BMO Investments Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Technical relief granted to mutual funds from Parts 9, 10 and 14 of National Instrument 81-102 Investment Funds to facilitate the offering of exchange-traded series and conventional mutual fund series within same fund structure -- Relief permitting funds to treat exchange-traded series in a manner consistent with treatment of other ETF securities in continuous distribution in connection with their compliance with Parts 9, 10 and 14 of NI 81-102 -- Relief permitting funds to treat mutual fund series in a manner consistent with treatment of other conventional mutual fund securities in connection with their compliance with Parts 9, 10 and 14 of NI 81-102 -- National Instrument 81-102 Investment Funds -- relief granted from certain mutual fund requirements and restrictions on borrowing from custodian and, if necessary, provision of a security interest to the custodian to fund distributions payable under the fund's distribution policy -- Relief granted to allow mutual funds to invest in ETF series of mutual funds under common management or managed by an affiliate, and to allow top funds to pay brokerage commissions for the purchase and sale of the ETF series -- Underlying ETF series are subject to NI 81-102, and underlying funds are not commodity pools under NI 81-104 -- Relief subject to terms and conditions as set out in the decision document.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.1(1), 2.2(1)(a), 2.5(2)(e), 2.6(a), 9.1, 9.2, 9.3, 9.4, 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 14.1 and 19.1.
May 17, 2018
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 BMO INVESTMENTS INC.
DECISION
Background
The principal regulator in the Jurisdiction has received an application from BMO Investments Inc. (together with its affiliates, the Filer) on behalf of:
(a) the BMO mutual funds listed in Schedule A (collectively, the Proposed ETF Funds), each of which offers an exchange-traded series, and such other exchange-traded series mutual funds as are managed and may be managed by the Filer now or in the future and that are structured in the same manner as the Proposed ETF Funds (the Other Funds) and together with the Proposed ETF Funds, the Funds and each individually, a Fund) for a decision under the securities legislation of the Jurisdiction (the Legislation) that:
a. permits each Fund to borrow cash from the custodian of the Fund (the Custodian) and, if required by the Custodian, to provide a security interest over any of its portfolio assets as a temporary measure to fund the portion of any distribution payable to Securityholders (as defined below) that represents, in the aggregate, amounts that are owing to, but not yet been received by, the Fund (the Borrowing Requirement); and
b. permits the Filer and each Fund to treat the ETF Securities and the Mutual Fund Securities (as defined below) as if such securities were separate funds in connection with their compliance with the provisions of Parts 9, 10 and 14 of NI 81-102 (the Sales and Redemptions Requirements)
(collectively, the ETF Exemptions);
(b) existing mutual funds managed by the Filer (the Existing Top Funds) and additional mutual funds that may be managed by the Filer now or in the future (together with the Existing Top Funds, the Top Funds) for a decision under the Legislation that:
a. permits each Top Fund to purchase an ETF Security of, or enter into a specified derivatives transaction with respect to, a Fund, the ETF Securities of which are not "index participation unit" (IPUs), as such term is defined in NI 81-102 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 ETF Securities (the Concentration Restriction);
b. permits each Top Fund to purchase an ETF Security, the ETF Securities of which are not IPUs such that, after the purchase, the Top Fund would hold ETF Securities representing more than 10% of:
i. the votes attaching to the outstanding voting securities of the Fund; or
ii. the outstanding equity securities of the Fund (the Control Restriction); and
c. permits each Top Fund to pay brokerage commissions in relation to its purchase and sale on the TSX or another Marketplace (as defined below) of ETF Securities (the Payment of Fees Restrictions)
(collectively, the Top Fund Exemptions, and together with the ETF Exemptions, the Exemption Sought).
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 section 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).
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.
Affiliate Dealer means a registered dealer that is an affiliate of an Authorized Dealer or Designated Broker and that participates in the re-sale of Creation Units (as defined below) from time to time.
Authorized Dealer means a registered dealer that has entered, or intends to enter, into an agreement with the manager of a Fund authorizing the dealer to subscribe for, purchase and redeem Creation Units from one or more Funds on a continuous basis from time to time.
Basket of Securities means, in relation to a Fund, a group of securities or assets representing the constituents of the Fund.
Designated Broker means a registered dealer that has entered, or intends to enter, into an agreement with the Filer to perform certain duties in relation to the ETF Securities, including the posting of a liquid two-way market for the trading of the Fund's ETF Securities on the TSX or another Marketplace.
