Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Exemption granted from the requirements of paragraphs 2.5(2)(a) and (c) of National Instrument 81-102 Investment Funds to allow a mutual fund to invest up to 10% of its net asset value in aggregate in third party underlying pooled funds – Exemption granted on the basis that the pooled funds will comply with Part 2 and other requirements of NI 81-102 and NI 81-106.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.5(2)(a) and (c), 19.1.

May 29, 2017

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
BRANDES INVESTMENT PARTNERS & CO.
(the Filer)

AND

MORNINGSTAR AGGRESSIVE PORTFOLIO,
MORNINGSTAR BALANCED PORTFOLIO,
MORNINGSTAR CONSERVATIVE PORTFOLIO,
MORNINGSTAR GROWTH PORTFOLIO AND
MORNINGSTAR MODERATE PORTFOLIO
(the Initial Top Funds )

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Initial Top Funds and such other mutual funds as may be managed by the Filer or an affiliate or successor of the Filer from time to time with similar investment objectives to the Initial Top Funds (the “Top Funds” and individually, a “Top Fund”) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption, pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), from:

i.              the prohibition contained in paragraph 2.5(2)(a) of NI 81-102 against a mutual fund investing in another mutual fund that is not subject to NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101); and

ii.             the prohibition contained in paragraph 2.5(2)(c) of NI 81-102 against a mutual fund investing in another mutual fund’s securities where those securities are not qualified for distribution in the local jurisdiction (together with paragraph (i) above, the Requested Relief)

to permit each Top Fund to invest up to 10% of its net assets, taken at market value at the time of the investment, in aggregate, in units of Galibier Canadian Equity Pool and Invesco Select Emerging Markets Equity Pool (collectively, the Underlying Pooled Funds).

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 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, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (together with Ontario, the Jurisdictions).

Interpretation

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 following term shall have the following additional meaning:

Pooled Fund Managers means Galibier Capital Management Ltd. and Invesco Canada Ltd.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1.             The Filer is a corporation existing under the laws of Nova Scotia having its registered head office in Toronto, Ontario. The Filer operates under the retail trade name Bridgehouse Asset Managers.

2.             The Filer is registered as an investment fund manager in each of Ontario, Québec, and Newfoundland and Labrador, as a portfolio manager and exempt market dealer in all provinces and territories, and as a mutual fund dealer in all provinces and territories except Québec.

3.             The Filer is not in default of securities legislation in any of the Jurisdictions.

4.             The Filer or an affiliate is, or will be, the manager of each Top Fund.

The Top Funds

5.             Each Top Fund is, or will be, a “mutual fund”, as such term is defined under the Securities Act (Ontario) (the Act), to which NI 81-102 applies.

6.             Each Top Fund has, or will have, a simplified prospectus and annual information form prepared in accordance with NI 81-101, and securities of each Top Fund are, or will be, qualified for distribution in the Jurisdictions.

7.             Each Top Fund is, or will be, a reporting issuer under the securities legislation of one or more Jurisdictions.

8.             None of the existing Top Funds is in default of securities legislation in any of the Jurisdictions.

9.             The investment objective of Morningstar Aggressive Portfolio is to achieve long-term capital appreciation by investing primarily in a diverse mix of other mutual funds and exchange traded funds that invest in Canadian and global equity securities with limited exposure to fixed income securities.

10.          The investment objective of Morningstar Balanced Portfolio is to achieve a combination of long-term capital appreciation and income by investing primarily in a diverse mix of mutual funds and exchange traded funds that invest in Canadian and global fixed-income and equity securities.

11.          The investment objective of Morningstar Conservative Portfolio is to preserve value and achieve modest long-term capital appreciation and income by investing primarily in a diverse mix of other mutual funds and exchange traded funds that invest in Canadian and global fixed-income and equity securities.

12.          The investment objective of Morningstar Growth Portfolio is to achieve long-term capital appreciation by investing primarily in a diverse mix of other mutual funds and exchange traded funds that invest in Canadian and global equity and fixed income securities.

