TD Asset Management Inc. and Its Affiliates

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- relief granted to permit investment funds subject to NI 81-102 to invest in securities of related underlying investment funds not subject to NI 81-102 and that are not reporting issuers, subject to conditions.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.5(2)(a) and (c), and 19.1.

January 13, 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 TD ASSET MANAGEMENT INC. (TDAM) AND ITS AFFILIATES (THE FILER)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) granting an exemption to each existing and future mutual fund managed by the Filer that is a reporting issuer to which National Instrument 81-102 Investment Funds (NI 81-102) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) apply (the Top Funds) from sections 2.5(2)(a) and (c) of NI 81-102 to permit each Top Fund to invest, within the restrictions concerning illiquid assets applicable to mutual funds in section 2.4 of NI 81-102, in securities of the following (the Exemption Sought):

(a) TD Emerald Private Debt Pooled Fund Trust and TD Greystone Mortgage Fund (the Existing Underlying Pooled Funds); and

(b) such other similar investment funds as the Existing Underlying Pooled Funds as may be established and managed by the Filer in the future which will also be mutual funds that are neither subject to NI 81-102 nor reporting issuers in any jurisdiction (the Future Underlying Pooled Funds, and together with the Existing Underlying Pooled Funds, the Underlying Pooled Funds, and together with the Top Funds, the Funds).

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;

(b) the Filer has provided notice that subsection 4.7(2) of Multilateral Instrument 11-102 Passport System (MI 11-102) that the Exemption Sought is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with the Jurisdiction, the Canadian Jurisdictions).

Interpretation

Terms defined in the Legislation, MI 11-102 and National Instrument 14-101 -- Definitions have the same meanings in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

TDAM

1. TDAM is a corporation continued under the laws of the province of Ontario.

2. TDAM is a wholly-owned subsidiary of The Toronto-Dominion Bank, a Schedule 1 Canadian chartered bank. The head office of TDAM is located in Toronto, Ontario.

3. TDAM is registered in: (i) each of the Canadian Jurisdictions as an adviser in the category of portfolio manager (PM) and as a dealer in the category of exempt market dealer; (ii) Ontario, Québec, Saskatchewan and Newfoundland and Labrador in the category of investment fund manager (IFM); (iii) Ontario in the category of commodity trading manager; and (iv) Québec as a derivatives portfolio manager.

4. TDAM, or an affiliate of TDAM, is or will be, the IFM of the Funds. TDAM, or an affiliate of TDAM, is or will be, the PM of the Funds.

5. TDAM is not in default of the securities law of any jurisdiction with respect to the subject matter of this application. However, TDAM has applied for routine exemptive relief to permit certain related party investments made by affiliates or associates of TDAM that are not directly related to the investments described in this Decision

6. An officer and/or director of the Filer, may have a "significant interest" (as such term is defined in section 110(2)(a) of the Securities Act (Ontario) (the Ontario Act)) in an Underlying Pooled Fund from time to time. A person or company who is a substantial security holder of a Top Fund, or of the Filer, may also have a significant interest in an Underlying Pooled Fund from time to time.

7. The Filer is, or will be, a "responsible person" of the Top Funds and the Underlying Pooled Funds, as that term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

The Top Funds

8. A Top Fund is, or will be, an investment fund, to which NI 81-102 applies, organized and governed by the laws of a Canadian Jurisdiction.

9. Each Top Fund has distributed, distributes, or will distribute, its securities pursuant to a simplified prospectus prepared pursuant to NI 81-101 Mutual Fund Prospectus Disclosure and Form 81-101F1 or a long form prospectus prepared pursuant to NI 41-101 General Prospectus Requirements and Form 41-101F2.

10. Securities of each Top Fund are, or will be, qualified for distribution in the Canadian Jurisdictions.

11. A Top Fund is, or will be, a reporting issuer under the securities legislation of one or more Canadian Jurisdictions.

