National Policy 11-203 -- Exemption granted from requirements contained in paragraphs 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 -- Top mutual funds proposing to invest up to 7.5% of net assets in securities of underlying mutual fund governed by the laws of Luxembourg -- Relief granted subject to certain conditions, including that the underlying fund follows investment restrictions and practices that are substantially similar to those that govern the top funds and that the top funds be required to divest if the investment restrictions and practices that the underlying fund follows cease to be materially consistent with Part 2 of NI 81-102 -- a top fund's aggregate investment in underlying mutual funds that are not subject to National Instrument 81-101 and NI 81-102 and not qualified in the jurisdictions where the top fund is qualified cannot exceed 10% of net assets -- National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a), 2.5(2)(c), 19.1.
February 3, 2010
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
THE PROVINCE OF ONTARIO
IN THE MATTER OF THE
PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
TEMPLETON GROWTH FUND, LTD.,
TEMPLETON INTERNATIONAL STOCK FUND,
TEMPLETON GLOBAL SMALLER
COMPANIES FUND AND TEMPLETON GLOBAL
(collectively, the "Existing Top Funds")
FRANKLIN TEMPLETON INVESTMENTS CORP.
("FTIC" or the "Manager")
The principal regulator in the Jurisdiction has received an application from FTIC and the Existing Top Funds (collectively, the "Filers") for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") exempting the Top Funds (as defined below) from
(i) the prohibition contained in paragraph 2.5(2)(a) of National Instrument 81-102 Mutual Funds (NI 81-102) against a mutual fund investing in another mutual fund that is not subject to NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101); and
(ii) the prohibition contained in paragraph 2.5(2)(c) of NI 81-102 against a mutual fund investing in another mutual fund's securities where those securities are not qualified for distribution in the local jurisdiction
to enable each Top Fund to invest up to 7.5% of its net assets, taken at market value at the time of the investment, in TCOF, as defined below (the "Exemption Sought").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended 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.
Defined terms contained in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
"Franklin Templeton Investments" means Franklin Resources, Inc. and its subsidiaries;
"FTSMF" means Franklin Templeton Selected Markets Funds, an umbrella SICAV under the laws of Luxembourg;
"SICAV" means Société d'Investissement à Capital Variable, an open-end mutual fund governed by the laws of Luxembourg;
"TCOF" means Templeton China Opportunities Fund, a sub-fund forming part of FTSMF and governed by the laws of Luxembourg;\
"Top Funds" means, collectively, the Existing Top Funds and other top funds managed by the Manager after the date of this Decision that have an investment objective which includes capital appreciation by investing in equity or debt securities of issuers located or carrying on business in the Pacific Rim, or more broadly, around the world;
"UCITS" means Undertakings for Collective Investment in Transferable Securities and refers to the investment funds authorized by the European Union as investment funds suitable to be distributed in more than one country of Europe;
"UCITS Directive" means the Council Directive 85/611/EEC of December 20, 1985 on the coordination of laws, regulations and administrative provisions relating to UCITS, as amended; and
"Valuation Day" means generally, a week day on which the banks are normally open for business in Luxembourg or any business day on which the New York Stock Exchange is open for normal business (other than during a suspension of normal dealing) and on which the net asset value per share of each class of TCOF is determined.
This decision is based on the following facts represented by the Filers:
1. The Manager is a corporation existing under the laws of Ontario, having its head office in Toronto, Ontario. The Manager is registered as a portfolio manager in Ontario as well as British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Yukon and as a mutual fund dealer in Ontario and Alberta.
2. The Manager is a wholly-owned subsidiary of Templeton Worldwide, Inc., a Delaware corporation, which is a direct wholly-owned subsidiary of Franklin Resources, Inc. ("FRI"). FRI is a global investment management organization operating as Franklin Templeton Investments. Franklin Templeton Investments provides global and domestic investment management solutions for institutional and retail clients managed by its Franklin, Templeton, Mutual Series, Bissett and Fiduciary Trust investment teams. In addition to Canada, FRI and its subsidiaries maintain offices in 30 other countries.
