Tralucent Asset Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- alternative mutual funds granted relief from subsection 6.1(1) of NI 81-102 to permit the Funds to deposit portfolio assets with a borrowing agent that is not the Funds' custodian or sub-custodian in connection with a short sale of securities, if the aggregate market value of the portfolio assets held by the borrowing agent after such deposit, excluding the aggregate market value of the proceeds from outstanding short sales of securities held by the borrowing agent, (i) in the case of a Fund that is a mutual fund, other than an alternative mutual fund, does not exceed 10% of the NAV of the Fund and (ii) in the case of a Fund that is an alternative mutual fund does not exceed 25% of the NAV of the Fund at the time of the deposit -- relief subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss 6.1(1), 6.8.1 and 19.1.
July 20, 2023
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 TRALUCENT ASSET MANAGEMENT INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Tralucent Global Alt (Long/Short) Equity Fund (the Existing Fund) and any other mutual fund or alternative mutual fund that is or may be managed by the Filer now or in the future that offer ETF Securities (as defined below) either alone or along with Mutual Fund Securities (as defined below) (collectively, the Future Funds and together with the Existing Fund, the Funds, and each, a Fund), for a decision under the securities legislation of the Jurisdiction (the Legislation) that exempts each Fund from the requirement in subsection 6.1(1) of National Instrument 81-102 Investment Funds (NI 81-102) that, except as provided, all portfolio assets of a Fund be held under the custodianship of one qualified custodian, to permit the Fund to deposit portfolio assets with a borrowing agent that is not the Fund's custodian or sub-custodian in connection with a short sale of securities, if the aggregate market value of the portfolio assets held by the borrowing agent after such deposit, excluding the aggregate market value of the proceeds from outstanding short sales of securities held by the borrowing agent, (i) in the case of a Fund that is a mutual fund, other than an alternative mutual fund, does not exceed 10% of the net asset value (the NAV) of the Fund and (ii) in the case of a Fund that is an alternative mutual fund does not exceed 25% of the NAV of the Fund (the Short Sale Collateral Limit) at the time of the deposit (the Exemption Sought).
Under National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario 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 all of the provinces and territories of Canada other than Québec and Ontario (together with Ontario, the Jurisdictions).
Interpretation
Capitalized terms used herein have the meaning ascribed thereto below (or in MI 11-102, National Instrument 14-101 Definitions and NI 81-102, as applicable) unless otherwise defined in this decision.
(a) ETF Facts means an ETF facts document prepared, filed and delivered in accordance with Part 3B of National Instrument 41-101 General Prospectus Requirements.
(b) ETF Securities means securities of an exchange-traded class of a Fund that 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.
(c) Form 81-101F1 means Form 81-101F1 Contents of Simplified Prospectus.
(d) Fund Facts means a Fund facts document prepared, filed and delivered in accordance with Form 81-101F3 Contents of Fund Facts Document.
(e) Legislation means the securities legislation of each of the Jurisdictions, as applicable.
(f) Marketplace means a "marketplace" as defined in National Instrument 21-101 Marketplace Operation that is located in Canada.
(g) Mutual Fund Securities means securities of a non-exchange-traded class of a Fund that will be distributed pursuant to a simplified prospectus prepared in accordance with NI 81-101 and Form 81-101F1.
(h) NI 81-101 means National Instrument 81-101 Mutual Fund Prospectus Disclosure.
(i) Prime Broker means any entity that acts as a lender or borrowing agent, as the case may be, to one or more investment funds.
(j) Securityholders means beneficial or registered holders of Mutual Fund Securities or ETF Securities of a Fund, as applicable.
(k) TSX means the Toronto Stock Exchange.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation formed and organized under the laws of the Province Ontario. The head office of the Filer is located at 47 High Park Avenue, Toronto, Ontario, M6P 2R5.
2. The Filer is registered as a portfolio manager, an investment fund manager and as an exempt market dealer in Ontario, and as a portfolio manager and exempt market dealer in New Brunswick, Québec, Alberta and British Columbia.
