Securities Law & Instruments

Headnote

National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from the mutual fund conflict of interest restrictions and reporting requirements in the Securities Act (Ontario) and the self-dealing prohibition in National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations to allow pooled funds to invest in securities of underlying funds under common management -- relief subject to certain conditions.

Applicable Legislative Provisions

Securities Act (Ontario) R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(3), 113, 117(1)(a), 117(2).

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.

September 23, 2013

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
RUSSELL INVESTMENTS CANADA LIMITED
(the Filer)

AND

RUSSELL EXTENDED DURATION FUND
(the Initial Top Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on its own behalf and on behalf of the Initial Top Fund and any other investment fund which is not a reporting issuer under theSecurities Act (Ontario) (the Act) established, advised or managed by the Filer after the date hereof (the Future Top Funds and, together with the Initial Top Fund, the Top Funds), for a decision under the securities legislation of the Jurisdiction (the Legislation), exempting the Filer and the Top Funds from:

1. the restriction contained in section 111(2)(b) and section 111(3) of the Act which prohibits:

(a) a mutual fund from knowingly making an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder; and

(b) a mutual fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) above;

(the Related Issuer Restriction Relief);

2. the requirement in section 117(1)(a) of the Act requiring every management company to file a report of every transaction of purchase or sale of securities between a mutual fund and any related person or company (the Reporting Requirement Relief); and

3. the restriction in section 13.5(2)(a) of National Instrument 31-103 Registration Requirement and Exemptions (NI 31-103) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase securities of an issuer in which a responsible person or an associate of the responsible person is a partner, officer or director unless this fact is disclosed to the client and the written consent of the client to the purchase is obtained before the purchase (the Consent Restriction Relief)

(collectively, 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 Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia and Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (the Non-Principal Passport Jurisdictions).

Interpretation

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.

Representations

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

The Filer

1. The Filer is a corporation incorporated under the laws of Canada. The Filer has its head office in Toronto, Ontario. The Related Issuer Restriction Relief and the Reporting Requirement Relief is only required in the provinces of Ontario and Alberta. The Consent Restriction Relief is required in all the Non-Principal Passport Jurisdictions.

2. The Filer is registered as an investment fund manager in Ontario and is, or will be, the manager of the Top Funds and the Underlying Funds (as defined below). The Filer is also registered as a portfolio manager and is, or will be, the portfolio manager of the Top Funds and the Underlying Funds. The Filer is also an exempt market dealer in all provinces of Canada.

3. The Filer is, or will be, the trustee and/or manager of the Underlying Funds (as defined below).

4. The Filer is not a reporting issuer in any jurisdiction of Canada.

5. The Filer is not in default of securities legislation in any of the provinces and territories of Canada.

Top Funds

6. The Top Funds are, or will be, formed as a trust under the laws of Ontario by a declaration of trust.

7. Each Top Fund is, or will be, a "mutual fund" as defined in the securities legislation of the jurisdictions in which the Top Funds are distributed.

8. The securities of each of the Top Funds are, or will be, sold pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

9. None of the Top Funds is, or will be, a reporting issuer under the Legislation.

10. The Initial Top Fund is not in default of securities legislation in any of the provinces and territories of Canada.

11. Subject to obtaining the Exemption Sought, the Top Funds may invest all, or a certain portion, of their assets in other investment funds established and managed by the Filer, or an affiliate of the Filer, to which National Instrument 81-102 -- Mutual Funds (NI 81-102) applies (the Underlying NI 81-102 Funds) or to which NI 81-102 does not apply (the Underlying Pooled Funds, together with the Underlying NI 81-102 Funds, the Underlying Funds).

Underlying Funds

12. Each Underlying Fund is, or will be, a mutual fund trust or a class of a mutual fund corporation established under the laws of the Province of Ontario.