12. None of the existing Top Funds are in default of securities legislation in any of the Canadian Jurisdictions.

13. The investment objectives and strategies of a Top Fund will permit the Top Fund to invest in one or more Underlying Pooled Funds.

14. Each Top Fund is subject to NI 81-107 and the Filer has established an independent review committee (an IRC) in order to review conflict of interest matters pertaining to the Top Funds as required by NI 81-107.

15. No Top Fund that will hold securities of an Underlying Pooled Fund will vote any of those securities.

The Underlying Pooled Funds

16. Each Underlying Pooled Fund is, or will be, a "mutual fund", as such term is defined under the Ontario Act, formed as a limited partnership, trust or class of shares of a corporation under the laws of Ontario, another jurisdiction of Canada, or a foreign jurisdiction.

17. The investment objective of TD Emerald Private Debt Pooled Fund Trust is to seek to provide income and preserve capital over the long term by investing primarily in private debt securities. TD Emerald Private Debt Pooled Fund Trust may also invest in other fixed and floating rate debt instruments.

18. The investments of TD Emerald Private Debt Pooled Fund Trust, which primarily consist of private debt securities, are primarily illiquid and the units of TD Emerald Private Debt Pooled Fund Trust therefore have limited liquidity.

19. The investment objective of TD Greystone Mortgage Fund is to provide a vehicle to invest in Canadian commercial real estate mortgages and to achieve superior long-term total returns while maintaining long-term stability of capital.

20. The investments of TD Greystone Mortgage Fund, which primarily consist of Canadian commercial real estate mortgages, are primarily illiquid and the units of TD Greystone Mortgage Fund therefore have limited liquidity.

21. The Existing Underlying Pooled Funds are not, and the Future Underlying Pooled Funds will not be, reporting issuers in any of the Canadian Jurisdictions or listed on any recognized stock exchange. Units of the Underlying Pooled Funds are, or will be, sold pursuant to exemptions from the prospectus requirements in accordance with National Instrument 45-106 Prospectus Exemptions.

22. The Existing Underlying Pooled Funds are not in default of the securities legislation of any of the Canadian Jurisdictions.

23. The Existing Underlying Pooled Funds are valued daily and redeemable monthly at a redemption price per unit equal to the net asset value per unit on the redemption date. A redemption request may be deferred:

(a) if, in the case of TD Emerald Private Debt Pooled Fund Trust, the redemption request would result in proceeds of more than TD Emerald Private Debt Pooled Fund Trust's forecast available liquidity; and

(b) if, in the case of TD Greystone Mortgage Fund, the redemption request would: (i) result in the material diminution in the unit value; (ii) require the sale of assets outside of established parameters; (iii) be contrary to law; (iv) exceed the aggregate of the cash and short-term equivalents of TD Greystone Mortgage Fund on the redemption date; or (v) result in the reduction in liquidity available for investment to a level below which that which the Filer determines to be required in order for TD Greystone Mortgage Fund to continue to meet its obligations as they become due.

24. The value of the portfolio assets of each Existing Underlying Pooled Fund is determined in accordance with Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure.

25. The value of the portfolio assets of TD Greystone Mortgage Fund is independently determined by a party that is arm's length to the Filer, each Underlying Pooled Fund and all other investment funds or vehicles managed by TDAM (the MF Independent Valuator) on a monthly basis. TD Greystone Mortgage Fund's auditor will not act as an MF Independent Valuator. TD Greystone Mortgage Fund's net asset value is based on the valuation of the portfolio assets determined by the MF Independent Valuator.

