National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted from subsection 2.1(1) and paragraphs 2.2(1)(a), 2.5(2)(a), (c) and (e) of National Instrument 81-102 Investment Funds to allow mutual funds to invest in ETFs in Canada and the United States, and to allow the top funds to pay brokerage commissions for the purchase and sale of the securities of the underlying ETFs – Underlying ETFs are subject to NI 81-102 or the United States Investment Company Act of 1940 – Investments in U.S. ETFs limited to 10% of net asset value – Relief subject to terms and conditions based on investment restrictions of NI 81-102 such that top funds cannot do indirectly via investment in underlying ETFs what they cannot do directly under NI 81-102.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.1(1), 2.2(1)(a), 2.5(2)(a), (b), (c) and (e), 19.1.
May 29, 2017
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
CI INVESTMENTS INC.
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of existing and future mutual funds that are managed by the Filer or an affiliate or associate of the Filer (the Funds), for a decision (the Exemption Sought) under the securities legislation of the principal regulator (the Legislation) exempting each Fund from the following provisions of National Instrument 81-102 Investment Funds (NI 81-102) in order to permit the Funds to invest in securities of exchange-traded funds that are not index participation units (the Underlying ETFs):
(a) subsection 2.1(1) (the Concentration Restriction) to permit each Fund to purchase securities of an Underlying ETF or enter into a specified derivatives transaction with respect to an Underlying ETF even though, immediately after the transaction, more than 10% of the net asset value (NAV) of the Fund would be invested, directly or indirectly, in securities of the Underlying ETF (the Concentration Relief);
(b) paragraph 2.2(1)(a) (the Control Restriction) to permit each Fund to purchase securities of an Underlying ETF even though, immediately after the purchase, the Fund would hold securities representing more than 10% of (i) the votes attaching to the outstanding voting securities of the Underlying ETF, or (ii) the outstanding equity securities of the Underlying ETF (the Control Relief);
(c) paragraph 2.5(2)(a) to permit each Fund to invest in securities of Underlying ETFs that do not offer securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and that may not be subject to NI 81-102;
(d) paragraph 2.5(2)(c) to permit each Fund to invest in securities of U.S. Underlying ETFs (defined below); and
(e) paragraph 2.5(2)(e) of NI 81-102 to permit each Fund to pay brokerage fees in relation to its purchase and sale of securities of Related Underlying ETFs (defined below) (the Brokerage Fee Relief).
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 all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined. In addition, the following terms as used in this decision have the following meanings:
Canadian Underlying ETF means an Underlying ETF that is, or will be, a reporting issuer in the provinces and territories of Canada in which its securities are, or will be, distributed.
Related Underlying ETF means an Underlying ETF that is managed by the Filer or an affiliate or associate of the Filer.
U.S. Underlying ETF means an Underlying ETF that is not, or will not be, a reporting issuer in the provinces and territories of Canada.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation subsisting under the laws of Ontario with its head office located in Toronto, Ontario. The Filer is registered:
(a) under the securities legislation of all provinces of Canada as a portfolio manager;
(b) under the securities legislation of Ontario, Québec, and Newfoundland and Labrador as an investment fund manager;
(c) under the securities legislation of Ontario as an exempt market dealer; and
(d) under the Commodity Futures Act (Ontario) as a commodity trading counsel and a commodity trading manager.
2. The Filer and the existing Funds are not in default of securities legislation in any of the Jurisdictions.
3. The Filer or an affiliate or associate of the Filer is, or will be, the manager of the Funds.
4. Each Fund is, or will be, a mutual fund organized and governed by the laws of Canada or a Jurisdiction.
5. Each Fund distributes, has distributed or will distribute, its securities pursuant to a simplified prospectus prepared pursuant to NI 81-101 and Form NI 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) or a long form prospectus prepared pursuant to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2) and is, or will be, governed by the applicable 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.