ETF Securities means securities of an ETF Series of a Fund that are listed or will be listed on the TSX or another Marketplace and that will be distributed pursuant to a simplified prospectus prepared in accordance with NI 81-101 and Form 81-101F1.
ETF Series means an exchange-traded series of a Fund.
Form 41-101F2 means Form 41-101F2 Information Required in an Investment Fund Prospectus.
Form 81-101F1 means Form 81-101F1 Contents of Simplified Prospectus.
Marketplace means a "marketplace" as defined in National Instrument 21-101 Marketplace Operation that is located in Canada.
Mutual Fund Securities means securities of a non-exchange-traded series of a Fund that are or will be distributed pursuant to a simplified prospectus prepared in accordance with NI 81-101 and Form 81-101F1.
NI 41-101 means National Instrument 41-101 General Prospectus Requirements.
NI 81-101 means National Instrument 81-101 Mutual Fund Prospectus Disclosure.
Other Dealer means a registered dealer that acts as authorized dealer or designated broker to exchange-traded funds that are not managed by the Filer and that has received relief under a Prospectus Delivery Decision.
Prescribed Number of ETF Securities means, in relation to a Fund, the number of ETF Securities of the Fund determined by the Filer from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.
Prospectus Delivery Decision means a decision granting relief from the Prospectus Delivery Requirement to an Affiliate Dealer, Authorized Dealer, Designated Broker or Other Dealer dated August 24, 2015 and any subsequent decision granted to an Affiliate Dealer, Authorized Dealer, Designated Broker or Other Dealer that grants similar relief.
Prospectus Delivery Requirement means the requirement that a dealer, not acting as agent of the purchaser, who receives an order or subscription for a security offered in a distribution to which the prospectus requirement of the Legislation applies, send or deliver to the purchaser or its agent, unless the dealer has previously done so, the latest prospectus and any amendment either before entering into an agreement of purchase and sale resulting from the order or subscription, or not later than midnight on the second business day after entering into that agreement.
Securityholders means beneficial or registered holders of ETF Securities or Mutual Fund Securities, as applicable.
TSX means the Toronto Stock Exchange.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. BMO Investments Inc. is a corporation governed by the laws of Canada with its head office in Toronto, Ontario.
2. BMO Investments Inc. is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, and as a mutual fund dealer in each of the Jurisdictions.
3. The Filer is, or will be, the investment fund manager of each Fund.
4. Neither the Filer nor any of the existing Top Funds is in default of securities legislation in any of the Jurisdictions.
The Top Funds
5. The Top Funds are, or will be, open-ended mutual funds, including exchange-traded funds, organized and governed by the laws of a Jurisdiction or the laws of Canada.
6. The Top Funds are, or will be, governed by the provisions of NI 81-102, subject to any exemption therefrom that has been, or may be, granted by the securities regulatory authorities.
7. Each Top Fund distributes, or will distribute, some or all of its securities pursuant to a simplified prospectus prepared pursuant to NI 81-101 and Form 81-101F1 or a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2.
8. The Top Funds are, or will be, reporting issuers in each of the Jurisdictions in which their securities are distributed.
9. Each Top Fund wishes to have the ability to invest up to 100% of its net asset value in the ETF Securities of one or more Funds.
10. Each investment by a Top Fund in the ETF Securities will be made in accordance with the investment objectives of the Top Fund and will represent the business judgement of responsible persons uninfluenced by considerations other than the best interest of the Top Fund.
11. The Top Funds do not, and will not, sell short the ETF Securities.
The Funds
12. Each Proposed ETF Fund is established under the laws of Ontario as an investment fund that is an open-ended mutual fund trust. The Funds will be either trusts or corporations or classes thereof governed by the laws of the Jurisdiction. Each Fund is, or will be, a reporting issuer in the Jurisdictions in which its securities are distributed. Each Fund offers, or will offer, ETF Securities and Mutual Fund Securities.
13. Subject to any exemptions therefrom that have been, or may be, granted by the applicable securities regulatory authorities, each Fund is, or will be, subject to NI 81-102 and Securityholders will have the right to vote at a meeting of Securityholders in respect of matters prescribed by NI 81-102.
14. The Proposed ETF Funds currently offer one or more of Series A, Series F, Series D, Series I and Advisor Series securities. These Mutual Fund Securities and the ETF Securities of the Proposed ETF Funds are currently qualified for distribution under a simplified prospectus dated May 4, 2018.