26. The value of the portfolio assets of TDEmerald Private Debt Pooled Fund Trust is currently determined utilizing valuation models and methodologies developed by the Filer specifically for private debt (the Private Debt Valuation Models). Private debt securities are classified as level 3 assets under IFRS 13 (Fair Value). Level 3 assets are infrequently traded with no available broker-dealer bid/ask quotes, and fair value cannot be determined using market prices. Instead, fair value is determined by using significant inputs that are not observable market data. TDAM uses a fair value price as calculated by a third-party valuation service utilizing the Private Debt Valuation Models. Such valuation service provider constructs daily corporate bond yield curves based on data gathered from thousands of bonds globally. Corporate bond yield curves are broken down by currencies and minor ratings (e.g., A+, A, A). Based on the inputs provided by TDAM, the valuation service discounts the cash flows of each security using a discount rate that is appropriate given the security's ranking, rating, weighted average life, currency and uniqueness premium to calculate the value of each security. The non-observable inputs provided by TDAM are the credit ratings and uniqueness premium for each security and any changes to the uniqueness premium. The application of the Private Debt Valuation Models and the inputs used in the Private Debt Valuation Models are overseen by an internal risk group of the Filer whose members do not include the portfolio management teams who make the investment decisions for TD Emerald Private Debt Pooled Fund Trust. The Private Debt Valuation Models may be adjusted from time to time by the Filer at its discretion.

27. A Future Underlying Pooled Fund will either:

(a) utilize a portfolio valuation process similar to that of TD Greystone Mortgage Fund referenced above (TD Greystone Mortgage Fund and such Future Underlying Pooled Funds, the Independently Valued Underlying Pooled Funds and each anIndependently Valued Underlying Pooled Fund); or

(b) utilize a portfolio valuation process similar to that of TD Emerald Private Debt Pooled Fund Trust referenced above (TD Emerald Private Debt Pooled and such Future Underlying Pooled Funds, the Internally Valued Underlying Pooled Funds and each an Internally Valued Underlying Pooled Fund).

28. No Top Fund will actively participate in the business or operations of the Underlying Pooled Funds.

29. A Top Fund will not invest, directly or indirectly, in an Underlying Pooled Fund unless:

(a) in the case of an investment in an Independently Valued Underlying Pooled Fund, at the time of purchase, at least 20% of the units of such Independently Valued Underlying Pooled Fund are directly or indirectly held by unitholders that are not affiliated or associated with the Filer (not including any holdings made through the Top Fund); or

(b) in the case of an investment in an Internally Valued Underlying Pooled Fund, at the time of purchase, at least 50% of the units of such Internally Valued Underlying Pooled Fund are directly or indirectly held by unitholders that are not affiliated or associated with the Filer (not including any holdings made through the Top Fund).

Top Fund on Underlying Pooled Fund Structure

30. The Filer submits that an investment in an Underlying Pooled Fund by a Top Fund will allow the Top Fund to gain cost-effective exposure to private investments through a fund structure with a more diverse portfolio of private investments than would be available if the Top Fund were to invest directly. While it may be possible for the Top Funds to gain exposure to private debt securities by investing in other mandates, the Filer believes it is in the best interests of the Top Funds to have the ability to invest in the Existing Underlying Pooled Funds, because the Filer believes the alternatives available to the Filer are not optimal relative to investing in the Existing Underlying Pooled Funds.

31. An investment by a Top Fund in an Underlying Pooled Fund will be compatible with the investment objective and strategy of the Top Fund.

32. A unit of an Underlying Pooled Fund will be considered an "illiquid asset" within the meaning of NI 81-102. Consequently, if the Exemption Sought is granted, a Top Fund will acquire securities of an Underlying Pooled Fund, whether directly or indirectly, in compliance with section 2.4 of NI 81-102. As a result, a Top Fund will not be able to purchase units of an Underlying Pooled Fund if immediately after purchase, more than 10% of the net asset value of the Top Fund would be made up of "illiquid assets".

33. The IRC of the Top Funds will review and provide its approval, including by way of standing instructions, for the purchase of units of the Underlying Pooled Funds, directly or indirectly, by the Top Funds, in accordance with section 5.2(2) of NI 81-107.

