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 existing and future mutual funds to invest up to 10% of their net assets in closed-end funds traded on a stock exchange in Canada and the United States provided 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.
November 7, 2016
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 (CANADA) INC.
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Top Funds (as defined below) for an exemption under the securities legislation of the jurisdiction of the principal regulator (the “Legislation”) from paragraphs 2.5(2)(a) and (c) of National Instrument 81-102 Investment Funds (“NI 81-102”) to permit the Top Funds to purchase and 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 Funds Prospectus Disclosure (“NI 81-101”) (each a “Closed-End Fund” and collectively, the “Closed-Ends Funds”) and to permit the Top Funds to purchase and 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 applications; and
b) The Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 – Passport System (“MI 11-102”) is intend-ed to be relied upon in each of the other provinces and territories of Canada (together with Ontario, the “Jurisdic-tions”).
Terms defined in NI 81-102, National Instrument 14-101 Definitions, MI 11-102 and the Securities Act (Ontario) have the same meaning if used in this decision, unless otherwise defined. Capitalized terms used in this decision have the following meanings:
Existing Top Funds means the existing mutual funds managed by the Filer as set out in Exhibit A that are subject to NI 81-102.
Future Top Funds means the mutual funds that are managed by the Filer in the future and that are or will be subject to NI 81-102.
Investment Company Act means the Investment Company Act of 1940 and the rules and regulations thereunder, as the same may be amended from time to time.
Top Funds means the Existing Top Funds and the Future Top Funds, collectively.
This decision is based on the following facts represented by the Filer:
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: (i) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; (ii) a mutual fund dealer in each of the Jurisdictions; and (iii) a commodity trading manager and portfolio manager in Ontario.
3. The Filer acts or will act as the manager and portfolio manager of the Top Funds.
4. The Filer does not act and does not intend to act as the manager or portfolio manager of any Underlying Closed-End Fund purchased or held by a Top Fund.
5. Neither the Filer nor the Existing Top Funds are in default of securities legislation in any of the Jurisdictions.
The Top Funds
6. Each of the Top Funds is or will be an open-ended mutual fund trust established under the laws of Ontario or a province or territory of Canada or a class of a corporation established under the laws of Canada or a province or territory of Canada.
7. Each of the Top Funds is or will be a reporting issuer in one or more of the Jurisdictions and subject to NI 81-102, subject to any relief there-from granted by applicable securities regulatory authorities.
8. The securities of the existing Top Funds are qualified for distribution pursuant to a simplified prospectus, annual information form and Fund Facts that were prepared and filed in accordance with NI 81-101.
9. The investment objectives of the Top Funds generally permit, or will permit, the Top Funds to invest in Underlying Closed-End Funds.
10. The investment strategies of each Top Fund expressly states, or will state, that the Top Fund may invest in Underlying Closed-End Funds.
11. Each of the Existing Top Funds that previously invested in Underlying Closed-End Funds filed a prospectus on or before September 22, 2014, permitting them to invest in Underlying Closed-End Funds until March 21, 2016.
12. To achieve the Top Funds’ investment objectives, the Filer has determined that it would be in the best interests of each Top Fund to have the ability to invest up to 10% of its net asset value in securities of one or more Underlying Closed-End Funds in order to obtain diversification and expo-sure from time to time to the assets and sectors represented by the portfolios of such Underlying Closed-End Funds, which are not always readily available through equity investments.
13. Investments by a Top Fund in an Underlying Closed-End Fund are limited by the requirements of NI 81-102. The Filer proposes that no more than 10% of the net asset value of a Top Fund be invested in a particular Underlying Closed-End Fund taken at market value at the time of purchase.
14. The securities of the Underlying Closed-End Funds will not be “index participation units” within the meaning of NI 81-102 (“IPUs”).
15. Each Closed-End Fund is or will be a non-redeemable investment fund that is subject to NI 81-102, that is not managed and/or advised by the Manager or an affiliate or associate of the Manager and whose securities are listed on a stock exchange in Canada.
16. Each Foreign Closed-End Fund is or will be a non-redeemable investment fund that is subject to the Investment Company Act, that is not managed and/or advised by the Manager or an affiliate or associate of the Manager and whose securities are listed on a stock exchange in the United States.
17. A Top Fund does not, and will not, pay manage-ment fees or incentive fees that, to a reasonable person, would duplicate a fee payable by an Underlying Closed-End Fund for the same service.
Change in Fund of Fund Rules under NI 81-102
18. Prior to 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 Investment in Other Investment Funds to include other types of investment funds, such as closed-end funds.
Investment by the Top Funds in Underlying Closed-End Funds
20. Recent amendments to NI 81-102 prohibit a mutual fund from being able to purchase or hold a security of an underlying investment fund, including a non-redeemable investment fund that is not an IPU, unless, among other things:
(a) under paragraph 2.5(2)(a) of NI 81-102, the underlying investment fund is a mutual fund that is subject to NI 81-102 and offers or has offered securities under a simplified prospectus in accordance with NI 81-101 (the “s. 2.5(2)(a) Invest-ment Restriction”); and
(b) under paragraph 2.5(2)(c) of NI 81-102, the mutual fund and the underlying investment fund are reporting issuers in the applicable local jurisdiction (the “s. 2.5(2)(c) Investment Restriction” and, together with the s. 2.5(2)(a) Investment Restriction the “Investment Restric-tions”).
