CIBC Asset Management Inc. and the Top Funds
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to permit investment funds subject to NI 81-102 to invest in securities of related underlying investment funds that are not reporting issuers -- relief subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a), 2.5(2)(c) and 19.1.
June 1, 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 CIBC ASSET MANAGEMENT INC. (CAMI) AND IN THE MATTER OF THE TOP FUNDS (AS DEFINED BELOW)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the Application) from CAMI and its affiliates (collectively, the Filer) on behalf of each of the Filer, CIBC Canadian Bond Fund, Renaissance Canadian Bond Fund, Imperial Canadian Bond Fund (the Existing Top Funds) and other existing and future investment funds managed or to be managed by the Filer that is, or will be, reporting issuers subject to National Instrument 81-102 Investment Funds (NI 81-102) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) (the Future Top Funds, and together with the Existing Top Funds, the Top Funds).
The Filer intends for one or more Top Funds to invest, as the Filer considers in the best interest of the Top Fund and in accordance with its investment objectives and strategies, a portion of its assets in CIBC Long Term Private Debt Pool and CIBC Short Term Private Debt Pool, each an investment fund structured as a trust that is not currently subject to NI 81-102 or NI 81-107 (the Initial Underlying Funds), and/or in any other future investment fund that is, or will be, managed by the Filer and that is not subject to NI 81-102 or NI 81-107 (the Future Underlying Funds and, together with the Initial Underlying Funds, the Underlying Funds), and therefore has applied for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Top Funds from the following prohibitions in NI 81-102:
(a) section 2.5(2)(a) of NI 81-102, which prohibits an investment fund from purchasing or holding a security of another investment fund unless, if the investment fund is a mutual fund, other than an alternative mutual fund, either of the following applies: (i) the other investment fund is a mutual fund, other than an alternative mutual fund, that is subject to this Instrument; (ii) the other investment fund is an alternative mutual fund or a non-redeemable investment fund that is subject to this Instrument and, at the time of the purchase of that security, the investment fund holds no more than 10% of its net asset value in securities of alternative mutual funds and non-redeemable investment funds; and
(b) section 2.5(2)(c) of NI 81-102, which prohibits an investment fund from purchasing or holding a security of another investment fund unless the other investment fund is a reporting issuer in a jurisdiction.
(collectively, the Exemption Sought).
2. Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Québec, Prince Edward Island, Saskatchewan and Yukon (together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
3. CAMI is a corporation incorporated under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
4. CAMI is registered as a portfolio manager in all Jurisdictions, as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as a commodity trading manager in Ontario, and as a derivative portfolio manager in Québec.
5. The Filer is not in default of securities legislation in any Jurisdiction.
The Top Funds
6. Each Top Fund is, or will be, an investment fund to which NI 81-102 applies, and will be organized and governed by the laws of a Jurisdiction.
7. CAMI is the manager of the Existing Top Funds and CAMI, or an affiliate of CAMI, will be the manager of any Future Top Funds. To the extent that the Filer is the manager of any Future Top Fund, the representations set out in this decision will apply to the same extent to such Future Top Funds.
8. The securities of each of the Top Fund are, or will be, qualified for distribution in one or more of the Jurisdictions and distributed to investors pursuant to a simplified prospectus and Fund Facts, prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
9. Each Top Fund is, or will be, a reporting issuer under the securities legislation of one or more Jurisdictions.
10. The Existing Top Funds are not in default of the securities legislation of any Jurisdiction.
11. The simplified prospectus of each Top Fund discloses, or will disclose, in its description of the Top Fund's investment strategies that the Top Fund may invest up to 10% of its assets directly or indirectly in the Underlying Funds. This limit is consistent with the classification of the Underlying Funds as illiquid assets for purposes of NI 81-102.
12. Each Top Fund is, or will be, subject to NI 81-107 and the Filer has established, or will establish, an independent review committee (IRC) in order to review conflict of interest matters pertaining to its management of the Top Funds are required by NI 81-107.