34. Further to section 3.4(2) of the companion policy to NI 81-102, the Filer understands that, if the Exemption Sought is granted, the Top Funds may rely on section 2.5(7) of NI 81-102, which provides that the "investment fund conflict of interest investment restrictions" and the "investment fund conflict of interest reporting requirements" (as such terms are defined in NI 81-102) do not apply to an investment fund which purchases or holds securities of another investment fund if the purchase or holding is made in accordance with this section.

Generally

35. The Filer does not anticipate that any fees or sales charges would be incurred, directly or indirectly, by a Top Fund with respect to an investment in an Underlying Pooled Fund.

36. Absent the Exemption Sought, a Top Fund would be prohibited by section 2.5(2)(a) and 2.5(2)(c) from purchasing or holding securities of an Underlying Pooled Fund because the Underlying Pooled Funds are not subject to NI 81-102.

37. Investments by the Top Funds in securities of the Underlying Pooled Funds will otherwise comply with section 2.5 of NI 81-102.

38. If the IRC becomes aware of an instance where the Filer, in its capacity as manager of a Top Fund, did not comply with the terms of the decision, or a condition imposed by securities legislation or the IRC in its approval, the IRC of such Top Fund will, as soon as practicable, notify in writing the securities regulatory authority or regulator in the jurisdiction under which the Top Fund is organized.

39. A Top Fund's investment in an Underlying Pooled Fund will represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the Top 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) each Top Fund will be treated as an arm's-length investor in the Underlying Pooled Fund on the same terms as all other third-party investors with each investment by a Top Fund in an Underlying Pooled Fund made at a price and other terms as favourable for the Top Fund as for all other third-party investors;

(b) a Top Fund will not invest, directly or indirectly, in an Underlying Pooled Fund unless:

(i) in the case of an investment in an Independently Valued Underlying Pooled Fund, at the time of purchase, at least 20% of the units of such Independently Valued Underlying Pooled Fund are directly or indirectly held by unitholders that are not affiliated or associated with the Filer (not including any holdings made through the Top Fund); or

(ii) in the case of an investment in an Internally Valued Underlying Pooled Fund, at the time of purchase, at least 50% of the units of such Internally Valued Underlying Pooled Fund are directly or indirectly held by unitholders that are not affiliated or associated with the Filer (not including any holdings made through the Top Fund);

(c) an investment by a Top Fund in an Underlying Pooled Fund will be compatible with the investment objective and strategy of the Top Fund and 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;

(d) in respect of an investment by a Top Fund in an Underlying Pooled Fund, the investment will otherwise comply with section 2.5 of NI 81-102, including in that (i) no sales or redemption fees will be paid as part of the investment in the Underlying Pooled Fund; and (ii) no management fees or incentive fees will be payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Pooled Fund for the same service;

(e) where applicable, a Top Fund's investment in an Underlying Pooled Fund, whether direct or indirect, will be disclosed to investors in such Top Fund's quarterly portfolio holding reports, financial statements and/or fund facts/ETF facts documents;

(f) the prospectus of the 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, directly or indirectly, in an Underlying Pooled Fund, which are investment funds managed by the Filer;

(g) the IRC of the Top Fund will review and provide its approval, including by way of standing instructions, prior to the purchase of an Underlying Pooled Fund, directly or indirectly, by the Top Fund, in accordance with section 5.2(2) of NI 81-107;

(h) the manager of the Top Fund complies with section 5.1 of NI 81-107 and the manager and the IRC of the Top Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;

(i) where an investment is made by a Top Fund in an Underlying Pooled Fund, the annual and interim management reports of fund performance for the Top Fund disclose the name of the related person in which an investment is made, being an Underlying Pooled Fund; and

(j) where an investment is made by a Top Fund in an Underlying Pooled Fund, the records of portfolio transactions maintained by the Top Fund include, separately for every portfolio transaction effected by the Top Fund through the Filer, the name of the related person in which an investment is made, being an Underlying Pooled Fund.

"Darren McKall"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission
 
Application File #: 2022/0045
SEDAR File #s: 3329230, 3329231, 3329235, 3329236, 3329237, 3329238, 3329240