Burgundy Asset Management Ltd. et al.
Headnote
Relief granted from mutual fund investment restrictions in clause 111(2)(b), subclause 111(2)(c)(i) and subsection 111(3) of the Act, and from the management company reporting requirements in clauses 117(1)(a) and (d) of the Act, in connection with proposed actively managed investments by pooled funds in underlying pooled funds and mutual funds under common management - Fund manager may have significant interest in underlying fund as a result of investing seed capital in underlying fund - To the extent a top pooled fund would be a "related person or company" of an underlying mutual fund, the fund manager would have to report every sale of securities made from the underlying mutual fund to the top pooled fund - Relief granted subject to compliance with certain conditions.
Statutes Cited
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c)(i), 111(3), 113, 117(1)(a) and (d), 117(2).
January 22, 2008
IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990,
CHAPTER S.5, AS AMENDED (the "Act")
AND
IN THE MATTER OF
BURGUNDY ASSET MANAGEMENT LTD.
(the "Filer")
AND
BURGUNDY BALANCED PENSION FUND AND
BURGUNDY BALANCED FOUNDATION FUND
(the "Existing Top Funds")
ORDER
Background
The Ontario Securities Commission ("Commission") has received an application from the Filer on its behalf, and on behalf of the Existing Top Funds and such other mutual funds that are established and managed by the Filer after the date of this Order which are sold pursuant to exemptions from the prospectus requirement (the "Future Top Funds" and together with the Existing Top Funds the "Top Funds"), for an order permitting the Top Funds to invest in other mutual funds that are established and managed by the Filer from time to time (collectively, the "Underlying Funds"):
(a) pursuant to section 113 of the Act, exempting the Top Funds from the restrictions in clause 111(2)(b), subclause 111(2)(c)(i) and subsection 111(3) of the Act, prohibiting a mutual fund from knowingly making or holding an investment,
(i) in any person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder; or
(ii) in an issuer in which any officer or director of the mutual fund, its management company or distribution company or an associate of any of them, has a significant interest; and
(b) pursuant to subsection 117(2) of the Act, exempting the Filer from the requirements under clauses 117(1)(a) and 117(1)(d) of the Act to file a report relating to a purchase or sale of securities between a mutual fund and any related person or company, or any transaction in which, by arrangement other than an arrangement relating to insider trading in portfolio securities, a mutual fund is a joint participant with one or more of its related persons or companies, in respect of each mutual fund to which it provides services or advice, within 30 days after the end of a month in which it occurs
(collectively, the "Requested Relief").
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this Order unless they are defined in this Order.
NI 81-102 means National Instrument 81-102 Mutual Funds;
Pooled Funds means mutual funds managed by the Filer from time to time that are sold in Ontario pursuant to exemptions from the prospectus requirement; and
Public Funds means mutual funds managed by the Filer from time to time that are qualified and distributed under a simplified prospectus.
Representations
This Order is based on the following facts as represented by the Filer on behalf of the Top Funds:
1. The Filer is a corporation incorporated under the laws of Ontario. The Filer is the trustee, advisor and manager of the Existing Top Funds and is or will be the manager of the Future Top Funds and the Underlying Funds.
2. Each Existing Top Fund is, and each Future Top Fund will be, an open-ended mutual fund. The Existing Top Funds are not, and the Future Top Funds will not be, reporting issuers in Ontario. The Top Funds are or will be Pooled Funds.
3. Each Underlying Fund is or will be an open-ended mutual fund. The Underlying Funds are or will be either Pooled Funds or Public Funds.
4. Currently, the Filer has an exemption under the Act and NI 81-102 (the "July 2004 Exemption") permitting its Public Funds to invest in underlying Pooled Funds using an active fund-of-fund structure.
5. The Filer also has an exemption under the Act permitting its Pooled Funds to invest in other mutual funds managed by the Filer in fixed percentages using a passive fund-of-fund structure.
6. It is proposed that the Top Funds obtain the Requested Relief for the purpose of investing in the Underlying Funds using an active fund-of-fund structure.
7. The Filer wishes to actively manage each Top Fund's investments in any Underlying Fund with discretion to buy and sell securities of the Underlying Fund, selected in accordance with the Top Fund's investment objectives, as well as alter its holdings in any Underlying Fund in which it invests.