6. Each Fund is, or will be, a reporting issuer in one or more Jurisdictions.
7. Each Fund is, or will be, subject to National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).
8. The Funds may, from time to time, wish to invest in Underlying ETFs in accordance with their investment objectives.
The Underlying ETFs
9. The securities of an Underlying ETF will not meet the definition of index participation unit (IPU) in NI 81-102 because the only purpose of the Underlying ETF will not be to:
(a) hold the securities that are included in a specified widely quoted index in substantially the same proportion as those securities are reflected in that index; or
(b) invest in a manner that causes the Underlying ETF to replicate the performance of that index.
10. The securities of an Underlying ETF are, or will be, listed on a recognized exchange in Canada or the United States and the market for them is, or will be, liquid because it is, or will be, supported by designated brokers. As a result, the Filer expects a Fund to be able to dispose of such securities through market facilities in order to raise cash, including to fund the redemption requests of its securityholders.
11. No Underlying ETF will hold more than 10% of its NAV in securities of another investment fund unless (i) the Underlying ETF is a clone fund, as defined in NI 81-102, (ii) the other investment fund is a money market fund, as defined in NI 81-102, or (iii) securities of the other investment fund are IPUs.
12. No Fund will pay management or incentive fees which to a reasonable person would duplicate a fee payable by an Underlying ETF for the same service.
13. Absent the Exemption Sought, an investment by a Fund in an Underlying ETF would be prohibited by paragraph 2.5(2)(a) of NI 81-102 because the Underlying ETFs do not offer securities under a simplified prospectus in accordance with NI 81-101, and in the case of the U.S. Underlying ETFs, are not subject to NI 81-102. An investment by a Fund in an Underlying ETF would not qualify for the exception in paragraph 2.5(3)(a) of NI 81-102 because the securities of the Underlying ETF are not IPUs.
The Canadian Underlying ETFs
14. Each Canadian Underlying ETF is, or will be, an open-ended mutual fund subject to NI 81-102, subject to any exemption therefrom that may be granted by the securities regulatory authorities.
15. Securities of each Canadian Underlying ETF are, or will be:
(a) distributed pursuant to a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2 or, if it has received an exemption to do so, a simplified prospectus prepared pursuant to NI 81-101 and Form 81-101F1; and
(b) listed on the Toronto Stock Exchange or another “recognized exchange” in Canada, as that term is defined in securities legislation.
16. Each Canadian Underlying ETF is, or will be, subject to NI 81-107 generally and in respect of conflict of interest matters to which NI 81-107 applies.
The U.S. Underlying ETFs
17. Each U.S. Underlying ETF is, or will be, a publicly offered mutual fund subject to the United States Investment Company Act of 1940 (the Investment Company Act), whose securities are listed for trading on a stock exchange in the United States.
18. The Filer has concluded that it could not currently gain exposure to applicable asset classes, sectors and/or markets entirely through existing Canadian fund alternatives or IPUs.
19. Absent the Exemption Sought, an investment by a Fund in a U.S. Underlying ETF would be prohibited by paragraph 2.5(2)(c) of NI 81-102 because such U.S. Underlying ETF is not a reporting issuer in the local jurisdiction.
20. The Filer submits that having the option to allocate a limited portion of each Fund’s assets to U.S. Underlying ETFs will increase diversification opportunities and improve a Fund’s overall risk/reward profile.
21. A key benefit of investing in the Underlying ETFs, including the U.S. Underlying ETFs, is improved portfolio diversification and potentially enhanced returns. For example:
(a) an investment in the Underlying ETFs will provide the Funds with access to specialized knowledge, expertise and/or analytical resources of the investment adviser to the Underlying ETFs;
(b) the Underlying ETFs provide a potentially better risk profile and improved liquidity/tradability than direct holdings of asset classes to which the Underlying ETFs provide exposure; and
(c) the investment strategies of the U.S. Underlying ETFs offer significantly broader exposure to asset classes, sectors and markets than those available in the existing Canadian exchange-traded fund market.
