held directly by it, its affiliates or appointed sub-custodians.
21. CIBC Mellon acts as the custodian of numerous Purpose Funds under the Custodian Agreement.
22. CIBC Mellon Global Securities Services Company, an affiliate of CIBC Mellon, acts as Administrator of the Purpose Funds and, in such capacity, provides the Purpose Funds with valuation and unitholder recordkeeping services, in accordance with the Fund Administration Agreement. In the course of performing its services under the Fund Administration Agreement, the Administrator completes a daily reconciliation of the cash and securities positions of each Fund, under the supervision of the Filer.
23. The Funds have engaged CIBC Mellon as their securities lending agent to enter into Securities Lending Agreements under which the Funds lend portfolio securities to borrowers, and such borrowers pay the Funds securities borrowing fees which represent additional revenues for the Funds and enhance returns to their securityholders.
24. CIBC Mellon acts as custodian and securities lending agent for other third party investment funds which have similar investment objectives and strategies to the Existing Funds, and hold portfolios of securities for the third party investment funds that include In Demand Securities (the Other Funds).
25. CIBC Mellon, as securities lending agent for the Funds and the Other Funds, pools the In Demand Securities of the Funds and the Other Funds and lends them to borrowers on a pro rata basis. Consequently, when a borrower seeks a particular In Demand Security from CIBC Mellon, a relatively small portion of the total number of such securities lent by CIBC Mellon are owned by the Funds, and accordingly only a portion of the securities lending revenues generated from such transactions are payable to the Funds.
26. National Bank Financial Inc. (NBF) acts as custodian of certain Purpose Funds.
27. NBF has indicated to the Filer that it is prepared to act as securities lending agent of the Funds. The Filer expects that NBF will be able to lend more of the Funds’ In Demand Securities than CIBC Mellon is lending under the Funds’ current securities lending arrangements.
28. NBF is a member of IIROC, is a wholly-owned subsidiary of National Bank of Canada, a Schedule I Bank, and is qualified to act as a custodian and sub-custodian of the Funds in accordance with subsection 6.2(3) of NI 81-102.
29. NBF is not in default of securities legislation is any of the Jurisdictions.
30. Subsection 6.8(5) of NI 81-102 provides that the Funds may deliver portfolio assets in satisfaction of its obligations under Securities Lending Agreements if the collateral, cash proceeds or purchased securities that are delivered to the Funds in connection with such transactions are held under the custodianship of CIBC Mellon, as custodian, or a sub-custodian of the Funds. Therefore, in order to act as the Funds’ securities lending agent, NBF must be appointed as a sub-custodian of the Funds.
31. CIBC Mellon is unwilling or unable to appoint NBF as a sub-custodian of the Funds because NBF is not currently on CIBC Mellon’s approved list of sub-custodians. CIBC Mellon is unwilling or unable to complete the process which would be required to approve NBF as a sub-custodian.
32. The Filer believes that if the Funds were permitted to engage NBF as an additional securities lending agent for some of the Funds’ portfolio securities, significant incremental revenues would be generated which would enhance the returns of the Funds for the benefit of their securityholders.
33. The Filer has a meaningful business relationship with CIBC Mellon and the Administrator and does not want to terminate CIBC Mellon as the custodian of the Funds or the Administrator as the administrator of the Funds.
34. The Filer has applied for the Requested Relief in order to permit the appointment of NBF as a second custodian of the Funds. NBF’s responsibility for custody of the Funds’ assets will apply only to the In Demand Securities transferred to NBF by the Funds. The custodial arrangements between the Funds and NBF will comply with all of Part 6 of NI 81-102, other than subsection 6.1(1).
35. Upon receipt of the Requested Relief, both NBF and CIBC Mellon will safeguard the assets of the Funds in their custody in accordance with the standard of care applicable to qualified custodians under section 6.6 of NI 81-102.
36. Upon receipt of the Requested Relief, the Administrator will continue to act as the sole fund administrator of the Funds. The Administrator’s daily reconciliation of the cash and securities positions of the Funds will include an automated reconciliation of daily securities and cash position records delivered by both CIBC Mellon and NBF to the Administrator. The final net asset value of the Funds calculated on each business day will reflect the positions of the Funds after this reconciliation process is complete.
37. Upon receipt of the Requested Relief, the Filer will amend the Prospectus and AIF of the Existing Funds to include disclosure regarding the Requested Relief and particulars of the appointment of NBF as the custodian of the Existing Funds with respect to the In Demand Securities transferred to NBF by the Existing Funds.
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 Requested Relief is granted, provided that:
(a) a single entity reconciles all the portfolio assets of the Funds and provides the Funds with valuation services;
(b) the Filer will maintain such operational systems and processes, as between the two custodians and the single entity referred to in clause (a), in order to keep a proper reconciliation of all the portfolio assets, including the In Demand Securities, that will move between the two custodians, as appropriate; and
(c) the second custodian will act as custodian and securities lending agent only for the portion of In Demand Securities of the Funds transferred to it.
Investment Funds and Structured Products Branch
Ontario Securities Commission