8. Each Top Fund's investment in securities of an Underlying Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund.
9. The Filer does not charge and will not charge any management fee or incentive fee to the Top Funds or the Underlying Funds. However, each client of the Filer that invests in any mutual fund managed by the Filer enters into an agreement, under which the Filer has full authority to manage the client's assets, and the client pays a fee to the Filer directly in respect of all assets of the client under such management ("Investment Counsel Agreement"). As a result, no duplication of management fees can occur where a Top Fund invests in an Underlying Fund. Any incentive fees are charged by the Filer to the client and are not charged to any Top Fund that invests in an Underlying Fund.
10. In accordance with each Investment Counsel Agreement, the Filer exercises its discretion to allocate a client's portfolio between different models that represent particular sectors of various Canadian and global securities markets. This is achieved by allocating assets in client accounts among individual securities, the Top Funds, other mutual funds managed by the Filer and the Underlying Funds.
11. The Filer does not charge or receive any sales fees or redemption fees in relation to the purchase of securities of the Underlying Funds by the Top Funds. As a result, no duplication of any sales fees or redemption fees can occur where a Top Fund invests in an Underlying Fund.
12. Because of the proposed size of the investment by the Top Funds in the Underlying Funds, each Top Fund could, either alone or together with the other Top Funds, become a substantial security holder of each Underlying Fund. Accordingly, each Top Fund is prohibited by clause 111(2)(b) from making an investment in the Underlying Funds unless the requested exemption is granted.
13. It is expected that the Filer may have a significant interest in any Underlying Fund that it establishes and manages in the future, at the time of the establishment of the Underlying Fund as a result of investing seed capital in such Underlying Fund. Accordingly, each Top Fund is or will be prohibited by clause 111(2)(c)(i) of the Act from investing in such Underlying Fund, unless the requested exemption is granted.
14. Further to the July 2004 Exemption permitting the Public Funds to invest in underlying Pooled Funds, a Public Fund may individually hold in excess of 10 per cent of the voting securities of a Pooled Fund, or may together with related mutual funds hold in excess of 20 per cent of the voting securities of a Pooled Fund. In those circumstances, the Pooled Fund would be deemed a "related person or company" (as that term is defined in the Act) of the Public Fund.
15. Subsection 117(1) of the Act requires the Filer to report every transaction of purchase and sale of securities between its Public Funds and any related person or company. To the extent a top Pooled Fund would be a "related person or company" of an underlying Public Fund, the Filer would have report to the Commission every sale of securities made from that underlying Public Fund to the top Pooled Fund, unless the requested exemption is granted.
16. The Filer will, upon request, provide unitholders of a Top Fund with a copy of the simplified prospectus or, if available, offering memorandum (or other similar document), and the audited annual financial statements and semi-annual financial statements, of each Underlying Fund in which the Top Fund invests.
Decision
The Commission is satisfied that the proposed investments by the Top Funds represents the business judgement of responsible persons uninfluenced by considerations other than the best interests of a mutual fund and that it would not be prejudicial to the public interest to grant the Requested Relief.
The Commission orders that the Requested Relief is granted to the Top Funds and the Filer for the purpose of allowing the Top Funds to make or hold investments in securities of the Underlying Funds provided that:
(a) securities of the Top Funds are distributed in Ontario solely to investors pursuant to an exemption from the prospectus requirements;
(b) the Top Funds do not vote on any of the securities they hold of the Underlying Funds, but the Filer may, if it chooses, arrange for all of the securities of the Underlying Funds held by a Top Fund to be voted by the beneficial owners of securities of the Top Funds;
(c) the Filer will not charge a management fee or an incentive fee to a Top Fund that invests in an Underlying Fund;
(d) the Filer will not charge a sales fee or a redemption fee to a Top Fund that invests in an Underlying Fund; and
(e) if available, the offering memorandum (or other similar document) of a Top Fund will disclose:
(i) that the Top Fund may purchase units of the Underlying Funds;
(ii) the fact that both the Top Fund and the Underlying Funds are managed by the Filer; and
(iii) the approximate or maximum percentage of net assets of the Top Fund that is dedicated to investment in units of the Underlying Funds.