Securities Law & Instruments

Headnote

 

National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from section 2.1(1) of National Instrument 81-102 – Investment Funds to permit mutual funds to invest more than 10 percent of net assets in debt securities issued by a foreign government or supranational agency, subject to conditions.

 

Applicable Legislative Provisions

 

National Instrument 81-102 Investment Funds, ss. 2.1(1), 19.1.

 

July 20, 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

TD ASSET MANAGEMENT INC.

(the Filer)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of TD Global Income Fund and TD Global Unconstrained Bond Fund (each the Fund, and together, the Funds) for a decision under the securities legislation of Ontario (the Legislation) for an exemption pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81- 102) from subsection 2.1(1) of NI 81-102 (the Concentration Restriction) to permit each Fund to invest up to:

 

1.             20% of its net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a province or territory of Canada or the government of the United States of America and are rated “AA” by Standard & Poor’s Rating Services (Canada) (S&P) or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates; and

 

2.             35% of its net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a province or territory of Canada or the government of the United States of America and are rated “AAA” by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates.

 

(collectively, the Exemption Sought).

 

The evidences of indebtedness as described above are collectively referred to as Foreign Government Securities.

 

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 that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada.

 

Interpretation

 

Defined terms contained in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.

 

Representations

 

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

 

1.             The Filer is registered as an investment fund manager in the provinces of Ontario, Quebec and Newfoundland and is registered as a portfolio manager and exempt market dealer in all the provinces and territories of Canada. The Filer is also registered under the Commodity Futures Act (Ontario) in the category of commodity trading manager in the province of Ontario and under the Derivatives Act (Quebec) in the category of derivatives portfolio manager in the province of Quebec.

 

2.             The Filer is a corporation governed by the laws of Ontario. The head office of the Filer is located in Toronto, Ontario.


3.             The Filer will be the trustee, manager and portfolio adviser of the Funds.

 

4.             Each Fund will be an open-end mutual fund trust established under the laws of Ontario.

 

5.             Securities of the Funds will be offered by way of a simplified prospectus dated on or about July 27, 2017 filed in all of the provinces and territories in Canada (the Simplified Prospectus) and, accordingly, the Funds will be reporting issuers in all of the provinces and territories of Canada.

 

6.             Neither the Filer nor the Funds are in default of securities legislation in any jurisdiction in Canada.

 

7.             The fundamental investment objective of TD Global Income Fund is expected to be substantially as follows: "to seek to earn current income while preserving capital by investing primarily in fixed-income securities of issuers anywhere in the world."

 

8.             To achieve its investment objectives, TD Global Income Fund will employ a strategy of fundamental economic analysis of each country and currency region. The Fund may invest in fixed-income securities of issuers anywhere in the world. As part of its investment strategies, the Fund's portfolio managers would like to invest a portion of its assets in Foreign Government Securities. Depending on market conditions, the Fund's portfolio managers seek the discretion to gain exposure to any one issuer of Foreign Government Securities in excess of the Concentration Restriction.

 

9.             The fundamental investment objective of TD Global Unconstrained Bond Fund is expected to be substantially as follows: "to seek to maximize total return while preserving capital by investing primarily in fixed-income securities of issuers anywhere in the world."

 

10.          To achieve its investment objectives, TD Global Unconstrained Bond Fund will employ a strategy of fundamental economic analysis of each country and currency region that is complemented with a bottom-up approach to fixed-income security selection. The Fund has broad investment discretion to invest in issuers in any industry or sector in order to achieve positive returns in any market conditions. The Fund may invest in fixed-income securities of issuers anywhere in the world. As part of its investment strategies, the Fund's portfolio managers would like to invest a portion of its assets in Foreign Government Securities. Depending on market conditions, the Fund's portfolio managers seek the discretion to gain exposure to any one issuer of Foreign Government Securities in excess of the Concentration Restriction.

 

11.          Section 2.1(1) of NI 81-102 prohibits each Fund from purchasing a security of an issuer, other than a "government security" as defined in NI 81-102, if immediately after the purchase more than 10% of the net asset value of the Fund, taken at market value at the time of the purchase, would be invested in securities of the issuer.

 

12.          The Foreign Government Securities are not within the meaning of "government securities" as such term is defined in NI 81-102.

 

13.          The Filer believes that the Exemption Sought will better enable the Funds to achieve their fundamental investment objectives.

 

14.          The Funds will only purchase Foreign Government Securities if the purchase is consistent with the Funds' fundamental investment objectives.

 

15.          In Companion Policy 81-102CP (the Companion Policy), the Canadian Securities Administrators state their views on various matters relating to NI 81-102. Subsection 3.1(4) of the Companion Policy indicates that relief from paragraph 2.04(1)(a) of National Policy 39, which was replaced by the Concentration Restriction, has been provided to mutual funds generally under the following circumstances:

 

(a)           The mutual fund has been permitted to invest up to 20% of its net asset value in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction, or the government of the United States of America and are rated "AA" by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated credit rating organizations or their DRO affiliates; and

 

(b)           The mutual fund has been permitted to invest up to 35% of its net asset value in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction, or the government of the United States of America and are rated "AAA" by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated credit rating organizations or their DRO affiliates.

 

16.          The Simplified Prospectus for the Funds will disclose the risks associated with the concentration of net assets of the Funds in securities of a limited number of issuers.

 

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 Exemption Sought is granted provided that, in respect of each Fund:

 

1.             Paragraphs 1 and 2 of the Exemption Sought cannot be combined for any one issuer;

 

2.             Any security that may be purchased under the Exemption Sought is traded on a mature and liquid market;

 

3.             The acquisition of the securities purchased pursuant to this Decision is consistent with the fundamental investment objective of the Fund;

 

4.             The Simplified Prospectus of the Funds discloses the additional risks associated with the concentration of the net assets of the Funds in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Funds have so invested and the risks, including foreign exchange risks, of investing in the country in which that issuer is located; and

 

5.             The Simplified Prospectus of the Funds discloses, in the investment strategy section, a summary of the nature and terms of the Exemption Sought along with the conditions imposed and the type of securities covered by this Decision.

 

“Vera Nunes”

Manager

Investment Funds and Structured Products Branch

Ontario Securities Commission