Securities Law & Instruments

Headnote

NP 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- fund on fund structure -- mutual fund granted exemption from the three-tiered prohibition to invest in another mutual fund that invests substantially all of its assets in a bottom fund to gain exposure to a specific country's capital markets.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.5(2)(b), 19.1.

December 23, 2009

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

POWERSHARES INDIA CLASS

(the "Top Fund" or "Filer")

DECISION

Background

The principal regulator in the jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the restriction in subclause 2.5(2)(b) of National Instrument 81-102 Mutual Funds (NI 81-102) that would prevent the Top Fund from investing in the PowerShares India Portfolio (PowerShares ETF) (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(a) The Ontario Securities Commission is the principal regulator for this 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 the following non-principal passport jurisdictions: British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, the Northwest Territories, the Yukon Territories and Nunavut (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein. The following additional terms shall have the following meanings:

Mauritius means the Republic of Mauritius; and

Mauritius Underlying Fund means a wholly-owned subsidiary of the PowerShares ETF in the Republic of Mauritius.

Representations

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

The Top Fund

1. The Top Fund will be an open-end mutual fund established under the laws of Canada as a class of shares of Invesco Trimark Corporate Class Inc. and be qualified for distribution in the Jurisdictions by way of a simplified prospectus and annual information form that are prepared in accordance with NI 81-102 and will be subject to NI 81-102. It is anticipated that the Top Fund will file in order to qualify the shares of the Top Fund for distribution in all of the Jurisdictions a preliminary simplified prospectus and annual information form in late November 2009.

2. Invesco Trimark Ltd. will be the manager of the Top Fund (the Manager). The head office of the Manager is located in Toronto, Ontario.

3. The Top Fund will be a reporting issuer in each of the Jurisdictions.

4. The investment objective of the Top Fund will be to seek to gain exposure to India's capital markets through investments in the PowerShares ETF and is expected to be expressed as follows:

"PowerShares India Class seeks to provide a return that is similar to the return of one or more Invesco PowerShares ETFs that invest primarily in India."

5. Other than the Exemption Sought herein, the Top Fund will comply with NI 81-102 and relevant securities legislation.

6. There will be no duplication of management fees or incentive fees in the proposed structure, and the Manager of the Top Fund will ensure that there will be no sales fees other than nominal brokerage commissions and no redemption charges payable by the Top Fund in relation to its purchases or sales of securities of the PowerShares ETF.

7. The Top Fund will provide all disclosure mandated for mutual funds investing in other mutual funds.

The PowerShares ETF and the Mauritius Underlying Fund

8. The PowerShares ETF is a United States exchange-traded fund and is a security of PowerShares India Exchange-Traded Fund Trust (the Trust), a registered investment company in the U.S. Invesco PowerShares Capital Management LLC is the investment adviser of the Trust.

9. Securities of the PowerShares ETF are redeemable on demand, qualified for distribution in the United States by way of a prospectus dated February 27, 2009 and are traded on the NYSE Arca in the United States. The securities of the PowerShares ETF are index participation units as defined in NI 81-102.

10. The PowerShares ETF is not a reporting issuer in any of the Jurisdictions and, accordingly, is not governed by NI 81-102.

11. The investment objective of the PowerShares ETF is to seek investment results that correspond generally to the price and yield of the Indus India Index (the India Index).

12. The India Index is comprised of Indian equity securities traded on regulated stock exchanges in India and is designed to represent the Indian equity markets as a whole. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Sciences, Financial Services, Heavy Industry, Consumer Products and Other.

13. There are significant taxes and investment restrictions imposed by Indian regulatory authorities that are applicable to non-resident investors, such as the PowerShares ETF. These restrictions include withholding taxes and a per issuer aggregate investment restriction. In addition, there is a cumbersome registration regime for non-resident investors.

14. In order to permit investors in the PowerShares ETF to obtain broad exposure to India's capital markets in a tax-efficient manner, the Mauritius Underlying Fund has been created to serve exclusively as an investment vehicle for the PowerShares ETF.

15. The Mauritius Underlying Fund qualifies as an expert fund, established under the laws of Mauritius, holds a Category 1 Global Business licence issued by the Financial Services Commission of Mauritius (FSC) and is registered with the Securities and Exchange Board of India (SEBI). The securities of the Mauritius Underlying Fund are redeemable on demand.

16. The principal investment strategy of the PowerShares ETF is to invest at least 90% of its assets in the Mauritius Underlying Fund which, in turn, invests at least 90% of its total assets in securities that comprise the India Index and American Depository Receipts (ADRs) based on the securities in the India Index. The PowerShares ETF anticipates that the majority of its investments will be in securities that comprise the India Index rather than ADRs.

17. As part of its investment strategy, the Mauritius Underlying Fund may invest its remaining assets in money market instruments, including repurchase agreements or other funds which invest exclusively in money market instruments, convertible securities, structured notes (notes on which the amount of principal repayment and interest payments are based on the movement of one or more specified factors, such as the movement of a particular security or securities index), and in swaps, options and futures contracts. Swaps, options and futures contracts (and convertible securities and structured notes) may be used by the Mauritius Underlying Fund in seeking performance that corresponds to the India Index and in managing cash flows.

18. The rules governing the investments of the Mauritius Underlying Fund address the same concerns as the investment restrictions on mutual funds in NI 81-102 by providing, among other things, the following restrictions:

(a) on the ability of the Mauritius Underlying Fund to borrow;

(b) on purchasing or selling physical commodities and real estate;

(c) on selling securities short;

(d) on purchasing securities on margin except in connection with the use of derivatives consistent with NI 81-102; and

(e) on investing in illiquid securities if, as a result of such investment, more than 15% of the Mauritius Underlying Fund's net assets would be invested in illiquid securities.

19. The custodian of the Mauritius Underlying Fund is an arm's length third party, Brown Brothers Harriman & Co. (BBH). BBH has hired Hong Kong and Shanghai Banking Corporation China (HSBC), an arm's length third party entity, to act as sub-custodian in Mauritius and Citibank of India, Mumbai, also an arm's length third party entity, to act as sub-custodian in India.

20. The Manager will ensure that there is no duplication of management fees in the proposed structure, and that no sales fees, redemption charges or other fees will be payable by the PowerShares ETF in relation to its purchases or sales of securities of the Mauritius Underlying Fund.

21. By investing primarily in securities of the Mauritius Underlying Fund, the PowerShares ETF can gain broad exposure to India's capital markets in an efficient way, as withholding tax that would otherwise be applicable to the PowerShares ETF were it to invest directly in India is effectively eliminated due to a tax agreement between India and Mauritius. In addition, the PowerShares ETF will not be subject to a cumbersome registration regime.

22. As outlined above, the Top Fund may consistent with its investment objective, seek to gain exposure to India's capital markets through investments in the PowerShares ETF. Through the proposed structure, the PowerShares ETF will offer Canadian investors the opportunity to gain broad exposure to India's capital markets in a tax-efficient manner. Investing directly in securities in India is a less desirable option for the PowerShares ETF because of the adverse tax treatment and the investment restrictions and registration requirements that are associated with such direct investing.

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 the decision shall only apply if, at the time the Top Fund makes or holds an investment in the PowerShares ETF, the following conditions are satisfied:

(a) the securities of the PowerShares ETF are index participation units as defined in NI 81-102;

(b) the PowerShares ETF invests substantially all of its assets in the Mauritius Underlying Fund;

(c) no duplication of management fees or incentive fees are payable by the Top Fund in relation to its purchases or sales of securities of the PowerShares ETF;

(d) no sales fees other than nominal brokerage commissions and no redemption charges are payable by the Top Fund in relation to its purchases or sales of securities of the PowerShares ETF;

(e) no sales fees, redemption charges or other fees are payable by the PowerShares ETF in relation to its purchases or sales of securities of the Mauritius Underlying Fund;

(f) no duplication of management fees are payable by the PowerShares ETF in relation to its purchases or sales of securities of the Mauritius Underlying Fund; and

(g) the Mauritius Underlying Fund is subject to daily net asset value pricing substantially similar to that imposed under NI 81-106.

"Rhonda Goldberg"
Manager, Investment Funds Branch
Ontario Securities Commission