13. Each Underlying Fund is, or will be, either an Underlying NI 81-102 Fund or an Underlying Pooled Fund. Currently, the only Underlying Funds are the Russell Funds currently offered under a simplified prospectus and an annual information form dated July 8, 2013, which are Underlying NI 81-102 Funds.

14. Each Underlying Fund is, or will be, a "mutual fund" as defined in the securities legislation of the jurisdictions that the Underlying Funds are distributed.

15. Each Underlying NI 81-102 Fund is, or will be, offered by a simplified prospectus such that it will be a reporting issuer in each of the provinces and territories in Canada. Each Underlying Pooled Fund will be offered on a private placement basis such that it will not be a reporting issuer in any jurisdiction in Canada.

16. Each of the Underlying Funds has, or will have, separate investment objectives, strategies and investment restrictions.

17. The Underlying Funds will invest primarily in equity securities, in fixed income securities, options on equities and currency, as well as illiquid assets including private equity and debt. Where an Underlying Fund holds illiquid assets, the remainder of the Underlying Fund's portfolio will be managed to provide sufficient liquidity to fund redemptions in the ordinary course.

18. None of the existing Underlying NI 81-102 Funds is in default of any securities legislation of any jurisdiction in Canada.

Fund-on-Fund Investing

19. The Top Funds provide investors with exposure to the investment portfolios of the Underlying Funds and their respective investment strategies. The Top Funds will primarily invest directly in the securities of the Underlying Funds (the Fund-on-Fund Structure).

20. The Fund-on-Fund Structure will allow the Top Funds to be able, where available and appropriate for their respective investment objective, to achieve greater diversification at a lower cost than investing directly in the securities held by the relevant Underlying Funds. Investment by the Top Funds in the Underlying Funds will increase the asset base of the Underlying Funds, enabling the Underlying Funds to further diversify their portfolios to the benefit of all their investors. The larger asset base will also benefit investors in the Underlying Funds through achieving favourable pricing and transaction costs on portfolio trades, increased access to investments where there is a minimum subscription or purchase amount, and economies of scale through greater administrative efficiency.

21. Any investment made by a Top Fund in an Underlying Fund will be compatible with the investment objectives of the Top Fund.

22. The Top Funds and the Underlying Funds are, or will be, valued no less frequently than monthly and in any event, the Underlying Funds are, or will be, valued no less frequently than the Top Funds.

23. The Top Funds and the Underlying Funds are, or will be, redeemable no less frequently than monthly and in any event, the Underlying Funds are, or will be, redeemable no less frequently than the Top Funds.

24. The investments held by the Underlying Funds are considered to be liquid.

25. A Top Fund will not purchase or hold securities of an Underlying Fund unless:

(a) at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds no more than 10% of the market value of its net assets in securities of other mutual funds, unless the Underlying Fund:

(i) links its performance to the performance to one other mutual fund, i.e. a clone fund,

(ii) purchases or holds securities of a "money market fund" (as defined by NI 81-102), or

(iii) purchases or holds securities that are "index participation units" (as defined by NI 81-102) issued by a mutual fund;

(b) no management fees or incentive fees are payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;

(c) no sales fees or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of the securities of the Underlying Fund;

(d) the Filer does not cause the securities of the Underlying Fund held by the Top Fund to be voted at any meeting of the securityholders of the Underlying Fund except that the Top Fund may arrange for the securities it holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund; and

(e) the offering memorandum, where available, or other disclosure document, of the Top Fund will be provided to all investors of the Top Fund and will disclose:

(i) that the Top Fund may purchase securities of the Underlying Funds;

(ii) that the Filer is the investment fund manager of both the Top Funds and the Underlying Funds, if applicable,

(iii) the approximate or maximum percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds; and

(iv) the process or criteria used to select the Underlying Funds.

26. Prior to the time of purchase of securities of a Top Fund, an investor will be provided with a copy of the Top Fund's offering memorandum, where available, as well as disclosure about the relationships and potential conflicts of interest between the Top Fund and the Underlying Funds.

27. Each of the Top Funds and the Underlying Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106 applicable to them. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.

28. Securityholders of a Top Fund will receive, on request, a copy of the Top Fund's audited annual and interim financial statements.

29. Securityholders of a Top Fund will receive, on request, a copy of the offering document of the Underlying Funds, if available, and the audited annual financial statements and interim unaudited financial statements of any Underlying Fund in which the Top Fund invests.

Generally

30. The amounts invested from time to time in an Underlying Fund by a Top Fund may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Top Fund could, either alone or together with other Top Funds, become a substantial security holder of an Underlying Fund. The Top Funds are, or will be, related mutual funds by virtue of the common management by the Filer.

31. In addition, the board of directors of an Underlying Fund that is a class of a mutual fund corporation may include directors who are also directors or officers of the Filer.

32. In the absence of the Related Issuer Restriction Relief, the Top Funds would be precluded from implementing Fund-on-Fund Investing. Since the Underlying Pooled Funds do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Top Funds and the Underlying Pooled Funds are unable to rely upon the exemption codified under section 2.5(7) of NI 81-102.

33. Unless the Reporting Requirement Relief is granted, to the extent that a Top Fund would be a "related person or company" of an Underlying NI 81-102 Fund, the Filer would have to report to the securities regulatory authority every sale of securities made from that Underlying NI 81-102 Fund to the Top Fund.

34. In the absence of the Consent Restriction Relief, each Top Fund would be precluded from investing in an Underlying Fund, unless the consent of each investor in the Top Fund is obtained, since the Filer or an officer and/or director of the Filer (considered a responsible person within the meaning of the applicable provisions of NI 31-103) may also be an officer and/or director of, or may person a similar function for or occupy a similar position with the Underlying Fund.

35. A Top Fund's investment in an Underlying Fund represents the business judgment of responsible persons 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) securities of the Top Funds are distributed in Canada solely pursuant to exemptions from the prospectus requirements in accordance with NI 45-106;

(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental investment objectives of the Top Fund;

(c) no Top Fund will purchase or hold securities of an Underlying Fund unless, at the time of the purchase of securities of the Underlying Fund, the Underlying Fund holds no more than 10% of the market value of its net assets in securities of other mutual funds other than a mutual fund that:

(i) links its performance to the performance to one other mutual fund, i.e. a clone fund,

(ii) purchases or holds securities of a "money market fund" (as defined by NI 81-102), or

(iii) purchases or holds securities that are "index participation units" (as defined by NI 81-102) issued by a mutual fund;

(d) no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by an Underlying Fund for the same service;

(e) no sales fees or redemption fees are payable by a Top Fund in relation to its purchases or redemptions of the securities of the Underlying Fund;

(f) the Filer does not cause the securities of the Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of the Underlying Fund except that the Top Fund may arrange for the securities it holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;

(g) the offering memorandum, where available, or other disclosure document, of the Top Fund will be provided to all investors of the Top Fund and will disclose:

(i) that the Top Fund may purchase securities of the Underlying Funds;

(ii) that the Filer, or an affiliate of the Filer, is the investment fund manager of both the Top Funds and the Underlying Funds;

(iii) the approximate or maximum percentage of net assets of the Top Fund that the Top Fund intends to invest in securities of the Underlying Funds; and

(iv) the process or criteria used to select the Underlying Funds; and

(h) investors in each Top Fund are entitled to receive from the Filer or its affiliates, on request and free of charge, a copy of the offering memorandum or other disclosure documents, or the annual or semi-annual financial statements relating to all Underlying Funds in which the Top Fund may invest its assets.

"Vera Nunes"
Manager, Investment Funds Branch
Ontario Securities Commission
 
"Judith Robertson"
Commissioner
Ontario Securities Commission
 
"Wes M. Scott"
Commissioner
Ontario Securities Commission