National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from paragraphs 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 Investment Funds to permit an existing mutual fund to invest in closed-end funds located in Canada, the United States and the United Kingdom in accordance with its investment objectives -- the mutual fund will ensure the closed-end funds comply with the investment restrictions in NI 81-102 applicable to mutual funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a) and (c), 19.1.
March 2, 2016
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF TRADEX MANAGEMENT INC. (the Filer)
The principal regulator in Ontario has received an application from the Filer on behalf of Tradex Global Equity Fund (the Fund), an existing mutual fund managed by the Filer that is subject to National Instrument 81-102 Investment Funds (NI 81-102), for a decision under the securities legislation of the jurisdiction of the principal regulator (the Legislation) providing an exemption from paragraphs 2.5(2)(a) and (c) of NI 81-102 to permit the Fund to purchase or hold a security of another investment fund that is not a mutual fund subject to NI 81-102 and whose securities are not or have not been offered under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) (each a Closed-End Fund and collectively, the Closed-End Funds) and, to permit the Fund to purchase or hold a security of another investment fund that is not a reporting issuer in the local jurisdiction (each a Foreign Closed-End Fund, and collectively, the Foreign Closed-End Funds and together with the Closed-End Funds, the Underlying Closed-End Funds) (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 the application; and
(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, Québec, 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.
1. The Filer, a not-for-profit mutual fund company, is a corporation that was incorporated under the laws of Canada in 1988. In any year where the Filer has a surplus in its revenue from management fees, the Filer reduces the management fee that was paid by the Fund by providing a rebate to the Fund.
2. The head office of the Filer is located in Ottawa, Ontario.
3. The Filer is registered under the securities legislation of Ontario, Québec and Newfoundland and Labrador as an investment fund manager and under the securities legislation of British Columbia, Ontario and Québec as a mutual fund dealer. The Filer has been a member of the Mutual Fund Dealers Association (MFDA) since 2002.
4. The Filer is the investment fund manager of the Fund. In addition, the Filer is the trustee of the Fund.
5. In addition to the Fund, the Filer manages two other mutual funds as part of the Tradex Family of Funds, which funds are only available to members of the public service and their families.
6. Each of the Filer and the Portfolio Manager (defined below) has no intention of being the manager or portfolio manager, as applicable, of any of the Underlying Closed-End Funds.
Tradex Global Equity Fund
7. The Fund is an open-ended mutual fund organized and governed by the laws of Ontario.
8. The Fund is governed by the provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.
9. The Fund distributes its securities pursuant to a simplified prospectus prepared pursuant to NI 81-101.
10. The Fund is a reporting issuer in each Jurisdiction.
11. Neither the Filer nor the Fund is in default of securities legislation in any Jurisdiction.
12. Throughout its approximate 21 year history, the Fund has invested in closed-end funds in accordance with its investment objective (both its current investment objective and its previous investment objective). The investment objective of the Fund is to achieve long-term capital appreciation by investing primarily in closed-end funds whose investments are principally in a diversified portfolio of equity securities of issuers based in any country. The investment objective and strategies of the Fund are disclosed in the Fund's simplified prospectus. The Fund must invest in an Underlying Closed-End Fund to meet its investment objective.
13. As indicated above, the Fund achieves its investment objective by making investments in global stocks primarily through exchange traded closed-end funds managed by some of the world's leading investment firms. Many closed-end funds trade at discounts; taking advantage of the variance/volatility within the discount is a meaningful element of the Fund's strategy. The Fund also invests in exchange-traded funds whose securities are index participation units (IPUs), which mirror the performance of a particular exchange index. Up to 25% of the book value of the portfolio may also be invested in shares of non closed-end fund companies listed on a recognized stock exchange. In practice, the Fund generally invests in IPUs only when there is no attractive Underlying Closed-End Fund with a deeper than usual trading discount.
14. Investments by the Fund in an Underlying Closed-End Fund are limited by the requirements of NI 81-102. In accordance with the investment strategies of the Fund, no more than 10% of the net asset value of the Fund will be invested in a particular Underlying Closed-End Fund taken at market value at the time of purchase.
