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 each Fund to invest in ETFs up to 10 percent of its net asset value, in aggregate, in gold and other physical commodities – ETFs will be traded on a Canadian or U.S. stock exchange – subject to 10% exposure to physical commodities, in aggregate, and certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a, 2.5(2)(c), 19.1.
December 14, 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
RUSSELL INVESTMENTS CANADA LIMITED
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the existing and future mutual funds managed by the Filer that are subject to National Instrument 81-102 Investment Funds (NI 81-102) and that are not money market funds as defined in NI 81-102 (the Existing Funds and the Future Funds, respectively, and together, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
(a) revoking and replacing the Previous Decision (as defined below); and
(b) exempting the Funds from the prohibitions in paragraphs 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit each Fund to invest in Commodity ETFs (as defined below),
(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 pursuant to section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) that the Exemption Sought is intended to be relied upon in all the other provinces and territories of Canada.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
The decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered in each of the provinces and territories of Canada in the categories of investment fund manager, portfolio manager and exempt market dealer. The Filer also is registered in Ontario as a commodity trading manager and as a mutual fund dealer exempt from membership in the Mutual Funds Dealer Association of Canada. The Filer also is registered in Manitoba as an advisor (commodities).
3. The Filer is the investment fund manager of each Existing Fund and will be the investment fund manager of each Future Fund. The Filer is the portfolio adviser to, or will retain a portfolio manager to act as portfolio adviser to, each Existing Fund, and will be the portfolio adviser to, or will retain a portfolio manager to act as portfolio adviser to, each Future Fund.
4. The Filer is not in default of securities legislation in any of the provinces or territories of Canada.
5. Each Existing Fund is, and each Future Fund will be:
(a) an mutual fund established under the laws of Canada or the laws of a province or territory of Canada and not a money market fund;
(b) a reporting issuer under the laws of some or all of the provinces or territories of Canada; and
(c) subject to the requirements of NI 81-102.
6. Securities of each Existing Fund are, and securities of each Future Fund will be, qualified for distribution in some or all of the provinces or territories of Canada under a simplified prospectus, annual information form and fund facts prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and filed with and receipted by the securities regulators in the applicable provinces or territories of Canada.
7. The Existing Funds are not in default of securities legislation in any of the provinces or territories of Canada.
The Previous Decision
8. The Filer obtained a previous decision dated September 26, 2013 (the Previous Decision) exempting Russell Investments Real Assets (then called Russell Real Assets Portfolio) (the Specified Fund) from paragraphs 2.5(2)(a) and 2.5(2)(c) of NI 81-102 to permit the Specified Fund to invest in securities of exchange-traded funds (ETFs) traded on a stock exchange in Canada or the United States which hold, or obtain exposure to, one or more physical commodities (other than gold or silver) on an unlevered basis (Commodity ETFs).
9. Since the Previous Decision applies solely to the Specified Fund, the Filer requests that the Previous Decision be revoked and replaced by the Exemption Sought in order to permit each Fund to invest in Commodity ETFs on the terms contained in exemptive relief granted more recently to other mutual funds. In particular, the Exemption Sought will not impose a limit on a Fund’s exposure to one commodity sector of 2.5% of the Fund’s net asset value at the time of purchasing a Commodity ETF.
10. The Filer also obtained a previous decision dated June 28, 2011 which permits each Fund to invest in, among other matters:
(a) ETFs that seek to provide daily results that replicate the daily performance of a specified widely-quoted market index (the ETF’s Underlying Index) by a multiple of 200% or an inverse multiple of 200%;
(b) ETFs that seek to provide daily results that replicate the daily performance of their Underlying Index by an inverse multiple of 100%;
(c) ETFs that seek to replicate the performance of gold or silver, or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis; and
(d) ETFs that seek to provide daily results that replicate the daily performance of gold or silver or the value of a specified derivative the underlying interest of which is gold or silver on an unlevered basis, by a multiple of 200%,
(collectively, Underlying ETFs).
11. Each Commodity ETF will be a mutual fund, and not a non-redeemable investment fund.
12. The assets of each Commodity ETF consist, or will consist, primarily of one or more physical commodities (other than gold or silver) or derivatives that have an underlying interest in such physical commodity or commodities. These physical commodities may include, but are not limited to, agriculture or livestock (such as soy meal, sugar, wheat, cotton, coffee and live cattle), energy (such as crude oil, gasoline, heating oil, gas oil and natural gas), precious metals other than gold or silver (such as platinum and palladium) and industrial metals (such as copper and aluminum).
13. The objective of each Commodity ETF is or will be, on an unlevered basis, to:
(a) reflect the price of the applicable physical commodity or commodities (less the Commodity ETF’s expenses and liabilities), or
(b) track the performance of an index which is intended to reflect the changes in the market value of the physical commodity or commodities sector.
14. In addition to investing in securities of ETFs that are index participation units, the Funds propose to have the ability to invest in the Commodity ETFs.
15. The amount of the loss that can result from an investment by a Fund in a Commodity ETF will be limited to the amount invested by the Fund in securities of the Commodity ETF.
16. Each Existing Fund is, and each Future Fund will be, permitted, in accordance with its investment objectives and investment strategies, to invest in securities of Commodity ETFs.
17. The Exemption Sought is needed because:
(a) paragraph 2.5(2)(a) of NI 81-102 would prohibit a Fund from investing in securities of Commodity ETFs because the Commodity ETFs will not be subject to NI 81-101 and may not be subject to NI 81-102; and
(b) paragraph 2.5(2)(c) of NI 81-102 would prohibit a Fund from investing in securities of some Commodity ETFs because such Commodity ETFs will not be qualified for distribution in the local jurisdiction.
18. Any investment by a Fund in securities of a Commodity ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests 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) the investment by the Fund in securities of a Commodity ETF is in accordance with the fundamental investment objective of the Fund;
(b) the securities of the Commodity ETF are traded on a stock exchange in Canada or the United States;
(c) the Fund will not purchase securities of a Commodity ETF if, immediately after the transaction, more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction, would consist of securities of Commodity ETFs and Underlying ETFs;
(d) immediately after entering into a purchase, derivative or other transaction providing exposure to one or more physical commodities, the Fund’s aggregate market value exposure (whether direct or indirect, including through Commodity ETFs) to all physical commodities (including gold) will not exceed 10% of the net asset value of the Fund, taken at market value at the time of the transaction; and
(e) the simplified prospectus of each Existing Fund discloses, or will disclose the next time it is renewed, and the simplified prospectus of each Future Fund discloses:
(i) in the investment strategy section:
(A) that the Fund has obtained relief to invest in Commodity ETFs;
(B) the extent to which the Fund may invest in Commodity ETFs;
(C) an explanation of each type of Commodity ETF; and
(D) that the Fund may indirectly invest in gold and other physical commodities; and
(ii) the risks associated with such investments and strategies.
Investment Funds and Structured Products Branch
Ontario Securities Commission