15. The TSX has conditionally approved the listing of the ETF Securities of the Proposed ETF Funds on the TSX. The Filer will apply to list any ETF Securities of any Other Funds on the TSX or another Marketplace and will not file a final prospectus for any of the Other Funds in respect of the ETF Securities until the TSX or other applicable Marketplace has conditionally approved the listing of the ETF Securities.
The ETF Exemptions
16. ETF Securities will be distributed on a continuous basis in one or more of the Jurisdictions under a prospectus. ETF Securities may generally only be subscribed for or purchased directly from the Funds (Creation Units) by Authorized Dealers or Designated Brokers. Generally, subscriptions or purchases may only be placed for a Prescribed Number of ETF Securities (or a multiple thereof) on any day when there is a trading session on the TSX or other Marketplace. Authorized Dealers or Designated Brokers subscribe for Creation Units for the purpose of facilitating investor purchases of ETF Securities on the TSX or another Marketplace.
17. In addition to subscribing for and re-selling Creation Units, Authorized Dealers, Designated Brokers and Affiliate Dealers will also generally be engaged in purchasing and selling ETF Securities of the same class or series as the Creation Units in the secondary market. Other Dealers may also be engaged in purchasing and selling ETF Securities of the same class or series as the Creation Units in the secondary market despite not being an Authorized Dealer, Designated Broker or Affiliate Dealer.
18. Each Designated Broker or Authorized Dealer that subscribes for Creation Units must deliver, in respect of each Prescribed Number of ETF Securities to be issued, a Basket of Securities and/or cash in an amount sufficient so that the value of the Basket of Securities and/or cash delivered is equal to the net asset value of the ETF Securities subscribed for next determined following the receipt of the subscription order. In the discretion of the Filer, the Funds may also accept subscriptions for Creation Units in cash only, in securities other than Baskets of Securities and/or in a combination of cash and securities other than Baskets of Securities, in an amount equal to the net asset value of the ETF Securities subscribed for next determined following the receipt of the subscription order.
19. Upon notice given by the Filer from time to time and, in any event, not more than once quarterly, a Designated Broker may be contractually required to subscribe for Creation Units of a Fund for cash in an amount not to exceed a specified percentage of the net asset value of the Fund or such other amount established by the Filer.
20. The Designated Brokers and Authorized Dealers will not receive any fees or commissions in connection with the issuance of Creation Units to them. On the issuance of Creation Units, the Filer or the Fund may, in the Filer's discretion, charge a fee to a Designated Broker or an Authorized Dealer to offset the expenses incurred in issuing the Creation Units.
21. Each Fund will appoint a Designated Broker to perform certain other functions, which include standing in the market with a bid and ask price for ETF Securities for the purpose of maintaining liquidity for the ETF Securities.
22. Except for Authorized Dealer and Designated Broker subscriptions for Creation Units, as described above, and other distributions that are exempt from the Prospectus Delivery Requirement under the Legislation, ETF Securities generally will not be able to be purchased directly from a Fund. Investors are generally expected to purchase and sell ETF Securities, directly or indirectly, through dealers executing trades through the facilities of the TSX or another Marketplace. ETF Securities may also be issued directly to Securityholders upon a reinvestment of distributions of income or capital gains.
23. Securityholders that are not Designated Brokers or Authorized Dealers that wish to dispose of their ETF Securities may generally do so by selling their ETF Securities on the TSX or other Marketplace, through a registered dealer, subject only to customary brokerage commissions. A Securityholder that holds a Prescribed Number of ETF Securities or multiple thereof may exchange such ETF Securities for Baskets of Securities and/or cash in the discretion of the Filer. Securityholders may also redeem ETF Securities for cash at a redemption price equal to 95% of the closing price of the ETF Securities on the TSX or other Marketplace on the date of redemption, subject to a maximum redemption price of the applicable net asset value per ETF Security.
Fund of Fund Investments
24. No Fund will hold more than 10% of its net asset value in securities of another investment fund unless the securities of the other investment fund are securities of a money market fund, as defined in NI 81-102, or are IPUs.
25. No Fund will pay management or incentive fees which to a reasonable person would duplicate a fee payable by the applicable Top Fund for the same service.
26. All brokerage costs related to trades in ETF Securities will be borne by the Top Funds in the same manner as any other portfolio transactions made on the exchange.
27. The ETF Securities are highly liquid, as the Designated Broker acts as an intermediary between investors and each Fund, standing in the market with bid and ask prices for such ETF Securities to maintain a liquid market for them.
28. Each Top Fund and each Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) generally and in respect of conflicts of interest matters arising from trades of securities of a Top Fund or a Fund.