13.          The investment objective of Morningstar Moderate Portfolio is to preserve value and achieve a mix of long-term capital appreciation and income by investing primarily in a diverse mix of other mutual funds and exchange traded funds that invest in Canadian and global fixed-income and equity securities.

14.          The investment objectives and strategies of the Initial Top Funds and of any other Top Fund will allow the Top Funds to obtain exposure, on some or more of their assets, to securities of other mutual funds.

15.          Subject to compliance with NI 81-102, the investment objectives and strategies of each Top Fund would permit the Top Fund to invest in units of the Underlying Pooled Funds.

The Underlying Pooled Funds

16.          The Underlying Pooled Funds are each a “mutual fund”, as such term is defined under the Act, formed as a trust under the laws of Ontario pursuant to a declaration of trust.

17.          The Underlying Pooled Funds are not subject to NI 81-102 and have not prepared a simplified prospectus or annual information form in accordance with NI 81-101.

18.          The Underlying Pooled Funds are not reporting issuers in any of the Jurisdictions.

19.          Units of the Underlying Pooled Funds are available for purchase only by investors who qualify to invest in the Underlying Pooled Funds pursuant to an exemption from the prospectus requirement, such as those that meet the definition of an “accredited investor” as set forth in National Instrument 45-106 Prospectus Exemptions and/or the Act, including by mutual funds managed by the Filer.

20.          The investment objective of Galibier Canadian Equity Pool is to achieve long-term capital appreciation through investments primarily in Canadian equity securities.

21.          The investment objective of Invesco Select Emerging Markets Equity Pool is to achieve capital growth over the long term by investing substantially all of its assets in equity securities of companies located in emerging market countries and frontier markets.

22.          While not subject to NI 81-102, as of the date of this decision, the investment strategies and restrictions of the Underlying Pooled Funds are consistent with NI 81-102. The Filer has compliance processes in place to ensure each Underlying Pooled Fund is managed in accordance with NI 81-102, as if it were applicable.

Investments in Galibier Canadian Equity Pool

23.          An investment by the Top Funds in Galibier Canadian Equity Pool will be compatible with the investment objectives and strategies of those Top Funds that desire exposure to Canadian equities.

24.          The Filer submits that the most economically-efficient and strategic way to obtain the desired exposure to a Canadian equity mandate is to invest in a fund that is focused exclusively on Canadian equities. Allowing the Top Funds to invest in units of Galibier Canadian Equity Pool will also allow them to leverage the expertise, research and investment style of the portfolio manager of Galibier Canadian Equity Pool.

25.          While it may be possible for the Filer to gain exposure to Canadian equities by investing in other mandates, the Filer believes it is in the best interests of the Top Funds to have the ability to invest in Galibier Canadian Equity Pool.

26.          The Filer has determined that passive exchange traded funds (ETFs) generally do a sub-optimal job in replicating the returns of inefficient or specialized markets, particularly small and mid-sized Canadian equities. Moreover, actively-managed ETFs are too costly an option for the Top Funds and the Filer would need to dedicate additional resources to select from many different ETFs in order to gain the same diversified exposure in the Canadian market as it would obtain by investing in Galibier Canadian Equity Pool.

27.          The Initial Top Funds are unable to invest directly in the individual underlying securities that Galibier Canadian Equity Pool is invested in as the investment objectives of the Initial Top Funds limit them to primarily investing in other mutual funds.

Investments in Invesco Select Emerging Markets Equity Pool

28.          An investment by the Top Funds in Invesco Select Emerging Markets Equity Pool will be compatible with the investment objectives and strategies of those Top Funds that desire exposure to emerging market equities.

29.          The Filer believes that an investment in Invesco Select Emerging Markets Equity Pool will provide an efficient and cost effective way for the Top Funds to achieve diversification and obtain exposure to the markets and asset classes in which Invesco Select Emerging Markets Equity Pool invests. This is particularly important in emerging markets, which may be less efficient due to legal, regulatory, trading exchanges and accounting systems that are typically less advanced than those in developed markets.