The Concentration Relief and Control Relief
22. An investment in an Underlying ETF by a Fund is an efficient and cost effective alternative to administering one or more investment strategies similar to that of the Underlying ETF.
23. An investment in an Underlying ETF by a Fund should pose limited investment risk to the Fund because each Underlying ETF will be subject to NI 81-102 or the Investment Company Act, subject to any exemption therefrom that may in the future be granted by the securities regulatory authorities.
24. Due to the potential size disparity between the Funds and the Underlying ETFs, it is possible that a relatively small investment, on a percentage of NAV basis, by a relatively larger Fund in securities of an Underlying ETF could result in such Fund holding securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of the Underlying ETF; or (ii) the outstanding equity securities of that Underlying ETF, contrary to the Control Restriction.
25. An investment by a Fund in securities of an Underlying ETF will not qualify for the exemptions set out in:
(a) paragraph 2.1(2)(d) of NI 81-102 from the Concentration Restriction; and
(b) paragraph 2.2(1.1)(b) of NI 81-102 from the Control Restriction;
because securities of the Underlying ETFs are not IPUs.
26. The material difference between the securities of an Underlying ETF and the securities of a conventional mutual fund is the method of distribution and disposition.
The Brokerage Fee Relief
27. The trades conducted by a Fund may not be of the size necessary for the Fund to be eligible to purchase or exchange securities of a Related Underlying ETF directly from the Related Underlying ETF at its NAV per security. Trades in securities of a Related Underlying ETF are therefore likely to be conducted by a Fund in the secondary market through the facilities of a recognized exchange. Absent the Brokerage Fee Relief, paragraph 2.5(2)(e) of NI 81-102 would not permit a Fund to pay brokerage fees incurred in connection with a Related Underlying ETF.
28. All brokerage fees related to trades in securities of Related Underlying ETFs will be borne by the Funds in the same manner as any other portfolio transactions made on an exchange.
29. If a Fund trades in securities of a Related Underlying ETF with or through an affiliate or associate of the Filer acting as dealer, the Filer will comply with its obligations under NI 81-107 in respect of any proposed related party transactions. These related party transactions will be disclosed to securityholders of the applicable Fund in its management report of fund performance.
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 a Fund in securities of an Underlying ETF is in accordance with the investment objectives of the Fund;
(b) a Fund does not purchase securities of a U.S. Underlying ETF if, immediately after the purchase, more than 10% of the NAV of the Fund in aggregate, taken at market value at the time of the purchase, would consist of securities of U.S. Underlying ETFs;
(c) a Fund does not short sell securities of an Underlying ETF;
(d) an Underlying ETF is not a commodity pool as defined in National Instrument 81-104 Commodity Pools or under applicable U.S. laws and its investment adviser is not required to register as a commodity pool operator in the United States in connection with the U.S. Underlying ETFs;
(e) the Canadian Underlying ETF does not rely on exemptive relief from the requirements of:
(i) section 2.3 of NI 81-102 regarding the purchase of physical commodities;
(ii) sections 2.7 and 2.8 of NI 81-102 regarding the purchase, sale or use of specified derivatives; or
(iii) paragraphs 2.6(a) and 2.6(b) of NI 81-102 with respect to the use of leverage;
(f) securities of each Underlying ETF are listed on a recognized exchange in Canada or the United States;
(g) each U.S. Underlying ETF is, immediately before the purchase by a Fund of securities of that U.S. Underlying ETF, an investment company subject to the Investment Company Act in good standing with the United States Securities and Exchange Commission; and
(h) the prospectus of each Fund discloses, or will disclose in the next renewal of its prospectus following the date of this decision, in the investment strategy section, the fact that the Fund has obtained the Exemption Sought to permit investments in Underlying ETFs on the terms described in this decision.
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission