IA Clarington Investments Inc. et al.

Decision

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Technical relief granted to mutual funds from Parts 9, 10 and 14 of NI 81-102 to facilitate the offering of exchange-traded series and conventional mutual fund series within same fund structure – Relief permitting funds to treat exchange-traded series in a manner consistent with treatment of other ETF securities in continuous distribution in connection with their compliance with Parts 9, 10 and 14 of NI 81-102 – Relief permitting funds to treat mutual fund series in a manner consistent with treatment of other conventional mutual fund securities in connection with their compliance with Parts 9, 10 and 14 of NI 81-102 – National Instrument 81-102 Investment Funds – relief granted from certain mutual fund requirements and restrictions on borrowing from custodian and, if necessary, provision of a security interest to the custodian to fund distributions payable under the fund’s distribution policy.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.6(a), 9.1, 9.2, 9.3, 9.4, 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 14.1, 19.1.

[TRANSLATION]

August 27, 2018

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the Jurisdictions)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
IA CLARINGTON INVESTMENTS INC.
(the Filer)

AND

IA CLARINGTON CORE PLUS BOND FUND,
IA CLARINGTON GLOBAL BOND FUND AND
IA CLARINGTON EMERGING MARKETS BOND FUND
(the Proposed ETF Funds)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer on behalf of the Proposed ETF Funds, each being a mutual fund with an exchange-traded series, and such other mutual funds as are managed and may be managed by the Filer now or in the future and that are structured in the same manner as the Proposed ETF Funds (the Other Funds and together with the Proposed ETF Funds, the Funds and each individually, a Fund) for a decision under the securities legislation of the Jurisdictions (the Legislation) that:

(a)           exempts each Fund from subparagraph 2.6(a)(i) of Regulation 81-102 respecting Investment Funds (V-1.1, r. 39) (Regula-tion 81-102) to permit each Fund to borrow cash from the custodian of the Fund (the Custodian) and, if required by the Custodian, to provide a security interest over any of its portfolio assets as a temporary measure to fund the portion of any distribution payable to Security-holders (as defined below) that repre-sents, in the aggregate, amounts that are owing to, but not yet been received by, the Fund (the Borrowing Requirement); and

(b)           permits the Filer and each Fund to treat the ETF Securities and the Mutual Fund Securities (as defined below) as if such securities were separate funds in connection with their compliance with the provisions of Parts 9, 10 and 14 of Regu-lation 81-102 (the Sales and Redemp-tions Requirements)

(collectively, the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a)           the Autorité des marchés financiers is the principal regulator for this application;

(b)           the Filer has provided notice that subsection 4.7(1) of Regulation11-102 respecting Passport System (V-1.1, r. 1) (Regulation 11-102) is intended to be relied upon in each jurisdiction of Canada other than the Jurisdictions (the Other Jurisdictions); and

(c)           the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario

Interpretation

Terms defined in Regulation 14-101 respecting Definitions (V-1.1, r. 3), Regulation 11-102, Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (V-1.1, r. 38) (Regulation 81-101) and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined.

Affiliate Dealer means a registered dealer that is an affiliate of an Authorized Dealer or Designated Broker and that participates in the re-sale of Creation Units (as defined below) from time to time.

Authorized Dealer means a registered dealer that has entered, or intends to enter, into an agreement with the manager of a Fund authorizing the dealer to subscribe for, purchase and redeem Creation Units from one or more Funds on a continuous basis from time to time.

Basket of Securities means, in relation to the ETF Securities of a Fund, a group of securities or assets representing the constituents of the Fund.

Designated Broker means a registered dealer that has entered, or intends to enter, into an agreement with the Filer or an affiliate of the Filer on behalf of a Fund to perform certain duties in relation to the ETF Securities of the Fund, including the posting of a liquid two-way market for the trading of the Fund’s ETF Securities on the TSX (as defined below) or another Marketplace.

ETF Securities means securities of an exchange-traded series of securities of a Fund that are listed or will be listed on the TSX or another Marketplace and that will be distributed pursuant to a simplified prospectus prepared in accordance with Regulation 81-101 and Form 81-101F1 (as defined below).

Form 81-101F1 means Form 81-101F1 Contents of Simplified Prospectus.

Marketplace means a “marketplace” as defined in Regulation 21-101 respecting Marketplace Operation (V-1.1, r. 5) that is located in Canada.

Mutual Fund Securities means securities of a non-exchange-traded series of a Fund that are or will be distributed pursuant to a simplified prospectus prepared in accordance with Regulation 81-101 and Form 81-101F1.

Other Dealer means a registered dealer that acts as authorized dealer or designated broker to other exchange-traded funds that are not managed by the Filer.

Prescribed Number of ETF Securities means, in relation to a Fund, the number of ETF Securities of the Fund determined by the Filer from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.

Prospectus Delivery Requirement means the requirement that a dealer, not acting as agent of the purchaser, who receives an order or subscription for a security offered in a distribution to which the prospectus requirement of the Legislation applies, send or deliver to the purchaser or its agent, unless the dealer has previously done so, the latest prospectus and any amendment either before entering into an agreement of purchase and sale resulting from the order or subscription, or not later than midnight on the second business day after entering into that agreement.

Securityholders means beneficial or registered holders of ETF Securities or Mutual Fund Securities of a Fund, as applicable.

TSX means the Toronto Stock Exchange.

Representations

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

The Filer

1.             The Filer’s head office is in Québec City, Québec.

2.             The Filer is a corporation amalgamated under the laws of Canada.

3.             The Filer is registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador, as an exempt market dealer in Québec and Ontario, and as a portfolio manager in all the jurisdictions of Canada.

4.             The Filer or an affiliate of the Filer is, or will be, the investment fund manager of each Fund.

5.             The Filer is not in default of securities legislation in any jurisdictions of Canada.

The Funds

6.             Each Proposed ETF Fund is established under the laws of Ontario as an investment fund that is an open-ended mutual fund trust. Each Fund is, or will be, a reporting issuer in any jurisdiction of Canada in which its securities are distributed. Each Fund offers, or will offer, ETF Securities and Mutual Fund Securities.

7.             Subject to any exemptions therefrom that have been, or may be, granted by the applicable securities regulatory authorities, each Fund is, or will be, subject to Regulation 81-102 and Securityholders will have the right to vote at a meeting of Securityholders in respect of matters prescribed by Regulation 81-102.

8.             The Proposed ETF Funds currently offer Series A, Series E, Series EF, Series F, Series I, Series L and Series O units. IA Clarington Core Plus Bond Fund also currently offers Series E4, Series EF4, Series F4, Series L4, Series P, Series P4, Series T4 and Series W units. IA Clarington Global Bond Fund and IA Clarington Emerging Markets Bond Fund also currently offer Series E5, Series EF5, Series F5, Series L5 and Series T5 units. These Mutual Fund Securities are currently distributed under a simplified prospectus dated June 18, 2018.

9.             On or about August 27, 2018, an amended and restated prospectus in respect of the ETF Securities of the Proposed ETF Funds will be filed with the securities regulatory authorities in each jurisdiction of Canada.

10.          The Filer will apply to list any ETF Securities of the Funds on the TSX or another Marketplace. The Filer will not file an amendment for any of the Funds in respect of the ETF Securities until the applicable Marketplace has conditionally approved the listing of the ETF Securities.

The Exemption Sought

11.          Mutual Fund Securities may be subscribed for or purchased directly from a Fund through qualified financial advisors or brokers.

12.          ETF Securities will be distributed on a continuous basis in one or more jurisdictions of Canada under a prospectus. ETF Securities may generally only be subscribed for or purchased directly from the Funds (Creation Units) by Authorized Dealers or Designated Brokers. Generally, subscriptions or purchases may only be placed for a Prescribed Number of ETF Securities on any day when there is a trading session on the TSX or other Marketplace. Authorized Dealers or Designated Brokers subscribe for Creation Units for the purpose of facilitating investor purchases of ETF Securities on the TSX or another Marketplace.

13.          In addition to subscribing for and re-selling Creation Units, Authorized Dealers, Designated Brokers and Affiliate Dealers will also generally be engaged in purchasing and selling ETF Securities of the same class or series as the Creation Units in the secondary market. Other Dealers may also be engaged in purchasing and selling ETF Securities of the same class or series as the Creation Units in the secondary market despite not being an Authorized Dealer, Designated Broker or Affiliate Dealer.

14.          Each Designated Broker or Authorized Dealer that subscribes for Creation Units must deliver, in respect of each Prescribed Number of ETF Securities to be issued, cash only, a Basket of Securities and cash, and/or a combination of cash and securities other than Baskets of Securities, in each case in an amount equal to the net asset value of the ETF Securities subscribed for next determined following the receipt of the subscription order.

15.          Upon notice given by the Filer from time to time and, in any event, not more than once quarterly, a Designated Broker may be contractually required to subscribe for Creation Units of a Fund for cash in an amount not to exceed a specified percentage of the net asset value of the Fund or such other amount established by the Filer.

16.          The Designated Brokers and Authorized Dealers will not receive any fees or commissions from the Filer or the Funds in connection with the issuance of Creation Units to them. On the issuance of Creation Units, the Filer or the Fund may, in the Filer’s discretion, charge a fee to a Designated Broker or an Authorized Dealer to offset the expenses incurred in issuing the Creation Units.

17.          Each Fund will appoint a Designated Broker to perform certain other functions, which include standing in the market with a bid and ask price for ETF Securities for the purpose of maintaining liquidity for the ETF Securities.

18.          Except for Authorized Dealer and Designated Broker subscriptions for Creation Units, as described above, and other distributions that are exempt from the Prospectus Delivery Requirement under the Legislation, ETF Securities generally will not be able to be purchased directly from a Fund. Investors are generally expected to purchase and sell ETF Securities, directly or indirectly, through dealers executing trades through the facilities of the TSX or another Marketplace. ETF Securities may also be issued directly to Securityholders upon a reinvestment of distributions of income or capital gains.

19.          Securityholders that are not Designated Brokers or Authorized Dealers that wish to dispose of their ETF Securities may generally do so by selling their ETF Securities on the TSX or other Marketplace, through a registered dealer, subject only to customary brokerage commissions. A Securityholder that holds a Prescribed Number of ETF Securities or multiple thereof may exchange such ETF Securities for cash and/or Baskets of Securities in the discretion of the Filer. Securityholders may also redeem ETF Securities for cash at a redemption price equal to 95% of the closing price of the ETF Securities on the TSX or other Marketplace on the date of redemption, subject to a maximum redemption price of the net asset value per ETF Security.

Borrowing Requirement

20.          Subparagraph 2.6(a)(i) of Regulation 81-102 prevents a mutual fund from borrowing cash or providing a security interest over its portfolio assets unless the transaction is a temporary measure to accommodate redemption requests or to settle portfolio transactions and does not exceed five percent of the net assets of the mutual fund. As a result, a Fund is not permitted under subparagraph 2.6(a)(i) to borrow from the Custodian to fund distributions under the Distribution Policy (as defined below).

21.          Each Fund will make distributions on a monthly or quarterly basis or at such frequency as the Filer may, in its discretion, determine appropriate, may make additional distributions and, in each taxation year, will distribute sufficient net income and net realized capital gains so that it will not be liable to pay income tax under Part I of the Income Tax Act (Canada) (collectively, the Distribution Policy).

22.          Amounts included in the calculation of net income and net realized capital gains of a Fund for a taxation year that must be distributed in accordance with the Distribution Policy sometimes include amounts that are owing to but have not actually been received by the Fund from the issuers of securities held in the Fund’s portfolio (Issuers).

23.          While it is possible for a Fund to maintain a portion of its assets in cash or to dispose of securities in order to obtain any cash necessary to make a distribution in accordance with the Distribution Policy, maintaining such a cash position or making such a disposition (which would generally be followed, when the cash is actually received from the Issuers, by an acquisition of the same securities) impacts the Fund’s performance. Maintaining assets in cash or disposing of securities means that a portion of the net asset value of the Fund is not invested in accordance with its investment objective.

24.          The Filer is of the view that it is in the interests of a Fund to have the ability to borrow cash from the Custodian and, if required by the Custodian, to provide a security interest over its portfolio assets as a temporary measure to fund the portion of any distribution payable to Securityholders that represents, in the aggregate, amounts that are owing to, but have not yet been received by, the Fund from the Issuers. While such borrowing will have a cost, the Filer expects that such costs will be less than the reduction in the Fund’s performance if the Fund had to hold cash instead of securities in order to fund the distribution.

Sales and Redemptions Requirements

25.          Parts 9, 10 and 14 of Regulation 81-102 do not contemplate both Mutual Fund Securities and ETF Securities being offered in a single fund structure. Accordingly, without the Exemption Sought from the Sales and Redemptions Requirements, the Filer and the Funds would not be able to technically comply with those parts of Regulation 81-102.

26.          The Exemption Sought from the Sales and Redemptions Requirements will permit the Filer and the Funds to treat the ETF Securities and the Mutual Fund Securities as if such securities were separate funds in connection with their compliance with Parts 9, 10 and 14 of Regulation 81-102. The Exemption Sought from the Sales and Redemptions Requirements will enable each of the ETF Securities and Mutual Fund Securities to comply with Parts 9, 10 and 14 of Regulation 81-102 as appropriate for the type of security being offered.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

1.             The decision of the Decision Makers under the Legislation is that the Exemption Sought from the Borrowing Requirement is granted, provided that the Filer will be in compliance with the following conditions:

a)            the borrowing by a Fund in respect of a distribution does not exceed the portion of the distribution that represents, in the aggregate, amounts that are payable to the Fund but have not been received by the Fund from the Issuers and, in any event, does not exceed five percent of the net assets of the Fund;

b)            the borrowing is not for a period longer than 45 days;

c)             any security interest in respect of the borrowing is consistent with industry practice for the type of borrowing and is only in respect of amounts owing as a result of the borrowing;

d)            a Fund does not make any distribution to Securityholders where the distribution would impair the Fund’s ability to repay any borrowing to fund distributions; and

e)            the final prospectus of the Funds discloses the potential borrowing, the purpose of the borrowing and the risks associated with the borrowing.

2.             The decision of the Decision Makers under the Legislation is that the Exemption Sought from the Sales and Redemptions Requirements is granted, provided that the Filer will be in compliance with the following conditions:

a)            with respect to its Mutual Fund Securities, each Fund complies with the provisions of Parts 9, 10 and 14 of Regulation 81-102 that apply to mutual funds that are not exchange-traded mutual funds; and

b)            with respect to its ETF Securities, each Fund complies with the provisions of Parts 9 and 10 of Regulation 81-102 that apply to exchange-traded mutual funds.

“Lucie Roy”
Senior Director, Corporate finance