29. If a Top Fund makes a trade in ETF Securities with or through the Filer acting as dealer, the Filer will comply with its obligations under NI 81-107 in respect of any proposed related party transactions. All such related party transactions will be disclosed to securityholders of the relevant Top Fund in its management report of fund performance.
Borrowing Requirement
30. Section 2.6(a)(i) of NI 81-102 prevents a mutual fund from borrowing cash or providing a security interest over its portfolio assets unless the transaction is a temporary measure to accommodate redemption requests or to settle portfolio transactions and does not exceed five percent of the net assets of the mutual fund. As a result, a Fund is not permitted under section 2.6(a)(i) to borrow from the Custodian to fund distributions under the Distribution Policy (as defined below).
31. Each Fund will make distributions on a monthly, quarterly or annual basis or at such frequency as the Filer may, in its discretion, determine appropriate, may make additional distributions and, in each taxation year, will distribute sufficient net income and net realized capital gains so that it will not be liable to pay income tax under Part I of the Income Tax Act (Canada) (collectively, the Distribution Policy).
32. Amounts included in the calculation of net income and net realized capital gains of a Fund for a taxation year that must be distributed in accordance with the Distribution Policy sometimes include amounts that are owing to but have not actually been received by the Fund from the issuers of securities held in the Fund's portfolio (Issuers).
33. While it is possible for a Fund to maintain a portion of its assets in cash or to dispose of securities in order to obtain any cash necessary to make a distribution in accordance with the Distribution Policy, maintaining such a cash position or making such a disposition (which would generally be followed, when the cash is actually received from the Issuers, by an acquisition of the same securities) impacts the Fund's performance. Maintaining assets in cash or disposing of securities means that a portion of the net asset value of the Fund is not invested in accordance with its investment objective.
34. The Filer is of the view that it is in the interests of a Fund to have the ability to borrow cash from the Custodian and, if required by the Custodian, to provide a security interest over its portfolio assets as a temporary measure to fund the portion of any distribution payable to Securityholders that represents, in the aggregate, amounts that are owing to, but have not yet been received by, the Fund from the Issuers. While such borrowing will have a cost, the Filer expects that such costs will be less than the reduction in the Fund's performance if the Fund had to hold cash instead of securities in order to fund the distribution.
Sales and Redemptions Requirements
35. Parts 9, 10 and 14 of NI 81-102 do not contemplate both Mutual Fund Securities and ETF Securities being offered in a single fund structure. Accordingly, without the Exemption Sought, the Filer and the Funds would not be able to technically comply with those parts of the Instrument.
36. The Exemption Sought will permit the Filer and the Funds to treat the ETF Securities and the Mutual Fund Securities as if such securities were separate funds in connection with their compliance with Parts 9, 10 and 14 of NI 81-102. The Exemption Sought will enable each of the ETF Securities and Mutual Fund Securities to comply with Parts 9, 10 and 14 of NI 81-102 as appropriate for the type of security being offered.
Top Fund Exemptions
37. An investment in an ETF Series by a Top Fund is an efficient and cost effective alternative to administering one or more investment strategies similar to that of the ETF Series.
38. An investment in an ETF Series by a Top Fund should pose little investment risk to the Top Fund because each ETF Series will be subject to NI 81-102, subject to any exemption therefrom granted by the securities regulatory authorities.
39. As the ETF Securities are not IPUs and the purchase of the ETF Securities is not made in accordance with section 2.5 of NI 81-102, absent the Exemption Sought, an investment by a Top Fund in ETF Securities does not qualify for the exemptions set out in:
(a) section 2.1(2)(c) of NI 81-102 from the Concentration Restriction;
(b) section 2.1(2)(d) of NI 81-102 from the Concentration Restriction
(c) section 2.2(1.1)(a) of NI 81-102 from the Control Restriction; and
(d) section 2.2(1.1)(b) of NI 81-102 from the Control Restriction.
Concentration Restriction
40. The Exemption Sought will permit the Filer to invest more than 10% of its net asset value in a Fund the ETF Securities of which are not IPUs. The Exemption Sought will only grant each Top Fund relief from the Concentration Restriction in respect of the Top Fund's direct or indirect holdings of ETF Securities.
41. The Exemption Sought will not relieve a Top Fund from the obligation to comply with the Concentration Restriction in respect of the Top Fund's indirect holdings in ETF Securities held by the applicable Fund. Each Top Fund will comply with the Concentration Restriction in respect of the Top Fund's indirect holdings in ETF Securities held by any Fund in accordance with sections 2.1(3) and (4) of NI 81-102.