21. Without the Exemption Sought, the s. 2.5(2)(a) Investment Restriction prohibits a Top Fund from purchasing or holding securities in one or more Underlying Closed-End Funds because such Underlying Closed-End Funds are not mutual funds subject to NI 81-102 and do not offer, or have not offered, securities under a simplified prospectus in accordance with NI 81-101.
22. Without the Exemption Sought, the s. 2.5(2)(c) Investment Restriction prohibits a Top Fund from purchasing or holding securities in one or more Foreign Closed-End Funds because such Foreign Closed-End Funds will not be reporting issuers in the local jurisdiction.
23. An investment by a Top Fund in securities of an Underlying Closed-End Fund will represent the business judgment of responsible persons unin-fluenced by considerations other than the best interests of the Top Fund and will be made in accordance with the investment objective of Top Fund.
24. Granting the Exemption Sought is in the best interests of the Top Funds and is not prejudicial to the public interest or to securityholders of the Top Funds.
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 on the following conditions:
(a) the securities of each Underlying Closed-End Fund trade on a stock exchange in Canada or the United States;
(b) a Top Fund does not purchase securities of an Underlying Closed-End Fund if, immediately after the purchase, more than 10% of the Top Fund’s net asset value would consist of securities of Underlying Closed-End Funds;
(c) subject to (d) below, other than any exemptive relief granted to an Underlying Closed-End Fund and 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 of NI 81-102 applicable to mutual funds;
(d) the weighted average leverage exposure of each Top Fund does not exceed 10% of the net asset value of the Top Fund. Each Top 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 Top Fund’s net
asset value to be invested in such Underlying Closed-End Fund; and
(e) the Filer uses pre-trade compliance controls to monitor the restrictions in paragraph (c) and (d) above.
Investment Funds and Structured Products Branch
Ontario Securities Commission
LIST OF EXISTING TOP FUNDS
Sun Life Granite Balanced Growth Portfolio
Sun Life Granite Balanced Growth Class
Sun Life Granite Balanced Portfolio
Sun Life Granite Balanced Class
Sun Life Granite Conservative Portfolio
Sun Life Granite Conservative Class
Sun Life Granite Enhanced Income Portfolio
Sun Life Granite Growth Portfolio
Sun Life Granite Growth Class
Sun Life Granite Income Portfolio
Sun Life Granite Moderate Portfolio
Sun Life Granite Moderate Class
Sun Life Milestone 2020 Fund
Sun Life Milestone 2025 Fund
Sun Life Milestone 2030 Fund
Sun Life Milestone 2035 Fund
Sun Life BlackRock Canadian Composite Equity Class
Sun Life BlackRock Canadian Equity Fund
Sun Life BlackRock Canadian Equity Class
Sun Life Franklin Bissett Canadian Equity Class
Sun Life MFS Canadian Equity Fund
Sun Life MFS Canadian Equity Class
Sun Life MFS Canadian Equity Growth Fund
Sun Life MFS Canadian Equity Value Fund
Sun Life Sentry Value Fund
Sun Life Sentry Value Class
Sun Life Sionna Canadian Small Cap Equity Class
Sun Life Trimark Canadian Class
Sun Life Dynamic American Value Fund
Sun Life MFS U.S. Equity Fund
Sun Life MFS U.S. Growth Fund
Sun Life MFS U.S. Growth Class
Sun Life MFS U.S. Value Fund
Sun Life MFS Global Growth Fund
Sun Life MFS Global Growth Class
Sun Life MFS Global Value Fund
Sun Life MFS Low Volatility Global Equity Fund
Sun Life Sentry Global Mid Cap Fund
Sun Life Sentry Infrastructure Fund
Sun Life MFS International Growth Fund
Sun Life MFS International Growth Class
Sun Life MFS International Value Fund
Sun Life MFS Low Volatility International Equity Fund
Sun Life Schroder Emerging Markets Fund
Sun Life Dynamic Energy Fund
Sun Life BlackRock Canadian Balanced Fund
Sun Life BlackRock Canadian Balanced Class
Sun Life MFS Balanced Growth Fund
Sun Life MFS Balanced Value Fund
Sun Life Sentry Conservative Balanced Fund
Sun Life MFS Global Total Return Fund
Sun Life Multi-Strategy Bond Fund
Sun Life MFS Canadian Bond Fund
Sun Life Templeton Global Bond Fund
Sun Life Dynamic Equity Income Fund
Sun Life Dynamic Equity Income Class
Sun Life Dynamic Strategic Yield Fund
Sun Life Dynamic Strategic Yield Class
Sun Life MFS Dividend Income Fund
Sun Life MFS Dividend Income Class
Sun Life MFS Monthly Income Fund
Sun Life NWQ Flexible Income Fund
Sun Life Money Market Fund
Sun Life Money Market Class