3. The Manager is the manager of the Existing Top Funds. Each Existing Top Fund is a mutual fund subject to NI 81-102 and distributes securities under a simplified prospectus and annual information form prepared in accordance with NI 81-101.
4. The Manager and the Existing Top Funds are not in default of securities legislation in any Canadian jurisdiction.
5. The Manager obtained an exemption from NI 81-102 dated February 13, 2009 on behalf of the mutual funds that it manages that invest a portion of their assets in global/international equities to allow each such mutual fund to invest up to 10% of its net assets in underlying mutual funds that are not subject to NI 81-101 and NI 81-102 and that are not qualified for distribution in the local jurisdiction.
The Existing Top Funds
6. The investment objective of Templeton Growth Fund, Ltd. is long-term capital appreciation by investing primarily in equity securities of companies around the world, and fixed income securities issued by governments or companies of any country.
7. The investment objective of Templeton International Stock Fund is long-term capital appreciation by investing primarily in equity securities of companies outside of Canada and the United States.
8. The investment objective of Templeton Global Smaller Companies Fund is long-term capital appreciation by investing primarily in equity securities of smaller companies around the world.
9. The investment objective of Templeton Global Income Fund is current income while maintaining prospects for capital appreciation by investing primarily in debt and equity securities issued around the world.
Access to the China A-Share Market
10. Historically, foreign investors interested in investing in China were only able to participate in China's H-share market. The H-share market comprises 43 companies listed on the Hong Kong Stock Exchange, with a market cap of approximately USD 400 billion.
11. China's A-share market comprises approximately 1600 companies listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, with a market cap that is approximately eight times larger than the H-share market (approximately USD 3 trillion).
12. The Manager believes that it is in the best interests of the Top Funds to obtain exposure to locally-listed Chinese stocks in China's A-share market and thereby obtain clear exposure to the local opportunities presented by the Chinese economy.
13. Foreign fund management institutions, insurance companies, securities companies and other asset management institutions are now able to invest in the China A-share market by applying to the China Securities Regulatory Commission ("CSRC") for status as a Qualified Foreign Institutional Investor ("QFII") and applying to the State Administration of Foreign Exchange ("SAFE") for an investment quota ("Investment Quota").
Restrictions of the QFII Program
14. Templeton Investment Counsel, LLC ("TIC"), an affiliate of the Manager that is a U.S. registered adviser under the Investment Advisers Act of 1940, has obtained QFII status from the CSRC and has now obtained an Investment Quota from SAFE of USD 200 million. TIC must remit the investment principal corresponding to its Investment Quota into an account held with a local sub-custodian bank within six months from the Investment Quota approval date, unless an extension is approved by SAFE.
15. According to the current practice of the QFII program, for an open-ended fund, there is a lock-up period of one year in which the investment principal may not be repatriated (the "Lock-Up Period") commencing from the day when the full amount equal to the Investment Quota is remitted into the People's Republic of China (the "PRC"). Thereafter, redemptions are subject to the PRC laws and practice affecting a fund's ability to obtain approval from SAFE to remit the proceeds thereof out of the PRC.
16. Net realized profits for any fiscal year of a QFII fund can be repatriated at calendar year end provided that an annual audit is undertaken by a Chinese certified public accountant of the QFII's transaction history at the local sub-custodian bank and subject to payment of all applicable taxes and SAFE approval. The purpose of the audit is solely intended to determine the amount of the QFII fund's net realized profits that may be repatriated. All repatriations of gains and income on A-shares require the approval of SAFE.
17. An entity that has been granted QFII status can establish a QFII vehicle approved by the CSRC to invest in the China A-share market. Franklin Templeton Investments understands that, to date, the QFII vehicles established under the QFII regulations and approved by the CSRC have been foreign-domiciled funds.
18. Because TIC is an investment management company requiring access to the China A-share market for numerous internally run funds domiciled overseas and given the complexity of having multiple foreign funds participate in the QFII program, the CSRC expressed a strong preference that Franklin Templeton Investments create a new fund to act as a master fund in a master-feeder fund structure to invest in the China A-share market. Consequently, TIC has established an investment model whereby several open-end retail mutual funds managed by affiliates of Franklin Templeton Investments, including the Top Funds, can indirectly benefit from an investment in the China A-share market by investing in TCOF, a master fund that is domiciled in Luxembourg.
19. TCOF is a sub-fund of FTSMF, which, pending regulatory approval in Luxembourg, is expected to be launched in February 2010. FTSMF is an umbrella SICAV having its central administration and transfer agency services performed by Franklin Templeton International Services S.A., a Luxembourg regulated entity and an indirect subsidiary of FRI.
20. A prospectus for TCOF has been filed and is expected to be approved by the Luxembourg financial sector regulator, the Commission de Surveillance du Secteur Financier, in February 2010.
21. TIC will act as the portfolio manager of TCOF.
22. Subject to pending regulatory approval in Luxembourg, the investment objective of TCOF is capital appreciation, which it seeks to achieve through a policy of investing all or almost all of its assets in China A-Shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges. However, since the investment objective is more likely to be achieved through an investment policy that is flexible and adaptable, TCOF may also seek on an ancillary basis, investment opportunities in other types of securities as permitted under the PRC securities related laws and regulations, including, but not limited to, debt and fixed income securities and bonds. TCOF may invest up to 5% of its net assets in cash deposits and, on a temporary basis, up to 15% of its net assets in aggregate, in cash and money market instruments.
23. Because Franklin Templeton Investments' open-end retail mutual funds domiciled in the United States are not permitted to invest in a Luxembourg domiciled master fund, TIC is also establishing a second QFII master fund that will be domiciled in the Cayman Islands (the "Cayman Fund"). TIC's Investment Quota will be shared by TCOF and the Cayman Fund.
24. Shares of TCOF are only offered to Franklin Templeton Investments' open-ended retail mutual funds managed by Franklin Templeton Investments affiliates, including the Manager. It is anticipated that TCOF's share of TIC's Investment Quota, and accordingly its initial assets under management, will amount up to approximately USD 43 million. It is expected that TCOF will hold approximately 50 positions and will therefore be sufficiently diversified.
25. Due to the restrictions of the QFII program, an investment in TCOF is subject to the aforementioned Lock-Up Period. After this Lock-Up Period, subject to TIC believing that it will reasonably be able to obtain approval from SAFE to repatriate sufficient funds under the Investment Quota, shares of TCOF will be redeemable on each Valuation Day upon 30 calendar days prior written notice to TCOF's transfer agent.
26. As the restrictions imposed by the PRC investment regulations apply at the Investment Quota level, the actions of other investors accessing the PRC market through the Investment Quota and the actions of other investors in TCOF wishing to redeem on a particular redemption day could all adversely impact the ability of a Top Fund to realize the full value of its redemption request in respect of any particular redemption day. These restrictions would apply to all non-Chinese investors dealing with the Investment Quota.
27. Redemption requests will be honoured by TCOF on a pro-rata basis, taking into account the redemption requests tendered by the other investors accessing the PRC market through the Investment Quota (including investors in the Cayman Fund).
28. Due to the restrictions of the QFII program, units of TCOF are "illiquid assets", as that term is defined in NI 81-102.
Fund-on-fund investment strategy to obtain exposure to China A-shares
29. The Manager believes that it is in the best interests of the Top Funds to invest in TCOF in order to obtain exposure to the local opportunities presented by the Chinese economy. Each Top Fund's investment in units of TCOF is, or will be, consistent with its investment objective and strategies.
30. An investment in TCOF by a Top Fund is, or will be, consistent with the limit on investments in illiquid assets prescribed by s.2.4 of NI 81-102.
31. Given the requirements of the CSRC, the Top Funds would not be able to obtain exposure to China A-shares absent an investment in TCOF. However, section 2.5(2) of NI 81-102 does not permit the Top Funds to invest in an underlying fund that is not subject to NI 81-102 and NI 81-101 and is not distributed in the jurisdictions where the Top Funds are distributed.
32. Due to the nature of the QFII program, it would be extremely difficult, if not impossible, to launch a Canadian mutual fund able to invest in the China A-share market.
33. TCOF is a low-cost mutual fund whose investment objectives and strategies make it a suitable investment option for the Top Funds. Further, investing in China A-shares through TCOF would allow the Top Funds to achieve economies of scale with other Franklin Templeton Investment mutual funds.
34. TCOF's portfolio manager, TIC, has the same investment philosophy and style as the portfolio advisors of the Existing Top Funds. As well, as TCOF is managed by a portfolio manager within Franklin Templeton Investments, the portfolio advisors of the Top Funds will benefit from understanding TCOF's investments and the management style of TIC, which understanding will benefit the Top Funds.
35. Under the laws of Luxembourg and the UCITS Directive, an open-ended fund that meets certain requirements that are deemed to render its supervision, shareholder protection, rules on asset segregation, borrowing, lending and uncovered sales, equivalent to the legal and regulatory framework of a UCITS (a "UCITS Equivalent Investment Fund") is eligible for investment by a UCITS. In accordance with the eligibility criteria laid down in the laws of Luxembourg and the UCITS Directive, TCOF is considered as a UCITS Equivalent Investment Fund.
36. The Lock-Up Period imposed by the QFII program in connection with an investment in China A-shares makes it impossible for TCOF to comply with Article 37 of the UCITS Directive, which stipulates that a UCITS must re-purchase or redeem its units at the request of any unitholder. However, although TCOF is not a UCITS, TCOF's portfolio will be managed in accordance with the investment restrictions applicable to UCITS. The investment restrictions applicable to UCITS are substantially similar to those of Part 2 of NI 81-102. Accordingly, TCOF follows investment restrictions and practices that are substantially similar to those that govern the Top Funds.
37. TCOF would not be considered a hedge fund and it does not use investment strategies that a Top Fund could not use directly. TCOF does not invest in other mutual funds.
38. The Top Funds' investment in TCOF is not for the purposes of distributing TCOF to the Canadian public. The investments by the Top Funds in TCOF are proposed to allow the Top Funds to better achieve their investment objectives by investing, to a limited extent, in a unique, suitable and professionally managed lower-cost mutual fund which is able to access the China A-share market and where the investment style and approach are well-suited to the portfolios of the Top Funds.
39. The Top Funds will otherwise comply fully with section 2.5 of NI 81-102 in investing in TCOF and will provide disclosure in their simplified prospectus regarding their investment in a foreign fund, including the risks associated with such investment.
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) TCOF follows investment restrictions and practices that are substantially similar to those that govern the Top Funds;
(B) the investment of the Top Funds in TCOF otherwise complies with section 2.5 of NI 81-102 and the Top Funds provide the disclosure contemplated for fund of fund investments in NI 81-101. Specifically, the investment by the Top Funds in TCOF is disclosed in their simplified prospectus;
(C) a Top Fund will not purchase securities of TCOF if, immediately after the purchase, more than 7.5% of its net assets, taken at market value at the time of the purchase, would consist of investments in TCOF;
(D) a Top Fund will not purchase securities of TCOF if, immediately after the purchase, more than 10% of its net assets, taken at market value at the time of the purchase, would consist of investments in underlying mutual funds that are not subject to NI 81-101 and NI 81-102 and that are not qualified in the jurisdictions where the Top Fund is qualified; and
(E) the Top Funds shall not acquire any additional securities of TCOF and shall dispose of the securities of TCOF then held in an orderly and prudent manner, after the date that the investment restrictions and practices that TCOF follows change to be materially inconsistent with Part 2 of NI 81-102.