The Underlying Funds
13. Each Initial Underlying Fund falls, and each Future Underlying Fund will fall, within the definition of "investment fund" under the Securities Act (Ontario).
14. CAMI is the manager of the Initial Underlying Funds and CAMI, or an affiliate of CAMI, will be the manager of any Future Underlying Funds. To the extent that CAMI or an affiliate of CAMI is the manager of any Future Underlying Funds, the representations set out in this decision will apply to the same extent to such Future Underlying Funds.
15. Each Initial Underlying Fund is an investment fund structured as a trust to which NI 81-102 and NI 81-107 will not apply, and will be organized and governed by the laws of a Jurisdiction. Future Underlying Funds may be structured as limited partnerships, trusts or corporations to which NI 81-102 and NI 81-107 will not apply, and will be governed by the laws of a jurisdiction of Canada and organized and governed by the laws of a Jurisdiction.
16. No Underlying Fund will prepare a simplified prospectus in accordance with NI 81-101 or a long form prospectus in accordance with NI 41-101.
17. The Underlying Funds are not, or will not be, reporting issuers in any of the Jurisdictions or listed on any recognized stock exchange.
18. Securities of the Underlying Funds will be distributed solely to investors pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 -- Prospectus Exemptions and the Legislation.
19. The Initial Underlying Funds are not in default of the securities legislation of any of the Canadian Jurisdictions.
20. The investment objective of the CIBC Long Term Private Debt Pool is to provide stable cash flows from long-lived assets by investing primarily in investment grade-quality Canadian bonds that are not publicly traded. The fund will focus on the infrastructure and power sectors with tactical allocations to other sectors within the private debt universe. Any non-Canadian dollar exposure will generally be hedged back to the Canadian dollar. The strategies employed use active management to add value relative to a long bond index designated by the manager.
21. The investment objective of the CIBC Short Term Private Debt Pool is to provide stable cash flows from short-lived assets by investing primarily in investment grade-quality Canadian bonds that are not publicly traded. The fund will focus on the infrastructure and power sectors with tactical allocations to other sectors within the private debt universe. Any non-Canadian dollar exposure will generally be hedged back to the Canadian dollar. The strategies employed use active management to add value relative to a short bond index designated by the manager.
22. The securities of each Underlying Fund are generally considered illiquid assets for purposes of NI 81-102. Securities of the Initial Underlying Funds are redeemable quarterly.
23. The Filer has one valuation policy for the calculation of NAV, which applies to both the Top Funds and the Underlying Funds managed by it. The Filer calculates NAV for the Underlying Funds in accordance with Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106).
24. The value of the underlying portfolio assets of each Initial Underlying Fund will be determined by a third party administrator that is independent of the Filer and the Top and Underlying Funds. The value of the underlying portfolio assets of each Initial Underlying Fund will be determined on at least a quarterly basis. Similar independent valuation will be carried out in respect of the underlying portfolio assets of each Future Underlying Fund.
25. Each Underlying Fund produces, and will produce, audited financial statements on an annual basis, in accordance with generally accepted accounting principles with a qualified auditing firm as the auditor of those financial statements.
26. No Top Fund will actively participate in the business or operations of an Underlying Fund.
Investments by Top Funds in the Underlying Funds
27. An investment by a Top Fund in an Underlying Fund will only be made if the investment is, or will be, compatible with the investment objectives of the Top Fund and allows, or will allow, the Top Fund to obtain exposure to asset classes in which the Top Fund may otherwise invest directly. Each Top Fund will comply with the investment restrictions and practices provided for in Part 2 of NI 81-102 in making such investments except where exempted pursuant to the Exemption Sought or other exemptive relief previously obtained.
28. The Filer believes that the investment by a Top Fund in an Underlying Fund will provide the Top Fund with an efficient and cost-effective manner of pursuing portfolio diversification and asset diversification instead of purchasing securities directly.
29. Investments by a Top Fund in an Underlying Fund will be effected at an objective price. The Filer's policies and procedures provide that an objective price, for this purpose, will be the NAV per security of the applicable Underlying Fund.
30. A Top Fund will not invest in an Underlying Fund unless the portfolio manager of the Top Fund believes that the liquidity of the Top Fund's portfolio is adequately managed through other strategies.
Generally
31. Since the Underlying Funds are not reporting issuers and are not subject to NI 81-102, the Top Funds are unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102 for investments by investment funds subject to NI 81-102 in other investment funds.
32. Absent the Exemption Sought, a Top Fund would by prohibited by section 2.5(2)(a) and 2.5(2)(c) from purchasing or holding securities of an Underlying Fund because the Underlying Funds (i) are not subject to NI 81-102; and (ii) are not reporting issuers in the Jurisdictions.
33. The Filer considers that investments in the Underlying Funds by the Top Funds raise "conflict of interest matters" within the meaning of NI 81-107 and therefore if the Exemption Sought is granted, the Filer will request approvals of the IRC for the proposed investments of the Top Funds in the Underlying Funds, including by way of standing instructions. No such investments will be made until the IRC provides its approvals under section 5.2 of NI 81-107.
34. The decision to permit the Top Funds to invest in the Underlying Funds represents CAMI's business judgment and is not influenced by factors other than the best interests of the Top Funds.
35. On an annual basis the financial statements of each Underlying Fund, are, or will be, audited by the Underlying Fund's external auditors, which audit includes independent confirmation of the fair value of each portfolio investment. Such appointed auditor also audits the value of the portfolio investments to ensure that they are accurately valued in accordance with the Underlying Fund's valuation policy. Such financial statements will be accessible in the ordinary course by the Filer.
36. Aside from the sections covered by the Exemption Sought, the Top Funds will comply with section 2.5 of NI 81-102 with respect to any investment in an Underlying Fund.
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) no Top Fund will actively participate in the business or operations of any Underlying Fund;
(b) each Top Fund will be treated similar to an arm's-length investor when making investments in each Underlying Fund, with such investment being accepted by the Underlying Fund on a fair and equitable basis as compared to all other third-party investors;
(c) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;
(d) the investments in the Underlying Funds are included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102 for a Top Fund;
(e) in respect of an investment by a Top Fund in an Underlying Fund, no management fees or incentive fees will be payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;
(f) in respect of an investment by a Top Fund in an Underlying Fund, no sales or redemption fees will be paid as part of the investment in the Underlying Fund;
(g) where applicable, a Top Fund's investment in an Underlying Fund, will be disclosed to investors in such Top Fund's quarterly portfolio holding reports, financial statements and fund facts;
(h) the prospectus of a Top Fund discloses, or will disclose in the next renewal or amendment thereto following the date of a decision evidencing the Exemption Sought, the fact that the Top Fund may invest in a related Underlying Fund, which are investment funds managed by the Filer;
(i) the IRC of a Top Fund will review and provide its approval, including by way of standing instructions, prior to the purchase of an Underlying Fund by the Top Fund in accordance with section 5.2(2) of NI 81-107. The Filer will comply with section 5.1 of NI 81-107 and the Filer and the IRC of the Top Fund will comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;
(j) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the holders of such securities, except that the Filer may arrange for the securities the Top Fund holds of an Underlying Fund to be voted by the beneficial owners of the securities of the Top Fund who are not the Filer or an officer, director or substantial securityholder of the Filer;
(k) a Top Fund will invest in, and redeem, each Underlying Fund at the NAV of the applicable securities of the Underlying Fund, which will be based on the valuation of the applicable portfolio assets to which the Underlying Fund has exposure, determined by a third party that is independent of the Filer and the Top and Underlying Funds; and
(l) a Top Fund will invest in a Future Underlying Fund only where it is managed by the Filer, structured in similar ways to the Initial Underlying Funds and the NAV of the Future Underlying Fund is based on a valuation that is determined by a third party that is independent of the Filer and the Top and Underlying Funds.