15. The Fund does not, and will not, pay management fees or incentive fees that, to a reasonable person, would duplicate a fee payable by an Underlying Closed-End Fund for the same service.
City of London Investment Management Company Limited and Portfolio Management Style
16. City of London Investment Management Company Limited (CLIM or the Portfolio Manager) is the portfolio manager of the Fund and has been the portfolio manager of the Fund since the Fund's inception in 1994.
17. CLIM operates a global closed-end fund strategy in several jurisdictions globally and has been doing so for 25 years. CLIM's investment style differs from that of a traditional portfolio manager in that it capitalizes on the inefficiencies relating to investing in closed-end funds. A closed-end fund has a fixed capital structure, which is composed of securities that are listed and traded on stock exchanges via a stock broker. These securities trade at whatever value the stock market puts on them. In effect, a closed-end fund trades at a price that reflects demand. Demand or the lack thereof is reflected in securities trading at a premium or a discount to the net asset value (NAV) of the fund.
Change in Fund of Fund Rules under NI 81-102
18. Prior to the recent amendments to NI 81-102, the fund of fund rules in section 2.5 Investments in Other Mutual Funds (as it was then called) did not prohibit mutual funds from investing in closed-end funds that were not mutual funds.
19. The recent amendments to NI 81-102 have broadened the fund of fund rules in section 2.5 Investments in Other Investment Funds (as it is now called) to include other types of investment funds, such as closed-end funds.
Investment in Underlying Closed-End Funds
20. In the absence of the Exemption Sought:
(a) The investment restriction in paragraph 2.5(2)(a) of NI 81-102 would prohibit the Fund, which is a mutual fund, from purchasing or holding securities of the Underlying Closed-End Funds (because such Underlying Closed-End Funds are not mutual funds, are not subject to NI 81-102 or do not offer, or have not offered, securities under a simplified prospectus in accordance with NI 81-101), unless the securities of such Underlying Closed-End Funds are IPUs.
(b) The investment restriction in paragraph 2.5(2)(c) of NI 81-102 would prohibit the Fund, which is a mutual fund, from purchasing or holding securities of the Foreign Closed-End Funds (because such Foreign Closed-End Funds will not be reporting issuers in the local jurisdiction), unless the securities of such Foreign Closed-End Funds are IPUs.
21. Each Foreign Closed-End Fund is, or will be:
(a) in the United States, a registered investment company under the Investment Companies Act of 1940; and
(b) in the United Kingdom, a form of collective investment fund under the UK Companies Act.
22. The requirements/industry standards relating to reporting, fund governance and investment restrictions in the jurisdictions of the Foreign Closed-End Funds are comparable to those in the Canadian regulations.
23. An investment by the Fund in securities of each Underlying Closed-End Fund will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund and will be made in accordance with the investment objective of the Fund.
24. In the Portfolio Manager's view, there does not exist other investment options for the Fund that would provide the same or comparable benefits that investing in Underlying Closed-End Funds provide while fulfilling the Fund's objective.
25. Each Underlying Closed-End Fund is traded on a recognized stock exchange in Canada, the United States or the United Kingdom.
26. Granting the Exemption Sought is in the best interests of the Fund and is not prejudicial to the public interest or to securityholders 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) subject to (b) and (c) below, other than with respect to paragraphs 2.12(1)10, 2.13(1)9 and 2.14(1)8 of NI 81-102, each Underlying Closed-End Fund complies with the investment restrictions in NI 81-102 applicable to mutual funds;
(b) the Fund's weighted average leverage exposure does not exceed 10% of the NAV of the Fund. The Fund's weighted average leverage exposure is determined by multiplying (i) the leverage employed by each Underlying Closed-End Fund, by (ii) the percentage of the Fund's NAV invested in such Underlying Closed-End Fund;
(c) the Fund may invest an amount equal to 10% of its NAV in Underlying Closed-End Funds that do not comply with the investment restrictions in NI 81-102;
(d) CLIM uses pre-trade compliance controls to monitor the restrictions in paragraphs (a), (b) and (c) above; and
(e) securities of each Underlying Closed-End Fund trade on a recognized stock exchange in Canada, the United States or the United Kingdom.