Control Restriction
42. Due to the potential size disparity between the Top Funds and the ETF Series of the Funds, it is possible that a relatively small investment, on a percentage of net asset value basis, by a relatively larger Top Fund in ETF Securities which are not IPUs could result in such Top Fund holding ETF Securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the applicable Fund; or (ii) the outstanding equity securities of that Fund, contrary to the Control Restriction.
Payment of Fees Restriction
43. It is anticipated that many of the trades in ETF Securities conducted by a Top Fund will not be of the size necessary for the Top Fund to be eligible to purchase or redeem a Prescribed Number of ETF Securities directly from or to, as the case may be, the Fund. As such, it is anticipated that many of the trades in ETF Securities by a Top Fund will be conducted in the secondary market through the TSX or another Marketplace.
44. The Exemption Sought will permit a Top Fund to pay any brokerage fees incurred in connection with such a trade when a Top Fund buys or sells ETF Securities on the TSX or another Marketplace.
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.
1. The decision of the principal regulator under the Legislation is that the Exemption Sought from the Borrowing Requirement is granted, provided that the Filer will be in compliance with the following conditions:
a. the borrowing by a Fund in respect of a distribution does not exceed the portion of the distribution that represents, in the aggregate, amounts that are payable to the Fund but have not been received by the Fund from the Issuers and, in any event, does not exceed five percent of the net assets of the Fund;
b. the borrowing is not for a period longer than 45 days;
c. any security interest in respect of the borrowing is consistent with industry practice for the type of borrowing and is only in respect of amounts owing as a result of the borrowing;
d. a Fund does not make any distribution to Securityholders where the distribution would impair the Fund's ability to repay any borrowing to fund distributions; and
e. the final prospectus of the Funds discloses the potential borrowing, the purpose of the borrowing and the risks associated with the borrowing.
2. The decision of the principal regulator under the Legislation is that the Exemption Sought from the Sales and Redemptions Requirements is granted, provided that the Filer will be in compliance with the following conditions:
a. with respect to its Mutual Fund Securities, each Fund complies with the provisions of Parts 9, 10 and 14 of NI 81-102 that apply to mutual funds that are not exchange-traded mutual funds; and
b. with respect to its ETF Securities, each Fund complies with the provisions of Parts 9 and 10 of NI 81-102 that apply to exchange-traded mutual funds.
3. The decision of the principal regulator under the Legislation is that the Exemption Sought in respect of the Top Fund Exemptions is granted, provided that the Filer will be in compliance with the following conditions:
a. the investment by a Top Fund in ETF Securities is in accordance with the investment objectives of the Top Fund;
b. a Top Fund does not short sell ETF Securities;
c. no Fund is a commodity pool governed by National Instrument 81-104 Commodity Pools;
d. other than exemptive relief granted in favour of a Fund, the Fund complies with the requirements of:
i. section 2.3 of NI 81-102 regarding the purchase of physical commodities;
ii. sections 2.7 and 2.8 of NI 81-102 regarding the purchase, sale or use of specified derivatives; and
iii. subsections 2.6(a) and 2.6(b) of NI 81-102 with respect to the use of leverage;
e. in connection with the Exemption Sought from the Concentration Restriction, each Top Fund shall, for each investment it makes in ETF Securities, apply, to the extent applicable, subsections 2.1(3), 2.1(4) and 2.1(5) of NI 81-102 as if those provisions applied to a Top Fund's investments in ETF Securities, and, accordingly, limit a Top Fund's indirect holdings in securities of an issuer held by one or more Funds as required by, and in accordance with sections 2.1(3), 2.1(4) and 2.1(5) of NI 81-102;
f. the investment by a Top Fund in ETF Securities is made in accordance with section 2.5 of NI 81-102, with the exception of paragraph 2.5(2)(a) and, in respect only of brokerage fees incurred for the purchase and sale of ETF Securities by a Top Fund, paragraph 2.5(2)(e) of NI 81-102; and
g. the prospectus of each Top Fund discloses, or will disclose in the next renewal of its prospectus after the date of this decision, in the investment strategy section, the fact that the Top Fund has obtained the Exemption Sought to permit the relevant transactions on the terms described in this decision.
SCHEDULE A
PROPOSED ETF FUNDS
BMO Core Plus Bond Fund
BMO Global Multi-Sector Bond Fund
BMO Global Strategic Bond Fund
BMO Women in Leadership Fund