National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from section 2.5 of NI 81-102 Investment Funds to permit funds to invest in underling fund of funds -- relief needed to facilitate "cloning" structure in which corporate class fund replicates performance of mutual fund trusts that invests in underlying mutual funds -- each top fund to invest substantially all of its assets in corresponding intermediate trust fund -- top fund investment objectives to include name of intermediate fund and make reference to cloning strategy -- fund of fund investing by top funds to otherwise comply with fund of fund restrictions in section 2.5 of NI 81-102.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(b), 19.1.
November 13, 2015
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 MACKENZIE FINANCIAL CORPORATION (the Filer) AND IN THE MATTER OF MACKENZIE PRIVATE INCOME BALANCED POOL CLASS, MACKENZIE PRIVATE CANADIAN FOCUSED EQUITY POOL CLASS, MACKENZIE PRIVATE US EQUITY POOL CLASS, MACKENZIE PRIVATE GLOBAL EQUITY POOL CLASS (the Pools)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Pools and any future similar mutual funds created and managed by the Filer (the Future Top Funds, together with the Pools, the Top Funds) for a decision (the Exemption Sought) under the securities legislation of the Jurisdiction (the Legislation) pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) exempting the Top Funds from paragraph 2.5(2)(b) of NI 81-102 to permit each Top Fund to invest in securities of another mutual fund that is subject to NI 81-102 and managed by the Filer (each an "Intermediate Fund"), notwithstanding that at the time of investment an Intermediate Fund holds more than 10% of its net asset value in securities of one or more other mutual funds that are subject to NI 81-102 and managed by the Filer (each an "Underlying Fund").
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 11-102 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, the Northwest Territories, Nunavut and Yukon (together with Ontario, the Jurisdictions).
Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 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 registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in the Province of Ontario. The Filer is also registered as a portfolio manager and exempt market dealer in all other provinces and territories of Canada and as an investment fund manager in the Provinces of Newfoundland and Labrador and Québec.
2. The Filer is, or will be, the manager and portfolio manager of each of the Pools, Intermediate Funds and Underlying Funds.
3. The Filer is not in default of securities legislation in any of the Jurisdictions.
4. Each Top Fund, Intermediate Fund and Underlying Fund is, or will be, a reporting issuer under the laws of some or all of the provinces and territories of Canada and subject to NI 81-102. The securities of each Top Fund, Intermediate Fund and Underlying Fund are, or will be, qualified for distribution pursuant to a simplified prospectus, annual information form and fund facts that have been, or will be, prepared and filed in accordance with National Instrument 81-101 -- Mutual Fund Prospectus Disclosure, however, the Intermediate Funds may also invest from time to time in one or more Underlying Funds that file an annual information form pursuant to Section 9.2 of National Instrument 81-106 -- Investment Fund Continuous Disclosure. A preliminary simplified prospectus was filed for the Top Funds and Intermediate Funds via SEDAR in all the provinces and territories on September 22, 2015.
5. Each Top Fund is, or will be, a class of shares of a mutual fund corporation and each Intermediate Fund is or will be an open-end mutual fund trust that has been created under the laws of the Province of Ontario and each Underlying Fund is, or will be, either a class of shares of a mutual fund corporation or a unit trust, which in either case will comprise an open-end mutual fund.
6. The investment objectives and investment strategies of each Top Fund contemplate that it will invest substantially all of its assets in an Intermediate Fund managed by the Filer.
7. The investment objectives and investment strategies of each Intermediate Fund will permit it to hold substantially all of its assets in one or more Underlying Funds. Each Intermediate Fund may also invest directly in other portfolio securities.
8. Each Underlying Fund primarily invests directly in a portfolio of securities and/or other assets.
9. No Top Fund, Intermediate Fund or Underlying Fund is in default of securities legislation in any of the Jurisdictions.
Three-Tier Fund Structure
10. Each Top Fund will seek to provide a return that is similar to its corresponding Intermediate Fund. The investment objectives of each Top Fund will be substantially similar to the investment objectives of the corresponding Intermediate Fund.
11. If the Exemption Sought is not granted the Pools could obtain equity and fixed-income exposure by investing directly in other Underlying Funds or directly in securities and/or other assets. However, the Filer has determined that it is better for each Top Fund to achieve its investment objectives by investing substantially all of its assets in securities of its corresponding Intermediate Fund, for the following reasons:
i. This arrangement will be somewhat more tax efficient for the Top Fund. This is important because the Top Funds are, or will be, designed to be held in taxable accounts, whereas the Intermediate Funds are designed to be held in registered accounts; and
ii. This arrangement will reduce tracking error between a Top Fund and the corresponding Intermediate Fund, since any adjustments made by an Intermediate Fund to its portfolio of Underlying Funds will automatically adjust the exposure of the corresponding Top Fund to those Underlying Funds.
12. Accordingly, the Filer wishes to provide each Top Fund with the ability to invest in the corresponding Intermediate Fund, notwithstanding that the Intermediate Fund has invested 10% or more of its net asset value in securities of one or more Underlying Funds.
13. The Filer will include the name of the corresponding Intermediate Fund within the investment objectives of each Top Fund.
14. A Top Fund's investment in securities of its corresponding Intermediate Fund will otherwise be made in accordance with the requirements of section 2.5 of NI 81-102.
15. The simplified prospectus of each Top Fund will disclose: (i) in the investment objective, the name of the applicable Intermediate Fund that the Top Fund will invest in; and (ii) in the investment strategies, the investment strategies of the Intermediate Fund. The fund facts of each Top Fund will include similar disclosure.
16. The simplified prospectus of each Top Fund and each Intermediate Fund will disclose that there will be no duplication of fees and expenses as a result of its investment in other investment funds.
17. The simplified prospectus of each Top Fund discloses to investors that the accountability for portfolio management is (a) at the level of the Intermediate Fund with respect to the selection of the Underlying Fund to be purchased by the Intermediate Fund and with respect to the purchase and sale of any other portfolio securities held by the Intermediate Fund and (b) at the level of the applicable Underlying Fund with respect to the purchase and sale of portfolio securities and other assets held by that Underlying Fund.
18. Each Top Fund will comply with the requirement under NI 81-106 relating to the top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 -- Contents of Fund Facts Document relating to the top 10 position portfolio holdings disclosure in its fund facts as if the Top Fund were investing directly in the Underlying Funds held by its Intermediate Fund.
19. The Exemption Sought will result in a fund of fund structure that is akin to, and no more complex than, the three-tier structure currently permitted under subsection 2.5(4)(a) of NI 81-102.
20. An investment by a Top Fund in its applicable Intermediate Fund and by an Intermediate Fund in its applicable Underlying Funds represents the business judgment of responsible persons of the Top Funds and Intermediate Funds, uninfluenced by considerations other than the best interests of the Top Fund(s) and Intermediate Fund(s), respectively.
21. The Filer has determined that it would be in the best interest of the Top Funds to receive the Exemption Sought.
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 proposed investment of each Top Fund in its corresponding Intermediate Fund is otherwise made in compliance with all other requirements of section 2.5 of NI 81-102, and
(b) the investment objectives of each Top Fund as stated in the simplified prospectus and fund facts states the name of the Intermediate Fund in which the Top Fund invests.