Sprott Asset Management L.P. and Sprott Diversified Yield Fund
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted to allow global fixed income fund to invest more than 10% of net assets in debt securities issued by a foreign government of supranational agency, subject to certain conditions. National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.1(1), 19.1.
May 3, 2011
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
SPROTT ASSET MANAGEMENT L.P.
(the Filer)
AND
IN THE MATTER OF
SPROTT DIVERSIFIED YIELD FUND
(the Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer and the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption pursuant to section 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) from subsection 2.1(1) of NI 81-102, which prohibits a mutual fund from investing more than 10% of the net asset value of the fund, taken at market value at the time of the transaction, in securities of any issuer (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for the 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
The decision is based on the following facts represented by the Filer:
1. The Filer is a limited partnership established under the laws of the Province of Ontario and is registered as an adviser in the category of portfolio manager in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Newfoundland and Labrador and as an exempt market dealer in Ontario. The Filer is not in default of securities legislation in any province or territory of Canada.
2. The Filer is the manager and portfolio adviser of the Fund, the securities of which are qualified for distribution in each province and territory of Canada under a simplified prospectus and annual information form filed with the applicable securities regulatory authorities. The Fund is a reporting issuer and is not in default of securities legislation in any of the jurisdictions in Canada.
3. The Fund's investment objective is to maximize the total return of the Fund and to provide income by investing primarily in debt and debt-like securities of corporate and government issuers from around the world.
4. The portfolio adviser will achieve the Fund's investment objective by taking a flexible approach in investing in debt instruments and the allocation will depend on the portfolio adviser's view of economic and market conditions. In addition, the portfolio adviser will select the Fund's investments in an effort to take advantage of the credit cycle and the differences in currencies, interest rates and credits between countries based on global macroeconomic and political analysis. Capital is allocated based on the portfolio adviser's assessment of anticipated market opportunities and expected risk reward profile.
5. The Fund would like to invest a portion of its assets in the Foreign Government Securities (as defined hereinafter).
6. Section 2.1(1) of NI 81-102 prohibits the Fund from purchasing a security of an issuer, other than a "government security" as defined in NI 81-102 or a security issued by a clearing corporation, if immediately after the purchase more than 10% of the net asset value of the Fund, taken at market value at the time of the purchase, would be invested in securities of the issuer.
7. To achieve the investment objective of the Fund, the Fund wishes to have the ability to invest up to:
(a) 35% of the Fund's net asset value, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by a permitted supranational agency (as such term is defined in NI 81-102) or governments other than the government of Canada, the government of a jurisdiction or the government of the United States of America and are rated "AAA" by Standard & Poor's, or have an equivalent rating by one or more other approved credit rating organizations; and
(b) 20% of the Fund's net asset value, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by a permitted supranational agency (as such term is defined in NI 81-102) or governments other than the government of Canada, the government of a jurisdiction or the government of the United States of America and are rated "AA" by Standard & Poor's, or have an equivalent rating by one or more other approved credit rating organizations
(such evidences of indebtedness are collectively referred to as Foreign Government Securities).
8. The Foreign Government Securities are not within the meaning of "government securities" as such term is defined in NI 81-102. Therefore, absent the Exemption Sought, the Fund could not invest in the Foreign Government Securities.
9. The Filer believes that the Exemption Sought will be in the best interest of the Fund as it will enhance the ability of the Fund to pursue and achieve its investment objective.
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 Exemption Sought is granted provided that:
(a) the Fund may only invest up to:
(i) 35% of the proportion of its net asset value then invested in evidences of indebtedness, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies (as defined in NI 81-102) or governments other than the government of Canada, the government of a jurisdiction, or the government of the United States of America and are rated "AAA" by Standard & Poor's, or have an equivalent rating by one or more other approved credit rating organizations; and
(ii) 20% of the proportion of its net asset value then invested in evidences of indebtedness, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies (as defined in NI 81-102) or governments other than the government of Canada, the government of a jurisdiction, or the government of the United States of America and are rated "AA" by Standard & Poor's, or have an equivalent rating by one or more other approved credit rating organizations;
(b) subparagraphs (i) and (ii) above shall not be combined for any one issuer;
(c) the securities that are purchased pursuant to this Decision are traded on a mature and liquid market;
(d) the acquisition of the securities purchased pursuant to this Decision is consistent with the fundamental investment objectives of the Fund;
(e) the simplified prospectus of the Fund discloses any additional risks associated with the concentration of the net assets of the Fund in securities of fewer issuers, such as the potential additional exposure to the risk of de-fault of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which that issuer is located; and
(f) the simplified prospectus or annual information form of the Fund discloses, in the investment strategy section, the details of the Exemption Sought along with the conditions imposed and the type of securities covered by this Decision.