30.          While it may be possible for the Filer to gain exposure to emerging markets equity securities by investing in other mandates, the Filer believes it is in the best interests of the Top Funds to have the ability to invest in Invesco Select Emerging Markets Equity Pool.

31.          The Filer has determined that passive ETFs generally do a sub-optimal job in replicating the returns of inefficient or specialized markets. Moreover, actively-managed ETFs are too costly an option for the Top Funds and the Filer would need to dedicate additional resources to select from many different ETFs in order to gain the same diversified exposure to emerging markets equity securities as it would obtain by investing in Invesco Select Emerging Markets Equity Pool.

32.          The Initial Top Funds are unable to invest directly in the individual underlying securities that Invesco Select Emerging Markets Equity Pool is invested in as the investment objectives of the Initial Top Funds limit them to primarily investing in other mutual funds.

General

33.          Each of the Pooled Fund Managers has experience complying with NI 81-102 in its role as manager or sub-advisor of mutual funds subject to NI 81-102.

34.          Each of the Pooled Fund Managers has confirmed that its respective Underlying Pooled Fund is managed substantially in compliance with NI 81-102, and an investment in an Underlying Pooled Fund by the Top Funds will not expose the investors of the Top Funds to any investment strategies or risks that they are not currently exposed to by virtue of holding the Top Funds.

35.          Each of the Pooled Fund Managers has confirmed that its respective Underlying Pooled Fund does not utilize leverage, does not short sell and generally complies with the investment and derivative requirements set out in NI 81-102. Each of the Pooled Fund Managers also confirmed that its respective Underlying Pooled Fund will comply with the restrictions relating to illiquid assets (section 2.4 of NI 81-102) and investments in other investment funds (section 2.5 of NI 81-102) for so long as they are held by one of the Top Funds.

36.          The Filer has entered, or will enter, into a fund purchase agreement with each of the Pooled Fund Managers with respect to the Top Funds, and such fund purchase agreements contain, or will contain, provisions that enable the Filer to comply with the conditions of the Requested Relief.

37.          The Filer will monitor the portfolio holdings of the Underlying Pooled Funds on a monthly basis to ensure compliance with NI 81-102.

38.          Securities of the Underlying Pooled Funds are valued and redeemable on the same dates as securities of the Top Funds. Each Underlying Pooled Fund will not hold more than 10% of its net asset value in illiquid assets (as defined in NI 81-102). The portfolio of each Underlying Pooled Fund will consist primarily of publicly traded securities.

39.          An investment by a Top Fund in an Underlying Pooled Fund will be effected based on an objective net asset value of the Underlying Pooled Fund, which is calculated in accordance with Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106).

40.          Any investment by a Top Fund in an Underlying Pooled Fund would be made in accordance with the investment objectives and strategies of the Top Fund.

41.          Each Top Fund will invest no more than 10% of its net assets in the Underlying Pooled Funds.

42.          The Top Funds will otherwise comply fully with section 2.5 of NI 81-102 in their investments in the Underlying Pooled Funds and will provide all applicable disclosure mandated for mutual funds investing in other mutual funds.

43.          Where applicable, a Top Fund’s investment in an Underlying Pooled Fund will be disclosed to investors in such Top Fund’s quarterly portfolio holding reports, financial statements and/or fund facts documents.

Decision

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 Requested Relief is granted provided that:

(a)           the Underlying Pooled Fund complies with Parts 2, 4 and 6 of NI 81-102 and Part 14 of NI 81-106 at the time of any investment by a Top Fund and for so long as it is held by a Top Fund;

(b)           the prospectus of the Top Funds discloses, or will disclose at the next renewal or amendment thereto, that they may invest in the Underlying Pooled Funds; and

(c)           a Top Fund will not invest in an Underlying Pooled Fund if, immediately after the investment, more than 10% of its net assets, in aggregate, taken at market value at the time of the investment, would consist of investments in the Underlying Pooled Funds.

“Vera Nunes”
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission