National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from sections 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 -- Mutual Funds to permit a mutual fund to use ETFs to invest up to 10 percent of its net assets, in aggregate, in gold, silver and other physical commodities provided that no more than 2.5 percent of the mutual fund's net assets may be invested in any one commodity sector, other than gold and silver -- ETFs will be traded on a Canadian or U.S. stock exchange -- subject to 10 percent exposure to physical commodities, in aggregate, and certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a) and (c), 19.1.
September 26, 2013
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
RUSSELL INVESTMENTS CANADA LIMITED
RUSSELL REAL ASSETS PORTFOLIO
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 sections 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 Mutual Funds (NI 81-102) in order to permit the Fund to invest in exchange-traded funds traded on a stock exchange in Canada or the United States which hold, or obtain exposure to, one or more physical commodities on an unlevered basis (Commodity ETFs) (the Requested Relief).
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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions).
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation with its head office located in Toronto, Ontario. The Filer is registered under the securities legislation of the Jurisdiction as an investment fund manager and portfolio manager, and also is registered under the Commodity Futures Act (Ontario) in the category of commodity trading manager. The Filer is not in default of securities legislation in the Jurisdiction or any Passport Jurisdiction.
2. The Filer is the investment fund manager of, and portfolio advisor to, the Fund.
3. Russell Real Assets Portfolio is an open-end mutual fund trust created under the laws of the Province of Ontario. The Fund is not in default of securities legislation in any jurisdiction of Canada.
4. The securities of the Fund are qualified for distribution pursuant to a simplified prospectus and annual information form that has been prepared and filed in accordance with the securities legislation of the Jurisdiction and each Passport Jurisdiction.
5. The Fund is a reporting issuer or the equivalent under the securities legislation of the Jurisdiction and each Passport Jurisdiction and therefore subject to the requirements of NI 81-102.
6. The investment objective of the Fund is to provide exposure to a diversified portfolio of asset classes that are directly or indirectly linked to physical assets, or to assets that the investment manager of the Fund believes have a tendency to maintain their real (after inflation) value over time. To pursue its investment objective, the Fund invests in, or obtains exposure to, primarily equity securities, fixed-income securities, commodities and securities of other mutual funds.
7. The principal advantage of the Fund's investment objective and strategies is that they will provide investors with exposure to asset classes which tend to preserve their value after taking into account the effects of inflation (referred to herein as Real Assets). Accordingly, the Fund may provide investors with a hedge against inflation. Real Assets include real estate, infrastructure, physical commodities and inflation-adjusted bonds. The Fund's asset mix initially will be comprised of exposure to Real Assets in approximately the following percentages of the Fund's net asset value:
(a) 35% in real estate;
(b) 35% in infrastructure;
(c) 10% in physical commodities; and
(d) 20% in inflation-adjusted bonds.
8. A secondary advantage of the Fund's investment objective and strategies is that they will provide investors with exposure to Real Assets, the market value of which tend to be uncorrelated with changes in the global equity and fixed income markets. Accordingly, the Fund may provide investors with returns which, when part of a larger portfolio, may reduce the volatility of the investor's portfolio.
9. The Fund's investment objective and strategies are designed to offer investors an opportunity to obtain exposure to Real Assets. To pursue its investment objective, the Fund requires the ability to obtain exposure for up to 10% of its net asset value to physical commodities through investments in Commodity ETFs.
10. Each Commodity ETF is a "mutual fund" (as such term is defined under the securities legislation of the Jurisdiction) and is listed and traded on a stock exchange in Canada or the United States.
11. The assets of each Commodity ETF consist primarily of one or more physical commodities (other than gold or silver) or derivatives that have an underlying interest in such physical commodities. These physical commodities may include, without limitation, precious metals other than gold and silver (such as platinum and palladium), energy (such as crude oil, gasoline, heating oil and natural gas), industrial metals (such as aluminum, copper, nickel and zinc), livestock (such as hogs and cattle) and agricultural products (such as coffee, corn, cotton, livestock, soybeans, soybean oil, sugar and wheat). The objective of each Commodity ETF is to reflect the price of its applicable commodities (less the Commodity ETF's expenses and liabilities) on an unlevered basis.
12. The Fund will not directly hold the physical commodities described above, nor will the Fund enter into a specified derivative with an underlying interest that is a physical commodity described above. Instead, the Fund will obtain exposure to such physical commodities solely through investing in securities of Commodity ETFs. The securities of Commodity ETFs trade on established exchanges in Canada or the United States and are highly liquid.
13. The Fund will not obtain exposure to the physical commodities described above through futures contracts (on margin or otherwise). Further, the Fund will invest only in Commodity ETFs which do not utilize leverage.
14. Pursuant to a decision dated June 28, 2011 (the Existing ETF Relief), the Fund is entitled to purchase and hold securities of certain types of exchange-traded funds. These additional types of exchange-traded funds seek to replicate:
(a) the daily performance of an index by (i) a multiple or an inverse multiple of 200% or (ii) an inverse multiple of 100%; or
(b) the performance of gold or silver, either (i) on an unlevered basis or (ii) by a multiple of 200% (the Gold/Silver ETFs).
15. The Fund is not permitted purchase these additional types of exchange-traded funds if more than 10% of its net assets taken at market value at the time of the transaction would be invested in such exchange-traded funds. The Existing ETF Relief also allows the Fund to invest directly in silver, certain silver certificates and derivatives the underlying interest of which is silver (or another derivative with silver as its underlying interest). By the terms of the Existing ETF Relief, the Fund cannot purchase silver or silver-related investments if more than 10% of its net assets taken at market value at the time of the transaction would be invested, directly or indirectly, in gold or silver.
16. Investments by the Fund in Commodity ETFs under the Requested Relief will complement any investments made by the Fund under the Existing ETF Relief. The Fund's aggregate investments made under the Existing ETF Relief and the Requested Relief will be prudent by adhering to the following conditions:
(a) not more than 10% of the Fund's net asset value will be invested in Commodity ETFs at the time of the investment;
(b) not more than 2.5% of the Fund's net asset value will be exposed through investments in Commodity ETFs to one commodity sector at the time of the investment (for this purpose, the commodity sectors are precious metals other than gold and silver, energy, industrial metals, livestock and agricultural products); and
(c) not more than 10% of the Fund's net asset value will be invested in reliance upon the Existing ETF Relief and the Requested Relief, in aggregate, at the time of investment.
17. An investment by the Fund in securities of a Commodity ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interest 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 Requested Relief is granted provided that, in respect of the Fund:
1. any trades in Commodity ETFs by the Fund will be made in compliance with the Fund's investment objective;
2. the Fund will invest only in Commodity ETFs which do not utilize leverage;
3. the Fund will not short sell securities of any Commodity ETF;
4. not more than 10% of the Fund's net asset value will be invested in Commodity ETFs at the time of the purchase;
5. not more than 2.5% of the Fund's net asset value will be exposed through investments in Commodity ETFs to one commodity sector at the time of the purchase (for this purpose, the commodity sectors are precious metals other than gold and silver, energy, industrial metals, livestock and agricultural products);
6. not more than 10% of the Fund's net asset value will be invested in reliance upon the Existing ETF Relief and the Requested Relief, in aggregate, at the time of the purchase;
7. the Fund will limit its exposure to physical commodities (including direct purchases of gold, permitted gold certificates, Gold/Silver ETFs and Commodity ETFs), to no more than 10% of the net assets of the Fund, taken at market value at the time of purchase as applicable; and
8. the Fund discloses (a) in the investment strategy section of its simplified prospectus the fact that the Fund has obtained relief to invest in Commodity ETFs, and (b) in its simplified prospectus (i) what is a Commodity ETF, (ii) how assets of the Fund will be invested in Commodity ETFs, and (iii) the risks associated with investing in Commodity ETFs.