National Policy 11-203 -- Existing and future mutual funds granted exemption to invest in an exchange traded fund whose securities would meet the definition of index participation unit in NI 81-102, but for the fact that they are listed on the London Stock Exchange -- relief is subject to certain conditions and requirements.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.2(1), 2.5(2)(a), (b), (c), and (f), 19.1.
April 8, 2011
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
SUN LIFE GLOBAL INVESTMENTS
IN THE MATTER OF
SUN LIFE BLACKROCK CANADIAN
(the New Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the New Fund and any other mutual fund for which the Filer or an affiliate acts or may in the future act as manager that are subject to National Instrument 81-102 Mutual Funds (NI 81-102) (the Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) providing an exemption from the prohibitions in:
(a) subsections 2.1(1) and 2.2(1) and paragraphs 2.5(2)(a), (b), (c) and (f) of NI 81-102 to permit the Funds to invest in securities of any mutual fund that is an exchange-traded fund (an ETF) that, but for the fact that they are listed on a stock exchange in the United Kingdom and not on a stock exchange in Canada or the United States, would otherwise qualify as "index participation units" (IPU) as defined in NI 81-102 (UK IPUs); and
(b) subsection 2.5(2)(b) of NI 81-102 to allow the Funds to invest in other mutual funds that invest more than 10% of the market value of their net assets in securities of UK IPUs.
(Items (a) and (b) are 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,
(b) the Filer has provided notice that Subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (with Ontario, the Jurisdictions).
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meanings if used in this decision unless otherwise defined.
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is a corporation incorporated under the laws of Canada with its head office in Toronto, Ontario.
2. The Filer is registered as a commodity trading manager, investment fund manager and portfolio manager in Ontario.
3. The Filer acts, or will act, as manager of each of the Funds.
4. Each Fund is, or will be, a mutual fund under the laws of Ontario or Canada and a reporting issuer under the laws of all the Jurisdictions.
5. Neither the Filer nor the Funds are in default of securities legislation in any of the Jurisdictions.
6. Each Fund is, or will be, governed by NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.
7. Securities of each Fund are, or will be, qualified for distribution in some or all of the provinces and territories of Canada under a simplified prospectus and annual information form filed with, and receipted by, the securities regulators in the applicable Jurisdictions.
The UK IPUs
8. Each UK IPU will be a "mutual fund" within the meaning of applicable Canadian securities legislation and an ETF traded on a stock exchange in the United Kingdom.
9. Each UK IPU's only purpose will be to (a) hold the securities that are included in a specified widely quoted market index in substantially the same proportion as those securities are reflected in that index, or (b) invest in a manner that causes the UK IPU to replicate the performance of that index.
10. In replicating the performance of an index, a UK IPU may purchase securities of other mutual funds.
11. It is the Filer's understanding that the regulatory regime, administration, operation, investment objectives and restrictions applicable to UK IPUs are as rigorous as those applicable to similar Canadian IPUs.
12. It is the Filer's understanding that stock exchanges in the United Kingdom are subject to materially equivalent regulatory oversight to securities exchanges in Canada.
Investment by Funds (Directly or Indirectly) in the ETFs
13. Each Fund is or will be permitted, in accordance with its investment objectives and strategies, to invest in ETFs.
14. The amount of the loss that can result from an investment by a Fund in a UK IPU will be limited to the amount invested by the Fund in the UK IPUs.
15. The Filer considers that investments by the Funds in UK IPUs or in other Funds that invest in UK IPUs provide an efficient and cost effective means of achieving diversification and exposure.
16. On June 25, 2010, the Canadian Securities Administrators published for comment proposed amendments to NI 81-102 (the Modernization Amendments) which included a proposal to expand the definition of IPU to include UK IPUs (the Proposed IPU Amendments).
17. Because the current definition of IPU only includes securities that are traded on an exchange in Canada or the United States, in the absence of the Exemption Sought:
(a) a Fund would not be able to rely upon the IPU exemption in paragraph 2.1(2) of NI 81-102 from the concentration restriction in paragraph 2.1(1) to purchase or hold more than 10% of its net assets in securities of UK IPUs;
(b) a Fund would not be able to rely upon the IPU exemption in paragraph 2.2(1.1) of NI 81-102 from the control restriction in paragraph 2.2(1) to purchase or hold securities representing more than 10% of the votes attaching to the outstanding voting securities of a UK IPU or from purchasing securities of a UK IPU for the purpose of exercising control over or management of the UK IPU;
(c) a Fund would not be able to rely upon the IPU exemption in paragraph 2.5(3)(a) of NI 81-102 from the investment restriction in paragraph 2.5(2)(a) against purchasing or holding securities of the UK IPU unless the UK IPU is subject to NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure;
(d) a Fund would not be able to rely upon the IPU exemption in paragraph 2.5(4)(b)(ii) of NI 81-102 from the investment restriction in paragraph 2.5(2)(b) against purchasing or holding securities of a Fund or a UK IPU unless at the time of the purchase of that security, the Fund or UK IPU holds no more than 10% of the market value of its net assets in securities of other mutual funds;
(e) a Fund would not be able to rely upon the IPU exemption in paragraph 2.5(3)(a) of NI 81-102 from the investment restriction in paragraph 2.5(2)(c) against purchasing or holding securities of the UK IPU unless securities of the UK IPU were qualified for distribution in the local jurisdiction; and
(f) a Fund would not be able to rely upon the IPU exemption in paragraph 2.5(5) of NI 81-102 from the investment restriction in paragraph 2.5(2)(f) against purchasing or holding securities of the UK IPU unless no sales fees or redemption fees are payable by the Fund in relation to its purchases or redemptions of securities of the UK IPU that, to a reasonable person, would duplicate a fee payable by an investor in the Fund.
18. Each investments by a Fund in securities of a UK IPU will represent the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.
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) the investment by a Fund in securities of a UK IPU is in accordance with the fundamental investment objectives of the Fund;
(b) paragraphs 2.1(3) and 2.1(4) of NI 81-102 will apply with respect to the Fund's investments and holdings in UK IPUs in determining a Fund's compliance with the concentration restrictions of section 2.1 of NI 81-102;
(c) the relief from paragraph 2.5(2)(f) of NI 81-102 will only apply to brokerage fees incurred for the purchase or sale of UK IPUs;
(d) the prospectus of each Fund discloses, or will disclose the next time it is renewed after the date of this decision if the Proposed IPU Amendments are not yet in effect, in the investment strategy section, the fact that the Fund has obtained relief to invest in UK IPUs; and
(e) the Exemption Sought will terminate six months after the coming into force of the Modernization Amendments.