Securities Law & Instruments

Headnote

National Policy 11-203 -- Relief granted from 15.3(2), 15.6(1)(a)(i) and 15.6(1)(d) of National Instrument 81-102 Investment Funds to permit a mutual fund, that has not distributed securities under a simplified prospectus in a jurisdiction for 12 consecutive months, to include in their sales communications performance data for the period when the fund was not a reporting issuer -- relief also granted from section 2.1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure for the purposes of the relief requested from Item 5 of Part I of Form 81-101F3 Contents of Fund Facts Document, to permit the mutual fund to include in its fund facts for series O, the past performance data for the period when the fund was not a reporting issuer.

National Policy 11-203 -- relief granted from section 4.4 of National Instrument 81-106 Investment Fund Continuous Disclosure for the purposes of the relief requested from Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance, items 3.1(7), 4.1(1), 4.1(2), 4.2(1), 4.3(1) and 4.3(2) of Part B of Form 81-106F1, and Items 3(1) and 4 of Part C of Form 81-106F1, to permit a mutual fund to include in annual and interim management reports of fund performance the financial highlights and past performance of the fund that are derived from the fund's annual financial statements that pertain to time periods when the fund was not a reporting issuer.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 15.3(2), 15.6(1)(a)(i), 15.6(1)(d) and 19.1.

National Instrument 81-101 Investment Fund Prospectus Disclosure, s.2.1.

Item 5 of Part I of Form 81-101F3 Contents of Fund Facts Document.

National Instrument 81-106 Investment Fund Continuous Disclosure, ss. 4.4 and 17.1.

Items 3.1(7), 4.1(1), 4.1(2), 4.2(1), 4.3(1) and 4.3(2) of Part B of Form 81-0106F1 Contents of Annual and Interim Management Report of Fund Performance and Items 3(1) and 4 of Part C of Form 81-106F1.

December 19, 2019

IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF MCELVAINE INVESTMENT MANAGEMENT LTD. (the Filer) AND IN THE MATTER OF THE MCELVAINE INVESTMENT TRUST (the Fund)

DECISION

Background

¶ 1 The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for relief, with respect to the Series B Units, exempting the Fund from:

(a) sections 15.3(2), 15.6(1)(a)(i) and 15.6(1)(d) of National Instrument 81-102 Investment Funds (NI 81-102) to permit the Fund to include performance data in sales communications notwithstanding that

(i) the performance data will relate to a period prior to the Fund offering its securities under a simplified prospectus; and

(ii) the Fund has not distributed its securities under a prospectus for 12 consecutive months;

(b) section 2.1 of National Instrument 81-101 Mutual Funds Prospectus Disclosure (NI 81-101) to permit the Fund to file a fund facts document (fund facts) that does not comply with Part I Items 5(2), 5(3) and 5(4), and Instructions (1) and (5) of Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3) in respect of the requirement to comply with sections 15.3(2), 15.6(1)(a)(i) and 15.6(1)(d) of NI 81-102 to permit the Fund to include in its fund facts past performance data of the Fund notwithstanding that

(i) the performance data relates to a period prior to the Fund offering its securities under a simplified prospectus, and

(ii) the Fund has not distributed its securities under a simplified prospectus for 12 consecutive months;

(c) section 4.4 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) to permit the Fund to file annual and interim management reports of fund performance (individually an MRFP and collectively, the MRFPs) that do not comply with Part B Items 3.1(7) and 4.1(1) of Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance (Form 81-106F1) in respect of the requirement to comply with section 15.3(2) of NI 81-102, Part B Items 4.1(2), 4.2(1), 4.3(1) and 4.3(2) of Form 81-106F1 and Part C Items 3(1) and 4 of Form 81-106F1 to permit the Fund to include in its MRFP past performance data notwithstanding that such performance data relates to a period prior to the Fund offering its securities under a simplified prospectus;

(collectively, the Exemption Sought).

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

(a) the British Columbia Securities Commission is the principal regulator for the Application;

(b) the Filer 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 Alberta, Saskatchewan, and Manitoba; and

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

¶ 2 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

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

1. the Fund is an open-end mutual fund established under the laws of British Columbia as a trust on September 27, 1996 (the Inception Date) and governed by an amended and restated trust agreement made as of June 30, 2019;

2. the Filer is a corporation organized under the laws of Canada with a head office in Victoria, British Columbia;

3. the Filer is registered as an investment fund manager in British Columbia, Ontario and Quebec; as a portfolio manager in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec and Saskatchewan; and as an exempt market dealer in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec and Saskatchewan;

4. the Filer is the trustee, manager, portfolio adviser and promoter of the Fund;

5. since the Inception Date, the Fund distributed Series B Units to investors using exemptions from the prospectus requirement in National Instrument 45-106 Prospectus Exemptions (NI 45-106); during such period of time, the majority of Series B Units were distributed to investors who are "accredited investors" under NI 45-106;

6. the Fund intends to commence distributing its Series B Units pursuant to a simplified prospectus (the IPO) and, to that end filed a preliminary simplified prospectus, annual information form and fund facts dated September 27, 2019 in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario; upon the issuance of a receipt for the final simplified prospectus and annual information form, the Fund will become a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario and will become subject to the requirements of NI 81-102 and NI 81-106; in the future, the Fund may become a reporting issuer in other jurisdictions of Canada;

7. the Filer and the Fund are not in default of securities legislation in any jurisdiction of Canada;

8. since the Inception Date, the Fund has prepared annual and interim financial statements in accordance with NI 81-106;

9. since the Inception Date, the Fund did not deviate from the investment restrictions contained in NI 81-102, except with respect to a small number of investments that, for certain periods, deviated from the concentration and control restrictions in sections 2.1 and 2.2 of NI 81-102 and with the restrictions concerning illiquid assets in section 2.4 of NI 81-102; and

10. specifically, the Fund deviated from the investment restrictions in NI 81-102 in the following instances:

Section 2.1 concentration restriction

(a) for the period from approximately September 2001 to June 2002, the Fund's investment in common shares of Sun-Rype Products Ltd. exceeded 10% of the Fund's net asset value;

(b) for the period from June 2002 to March 2004, the Fund's investment in shares of CINAR Corporation exceeded 10% of the Fund's net asset value; and

(c) for the period from September 2008 to February 2013, the Fund's investment in shares of Glacier Media Inc. exceeded 10% of the Fund's net asset value;

Section 2.2 control restriction

(d) for the period from April 2009 to November 2012, the Fund held securities of The Caldwell Partners International Inc. representing more than 10% of the outstanding equity securities of that issuer;

(e) for the period from November 2004 to May 2006, the Fund held securities of Humpty Dumpty Snack Foods Inc. representing more than 10% of the votes attached to the outstanding voting securities or the outstanding equity securities of that issuer; and

(f) for the period from December 2007 to November 2013, the Fund held securities of Wow! Unlimited Media Inc. (previously Rainmaker Entertainment Group Limited and Rainmaker Income Fund) representing more than 10% of the votes attached to the outstanding voting securities or the outstanding equity securities of that issuer;

Section 2.4 restrictions concerning illiquid assets

(g) on or about July 5, 2019, the Fund acquired common shares of Wintaai Holdings Ltd., which are illiquid assets for the purposes of NI 81-102; this transaction resulted in the Fund holding more than 10% of its net asset value in illiquid assets; immediately following the transaction, the Fund held approximately 18% of its net asset value in illiquid assets, and until November 25, 2019 illiquid assets held by the Fund continued to represent more than 15% of its net asset value;

11. the above exceptions to compliance with NI 81-102 did not have a material impact on the Fund's performance;

12. except as described above, there have been no other instances of the Fund's non-compliance with NI 81-102 since the Inception Date;

13. the Fund will be managed substantially similarly after it becomes a reporting issuer as it was prior to becoming a reporting issuer; as a result of the Fund becoming a reporting issuer:

(a) the Fund's investment objectives will not change;

(b) the management fee charged to the Fund in respect of its Series B Units will not change;

(c) the day-to-day administration of the Fund will not change, other than to comply with the additional regulatory requirements associated with being a reporting issuer (none of which will impact the portfolio management of the Fund); and

(d) the management expense ratio of Series B Units of the Fund is not expected to increase by more than 0.10%, which is an immaterial amount;

14. the Filer proposes to present the performance data of Series B Units of the Fund for the time period since the Inception Date in sales communications pertaining to the Fund;

15. without the Exemption Sought, sales communications pertaining to the Fund cannot include performance data of the Fund that relate to a period prior to it becoming a reporting issuer;

16. without the Exemption Sought, sales communications pertaining to the Fund would not be permitted to include performance data until the Fund has distributed securities under a simplified prospectus for 12 consecutive months;

17. as a reporting issuer, the Fund will be required under NI 81-101 to prepare and file fund facts;

18. the Filer proposes to include in the fund facts for Series B Units of the Fund past performance data in the disclosure required by items 5(2), 5(3) and 5(4) under the sub-headings "Year-by-year returns", "Best and worst 3-month returns" and "Average return", respectively, related to periods prior to the Fund becoming a reporting issuer;

19. without the Exemption Sought, the fund facts for Series B Units of the Fund cannot include performance data of the Fund that relate to a period prior to it becoming a reporting issuer;

20. as a reporting issuer, the Fund will be required under NI 81-106 to prepare and send MRFPs;

21. without the Exemption Sought, the MRFPs of the Fund cannot include financial highlights and performance data of the Fund that relate to a period prior to it becoming a reporting issuer; and

22. the performance data and other financial data of the Fund for the time period before it became a reporting issuer is significant and meaningful information for existing and prospective investors in making an informed decision whether to purchase Series B Units of the Fund.

Decision

¶ 4 Each of the Decision Makers 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 Makers under the Legislation is that the Exemption Sought is granted provided that:

(a) any sales communication and any fund facts that contain performance data of Series B Units of the Fund relating to a period prior to when the Fund was a reporting issuer discloses:

(i) that the Fund was not a reporting issuer during such period;

(ii) that the expenses of the Fund would have been higher during such period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer;

(iii) that prior to becoming a reporting issuer the Fund was not subject to and did not fully comply with the investment restrictions and practices in NI 81-102;

(iv) that the Fund's non-compliance with the investment restrictions and practices in NI 81-102 may have impacted the Fund's performance for the period prior to the Fund becoming a reporting issuer; and

(v) performance data of Series B Units of the Fund for 10, 5, 3 and one year periods;

(b) the information contained under the heading "Fund Expenses Indirectly Borne by Investors" in Part B of the simplified prospectus of the Fund based on the management expense ratio (MER) for the Fund for the financial year ended December 31, 2019 be accompanied by disclosure that:

(i) the information is based on the MER of Series B Units of the Fund for the Fund's last completed financial year when Series B Units were offered privately during part of such financial year; and

(ii) the MER of the Fund may increase as a result of the Fund offering Series B Units under the simplified prospectus;

(c) any MRFP that includes performance data of Series B Units of the Fund relating to a period prior to when the Fund was a reporting issuer discloses:

(i) that the Fund was not a reporting issuer during such period;

(ii) that the expenses of the Fund would have been higher during such period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer;

(iii) that prior to becoming a reporting issuer the Fund was not subject to and did not fully comply with the investment restrictions and practices in NI 81-102;

(iv) that the Fund's non-compliance with the investment restrictions and practices in NI 81-102 may have impacted the Fund's performance for the period prior to the Fund becoming a reporting issuer;

(v) that the financial statements of the Fund for such period are posted on the Fund's website and are available to investors upon request; and

(vi) performance data of Series B Units of the Fund for 10, 5, 3 and one year periods; and

(d) the Filer posts the annual financial statements of the Fund since the Inception Date on the Fund's website and makes those financial statements available to investors upon request.

"Nigel P. Cave"
Vice Chair
British Columbia Securities Commission