3. The Filer is not a reporting issuer in any Jurisdiction and is not in default of the Legislation.
4. The Filer's principal business is that of a portfolio manager. It is an independently owned firm providing customized wealth management solutions to various clients in the Jurisdictions in which it is registered.
5. The Filer is also the investment fund manager and portfolio manager of the Existing Fund.
The Funds
6. Each Fund is or will be an open-ended mutual fund trust, governed by the laws of Ontario.
7. The Filer established the Existing Fund in March 2020 and previously offered its classes of units to qualified investors by means of the prospectus exemptions in National Instrument 45-106 Prospectus Exemptions on a private placement basis.
8. The Filer wishes to offer the Mutual Fund Securities and the ETF Securities of a Fund to interested retail investors by means of a simplified prospectus, Fund Facts and ETF Facts, as applicable, as a mutual fund or an alternative mutual fund that complies with the various requirements of NI 81-102 and all other applicable securities legislation, including NI 81-101, National Instrument 81-105 Mutual Fund Sales Practices, National Instrument 81-106 Investment Fund Continuous Disclosure and National Instrument 81-107 Independent review Committee for Investment Funds.
9. On April 19, 2023, a preliminary simplified prospectus, Fund Facts in respect of each class of Mutual Fund Securities and ETF Facts in respect of the ETF Securities of the Existing Fund were filed with the securities regulatory authorities in each of the Jurisdictions.
10. The Existing Fund and each Future Fund will be a reporting issuer in the Jurisdictions in which it offers its Mutual Fund Securities and ETF Securities.
11. The Mutual Fund Securities of the Existing Fund consist of Class A units, Class F units and Class M units. The ETF Securities of the Existing Fund consist of Class E units.
12. Subject to any exemptions that may be granted by the applicable securities regulatory authorities, each Fund will be subject to NI 81-102 and the Securityholders of each Fund will have the right to vote at a meeting of Securityholders in respect of any matter prescribed by NI 81-102.
13. The Filer has applied to list the ETF Securities of the Existing Fund on the TSX. The Filer will not file a final simplified prospectus for a Fund in respect of the ETF Securities of the Fund until the TSX or another applicable Marketplace has conditionally approved the listing of the ETF Securities of the Fund.
14. The Existing Fund is not in default of the Legislation.
Reasons for the Exemption Sought
15. As part of its investment strategies, each Fund that engages in short sales of securities is permitted to grant a security interest in favour of and to deposit pledged portfolio assets with its Prime Broker. If a Fund engages as its Prime Broker an entity that is not its custodian or sub-custodian, then a Fund may only deliver to its Prime Broker portfolio assets having a market value, in the aggregate, in the case of a Fund that is a mutual fund, other than an alternative mutual fund, of not more than 10% of the NAV of the Fund, or, in the case of a Fund that is an alternative mutual fund, not more than 25% of the NAV of the Fund, at the time of deposit.
16. A Prime Broker may not wish to act as the borrowing agent for a Fund that has the ability to sell securities short that have an aggregate market value of up to 50% of the Fund's NAV (or more if the Exemption Sought is granted) if the Prime Broker is only permitted to hold, as security for such transactions, portfolio assets having an aggregate market value, in the case of a Fund that is a mutual fund, other than an alternative mutual fund, that is not in excess of 10% of the NAV of the Fund, or, in the case of a Fund that is an alternative mutual fund, that is not in excess of 25% of the NAV of the Fund.
17. Prime Brokers that are qualified to act as a custodian or sub-custodian under NI 81-102 are not widely appointed as custodians or sub-custodians under NI 81-102 as it can be both operationally challenging and costly to appoint them to act in such capacity.
18. Given the typical collateral requirements that Prime Brokers impose on their customers who engage in the short sale of securities, if the Short Sale Collateral Limits apply, the Funds would need to retain multiple Prime Brokers in order to sell short securities to the extent permitted under Section 2.6.1 of NI 81-102 and, if granted, the Exemption Sought described above. Managing and overseeing relationships with multiple Prime Brokers introduces unnecessary operational and administrative complexities and additional costs of operation for the Funds.
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 each Fund otherwise complies with subsections 6.8.1(2) and (3) of NI 81-102.